-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WTR4cHvCzr076NRDJFFIvhNpsM7IVhGNZowWrTgeM3N5BlzE+OZKqEZuI7w3OLZx QTzagCa9PlH3Nq4ODeP9+A== 0000806388-98-000051.txt : 19981130 0000806388-98-000051.hdr.sgml : 19981130 ACCESSION NUMBER: 0000806388-98-000051 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NICHOLS RESEARCH CORP /AL/ CENTRAL INDEX KEY: 0000806388 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 630713665 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15295 FILM NUMBER: 98760421 BUSINESS ADDRESS: STREET 1: 4090 SOUTH MEMORIAL PARKWAY STREET 2: P.O. 400002 CITY: HUNTSVILLE STATE: AL ZIP: 35815-1502 BUSINESS PHONE: 256-883-1140 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 1998. ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . Commission file number 0-15295 NICHOLS RESEARCH CORPORATION (Exact name of registrant as specified in its charter) Delaware 63-0713665 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4090 South Memorial Parkway Huntsville, Alabama 35815-1502 ------------------- ---------- (Address of principal executive offices) (Zip Code) The registrant's telephone number including area code: (256) 883-1140 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange - ------------------- --------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of November 3, 1998, there were 13,854,932 shares outstanding of Nichols Research Corporation voting Common Stock, $.01 par value. The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $225,938,622 based on the closing price of such stock as reported by the Nasdaq National Market on November 3, 1998, assuming that all shares beneficially held by officers and members of the registrant's Board of Directors are shares owned by "affiliates," a status which each of the officers and directors individually disclaims. DOCUMENTS INCORPORATED BY REFERENCE Documents Form 10-K Reference - --------- ------------------- Portions of the Proxy Statement for the January 14, 1999 Part III Annual Shareholders' Meeting ================================================================================ Except for historical information contained herein, this document contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These risks and uncertainties are discussed in more detail in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Annual Report. These forward-looking statements can be generally identified as such because the content of the statements will usually contain such words as the Company or management "believes," "anticipates," "expects," "plans," or words of similar import. Similarly, statements that describe the Company's future plans, objectives, goals, or strategies are forward-looking statements. PART I ITEM 1. BUSINESS General References herein to the "Company" mean Nichols Research Corporation and its majority-owned subsidiaries and joint ventures. The Company is a premier provider of high-performance technology-based solutions and services where information access, movement, and evaluation are mission critical to an organization's success. The Company provides these services to a wide range of clients, in four markets: national security, government information technology (IT), commercial IT, and healthcare IT. The Company's substantial expertise and capabilities in a wide range of technologies have been built over a 22-year period of providing advanced development, scientific and application services to U.S. military programs, including air defense systems, national and theater missile defense systems, and weapons development programs. These activities have allowed the Company to build and maintain a foundation of advanced skills in systems engineering; command, control, communication, computers and intelligence (C4I) systems; virtual reality-based training systems; test and evaluation; naval architecture; high performance systems integration; information systems support; network and computer facility outsourcing and management software and systems development; data warehousing and mining; and systems security. The Company's advanced technical capabilities gained while performing services for mission critical federal projects provide the Company with a technological competence which the Company is transferring to the commercial sector. The Company today addresses the technology needs of a diverse customer base by applying its state-of-the-art technical capabilities in commercial system integration, simulation, software development and client-server architectures, including SAP(TM) consulting. As a result, the Company has expanded the market for its services by offering innovative technical solutions to customers' needs. Although the Company's traditional military technology business has continued to grow and represented approximately 55% of revenues in fiscal year 1998, other growing markets for the Company's services represented approximately 45% of revenues in fiscal year 1998. Some of the Company's federal government contracts contain options which are exercisable at the discretion of the customer. An option may extend the period of performance for one or more years for additional consideration on terms and conditions similar to those contained in the original contract. An option may also increase the level of effort and assign new tasks to the Company. In the Company's experience, options are usually exercised. Therefore, references herein to contract terms and values include options. Business Strategy The Company's business strategy consists of three key elements: (i) maintain the Company's leadership in technology applications in its current markets; (ii) apply the Company's technology base to create solutions for new clients in chosen markets; and (iii) make strategic acquisitions and form alliances to gain industry knowledge and thereby expand the business base of the Company. Maintain Technology Leadership. The Company's substantial expertise and capabilities in a wide range of technologies have been built over a 22-year period of providing advanced development, scientific, and application services to U.S. military programs, including air defense systems, strategic and theater missile defense systems, and weapons development programs. The Company believes that, because of its expertise and capabilities with such a wide range of technologies, it has an advantage over its competitors in providing information technology and other technical business services based on these technologies. The Company will seek to maintain this advantage by keeping pace with new developments in technology and by continuing to compete for contracts which will require the Company to provide high-quality, sophisticated technical solutions to clients utilizing advanced technologies. Apply Technology To Create Solutions For New Clients. The Company believes that the creative use of its technology expertise and capabilities to provide innovative, focused technical solutions for its clients has been largely responsible for the Company's success. The Company intends to use its base of technical expertise and capabilities in network design, systems integration, software development, simulation technology, and Internet services to create solutions for new clients in government, healthcare, insurance, and other commercial markets. Make Strategic Acquisitions And Form Alliances. The Company's acquisition program is a key component of its overall business strategy. The Company will seek to make strategic acquisitions and form alliances that will allow the Company to (i) develop technical services which it does not currently provide, (ii) target markets that it does not currently serve and gain industry knowledge in such markets, (iii) develop strategic relationships with clients, and (iv) spin-out high growth/high margin businesses. In order to better execute its business strategy, the Company is organized into the following four strategic business units reflecting the particular market focus of each line of business: Defense and Intelligence, formerly Nichols Federal, provides technical services primarily to U.S. Government defense agencies. For the year ended August 31, 1998, the Defense and Intelligence unit produced approximately 55% of the Company's revenues. Government Information Technology, formerly Nichols InfoFed, provides information and technology solutions and services to a variety of federal, state and local governmental agencies. For the year ended August 31, 1998, the Government Information Technology unit produced approximately 24% of the Company's revenues. Commercial Information Technology, formerly Nichols InfoTec, provides information and technology services to various commercial clients, other than healthcare clients. For the year ended August 31, 1998, the Commercial Information Technology unit produced approximately 10% of the Company's revenues. Healthcare Information Technology, formerly Nichols SELECT, provides administrative and information services to clients in the healthcare and insurance industries. For the year ended August 31, 1998, the Healthcare Information Technology unit produced approximately 11% of the Company's revenues. Acquisitions and Alliances Since September 1, 1994, the Company has successfully completed ten strategic acquisitions and alliances to expand its business into other markets and gain industry knowledge. The key acquisitions and alliances completed during this period are: Communications & Systems Specialists, Inc. (CSSi). In September 1994, the Company acquired CSSi, which provides information systems development and services primarily in client-server systems development for federal government agencies. This acquisition enhanced the Company's ability to provide information development services. Conway Computer Group (CCG). In May 1995, the Company acquired CCG, which provides information technology products and services to a variety of commercial customers. As a result of the CCG acquisition, the Company expanded its business to include computerized workers' compensation claims, administration and risk management services. CCG also provides IT services to a variety of commercial customers, including software development and consulting services. CCG provides support services to customers with IBM business computer systems. Computer Services Corporation (CSC). In June 1995, the Company acquired CSC, which provides transaction and practice management system services, a computer-based medical management system, and a complete billing and accounts receivable management service to physicians and other medical providers. This acquisition expands the Company's commitment to IT services in the healthcare industry by providing the Company with a core business base in computerized transaction processing and related IT services. Effective September 23, 1996, CSC was merged into Nichols SELECT Corporation which was subsequently renamed Nichols TXEN Corporation. HealthGate Data Corporation (HealthGate). In October 1995, the Company acquired approximately 20% of HealthGate. HealthGate is a global Internet media company which develops and provides branded, interactive health and wellness information solutions to each of the four primary healthcare constituencies: patients, providers, payors and suppliers. Advanced Marine Enterprises, Inc. (AME). In May 1996, the Company acquired AME, a leading naval architecture and marine technical services firm. AME also develops simulation and virtual reality technology for naval and marine applications and provides support in ship acquisition management, production support, human systems integration and ship survivability and protection. AME sells ship simulators and virtual reality trainers to the international commercial ship building industry. Approximately 80% of AME's business is with the U.S. Navy. The acquisition substantially expanded the Company's presence in the Washington, D.C. area and provided an opportunity for the Company to expand its business relationship with the U.S. Navy. Intertech Management Group, Inc. (Intertech). During fiscal year 1997, the Company acquired approximately 36% of the capital stock of Intertech. Intertech provides software and data processing services to the telecommunications industry. NCCIM L.L.C (NCCIM). In fiscal year 1997, NCCIM, a joint venture equally owned by the Company and Colsa Corporation, was formed and awarded a five year contract having a value with options of $193 million. Under this contract, NCCIM provides support services for automation, telecommunications, visual information and records management for the U.S. Army Aviation and Missile Command and other federal, state and local government agencies. TXEN, Inc. (TXEN). In fiscal year 1995, the Company purchased 19.9% of TXEN's capital stock with an option to purchase the remaining 80.1%. In August 1997, the Company exercised its option to purchase the remaining 80.1% of the capital stock of TXEN. TXEN provides information technology products and services to the managed healthcare industry, including computerized claims processing and administration services. As a result of the acquisition of TXEN, the Company enhanced its knowledge of the healthcare industry and acquired a business base in a rapidly expanding segment of the healthcare information services industry. TXEN was merged into Nichols SELECT Corporation, which after the merger changed its name to Nichols TXEN Corporation. Mnemonic Systems, Incorporated (MSI). In April 1998, the Company acquired MSI, a systems integration company providing services primarily within the U.S. Department of Justice. The acquisition supports the Company's performance of information technology services for government agencies other than the Department of Defense (DOD). Welkin Associates, Ltd. (Welkin). In July 1998, the Company acquired Welkin, a provider of systems engineering and acquisition management services to the national intelligence community. The acquisition supports the Company's work in the national intelligence community and increases the Company's presence in the Washington D.C. area. Defense and Intelligence The Company's Defense and Intelligence unit provides technical services to U.S. defense and intelligence agencies. For the year ended August 31, 1998, the Company's Defense and Intelligence unit produced approximately 55% of the Company's revenues. The Company provides systems engineering, systems analysis, simulation development, and systems integration for the defense and intelligence technical services market. The Company's capabilities include optics, guidance and control, software engineering, virtual reality trainers and simulations, naval architecture, and C4I. These technical services are rendered primarily for the U.S. Army, U.S. Navy, U.S. Air Force, and national agencies. Many of the Company's contracts are not project specific, but require that the Company provide technical services to a variety of weapons development and other projects. The Company has provided technical services related to missile defense since 1983 when the Strategic Defense Initiative Organization (SDIO) was formed. In 1993, SDIO changed its name to the Ballistic Missile Defense Organization (BMDO). BMDO's mission continues to be Ballistic Missile Defense (BMD) with emphasis on Theater Missile Defense (TMD) and National Missile Defense (NMD). The Company's contract revenues from BMD programs were approximately $63.0 million in fiscal year 1996, $76.5 million in fiscal year 1997 and $71.7 million in fiscal year 1998. Approximately 17% of the Company's revenues in fiscal year 1998 were from contracts related to BMD, compared to 20% of revenues in fiscal year 1997, and 26% of revenues in fiscal year 1996. Ballistic Missile Defense has existed for more than 29 years as a mission of the DOD through activities such as the BMD program. If a decision were made to reduce substantially the scope of current BMD programs or to eliminate the BMDO, management believes that many national and theater missile defense programs, including some research and development areas that existed prior to the creation of SDIO/BMDO, would continue to be funded by the U.S. Army and U.S. Air Force, and other DOD agencies. Missile and Air Defense For NMD and TMD programs, the Company's services include system architecture definition, system analysis, system and element definition and performance estimates, system engineering, lethality and vulnerability analysis, test and evaluation, model and simulation development, radar and infrared sensor and seeker definition and technology assessments, risk assessments, and program and system acquisition documentation. Under a five year contract awarded in fiscal year 1997 by the U.S. Army Space and Missile Defense Command with an estimated value of $250 million, the Company is providing systems engineering and technical support through studies, concept definition, independent analyses, simulations, technological assessments, and related tasks in support of ballistic and theater missile defense systems, experiments and technology demonstrations. Under a five year contract awarded in fiscal year 1998 by the BMDO with an estimated total value of $100 million, the Company provides system engineering support for sensor systems. Air Force Space Programs Under a seven year contract awarded in fiscal year 1993 by the U.S. Air Force Space and Missile Systems Center with an estimated total value of $100 million, the Company provides engineering, analysis, and design for satellite and missile development programs. The Company anticipates that this contract will be recompeted in late fiscal year 1999. Under several contracts with the U.S. Air Force, the Company supports new materials research, provides software quality assurance for testing and evaluation, supports research for infrared and cryogenic technologies, provides sensor data reduction analysis, and develops software for satellite tracking systems. Military Systems and Simulations The Company specializes in the application of information technology for military systems and the simulation of those systems. The Company has developed FlexTM, a modeling and simulation software product.The Company develops user-friendly interface technologies that assist in applying information technology for military applications. Army Tactical Systems and Technology The Company provides development services for U.S. Army tactical systems and technologies, which support Army project offices and research and development centers. The Company develops high-fidelity simulations for weapon systems, which are used for cost-effective missile concept definition, design, and analysis. Under a three year contract awarded in fiscal year 1997 with an estimated total value of $104 million, the Company provides functional engineering support to the U.S. Army Aviation and Missile Command's (AMCOM) Research Development and Engineering Center for missile guidance and control. The functional engineering support includes simulation-based analysis and technical support. The Company anticipates that this contract will be recompeted in fiscal year 1999. Under a four year contract awarded in fiscal year 1996 by the U.S. Army with an estimated contract value of $20 million, the Company is producing the Avenger Institutional Conduct of Fire Trainer (ICOFT) and the Avenger Tabletop Trainer. These two real-time training devices are being delivered to air defense units of the U.S. Army, U.S. Marine Corps, and to U.S. allies under the Foreign Military Sales Program. Under a five year contract awarded in fiscal year 1998 by the Naval Surface Warfare Center, Crane Division, with an estimated total value of $50 million, the Company is providing development, production, installation and field support services for various air defense systems. Army Simulation Programs The Company provides engineering, analysis and development services for U.S. Army tactical and strategic systems and advanced weapons system concepts, which support Army project offices and research and development centers. The Company develops high-fidelity digital, hardware-in-the-loop, and virtual reality man-in-the-loop simulations for weapon systems, which are used for cost-effective missile concept definition, design, and analysis. Under a four year contract awarded in fiscal year 1996 with an estimated total value of $93 million, the Company provides systems analysis, design and fabrication, simulation and software support, system, subsystem and component test and evaluation support, and scientific computing support to the AMCOM Research Development and Engineering Center for missile system simulation and analysis. The Company anticipates that this contract will be recompeted during fiscal year 1999. The Company has used the knowledge and capabilities that it gained from creating computer simulations, performing computer and network integrations and developing high resolution scene generations to establish an extensive business base in Distributive Interactive Simulation (DIS), Virtual Prototype Simulation (VPS) and Virtual Engagement (VE) simulations. DIS, which is migrating into the High Level Architecture (HLA), is a simulation infrastructure that permits an interactive exchange of information to facilitate multiple simulations across a computer network. VPS is a virtual reality computer simulation that replicates the sights, sounds, and functionality of a given system, simulating both the operation of the weapon system and the environment surrounding the operator of the system. VPS may be used to evaluate equipment designs, instruct users in the operation of weapon systems, analyze the effectiveness of the system against different threats, or test system effectiveness under various conditions. VPS also provides the basis for the development of system trainers. VE simulations support the integration and testing of weapons systems by engaging real or virtual targets using a virtual missile interceptor. The Company has developed virtual prototype simulators for several AMCOM systems, including Bradley Linebacker, Line-Of-Sight-Anti-Tank (LOSAT) missile, Javelin, the Bradley Fighting Vehicle (BFV) A2 and the Improved Target Acquisition System (ITAS). BFV and ITAS include the Tube Launched Optically Guided Weapon (TOW) missile, Rapid Force Projection Initiative (RFPI) Hunter Vehicle, Unmanned Ground Vehicle (UGV), and Advanced Chaparral. The Company has developed a VE simulation for the Patriot missile system which has been used in tests. Defense Systems Integration The Company provides system integration and development services for the DOD, and supports DOD program managed activities as well as research and development centers. The Company's capability to provide systems engineering and integration solutions and services is broad based. The Company conducts analyses of requirements, modernization of information technologies, process modeling, design and rapid prototyping of designs and extensive simulation of the design for operational application, training, testing and post deployment support and analyses. Digitization and C4I activities are a major force in the transformation and modernization of the military in the next century. Tactical and strategic digitization of the U.S. armed forces leverage the major IT advances in both the commercial and government sectors of the U.S. economy. A major program supported by the Company is the Rapid Forces Projection Initiative (RFPI) Advanced Concept Technology Development (ACTD), for which the Company has acted as the systems integration contractor since fiscal year 1994. The Company developed significant solutions to the application of commercial-off-the-shelf components for military needs including development of a Light Digital Tactical Operation Center prototype and simulation center, and a distributed command and control computer for the 101st Airborne Division of the U.S. Army. The Company has also assisted in the development of the Institute of Electrical and Electronic Engineers (IEEE) standards for information exchange by the military, such as the Sensor Link Protocol for the Program Manager for Night Vision Devices. Under a five year contract awarded in fiscal year 1997 with an estimated total value of $50 million, the Company supports the Office of the Secretary of Defense and joint military services in the conduct of test planning, multi-service coordination, and execution for joint testing and evaluations. Advanced Tactical Systems The Company performs basic research and provides engineering services to the U.S. Air Force, U.S. Army, U.S. Navy, and Special Operations Command. The Company supports the U.S. Air Force in the development of simulations and signal processing algorithms for advanced guidance concepts for conventional weapon systems. The Irma Multi-Sensor Signature Model, the U.S. Air Force's standard air-to-surface target-in-background simulation, is an example of one such code. Training concepts and course development are provided to the U.S. Army Simulation, Training, and Instrumentation Command (STRICOM) and the Aviation Center. Other areas of engineering support include special operations technology, mine detection algorithms, avionics counter measures and formational positioning systems, and special operations maritime electronics. Naval Architecture The Company provides naval architecture, marine engneering services, services in ship acquisition management, production support, human systems integration, and ship survivability and protection. The Company is also a leader in the application of modeling and simulation technologies for naval solutions, simulations development, training simulators, and virtual reality programs. Under a five year contract awarded in fiscal year 1995 by the U.S. Naval Sea Systems Command, with an estimated total value of $169 million, the Company provides ship design services and technical support. Under two five year contracts awarded in fiscal year 1998 for the Naval Surface Warfare Center, Carderock Division, with an estimated total value of $23 million, the Company is performing marine scale model design, construction, and testing services, and ship systems integration engineering. Systems Engineering The Company provides studies, analysis, acquisition management and systems engineering services to elements of the intelligence community sponsoring advanced technology systems essential to national security. The Company delivers consulting services or direct support labor to augment the capability of selected U.S. Government agencies to develop, acquire, and integrate effectively complex systems or system components to achieve maximum effectiveness in system operation. Space Systems Applications The Company provides integration and development support involving satellite and other space applications. The Company performs contracts involving the establishment of the architecture of future space surveillance and avionics systems for the defense and intelligence community, and the development of related prototype information processing systems. These contracts are based on the Company's experience in optical sensor and geolocation technologies and its ability to develop sophisticated computer simulations to evaluate the performance of candidate architectures. Intelligence Program Applications The Company provides systems and software engineering services related to the design, development, and support of real-time and embedded IT systems, turnkey information systems, distributed client-server software systems, object-oriented software solutions, and software applications to the various U.S. Government intelligence agencies. The Company also provides engineering services in the areas of network security, enterprise solutions, and professional staff augmentation. The Company's information technology services cover a broad spectrum of multi-vendor platforms and operating environments, including client-server, scientific computing and digital signal processing. Business practices employed by the Company are consistent with the Software Engineering Institute Software and Systems Engineering Capability Maturity Models. Special Programs and Polarimetry Programs The Company provides technical services related to scientific and technical intelligence analysis, including hardware systems evaluation and integration, hardware-in-the-loop testing and evaluation, analysis of foreign weapons systems, foreign material exploitation, and system signature analysis and prediction. Results of this work aid U.S. weapon system developers in producing more effective products that give U.S. military forces greater combat leverage. The Company's 17-year record of such analysis and engineering support has positioned the Company to develop polarization technology as an augmentation to conventional optical sensor performance. The Company is continuing to develop the fundamental technology, both independently and through integrated product teams with government laboratories, while pursuing specific opportunities for application of the technology under contracts from several government agencies. Government Information Technology The Company's Government Information Technology unit provides information services and systems integration to federal, state and local governmental agencies. For the year ended August 31, 1998, the Company's Government Information Technology unit produced approximately 24% of the Company's revenues. The services offered by the Company include information technology services, computer systems integration, staff augmentation, consulting services, computer facility management and operations, Internet services, and customized software system development for customers in the federal and state information technology services market. Computer Systems Integration By building on its existing technical expertise and capabilities, the Company has been awarded contracts in computer systems integration, including large-scale projects. The Company's services include high performance computing, enterprise networking, and office automation, including high-end supercomputer architectures and applications; Internet services; high-speed, networking technologies; advanced visualization systems; and on-line, high-integrity data storage and archival systems. The Company is a systems integrator for many manufacturers and suppliers of supercomputers, workstations, personal computers, and networking equipment. The Company also offers a wide range of training services utilizing innovative techniques and tools, such as computer-based training aids to promote high productivity and efficient use of installed systems. These training services include personal computer applications as well as advanced supercomputing applications. Under two three year contracts (excluding options) awarded in fiscal year 1996 by the U.S. Army Information Systems Selection and Acquisition Agency, the Company acts as the lead systems integrator for the DOD High Performance Computing Modernization Program. Under these contracts, the Company supplies computer hardware and software, provides maintenance and systems integration and provides Internet services to DOD shared resource centers in Dayton, Ohio and Vicksburg, Mississippi. The U.S. Government has awarded a total of only four such contracts under a program to modernize its shared computer resources. These shared resource centers offer government scientists and engineers access to state-of-the-art high performance computing and communications capabilities. The programs provide for periodic upgrades in systems to insure state-of-the-art technology is installed in these centers. These awards established the Company as a leader in systems integration of high performance computers. The Company anticipates that these contracts will be recompeted in fiscal year 1999. Other contracts include an eight year contract awarded in fiscal year 1994 with the State of Alabama, with an estimated total value of $53 million to provide complete systems integration and facilities management services for the statewide Alabama Research and Education Network and the Alabama Supercomputer Center. The Company is providing Internet access to state government, industry, college and secondary school clients within the State of Alabama. Under two eight year contracts awarded in fiscal year 1992 by the Defense Intelligence Agency's Missile and Space Intelligence Center with an estimated total value of $34 million, the Company provides acquisition, installation, Intranet and Internet services, and technical and management services for a high performance scientific computer center. In August 1998 the Company was awarded two eight year subcontracts under the General Services Administration's Seat Management Program with an estimated total value of $100 million. The Company has responsibility under these subcontracts for high performance computing services and for delivery of high-end scientific and engineering workstations. Information Systems Support The Company provides operating and support services for existing information systems and assists in the development of enhancements that allow these existing systems to meet evolving technical challenges. The Company provides a wide range of services such as workflow management to enhance operations data, training to improve the client's abilities to use existing IT capabilities, support of video teleconferences, document imaging to reduce paperwork, support of desktop computers, network design and development, and software support for new and legacy computer systems. The Company supports federal and state government clients in the use of their information systems to ensure maximum potential and to keep such systems up-to-date with evolving hardware and software technology. The Company is performing its final option year under a $35 million contract awarded in fiscal year 1995 by the Centers for Disease Control and Prevention and the Agency for Toxic Substances and Disease Registry to upgrade, maintain, and manage their microcomputer local and wide area networks for a primary facility in Atlanta, Georgia, as well as offices in all 50 states and a number of locations around the world. In fiscal year 1998, the Company was awarded a seven year subcontract for $16 million to support the Space and Missile Defense Center. The Company will provide computer support and network administrative services and operate and maintain software applications. Other customers for which the Company provides information services include the State of Alabama Department of Human Resources and the Office of National Drug Control Policy. Law Enforcement and Criminal Justice The Company is a provider of proprietary and state-of-the-art innovative technology and services to the investigative and law enforcement communities both domestically and internationally. The Company's focus is to improve the effectiveness of the criminal justice system. The Company provides software development, maintenance and technical support to the Federal Bureau of Investigation. The Company supports the Drug Enforcement Agency (DEA) by using digital imaging techniques to populate databases used in DEA investigations. The Company licenses a proprietary software product known as DRUGFIRETM which is a forensic firearms examination and analysis system installed throughout the United States and in six other countries. The Company also plans to introduce in fiscal year 1999, another software product, ScenePro, which will be an automated, multi-media crime scene toolkit. Commercial Information Technology The Company provides information technology and services to commercial customers, state and local government agencies and judicial systems. The services offered by the Company include systems integration and engineering, application software development and deployment, data warehousing and mining, information security, staff augmentation, and SAP R/3 consulting and implementation. For the year ended August 31, 1998, the Company's Commercial Information Technology unit generated approximately 10% of the Company's revenues. SAP (TM) Licensing and Implementation Nichols ENTEC Systems, L.L.C. (ENTEC) is a joint venture presently owned 60% by the Company and 40% by DSM Copolymer, Inc., formed to license and implement SAP (TM) software. This software is used to manage accounting, human resources, production planning, materials management, and the sales and distribution functions. According to SAP publications, this software has been purchased by more than 9,000 customers worldwide. ENTEC is a National Implementation Partner with SAP America, specializing in the implementation of SAP R/3 enterprise-wide business software. In addition, ENTEC is both a SAP (TM) Certified Business Solutions Partner and ASAP Partner. ENTEC sells SAP R/3 software to companies with annual revenues of less than $200 million in the states of Arkansas, Louisiana, Mississippi, and Alabama. ENTEC provides a single point of contact for the customer interested in purchasing software, hardware, and services to implement a complete system. ENTEC was awarded a two year contract in fiscal year 1998 by DynMcDermott Petroleum Operations Company, with an estimated total value of $10 million, to deliver and implement SAP R/3 software for the Department of Energy's Strategic Petroleum Reserve. ENTEC clients include DSM Copolymer, Aluma-Form/Dixie Electrical Manufacturing Company, Tractor Supply Company, and Philips. Consulting and Professional Services The Company provides IT consulting and professional services such as networking and system integration client server, custom business application software development, contract programming, staff augmentation and training. The Company provides these IT consulting services for clients with all types of systems and networks. Programming and design capabilities range from traditional software languages to modern graphical user interface development tools. The Company's experience covers a broad spectrum of platforms and operating environments. The Company's clients include the State of Alabama, MobileComm, The Vanguard Group, Philips, the Virginia Courts System, and the University of Mississippi Medical Center. Healthcare Information Technology The Company provides information technology-based administrative services for the healthcare industry. For the year ended August 31, 1998, the Company's Healthcare Information Technology unit produced approximately 11% of the Company's revenues. Nichols TXEN Corporation The Company formed CSC Acquisition, Inc. ("Acquisition") as a wholly-owned subsidiary on June 6, 1995. On June 30, 1995, the Company acquired all of the assets and certain liabilities of Computer Services Corporation (CSC). Since its incorporation in 1967, CSC performed administrative services and information technology services for, and sold turnkey computer systems to, physician practices. The Company formed Nichols SELECT Corporation (Nichols SELECT) as a wholly-owned subsidiary on September 17, 1996. On September 23, 1996, Acquisition was merged into Nichols SELECT. On December 16, 1994, the Company acquired 19.9% of the capital stock of TXEN, Inc. (TXEN) with an option to acquire the remaining 80.1% of TXEN. Since its incorporation in 1989, TXEN provided technology information outsourcing and administrative outsourcing services for the managed health care industry. On August 29, 1997, the Company acquired the remaining 80.1% of TXEN through a merger of TXEN into Nichols SELECT, which after the merger continued to be wholly-owned by the Company. After the TXEN acquisition, Nichols SELECT changed its name to Nichols TXEN Corporation. The Company, through its wholly-owned subsidiary, Nichols TXEN Corporation, is a leading provider of outsourcing solutions for information technology and administrative services in the managed care and physician practice management segments of the health care industry. The Company's outsourcing services improve quality and reduce costs by minimizing the time and personnel needed to process health care transactions by offering customers a broad range of medical billing and claims processing solutions. The Company provides services under contracts and generates revenues primarily based on the number of transactions processed or the number of enrolled health plan members per month. As a result of the Company's fee structure and high customer retention, approximately 72% and 77% of Nichols TXEN's revenues for fiscal years 1997 and 1998, respectively, were recurring. The Company, through Nichols TXEN, offers a broad range of products and services which allow customers the flexibility to perform administrative functions with their own staff utilizing the Company's technology or to outsource to the Company certain administrative and processing functions. Each customer contracts with the Company for the level of outsourcing service needed. The Company's outsourcing solutions provide customers with significant benefits, including: (i) a variable rate operating cost structure for outsourced services; (ii) speed of implementation; (iii) reduced capital expenditures for administrative health care technologies; (iv) access to knowledgeable and experienced personnel; (v) sophisticated application software and decision support tools; and (vi) streamlined administrative functions. As a result, the Company's services enable customers to concentrate on providing quality health care by focusing on core competencies. The Company maintains a centralized network data center to process transactions and provide technology services for its customers. The Company believes that its ability to offer both technical solutions and administrative services through a network data center differentiates the Company from competitors that offer only turnkey software solutions or only administrative services. The Company, through Nichols TXEN, has organized its healthcare and administrative services into two business divisions. The Managed Care Services division provides the Company's technology and services to health maintenance organizations (HMOs), physician-hospital organizations (PHOs), independent practice associations (IPAs), integrated delivery systems (IDSs), provider sponsored organizations (PSOs), Medicare and Medicaid HMOs, insurance carriers and managed third-party administrators (Managed TPAs). The Practice Management Services division provides the Company's technology and services to hospital-based and other physician groups, hospital emergency departments and physician networks. As of October 1, 1998, the Company had 90 managed care services customers representing over 3.0 million lives nationwide and over 235 practice management services customers representing approximately 3,000 physicians primarily in the Southeast. Workers' Compensation Services The Company develops and supports two major packaged software products which are used for property and casualty and workers' compensation insurance systems. One of the products provides rating, underwriting, policy administration, and premium accounting for insurance companies. The other product provides full claims administration and risk management, as well as electronic data transfer and managed care options, which may be used in conjunction with the other products in an insurance company environment. The Company also provides information technology consulting services, customized software development, and packaged solutions for the property and casualty insurance industry. Customers using the software include the State of Alaska, The Kroger Company, Employers' Security Insurance Co., and American Federated General Agency. The Company recently expanded its services by offering a continuum of technology-based services built around a network data center. For the fiscal year ended August 31, 1998, revenues from the Company's workers compensation services were less than 1% of total revenues. Beginning in fiscal year 1999, the Company's workers' compensation services became part of the Company's Commercial IT unit. HealthGate The Company owns approximately 20% of HealthGate Data Corporation (HealthGate). HealthGate is a global Internet media company which develops and provides branded, interactive health and wellness information solutions to each of the four primary healthcare constituencies: patients, providers, payors and suppliers. Competition The Company competes against technical services companies in the defense and aerospace industries, including TRW, Inc., GRC International, Inc., BTG, Inc., and CACI International, Inc. The information services industry in which the Company operates is highly fragmented with no single company or small group of companies in a dominant position. The Company's competitors include large, diversified firms with substantially greater financial resources and larger technical staffs than the Company. Some of the larger competitors offer services in a number of markets which overlap many of the same areas in which the Company offers services, while certain companies are focused on only one or a few of these markets. The firms which compete with the Company are consulting firms, computer services firms, applications software companies and accounting firms, as well as the computer service arms of computer manufacturing companies and defense and aerospace firms. The primary factors of competition in the business in which the Company is engaged include technical, management and marketing competence, price, and past performance. The federal government market is highly competitive with no single dominant company. Procurement reforms have increased the importance of a contractor's past performance in deciding new bid awards. Past performance can represent over half the criteria weighting on new awards. The Company emphasizes client satisfaction, as evidenced by the Company's ability to maintain clients for many years and winning all of its major contract recompetes during the last five years. The Company believes that its low overhead and cost structure give it an advantage in bidding on contracts. Marketing For the Defense and Intelligence and Government IT units, the Company's marketing activities are generally directed by the strategic business unit presidents. The strategic business unit presidents coordinate the marketing activities of program development managers assigned to the executing business units. The program development staff, as well as other Company managers, engineers and scientists, attend new business briefings sponsored by government agencies, review publications and learn of new business opportunities through customer contacts. Potential new procurements are analyzed and evaluated within the unit of the Company that would be principally responsible for performance of the contract. The decision to submit a bid or proposal is made by the responsible unit president for bids under $10 million. The decision to submit a bid or proposal for bids greater than $10 million is made by the Chief Marketing Officer through a formal bid review process. For the Commercial IT and Healthcare IT units, the Company's marketing services are directed by such units' vice presidents of commercial sales. The marketing and sales staff receive a salary plus incentive compensation based on sales. After identifying prospective sales opportunities, the sales and marketing staff coordinates with the technical staff responsible for performing the services to develop each customer proposal which, if accepted, results in a contract award. The corporate marketing staff focuses on selected large procurements and activities associated with major new clients. Resources from across the Company are available to the corporate marketing staff to address major marketing issues. The corporate proposal staff and the corporate marketing staff report to the Chief Marketing Officer. Government Contracts A substantial portion of the Company's revenues are derived from contracts and subcontracts with the DOD and other federal government agencies. A majority of the Company's contracts are competitively bid and awarded on the basis of technical merit, personnel qualifications, experience, and price. The Company also receives some contract awards involving special technical capabilities on a negotiated, noncompetitive basis due to the Company's unique technical capabilities in special areas. Future revenues and income of the Company could be materially affected by changes in procurement policies, a reduction in expenditures for the services provided by the Company, and other risks generally associated with federal government contracts. The Company performs its services under federal government contracts that usually require performance over a period of one to five years. Long-term contracts may be conditioned upon continued availability of Congressional appropriations. Variances between anticipated budget and Congressional appropriations may result in delay, reduction or termination of such contracts. Contractors often experience revenue uncertainties with respect to available contract funding during the first quarter of the government's fiscal year beginning October 1, until differences between budget requests and appropriations are resolved. The Company's federal government contracts are performed under cost-reimbursement contracts, time-and-materials contracts and fixed-price contracts. Cost-reimbursement contracts provide for reimbursement of costs (to the extent allowable under Federal Acquisition Regulations) and for payment of a fee. The fee may be either fixed by the contract (cost-plus-fixed fee) or variable, based upon cost, quality, delivery, and the customer's subjective evaluation of the work (cost-plus-award fee). Under time-and-materials contracts, the Company receives a fixed amount by labor category for services performed and is reimbursed (without fee) for the cost of materials purchased to perform the contract. Under a fixed-price contract, the Company agrees to perform certain work for a fixed price and, accordingly, realizes the benefit or detriment to the extent that the actual cost of performing the work differs from the contract price. Contract revenues for the year ended August 31, 1998 were approximately 43% from cost-reimbursement contracts, approximately 33% from time-and-materials contracts and 24% from fixed-price contracts. The Company's allowable federal government contract costs and fees are subject to audit by the Defense Contract Audit Agency (DCAA). Audits may result in non-reimbursement of some contract costs and fees. To date, the Company has experienced no material adjustments as a result of audits by the DCAA. The DCAA has not completed its audit of the Company's federal contracts for fiscal year 1998. The Company's federal government contracts may be terminated, in whole or in part, at the convenience of the government. If a termination for convenience occurs, the government generally is obligated to pay the cost incurred by the Company under the contract plus a pro rata fee based upon the work completed. When the Company participates as a subcontractor, the Company is at risk if the prime contractor does not perform its contract. Similarly, when the Company as a prime contractor employs subcontractors, the Company is at risk if a subcontractor does not perform its subcontract. Some of the Company's federal government contracts contain options which are exercisable at the discretion of the customer. An option may extend the period of performance for one or more years for additional consideration on terms and conditions similar to those contained in the original contract. An option may also increase the level of effort and assign new tasks to the Company. In the Company's experience, options are usually exercised. The Company's eligibility to perform under its federal government contracts requires the Company to maintain adequate security measures. The Company has implemented security procedures necessary to satisfy the requirements of its federal government contracts. Backlog The Company had a backlog of approximately $1.3 billion, including options of $954.1 million, at August 31, 1998. The Company had a backlog of $1.2 billion, including options of $928.0 million, at August 31, 1997, and a backlog of $1.0 billion, including options of $501.8 million, at August 31, 1996. Backlog represents the amount of revenues expected to be realized from awarded contracts. Therefore, the amount in backlog is typically less than the face amount of the contract. The amount includes estimates based on the Company's experience with similar awards and customers, and estimates of revenues that would be recognized from the performance of options, under existing contracts, that may be exercised by the customer. These estimates are reviewed periodically and are adjusted based on the latest available information. Historically, these adjustments have not been significant. Because contracts in backlog are typically multi-year contracts, an increase in backlog may not translate into proportional revenue growth in any future period. Management believes that approximately 20% to 25% of the Company's backlog at August 31, 1998 will result in revenues for the year ending August 31, 1999. The backlog of contract awards is influenced by the number of new contracts awarded and by the number of contracts awarded where the Company has an existing contract that is recompeted. The Company performs under several large multi-year contracts which, upon expiration, are recompeted. Historically, the Company has been successful in winning recompeted contracts where it has been the incumbent contractor. However, the Company cannot give assurance that it will experience continued success with respect to future awards of recompeted contracts. The backlog amounts as presented are comprised of funded and unfunded components. Funded backlog represents the sum of contract amounts for which funds have been specifically obligated by customers to contracts. Unfunded backlog represents future contract or option amounts that customers may obligate over the specified contract performance periods. The Company's customers allocate funds for expenditures on long-term contracts on a periodic basis. The Company is committed to provide services under its contracts to the extent funds are provided. The funded component of the Company's backlog at August 31, 1998 was approximately $214.6 million. The funded components of the Company's backlog at August 31, 1997 and 1996, were $162.2 million and $99.5 million, respectively. The ability of the Company to realize revenues from contracts in backlog is dependent upon adequate funding for such contracts. Although funding of its contracts is not within the Company's control, historical contract fundings have been approximately equal to the aggregate amounts of the contracts. Intellectual Property Rights The Company's success has resulted, in part, from its methodologies and other proprietary intellectual property rights. The Company relies upon a combination of trade secret, nondisclosure and other contractual arrangements and technical measures to protect its proprietary rights. The Company generally enters into confidentiality and nonsolicitation agreements with its clients and potential clients and limits access to and distribution of its proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of its proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. The Company's business does not depend on patents, copyrights, and trademarks. Management believes that the Company's success depends on the innovative skills and technical competence of its personnel rather than on the ownership of patents, copyrights or trademarks. Technology developed by the Company under its federal contracts is owned by the U.S. Government. Employees At August 31, 1998 the Company had approximately 3,000 full-time employees. None of the Company's employees is covered by a collective bargaining agreement. The Company considers its relationship with its employees to be good. ITEM 2. PROPERTIES The Company currently leases approximately 253,000 square feet of office space in Huntsville, Alabama, and approximately 512,000 square feet of office space in approximately 30 other locations throughout the United States. The Company's leases expire at varying periods from 1998 to 2005, and currently call for minimum annual lease payments of approximately $9.3 million. Certain of the lessors under such leases are affiliated with the Company. See Note 8 to Notes to the Company's Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS Pursuant to a purchase agreement dated April 15, 1998, the Company purchased all of the capital stock of Mnemonic Systems, Inc. (MSI), from Artis B. Isaac (Isaac). The purchase agreement contains an indemnity from Isaac in favor of the Company against damages arising out of that certain litigation pending in the United District Court for the District of Columbia captioned Otto B. Isaac and Kathryn Isaac, Plaintiffs, v. Mnemonic Systems Inc. and Artis B. Isaac, Defendants instituted on August 8, 1996, wherein the plaintiffs alleged, among other matters, breach of contract, promissory estoppel, fraud, and negligent misrepresentation in connection with the employment of Otto B. Isaac by MSI and the subsequent termination of such employment relationship. MSI and Isaac have denied the allegations and have counterclaimed for breach of contract and fraud. In addition to the contractual indemnity, an escrow account funded by the seller in the amount of approximately $800,000 exists to secure Isaac's indemnity obligation to the Company, which the Company believes will be adequate to cover the potential liability associated with this litigation. On July 1, 1998, Forensic Technology WAI, Inc. (Forensic), filed suit against MSI in United States District Court for the Eastern District of Virginia, Alexandria Division, seeking injunctive relief, as well as monetary damages. Forensic has alleged that the DRUGFIRE system offered by MSI and used for the examination of fired cartridges infringes a United States patent issued to Forensic on August 5, 1997. MSI believes that the DRUGFIRE system is non-infringing, and that there are various grounds for invalidating the Forensic patent. The Company has made a claim for indemnity against Isaac pursuant to the contractual indemnity provisions of the purchase agreement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to the executive officers of the Company as of August 31, 1998, is set forth below. Officers serve at the discretion of the Board of Directors.
Officer Name Age Position Since Chris H. Horgen 52 Chairman 1976 Michael J. Mruz 53 Chief Executive Officer, President, Chief Operating 1994 Officer and Director Roy J. Nichols 60 Senior Vice President and Vice Chairman 1976 Patsy L. Hattox 49 Corporate Vice President, Chief Administrative 1980 Officer, Secretary and Director J. Michael Coward 55 Corporate Vice President and Chief Marketing Officer 1990 Allen E. Dillard 38 Corporate Vice President, Chief Financial Officer and Treasurer 1992 Michael W. Solley 40 Executive Vice President 1992 John Rose 52 President, Army Business Operations 1998 James C. Moule 62 President, Navy and Air Force Business Operations 1988 Carl W. Monk, Jr. 51 President, National Programs Business Operations 1998 Thomas L. Patterson 56 Chairman, Healthcare IT and Director 1996 Paul D. Reaves 41 Chief Executive Officer, Healthcare IT 1998 H. Grey Wood 42 President, Healthcare IT 1998 Maurice Romine 57 President, Commercial IT 1996
Messrs. Horgen, Nichols, Coward, Dillard, Solley and Moule and Ms. Hattox have been principally employed by the Company for over five years. Mr. Horgen serves as a director of SouthTrust Bank of Alabama, N.A. Mr. Nichols serves as a director of Adtran, Inc. Michael J. Mruz became President of the Company in August 1994, its Chief Operating Officer and a Director in September 1994, and its Chief Executive Officer in September 1997. From 1989 to 1994, Mr. Mruz served as Executive Vice President, Chief Financial and Administrative Officer, and a member of the Board of Directors of BDM International, Inc. (BDM), a defense contractor. While at BDM, Mr. Mruz held the positions of Corporate Vice President from 1988 to 1989, Vice President/General Manager of BDM's Huntsville Technology Center from 1983 to 1988, Vice President, Systems Design and Analysis from 1979 to 1983, and various management and technical positions from 1974 to 1979. Mr. Mruz served in the U.S. Air Force from 1968 through 1974 in research and development assignments involving communications systems. John P. Rose became the President of the Company's Army Business Operations on May 1, 1998. General Rose retired as a Brigadier General from the U.S. Army in April, 1998. He served as the Director of Requirements on the Army Staff from July 1995 to April 1998. From July 1992 to July 1995, General Rose served as Director of North Atlantic Treaty Organization (NATO) Force Programs at the Supreme Headquarters Allied Powers Europe (SHAPE), Belgium. In that capacity he orchestrated military requirements for NATO nations in the post Cold War environment. Carl W. Monk, Jr. was named president of the Company's National Programs Business Operations in September 1998. Mr. Monk joined the Company in July 1998 with the acquisition of Welkin. Mr. Monk was the founder and CEO of Welkin from its inception in 1988 through its merger with the Company in 1998. Thomas L. Patterson is Chairman of Nichols TXEN Corporation, a wholly-owned subsidiary of the Company. He has been active in the healthcare, managed care, and insurance markets since 1980. Mr. Patterson was co-founder and President of TXEN, Inc., an information technology company for managed care organizations, from 1989 to 1997. From 1980 to 1989, he was President of SEAKO, Inc., an information technology company for practice management and managed care systems. Paul D. Reaves has been Chief Executive Officer of Nichols TXEN Corporation since May 1998. Mr. Reaves was a co-founder of TXEN, Inc., and he served as Executive Vice President of TXEN, Inc., from 1989 to 1997. From 1981 to 1989, Mr. Reaves was employed by SEAKO, Inc. in programming, implementation, customer support and sales and marketing. Mr. Reaves served as Vice President of SEAKO, Inc. from 1985 to 1989. H. Grey Wood has been President of Nichols TXEN Corporation since January 1998 and was Vice President and General Manager of TXEN, Inc. from 1995 to 1998. From 1993 to 1995, he was Director and General Manger of the Physician Practice Management Group of CSC Healthcare Systems, Inc., a vendor of turnkey practice management and managed care software. Maurice G. Romine became President of Nichols InfoTec Corporation, a wholly-owned subsidiary of the Company, in May 1997. He served as Vice President/General Manager of Nichols InfoTec Corporation from November 1996 until May 1997, and Vice President of the Company's Commercial Information Technology Systems from February 1996 to November 1996. Prior to joining the Company, Mr. Romine was employed by Intergraph Corporation, an interactive computer graphics systems company, where he served as Executive Vice-President, Corporate Marketing, from November 1989 to October 1992, and held various management and technical positions from October 1976 to November 1989. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Dividend Policy The Company has never declared or paid cash dividends on its Common Stock. The Company presently intends to retain its earnings for use in its business, and therefore does not anticipate paying any cash dividends. Future cash dividends, if any, will be determined by the Board of Directors in light of Company's earnings, financial condition, capital requirements, and such other factors as the Board may deem relevant. The Company's existing loan agreement presently restricts the payment of cash dividends if the Company is in default. Market and Stockholder Information The Company's Common Stock is traded on the Nasdaq National Market under the symbol NRES. The following table sets forth, for the periods indicated, the high and low closing sale prices of the Company's Common Stock as reported on the Nasdaq National Market. 1998 1997 High Low High Low First Quarter 28 1/8 20 3/4 25 2/3 18 2/3 Second Quarter 26 5/8 20 3/8 29 3/4 21 1/2 Third Quarter 28 3/8 22 26 1/8 14 5/8 Fourth Quarter 28 3/4 20 1/8 25 3/4 17 3/4 On November 3, 1998, the per share closing sale price of the Common Stock on the Nasdaq National Market was $19.875. On November 3, 1998, there were approximately 1,607 holders of record of the Common Stock. Recent Sales of Unregistered Securities On July 28, 1998, the Company issued 415,671 shares of Common Stock to shareholders of Welkin in connection with the merger of a wholly-owned subsidiary of the Company with and into Welkin. The offering was exempt from registration under Section 4(2) of the Securities Act of 1933 as a transaction not involving any public offering. ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY Pro forma Pro forma 1998 1998 1997 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- Revenues $ 427,043,000 $427,043,000 $ 398,142,000 $ 398,142,000 $256,605,000 $ 180,698,000 $149,874,000 Net income $16,958,000*** $ 14,423,000 13,199,000** $ 1,199,000 $ 10,063,000 $ 7,651,000 $ 6,858,000 Earnings per common share * $ 1.25 $ 1.06 $ 1.09 $ 0.10 $ 1.00 $ 0.80 $ 0.72 Earnings per common share assuming dilution* $ 1.20 $ 1.02 $ 1.04 $ 0.09 $ 0.94 $ 0.77 $ 0.70 Stockholders' equity $ 166,472,000 $166,472,000 $ 146,968,000 $ 146,968,000 $115,052,000 $ 69,358,000 $ 58,365,000 Long-term debt $ 2,948,000 $ 2,948,000 $ 4,025,000 $ 4,025,000 $ 4,784,000 $ 5,366,000 $ 4,328,000 Goodwill and other intangibles, net $ 54,214,000 $ 54,214,000 $ 48,130,000 $ 48,130,000 $21,004,000 $ 8,803,000 $ - Total assets $ 224,061,000 $224,061,000 $ 210,132,000 $ 210,132,000 $165,321,000 $ 103,283,000 $82,318,000
* As adjusted for a three-for-two stock split effective October 21, 1996. ** Excludes a $12.0 million write off of purchased in-process research and development. *** Excludes $4.1 million of pretax special charges. NOTE: All prior periods have been restated to reflect the fiscal year 1998 merger with Welkin, which was accounted for as a pooling of interests. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained herein, this document contains forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. These risks and uncertainties are discussed in more detail below. These forward-looking statements can be generally identified as such because the content of the statements will usually contain such words as the Company or management "believes," "anticipates," "expects," "plans," or words of similar import. Similarly, statements that describe the Company's future plans, objectives, goals, or strategies are forward-looking statements. Overview and Business Environment The Company is a leading provider of technical and information technology (IT) services, including information processing, systems development and systems integration. The Company provides these services to a wide range of clients, including the Department of Defense (DOD), other federal agencies, state and local governments, healthcare and insurance organizations, and commercial enterprises. The Company was founded in 1976 to develop specialized optical sensing capabilities for military weapons and ballistic defense programs. Until fiscal year 1991, virtually all of the Company's revenues were derived under contracts with the federal government relating to high technology weapons systems, strategic missile defense and other related aerospace technologies. Areas of particular strength have included tactical technology, smart sensing systems, simulations, data processing, systems engineering and systems integration (including software development, networking, hardware acquisition and installation, user training and system operation and maintenance). Beginning in fiscal year 1991, in response to increasing budget pressure on military procurements, the Company strategically began to develop applications for its technical capabilities outside its traditional core military business. Although the Company's core military business has continued to grow, the Company has successfully entered the markets for other government information technology solutions, as well as information technology solutions in the healthcare industry and other commercial markets. The Company's business strategy consists of three key elements: (i) maintain the Company's leadership in technology; (ii) apply the Company's technology to create solutions for new clients; and (iii) make strategic acquisitions and investments to expand the business of the Company and gain industry knowledge. The Company is organized into four strategic business units, reflecting the particular market focus of each line of business. The Defense and Intelligence unit, formerly Nichols Federal, provides technical services primarily to U.S. Government defense agencies. The Government Information Technology unit, formerly Nichols InfoFed, provides information and technology solutions and services to a variety of governmental agencies. The Commercial Information Technology unit, formerly Nichols InfoTec, provides information and technology services to various commercial clients, other than healthcare clients. The Healthcare Information Technology unit, formerly Nichols SELECT, provides information and administrative services to clients in the healthcare and insurance industries. For the year ended August 31, 1998, the percentage of total revenues attributable to the four business units was approximately 55% for Defense and Intelligence, 24% for Government IT, 10% for Commercial IT, and 11% for Healthcare IT. Risk Factors The Company's business and financial performance are subject to risks and uncertainties, including those discussed below. Acquisition Strategy Expansion through acquisitions is an important component of the Company's overall business strategy. The Company has successfully completed ten strategic acquisitions and alliances since September 1, 1994, most of which have centered on IT and healthcare information services markets. Since the respective dates of the acquisitions, the Company has integrated these acquired entities in order to draw on the Company's base of technical expertise and capabilities in designing solutions for government, commercial, and healthcare clients. The Company's continued ability to grow by acquisitions is dependent upon, and may be limited by, the availability of compatible acquisition candidates at reasonable prices, the Company's ability to fund or finance acquisitions on acceptable terms, and the Company's ability to maintain or enhance the profitability of any acquired business. Performance of Large Systems Integration Contracts As part of the Company's business strategy to enter new markets, the Company continues to pursue large systems integration contracts in both the government and commercial markets, although competition for such contracts is intense and many of the Company's competitors have greater resources than the Company. While such contracts are working capital intensive, requiring large equipment and software purchases to be funded by the Company before payment from the customer, the Company believes such contracts offer attractive revenue growth and margin expansion opportunities for the Company's range of technical expertise and capabilities. Variability of Quarterly Earnings or Operating Results The Company's revenues and earnings may fluctuate from quarter to quarter based on such factors as the number, size, and scope of projects in which the Company is engaged, the contractual terms and degree of completion of such projects, expenditures required by the Company in connection with such projects, any delays incurred in connection with such projects, employee utilization rates, the adequacy of provisions for losses, the accuracy of estimates of resources required to complete ongoing projects, and general economic conditions. Under certain contracts, the Company is required to purchase, integrate and deliver to the customer large amounts of computer processing systems and other equipment. Revenues are accrued as costs to deliver these systems are incurred, and as a result, quarterly revenues will be impacted by fluctuations related to equipment purchases which occur on a periodic basis depending on contract terms and modifications. Concentration of Revenues Approximately 75%, 88%, and 76% of the Company's total revenues in fiscal year 1998, fiscal year 1997 and fiscal year 1996, respectively, were derived from contracts or subcontracts funded by the U.S. Government. These U.S. Government contracts include military weapons systems contracts funded by the DOD that accounted for approximately 55%, 53%, and 57% of the Company's total revenues in such years, respectively. The Company believes that the success and development of its business will continue to be dependent upon its ability to participate in U.S. Government contract programs. Accordingly, the Company's financial performance may be directly affected by changing U.S. Government procurement practices and policies. Other factors that could materially and adversely affect the Company's government contracting business and programs include budgetary constraints, changes in fiscal policies or available funding, changes in government programs or requirements (including proposals to abolish certain government agencies or departments, curtailing the U.S. Government's use of technology services firms, the adoption of new laws or regulations), technological developments and general economic conditions. These factors could cause U.S. Government agencies to exercise their rights to terminate existing contracts for convenience or not to exercise options to renew such contracts. Certain of the Company's contracts individually contribute a significant percentage of the Company's revenues. The Company's seven largest contracts (by revenues) are with the U.S. Government and generated approximately 43% of the Company's total revenues for the year ended August 31, 1998. The Company expects revenues to continue to be concentrated in a relatively small number of large U.S. Government contracts. Termination of such contracts, or the Company's inability to renew or replace such contracts when they expire, could materially and adversely affect the Company's revenues and income. During fiscal year 1999, five of these seven contracts are expected to be recompeted. Reductions or Changes in Military Weapons Expenditures Historically, a majority of the Company's revenues (55% for the year ended August 31, 1998) are related to U.S. military weapons systems. The U.S. military weapons budget has been declining in real terms since the mid-1980s, resulting in some cases in program delays, extensions, and cancellations. A further significant decline in U.S. military expenditures for weapons systems, or a reduction in the weapons systems portion of the defense budget, could materially and adversely affect the Company. While not anticipated, the loss or significant curtailment of the Company's U.S. military contracts would materially and adversely affect the Company's revenues and income. Approximately 17% of the Company's revenues in fiscal year 1998 were from contracts related to Ballistic Missile Defense (BMD), compared to 20% of revenues in fiscal year 1997 and 26% of revenues in fiscal year 1996 from such contracts. Strategic defense has existed for more than 26 years as a mission of DOD through activities such as the BMD program. If a decision were made to reduce substantially the scope of current BMD programs, management believes that many national and theater missile defense programs would continue to be funded by the U.S. Army and U.S. Air Force, and other DOD agencies. While the Company has expanded into other markets, a decision to reduce significantly or eliminate missile defense funding would have an adverse effect on the Company's revenues and income. Uncertainties Associated with Government Contracts The Company performs its services under U.S. Government contracts that usually require performance over a period of one to five years. Long-term contracts may be conditioned upon continued availability of Congressional appropriations. Variances between anticipated budgets and Congressional appropriations may result in delay, reduction, or termination of such contracts. Contractors can experience revenue uncertainties with respect to available contract funding during the first quarter of the government's fiscal year beginning October 1, until differences between budget requests and appropriations are resolved. The Company's contracts with the U.S. Government and its prime contractors are subject to termination, in whole or in part, either upon default by the Company or at the convenience of the government. The termination for convenience provisions generally entitle the Company to recover costs incurred, settlement expenses, and profit on work completed prior to termination. Because the Company contracts to supply goods and services to the U.S. Government, it is also subject to other risks, including contract suspensions, audit adjustments, protests by disappointed bidders of contract awards which can result in the re-opening of the bidding process and changes in government policies or regulations. Contract Profit Exposure The Company's services are provided primarily through three types of contracts: fixed-price, time-and-materials and cost-reimbursement contracts. Fixed-price contracts require the Company to perform services under a contract at a stipulated price. Time-and-materials contracts reimburse the Company for the number of labor hours expended at an established hourly rate negotiated in the contract, plus the cost of materials incurred. Under cost-reimbursement contracts, the Company is reimbursed for all actual costs incurred in performing the contract to the extent that such costs are within the contract ceiling and allowable under the terms of the contract, plus a fee or profit. The Company assumes greater financial risk on fixed-price contracts than on either time-and-materials or cost-reimbursement contracts. As the Company increases its commercial business, it believes that an increasing percentage of its contracts will be fixed-priced. Failure to anticipate technical problems, estimate costs accurately, or control costs during performance of a fixed-price contract, may reduce the Company's profit or cause a loss. In addition, greater risks are involved under time-and-materials contracts than under cost-reimbursement contracts because the Company assumes the responsibility for the delivery of specified skills at a fixed hourly rate. Although management believes that adequate provision for its fixed-price and time-and-materials contracts is reflected in the Company's financial statements, no assurance can be given that this provision is adequate or that losses on fixed-price and time-and-materials contracts will not occur in the future. To compete successfully for business, the Company must satisfy client requirements at competitive rates. Although the Company continually attempts to lower its costs, there are other information technology and technical services companies that may provide the same or similar services at comparable or lower rates than the Company. Additionally, certain of the Company's clients require that their vendors reduce rates after services have commenced. The Company's success will also depend upon its ability to attract, retain, train, and motivate highly skilled employees, particularly in the areas of information technology, where such employees are in great demand. Year 2000 Many computer programs were designed and developed without considering the upcoming change in the century, which could lead to failure in computer applications or create erroneous results due to those computer programs not recognizing the year 2000. This issue is referred to as the "Year 2000" problem. Although the Company believes that its Year 2000 compliance program is comprehensive, the Company may not be able to identify, successfully remedy or assess all date-handling problems in its business systems or operations or those of its customers and suppliers. As a result, the Year 2000 problem could have a materially adverse affect on the Company's business, financial condition or results of operations. Amortization of Intangible Assets Related to TXEN Acquisition In fiscal year 1995, the Company purchased 19.9% of the capital stock of TXEN, Inc. (TXEN), for approximately $1.5 million. In August 1997, the Company exercised its option to acquire the remaining 80.1% of the capital stock of TXEN for aggregate consideration of approximately $43.8 million. The total purchase price for the TXEN acquisition was allocated to the TXEN assets and liabilities. The excess of the purchase price over the fair market value of the tangible net assets acquired of approximately $42.1 million was allocated to the following intangibles: $12.0 million to in-process research and development, $15.6 million to goodwill, $12.7 million to other intangibles and $1.8 million to capitalized software development. In-process research and development of $12.0 million was expensed in the fourth quarter of 1997. Goodwill and other intangibles of $27.6 million are being amortized using the straight-line method over an estimated useful life of 20 years. Of the total purchase price for the acquisition of TXEN, $12.0 million was allocated to ten software programs and systems constituting in-process technology. The fair value of the acquired in-process technology was determined based on an analysis of the markets, projected cash flows and risks associated with achieving such cash flows. At the date of acquisition, the technological feasibility of the acquired technology had not been established and the acquired technology has no alternative future uses. There can be no assurance that the purchased in-process technology will be successfully developed. The acquired in-process technology consisted of ten software and systems development projects to reduce the time and personnel needed to perform managed care administrative functions and provide enhanced information reports. At the date of acquisition, the Company estimated that the cost to complete the projects was $1.75 million of which $445,000 was spent in fiscal year 1998 and of which $1.3 million is expected to be spent in fiscal year 1999. The Company expects to benefit from such projects commencing in the second quarter of fiscal year 1999. The Company expects the projects will be completed in the third quarter of fiscal 1999. To the extent the in-process technology is not successfully developed, this could have a material adverse impact on the Company's operating results and financial condition. In connection with the Company's filing of a Form S-3 registration statement, the Company is engaged in discussions with the staff of the Securities and Exchange Commission regarding the purchase price allocation related to its August 1997 acquisition of TXEN. These discussions principally relate to the amount allocated to in-process research and development and the useful life of twenty years assigned to goodwill. The Company and its independent auditors, Ernst & Young LLP, believe the purchase price allocation recorded in connection with the TXEN acquisition, and related amortization charges, are in accordance with widely recognized appraisal practices and generally accepted accounting principles. However, the staff of the Securities and Exchange Commission has recently expressed views concerning valuation of in-process research and development in business combinations which, if determined to be applicable, would probably result in a reduction in the amount allocated to in-process research and development. If there are any significant changes as a result of these discussions to the amounts allocated to purchased in-process research and development or other intangible assets, or changes in the lives over which such amounts are amortized, these could result in a material reduction in the amount of the charge for in-process research and development reflected in the Company's financial results for the year ended August 31, 1997 and increased amortization expense in 1998 and subsequent periods which could be material. Results of Operations The following table sets forth, for the periods indicated, the percentages which certain items bear to consolidated revenues and the percentage change of such items for the periods indicated. The amounts for fiscal years 1998 and 1997 include the impact of special charges to operating profit:
Percentage Increase Percentage of Revenues (Decrease) Years Ended August 31, Years Ended August 31, 1998 1997 1996 1998-1997 1997-1996 Revenues....................................... 100.0% 100.0% 100.0% 7.3% 55.2% Cost and expenses: Direct and allocable.................... 83.3 88.3 85.1 1.3 60.9 General and administrative.............. 9.2 6.3 8.4 56.9 16.4 Amortization of intangibles............. 1.0 0.5 0.5 121.3 53.0 Special charges......................... 1.0 3.0 __ (65.6) n/a --------------------------------------------- Total cost and expenses............. 94.5 98.1 94.0 3.4 61.9 Operating profit............................. 5.5 1.9 6.0 202.0 (49.9) Other income (expense), net.................. 0.1 0.3 0.2 (67.3) 167.5 Income before income taxes................... 5.6 2.2 6.2 168.2 (44.2) Income taxes................................. 2.2 1.9 2.3 21.6 32.0 --------------------------------------------- Net income................................... 3.4% 0.3% 3.9% 1,102.9% (88.1)% =============================================
The following table summarizes the percentage of revenues by contract type for the periods indicated: Years Ended August 31, 1998 1997 1996 ---- ---- ---- Cost-reimbursement................................... 43% 49% 51% Fixed-price.......................................... 33 35 22 Time-and-materials................................... 24 16 27 The table below presents contract award and backlog data for the periods indicated:
Years Ended August 31, 1998 1997 1996 ---- ---- ---- (in thousands) Contract award amount................................$ 453,527 $ 679,174 $ 598,653 Backlog (with options)...............................$ 1,264,201 $ 1,228,362 $ 1,003,135 Backlog (without options)............................$ 310,071 $ 300,337 $ 501,373 Backlog percentage by contract type: Cost-reimbursement.............................. 44% 45% 60% Fixed-price..................................... 37% 30% 30% Time-and-materials.............................. 19% 25% 10%
The backlog of contract awards is influenced by the number of new contracts awarded and by the number of contracts awarded where the Company has an existing contract that is recompeted. The Company performs under several large multi-year contracts which, upon expiration, are recompeted. Historically, the Company has been successful in winning recompeted contracts where it has been the incumbent contractor. However, the Company cannot give assurance that it will experience continued success with respect to future awards of recompeted contracts. Of the $599 million in contract awards for fiscal year 1996, $355 million or 59% were with respect to the two high performance systems integration contract awards. Of the $679 million in contract awards for fiscal year 1997, $447 million or 65% were awards related to recompetition of contracts where the Company was the incumbent. Of the $454 million of contract awards in fiscal year 1998, $77 million or 17% were awards related to recompetition of existing contracts where the Company was the incumbent. The Company expects that in fiscal year 1999, five of the Company's largest contracts by revenues will be recompeted. Comparison of Operating Results for Fiscal Year 1998 with Fiscal Year 1997 Revenues. Revenues increased $28.9 million (7.3%) for the year ended August 31,1998. The Company's Defense and Intelligence unit, which represented approximately 55% of consolidated revenues for the year, reported an increase of $16 million (7%), primarily as a result of continued growth in existing contract base. The Government IT unit, representing approximately 24% of consolidated revenues for the year, reported a decrease of $30 million, primarily as a result of reduced orders on two existing systems integration contracts. Commercial IT revenues increased $15 million (58%) for the year, primarily as a result of SAP software sales and integration services. Healthcare IT revenues increased $28 million (175%) for the year, primarily as a result of the acquisition of TXEN, Inc. completed in August 1997. Operating Profit. In the third quarter of fiscal year 1998 the Company expensed $2 million of purchased in-process research and development activities related to the acquisition of Mnemonic Systems, Incorporated (MSI). In the fourth quarter of fiscal year 1998 the Company expensed $2.1 million in special charges of which, $1.9 million related to the impairment of assets associated with the insurance line of business (see Note 4 of the Notes to Consolidated Financial Statements) and $0.2 million related to expenses incurred to consummate the merger with Welkin Associates, Ltd. (Welkin), accounted for as a pooling of interests. In the fourth quarter of fiscal year 1997 the Company expensed $12 million of purchased in-process research and development activities related to the acquisition of the remaining 80.1% of TXEN, Inc. (TXEN). Operating profit including the write-offs of purchased in-process research and development and special charges, increased $15.6 million (202%) for year ended August 31, 1998 as compared to year ended August 31, 1997. Operating profit excluding the write-offs of purchased in-process research and development and special charges, increased $7.8 million (39.3%) for the year ended August 31, 1998 as compared to the year ended August 31, 1997. Direct and allocable costs during fiscal year 1998 decreased as a percent of revenues compared to fiscal year 1997 as a result of fewer hardware purchases for systems integration contracts. General and administrative expense increased $14.2 million (56.9%) for the year ended August 31, 1998 compared to the year ended August 31, 1997, primarily as a result of the acquisition of TXEN completed in August 1997. Amortization of intangibles increased $2.6 million (121.3%) for the year ended August 31, 1998 as compared to the year ended August 31, 1997 primarily as a result of the amortization of the intangibles recorded with the TXEN acquisition completed in August 1997. The $4.1 million pre-tax special charges represents 1.0% of total costs and expenses for the year ended August 31, 1998. The $12.0 million pre-tax special charges represents 3.0% of total costs and expenses for the year ended August 31, 1997. Total costs and expenses were 94.5% of revenues for the year ended August 31, 1998 as compared to 98.1% of revenues for the year ended August 31, 1997. Operating Margin. Operating margin including the special charges was 5.5% of revenues for the year ended August 31, 1998 as compared to 1.9% of revenues for the year ended August 31, 1997. Operating margin excluding the special charges was 6.4% of revenues for the year ended August 31, 1998 as compared to 5.0% of revenues for the year ended August 31, 1997. The Company's Defense and Intelligence unit realized a 6.0% operating margin for the year ended August 31, 1998 as compared to 4.2% for the year ended August 31, 1997. The improved margins are primarily the result of improved margins on time-and-material contracts. The Company's Government IT unit realized operating margins, excluding the special charges, of 6.0% for the year ended August 31, 1998 as compared to 5.5% for the year ended August 31, 1997. The improved margins are the result of increased margins on modifications awarded to existing contracts during fiscal year 1998. The Company's Commercial IT unit realized operating margins of 4.7% for the year ended August 31, 1998 as compared to 8.5% for the year ended August 31, 1997. The decreased margins are a result of increased costs related to infrastructure additions and client receivable write-offs. The Company's Healthcare IT unit realized operating margins, excluding special charges, of 12.3% for the year ended August 31, 1998 as compared to 5.0% for the year ended August 31, 1997. The improved margins are the result of the managed care operations acquired with the acquisition of TXEN completed in August 1997. Other Income (Expense). Other income (expense) decreased $.7 million for the year ended August 31, 1998 as compared to the year ended August 31, 1997. Other income includes equity in earnings of unconsolidated affiliates and interest income. Other expense includes interest expense and minority interest. Interest income is from the investment of the Company's cash reserves. Substantially all available cash is invested in interest-bearing accounts or fixed income instruments. Interest expense is primarily from the long-term borrowings of the Company and the commitment fee on unused line of credit. Equity in earnings of unconsolidated affiliates for the year ended August 31, 1998 primarily represents the Company's share of the earnings of NCCIM, L.L.C., a joint venture, 50% of which is owned by the Company; while the comparable amount for the year ended August 31, 1997 primarily represents the Company's share of earnings of TXEN. As of August 29, 1997, TXEN became a wholly-owned subsidiary of the Company. Minority interest primarily represents the minority partner's share of earnings of Nichols ENTEC Systems, L.L.C., a joint venture, 60% of which is owned by the Company. The increase in minority interest of $0.7 million for the year ended August 31, 1998 as compared to the year ended August 31,1997 is primarily the result of an increase in SAP software sales and integration services in the Commercial IT unit. Income Taxes. Income taxes as a percentage of income before taxes was 39.2% for the year ended August 31, 1998 as compared to 86.4% for the year ended August 31, 1997. The decrease is primarily a result of the differences between financial and taxable income related to the amortization of intangibles and deductibility of special charges. In fiscal year 1997 the $12.0 million write-off of purchased in-process research and development was not deductible for tax purposes. In fiscal year 1998 the amortization expense of the intangible assets acquired in the August 1997 acquisition of TXEN was not deductible for tax purposes. Net Income. Net income including the special charges increased $13.2 million (1,103%) for the year ended August 31, 1998, as compared to the year ended August 31, 1997. Net income excluding the special charges increased $3.7 million (28.3%) for the year ended August 31, 1998 as compared to the year ended August 31, 1997. The increases are a result of the items discussed above. Earnings Per Common Share Assuming Dilution. Earnings per common share assuming dilution including the special charges were $1.02 for the year ended August 31, 1998 as compared to $0.09 for the year ended August 31, 1997. Earnings per common share assuming dilution excluding the special charges were $1.20 for the year ended August 31, 1998 compared to $1.04 for the year ended August 31, 1997. Net income including the special charges increased $13.2 million (1,103%) for the year ended August 31, 1998 as compared to the year ended August 31, 1997. Net income excluding special charges increased $3.7 million (28.3%) for the year ended August 31, 1998 as compared to the year ended August 31, 1997. Weighted average common shares and common equivalent shares increased 11.1% (1,412,291 shares) for the year ended August 31, 1998 as compared to the year ended August 31, 1997. Comparison of Operating Results for Fiscal Year 1997 with Fiscal Year 1996 Revenues. Revenues increased $141.5 million (55.2%) in fiscal year 1997. Approximately 70% of the increase was attributable to revenues from two high performance system integration contracts awarded in 1996. During fiscal year 1997, these two contracts generated approximately 30% of the Company's total revenues. At August 31, 1997 a substantial portion of the two contract values had been realized. These contracts generated less than 15% of the Company's total revenues in fiscal year 1998.Approximately 20% of the increase in revenues was attributable to acquisitions completed late in fiscal year 1996. Approximately 10% of the increase in revenues was attributable to the existing contract base. Operating Profit. The Company expensed $12.0 million of costs in the fourth quarter of fiscal year 1997 for research and development activities in-process at the time of the acquisition of the remaining 80.1% of TXEN stock. Including the $12.0 million write-off of purchased in-process research and development associated with the acquisition of TXEN, operating profit decreased $7.7 million (49.9%) in fiscal year 1997. Excluding the $12.0 million write-off of purchased in-process research and development, operating profit increased $4.3 million (27.8%) in fiscal year 1997. Including the write-off of purchased in-process research and development, costs and expenses were 98.1% of revenues for fiscal year 1997 compared to 94.0% of revenues for fiscal year 1996. The write-off of purchased in-process research and development represents 3.0% of total costs and expenses. Excluding the purchase of in-process research and development, costs and expenses were 95.0% of revenues for fiscal year 1997. Direct and allocable costs increased 60.9% ($133.0 million) in fiscal year 1997 as compared to fiscal year 1996. The increase is primarily the result of increased purchases of hardware, software and subcontractor services in the performance of certain government contracts. Direct and allocable costs as a percent of revenues increased to 88.3% in fiscal year 1997 as compared to 85.1% of revenues in fiscal year 1996 as a result of lower margins typically realized on the purchased hardware, software, and subcontractor services. General and administrative expenses increased 16.4% ($3.5 million) in fiscal year 1997 as compared to fiscal year 1996. The increase is primarily a result of investments in marketing and infrastructure resources made in fiscal year 1997 which are expected to support future commercial revenues. Other Income (Expense). Other income (expense) increased $0.7 million in fiscal year 1997 as compared to fiscal year 1996. Other income includes equity in earnings of unconsolidated affiliates and interest income. Other expense includes interest expense and minority interest. Equity in earnings of unconsolidated affiliates primarily represents the Company's share of earnings of TXEN. As of August 29, 1997, TXEN became a wholly-owned subsidiary of the Company. Interest income is from the investment of the Company's cash reserves. Substantially all available cash is invested in interest-bearing accounts or short-term fixed income instruments. Minority interest primarily represents the minority partner's share of earnings of Holland Technology Group and Holland Software Solutions, joint ventures, 60% of which are owned by the Company. Income Taxes. Income taxes as a percentage of income before taxes was 86.4% in fiscal year 1997 and 36.5% in fiscal year 1996. The $12.0 million write-off of purchased in-process research and development in the fourth quarter of fiscal year 1997 is not deductible for tax purposes. Net Income. Including the $12.0 million write-off of purchased in-process research and development, net income decreased $8.9 million (88.1%) for fiscal year 1997 as compared to fiscal year 1996. The decrease is the result of the impact of the $12.0 million write-off of purchased in-process research and development. Earnings Per Share Assuming Dilution. Earnings per share assuming dilution for fiscal year 1997 were $0.09 as compared to $0.94 for fiscal year 1996, a decrease of 90.0%. Excluding the $12.0 million write-off of purchased in-process research and development, earnings per share assuming dilution were $1.04 for fiscal year 1997 as compared to $0.94 for fiscal year 1996, a 10.2% increase. Excluding the $12.0 million write-off of purchased in-process research and development, net income increased 31.2% ($3.1 million), while weighted average shares outstanding increased 19.0% (2,031,407 shares) for fiscal year 1997 as compared to fiscal year 1996. Liquidity and Capital Resources Historically, the Company's positive cash flow from operations and available credit facilities have provided adequate liquidity and working capital to fully fund the Company's operational needs and support the acquisition program. Working capital was $78.0 million and $68.8 million at August 31, 1998 and 1997, respectively. Operating activities provided cash of $10.1 million and $16.9 million for the years ended August 31, 1998 and 1997, respectively. Investing activities used cash of $22.0 million and $29.2 million for the years ended August 31, 1998 and 1997, respectively. Financing activities used cash of $0.7 million for the year ended August 31, 1998 and provided cash of $14.1 million for the year ended August 31, 1997. Cash provided by operating activities decreased $6.8 million for the year ended August 31, 1998 as compared to the year ended August 31, 1997. The decrease is the result of a decrease in the non-cash adjustments to reconcile net income to net cash provided by operations ($3.9 million) and changes in operating assets and liabilities, net of the effects of acquisitions ($16.1 million) offset by increased net income ($13.2 million). Cash used for investing activities was $22.0 million for the year ended August 31, 1998. The Company acquired all of the capital stock of MSI for aggregate consideration of approximately $12.5 million. Purchases of property and equipment were $9.3 million and $4.8 million for the years ended August 31, 1998 and 1997, respectively. The Company realized net proceeds of $2.3 million from the maturity of long-term investments. An additional $1.0 million capital investment was made for affiliates accounted for using the equity method. Cash used for financing activities was $0.7 million for the year ended August 31, 1998. The primary use of cash for financing activities was for the net repayment of a $5.0 million indebtedness under the bank line of credit. The Company realized proceeds from the sale of common stock of $5.6 million and $4.6 million for the years ended August 31, 1998 and 1997, respectively. The Company renegotiated its bank line of credit in November 1997. The agreement provides for unsecured borrowings up to $100,000,000. The credit agreement provides for interest at London Interbank Offered Rate (LIBOR) plus a margin ranging from 0.325% to 0.450% and a facility fee, payable quarterly, of approximately 0.125% on the unused portion of the line of credit. The short-term commitment agreement ($50,000,000) is renewable annually and the long-term commitment agreement ($50,000,000) is renewable in November, 2000. There were $5,000,000 outstanding borrowings on this line of credit at August 31, 1998. The Company is regularly evaluating potential acquisition candidates and expects to complete other transactions in fiscal year 1999. The purchase price allocation for TXEN was finalized during the first fiscal quarter of 1998. The $30.1 million, preliminarily classified as goodwill, was allocated as follows; $15.6 million to goodwill, $12.7 million to other intangibles and $1.8 million to capitalized software development. Goodwill and other intangibles of $27.6 million are being amortized using the straight-line method over an estimated useful life of twenty years. Other intangibles of $0.7 million are being amortized using the straight-line method over an estimated useful life of seven years. The amount allocated to capitalized software development is being amortized using the straight-line method over an estimated useful life of five years. The acquisition of MSI was completed during the third fiscal quarter of 1998. The MSI acquisition resulted in the write-off of $2.0 million, pre-tax, purchased in-process research and development and the recording of approximately $10.0 million in goodwill which is being amortized using the straight-line method over an estimated useful life of 15 years. The Company has entered into preliminary negotiations with DSM Copolymer to acquire an additional 35% interest in the ENTEC joint venture from DSM Copolymer for $6.0 million plus an earn-out based on ENTEC revenues and profits. If the negotiations are successful, the Company would own a 95% interest in the joint venture. Closing is expected to occur during the second quarter of fiscal year 1999. The Company continues to actively pursue contracts for information system development and computer system integration activities, which could require the Company to acquire substantial amounts of computer hardware for resale or lease to customers. The timing of payments to suppliers and payments from customers under the Company's system integration contracts could cause cash flows from operations to fluctuate from period to period. The Company believes that, for the next four fiscal quarters, its existing capital resources, together with available borrowing capacity, will be sufficient to fund operating needs, finance acquisitions of property and equipment, and make strategic acquisitions, if appropriate. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings Per Share. The overall objective of Statement No. 128 is to simplify the calculation of earnings per share (EPS) and achieve comparability with recently issued international accounting standards. The Company first reported on the new EPS basis in the second quarter ended February 28, 1998. All prior period EPS amounts (including information regarding EPS in interim financial statements, earnings summaries, and selected financial data) have been restated to conform to the provisions of Statement No. 128. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income (SFAS 130). Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components. Adoption of Statement No. 130 by the Company on September 1, 1998 will have no impact on the Company's consolidated results of operations or stockholders' equity. In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS 131). Statement No. 131 changes the method of determining segments from that currently required, and requires the reporting of certain information about such segments. The Company has not finalized how its segments will be reported or whether and to what extent segment information will differ from that currently presented. Effects of Inflation Substantially all contracts awarded to the Company have been based on proposals which reflect estimated cost increases due to inflation. Historically, inflation has not had a significant impact on the Company. Year 2000 Overview Historically, certain computerized systems have had two digits rather than four digits to define the applicable year, which could result in recognizing a date using "00" as the year 1900 rather than the year 2000. This could cause significant software failures or miscalculations and is generally referred to as the "Year 2000" problem. The Company recognizes that the impact of the Year 2000 problem extends beyond its computer hardware and software and may affect utility and telecommunication services, as well as the systems of customers and suppliers. In response to the Year 2000 problem, the Company has developed a compliance program to evaluate and address date related problems with the Company's internal systems, services, products, and the systems and products of the Company's vendors and suppliers. The compliance program is managed by the Vice President of Corporate Information Systems and Services, and is patterned after the United States General Accounting Office (GAO) and Office of Management and Budget project management model. The Company's Year 2000 compliance program includes five major phases: Awareness Phase. The Year 2000 problem is defined and managers at the executive level are educated about potential date related problems and the potential impact to the Company and its customers from Year 2000 date handling errors. A Year 2000 program team is established and an overall strategy is developed. Assessment Phase. The Year 2000 program team assesses the Year 2000 impact on the Company by: (i) identifying core business areas and processes; (ii) performing an inventory and analysis of systems supporting the core business areas; (iii)contacting third party service providers, and software and hardware vendors to determine Year 2000 issues and their plans for becoming Year 2000 compliant; and (iv) prioritizing conversion or replacement of systems. Renovation Phase. The Year 2000 program team corrects Year 2000 problems identified in the Assessment Phase by modifying program software, updating databases, replacing systems or utilizing other appropriate methods. Implementation Phase. The Year 2000 program team tests, verifies, and validates converted or replaced systems, applications, databases and utilities within a limited operational environment. Validation Phase. The Year 2000 program team fully implements converted or replaced systems, applications, databases and utilities. The Year 2000 program team also performs extensive testing of all system changes. As part of the awareness phase the Company has reviewed - Mission Essential Software Systems - Mission Essential Computational Systems (hardware) - Mission Essential Facilities Systems, including elevators, heating and air conditioning systems, photocopying machines and utility services - Mission Essential Network Systems - Customer Software Services,provided by the Company's business units - Mission Essential Vendor-Supplied Software and Services The Company considers a system "mission essential" if a failure in that system would materially disrupt the ability of the Company to perform contractual services or to process business information in a timely manner. The Company monitors the status of its Year 2000 compliance program and routinely updates its Intranet to provide compliance data to its managers and employees. The Company provides services and products to the U.S. Government pursuant to specific contractual terms and exact specifications. The Company believes that it will be responsible for upgrading only those services or products that specify Year 2000 compliance and do not yet meet this requirement. The Company is not currently aware of any such services or products. Status and Timetable for Year 2000 Compliance Nichols Research has developed a master timetable for its Year 2000 compliance program. The status of each major category of mission essential systems is as follows: SYSTEM CATEGORY PHASE ESTIMATED DATE FOR COMPLIANCE - -------------------------------------------------------------------------------- Mission Essential Software Systems Renovation December 1998 Mission Essential Computational Systems Renovation December 1998 Mission Essential Network Systems Renovation December 1998 Mission Essential Facilities Systems Assessment Unknown Mission Essential Customer Systems Renovation December 1998 Mission Essential Vendor-Supplied Software & Services Assessment Unknown The phases listed above represent the status of the majority of products within each category. There may be, within each "system," components at a lower or higher phase in the Year 2000 assessment. For example, although Mission Essential Vendor-Supplied Software and Services is rated in the Assessment Phase, many of the Company's vendors have already been contacted and have supplied letters or referenced web pages certifying their Year 2000 compliance. The Vice-President of Corporate Information Systems and Services maintains compliance letters and referenced web page addresses. While the Company estimates that its internal systems will be Year 2000 compliant by the end of calendar year 1998, there can be no assurance that the third-party supplied software, hardware and services included in the Essential Facilities and Vendor-Supplied Services categories will be Year 2000 compliant, or that these third-parties will not suffer a Year 2000 business disruption that may adversely affect the Company's business, financial condition or results of operations. Contingency Plans Because the Company's Year 2000 conversions are expected to be completed prior to any potential disruption to the Company's business, the Company has not yet completed the development of a comprehensive Year 2000 contingency plan. However, the Company has minimized its exposure to Year 2000 failures of vendor supplied products by adding Year 2000 compliance as a standard condition to its purchase orders. These contracts also reference Federal Acquisition Regulation 39.106, which addresses Year 2000 compliance issues. The Company is currently negotiating a Risk Management Insurance Policy designed to protect the Company in the event that it is involved in litigation arising from errors and omissions relating to Year 2000 issues. If the Company determines that its business is at material risk of disruption due to the Year 2000 problem, or anticipates that its Year 2000 conversions will not be completed in a timely fashion, the Company will work to develop a detailed contingency plan. Cost for Year 2000 Compliance The Company believes that the total cost of its Year 2000 compliance activity will not be material to the Company's operation, liquidity and capital resources. The Company estimates that the total cost for its Year 2000 compliance will be $688,500 which represents 11,475 hours of analysis, modification and testing, and $34,500 for new equipment purchases. To date, the Company has completed 6,850 hours of Year 2000 compliance work, and purchased new equipment valued at $27,000, for a total cost of $438,000. Year 2000 Risks Faced by the Company Although the Company believes that its Year 2000 compliance program is comprehensive, the Company may not be able to identify, successfully remedy or assess all date-handling problems in its business systems or operations or those of its customers and suppliers. As a result, the Year 2000 problem could have a materially adverse affect on the Company's business financial condition or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS August 31, August 31, August 31, 1998 1997 1996 ---------------------------------------------------- ASSETS (amounts in thousands) Current assets: Cash and temporary cash investments (Note 1)......... $ 11,275 $ 23,964 $ 22,151 Accounts receivable (net of allowance of $534, $181, and $29) (Note 2)......................... 113,392 96,303 92,403 Deferred income taxes (Notes 1 and 5)................ 2,488 2,102 1,519 Other................................................ 3,939 3,162 2,438 ---------------------------------------------------- Total current assets............................. 131,094 125,531 118,511 Long-term investments (Notes 1 and 3).................... 1,519 3,738 4,483 Property and equipment (Note 1): Computers and related equipment...................... 29,465 22,409 17,455 Furniture, equipment and improvements................ 12,210 10,192 7,237 Equipment - contracts................................ 5,771 5,771 5,771 ---------------------------------------------------- 47,446 38,372 30,463 Less accumulated depreciation........................ 25,011 19,101 14,974 ---------------------------------------------------- Net property and equipment....................... 22,435 19,271 15,489 Goodwill and other intangibles (net of accumulated amortization of $5,857, $2,946, and $1,246) 54,214 48,130 21,004 (Notes 1, 4, and 11)............................... Software development costs (net of accumulated amortization of $840, $314, and $113) (Notes 1 and 4) 3,701 4,271 1,138 Investment in affiliates (Note 12)....................... 9,607 8,363 4,099 Other assets.............................................. 1,491 828 597 ---------------------------------------------------- Total assets.............................................. $ 224,061 $ 210,132 $ 165,321 ====================================================
The accompanying notes are an integral part of these financial statements. CONSOLIDATED BALANCE SHEETS (CONTINUED)
August 31, August 31, August 31, 1998 1997 1996 ----------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY (amounts in thousands) Current liabilities: Accounts payable..................................... $ 24,278 $ 28,679 $ 31,147 Accrued compensation and benefits (Note 9) ......... 18,317 11,854 9,382 Income taxes payable (Note 5)....................... 1,681 246 692 Current maturities of long-term debt (Note 6)....... 997 761 764 Borrowing on line of credit (Note 6)................ 5,000 10,500 __ Deferred revenue..................................... 1,797 3,114 230 Other................................................ 1,040 1,616 1,609 ----------------------------------------------------- Total current liabilities........................ 53,110 56,770 43,824 Deferred income taxes (Notes 1 and 5).................... 354 2,062 1,661 Long-term debt (Note 6): Industrial development bonds......................... 1,335 1,558 1,777 Long-term notes...................................... 1,613 2,467 3,007 ----------------------------------------------------- Total long-term debt............................. 2,948 4,025 4,784 Minority interest in consolidated subsidiaries............ 1,177 307 __ Stockholders' equity (Notes 1 and 10): Common stock, par value $.01 per share Authorized - 30,000,000, 20,000,000 and 20,000,000 shares, respectively Issued - 13,997,455, 13,553,346 and 12,076,463 shares, respectively.................. 140 135 121 Additional paid-in capital........................... 95,631 90,076 59,129 Retained earnings.................................... 71,989 58,045 57,090 Less cost of treasury stock - 168,500 shares......... (1,288) (1,288) (1,288) ----------------------------------------------------- Total stockholders' equity....................... 166,472 146,968 115,052 ----------------------------------------------------- Total liabilities and stockholders' equity................ $ 224,061 $ 210,132 $ 165,321 =====================================================
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended August 31, 1998 1997 1996 ---------------------------------------------------- (amounts in thousands except share data) Revenues (Note 1) ...................................... $ 427,043 $ 398,142 $ 256,605 Costs and expenses: Direct and allocable costs......................... 355,750 351,367 218,367 General and administrative expenses................ 39,099 24,913 21,408 Amortization of intangibles........................ 4,707 2,127 1,390 Special charges (Notes 4 and 11)................... 4,126 12,000 __ ---------------------------------------------------- Total costs and expenses....................... 403,682 390,407 241,165 ---------------------------------------------------- Operating profit........................................ 23,361 7,735 15,440 Other income (expense): Interest expense (Note 6)......................... (467) (512) (629) Other income, principally interest................. 1,176 1,095 1,044 Equity in earnings of unconsolidated affiliates......................................... 524 656 __ Minority interest in consolidated subsidiaries....................................... (870) (129) __ ---------------------------------------------------- Income before income taxes.............................. 23,724 8,845 15,855 Income taxes (Note 5).................................. 9,301 7,646 5,792 ---------------------------------------------------- Net income.............................................. $ 14,423 $ 1,199 $ 10,063 ==================================================== Earnings per common share (Note 7)..................... $ 1.06 $ .10 $ 1.00 ==================================================== Earnings per common share assuming dilution (Note 7)................................ $ 1.02 $ .09 $ .94 ==================================================== Weighted average common shares (Note 7)............... 13,607,145 12,090,377 10,090,684 ==================================================== Weighted average common shares and common equivalent shares (Note 7)................ 14,124,978 12,712,687 10,681,280 ====================================================
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Total Common Stock Paid-In Retained Treasury Stockholders' Shares Amount Capital Earnings Stock Equity ------ ------ ------- -------- ----- ------ (in thousands except share data) BALANCE, AUGUST 31, 1995........ 10,084,296 $101 $24,274 $47,125 $(2,143) $ 69,357 Sale of common stock............ 1,678,050 17 30,663 __ __ 30,680 Exercise of stock options....... 256,146 2 1,655 __ __ 1,657 Employee stock purchases........ 64,703 1 1,016 __ __ 1,017 Reissue of 108,066 shares of treasury stock............... __ __ 1,523 __ 855 2,378 Repurchase of shares for retirement (6,732) __ (2) (98) __ (100) Net income...................... __ __ __ 10,063 __ 10,063 ---------------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1996........ 12,076,463 121 59,129 57,090 (1,288) 115,052 Exercise of stock options....... 326,656 3 3,047 __ __ 3,050 Employee stock purchases........ 79,816 __ 1,590 __ __ 1,590 Repurchase of shares for retirement (13,737) __ (4) (244) __ (248) Issue of stock for acquisition.. 1,084,148 11 26,314 __ __ 26,325 Net income...................... __ __ __ 1,199 __ 1,199 ---------------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1997........ 13,553,346 135 90,076 58,045 (1,288) 146,968 Exercise of stock options....... 332,312 4 3,351 __ __ 3,355 Employee stock purchases........ 111,797 1 2,204 __ __ 2,205 Net income...................... __ __ __ 14,423 __ 14,423 Adjustments for Welkin Associates, Ltd. pooling of interests (Note 11).................... __ __ __ (479) __ (479) ---------------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1998........ 13,997,455 $140 $95,631 $71,989 $(1,288) $166,472 ==============================================================================================
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended August 31, 1998 1997 1996 ---- ---- ---- (amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................. $ 14,423 $ 1,199 $ 10,063 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for doubtful accounts..................................... 353 27 23 Depreciation........................................................ 5,989 4,160 3,382 Amortization........................................................ 4,737 1,926 1,301 Equity in earnings of unconsolidated affiliates..................... (524) (656) __ Minority interest................................................... 870 307 __ Deferred income taxes............................................... (1,923) (389) (135) Special charges..................................................... 3,977 12,000 __ Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable.............................................. (17,919) 608 (30,554) Other assets..................................................... (1,254) (307) (325) Accounts payable................................................. (4,410) (3,776) 12,146 Accrued compensation and benefits................................ 6,331 2,151 1,118 Income taxes payable............................................. 944 (858) (335) Other current liabilities........................................ (1,540) 487 (186) ------------------------------------------- Total adjustments................................................ (4,369) 15,680 (13,565) ------------------------------------------- Net cash provided (used) by operating activities.................................................... 10,054 16,879 (3,502) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment..................................... (9,273) (4,827) (5,339) Purchase of long-term investments...................................... (100) (75) __ Purchase of capitalized software....................................... (722) (834) (935) Payments for acquisitions, net of cash acquired........................ (13,178) (18,180) (15,503) Payments for investment in affiliates.................................. (1,028) (6,054) (2,504) Proceeds from long-term investments (Note 3)........................... 2,299 775 __ ------------------------------------------- Net cash used by investing activities......................... (22,002) (29,195) (24,281) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock................................. 5,560 4,640 33,354 Payments for retired shares............................................ __ (248) (100) Payments of long-term debt............................................. (1,301) (763) (1,005) Proceeds from borrowings on line of credit............................. 5,000 25,500 14,500 Payments on line of credit borrowings.................................. (10,000) (15,000) (14,500) ------------------------------------------- Net cash provided (used) by financing activities....................... (741) 14,129 32,249 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the Years Ended August 31, 1998 1997 1996 ---- ---- ---- (amounts in thousands) Net increase (decrease) in cash and temporary cash investments......... (12,689) 1,813 4,466 Cash and temporary cash investments at beginning of year............... 23,964 22,151 17,685 ------------------------------------------- Cash and temporary cash investments at end of year..................... $ 11,275 $ 23,964 $ 22,151 =========================================== SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: Issuance of stock as consideration in acquisitions..................... $ __ $ 26,325 $ 2,378 Adjustment to purchase price allocation................................ __ 200 __
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. Nichols Research Corporation (Nichols) provides information systems and technology services to agencies of the Department of Defense (DOD), non-defense federal agencies, state governments and commercial entities. The consolidated financial statements include the accounts of Nichols Research Corporation and its majority-owned subsidiaries and joint ventures (the Company). Wholly-owned subsidiaries as of August 31, 1998 are Communications & Systems Specialists, Inc. (CSSi), NRC Technical Services Corporation (NRCTSC), Advanced Marine Enterprises, Inc. (AME), Nichols InfoTec Corporation, Nichols TXEN Corporation, Mnemonic Systems, Incorporated. (MSI), and Welkin Associates, Ltd. (Welkin). The majority-owned joint venture as of August 31, 1998 is Nichols ENTEC. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's earnings in unconsolidated affiliates and joint ventures are accounted for using the equity method. Revenue Recognition. The major portion of the Company's revenues result from services performed under U.S. Government contracts, either directly or through subcontracts. Revenue on cost-plus-fee (including award fee) contracts is recognized based on reimbursable costs incurred plus estimated fees earned thereon. Revenue on fixed-price contracts is recognized using the percentage of completion method based on costs incurred in relation to total estimated costs. Revenue on time-and-materials contracts is recognized to the extent of fixed billable rates for hours delivered plus reimbursable costs. Software license fees are recognized upon delivery of the software product, unless the Company has significant obligations remaining. If significant obligations remain following delivery of the software, revenue is deferred and recognized as the obligations are fulfilled. Provisions for losses on contracts are recognized in the period in which the loss is first determinable. Unbilled accounts receivable are stated at estimated realizable value. Property and Equipment. Property and equipment are recorded at cost and depreciated using the straight-line method over estimated useful lives of three to ten years for equipment and furniture and over the terms of the related leases for leasehold improvements. In March 1995, the Financial Accounting Standards Board issued Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted Statement No. 121 in the first quarter of fiscal year 1997. Income Taxes. Deferred income taxes are provided for temporary differences between financial and taxable income, primarily related to accrued liabilities, intangible assets and use of accelerated depreciation methods for income tax purposes. Cash and Temporary Cash Investments. The Company considers as cash equivalents those securities that are available upon demand or have maturities of three months or less at the time of purchase. At August 31, 1998, temporary cash investments consisted of various money market accounts, primarily with an Alabama bank. Long-Term Investments. Investments are classified at the time of purchase and are evaluated as of each balance sheet date. Debt securities, which include municipal obligations and preferred stock, are classified as held-to-maturity and are stated at amortized cost. Interest, dividends and amortization of premiums are included in investment income. Goodwill. Goodwill is amortized using the straight-line method over periods ranging from ten to twenty years. The carrying amount of goodwill is evaluated and if facts and circumstances suggest that it may not be recoverable over the remaining amortization period, the carrying amount is reduced by the amount estimated not to be recoverable. The Company assesses long-lived assets, of which goodwill associated with assets acquired in a purchase business combination is included, for impairment evaluations under Statement No. 121. As discussed in Note 11 the Company is presently engaged in discussions with the staff of the Securities and Exchange Commission concerning the basis for the twenty year useful life being used to amortize certain of the Company's goodwill. Capitalized Software Development Costs. Certain costs of internally developed software are capitalized and amortized over the estimated economic useful life of the related software product. Amortization expense was $526,000, $201,000 and $89,000 for years ended August 31, 1998, 1997, and 1996 respectively. Stock Options. The Company grants stock options for a fixed number of shares to employees with an exercise option price equal to the fair value of the shares at the date of option grant. The Company accounts for stock option grants in accordance with the Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and intends to continue to do so; accordingly, the Company recognizes no compensation expense for stock option grants in the financial statements. Reclassification. Certain prior period amounts have been reclassified to conform with the current year's presentation. Use of Estimates. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from the estimates. NOTE 2 - ACCOUNTS RECEIVABLE Accounts receivable consist of the following as of August 31:
1998 1997 1996 ------------- --------------- ------------- (in thousands) Billed................................................................. $ 85,919 $ 50,901 $ 40,283 Unbilled............................................................... 27,473 45,402 52,120 ------------- --------------- ------------- $ 113,392 $ 96,303 $ 92,403 ============= =============== =============
Accounts receivable include $87,914,000, $82,702,000, and $74,357,000 due from the U.S. Government at August 31, 1998, 1997, and 1996, respectively. Unbilled accounts receivable include retainages of $1,652,000, $4,094,000, and $3,534,000 at August 31, 1998, 1997 and 1996, respectively. Unbilled amounts are classified as current assets since substantially all amounts will be realized within one year. Costs related to certain contracts are subject to adjustment from negotiations and audit between the Company and its customers, including representatives of the U.S. Government. Revenues for such contracts and the related unbilled receivables have been recorded in amounts that are expected to be realized. NOTE 3 - LONG-TERM INVESTMENTS The following is a summary of long-term investments as of the dates stated:
Gross Gross Estimated Fair Cost Unrealized Gains Unrealized Value Losses ------------------------------------------------------------------- (in thousands) August 31, 1998 Held-to-maturity: Municipal obligations..................... $ 1,019 $ 3 $ __ $ 1,022 Preferred stocks.......................... 500 1 __ 501 ---------------- ----------------- --------------- ---------------- $ 1,519 $ 4 $ __ $ 1,523 August 31, 1997 Held-to-maturity: Municipal obligations..................... $ 2,734 $ __ $ __ $ 2,734 Preferred stocks.......................... 1,004 9 __ 1,013 ---------------- ----------------- --------------- ---------------- $ 3,738 $ 9 $ __ $ 3,747 August 31, 1996 Held-to-maturity: Municipal obligations..................... $ 3,479 $ __ $ (20) $ 3,459 Preferred stocks.......................... 1,004 __ (26) 978 ---------------- ----------------- --------------- ---------------- $ 4,483 $ __ $ (46) $ 4,437 ================ ================= =============== ================
Contractual maturities of debt securities held to maturity occur ratably over the next two years. NOTE 4 - IMPAIRMENT OF LONG-LIVED ASSETS During the fourth quarter of fiscal 1998, the Company reviewed the insurance line of business. During the evaluation process it was determined that expected future cash flows from this business would not be sufficient to recover the recorded goodwill and capitalized software development costs related to this business. The goodwill and capitalized software development costs were written down to zero book value during the fourth quarter resulting in a pretax charge of $1.9 million included in Special Charges on the Consolidated Statement of Income for the year ended August 31, 1998. NOTE 5 - INCOME TAXES The provisions for income taxes for the years ended August 31, consist of the following: 1998 1997 1996 ---- ---- ---- (in thousands) Current: Federal....................... $ 9,766 $ 7,082 $ 5,203 State......................... 1,405 953 725 ----------------------------------- $ 11,171 $ 8,035 $ 5,928 Deferred: Federal...................... $ (1,553) $ (343) $ (120) State........................ (317) (46) (16) ----------------------------------- $ (1,870) $ (389) $ (136) ----------------------------------- $ 9,301 $ 7,646 $ 5,792 ==================================== The significant components of deferred tax assets and liabilities as of August 31:
1998 1997 1996 ---- ---- ---- (in thousands) Current deferred tax assets: Accrued liabilities not currently deductible................... $ 2,488 $ 2,102 $ 1,519 Non-current deferred tax liabilities: Basis difference for property and equipment................... (354) (2,062) (1,661) ---------------------------------------------- $ 2,134 $ 40 $ (142) ==============================================
Income tax expense as a percentage of income before income taxes for the years ended August 31, varies from the federal statutory rate due to the following: 1998 1997 1996 ---- ---- ---- Statutory federal income tax rate.................. 35.0% 35.0% 34.0% State income taxes, net of federal benefit........... 3.2 6.9 2.9 Non-deductible expenses from acquisitions.......... 2.3 47.5 __ Equity earnings in affiliates................. (0.8) (2.6) __ Other....................... (0.5) (0.4) (0.4) ------------------------------------------ 39.2% 86.4% 36.5% ========================================== The Company made income tax payments of approximately $9,189,000, $8,480,000, and $6,262,000 in the years ended August 31, 1998, 1997, and 1996, respectively. NOTE 6 - LINE OF CREDIT AND LONG-TERM DEBT The Company has a bank line of credit which provides for unsecured borrowings up to $100,000,000. The credit agreement provides for interest at London Interbank Offered Rate (LIBOR) plus a margin ranging from 0.325% to 0.450% and a facility fee, payable quarterly, of approximately 0.125% on the unused portion of the line of credit. The short-term commitment agreement ($50,000,000) expires November 1998 and is renewable annually and the long-term commitment agreement ($50,000,000) is renewable in November, 2000. At August 31, 1998, there was $5,000,000 outstanding on this line of credit at an effective interest rate of 6.0 percent. In January 1995, the Company received $2,225,000 in bond proceeds from the Alabama State Industrial Development Authority. The proceeds were restricted for use in acquiring certain capital assets by July 1996. The bonds are payable in equal annual principal installments of $222,500 through January 2005. The bonds bear a variable rate of interest computed weekly but contain an option for a fixed rate for a specified length of time. The bonds are secured by a letter of credit. Interest payments of $132,000, $138,000, and $144,000, were made in the years ended 1998, 1997, and 1996. The Company borrowed $5,771,000 in fiscal year 1994 under a term loan agreement. The proceeds were used to purchase computer hardware. The agreement requires equal monthly principal installments of $64,537 until September 2001. The loan bears interest at LIBOR plus 0.75% and is secured by the computer hardware which has a carrying value of $2,388,000. Interest payments of $182,000, $210,000, and $278,000 were made in the years ended August 31, 1998, 1997, and 1996, respectively. Interest expense is included in the consolidated statements of income as a direct and allocable cost. NOTE 7 - EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the previously reported primary and fully diluted earnings per share with earnings per common share and earnings per common share assuming dilution. Unlike primary earnings per common share, earnings per common share excludes any dilutive effects of options, warrants, and convertible securities. Earnings per common share assuming dilution is very similar to the previously reported fully diluted earnings per share. The Company adopted Statement 128 in the second quarter of fiscal 1998. All earnings per share amounts for all periods have been presented and, where necessary, restated to conform to the Statement 128 requirements. The following table sets forth the computation of earnings per common share and earnings per common share assuming dilution for the years ended August 31,:
1998 1997 1996 Numerator: Net income and income available to common stockholders and income available to common stockholders $ 14,423,000 $ 1,199,000 $ 10,063,000 after assumed conversions............... ================================================= Denominator: Denominator for earnings per common share - weighted average common shares.................................. 13,607,145 12,090,377 10,090,684 Effect of dilutive securities: Employee stock options....................... 517,833 622,310 590,596 ------------------------------------------------- Denominator for earnings per common share assuming dilution - adjusted weighted average common shares and assumed conversions...................... 14,124,978 12,712,687 10,681,280 ================================================= Earnings per common share.......................... $ 1.06 $ 0.10 $ 1.00 ================================================= Earnings per common share assuming dilution...................................... $ 1.02 $ 0.09 $ 0.94 =================================================
NOTE 8 - RELATED PARTY TRANSACTIONS AND COMMITMENTS The Company leases office facilities under various operating leases, including leases with companies in which certain officers and stockholders have ownership interests. The leases generally have terms of one to ten years. Rent expense for all operating leases for the years ended August 31, was as follows:
1998 1997 1996 ------------------------------------------------- (in thousands) Total rent expense................................................ $ 8,520 $ 7,853 $ 5,047 Amounts to related parties........................................ 983 983 980
Future minimum lease payments under operating leases with remaining terms of one year or more for the years ended August 31, are:
1999 2000 2001 2002 2003 thereafter ---- ---- ---- ---- ---- ----------- (in thousands) Total.......................... $ 9,296 $ 8,391 $ 5,555 $ 3,626 $ 3,320 $ 10,275 Amounts to related parties..... 983 894 429 215 __ __
NOTE 9 - DEFINED CONTRIBUTION BENEFIT PLANS Substantially all full-time employees are covered by one of several defined contribution plans offered by the Company. Employees are permitted to defer from 0% to 15% of their salary depending on the plan in which they participate. A Company matching contribution is determined based on employee deferral percentage and ranges from 0% to a maximum of 2.5%. Discretionary contributions may also be made to plans as determined annually by the Board of Directors. Total provisions for employee retirement plans were approximately $8,112,000, $6,968,000, and $5,633,000 for the years ended August 31, 1998, 1997 and 1996, respectively. NOTE 10 - EMPLOYEE STOCK OPTIONS AND STOCK PURCHASE PLANS The Company has employee stock option plans that provide for the issuance of incentive stock options (as defined by the Internal Revenue Code) and nonstatutory stock options to key employees, including officers of the Company and its subsidiaries. Options are nontransferable and exercisable only during employment, with certain exceptions. Options are fully vested 48 months from the date of grant. Options expire five or ten years from the date of grant. At August 31, 1998, 1,629,955 shares were available for grant under these plans. The Company also has a stock option plan for non-employee members of the Board of Directors. Options are exercisable immediately and expire five years from the date of grant. At August 31, 1998, 57,490 shares were available for grant under this plan. A summary of activity relating to stock options, including reclassification of prior year share presentation, is as follows:
Employee Non-Employee Stock Stock Option Option Total Plans Plans ---------------------------------------------------------- Outstanding at August 31, 1995 ($8.58 per share)............................... 1,350,760 29,508 1,380,268 Granted ($14.20 per share)................ 299,468 9,000 308,468 Exercised ($6.47 per share).............. (250,644) (5,502) (256,146) Canceled/Expired ($9.80 per share)........ (69,926) __ (69,926) ---------------------------------------------------------- Outstanding at August 31, 1996 ($10.18 per share).............................. 1,329,658 33,006 1,362,664 Granted ($22.80 per share)................ 243,077 6,000 249,077 Exercised ($9.36 per share)............... (316,150) (10,506) (326,656) Canceled/Expired ($12.45 per share)....... (36,474) (1,000) (37,474) ---------------------------------------------------------- Outstanding at August 31, 1997 ($12.85 per share).............................. 1,220,111 27,500 1,247,611 Granted ($23.86 per share)................ 453,540 5,000 458,540 Exercised ($10.09 per share).............. (323,312) (9,000) (332,312) Canceled/Expired ($17.09 per share)....... (106,676) __ (106,676) ---------------------------------------------------------- Outstanding at August 31, 1998.................. 1,243,663 23,500 1,267,163 Exercisable at August 31, 1998.................. 364,376 23,500 387,876
Weighted Weighted Range of Contractual Average Average Exercise Number Remaining Exercise Number Exercisable Prices Outstanding Life Price Exercisable Price ------ ----------- ---- ----- ----------- ----- $ 0.72 - $ 8.14 235,807 3.5 years $ 7.11 216,988 $ 7.13 8.15 - 13.56 269,199 1.8 years 11.09 126,167 10.94 13.57 - 21.70 124,949 3.0 years 16.72 32,221 15.97 21.71 - 27.13 637,208 3.9 years 23.56 12,500 23.27 - ------------------------------------------------------------------------------------------------------------------- $ 0.72 - $ 27.13 1,267,163 3.3 years $17.51 387,876 $ 9.63
The Company has an employee stock purchase plan that allows eligible employees to purchase common stock at less than fair market value. The purchase price is 85% of fair market value on each quarterly purchase date. Purchases are limited to the lesser of 10% of an employee's annual compensation or $25,000. Shares of common stock issued under this plan were 111,797, 79,816, and 64,703 in the years ended August 31, 1998, 1997, and 1996, respectively. In October 1995, the Financial Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based Compensation, which requires that financial statements include certain disclosures about the stock-based employees compensation and allows, but does not require, a fair value-based method of accounting for such compensation. As allowed under the provisions of Statement No. 123, the Company has elected to apply APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its stock based plans. Accordingly, no compensation cost has been recognized for its qualified stock option plans and its employee stock purchase plans. The effects of applying Statement No. 123 on a pro forma basis are not likely to be representative of the effects on reported pro forma net income (loss) for future years as the estimated compensation cost reflects only options granted subsequent to August 31, 1995. Had compensation cost for these programs been determined based on the fair value at the grant dates for awards under these programs consistent with the method prescribed under Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below for the years ended August 31:
1998 1997 1996 ---- ---- ---- (in thousands except share data) NET INCOME (LOSS): As reported......................................................... $ 14,423 $ 1,199 $ 10,063 Pro forma........................................................... 12,179 (160) 9,525 EARNINGS (LOSS) PER COMMON SHARE ASSUMING DILUTION: As reported......................................................... $ 1.06 $ 0.10 $ 1.00 Pro forma........................................................... 0.86 (0.01) 0.89 Weighted-average fair value of options granted during the period...................................................... $ 9.52 $ 9.05 $ 6.38
The fair value of each option grant is estimated on the date of grant using a type of Black-Scholes option-pricing model with the following weighted-average assumptions used for option grants in fiscal 1998, 1997 and 1996, respectively: dividend yield of 0% for all years; expected volatility factors of 0.391, 0.378 and 0.312; risk-free interest rates of 6.37%, 6.64% and 6.23%; and expected lives of 4 years for all years. NOTE 11 - BUSINESS COMBINATIONS On July 28, 1998, the Company exchanged 415,689 shares of its common stock for all of the outstanding shares of Welkin. Welkin is a provider of engineering and acquisition management services to the National Intelligence community. The business combination was accounted for as a pooling of interests. As a result of conforming Welkin's previous March 31 fiscal year end to the Company's August 31 fiscal year end, seven months of operations are included in both fiscal year ended August 31, 1998 and 1997. Revenue of $11,208,000 and net income of $479,000 are included in both fiscal years. All periods presented have been restated to include the accounts and operations of Welkin with those of the Company as previously reported.
For the Years Ended August 31, 1997 1996 ---------------------------------- (amounts in thousands) Revenue: Previously reported............................................. $ 379,695 $ 242,308 Welkin.......................................................... 18,447 14,297 ----------------------------------- Combined........................................................ $ 398,142 $ 256,605 Net Income: Previously reported............................................. $ 474 $ 9,392 Welkin.......................................................... 725 671 ----------------------------------- Combined........................................................ $ 1,199 $ 10,063
Operations of the companies acquired which were accounted for as purchases have been included in the accompanying consolidated financial statements from their respective dates of acquisition. The excess of purchase price over fair value of identifiable assets and liabilities acquired is included as goodwill. Certain of the purchase agreements provide for contingent payments based on certain operating results for periods ranging from one to five years from date of acquisition. On April 15, 1998 the Company acquired 100% of the outstanding stock of MSI. MSI is a systems integration company serving clients primarily within the U.S. Department of Justice. Aggregate consideration of approximately $12.5 million was paid at closing. Additional consideration of up to $6.0 million is contingent upon achieving specified operating results during the twelve months following acquisition as defined in the purchase agreement. The acquisition was accounted for using the purchase method of accounting. The allocation of the excess purchase price to intangible assets includes $2.0 million to in-process research and development and $10.0 million to goodwill. The purchased in-process research and development was expensed in the third quarter and is included in the consolidated statements of income for the year ended August 31, 1998. The goodwill amount is being amortized using the straight-line method over an estimated useful life of fifteen years. On August 29, 1997 the Company exercised its option to acquire the remaining 80.1% of TXEN, Inc., an information systems and services company in the managed care industry. Aggregate consideration of approximately $43.8 million was paid at closing, $17.5 million in cash and 1,084,148 shares of stock, valued at approximately $26.3 million. Allocation of the excess purchase price to intangible assets includes; $12.0 million to in-process research and development which was expensed in the fourth quarter and is included in the consolidated statement of income for the year ended August 31, 1997, $15.6 million to goodwill, $12.7 million to other intangibles and $1.8 million to capitalized software development costs. Goodwill and other intangibles totaling $27.6 million are being amortized using the straight-line method over an estimated useful life of twenty years. The remaining $0.7 million of intangibles is being amortized using the straight-line method over an estimated useful life of seven years. The $1.8 million of capitalized software development costs is being amortized using the straight-line method over an estimated useful life of five years. In connection with the Company's filing of a Form S-3 registration statement, the Company is engaged in discussions with the staff of the Securities and Exchange Commission regarding the purchase price allocation related to its August 1997 acquisition of TXEN. These discussions principally relate to the amount allocated to in-process research and development and the useful life of twenty years assigned to goodwill. The Company and its independent auditors, Ernst & Young LLP believe the purchase price allocation recorded in connection with the TXEN acquisition, and related amortization charges, are in accordance with widely recognized appraisal practices and generally accepted accounting principles. However, the staff of the Securities and Exchange Commission has recently expressed views concerning valuation of in-process research and development in business combinations which, if determined to be applicable, would probably result in a reduction in the amount allocated to in-process research and development. If there are any significant changes as a result of these discussions to the amounts allocated to purchased in-process research and development or other intangible assets, or changes in the lives over which such amounts are amortized, these could result in a material reduction in the amount of the charge for in-process research and development reflected in the Company's financial results for the year ended August 31, 1997 and increased amortization expense in 1998 and subsequent periods which could be material. On May 31, 1996 the Company acquired all of the outstanding capital stock of AME. AME provides naval architectural and marine engineering services to primarily U.S. Government clients. The purchase price of approximately $17.5 million consisted of $15.1 million in cash and 108,066 shares of the Company's stock valued at $2.4 million. The resulting goodwill of approximately $12.5 million is being amortized using the straight line method over fifteen years. The following unaudited pro forma summary presents information as if all the acquisitions had occurred at the beginning of each fiscal year presented. The pretax charge of $14 million related to the write-off of purchased in-process research and development has been included in the pro forma results for the year ended August 31, 1997. The pro forma information is presented for informational purposes only. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies. 1998 1997 -------------------------------- (in thousands except share data) Revenues...................................... $ 440,886 $ 435,949 Net income.................................... 16,341 1,608 Earnings per share assuming dilution.......... $ 1.16 $ 0.12 NOTE 12 - INVESTMENT IN AFFILIATES The Company owns a 50% interest in a joint venture, NCCIM. NCCIM was formed to perform work under a five year contract awarded in August 1997. The Company's aggregate capital investment is $1,345,000 at August 31, 1998. Undistributed equity earnings of $524,000 are included in the August 31, 1998 Retained Earnings balance reported in the Consolidated Balance Sheet. In February 1997, the Company acquired approximately 30% of the outstanding capital stock of Intertech Management Group, Inc. (Intertech). Subsequently, the Company purchased an additional 4% interest. As of August 31, 1998, the Company holds approximately 34% of the outstanding capital stock at an aggregate cost of approximately $5,663,000. Intertech provides software and data processing services to the telecommunications industry. In October 1995, the Company acquired the equivalent of approximately a 20% interest in HealthGate at an aggregate cost of approximately $2,069,000. HealthGate provides a biomedical and health information system on the World Wide Web. NOTE 13 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings (Loss) Operating Per Share Revenues Profit Net Income Assuming (Loss) (Loss) Dilution ------------------------------------------------------------------------------- (in thousands except share data) Year ended August 31, 1998 First Quarter.................. $ 88,540 $ 5,682 $ 3,504 $ 0.25 Second Quarter.................. 92,509 5,963 3,819 0.27 Third Quarter................... 118,478 5,589 3,427 0.24 Fourth Quarter.................. 127,516 6,127 3,673 0.26 Year ended August 31, 1997 First Quarter................... $ 87,240 $ 4,776 $ 3,214 $ 0.25 Second Quarter.................. 96,379 4,615 3,154 0.25 Third Quarter................... 98,702 4,989 3,402 0.27 Fourth Quarter.................. 115,821 (6,645) (8,571) (0.67)
NOTE: All prior periods have been restated to reflect the merger with Welkin, which was consummated on July 28, 1998 and accounted for as a pooling of interests. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board Of Directors Nichols Research Corporation We have audited the accompanying consolidated balance sheets of Nichols Research Corporation as of August 31, 1998, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nichols Research Corporation at August 31, 1998, 1997 and 1996, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP BIRMINGHAM, ALABAMA October 7, 1998 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information appearing under "Election of Directors" on pages 3 through 6 of the Nichols Research Corporation Proxy Statement relative to the Annual Meeting of Shareholders to be held January 14, 1999, is incorporated by reference in this Form 10-K Annual Report. Information regarding delinquent Form 3, 4 or 5 filers appearing under "Section 16(a) Beneficial Ownership Reporting Compliance" on page 14 of the Nichols Research Corporation Proxy Statement relative to the Annual Meeting of Shareholders to be held January 14, 1999, is incorporated by reference in this Form 10-K Annual Report. Information relating to the executive officers is set forth under "Executive Officers of the Registrant" on page 12 of this Form 10-K Annual Report. ITEM 11. EXECUTIVE COMPENSATION The information appearing under "Executive Compensation" on pages 7 through 14 of the Nichols Research Corporation Proxy Statement relative to the Annual Meeting of Shareholders to be held January 14, 1999, is incorporated by reference in this Form 10-K Annual Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing under "Common Stock Outstanding and Principal Shareholders" on pages 1 through 3 of the Nichols Research Corporation Proxy Statement relative to the Annual Meeting of Shareholders to be held January 14, 1999, is incorporated by reference in this Form 10-K Annual Report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing under "Certain Relationships and Related Transactions" on page 14 of the Nichols Research Corporation Proxy Statement relative to the Annual Meeting of Shareholders to be held January 14, 1999, is incorporated by reference in this Form 10-K Annual Report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) The financial statements and other financial information of Nichols Research Corporation set forth below and the Report of Independent Auditors thereon are incorporated by reference from pages 24 through 37 of this Form 10-K Annual Report: Consolidated Balance Sheets at August 31, 1998, 1997, and 1996 Consolidated Statements of Income for the three years ended August 31, 1998 Consolidated Statements of Stockholders' Equity for the three years ended August 31, 1998 Consolidated Statements of Cash Flows for the three years ended August 31, 1998 Notes to Consolidated Financial Statements Report of Ernst & Young LLP, Independent Auditors Selected Quarterly Financial Data (2) All financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits:
Exhibit Number and Method of Filing 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. 2.3 O Stock Purchase Agreement dated April 15, 1998, between Registrant and Artis G. Isaac, the sole shareholder of Mnemonic Systems, Incorporated. 2.4 A Agreement and Plan of Merger dated June 26, 1998, between Registrant, WAL Acquisition Company, Inc. and Welkin Associates, Ltd. 3.1 M&C Certificate of Incorporation and Amendments thereto. 3.2 K By-laws and Amendments thereto. 4 D Specimen Stock Certificate. 10.1 B Performance Bonus Plan of Registrant dated July 1, 1986.* 10.2 D&F Non-Employee Officer and Director Stock Option Plan of Registrant.* 10.3 D&I 1988 Employees' Stock Purchase Plan of Registrant and Amendments Number One and Two thereto.* 10.4 J Lease dated February 18, 1992, between Parkway Properties II, as Lessor, and Registrant, as Lessee, for office space located at 4035 Chris Drive, Huntsville, Alabama, together with exhibits. 10.5 N Lease dated January 25, 1996, between High Tech Properties, as Lessor, and Registrant, as Lessee, for office space located at 1900 Golf Road, Huntsville, Alabama, together with exhibits. 10.6 E&Q Nichols Research Corporation 1989 Incentive Stock Option Plan.* 10.7 A Credit Agreement dated November 25, 1997 between the Registrant and Corestates Bank, N.A.relating to a $100 million revolving credit facility. 10.8 G&R Nichols Research Corporation 1991 Stock Option Plan.* 10.9 H Amendments Three and Four to the 1988 Employees' Stock Purchase Plan of Registrant.* 10.10 H Amendment to the Non-Employee Officer and Director Stock Option Plan of Registrant.* 10.11 H Amendment to the 1989 Incentive Stock Option Plan of Registrant.* 10.12 J Amendment Number Five to the 1988 Employees' Stock Purchase Plan of Registrant.* 10.13 J Amendment Number Two to the Non-Employee Officer and Director Stock Option Plan of Registrant.* 10.14 J Amendment Number One to the 1991 Stock Option Plan of Registrant.* 10.15 K Amendments Two and Three to the 1991 Stock Option Plan of Registrant.* 10.16 K Lease dated July 31, 1995, between Parkway Properties, as Lessor, and Registrant, as Lessee, for office space located at 1910 Nichols Drive, Huntsville, Alabama. 10.17 K Restricted Stock Purchase Agreement dated September 1, 1994 between Registrant and Michael J. Mruz.* 10.18 P Amendment Six to the Nichols Research Corporation 1988 Employees' Stock Purchase Plan.* 10.19 Q Amendment Three to the Nichols Research Corporation 1989 Incentive Stock Option Plan.* 10.20 R Amendment Five to the Nichols Research Corporation 1991 Stock Option Plan.* 10.21 S Amendment Four to the Nichols Research Corporation Non-Employee Officer and Director Stock Option Plan.* 10.22 U Amendment Two to Employment Agreement dated September 1, 1997 between Nichols Research Corporation and Michael J. Mruz.* 10.23 T Employment Agreement with Thomas L. Patterson, and Amendment to such Employment Agreement.* 10.24 C Nichols Research Corporation 1997 Stock Option Plan. * 10.25 C Nichols Research Corporation 1997 Stock Bonus Plan.* 10.26 C Nichols Research Corporation Supplemental Retirement Benefit Plan between Registrant and Michael J. Mruz.* 10.27 C Nichols Research Corporation Supplemental Retirement Benefit Plan between Registrant and Chris H. Horgen.* 10.28 A Employment Agreement dated July 28, 1998, between Welkin Associates, Ltd., the Registrant and Carl W. Monk, Jr.* 10.29 A mendment Two dated June 1, 1998 to Employment Agreement between Nichols TXEN Corporation and Thomas L. Patterson.* 10.30 A Employment Agreement dated December 16, 1994 between Nichols SELECT Corporation and Paul D. Reaves, and amendment to such Employment Agreement.* 10.31 A Employment Agreement dated August 29, 1997 between Nichols SELECT Corporation and H. Grey Wood.* 21 A Subsidiaries of Registrant. 23 A Consent of Ernst & Young LLP, Independent Auditors. 24 A Power of Attorney. Reference is made to page 42 of this Form 10-K. 27 A Financial Data Schedule. 99 A Consent of Charles A. Leader.
- ---------------------- A Filed herewith. B Incorporated by reference to exhibits filed with the Commission on November 21, 1986 with the Company's registration statement on Form S-1 under the Securities Act of 1933, File No. 33-10323. C Incorporated by reference to exhibits filed with the Commission on April 13, 1998 with the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 1998, under the Securities Exchange Act of 1934. D Incorporated by reference to exhibits filed with the Commission on November 28, 1989 with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1989, under the Securities Exchange Act of 1934. E Incorporated by reference to exhibits filed with the Commission on November 16, 1990 with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1990, under the Securities Exchange Act of 1934. F Incorporated by reference to exhibits filed with the Commission on January 18, 1991 with the Company's registration statement on Form S-8 under the Securities Act of 1933, File No. 33-38568. G Incorporated by reference to exhibits filed with the Commission on November 20, 1992 with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1992, under the Securities Exchange Act of 1934. H Incorporated by reference to exhibits filed with the Commission on November 26, 1993 with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1993, under the Securities Exchange Act of 1934. I Incorporated by reference to exhibits filed with the Commission on February 7, 1989 with the Company's registration statement on Form S-8 under the Securities Act of 1933, File No. 33-13464. J Incorporated by reference to exhibits filed with the Commission on November 28, 1994 with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1994, under the Securities Exchange Act of 1934. K Incorporated by reference to exhibits filed with the Commission on November 29, 1995 with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1995, under the Securities Exchange Act of 1934. L Incorporated by reference to exhibits filed with the Commission on June 17, 1996 with the Company's Current Report on Form 8-K dated May 31, 1996, as amended, under the Securities Exchange Act of 1934. M Incorporated by reference to exhibits filed with the Commission on July 25, 1996 with the Company's registration statement on Form S-3 under the Securities Act of 1933, File No. 333-08787. N Incorporated by reference to exhibits filed with the Commission on November 25, 1996 with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1996, under the Securities Exchange Act of 1934. O Incorporated by reference to exhibits filed with the Commission on July 14, 1998 with the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1998, under the Securities Exchange Act of 1934. P Incorporated by reference to exhibits filed with the Commission on June 13, 1997 with the Company's registration statement on Form S-8 under the Securities Act of 1933, File No. 333-07164. Q Incorporated by reference to exhibits filed on December 10, 1991 with the Company's registration statement on Form S-8 under the Securities Act of 1933, File No. 33-44409, as amended by Form S-8 filed with the Commission on June 13, 1997 (File No. 333-07160). R Incorporated by reference to exhibits filed with the Commission on December 7, 1992 with the Company's registration statement on Form S-8 under the Securities Act of 1933, File No. 33-55454, as amended by Form S-8 filed with the Commission on June 13, 1997 (File No. 333-07162). S Incorporated by reference to exhibits filed with the Commission on June 23, 1997 with the Company's registration statement on Form S-8 under the Securities Act of 1933, File No. 333-29791. T Incorporated by reference to exhibits filed with the Commission on September 11, 1997 with the Company's Current Report on Form 8-K dated August 31, 1997, as amended under the Securities Exchange Act of 1934. U Incorporated by reference to exhibits filed with the Commission on November 28, 1997, with the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1997, under the Securities Exchange Act of 1934. * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended August 31, 1998. (c) Exhibits. The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted as a separate section of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NICHOLS RESEARCH CORPORATION November 24, 1998 By Chris H. Horgen ----------------- --------------- Chris H. Horgen Chairman of the Board POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below, hereby constitutes and appoints Michael J. Mruz and Allen E. Dillard, and each or either of them, with full power of substitution, as attorneys-in-fact in their names, place and stead to execute any and all amendments to this Form 10-K, and to file the same, with exhibits thereto and documents in connection therewith, and hereby ratify and confirm all that said attorneys-in-fact and each of them or his substitutes may do by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date Chris H. Horgen Chairman of the Board (Principal November 24, 1998 --------------- Executive Officer) Chris H. Horgen Michael J. Mruz Chief Exective Officer and Director November 24, 1998 --------------- Michael J. Mruz Patsy L. Hattox Corporate Vice President, Chief Administrative November 25, 1998 --------------- Officer, Secretary and Director Patsy L. Hattox Roy J. Nichols Vice Chairman and Senior Vice President November 24, 1998 -------------- Roy J. Nichols Roger P. Heinisch Director November 18, 1998 ----------------- Roger P. Heinisch John R. Wynn Director November 25, 1998 ------------ John R. Wynn William E. Odom Director November 20, 1998 --------------- William E. Odom James R. Thompson, Jr. Director November 20, 1998 ---------------------- James R. Thompson, Jr. Phil E. Depoy Director November 24, 1998 ------------- Phil E. Depoy ------------------- Chairman of Nichols TXEN Corporation and November ___, 1998 Thomas L. Patterson Director Daniel W. McGlaughlin Director November 23, 1998 --------------------- Daniel W. McGlaughlin David Friend Director November 18, 1998 ------------ David Friend Allen E. Dillard Corporate Vice President, Chief Financial Officer, November 25, 1998 ---------------- and Corporate Treasurer (Principal Financial Allen E. Dillard and Accounting Officer)
EX-2.4A 2 AGREEMENT AND PLAN OF MERGER By and Among Nichols Research Corporation, WAL Acquisition Company, Inc. and Welkin Associates, Ltd. Dated: June 26, 1998 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of June 26, 1998, by and among NICHOLS RESEARCH CORPORATION, a Delaware corporation ("Nichols"), WAL ACQUISITION COMPANY, INC., a Virginia corporation and a subsidiary of Nichols ("Merger Sub"), and WELKIN ASSOCIATES, LTD., a Virginia corporation ("Welkin"). R E C I T A L S Welkin is engaged in providing engineering and management services to national intelligence organizations with emphasis on systems engineering, processing and analysis, mission utility assessment, systems acquisition, and tactical operations and support (the 'Welkin Business'). This Agreement provides for the acquisition of Welkin by Nichols pursuant to the merger of Merger Sub into and with Welkin. At the effective time of such merger, the outstanding shares of the common stock of Welkin shall be converted into the right to receive shares of the common stock of Nichols (except as provided in Section 1.6 of this Agreement). As a result, shareholders of Welkin shall become shareholders of Nichols. The Board of Directors of Nichols, Merger Sub, and Welkin have adopted resolutions approving this Agreement and the consummation of the transactions contemplated hereby. The transactions described in this Agreement are subject to the approval of the shareholders of Welkin and the satisfaction of certain other conditions described in this Agreement. It is the intention of the parties to this Agreement that the merger for federal income tax purposes shall qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code, and for accounting purposes shall qualify for treatment as a pooling of interests. AGREEMENT AND PLAN NOW, THEREFORE, in consideration of their mutual promises and obligations hereunder, the parties hereto adopt and make this Agreement and Plan and prescribe the terms and conditions hereof and the manner and basis of carrying the merger into effect, which shall be as follows: ARTICLE I THE MERGER Section 1.1 The Merger. Upon performance of all covenants and obligations of the parties contained herein and upon fulfillment or waiver of all conditions to the obligations of the parties contained herein, on the Merger Date, as hereinafter defined, and pursuant to the Virginia Stock Corporation Act (the "VSCA"), Merger Sub will be merged with and into Welkin (the "Merger"), which will be the surviving corporation, and as a result thereof shall become a wholly-owned subsidiary of Nichols. The purposes of the surviving corporation shall be those stated in the Articles of Incorporation of Welkin. As soon as practicable after the terms and conditions of this Agreement have been satisfied, Articles and Plan of Merger, substantially in the form attached as Exhibit "A" hereto, properly completed and executed in accordance with the VSCA (the "Articles of Merger"), will be filed with the State Corporation Commission of Commonwealth of Virginia. The merger shall become effective at the time and on the date the filing of the Articles of Merger with the State Corporation Commission of the Commonwealth of Virginia shall have been completed. The date and time when the merger becomes effective is referred to in this Agreement as the 'Merger Date.' Section 1.2 Conversion of Shares. Upon consummation of the Merger and without any action on the part of Nichols, Merger Sub, Welkin or the shareholders thereof, each share of Welkin's common stock, $1.00 par value ("Welkin Stock"), outstanding immediately prior to the Merger, except shares held by shareholders who have properly exercised their dissenters' rights under Sections 13.1-729 through 13.1-741 of the VSCA ("Dissenting Shares") or shares then owned by Nichols or by a Nichols' subsidiary, shall be converted into the right to receive that number of shares of Nichols' common stock, $0.01 par value ("Nichols Stock") determined in accordance with the formula set forth on Schedule 1.2, Conversion of Shares, hereto (the "Conversion Ratio"). The outstanding shares of Merger Sub immediately prior to the Merger shall, upon consummation of the Merger, be converted into an equal number of shares of Welkin Stock, and shall thereafter constitute the outstanding capital stock of the surviving corporation. The authorized capital stock of Welkin as set forth in its Articles of Incorporation shall continue to be the authorized capital stock for the surviving corporation. Section 1.3 Stock Options. (a) At the Merger Date, each option to purchase shares of Welkin Stock pursuant to stock options ("Welkin Options") granted by Welkin under the Incentive Stock Option Plan of 1988 of Welkin Associates, Ltd. (the 'Welkin Stock Option Plan'), which are outstanding at the Merger Date, whether or not exercisable, shall be converted into and become rights with respect to Nichols Stock, and Nichols shall assume each Welkin Option in accordance with the terms of the Welkin Stock Option Plan and stock option or other agreement by which it is evidenced, except that from and after the Merger Date, (i) Nichols and its stock option committee shall be substituted for Welkin and Welkin's Board of Directors administering such Welkin Stock Option Plan, (ii) each Welkin Option assumed by Nichols may be exercised solely for shares of Nichols Stock, (iii) the number of shares of Nichols Stock subject to such Welkin Options shall be equal to the number of shares of Welkin Stock subject to such Welkin Options immediately prior to the Merger Date multiplied by the Conversion Ratio, and (iv) the per share exercise price under each such Welkin Option shall be adjusted by dividing the per share exercise price under each such Welkin Option by the Conversion Ratio and rounding up to the nearest cent. Notwithstanding the provisions of clause (iii) of the preceding sentence, Nichols shall not be obligated to issue any fraction of a share of Nichols Stock upon exercise of Welkin Options and any fraction of a share of Nichols Stock that otherwise would be subject to a converted Welkin Option shall represent the right to receive a cash payment upon exercise of such converted Welkin Option equal to the product of such fraction and the difference between the market value of one share of Nichols Stock at the time of exercise of such Welkin Option and the per share exercise price of such Welkin Option. The market value of one share of Nichols Stock at the time of exercise of a Welkin Option shall be the Weighted Average Share Price of Nichols Stock as set forth on Schedule 1.3(a), Weighted Average Share Price, hereto. Nichols and Welkin agree to take all necessary steps to effectuate the foregoing provisions of this Section. (b) As soon as practicable after the Merger Date and in any event no later than thirty (30) days after the Merger Date, Nichols shall deliver to the participants of the Welkin Stock Option Plan an appropriate notice setting forth such participant's rights pursuant thereto and the grants subject to the Welkin Stock Option Plan shall continue in effect on the same terms and conditions (subject to the adjustments required by Section 1.3(a) after giving effect to the Merger). Within fifteen (15) days after the Merger Date, Nichols shall file a registration statement on Form S-8 (the "S-8 Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act") with respect to the shares of Nichols Stock subject to such options. Nichols shall use its best efforts to maintain the effectiveness of the S-8 Registration Statement (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such options remain outstanding. The S-8 Registration Statement and all amendments and supplements thereto will conform in all respects with the requirements of the Securities Act and all rules and regulations thereunder. (c) All contractual restrictions or limitations on transfer with respect to Welkin Stock awarded under the Welkin Stock Option Plan to the extent that such restrictions or limitations shall not have already lapsed (whether as a result of the Merger or otherwise), and except as otherwise expressly provided in such plan, shall remain in full force and effect with respect to shares of Nichols Stock into which such restricted stock is converted pursuant to Section 1.3(a) of this Agreement. Section 1.4 No Fractional Shares. Only whole shares of Nichols Stock shall be issued in the Merger. In lieu of fractional shares, each holder of Welkin Stock who otherwise would be entitled to a fractional share of Nichols Stock shall, upon surrender of such holder's stock certificate, be entitled to receive a cash payment (without interest) equal to the product of such fractional share and the value per share of Nichols Stock as determined above in Section 1.2. Section 1.5 Exchange of Certificates; Deposits. On the Merger Date, Welkin shall deliver to Nichols a list of the names, addresses, and Social Security numbers of the Welkin shareholders (the "Welkin Shareholders"), and the number of shares of Welkin Stock owned by each Welkin Shareholder. Except as set forth above, from and after the Merger Date, each holder of a certificate which prior thereto represented shares of Welkin Stock shall be entitled to receive in exchange therefor, upon surrender thereof to Nichols, a certificate or certificates representing the number of whole shares of Nichols Stock into which the Welkin Stock shall have been converted, and, in respect of any fractional share, a cash payment in accordance with Section 1.4 above, except that 10% of the Nichols Stock to which each Welkin Shareholder is entitled to receive (the "Escrow Shares") shall be evidenced by a separate Nichols Stock certificate in the name of the SouthTrust Bank (the "Escrow Agent") as Escrow Agent, and at the Merger Date shall be deposited with the Escrow Agent to hold pursuant to the terms and conditions of the Escrow Agreement attached hereto as Exhibit "B" (the "Escrow Agreement"). For purposes of determining the number of shares of Nichols Stock to be deposited with the Escrow Agent and Carl W. Monk, Jr., on behalf of each Welkin Shareholder, a fractional share shall be rounded down to the nearest whole number of shares. Until so surrendered to Nichols, each certificate formerly representing shares of Welkin Stock, except Dissenting Shares, shall be deemed for all corporate purposes to evidence only the right to receive the number of shares of Nichols Stock and/or the cash payment determined in accordance with Sections 1.2 and 1.4. All shares of Nichols Stock to be delivered hereunder shall be delivered to the Representative (as defined below) for further distribution to the Welkin Shareholders in accordance with the Shareholders' Letter Agreement. Section 1.6 Dissenting Shares. (a) Notwithstanding anything to the contrary contained herein, Dissenting Shares shall not be converted into or be exchangeable for the right to receive shares of Nichols Stock and cash in lieu of fractional shares, unless and until the holder thereof shall have effectively withdrawn or lost his right to dissent from the Merger. (b) Welkin shall give Nichols (i) prompt notice of any written objection, notice, withdrawal of objections or notices, and any other instrument served pursuant to Sections 13.1-729 or 13.1-741 of the VSCA and received by Welkin, and (ii) the opportunity to direct all negotiations and proceedings with respect to holders of Dissenting Shares. Welkin shall not voluntarily make any payment with respect to any demands for payment for shares under any of Sections 13.1-729 through 13.1-741 of the VSCA and will not, except with the prior written consent of Nichols, settle or offer to settle any such demands. Section 1.7 Shareholder Approval. The Board of Directors of Welkin shall cause a special meeting of shareholders of Welkin to be duly held as soon as practicable after the execution hereof (the "Welkin Shareholders' Meeting"). This Agreement shall be submitted to such shareholders meeting for the purpose of considering its approval. The Board of Directors of Welkin shall recommend to its shareholders approval of this Agreement and the transactions contemplated herein. Section 1.8 Stock Transfer Books. At the Merger Date, the stock transfer books of Welkin shall be closed and no transfer of Welkin Stock shall thereafter be made. Section 1.9 Welkin Shareholder Representative. (a) The proxy submitted to the Welkin Shareholders in connection with the Welkin Shareholders' Meeting shall include a proposal to constitute and appoint Carl W. Monk, Jr. (the 'Representative') to act as the respective agent, representative, and attorney-in-fact of the Welkin Shareholders (other than holders of Welkin Dissenting Shares) for all purposes and with respect to all matters arising under this Agreement. The powers and authority of the Representative shall include, but not be limited to, the power and authority to give and accept notices as provided hereunder, execute on behalf of the Welkin Shareholders the Escrow Agreement, exercise all of the rights, powers, and duties of the Representative set forth in the Escrow Agreement and the Shareholders' Letter Agreement, and carry out the purposes and intent of this Agreement. (b) The Representative shall be entitled to rely on any communication or document that he believes to be genuine. Neither the Representative nor any of his employees, attorneys, and other agents shall be liable to any Welkin Shareholder for any action or omission on their respective parts except for gross negligence or willful misconduct. In his capacity as the Representative, Carl W. Monk, Jr. will be acting for the convenience of the non-dissenting Welkin Shareholders, without compensation, and, in such capacity, he shall have no duties or liabilities beyond those expressly assumed by him in this Agreement and the Escrow Agreement. As the Representative, Carl W. Monk, Jr. shall not be required to make any inquiry or investigation concerning any matter other than those expressly contemplated hereunder, nor shall he, in such capacity, be deemed to have made any representation or warranty of any kind to any person. The Representative shall be indemnified against any liabilities resulting from his role as Representative by the Welkin Shareholders, except to the extent caused by or arising out of the Representative's gross negligence or willful misconduct. In the event of death, resignation, or incapacity of Carl W. Monk, Jr., a majority of the Welkin Shareholders shall elect a successor Representative who shall have all of the rights, powers, and duties of the Representative set out herein and in the Escrow Agreement. Section 1.10 Closing. The closing (the 'Closing') of the Merger shall take place at the offices of Epstein Becker & Green in Washington, D.C. at 10:00 a.m. local time on the Merger Date which shall occur as promptly as possible after the date the conditions specified in Articles VI and VII hereof are satisfied or at such other time and place as Welkin, Merger Sub, and Nichols shall agree in writing. The obligations of Welkin, Merger Sub, and Nichols shall be subject to satisfaction, unless waived, of the applicable conditions set forth in this Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES OF WELKIN Welkin represents and warrants to Nichols as follows: Section 2.1 Authorized and Outstanding Common Stock. As of the date hereof and as of the Closing, the issued and outstanding capital stock of Welkin and the number of shares of authorized capital stock of Welkin are and will be as follows: Designation Number of Shares Number of Shares Number of Shares Authorized Issued and Subject to Options Outstanding - -------------------------------------------------------------------------------- Common Stock 50,000__________ 36,603_________ 2,508 - -------------------------------------------------------------------------------- All of the issued and outstanding shares of Welkin Stock are validly issued, fully paid and non-assessable. Set forth on Schedule 2.1, Welkin Shareholders and Number of Shares on Merger Date, on the date hereof and as of the Closing are the number of Shares held by each Welkin Shareholder and the number of shares of Welkin Stock subject to Welkin Options held by each Welkin Option holder. Welkin has and at Closing will have no other authorized, issued or outstanding shares of capital stock nor any outstanding securities, bonds, convertible securities, subscription agreements, warrants, options, buy-sell agreements, or other liens, agreements or commitments relating to Welkin's capital stock. Identified on Schedule 2.1, Welkin Shareholders and Number of Shares on Merger Date, are those Welkin Shareholders who are 'affiliates' of Welkin under Rule 145(c) as defined in Rule 405 of the Rules and Regulations of the Securities and Exchange Commission under the Securities Act of 1933. Section 2.2 Organization and Standing. Welkin is and will be at Closing a corporation duly organized, validly existing and in good standing under the laws of the State of Virginia, and will be at Closing duly qualified to do business in and in good standing as a foreign corporation in all other states where the nature of its business or operations or the ownership of its property requires such qualification, except where the lack of such qualification would not have a material adverse effect on the financial condition of Welkin taken as a whole. No jurisdiction where it is not presently qualified as a foreign corporation has made any assertion to Welkin that its business or operations or ownership of property makes qualification as a foreign corporation in such jurisdiction necessary. Welkin has all requisite corporate power and authority to own, lease and operate its properties and carry on its business as and where it is now being conducted. A copy of Welkin's Articles of Incorporation and all amendments thereto as of the date hereof and a copy of its Bylaws, as amended to the date hereof (both certified by the Secretary), have been furnished to Nichols and are true, accurate and complete as of the date hereof. Welkin owns no stock or securities of any other corporation or entity, except as shown on Schedule 2.9(a), Affiliates of Welkin. Section 2.3 No Violation. Except as disclosed in Schedule 2.3, Violations, the execution, delivery and performance of this Agreement by Welkin and the consummation of the transactions contemplated hereunder will not, with or without the giving of notice or the passage of time or both, (i) violate, conflict with, or constitute a default (or cause an acceleration) under Welkin's Articles of Incorporation or Bylaws or any material contract, note, lien, security agreement, license, permit, or instrument to which Welkin is a party or by which Welkin or its shareholders are bound or which may affect any of the assets, business or operations of Welkin, (ii) result in the creation or imposition of any lien, claim, charge or encumbrance upon any of Welkin's properties or assets, or (iii) constitute a violation of any statute, ordinance, judgment, order, decree, regulation, rule or law of any court, government, authority or arbitrator applicable to or relating to Welkin or any of the assets, business or operations of Welkin. This Agreement and all other agreements and obligations entered into and undertaken in connection with the transactions contemplated hereby to which Welkin is a party constitutes the valid and legally binding obligations of Welkin enforceable against it in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and equitable principles. Except as disclosed on Schedule 2.3, Violations and Schedule 2.20, Governmental Approvals, and except for the approval of this Agreement by the Welkin Shareholders and the filing of the Articles of Merger with the State Corporation Commission of the Commonwealth of Virginia, there are no consents, waivers or approvals of persons or authorities required in connection with the consummation of the transactions contemplated by this Agreement and the other agreements referenced herein. Section 2.4 Financial Statements. (a) Annexed hereto as Schedule 2.4(a), Financial Statements, are financial statements of Welkin (the "Financial Statements") consisting of: (i) the unaudited balance sheet of Welkin at May 31, 1998 (the 'Interim Balance Sheet'), together with the related statements of income and stockholders' equity for the two (2) month period ended May 31, 1998, and (ii) the audited balance sheets of Welkin at March 31, 1996, 1997, and 1998, together with the audited and related statements of income, stockholders' equity and cash flows of Welkin for such periods. (b) Except as disclosed in Schedule 2.4(b), Exceptions to Financial Statements, all of the foregoing Financial Statements, in each case, have been prepared in conformity with generally accepted accounting principles ('GAAP') applied on a consistent basis throughout the periods involved and with prior periods except as otherwise expressly stated therein and fairly present the assets, liabilities and financial condition and results of operations of Welkin at, or for the periods ended at, the dates thereof; provided, however, that the Interim Balance Sheet and the related statements of income, stockholders' equity and cash flows are subject to normal year-end adjustments and lack footnotes and other presentation items. Section 2.5 Liabilities. There are no material debts, liens, security interests, claims, liabilities or obligations of Welkin, whether accrued, contingent, absolute, direct or indirect, or matured or unmatured, including, but not limited to, liabilities for taxes, interest and penalties, except (i) as and to the extent reflected or reserved against in the Interim Balance Sheet; (ii) incurred in the ordinary course of business and not material in amount; and (iii) those disclosed on Schedule 2.5, Liabilities. Section 2.6 Accounts Receivable. All of the accounts receivable of Welkin are actual bona fide receivables representing obligations for the total dollar amount thereof as shown on the Financial Statements and books of Welkin which resulted from the ordinary course of business of Welkin, and are stated on the Financial Statements net of an appropriate reserve for bad debt and noncollectible accounts. Section 2.7 Fixed Assets and Inventory. (a) The dollar amount of the fixed assets owned by Welkin as shown on the Interim Balance Sheet and as acquired thereafter and treated on the books of Welkin as an asset does not exceed the cost of same, less depreciation determined in accordance with GAAP consistently applied, and Welkin has not written up the value of any such fixed assets. The fixed assets and inventory of Welkin as of the date of the Interim Balance Sheet include those items set forth in Schedule 2.7(a), Assets and Inventory, hereto, and, at Closing, such fixed assets and inventory shall be in existence, except for fixed assets and inventory sold or otherwise disposed of in the ordinary course of business. The fixed assets of Welkin are in good working order, reasonable wear and tear excepted. (b) Welkin is not under any liability or obligation with respect to the return of payments and, for the twelve month period immediately prior to the Closing, Welkin has not experienced any claims with respect to defective or unsatisfactory services or products except as specifically set forth on Schedule 2.7(b), Defective or Unsatisfactory Services or Products Claims. The inventory of Welkin existing on the Closing shall have been acquired in the ordinary course of Welkin's business. Section 2.8 Contracts. (a) Except as provided in 2.8(d) below, Schedule 2.8, Contracts, contains a list of all material verbal or written (i) leases, (ii) contracts (including employment and independent contractor and professional contracts), (iii) agencies, (iv) purchase orders, (v) marketing or referral agreements, (vi) software agreements (including software license agreements), (vii) maintenance or support agreements, (viii) training agreements, (ix) royalty agreements, (x) employee benefit, bonus or compensation agreements, (xi) bids, (xii) government contracts, (xiii) computer software agreements, (xiv) contracts for the furnishing of all services, (xv) all contracts for referrals, (xvi) all contracts to obtain supplies or services, (xvii) subcontracts, (xviii) teaming agreements, and (xix) all other agreements or understandings between Welkin and any other party or person (collectively, "Contracts"), which are not otherwise attached to any other Schedules of this Agreement. Such list includes completed Contracts where the services have been performed but the obligor has not paid. True, correct and complete copies of all of the written Contracts listed on Schedule 2.8, Contracts, have been made available for inspection by Nichols. (b) Welkin's standard agreements identified on Schedule 2.8(b), Welkin's Standard Agreements, have been made available to Nichols for inspection. (c) Since the Interim Balance Sheet, Welkin has not entered into any Contracts not in the ordinary course of business except as listed in Schedule 2.8(c), Contracts Not in the Ordinary Course of Business. Except for the contracts disclosed on Schedule 2.8(c), Contracts Not in the Ordinary Course of Business, none of the Contracts to which Welkin is a party or to which it is subject or by which it is bound requires the consent of any other person for the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. Each of the Contracts to which Welkin is a party or to which it is subject or by which it is bound, to the extent not otherwise already fully performed by Welkin, is a valid and existing contract of Welkin in full force and effect without modification, enforceable against Welkin in accordance with its terms, and Welkin does not have any knowledge that any Contract is not a valid and existing contract of the other parties thereto in full force and effect without modification and there are no pending or, to Welkin's knowledge, threatened disputes thereunder, and all will continue to be binding (except as to which the enforceability is limited by bankruptcy laws and equitable principles) in accordance with their terms after consummation of the transactions contemplated hereby and each is with unrelated and unaffiliated third parties and was entered into on an arms-length basis in the ordinary course of business, except as to agreements with Welkin Shareholders listed in Schedule 2.8, Contracts. Except as disclosed in Schedule 2.8, Contracts, Welkin has timely performed all material obligations required to be performed by it and is not in material default under any verbal or written Contract to which it is a party or to which it is subject or by which it is bound and no event has occurred which, with or without the lapse of time or the giving of notice, or both, or action by a third party, could result in a material default under any of the forgoing. To Welkin's knowledge, no other party is in default under any such Contract. None of the contracts provide for a scope of work substantially greater than the scope of work of any contracts that Welkin has completely performed. Section 2.9 Corporate Actions. The minute books of Welkin contain appropriate corporate minutes and authorizations for all material corporate actions taken by Welkin's Board of Directors, its officers, and shareholders. Welkin does not own any stock or otherwise possess ownership rights in any other corporation or organization and has no affiliates (other than Welkin Shareholders), except as disclosed in Schedule 2.9(a), Affiliates of Welkin. Attached hereto as Schedule 2.9(b), Directors and Officers of Welkin, is a list of directors and officers of Welkin. Section 2.10 Intellectual Property Rights. Schedule 2.10, Intellectual Property Rights, hereto sets forth a true and materially complete list of all trademarks, service marks, trade name, patents, patent applications, copyrights, and copyright applications heretofore or presently used or required to be used by Welkin in connection with its business (collectively "Intellectual Property Rights"). All Intellectual Property Rights are owned solely and exclusively by Welkin, except for those rights identified on Schedule 2.10, Intellectual Property Rights, as licensed by Welkin from third parties and are not subject to any license, lien, royalty arrangement or pending or, to Welkin's knowledge, threatened dispute, except as disclosed on Schedule 2.10, Intellectual Property Rights. Except as disclosed in Schedule 2.10, Intellectual Property Rights, to Welkin's knowledge, no product or service marketed, manufactured, sold or licensed, and no marketing, service or process used by Welkin infringes any Intellectual Property Rights of others and no product or service marketed, or process used by any other person, firm, corporation or other entity infringes any Intellectual Property Rights heretofore or presently used or required to be used by Welkin. Except as set forth on Schedule 2.10, Intellectual Property Rights, Welkin has not received notification of infringement by Welkin of any Intellectual Property Right of others. No trademark, service mark or trade name used by Welkin infringes any trademark, service mark or trade name of others in the United States of America or any foreign country. None of the Intellectual Property Rights is subject to any outstanding order, decree, judgment, stipulation or charge. No other material intellectual property rights are necessary for the conduct of the Welkin Business. Except as disclosed on Schedule 2.10, Intellectual Property Rights, all rights of Welkin in and to its Intellectual Property Rights will not be adversely affected by the Merger. Section 2.11 Insurance Policies. Schedule 2.11, Insurance Policies and Claims, hereto, sets forth a list of all business insurance policies held or owned by Welkin or which name Welkin as beneficiary, and true and correct copies of all such policies have heretofore been made available to Nichols. All premiums due thereon prior to the Closing have been paid. All the insurance policies listed in Schedule 2.11, Insurance Policies and Claims, will remain in full force and effect during the period immediately following the Closing. There are no pending material claims under such insurance policies. Schedule 2.11, Insurance Policies and Claims, also sets forth all claims filed during the past twelve (12) months with respect to insurance policies maintained by Welkin. Section 2.12 Backlog. The backlog of orders, sales and service commitments of Welkin is set forth on Schedule 2.12, Backlog, and such backlog, together with all Contracts to which Welkin is a party, consist of contracts for services of Welkin which are typical of the types of services heretofore marketed, sold or rendered by Welkin and which do not require the development or application of any materially new or materially more advanced technology or service than that utilized by Welkin in the past. No purchase or expansion of property (other than purchases of inventory consistent with Welkin's past ordinary course of business), plant, equipment or capacity is needed to timely fill the current backlog and current Contracts. Section 2.13 Compensation. Set forth on Schedule 2.13, Employee Compensation and Bonuses, is a list of the names, age, title, total annual compensation, date of last salary or hourly rate adjustment and amount thereof, and length of time in current position of all employees of Welkin, including a list of paid leave as of May 31, 1998. Welkin has not entered into any commitments or understandings with any employee concerning future compensation, bonuses and benefits of a material nature to be paid after May 31, 1998, except as set forth on Schedule 2.13, Employee Compensation and Bonuses, and there are no employment agreements, written or verbal, except as set forth on Schedules 2.8, Contracts and/or 2.16(a), Written and Oral Employee Contracts with Welkin and except for the employment contracts delivered with this Agreement. All employees of Welkin are "at will" and may be terminated at any time by Welkin, except as set forth on Schedule 2.16(a), Written and Oral Employee Contracts with Welkin. Section 2.14 Employee Benefits. (a) Set forth on Schedule 2.14(a), Employee Benefit Plans, is a materially accurate and complete list of all material employee benefit plans ("Plans") within the meaning of Section 3(3) of the Employee Retirement Income Security Act ("ERISA"), whether or not any such Plans are otherwise exempt from all or part of the provisions of ERISA, established, maintained or contributed to for the benefit of Welkin's employees, and a list of Pension Plans terminated prior to the date hereof. (b) Except as set forth in Schedule 2.14(b), Plans Not In Compliance with ERISA, Welkin does not maintain, cause to be maintained or contribute to any Plan subject to ERISA which is not, or in the past has not been in substantial compliance with ERISA or the Internal Revenue Code of 1986 (the "Code"), or which has incurred any accumulated funding deficiency within the meaning of Section 412 or 418(b) of the Code, or which has applied for or obtained a waiver from the Internal Revenue Service of any minimum funding requirement under Section 412 of the Code. Except as set forth on Schedule 2.14(b), Plans Not In Compliance with ERISA, Welkin has not incurred any liability to the Pension Benefit Guaranty Corporation ("PBGC") in connection with any Plan covering any employees of Welkin. (c) Welkin has caused the "group health plan," as such term is defined in Section 162(i)(3) of the Code, to be maintained, administered and operated in all material respects in compliance with the applicable requirements of Section 601 of ERISA and Section 162(k) of the Code, and Welkin has no liability, including, but not limited to, additional contributions, fines, penalties or loss of tax deduction as a result of such administration and operation. Welkin does not maintain any Plan (whether qualified or nonqualified within the meaning of Section 401(a) of the Code) providing for retiree health and/or life benefits. (d) Except as disclosed on Schedule 2.14(d), Employee Benefit Plan Amendments, none of the Plans have been amended subsequent to the date as of which copies thereof have been provided to Nichols except as required by law. (e) Each Plan intended to be qualified under Section 401(a) of the Code has been determined to be so qualified by the Internal Revenue Service and nothing has occurred since the date of the last such determination which resulted or is likely to result in the revocation of such determination. (f) The execution of, and consummation of the transactions contemplated by this Agreement, do not constitute a triggering event under any Plan, policy, arrangement, statement, commitment or agreement, which will or may result in any payment (whether of severance pay or otherwise), acceleration, vesting or increase in benefits to any employee or former employee or director of Welkin. (g) Welkin has made available for inspection and copying by Nichols true and complete copies of (i) all Plans as now in effect, together with all amendments thereto which will become effective at a later date, and (ii) Form 5500 for the most recent completed fiscal year for each Plan required to file such form. (h) Nichols has requested that after the Merger Welkin change its fiscal year to a fiscal year ending August 31. As a result of this change in Welkin's fiscal year, all of the current fiscal year for the Plans will be a "stub" year ending August 31, 1988. To the extent that the foregoing causes a breach of any of the warranties in this Agreement or an economic loss to any person, the parties hereto acknowledge and agree that the Welkin Shareholders will not be responsible for any such breach or loss. (i) Nichols acknowledges that the employee benefits currently offered by Welkin are substantially greater than the employee benefits currently offered by Nichols, which benefits will be offered to the current Welkin employees after the Closing. To the extent that the decrease in employee benefits offered to the current Welkin employees after the Closing results in any loss, harm or damage to Nichols or Welkin after the Closing, including, without limitation, the loss of the services of any employee, the parties hereto acknowledge and agree that the Welkin Shareholders will not be responsible for any such loss, harm or damage. Section 2.15 Environmental Matters. (a) Welkin holds and is in substantial compliance with all material environmental permits, certificates, licenses, approvals, registrations and authorizations ("Permits") required under all applicable environmental laws, rules and regulations in connection with its business as currently operated, and all of such Permits are in full force and effect. To Welkin's knowledge, without independent investigation, Welkin has complied with in all material respects, and is not in violation of any, material applicable environmental statutes, rules, regulations, ordinances and orders of any authority, including, those relating to Hazardous Substances (as defined below). (b) To Welkin's knowledge, without independent investigation, no notice, citation, summons or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review is pending or, to Welkin's knowledge, threatened by any authority with respect to (i) any alleged violation by Welkin of any environmental statute, ordinance, rule, regulation or order of any authority; or (ii) any alleged failure by Welkin to have any environmental Permit, certificate, license approval, registration or authorization required in connection with its business; or (iii) any use, generation, treatment, storage, recycling, transportation or disposal (collectively, "Management Activities" with respect to Hazardous Substances) of any hazardous substance, hazardous waste, hazardous materials, toxic substance, pollutants or contaminants as defined in federal, state or local laws, ordinances or regulations and including petroleum products and radioactive materials generated or used (collectively, "Hazardous Substances") by Welkin. Hazardous Substances shall not include office products, equipment, supplies and cleaning fluids customarily found in a commercial office setting. (c) Welkin has not received any request for information, notice of claim, demand or notification that it is or may be potentially responsible with respect to any investigation or clean-up of any threatened or actual release of any Hazardous Substance. (d) Except as set forth on Schedule 2.15(d), Management Activities Regarding Hazardous Substances, Welkin has not conducted any Management Activities, whatsoever, with respect to any Hazardous Substances on its properties, identified on Schedule 2.17, Assets, Liens and Encumbrances of Welkin, or the properties of another. (e) Except as set forth on Schedule 2.15(e), PCBs or Asbestos Insulation Present at Welkin Facilities, hereto, to Welkin's knowledge, without independent investigation, no polychlorinated biphenyls ("PCBs") or asbestos insulation is or has been present at the facilities leased by Welkin. (f) Hazardous Substances, if any, for which Welkin performs Management Activities (if any) are listed on Schedule 2.15(f), Hazardous Substances Generated by Welkin, and any Hazardous Substances listed on Schedule 2.15(f), Hazardous Substances Generated by Welkin, to Welkin's knowledge, without independent investigation,, have been generated by Welkin in regulated quantities and have been recycled, treated, stored, disposed of or transported, as applicable, in substantial compliance with all applicable laws. (g) Except as set forth on Schedule 2.15(g), Hazardous Substances Transported, Welkin has not transported any Hazardous Substances or arranged for the transportation of such substances to any location which is listed or proposed for listing under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. " 9601-9657 ("CERCLA"), or on any similar state list. (h) No Hazardous Substance has been released, spilled, leaked, discharged, disposed of, pumped, poured, emitted, emptied, injected, leached, dumped or allowed to escape ("Releases") by Welkin from, at, on or under the properties leased by Welkin. To Welkin's knowledge, no employee of Welkin in the course of his or her employment has been exposed to any chemical or other Hazardous Substance or material produced by Welkin which could give rise to a claim against Welkin. (i) No oral or written notification of a Release or threat of Release of a Hazardous Substance has been filed by or on behalf of Welkin or, to Welkin's knowledge, without independent investigation, any other person in relation to any properties now or previously owned, operated or leased by Welkin. No such properties are listed or proposed for listing on the National Priority List promulgated pursuant to CERCLA, or on any similar state list of sites requiring investigation or clean-up. (j) To Welkin's knowledge, without independent investigation, there are no environmental liens on the properties of Welkin, and no government actions have been taken or are in process or pending which could subject Welkin's properties to such liens. To Welkin's knowledge, without independent investigation, Welkin or any other person (solely as a result of the acts or omissions of Welkin) would not be required to place any notice or restriction relating to the presence of Hazardous Substance in the deed to any properties leased to Welkin. (k) In respect of environmental matters, no consent, approval or authorization of, or registration or filing, with any person or authority is required in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (l) There have been no environmental inspections, investigations, studies, audits, tests, reviews or other analyses conducted by or on behalf of Welkin in relation to Welkin's properties or operations. (m) To Welkin's knowledge, without independent investigation, there are no facts or circumstances related to environmental matters concerning the properties or businesses of Welkin that could lead to any future material environmental claims, liabilities or responsibilities of Nichols or Welkin. Section 2.16 Labor and Employment Matters. (a) Schedule 2.16(a), Written and Oral Employee Contracts With Welkin, hereto contains a complete and correct list of all written and oral contracts with employees of Welkin (inclusive of officers and directors) together with all bonus, stock option, and other incentive arrangements, pension and retirement plans, profit sharing plans, group or individual medical, health, dental, accident, life and other employee benefit insurance and other employee compensation or benefit plans, arrangements, understandings or policies (whether written or oral), except as otherwise disclosed pursuant to Sections 2.8, 2.13 or 2.14 hereto, affecting employees of Welkin, Welkin is not in default under any of the foregoing. There have been no claims of default under any of the foregoing and there are no facts or conditions which, with or without the passage of time or the giving of notice or both, would constitute or result in a default under any of the foregoing. True and complete copies of all the foregoing have heretofore been delivered by Welkin to Nichols. (b) Schedule 2.16(b), Written and Unwritten Employee Policies and Practices, identifies all written and material unwritten policies and practices describing termination payments and benefits to terminated employees of Welkin. (c) Except as set forth on Schedule 2.16(c), Noncompliance With Federal, State, Local or Other Applicable Laws, Welkin is in compliance in all material respects with all federal, state, local or other applicable laws or requirements of any governmental, regulatory or administrative authority or court respecting preemployment and employment practices, terms and conditions of employment and wages and hours and occupational safety and health, including, but not limited to, the National Labor Relations Act, the Fair Labor Standards Act (including the Equal Pay Act), Title VII of the Civil Rights Act of 1964, the Occupational Safety and Health Act of 1970, the Service Contract Act, the Contract for Work Hours and Safety Standards Act, the Rehabilitation Act of 1973, the Vietnam ERA Veterans Readjustment Assistance Act of 1974, Executive Order 11246, the Employees Retirement Income Security Act of 1974, and state and local employment, unemployment and worker's compensation statutes, and Welkin is not engaged in any unfair labor practice within the meaning of Section 8 of the National Labor Relations Act. Welkin is not party to any collective bargaining agreement and, to Welkin's knowledge, no union organizational efforts are currently in progress. (d) Except as disclosed in Schedule 2.16(d), Threatened or Pending Employment Practices Litigation and Schedule 2.24, Litigation and Compliance, there is no administrative or private claim, charge, complaint, dispute, action, grievance, suit, administrative, arbitration or other proceeding or investigation, pending or, to Welkin's knowledge, threatened against Welkin relating to any of the items or matters referenced in subparagraph (c) directly above, or with regard to any allegedly accrued or vested employee benefits or any other common or statutory law claim involving tort, contract, or equity. (e) There is no labor strike, dispute, slowdown or stoppage actually pending or, to Welkin's knowledge, threatened against Welkin, and no such strike, dispute, slowdown, or stoppage has been experienced by Welkin since the date of Welkin's incorporation. (f) Except as disclosed on Schedule 2.16(f), Threatened or Pending Discrimination Litigation, there are no charges, administrative proceedings, investigations or formal complaints of discrimination pending or, to Welkin's knowledge, threatened before the Equal Employment Opportunity Commission ("EEOC") or any federal, state or local agency or court. There are no pending or, to Welkin's knowledge, threatened audits of the equal employment opportunity practices of Welkin. Section 2.17 Title to Assets, Liens and Encumbrances. (a) Welkin is the owner of, and has good and marketable title to, free and clear of all security interests, mortgages, pledges, liens, claims, restrictions, equities, easements, rights-of-way, rights of first refusal and any other encumbrances and charges whatsoever, or is the lessee of, all of its respective property and assets, except for the Permitted Liens (as hereinafter defined) and except as set forth on Schedule 2.17(a), Assets, Liens and Encumbrances of Welkin hereto. Welkin owns or leases all of the assets used by it in the operation and conduct of its business or required by Welkin for the normal conduct of its business. "Permitted Liens" shall mean: (i) carriers', warehousemen's, mechanics', materialmen's, repairmen's, or other like liens arising in the ordinary course of business; (ii) easements, rights-of-way, restrictions, license rights, leases and other sim ilar encumbrances incurred in the ordinary course of business which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of Welkin; (iii) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation and deposits securing liability to insurance carriers under self-insurance arrangements; (iv) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in theordinary course of business; and (v) purchase money security interests in respect of new equipment in an aggregate amount not in excess of $25,000 at any time. (b) Schedule 2.17(b), Real Property Leases, sets forth a true and complete list and description of all real property, land, buildings and improvements leased by Welkin as of the Closing. True and correct copies of all leases with respect to the property listed on Schedule 2.17(b), Real Property Leases, have heretofore been made available to Nichols for inspection and copying. Except as disclosed in Schedule 2.17(b), Real Property Leases, all such real property, land and buildings used or leased by Welkin as of the Closing are used by or useful to Welkin in the ordinary course of business, and the use and occupancy by Welkin conforms in all material respects with all applicable laws, and, to Welkin's knowledge, the same are in good operating condition. Welkin owns no real property, land, buildings or improvements. (c) Except as set forth on Schedule 2.17(c), Noncompliance with Respect to Real Property, Welkin has not received any notices of violations of law, governmental orders, ordinances or requirements issued by any national, federal, state, municipal or other governmental, department or authority or corresponding foreign governmental instrumentality or any fire department or insurance carrier, that would have a material adverse effect or purport to have a material adverse effect on the use and occupancy of the real property used or leased by Welkin. Copies of all real property leases to which Welkin is a party have been made available for inspection by Nichols. (d) The leases described in Schedules 2.8, Contracts Delivered to Nichols or 2.17(b), Real Property Leases, are in full force and effect on the Closing without any material default or breach by Welkin or, to Welkin's knowledge, any lessor. (e) Welkin has not received any notice of any requirements or recommendations by any insurance company which has issued a policy covering any part of the real property used or leased by Welkin or by any board of fire underwriters or other body or authority exercising similar functions, requiring or recommending any repairs or work to be done on any part of said real property. (f) Schedule 2.17(f), Personal Property Leases, lists all personal property leased by Welkin. Section 2.18 Customer Claims and Complaints. Except as disclosed on Schedule 2.18, Customer Claims and Complaints, and the Financial Statements, Welkin has no liability or obligation with respect to the return of any funds because of products or services provided by it and has not experienced any material claims with respect to its products or services other than in the ordinary course during the thirty-six (36) months immediately preceding the execution of this Agreement. No customer, client, or contracting party has requested that performance under any contract or other agreement be canceled or delayed for any period of time. No customer liability claim is presently pending or, to Welkin's knowledge, threatened against Welkin. Welkin has not experienced any warranty claims for products or services in the past three (3) years, except as disclosed on Schedule 2.18, Customer Claims and Complaints. Section 2.19 Secrecy and Non-Competition Agreements. Welkin has not entered into any secrecy or non-competition agreements with any person with respect to the Welkin Business except as disclosed on Schedule 2.19, Secrecy and Non-Competition Agreements. Section 2.20 Governmental Approvals. Except as disclosed on Schedule 2.20, Governmental Approvals, no authorization, novation, approval, order, license, permit, franchise, or consent and no registration, declaration or filing by Welkin with any governmental authority is required in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. Section 2.21 Orders, Decrees, Etc. Except as set out in Schedule 2.21, Orders, Decrees, Etc., there are no orders, writs, decrees, injunctions, or rulings of any court, authority, arbitration tribunal, or any governmental department, commission, board, agency or instrumentality, domestic or foreign, issued, or pending or, to Welkin's knowledge, threatened against, nor consents binding on, Welkin, and any officer, director or employee of Welkin, which do or may affect, limit or control Welkin or any of its assets or Welkin's method or manner of doing business. Section 2.22 Compliance with the Law. Except as otherwise disclosed in the Schedules hereto, Welkin is in material compliance with all foreign, federal, state and local laws, rules, orders and regulations, including, but not limited to those relating to the Code, antitrust, occupational safety and health, environmental protection, water or air pollution, ERISA, toxic and hazardous waste and controlled substances, consumer product safety, product liability, employment and employment practices, term and conditions of employment, bidding and contracting procedures, dealings with federal, state, governmental, municipal or local authorities, hiring, wages, hours, employee benefit plans and programs, collective bargaining and withholding and social security taxes, and it has received no notices of alleged violations thereof. No governmental authorities are presently conducting proceedings against Welkin, and, to Welkin's knowledge, no such investigation or proceeding is threatened. Except as disclosed on Schedule 2.22, Compliance with the Law, Welkin has obtained all material permits, licenses and authorizations required for the conduct of its affairs as currently conducted, and all of such permits, licenses and authorizations will remain in full force and effect following such consummation. True, complete and correct copies of the foregoing permits, licenses and authorizations, if any, have been made available for inspection by Nichols. Section 2.23 Actions Not in Ordinary Course and No Material Change. Except as set forth on Schedule 2.13, Employee Compensation and Bonuses, since the date of the Interim Balance Sheet, Welkin has conducted its business in a manner consistent with past practice. Since the Interim Balance Sheet, the business of Welkin has been operated only in the regular and ordinary course and there has been no materially adverse change in the financial condition or business of Welkin. Except as set forth in Schedule 2.23, Actions Not in the Ordinary Course and as otherwise required by the terms and provisions of this Agreement, since the date of the Interim Balance Sheet, Welkin has not: (a) Except in the usual and ordinary course of its businesses, consistent with past practice, incurred any indebtedness or other liabilities (whether accrued, absolute, contingent or otherwise), guaranteed any indebtedness or sold any of its assets; (b) Suffered any damage, destruction or loss, whether or not covered by insurance; (c) Except as disclosed pursuant to Section 2.13, and except for the award of employee bonuses consistent with past Welkin compensation practices, increased the regular rate of compensation payable by it to any employee, or increased such compensation by bonus, percentage, compensation service award or similar or other arrangement theretofore or thereafter in effect for the benefit of any of its employees, and no such increase is required; (d) Established or agreed to establish any pension, retirement or welfare plan for the benefit of its employees not heretofore in effect; (e) Suffered any change in its financial condition, assets, liabilities or business or suffered any other event or condition of any character which individually or in the aggregate has had a material adverse effect on Welkin; (f) Experienced any labor organizational efforts or complaints or entered into any collective bargaining agreements with any union; (g) Made any single capital expenditure which exceeded $25,000 or made any capital expenditures in the aggregate which exceed $100,000; (h) Permitted or allowed any of the assets (real, personal or mixed, tangible or intangible) of Welkin to be subjected to any mortgage, pledge, lien, security interest, encumbrance, restriction or charge of any kind other than Permitted Liens; (i) Written down the value of any assets or written off as uncollectible any notes or accounts receivable or contracts, except for write-downs and write-offs in the ordinary course of business and consistent with past practice; (j) Paid, discharged or satisfied any claims, liabilities or obligations other than in the usual and ordinary course of business; (k) Canceled any debts or claims or waived any claims or rights, except in the usual and ordinary course of business and except as required by the Agreement; (l) Paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets (real, personal or mixed, tangible or intangible) to, or entered into any agreement or arrangement with any of the Welkin Shareholders or their affiliates, or any of the officers or directors of Welkin or their affiliates, except for reimbursement of ordinary and reasonable business expenses related to the business of Welkin; (m) Amended or terminated any contract, agreement or license of significant value, to which Welkin is a party, except in the ordinary course of business; (n) Made any change in any method of accounting or accounting practice; (o) Canceled or failed to continue insurance coverage, other than key man life insurance; (p) Acquired, whether by merger, purchase of stock or purchase of assets, all or substantially all of the business or assets of any other business or entity, or engaged in negotiations of any sort concerning such acquisition or acquired assets; (q) Issued any stock, any option to acquire stock or other securities, or taken any action with respect thereto, or declared or paid any dividends, or made or authorized any other distributions to the Welkin Shareholders with respect to their Welkin Stock; (r) Amended or repealed its Articles of Incorporation or Bylaws; (s) Agreed, whether in writing or otherwise, to take any action described in this Section 2.23. Section 2.24 Litigation. Except as set forth on Schedule 2.24, Litigation and Compliance hereto, there is no litigation, proceeding, arbitration, governmental claim or investigation instituted, pending or, to Welkin's knowledge, threatened, against or affecting Welkin or the assets of Welkin or which questions or challenges the validity of this Agreement or any action taken or to be taken pursuant to this Agreement. Section 2.25 Taxes and Tax Returns. (a) Welkin's federal and state income, franchise, share and ad valorem tax returns for the fiscal years ended March 31, 1995, 1996, 1997, and 1998, have been made available for inspection by Nichols. Welkin does not currently owe any taxes not reflected on the Interim Balance Sheet or incurred thereafter in the ordinary course of business. (b) Except as set forth on Schedule 2.25, Taxes attached hereto: (i) Within the times and in the manner prescribed by law Welkin has filed all federal, state and local tax returns and extensions and all tax returns for other governing bodies having jurisdiction to levy taxes which are required to be filed; (ii) Welkin has paid all taxes, interest, penal- ties, assessments and deficiencies which have been shown on such returns to be due, or which have been claimed to be due or which were due prior to Closing unless Welkin is contesting in good faith such tax, interest, penalty, assessment or deficiency and such contested amounts are reserved against on the Interim Balance Sheet; (iii) To Welkin's knowledge, all tax returns or extensions, if any, filed by Welkin constitute complete and accurate representations of the tax liabilities of Welkin for the periods covered thereunder and accurately set forth all items (to the extent required to be included or reflected in such returns) relevant to Welkin's past tax liabilities; (iv) Welkin has not waived or extended any applicable statute of limitations relating to the assessment of federal, state, local or foreign taxes; (v) No examinations of the federal, state, local or foreign tax returns of Welkin are currently in progress or, to Welkin's knowledge, threatened and no deficiencies have been asserted or assessed as a result of any audit by the Internal Revenue Service or any state or local taxing authority and no deficiency has been proposed or threatened; (vi) The charges, accruals and reserves for taxes due by Welkin or accrued but not yet due from Welkin, relating to the income, properties or operations of Welkin for any periods ending on or before the Closing or the portion of any period that ends on and includes the Closing as reflected on Welkin's Interim Balance Sheet are adequate to cover any such taxes payable by Welkin; (vii) There is no action, suit, proceeding,audit or claim pending or, to Welkin's knowledge, threatened regarding any taxes of Welkin; (viii) All taxes which Welkin are required by law to withhold and collect with respect to Welkin's employees have been duly withheld and collected, and have been timely paid over to the proper authorities to the extent due and payable; and (ix) There are no liens for any tax on Welkin or the assets of Welkin, except for ad valorem taxes accrued but not yet due or payable. (c) All federal, state and local income, franchise, property and other tax returns filed by Welkin are in all material respects complete and correct representations of the tax liabilities of Welkin for the periods covered by such returns. Section 2.26 Bank Accounts. Schedule 2.26, Bank Accounts, is a true and complete list as of the date hereof of all banking institutions in which Welkin has accounts or safety deposit boxes, plus the numbers thereof and the name of the persons authorized to make withdrawals therefrom or have access thereto. Section 2.27 Disclosure. No representations and warranties by Welkin in this Agreement or any document or certificate furnished to Nichols pursuant hereto contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein, in light of the circumstances under which they were made, not misleading. Section 2.28 Proprietary Rights. The term "Proprietary Rights" includes all material inventions, trade secrets, processes, proprietary rights, product specifications, blueprints, drawings, technical data, engineering information, other proprietary knowledge and know-how, patents, trademarks, service marks, trade name, copyrights, marks, symbols, logos, and all material documentation related thereto, and all licenses and agreements in respect thereof and applications therefor used or related to the Welkin Business, except for software and information systems as defined in Section 2.29. Welkin has all Proprietary Rights necessary for the operation of the Welkin Business as currently operated. Except as set forth on Schedule 2.28, Proprietary Rights, which includes a listing of material contracts or material licenses pursuant to which Welkin uses the intellectual property of third parties, with respect to the Proprietary Rights, (a) Welkin is either the sole and exclusive owner of or a licensee of its Proprietary Rights; (b) no action, suit, arbitration, or other proceeding or investigation is pending or to Welkin's knowledge threatened which involves any Proprietary Rights, (c) none of the Proprietary Rights infringes upon, conflicts with, or otherwise violates the rights of others or is being infringed upon by others, (d) none of the Proprietary Rights is subject to any outstanding order, decree, judgment, stipulation, or charge, (e) there are no royalty, commission, or similar arrangements and no licenses, sublicenses, or agreements relating to any of the Proprietary Rights, (f) Welkin has not received any notice of interference or infringement of or by the Proprietary Rights, (g) Welkin has not agreed to indemnify any person or entity for or against any infringement of or by the Proprietary Rights, (h) no other material Proprietary Rights not owned by Welkin are necessary for the conduct of the Welkin Business, and (i) to Welkin's knowledge no other party is operating a business or otherwise acting in violation or infringement of, Welkin's Proprietary Rights. Except as set forth on Schedule 2.28, Proprietary Rights, Welkin has good and marketable title to, or a valid license for the Proprietary Rights free and clear of all security interests, liens, pledges, encumbrances and restrictions. Section 2.29 Software and Information Systems. (a) Welkin does not own, have a license to, or have any use, possessory or proprietary rights to any information systems, programs and software, other than non-exclusive commercial software. (b) Welkin's use of the non-exclusive commercial software does not infringe on any patents, trademarks, copyrights or other rights or intellectual property rights of any third persons. Welkin has taken reasonable measures necessary to maintain and protect the non-exclusive commercial software used by or licensed to Welkin and no claims have been asserted by any person or entity to Welkin's use of the same or challenging or questioning the validity or effectiveness of the same, and there is no valid basis to any such claim. (c) Schedule 2.29, Software, also contains a list of the current software development and consulting activities and projects of Welkin. Welkin has described such projects and developments to Nichols. Welkin knows of no impediments to fully developing and exploiting the information systems, programs and software currently under development or to performing its currently pending consulting contracts. Section 2.30 Material Commitments. As used in this Section 2.30, the term "Material Commitments" means each Contract of Welkin which obligates Welkin to sell, license, distribute, deliver or provide products or services (including, without limitation, consulting services) for a consideration in excess of $100,000 and over a period of more than one (1) month. Schedule 2.30, Project List, sets forth a "Project List" with respect to each Material Commitment. The Project List sets forth Welkin's production schedule or performance schedule, and budget, with regard to each Material Commitment. Except as described in the Project List, the performance of Welkin or any other party involved with each Material Commitment is on schedule and within budget, and no practical or technological problems have been encountered that might reasonably be expected to impede completion or materially increase the cost of Welkin's performance with a corresponding detriment to profit. Each Material Commitment was made on a basis calculated to produce a profit under the circumstances prevailing when it was made, and, except as disclosed on Schedule 2.30, Project List, and except for changes to the Material Commitments that may result from the transactions contemplated hereby, Welkin is not aware of any circumstances that might reasonably be expected to prevent the realization of a profit. To Welkin's knowledge, except as set forth on the Project List, no Material Commitment involves the development of any product or technology that would infringe on the proprietary rights of any other party. Welkin is not bound by any Material Commitments for the performance of services or delivery of services or products in excess of its current ability to provide such services or deliver such products during the time available to satisfy such commitments; and all outstanding Material Commitments for the performance or delivery of services or products were made on a basis calculated to produce a profit under the circumstances prevailing when such commitments were made. Copies of outstanding commitments have been previously made available to Nichols and in all material respects contain the complete and correct terms and conditions of same, except for deletions required to comply with government security restrictions. Section 2.31 Estoppel Provisions. Immediately after the Closing, except as provided under Virginia law or applicable federal law, the Welkin Shareholders will have no right, title, claim, demand, interest, action or cause of action in, to or against Welkin in any capacity whatsoever (whether as a shareholder, officer, director or creditor), except (i) with respect to holders of Dissenting Shares, and (ii) in respect of their status as employees, officers or directors of Welkin, and then only to the extent of accrued and unpaid salary, benefits and reimbursable expenses under Welkin policy up to the date of Closing. Upon the Closing, the Welkin Shareholders shall have no option, warrant or other right to acquire any of the capital stock of Welkin. Section 2.32 Accounting and Tax Matters. There are no facts or circumstances relating to Welkin other than as disclosed in a certain representation letter delivered by the Representative to Ernst & Young, LLP, independent auditors, that may prevent the merger from qualifying for pooling-of-interests accounting treatment or as a reorganization within the meaning of Section 368(a) of the Code. Section 2.33 Transactions With Affiliates and Related Parties. Except as disclosed on Schedule 2.33, Transactions With Affiliates and Related Parties hereto, neither the Welkin Shareholders, nor any officer, director, employee, family members (whether related by blood or marriage) or any affiliates or relatives of any Welkin Shareholder, has (a) Borrowed money from or loaned money to Welkin which remains outstanding; (b) Had any contractual or other claim, express or implied, of any kind whatsoever against Welkin; (c) Had any interest in any property or assets used by Welkin in its business; or (d) Engaged in an other transaction with Welkin (other than employment relationships). Section 2.34 Brokers and Finders. No broker or finder has been involved in this transaction on behalf of the Welkin Shareholders or Welkin, and neither Welkin, Nichols nor the Welkin Shareholders will be obligated to pay any brokers' or finders' fees as a consequence of any brokerage agreement entered into by the Welkin Shareholders or Welkin. Section 2.35 Year 2000 Compliance. To Welkin's knowledge, Software, when used in accordance with its associated documentation, is capable of correctly processing, providing and/or receiving date-related or date-dependent data within and between the twentieth (20th) and twenty-first (21st) centuries, provided that all products (including hardware, software and firmware) used with the software utilized by Welkin in the conduct of its business properly exchange accurate date data with such software. Section 2.36 Incurred Cost Submission. The Incurred Cost Submission of Welkin for the fiscal year ended March 31, 1997 has been submitted to the United States Government and is a true and accurate representation of costs reimbursable under Welkin's government contracts. ARTICLE III REPRESENTATIONS AND WARRANTIES OF NICHOLS AND MERGER SUB Nichols and Merger Sub, jointly and severally, represent and warrant to Welkin as follows: Section 3.1 Organization; Standing; Corporate Power. Nichols and Merger Sub are each a corporation duly organized, validly existing, and in good standing under the laws of the states of their incorporation. Merger Sub is a wholly-owned subsidiary of Nichols. Nichols and Merger Sub each have all requisite power and authority, corporate and otherwise, to carry on and conduct their respective businesses as they are now being conducted and to own and lease their properties and assets. Section 3.2 Authority. Nichols and Merger Sub each has full legal right, powers, and authority to execute and deliver this Agreement and to carry out the transactions contemplated hereby. All corporate and other acts or proceedings required to be taken by Nichols and Merger Sub to authorize the execution, delivery, and performance of this Agreement and all transactions contemplated hereby have been duly and properly taken. Section 3.3 Approvals and Consents. No approval, authorization, consent, order, or action of, or filing with, any person, entity, court, administrative agency, or other governmental authority is required for the execution and delivery by Nichols and Merger Sub of this Agreement or the documents to be delivered at Closing. Section 3.4 Validity. This Agreement has been, and the documents to be delivered by Nichols and Merger Sub at Closing will be, duly executed and delivered and constitute lawful, valid, and binding obligations of Nichols and Merger Sub enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization, moratorium, and other laws affecting the rights of creditors generally and to the discretion of a court in granting equitable relief. The approval of the shareholders of Nichols is not required for the authorization or issuance of the Nichols Stock or for any of the other transactions contemplated by this Agreement. Section 3.5 No Breach. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby are not prohibited by, will not violate or conflict with any provision of, and will not constitute a default under or a breach of (a) the charter or bylaws of Nichols or Merger Sub, (b) any contract, agreement, or other instrument to which Nichols or Merger Sub is a party, (c) any order, writ, injunction, decree, or judgment of any court or governmental agency, or (d) any law, rule, or regulation applicable to Nichols or Merger Sub. Section 3.6 Finders. No finder or broker has acted or is acting on behalf of Nichols or Merger Sub in connection with the transactions contemplated by this Agreement. Section 3.7 Periodic Reports. The information in the Nichols Form 10-Q Reports for the first and second quarters of 1998, Nichols Annual Report to its Shareholders for 1997, Nichols Proxy Statement for the 1998 Annual Shareholders Meeting, and Nichols Form 10-K for 1997 and any Current Reports on Form 8-K filed for any period since December 31, 1997 (collectively the 'Nichols Disclosure Documents') do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Nichols Disclosure Documents include the consolidated balance sheet of Nichols as of August 31, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal year ended August 31, 1997, accompanied by the related report thereon by Ernst & Young, LLP, independent auditors. Such financial statements have been prepared in accordance with GAAP applied on a consistent basis throughout the periods involved and with prior periods except as otherwise expressly stated therein and fairly present the assets, liabilities and financial condition and results of operations of Nichols at, or for, the periods ended at, the dates thereof. Since August 31, 1997, there has been no material adverse change in the condition, financial or otherwise, of Nichols. Nichols has made, and shall use its best efforts to continue to make, all filings with the Securities and Exchange Commission which it is required to make. Section 3.8 Nichols Stock. All shares of Nichols Stock which may be delivered to the Welkin Shareholders pursuant to Article I hereof will be duly authorized, validly issued, fully paid, and nonassessable. The authorized capital stock of Nichols as of the date hereof consists of 30,000,000 shares of Common Stock. At May 31, 1998, there were 13,440,212 shares of Common Stock issued, including 168,500 shares held in the treasury. Section 3.9 Ownership of Welkin Stock. Neither Nichols nor Merger Sub owns any Welkin Stock. Section 3.10 Litigation. There are no legal actions, suits, arbitrations, or other legal or administrative proceedings or governmental investigations pending or threatened against Nichols or Merger Sub which would impair the ability of Nichols or Merger Sub to consummate the transactions contemplated in this Agreement. Section 3.11 Governmental Approval and Filings. No approval, authorization, consent, license, clearance, or order of, declaration or notification to, or filing registration or compliance with, any governmental regulatory authority, including nongovernmental self-regulatory agencies, is required in order to permit Nichols and Merger Sub to perform their obligations under this Agreement, except for the filing and recording of appropriate merger documents as required by the VSCA. Section 3.12 Disposition of Assets. Nichols has no present intention to cause Welkin to dispose of more than an insubstantial part of Welkin's assets during the two-year period following the Merger Date. Section 3.13 Financial Capability. Nichols has the financial capacity to perform all of its obligations under this Agreement and has no contemplation of insolvency. Nichols, immediately after the Closing: (i) will be solvent; (ii) will be able to meet its obligations and debts as they become due; (iii) the value of Nichols' assets at such time will exceed Nichols' liabilities; and (iv) Nichols will have adequate capital for the conduct of its business. ARTICLE IV COVENANTS OF WELKIN From the date of this Agreement until the Closing, Welkin will act in good faith and use its best efforts to cause the conditions to the obligations of Nichols and Merger Sub set forth in Article VI to be satisfied on or before the Closing and will: Section 4.1 Operate in Ordinary Course. Operate its business in the usual and ordinary manner as heretofore conducted; perform in all material respects all of its obligations; not materially modify, amend, supplement, or waive any obligation under any material lease, contract, agreement, or commitment without the prior written consent of Nichols which will not be unreasonably withheld; and not take, or permit to be taken, any of the actions described in subparagraphs (a) through (s) of Section 2.23. Section 4.2 Preserve Business Organization. Use all reasonable efforts to preserve intact its present business organization; keep available the services of the current Employees; preserve its relationships with suppliers, distributors, customers, and others having business relationships with it; and refrain from changing in any material way any of its material policies (including, without limitation, advertising, marketing, pricing, purchasing, personnel, sales, or budget policies) without the prior written consent of Nichols which will not be unreasonably withheld. Section 4.3 Maintain Properties. Retain and maintain all of Welkin's assets in customary repair, order, and condition, except for reasonable wear, the disposal of worn-out or obsolete equipment, the sale of inventory in the ordinary course of business, and damage due to unavoidable casualty. Section 4.4 Maintain Books of Account. Maintain Welkin's books of account and records in theusual and ordinary manner and in accordance with GAAP. Section 4.5 Comply with Law. Comply in all material respects with all laws applicable to Welkin in connection with the transactions contemplated hereby, or contest or settle in good faith, upon the advice of counsel, any alleged failure to comply with any such laws. Section 4.6 Maintain Insurance. Maintain the insurance policies listed on Schedule 2.11, Insurance Policies and Claims, in full force and effect, with policy limits and scope of coverage not less than is now provided. Section 4.7 Advise Nichols of Adverse Change. Promptly advise Nichols of the occurrence of any material adverse change in the financial condition or results of the operations of Welkin; the occurrence of any other event or condition that materially and adversely affects Welkin's assets or the conduct of Welkin's business; or the imposition of any lien, pledge, or encumbrance on any of Welkin's assets other than Permitted Liens. Section 4.8 Access for Nichols. Provide Nichols's employees, agents, and authorized representatives with reasonable access, during normal business hours and consistent with the normal operation of Welkin's business, to the locations owned or leased by Welkin and to the books and records relating to Welkin, to the extent necessary to enable Nichols to make a thorough investigation of Welkin, and to examine Welkin's books and records. Nichols's employees, agents, and authorized representatives shall hold all such information and materials in strict confidence, shall not use the same for any purpose other than to evaluate this transaction and, treat all such information in a manner consistent with Nichols's policies and procedures concerning its own confidential and proprietary information. If the transactions contemplated hereby are not consummated for any reason, Nichols shall (a) upon the request of Welkin, return all originals, copies, and summaries of such information to Welkin and (b) continue to treat all such information as strictly confidential in a manner consistent with Nichols's policies and procedures concerning its own confidential and proprietary information. Section 4.9 Third-Party Consents. Use its best efforts to obtain all consents and approvals of third parties, if any. Section 4.10 Welkin Shareholders' Approval of Merger. Call the Welkin Shareholders= Meeting to be held on or before July 27, 1998, and submit this Agreement at the Welkin Shareholders' Meeting for approval and adoption at the meeting, all as provided by law and its Articles of Incorporation and Bylaws. The notice of the Welkin Shareholders' Meeting, proxy, and accompanying proxy statement shall be prepared by Welkin and shall be subject to the reasonable approval of Nichols prior to delivery to the Welkin Shareholders. The materials submitted to the Welkin Shareholders shall include (i) this Agreement, (ii) the Nichols Disclosure Documents, (iii) a description of the transaction, (iv) appropriate securities law disclosures regarding the fact that the Nichols Stock delivered at Closing will be unregistered, and therefore, the certificates evidencing such stock will bear a restrictive legend to the effect the shares may not be sold unless registered or exempt from registration, and (v) proposed resolutions to be adopted by the Welkin Shareholders which shall include (1) approval of the Agreement and Plan of Merger, and (2) appointment of Carl W. Monk, Jr., as the Representative with full authority to sign the Escrow Agreement and to act for the Welkin Shareholders in regard to any claim for indemnity or other matter arising in regard to this Agreement or the Escrow Agreement. Section 4.11 Board of Director Resignations. Obtain the resignation of each of the members of the Board of Directors of Welkin other than Carl W. Monk, Jr. and Alan A. Ross, each such resignation to be effective upon the Closing. Section 4.12 Articles of Merger. Exert its best efforts to obtain assurance from the Secretary of State of the State of Virginia that the Articles of Merger attached as Exhibit 'A' comply with the VSCA. Section 4.13 Shareholders' Letter Agreement. Cause each of Carl W. Monk, Jr., Alan A. Ross, Frederick W. Raymond and Zeta Associates, Inc. to deliver to Nichols not later than 10 days prior to the Merger Date a written agreement, substantially in the form of Exhibit 'C.' ARTICLE V COVENANTS OF NICHOLS Section 5.1 Compliance with Conditions. Prior to the Closing, Nichols will act in good faith and use its best efforts to cause the conditions set forth in Article VII to be satisfied on or prior to the Closing. Section 5.2 Articles of Merger. Prior to the Closing, Nichols will exert its best efforts to obtain assurance from the Corporation Commission of the Commonwealth of Virginia that the Articles of Merger attached as Exhibit 'A' comply with the VSCA. Section 5.3 Advise Welkin of Adverse Change. Promptly advise Welkin of the occurrence of any material adverse change in the financial condition or results of operations of Nichols; the occurrence of any other event or condition that materially and adversely affects Nichols' assets or the conduct of Nichols' business. ARTICLE VI CONDITIONS TO OBLIGATIONS OF NICHOLS AND MERGER SUB The obligations of Nichols and Merger Sub under this Agreement are subject to the satisfaction on or before the Closing of the following conditions, unless such conditions are waived by Nichols or Merger Sub, as appropriate: Section 6.1 Representations and Warranties True as of Closing. Welkin's representations and warranties made in this Agreement are true in all material respects on and as of the Closing as though such representations and warranties were made on and as of the Merger Date. Section 6.2 Compliance with Agreement. Welkin has performed and complied in all material respects with all of its obligations and covenants under this Agreement that are to be performed or complied with by it on or before the Closing, and Welkin is not otherwise in default in any material respect under any of the provisions of this Agreement. Section 6.3 No Litigation. No litigation, proceeding, investigation, or inquiry is pending or threatened which, if sustained, would enjoin or prevent the consummation of the transactions contemplated by this Agreement or would materially and adversely affect Nichols's or Welkin's ability to carry on the Welkin Business presently and ordinarily conducted following the Closing. Section 6.4 Third-Party Consents and Approvals. Welkin has obtained all third-party consents and approvals, if any, all in form and substance reasonably satisfactory to Nichols, Merger Sub and their counsel. At or before the Closing, Welkin will deliver to Nichols and Merger Sub all such third party consents or approvals. Section 6.5 No Material Change. Nichols has made a good faith determination, with the assistance and advice of counsel, that there has been no material adverse change in the financial condition, assets, liabilities, net capital, business, or affairs of Welkin. Section 6.6 Shareholders' Equity. On the last business day prior to the Merger Date, the shareholders' equity of Welkin, as determined in accordance with GAAP, shall be no less than $2,750,000. Section 6.7 Non-Competition Agreements.Each of Carl W. Monk, Jr.,Alan A. Ross and Frederick W. Raymond shall have executed and delivered the non-competition agreements with Welkin attached hereto as Exhibits 'D-1,' 'D-2,' and 'D-3.' Section 6.8 Employment Agreements. Each of Carl W. Monk, Jr. and Jose S. Jimenez shall have executed and delivered the employment agreements attached as Exhibits 'E-1' and 'E-2.' Section 6.9 Certificates of Fulfillment of Conditions. Welkin shall have delivered to Nichols and Merger Sub certificates, dated as of the Closing and signed by the President of Welkin, stating that the conditions set forth in Sections 6.1, 6.2, 6.3, 6.4, 6.6 and 6.10 have been fulfilled. Welkin shall have delivered to Nichols copies of resolutions adopted by its Board of Directors and the Welkin Shareholders, certified as of the Closing by its Secretary or an Assistant Secretary, approving the execution and delivery of this Agreement and the performance of its obligations under this Agreement. Section 6.10 Shareholder Approval. The Welkin Shareholders shall have approved the consummation of the transactions contemplated by this Agreement. Section 6.11 Welkin Dissenting Shares. The number of shares of Welkin Stock held by a holder who has demanded and/or perfected the right, if any, to dissent from this Agreement in accordance with the VSCA shall be less than five percent of the total number of shares of Welkin Stock outstanding as of the date hereof. Section 6.12 Pooling Letter. Nichols shall have received a letter, dated as of the Merger Date, from Ernst and Young, LLP, confirming that the Merger, as closed and consummated in accordance with this Agreement, will qualify for pooling-of-interests accounting treatment under Accounting Principles Board Opinion No. 16. Section 6.13 Opinion of Counsel. Welkin shall have delivered to Nichols an opinion of its counsel, Epstein Becker & Green, P.C., dated as of the Merger Date, in the form of Exhibit 'F' hereto. Section 6.14 Number of Welkin Shareholders. On the Merger Date, the number of Welkin Shareholders shall not exceed thirty-five. ARTICLE VII CONDITIONS TO OBLIGATIONS OF WELKIN The obligations of Welkin under this Agreement are subject to the satisfaction on or prior to the Closing of the following conditions, unless such conditions are waived by Welkin: Section 7.1 Representations and Warranties True on Closing. Each of Nichols's and Merger Sub's representations and warranties made in this Agreement are true in all material respects on and as of the Closing as though such representations and warranties were made on and as of the Merger Date. Section 7.2 Compliance with Agreement. Nichols has performed and complied in all material respects with all of its obligations and covenants under this Agreement that are to be performed or complied with by it on or before the Closing, and Nichols is not other-wise in default in any material respect under any of the provisions of this Agreement. Section 7.3 No Litigation. No litigation, proceeding, investigation, or inquiry is pending or threatened which, if sustained, would enjoin or prevent the consummation of the transactions contemplated by this Agreement. Section 7.4 Certified Resolutions. Each of Nichols and Merger Sub has delivered to Welkin copies of resolutions adopted by its respective Board of Directors, certified as of the Closing by its Secretary or an Assistant Secretary, approving the execution and delivery of this Agreement and the performance of its respective obligations under this Agreement. Nichols or Merger Sub, as the case may be, has delivered to Welkin evidence satisfactory to Welkin of the approval by the sole shareholder of Merger Sub of this Agreement and the transactions contemplated hereby. Section 7.5 Certificate of Fulfillment of Conditions. Nichols, on behalf of itself and Merger Sub, shall have delivered to Welkin a certificate, dated as of the Closing and signed by an officer of Nichols stating that the conditions set forth in Sections 7.1 and 7.2 and 7.3 have been fulfilled. Section 7.6 Shareholder Approval. The Welkin Shareholders shall have approved the consummation of the transactions contemplated by this Agreement. Section 7.7 Opinion of Counsel. Nichols shall have delivered an opinion of its counsel, Lanier Ford Shaver & Payne, P.C., dated as of the Merger Date in the form of Exhibit 'G' hereto. ARTICLE VIII POST CLOSING COVENANTS Section 8.1 Merger of 401(k) Plans. Nichols and Welkin will determine whether or not to merge the Welkin Associates Limited Savings Plan listed in Schedule 2.14(a), Employee Benefit Plans, into the Nichols Retirement Plan after the Closing. The features and benefits of the Nichols Retirement Plan offered the employees by Welkin will be determined by Nichols. Welkin will notify all plan participants and the appropriate government agencies (as required under ERISA and the Code), if any, of the cessation of further benefit accrual under the Welkin 401(k) Plan. Section 8.2 Welkin Benefit Plans. Except for the Welkin 401(k) Plan, each of the Plans listed on Schedule 2.14(a), Employee Benefit Plans, shall continue in existence for one year after the Closing, unless Carl W. Monk, Jr., agrees to an earlier termination of any such plan or unless continuation following the Merger of any such plan would violate the nondiscrimination or other provisions of the Code or ERISA. After the Closing, a three-year plan will be implemented to consolidate the Welkin employee fringe benefits, including the employee benefit plans listed on Schedule 2.14(a), Employee Benefit Plans, and the Welkin employment policies and procedures with the Nichols employee fringe benefits and the Nichols employment policies and procedures. Section 8.3 Other Benefits. The employees of Welkin will be entitled to participate in the benefit plans sponsored by Nichols in accordance with the terms and provisions of such plans unless comparable benefits are provided under benefit plans maintained by Welkin after the Closing. Section 8.4 Employee Stock Options. A total of 40,000 shares of Nichols Stock will be reserved for issuance of stock options to employees of Welkin after Closing pursuant to the terms of the Nichols Stock Option Plan. Such amount includes 35,000 shares of Nichols Stock for options granted to Carl W. Monk, Jr. and Jose S. Jimenez pursuant to their employment agreements. The employees selected to receive Nichols' stock options and the number of shares subject to such options will be determined within thirty (30) days after the Closing after considering the recommendations of Carl W. Monk, Jr., and Mike Solley, and such options will be granted within forty-five (45) days after the Closing. Section 8.5 Registration of Nichols Stock. Within fifteen days after the Merger Date, Nichols shall file with the Securities and Exchange Commission a registration statement (the "S-3 Registration Statement") on Form S-3 under the Securities Act with respect to the Nichols Stock delivered in exchange for the Welkin Stock hereunder, including those shares delivered to the Escrow Agent in accordance with the Escrow Agreement and those shares delivered to the Representative as Cost Account Shares (the "Merger Stock"). Nichols shall use its best efforts to cause the S-3 Registration Statement to become effective as soon as practicable. Nichols shall maintain the effectiveness of the S-3 Registration Statement for a period of two years after the Merger Date or until all Nichols Stock delivered in exchange for the Merger Stock is sold, whichever occurs first. The S-3 Registration Statement and all amendments and supplements thereto will conform in all material respects with the requirements of the Securities Act and all rules and regulations thereunder. The Merger Stock (other than the Escrowed Stock or the Cost Account Stock) will be freely tradeable by the Welkin Shareholders from and after the effective date of the S-3 Registration Statement, and the Escrowed Stock will be freely tradeable by the Welkin Shareholders from and after the release of such shares from the escrow pursuant to the Escrow Agreement. ARTICLE IX MISCELLANEOUS Section 9.1 Termination. Anything herein or elsewhere to the contrary notwithstanding, this Agreement may be terminated and the transactions contemplated hereby abandoned at any time on or before the Closing, as follows: (a) By the mutual consent of Nichols and Welkin; (b) By Nichols if any of the conditions set forth in Article VI of this Agreement have become incapable of fulfillment or are not fulfilled on or before August 15, 1998; (c) By Welkin if any of the conditions set forth in Article VII of this Agreement have become incapable of fulfillment or are not fulfilled on or before July 31, 1997; or (d) By Welkin or by Nichols if any action, suit, or proceeding before any court or other governmental body or agency has been instituted to restrain, modify, or prohibit the transactions contemplated hereby. If this Agreement is terminated in a manner permitted by this Section 9.1, this Agreement will become void and of no further force and effect, neither of the parties hereto will have any liability to the other party in respect of a termination of this Agreement. Section 9.2 Expenses. Whether or not the transactions contemplated hereby are consummated, except to the extent otherwise expressly provided herein, each of the parties hereto will pay its respective expenses (including, without limitation, the fees, disbursements, and expenses of its attorneys, accountants, and consultants) incurred by it in negotiating, preparing, and carrying out this Agreement and the transactions contemplated by this Agreement. Section 9.3 Notices. Notices hereunder will be effective four business days after they are deposited in the official mails, postage prepaid, certified and with return receipt requested, the day after they are delivered to a courier for overnight delivery, or upon receipt when sent by facsimile or hand delivery, and addressed: (a) In the case of Nichols, to: 4040 South Memorial Parkway Huntsville, Alabama 35802 Attn.: Chris H. Horgen, Chairman Facsimile No.: (256) 650-2240 with a copy to: John R. Wynn Lanier Ford Shaver & Payne P.C. P.O. Box 2087 Huntsville, Alabama 35304 Facsimile No.: (256) 533-9322 (b) In the case of Merger Sub, to: c/o Nichols Research Corporation 4040 South Memorial Parkway Huntsville, Alabama 35802 Attn.: Chris H. Horgen, Chairman Facsimile No.: (256) 650-2240 with a copy to: John R. Wynn Lanier Ford Shaver & Payne P.C. P.O. Box 2087 Huntsville, Alabama 35304 Facsimile No.: (256) 533-9322 (c) In the case of Welkin, to: c/o Carl W. Monk, Jr., President Welkin Associates, Ltd. 4801 Stonecroft Boulevard Suite 210 Chantilly, Virginia 20151 Facsimile No.: (703) 633-8101 with a copy to: Susan E. Pravda Epstein Becker & Green, P.C. 75 State Street Boston, MA 02109 Facsimile: (617)342-4001 Any party may change the address to which notices are to be addressed by giving the other party notice in the manner herein set forth. Section 9.4 Public Announcements and Releases. No party to this Agreement will make or cause to be made any public announcement or release concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other party to this Agreement. Section 9.5 Governing Law. The validity, interpretation, and performance of this Agreement will be determined in accordance with the laws of the State of Delaware applicable to contracts made and to be performed wholly within that state. Section 9.6 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together shall constitute but one and the same instrument. Section 9.7 Headings. The headings, subheadings, and captions in this Agreement and in any exhibit hereto are for reference purposes only and are not intended to affect the meaning or interpretation of this Agreement. Section 9.8 Exhibits; Disclosure Schedule. The exhibits attached hereto, the Disclosure Schedule, and the other documents and instruments referenced in this Agreement as having been delivered or executed pursuant hereto are hereby made a part of this Agreement as if set forth in full herein. A statement on the Disclosure Schedule that qualifies or limits a representation or warranty, or that constitutes an exception to a representation and warranty, shall specifically identify the Section of this Agreement to which the statement relates. Information, lists, documents, agreements or other matters set forth in the Disclosure Schedule that are not described in the preceding sentence need only be set forth once even if another Section calls for similar disclosure. Section 9.9 Entire Agreement. This Agreement, the exhibits attached hereto, the Disclosure Schedule, and the other documents and instruments referenced in this Agreement as having been delivered or executed pursuant hereto contain the entire agreement between the parties hereto with respect to their subject matter and supersede all negotiations, prior discussions and understandings, written or oral, relating to their subject matter. Section 9.10 Successors and Assigns. This Agreement will be binding upon Welkin and Nichols and their respective successors and assigns. Notwithstanding the immediately preceding sentence, Welkin may assign their rights and delegate their duties under this Agreement only with the prior written consent of Nichols. Section 9.11 Severability. If any provision of this Agreement is held to be unenforceable, invalid, or void to any extent, that provision shall remain in force and effect to the maximum extent allowable, and the enforceability and validity of the remaining provisions of this Agreement shall not be affected thereby. ARTICLE X INDEMNIFICATION Section 10.1 By the Welkin Shareholders. If the Closing occurs, the Welkin Shareholders, severally, hereby indemnify and hold harmless Nichols from and against all claims, damages, losses, liabilities, costs and expenses, including, without limitation, settlement costs and legal, accounting or other expenses paid for investigating or defending any actions or threatened actions (collectively, the "Losses"), in connection with any breach of any representations, warranties or covenants made by Welkin in this Agreement, the Schedules hereto or any certificates delivered pursuant to this Agreement. Section 10.2 By Nichols. If the Closing occurs, Nichols hereby indemnifies and holds harmless the Welkin Shareholders from and against all Losses in connection with any breach of any representations, warranties or covenants made by Nichols in this Agreement, the Schedules hereto or the certificates delivered pursuant to this Agreement. Section 10.3 Claims for Indemnification. Whenever any claim shall arise for indemnification under this Section 10, Nichols or the Welkin Shareholders, as the case may be, seeking indemnification (the "Indemnified Party"), shall promptly notify (the "Claim Notice") the party for whom indemnification is sought hereunder (the "Indemnifying Party") of the claim and, when known, the facts constituting the basis for such claim. In the event such Claim Notice is sent by Nichols, Nichols shall deliver a copy of such Claim Notice to the Escrow Agent. In the event of any such claim for indemnification hereunder resulting from or in connection with any claim or legal proceedings by a thirty party, the notice shall specify, if known, the amount or an estimate of the amount of the liability arising therefrom. The Indemnified Party shall not settle or compromise any claim by a third party for which it is entitled to indemnification hereunder without the prior written consent, which shall not be unreasonably withheld or delayed, of the Indemnifying Party; provided, however, that if suit shall have been instituted against the Indemnified Party and the Indemnifying Party shall not have taken control of such suit after notification thereof as provided herein, the Indemnified Party shall have the right to settle or compromise such claim upon giving notice to the Indemnifying Party as provided in Section 10.4. In the event that the Welkin Shareholders constitute the Indemnifying Party, all notices and consents shall be given to, or by, the Representative, who shall have the power and authority to bind all of the Welkin Shareholders. Section 10.4 Defense by the Indemnifying Party. In connection with any claim which may give rise to indemnity hereunder resulting from or arising out of any claim or legal proceeding by a person other than the Indemnified Party, the Indemnifying Party, at its sole cost and expense, may, upon written notice to the Indemnified Party, assume the defense of any such claim or legal proceeding if the Indemnifying Party acknowledges to the Indemnified Party in writing of the obligation of the Indemnifying Party to indemnify the Indemnified Party with respect to all elements of such claim. If the Indemnifying Party assumes the defense of any such claim or legal proceeding, the Indemnifying Party shall, at its sole cost and expense, take all steps necessary in the defense or settlement thereof. The Indemnifying Party shall not consent to a settlement of, or the entry of any judgment arising from, any such claim or legal proceeding, other than the payment of money, unless such settlement includes a release of the Indemnified Party from any and all claims arising from or related to such claim or legal proceeding. The Indemnified Party shall be entitled to participate in (but not control) the defense of any such action, with its own counsel and at its own expense. If the Indemnifying Party does not assume the defense of any such claim or litigation resulting therefrom within thirty (30) days after the date such claim is made: (a) the Indemnified Party may defend against such claim or litigation in such manner as it may deem appropriate, including, but not limited to, settling such claim or litigation, after giving notice of the same to the Indemnifying Party on such terms as the Indemnified Party may deem appropriate, and (b) the Indemnifying Party shall be entitled to participate in (but not control) the defense of such action, with its counsel and at its own expense. If the Indemnifying Party thereafter seeks to question the manner in which the Indemnified Party defended such third party claim or the amount or nature of any such settlement, the Indemnifying Party shall have the burden to provide by a preponderance of the evidence that the Indemnified Party did not defend or settle such third party claim in a reasonably prudent manner. In the event that the Welkin Shareholders constitute the Indemnifying Party, all references herein to the Indemnifying Party shall be deemed to mean the Representative, who shall have the power and authority to bind all of the Welkin Shareholders. All costs and expenses to be borne by the Indemnifying Party, if the Indemnifying Party is the Welkin Shareholders, shall be borne severally by each of the Welkin Shareholders. Section 10.5 Survival of Representations; Claims for Indemnification. If the Closing occurs, all representations and warranties made in this Agreement, in the Schedules hereto and in all certificates delivered pursuant hereto shall survive through and until the first anniversary of the Closing Date (the "Termination Date"). After the Termination Date, all such representations and warranties shall immediately expire, except with respect to claims, if any, asserted in writing on or prior to the Termination Date and identified as claims for indemnification pursuant to Sections 10.1 or 10.2. All claims for actions for indemnity hereunder shall be asserted and maintained in writing by a party hereto on or prior to the Termination Date. Section 10.6 Exclusion for Certain Indemnity Obligations. Notwithstanding anything to the contrary in Section 10.1, 10.2 or elsewhere in this Agreement, if the Closing occurs, neither the Welkin Shareholders, on the one hand, nor Nichols and Welkin (taken together), on the other hand, shall be entitled to receive, or shall be obligated to pay, any claims hereunder until there are first claims hereunder resulting in more than $90,000 in aggregate amount of indemnity obligations otherwise payable pursuant to Sections 10.1 or 10.2, in which case the party seeking indemnification shall be entitled to recover commencing with the first dollar amount so payable. Section 10.7 Maximum Limitation for Indemnity Obligations. (a) Notwithstanding anything to the contrary in Sections 10.1, 10.2 or elsewhere in this Agreement, if the Closing occurs, the maximum aggregate amount payable to Nichols and all affiliates thereof by all of the Welkin Shareholders together as a group, as indemnity pursuant to this Agreement, or otherwise, shall be the amount of the Escrow Property (as defined in the Escrow Agreement). (b) Except for violations of federal and state securities laws and violations or breaches of post-closing obligations and covenants of Nichols in this Agreement to which the limitations in this Section 10.7(b) shall not apply, the maximum amount payable by Nichols to the Welkin Shareholders together as a group, as indemnity pursuant to this Agreement or otherwise, shall be limited to $1,200,000.00. (c) All amounts payable to Nichols and all affiliates thereof by the Welkin Shareholders shall be paid out of the Escrow Property in accordance with the Escrow Agreement. Upon exhaustion of the Escrow Property or termination of the Escrow Agreement, none of the Welkin Shareholders shall have any obligation whatsoever to indemnify Nichols or any affiliates hereunder. Section 10.8 General Limitations. After the Closing, no party hereto shall make any claims against any other party hereto under this Agreement, under any legal theory or with respect to the transfer of the Merger Stock, except pursuant to Article X hereof, each party to this Agreement hereby waiving any and all such claims. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed and delivered as of the day and year first above written. NICHOLS RESEARCH CORPORATION, a Delaware corporation By: Chris H. Horgen --------------- Its: Chairman WAL ACQUISITION COMPANY, INC., a Virginia corporation By:Patsy L. Hattox --------------- Its:Secretary WELKIN ASSOCIATES, LTD., a Virginia corporation By: Carl W. Monk, Jr. ----------------- Its:President EX-10.7 3 CREDIT AGREEMENT AMONG NICHOLS RESEARCH CORPORATION ("Borrower"), THE BANKS SET FORTH ON SCHEDULE 1 HERETO ("Banks") AND CORESTATES BANK, N.A., AS AGENT FOR THE BANKS ("Agent") November 25, 1997 CREDIT AGREEMENT THIS CREDIT AGREEMENT (this "Agreement") is made this 25th day of November, 1997, by and among NICHOLS RESEARCH CORPORATION, a Delaware corporation ("Borrower"); CORESTATES BANK, N.A., a national banking association ("CoreStates") and the other banks identified on Schedule 1 attached hereto (each individually a "Bank" and individually and collectively, "Banks"); and CoreStates as agent for the Banks ("Agent"). In consideration of the agreements hereinafter set forth, and intending to be legally bound, the parties hereto hereby agree as follows: SECTION 1 DEFINITIONS 1.1 Definitions. When used in this Agreement, the following terms shall have the respective meanings set forth below. "Acquisition Price" means, with respect to any Permitted Acquisition, the aggregate consideration payable by the Companies in connection therewith, including deferred or contingent obligations accounted for as liabilities in accordance with GAAP. "Advance" means a borrowing under the Commitment pursuant to Paragraph 2.7 hereof. "Advance Request Form" means the certificate in the form attached hereto as Exhibit A to be delivered by Borrower to Agent as a condition of each Advance. "Affiliate" means as to any party: (i) any person who or entity which directly or indirectly owns, controls or holds ten percent (10%) or more of the outstanding beneficial interests in such party; (ii) any entity of which ten percent (10%) or more of the outstanding beneficial interest is directly or indirectly owned, controlled, or held by such party; (iii) any entity which directly or indirectly is under common control with such party; (iv) any director or general partner of such party or any Affiliate; or (v) any immediate family member of any person who is an Affiliate. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities, by contract, or otherwise. "Agent" means CoreStates Bank, N.A., in its capacity as agent for the Banks hereunder and any successor in such capacity appointed pursuant to Paragraph 9.15 and 9.16 hereof. "Agreement" means this Credit Agreement and all exhibits hereto, as each may be amended, modified, extended, consolidated or restated from time to time. "ASIDA Bonds" means the bonds issued by the Alabama State Industrial Development Authority for the benefit of Borrower, having an aggregate principal balance of $1,842,300.00 as of the date hereof and a final maturity of January, 2000. "Bank" means individually, and "Banks" means individually and collectively, the institutions identified on Schedule 1 attached hereto and their respective successors and assigns so long as any such institution retains any portion of the Commitment or Loan hereunder. "Base Rate" means the higher of (a) the Federal Funds Rate plus one half of one percent (1/2%) per annum or (b) the Prime Rate. "Borrower" means Nichols Research Corporation, a Delaware corporation. "Business Day" means any day not a Saturday, Sunday or a day on which banks are required or permitted to be closed under the laws of the Commonwealth of Pennsylvania. "Capital Leases" means capital leases and subleases, as defined in Statement 13 of the Financial Accounting Standards Board dated November 1976, as amended and updated from time to time. "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, as amended from time to time, and all rules and regulations promulgated in connection therewith. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and regulations with respect thereto in effect from time to time. "Commitment" means either the Short Term Commitment or the Three Year Commitment, or both of them, as applicable.. "Company" means individually, and "Companies" means individually and collectively, Borrower and each Guarantor. "Compliance Certificate" means a certificate in the form of Exhibit F attached hereto delivered by Borrower to Banks pursuant to Paragraph 5.4 or Paragraph 4.1 hereof. "Debt to Capitalization Ratio" means, as of any date of determination, the ratio of (a) Funded Debt of Borrower and its consolidated Subsidiaries to (b) total stockholders' equity plus Funded Debt of Borrower and its consolidated Subsidiaries, determined in accordance with GAAP. "Default" means an event, condition or circumstance the occurrence of which would, with the giving of notice or the passage of time or both, constitute an Event of Default. "EBITDA" means, for any period, net income for such period as defined in accordance with GAAP, plus interest expense, taxes, depreciation and amortization, in each case as defined in accordance with GAAP and to the extent each has been deducted in determining net income. "EBITDAR" means, for any period, EBITDA for such period plus lease and rental expense for such period, as defined in accordance with GAAP and to the extent deducted in determining net income. "Environmental Control Statutes" means any federal, state, county, regional or local laws governing the control, storage, removal, spill, release or discharge of Hazardous Substances, including without limitation CERCLA, the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and the Hazardous and Solid Waste Amendments of 1984, the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1976, the Hazardous Materials Transportation Act, the Emergency Planning and Community Right to Know Act of 1986, the National Environmental Policy Act of 1975, the Oil Pollution Act of 1990, any similar or implementing state law, and in each case including all amendments thereto and all rules and regulations promulgated thereunder and permits issued in connection therewith. "EPA" means the United States Environmental Protection Agency, or any successor thereto. "ERISA" means the Employee Retirement Income Security Act of 1974, all amendments thereto and all rules and regulations in effect at any time thereunder. "ERISA Affiliate" means, when used with respect to any Plan, ERISA, the PBGC or a provision of the Code pertaining to employee benefit plans, any person or entity that is a member of any group or organization within the meaning of Code Sections 414(b), (c), (m) or (o) of which Borrower or any Guarantor is a member. "Event of Default" means an event described in Paragraph 8.1 hereof. "Existing Credit Agreement" means the Credit Agreement dated August 16, 1995 by and among Borrower and SouthTrust Bank of Alabama, National Association, First Alabama Bank and CoreStates Bank, N.A., as amended. "Federal Funds Rate" means, for any day, the effective rate of interest for such day, as announced from time to time by the Board of Governors of the Federal Reserve System as shown in publication H.15 as the "Federal Funds Rate." "Fixed Charge Coverage Ratio" means, as of any date of determination, the ratio of (a) EBITDAR for Borrower and its consolidated Subsidiaries for the most recent Rolling Period, to (b) the sum of (i) the current portion of long term debt, and (ii) interest, lease and rental expense for Borrower and its consolidated Subsidiaries for the most recent Rolling Period. "Funded Debt" means, as of the date of determination, the aggregate outstanding principal amount of all Indebtedness for, without duplication: (A) borrowed money (other than trade Indebtedness incurred in the normal and ordinary course of business for value received), including without limitation the Loan hereunder; (B) the purchase price for installment purchases of real or personal property; (C) the principal portion of Capital Leases; (D) guaranties of Funded Debt of others; and (E) reimbursement obligations under letters of credit, including the amount of any Letters of Credit outstanding hereunder and unreimbursed draws under Letters of Credit issued hereunder. "GAAP" means generally accepted accounting principles set forth in the Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and in statements of the Financial Accounting Standards Board and in such other statements by such other entity as Agent may reasonably approve, which are applicable in the circumstances as of the date in question, subject to Paragraph 1.2(a) hereof; and such principles observed in a current period shall be comparable in all material respects to those applied in a preceding period. "Guarantor" means individually, and "Guarantors" means individually and collectively, each Material Subsidiary of Borrower, including any future Material Subsidiaries of Borrower which may join in the Guaranty pursuant to Paragraph 5.20 hereof. "Guaranty" means the Guaranty Agreement executed by Guarantors in favor of Banks as required to be delivered pursuant to Paragraph 4.1 hereof and including any joinders thereto pursuant to Paragraph 5.20 hereof, as may be amended, modified or restated from time to time. "Hazardous Substance" means petroleum products and items defined in the Environmental Control Statutes as "hazardous substances", "hazardous wastes", "pollutants" or "contaminants" and any other toxic, reactive, corrosive, carcinogenic, flammable or hazardous substance or other pollutant. "Indebtedness" of any person as of any date of determination means and includes all obligations of such person which, in accordance with GAAP, shall be classified on a balance sheet of such person as liabilities of such person and in any event shall include, without duplication, all (i) obligations of such person for borrowed money or which have been incurred in connection with acquisition of property or assets, (ii) obligations secured by any lien upon property or assets owned by such person, notwithstanding that such person has not assumed or become liable for the payment of such obligations, (iii) obligations created or arising under any conditional sale or other title retention agreement with respect to property acquired by such person, notwithstanding the fact that the rights and remedies of the seller, lender or lessor under such agreement in the event of default are limited to repossession or sale of property, (iv) Capital Leases, (v) guarantees and (vi) letters of credit and letter of credit reimbursement obligations. "Letter of Credit" means individually, and "Letters of Credit" means individually and collectively, the letter(s) of credit issued from time to time by Agent and participated in by Banks pursuant to the terms and conditions of Section 2A hereof. "Letter of Credit Request Form" shall mean the certificate in the form attached as Exhibit B-1 hereto to be delivered by Borrowers to Agent as a condition of each issuance of a Letter of Credit pursuant to Paragraph 2A.3 hereof. "Letter of Credit Sublimit" shall mean the portion of the Three Year Commitment up to which Banks have agreed to participate in the issuance by Agent of Letters of Credit pursuant to Section 2A hereof, being Twenty-Five Million Dollars ($25,000,000). "Loan" means the aggregate outstanding balance of Indebtedness under the Short Term Loan and the Three Year Loan, together with all interest, costs and fees and expenses due hereunder. "Loan Documents" means the Agreement, the Note, the Guaranty and the other documents and agreements executed and delivered in connection with this Agreement. "Local Authorities" means individually and collectively the state and local governmental authorities and administrative agencies which govern the business, commercial activities or facilities owned or operated by any Company. "Material Adverse Effect" means a material adverse effect on the business, financial condition or prospects of the Borrower and its consolidated Subsidiaries taken as a whole. "Material Subsidiary" means any direct or indirect Subsidiary of Borrower which either: (i) comprises 5% or more of the assets of Borrower and its consolidated Subsidiaries as of the last day of the most recently ended fiscal quarter, or (ii) is responsible for 5% or more of the EBITDA of the Borrower and its consolidated Subsidiaries for the most recent Rolling Period. "Maximum Principal Amount" means the maximum principal amount of the Commitment, or the Short Term Commitment or Three Year Commitment, as applicable, up to which the applicable Bank has agreed to lend funds and/or participate in the issuance of Letters of Credit, as set forth in Schedule 1 attached hereto, as such amounts may be reduced or terminated from time to time pursuant to Paragraph 2.8 hereof. "Net Cash Proceeds" shall mean, with respect to any Sale of Material Assets, the cash proceeds received by the seller in such a transaction less (i) the reasonable costs of the transaction, (ii) reasonable reserves for retained liabilities, (iii) applicable taxes arising out of the transaction and (iv) the amount of any such proceeds used to repay indebtedness secured by the assets sold. "Note" means individually, and "Notes" means individually and collectively, the Short Term Notes and the Three Year Notes. "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Permitted Acquisition" means any acquisition, whether by merger, consolidation, purchase of equity securities or purchase of operating assets, in which the acquisition target is operating solely in the United States of America and is engaged in the same or a substantially similar business as the Companies. "Permitted Investments" means (i) investments in commercial paper maturing in 180 days or less from the date of issuance which is rated A1 or better by Standard & Poor's Corporation or P1 or better by Moody's Investors Services, Inc.; (ii) investments in direct obligations of the United States of America or obligations of any agency thereof which are guaranteed by the United States of America, provided that such obligations mature within twelve (12) months of the date of acquisition thereof; and (iii) investments in certificates of deposit maturing within one (1) year from the date of acquisition thereof issued by a bank or trust company organized under the laws of the United States or any state thereof, having capital, surplus and undivided profits aggregating at least $500,000,000 and the long-term deposits of which are rated A1 or better by Moody's Investors Services, Inc. or equivalent by Standard & Poor's Corporation. "Plan" means any employee pension benefit or employee welfare benefit plan as defined in Sections 3(1) or (2) of ERISA maintained or sponsored by, contributed to, or covering employees of, either Borrower or any ERISA Affiliate. "Prime Rate" means the rate of interest announced by Agent from time to time as its prime rate. "Pro Rata Share" shall mean, as to a Bank, the ratio which the outstanding principal balance of its portion of the Loan hereunder bears to the aggregate outstanding principal balance of the Loan at any time; or if no indebtedness is outstanding hereunder or the context otherwise requires, its percentage share of the Commitment as set forth in Schedule 1 attached hereto. "Release" means any spill, leak, emission, discharge or the pumping, pouring, emptying, disposing, injecting, escaping, leaching or dumping of a Hazardous Substance. "Required Banks" shall mean those Banks (which may include Agent in its capacity as a Bank) holding Pro Rata Shares of the Loan aggregating fifty-five percent (55%) or more. "Required Tangible Net Worth" means Seventy-Five Million Dollars ($75,000,000) as of August 31, 1997, increasing as of the end of each fiscal quarter ending thereafter by an amount equal to fifty percent (50%) of positive net income for such quarter (with no decrease for losses for any quarter). "Restricted Payments" means redemptions, repurchases, and distributions of any kind (including redemptions in exchange for real or tangible personal property held by a Company) in respect of the capital stock of Borrower. "Rolling Period" means a period of four consecutive fiscal quarters for which a Compliance Certificate has been (or is required to have been) delivered hereunder. "Sale of Material Assets" means the sale or other disposition (including damage, destruction or condemnation of assets) by any Borrower, in a single transaction or in the aggregate as to all transactions within any twelve (12) consecutive months, of assets (including stock or other investments or interests in a Person) which, valued at the greater of book value or fair market value, have a value of Five Million Dollars ($5,000,000) or more; excluding dispositions of equipment and other assets in the ordinary course of business, and the sale of Permitted Investments for cash or the conversion into cash of Permitted Investments. "Short Term Commitment" means at any time the maximum aggregate principal amount which Banks have agreed to make available at such time under Paragraph 2.1(a) hereof, being Fifty Million Dollars ($50,000,000) in the aggregate on the date hereof. "Short Term Commitment Termination Date" means the earlier of (i) November __, 1998, or (ii) the date on which the Short Term Commitment is terminated pursuant to Paragraph 2.8 hereof. "Short Term Loan" means the aggregate principal balance of Indebtedness advanced under the Short Term Commitment together with interest accrued thereon and fees and expenses incurred in connection with any of the foregoing. "Short Term Note" means individually, and "Short Term Notes" means individually and collectively, the promissory notes in the form of Exhibit C-1 attached hereto delivered by Borrower to each Bank, as may be amended, modified, consolidated or restated from time to time. "SouthTrust Term Loan" means the indebtedness of the Borrower pursuant to that certain Term Note dated February 9, 1994 between Borrower and SouthTrust Bank of Alabama, National Association, having an outstanding principal balance of $2,870,232.70 as of the date hereof and a final maturity of February, 2003. "Subsidiary" means any corporation or partnership of which any Company, directly or indirectly (including as beneficiary of a business trust), owns more than fifty percent (50%) of any class or classes of securities or partnership interests. Unless otherwise specified, references to "Subsidiaries" herein shall mean direct and indirect Subsidiaries of Borrower. "Tangible Net Worth", means, as of any date of determination, total stockholders' equity, less any intangible assets, determined in accordance with GAAP. "Three Year Commitment" means at any time the maximum aggregate principal amount which Banks have agreed to make Advances under Paragraph 2.1(b) hereof and/or issue Letters of Credit under Section 2A hereof, being Fifty Million Dollars ($50,000,000) in the aggregate on the date hereof. "Three Year Commitment Termination Date" means the earlier of (i) November __, 2000 or (ii) the date on which the Three Year Commitment is terminated pursuant to Paragraph 2.8 hereof. "Three Year Loan" means the outstanding principal balance of indebtedness advanced, and the face amount of Letters of Credit issued, under the Three Year Commitment, and without duplication the amount of all unreimbursed draws under Letters of Credit, together with interest accrued on and fees and expenses incurred in connection with any of the foregoing. "Three Year Note" mans individually, and "Three Year Notes" means individually and collectively, the promissory notes in the form of Exhibit C-2 attached hereto delivered by Borrower to each Bank, as may be amended, modified, consolidated or restated from time to time. 1.2 Rules of Construction (a) GAAP. Except as otherwise provided herein, financial and accounting terms used in the foregoing definitions or elsewhere in this Agreement, shall be defined in accordance with GAAP. If Borrower or Required Banks determine that a change in GAAP from that in effect on the date hereof has altered the treatment of certain financial data to its detriment under this Agreement, such party may, by written notice to the other within ten (10) days after the effective date of such change in GAAP, request renegotiation of the financial covenants affected by such change. If Borrower and Required Banks have not agreed on revised covenants within thirty (30) days after the delivery of such notice, then, for purposes of this Agreement, GAAP will mean generally accepted accounting principles on the date just prior to the date on which the change occurred that gave rise to the notice. (b) Use of term "consolidated". Any term defined in Paragraph 1.1 hereof, when modified by the word "consolidated," shall have the meaning given to such term herein as to Borrower and all entities whose accounts, financial results or position, for financial accounting purposes, are consolidated with those of Borrower in accordance with GAAP. SECTION 2 CREDIT FACILITY 2.1 The Facilities (a) Short Term Commitment. From time to time prior to the Short Term Commitment Termination Date, subject to the provisions below, each Bank severally agrees to make Advances to Borrower under the Short Term Commitment up to its respective Maximum Principal Amount with respect to the Short Term Commitment, which Borrower may repay and reborrow prior to the Short Term Commitment Termination Date, for purposes specified in Paragraph 2.4 hereof; provided, however, that the aggregate outstanding principal amount of such Advances shall not exceed at any time the amount of the Short Term Commitment. (b) Three Year Commitment. From time to time prior to the Three Year Commitment Termination Date, subject to the provisions below, each Bank severally agrees to make Advances to Borrower under the Three Year Commitment up to its respective Maximum Principal Amount with respect to the Three Year Commitment, which Borrower may repay and reborrow prior to the Three Year Commitment Termination Date, for purposes specified in Paragraph 2.4 hereof; provided, however, that the aggregate outstanding principal amount of such Advances, together with the amount available to be drawn under Letters of Credit and any unreimbursed draws under Letters of Credit, shall not exceed at any time the amount of the Three Year Commitment. 2.2 Promissory Notes (a) Short Term Notes. The Indebtedness of the Borrower to each Bank under the Short Term Loan will be evidenced by a Short Term Note executed by Borrower in favor of such Bank. The original principal amount of each Bank's Short Term Note will be in the amount identified in Schedule 1 attached hereto as its Maximum Principal Amount with respect to the Short Term Loan; provided, however, that notwithstanding the face amount of each such Short Term Note, Borrower's liability thereunder shall be limited at all times to the actual indebtedness, principal, interest, fees and expenses then outstanding to such Bank under the Loan. (b) Three Year Note. The Indebtedness of the Borrower to each Bank under the Three Year Loan will be evidenced by a Three Year Note executed by Borrower in favor of such Bank. The original principal amount of each Bank's Three Year Note will be in the amount identified in Schedule 1 attached hereto as its Maximum Principal Amount with respect to the Three Year Note; provided, however, that notwithstanding the face amount of each such Three Year Note, Borrower's liability thereunder shall be limited at all times to the actual indebtedness, principal, interest, fees and expenses then outstanding to such Bank under the Three Year Loan. 2.3 Banks' Participation. Banks shall be lenders in the Short Term Loan and the Three Year Loan in the Maximum Principal Amounts and Pro Rata Shares set forth in Schedule 1 attached hereto. 2.4 Use of Proceeds. Funds advanced under the Loan shall be used solely (i) for the working capital needs and general corporate purposes of the Companies, including the refinancing of existing indebtedness under the Existing Credit Agreement and the purchase of equipment for sale to customers, (ii) for reimbursement of draws under Letters of Credit in accordance with Paragraph 2A.4(b) hereof, and (iii) to finance the purchase price and related expenses in connection with Permitted Acquisitions. 2.5 Repayment (a) Short Term Loan. The aggregate outstanding principal balance under the Short Term Loan on the Short Term Commitment Termination Date, together with all outstanding interest, fees and costs due hereunder with respect to the Short Term Loan, shall be due and payable in full on November __, 1998. Notwithstanding the immediately preceding sentence, the aggregate outstanding balance of the Loan shall be due and payable immediately upon acceleration of the Short Term Loan in accordance with Paragraph 8.2 hereof. (b) Three Year Loan. The aggregate outstanding principal balance under the Three Year Loan on the Three Year Commitment Termination Date, together with all outstanding interest, fees and costs due hereunder, shall be due and payable in full on November __, 2000. Notwithstanding the immediately preceding sentence, the aggregate outstanding balance of the Three Year Loan shall be due and payable immediately upon acceleration of the Three Year Loan in accordance with Paragraph 8.2 hereof. 2.6 Interest. Portions of the Loan shall bear interest on the outstanding principal amount thereof in accordance with the following provisions: (a) Definitions. As used in this Paragraph 2.6 and elsewhere in this Agreement, the following words and terms shall have the meanings specified below: "Adjusted Libor Rate" shall mean, for any Interest Period, as applied to a Portion, the rate per annum (rounded upwards, if necessary to the next 1/100 of 1%) determined pursuant to the following formula: Adjusted Libor Rate = Libor Rate ---------- [1 - Reserve Percentage] For purposes hereof, "Libor Rate" shall mean, as applied to a Portion, the rate which appears on the Telerate Page 3750 at approximately 9:00 a.m. Philadelphia time two London Business Days prior to the commencement of such Interest Period for the offering to leading banks in the London Interbank Market of deposits in United States dollars ("Eurodollars") or, if such rate does not appear on the Telerate page 3750, the rate which appears (or, if two or more such rates appear, the average rounded up to the nearest 1/100 of 1% of the rates which appear) on the Reuters Screen LIBO Page as of 9:00 a.m. Philadelphia time two London Business Days prior to the commencement of the Interest Period, in either case for an amount substantially equal to such Portion as to which Borrower may elect the Adjusted Libor Rate to be applicable with a maturity of comparable duration to the Interest Period selected by Borrower for such Portion, as may be adjusted from time to time in accordance with Paragraph 2.6(f) hereof. "Applicable Margin" means the percentage per annum set forth in the appropriate column below that corresponds to the ratio for Borrower and its consolidated Subsidiaries of Funded Debt as of the end of the most recent Rolling Period to EBITDA for the most recent Rolling Period (the Applicable Margin being the lowest applicable percentage per annum as to which the ratio requirement has been attained):
Applicable Margin ----------------- Short Term Loan Long Term Loan --------------- -------------- Level Ratio of Funded Base Rate Libor Base Rate Libor Debt to EBITDA Portions Portions Portions Portions ------ -------------- -------- -------- -------- -------- I Less than or equal to 1.25 to 1 0.00% 0.350% 0.00% 0.325% II Less than or equal to 2.25 to 0.00% 0.400% 0.00% 0.375% 1 but greater than 1.25 to 1 III Greater than 2.25 to 1 0.00% 0.450% 0.00% 0.425%
The initial Applicable Margin shall be based on a closing Compliance Certificate delivered pursuant to Paragraph 4.1 hereof; thereafter the Applicable Margin shall adjust automatically, as appropriate, on the day following delivery of a quarterly Compliance Certificate in accordance with Paragraph 5.4 hereof, provided, that in the event that a quarterly compliance certificate has not been delivered on the date required by Paragraph 5.4 then the Applicable Margin shall adjust to Level III as of the date of required delivery; provided further, however, that the Applicable Margin shall readjust on the day after delivery of such delinquent Compliance Certificate based on the ratio set forth in such Compliance Certificate. "Interest Period" shall mean, with respect to the Adjusted Libor Rate, a period of one (1), two (2), three (3) or six (6) months' duration, as Borrower may elect, during which the Adjusted Libor Rate is applicable; provided, however, that (a) if any Interest Period would otherwise end on a day which shall not be a London Business Day, such Interest Period shall be extended to the next succeeding London Business Day, unless such London Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding London Business Day, subject to clause (c) below; (b) interest shall accrue from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires; (c) with respect to an Interest Period which begins on the last London Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last London Business Day of a calendar month; and (d) Borrower may not elect an Interest Period that would extend past the Termination Date. "London Business Day" shall mean any Business Day on which banks in London, England are open for business. "Portion" shall mean a portion of the Loan as to which a specific interest rate and, in the case of a Portion bearing interest based upon the Adjusted Libor Rate, an Interest Period, has been elected by Borrower. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System, comprising Part 204 of Title 12 Code of Federal Regulations, as amended, and any successor thereto. "Reserve" shall mean, for any day, that reserve (expressed as a decimal) which is in effect (whether or not actually incurred) with respect to a Bank (or any bank Affiliate of such Bank) on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor or any other banking authority to which a Bank (or any bank Affiliate of such Bank) is subject including any board or governmental or administrative agency of the United States or any other jurisdiction to which a Bank (or any bank Affiliate of such Bank) is subject for determining the maximum reserve requirement (including without limitation any basic, supplemental, marginal or emergency reserves) for Eurocurrency liabilities as defined in Regulation D. "Reserve Percentage" shall mean, for a Bank (or any bank Affiliate of such Bank) on any day, that percentage (expressed as a decimal) prescribed by the Board of Governors of the Federal Reserve System (or any successor or any other banking authority to which a Bank (or any bank Affiliate of such Bank) is subject, including any board or governmental or administrative agency of the United States or any other jurisdiction to which a Bank is subject), for determining the reserve requirement (including without limitation any basic, supplemental, marginal or emergency reserves) for (i) deposits of United States Dollars or (ii) Eurocurrency liabilities as defined in Regulation D, in each case used to fund a Portion subject to an Adjusted Libor Rate or any Loan made with the proceeds of such deposit. The Adjusted Libor Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. (b) Interest on Loan. (i) At the Borrower's election in accordance with the provisions of Paragraph 2.6(c) below, in the absence of an Event of Default hereunder and prior to maturity or judgment, and subject to clause (ii) below, any Portion of the Loan shall bear interest at either of the following rates: (A) Base Rate. The Base Rate plus the Applicable Margin. (B) Adjusted Libor Rate. The Adjusted Libor Rate plus the Applicable Margin. (ii) Notwithstanding the foregoing, upon the occurrence and during the continuance of an Event of Default hereunder, including after maturity and upon judgment, Borrower hereby agrees to pay to Banks interest (A) on any outstanding Portion bearing interest based on the Adjusted Libor Rate, at the rate which is two percent (2%) per annum in excess of the Adjusted Libor Rate plus the Applicable Margin for each such Portion through the end of the applicable Interest Period, and thereafter, at the rate of two percent (2%) per annum in excess of the Base Rate plus the Applicable Margin, and (B) on any Portion bearing interest based on the Base Rate, at the rate of two percent (2%) per annum in excess of the Base Rate plus the Applicable Margin. (iii) In the event that any interest rate applicable hereto is in excess of the highest rate allowable under applicable law, then the rate of such interest shall be reduced to the highest rate not in excess of such maximum allowable interest and any excess previously paid by Borrower shall be deemed to have been applied against principal. (c) Procedure for Determining Interest Periods and Rates of Interest. (i) If Borrower elects the rate based oN the Base Rate to be applicable to a Portion, Borrower must notify Agent of such election in writing prior to eleven o'clock (11:00) a.m. Philadelphia time one (1) Business Day prior to the proposed application of such rate. If Borrower elects the rate based on the Adjusted Libor Rate to be applicable to a Portion, Borrower must notify Agent of such election and the Interest Period selected prior to eleven o'clock (11:00) a.m. Philadelphia time at least three (3) London Business Days prior to the commencement of the proposed Interest Period. If Borrower does not provide notice for the rate based on the Adjusted Libor Rate, then Borrower shall be deemed to have requested that the rate based on the Base Rate shall apply to any Portion as to which the Interest Period is expiring and to any new Advance of the Loan until Borrower shall have given proper notice of a change in or determination of the rate of interest in accordance with this Paragraph 2.6(c). (ii) Borrower shall not elect more than six (6) different Portions bearing interest based on the Adjusted Libor Rate to be applicable to the Loan at one time, and any Portion shall be in an amount equal to Three Million Dollars ($3,000,000) or an even multiple of Five Hundred Thousand Dollars ($500,000) in excess thereof. (d) Payment and Calculation of Interest. With respect to Portions which bear interest at the rate based on the Adjusted Libor Rate, interest shall be due and payable on the last day of each Interest Period for each such Portion, and, in the case of a Portion with an Interest Period of six (6) months, on the ninetieth (90) day after the commencement of such Interest Period and on the last day of the Interest Period. With respect to Portions which bear interest at the rate based on the Base Rate, interest shall be due and payable on the last Business Day of each month commencing on the first such date after the first Advance which bears interest at the rate based on the Base Rate. Interest shall be calculated in accordance with the provisions of Paragraph 2.6(b) hereof; all interest shall be calculated on the basis of the actual number of days elapsed over a year of three hundred sixty (360) days. (e) Reserves. If at any time when a Portion is subject to the rate based on the Adjusted Libor Rate, a Bank (or a bank Affiliate of such Bank) is subject to and incurs a Reserve, other than a Reserve Percentage provided in the calculation of the applicable Adjusted Libor Rate, Borrower hereby agrees to pay within five (5) Business Days of demand thereof from time to time, as billed by Agent on behalf of itself or any other Bank, such additional amount as is necessary to reimburse such Bank (or such Bank's bank Affiliate) for its costs in maintaining such Reserve. Such amount shall be computed by taking into account the cost incurred by such Bank (or such Bank's bank Affiliate) in maintaining such Reserve in an amount equal to such Bank's ratable share of the Portion on which such Reserve is incurred, which computation shall be set forth in any such demand by Agent on behalf of itself or any other Bank. The determination by Agent or any Bank of such costs incurred and the allocation of such costs among Borrower and other customers which have similar arrangements with such Bank (or such Bank's bank Affiliate) shall be prima facie evidence of the correctness of the fact and the amount of such additional costs, if calculated in a manner consistent with similar charges made by such Bank (or such Bank's Affiliates) to its other customers having similar arrangements with such Bank. Upon notification to Borrower of any payment required pursuant to this Paragraph 2.6(e), Borrower (A) shall make such payment in accordance with the provisions hereof and (B) may repay the Portion of the Loan with respect to which such payment is required, subject to the requirements of Paragraph 2.9 and 2.6(g) hereof. (f) Special Provisions Applicable to Adjusted Libor Rate. The following special provisions shall apply to the Adjusted Libor Rate: (i) Change of Adjusted Libor Rate. The Adjusted Libor Rate may be automatically adjusted by Agent on a prospective basis to take into account the additional or increased cost of maintaining any necessary reserves for Eurodollar deposits or increased costs due to changes in applicable law or regulation or the interpretation thereof occurring subsequent to the commencement of the then applicable Interest Period, including but not limited to changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage and any Reserve which has resulted in a payment pursuant to subparagraph (e) above, that increase the cost to Banks of funding the Loan or a portion thereof bearing interest based on the Adjusted Libor Rate. Agent shall give Borrower notice of such a determination and adjustment, which determination shall be prima facie evidence of the correctness of the fact and the amount of such adjustment. Borrower may, by notice to Agent, (A) request Agent to furnish to Borrower a statement setting forth the basis for adjusting such Adjusted Libor Rate and the method for determining the amount of such adjustment; and/or (B) repay the Portion of the Loan with respect to which such adjustment is made, subject to the requirements of Paragraph 2.9 and 2.6(g) hereof. (ii) Unavailability of Eurodollar Funds. In the event that Borrower shall have requested the rate based on the Adjusted Libor Rate in accordance with Paragraph 2.6(c) and any Bank (or such Bank's bank Affiliate) shall have reasonably determined that Eurodollar deposits equal to the amount of the principal of the Portion and for the Interest Period specified are unavailable, or that the rate based on the Adjusted Libor Rate will not adequately and fairly reflect the cost of making or maintaining the principal amount of the Portion specified by Borrower during the Interest Period specified, or that by reason of circumstances affecting Eurodollar markets, adequate and reasonable means do not exist for ascertaining the rate based on the Adjusted Libor Rate applicable to the specified Interest Period, such Bank shall give notice to Agent and Agent shall promptly give notice of such determination to Borrower that the rate based on the Adjusted Libor Rate is not available. A determination by such Bank (or such Bank's bank Affiliate) hereunder shall be prima facie evidence of the correctness of the fact and amount of such additional costs or unavailability. Upon such a determination, (i) the obligation to advance or maintain Portions at the rate based on the Adjusted Libor Rate shall be suspended until Agent shall have notified Borrower and Banks that such conditions shall have ceased to exist, and (ii) the rate based on the Base Rate shall be applicable to all such Portions. In the event of any such determination, Borrower shall be entitled to replace the Bank that has made such determination with a bank or banks (which may include one or more of the other Banks hereunder) that have agreed to take such Bank's place. (iii) Illegality. In the event that it becomes unlawful for a Bank (or such Bank's bank Affiliate) to maintain Eurodollar liabilities sufficient to fund any Portion of the Loan subject to the rate based on the Adjusted Libor Rate, then such Bank shall immediately notify Borrower thereof (with a copy to Agent) and such Bank's obligations hereunder to advance or maintain advances at the rate based on the Adjusted Libor Rate shall be suspended until such time as such Bank (or such Bank's bank Affiliate) may again cause the rate based on the Adjusted Libor Rate to be applicable to any Portion of the outstanding principal balance of the Loan and any such Bank's share of any Portion shall then be subject to the rate based on the Base Rate. (g) Funding Costs and Loss of Earnings. In the event that Borrower shall have requested the Adjusted Libor Rate to be applicable to a Portion to be Advanced and Borrower shall revoke the request for such Advance or shall fail to meet the conditions to such Advance as set forth in Section Four hereof, and in connection with any prepayment or repayment of a Portion bearing interest at the rate based on the Adjusted Libor Rate made on other than the last day of the applicable Interest Period, whether such prepayment or repayment is voluntary, mandatory, by demand, acceleration or otherwise, Borrower shall pay to Banks all reasonable funding costs and loss of earnings which may arise in connection with such revocation of request for or failure to meet the conditions to such Advance or such prepayment or repayment, as calculated by Agent in accordance with Exhibit E hereto. 2.7 Advances (a) Advance Request. Borrower shall give Agent written notice, not later than eleven o'clock (11:00) a.m. Philadelphia time one (1) Business Day prior to the proposed Advance in the case of an advance to bear interest based on the Base Rate, and three (3) Business Days prior to an advance to bear interest based on the Adjusted Libor Rate, of each requested Advance under the Commitment specifying the date, amount and purpose thereof. Such notice shall be in the form of the Advance Request Form attached hereto as Exhibit A, shall be certified by the chief financial officer or treasurer of Borrower, and shall contain the following information and representations, which shall be deemed affirmed and true and correct as of and upon receipt of the date of and upon receipt of the requested Advance: (i) whether the Advance is to be drawn under the Short Term Commitment or the Three Year Commitment; (ii) the aggregate amount of the requested Advance, which shall be no less than $3,000,000 and in multiples of $500,000 in excess thereof, or be the unborrowed balance of the applicable Commitment; (iii) confirmation of Borrower's compliance with Paragraphs 5.14 through 5.17 as of the most recently ended fiscal quarter for which a Compliance Certificate has been (or is required to have been) delivered, and taking into account any Advances, including the requested Advance, and payments since such date; and (iv) statements that the representations and warranties set forth herein and in the other Loan Documents are true and correct as of the date thereof; no Event of Default or Default hereunder has occurred and is then continuing or will be caused by the requested Advance; and there has been no Material Adverse Effect since the date of this Agreement and no event or circumstance (or combination of events or circumstances) has occurred which is reasonably likely to have a Material Adverse Effect. (b) Procedures. (i) Upon receiving a request for an Advance in accordance with subparagraph (a) above, Agent shall request by prompt notice to Banks that each Bank advance funds to Agent so that each Bank participates in the requested Advance in the same percentage as it participates in the Commitment. Each Bank shall advance its applicable percentage of the requested Advance to Agent by delivering federal funds immediately available at Agent's offices prior to twelve o'clock (12:00) noon Philadelphia time on the date of the Advance. Subject to the satisfaction of the terms and conditions hereof, Agent shall make the requested Advance available to Borrower by crediting such amount to Borrower's deposit account with Agent not later than two o'clock (2:00) p.m. on the day of the requested Advance; provided, however, that in the event Agent does not receive a Bank's share of the requested Advance by such time as provided above, Agent shall not be obligated to advance such Bank's share. (ii) Unless Agent shall have been notified by a Bank prior to the date such Bank's share of any such Advance is to be made by such Bank that such Bank does not intend to make its share of such requested Advance available to Agent, Agent may assume that such Bank has made such proceeds available to Agent on such date, and Agent may, in reliance upon such assumption (but shall not be obligated to), make available to Borrower a corresponding amount. If such corresponding amount is not in fact made available to Agent by such Bank on the date the Advance is made, Agent shall be entitled to recover such amount on demand from such Bank (or, if such Bank fails to pay such amount forthwith upon such demand, from Borrower) together with interest thereon in respect of each day during the period commencing on the date such amount was made available to Borrower and ending on (but excluding) the date Agent recovers such amount, from such Bank, at a rate per annum equal to the effective rate for overnight federal funds in New York as reported by the Federal Reserve Bank of New York for such day (or, if such day is not a Business Day, for the next preceding Business Day) and from Borrower, at a rate per annum as provided in Paragraph 2.6(b)(i)(A) hereof. (c) Requests Irrevocable. Each request for an Advance pursuant to this Paragraph 2.7 shall be irrevocable and binding on Borrower. In the case of any Advance bearing interest at the rate based upon the Adjusted Libor Rate, Borrower shall indemnify Banks against any loss, cost or expense incurred by Bank as a result of not borrowing such funds on the requested Advance date, including as a result of any failure to fulfill on or before the date specified in such request for an Advance the applicable conditions set forth in Section Four hereof, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or redeployment of deposits or other funds acquired by Banks to fund the Advance to be made by Banks when such Advance, as a result of such failure, is not made on such date, as calculated by Agent in accordance with Exhibit E attached hereto. 2.8. Reduction and Termination of Commitment (a) Borrower. Borrower shall have the right at any time and from time to time, upon three (3) Business Days' prior written notice to Agent, to reduce the Short Term Commitment and/or the Three Year Commitment in increments aggregating $3,000,000 or multiples thereof without penalty or premium, provided that on the effective date of such reduction Borrower shall make a prepayment of Short Term Loan and/or the Three Year Loan, as applicable, in an amount, if any, by which the aggregate outstanding principal balance of such Loan exceeds the amount of the applicable Commitment as then so reduced, together with accrued interest on the amount so prepaid and any amounts due pursuant to Paragraph 2.6(g) hereof. Any reduction in the Short Term Commitment or the Three Year Commitment shall proportionately reduce each Bank's Maximum Principal Amount with respect thereto. (b) Banks. Required Banks shall have the right to terminate the Short Term Commitment and/or the Three Year Commitment at any time, in their discretion and upon notice to Borrower, upon the occurrence of any Event of Default hereunder (except if an Event of Default described in Paragraph 8.1(i) shall occur, in which case termination of the Short Term Commitment and/or the Three Year Commitment shall occur automatically without notice). (c) Restoration Only With Consent. Any termination or reduction of the Commitment pursuant to subparagraphs 2.8(a) and (b) shall be permanent, and such Commitment cannot thereafter be restored or increased without the written consent of Banks. 2.9 Prepayment (a) Upon one (1) Business Day's prior written notice by Borrower to Agent, in the case of Base Rate Portions, and upon three (3) Business Days prior written notice by Borrower to Agent, in the case of Libor Portions, Borrower may repay all or any portion of the outstanding principal balance under the Short Term Loan and/or the Three Year Loan without premium or penalty, provided that any such payment shall include all accrued interest on the amount prepaid plus any amounts which may be due pursuant to Paragraph 2.6(g) hereof. Payments made prior to the Short Term Commitment Termination Date or Three Year Commitment Termination Date, as applicable, shall not reduce the Short Term Commitment or Long Term Commitment, respectively, and may be reborrowed in accordance with this Agreement. (b) In addition to the scheduled payments of principal pursuant to Paragraph 2.5 above, in connection with each Sale of Material Assets approved by Banks pursuant to Paragraph 6.7 hereof, the Net Cash Proceeds to the seller of such transaction shall be paid directly to Agent for the account of Banks and applied to the Loan, together with any amounts. Payments made pursuant to this subparagraph 2.9(b) shall be applied first to the outstanding principal balance of the Short Term Loan and then to the outstanding principal balance of the Three Year Loan, and shall be accompanied by all accrued and unpaid interest and fees in connection with the amount prepaid (including any amount payable under Paragraph 2.6(g) hereof). Any such payments shall not reduce the respective Commitments and may be reborrowed in accordance herewith. 2.10 Payments. All payments of principal, interest, fees and other amounts due hereunder, including any prepayments thereof, shall be made by Borrower to Agent for the account of Banks in immediately available funds before twelve o'clock (12:00) noon, Philadelphia time, on any Business Day at the office of Agent set forth on Schedule 1 hereto. Borrower hereby authorizes Agent to charge Borrower's account with Agent for all payments of principal, interest and fees when due hereunder. 2.11 Facility Fee. Borrower shall pay to Agent, for the benefit of Banks in accordance with their Pro Rata Shares, a non-refundable facility fee at the rate of one-tenth of one percent (.10%) per annum on the aggregate amount of the Short Term Commitment and at the rate of one-eighth of one percent (.125%) per annum on the aggregate amount of the Three Year Commitment from the date hereof through the Short Term Commitment Termination Date and the Three Year Commitment Termination Date, respectively, which fees shall be payable at the offices of Agent quarterly in arrears on the first day of each March, June, September, and December and on the applicable Termination Date. The commitment fee shall be calculated on the basis of the actual number of days elapsed over a year of three hundred sixty (360) days. Borrower and Banks hereby agree that for purposes of calculating the commitment fee to be paid from time to time under this Paragraph 2.11, the unborrowed portion of the Three Year Commitment on which such fee is calculated shall be reduced by the amount available to be drawn under outstanding Letters of Credit and the amount of any unreimbursed draws on any Letters of Credit. 2.12 Fees. Borrower shall pay to Agent, for itself and for the account of Banks, fees as agreed pursuant to the letter dated August 22, 1997. 2.13 Regulatory Changes in Capital Requirements. If any Bank shall have determined that the adoption or the effectiveness after the date hereof of any law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Bank (or any lending office of such Bank) or such Bank's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Bank's capital or on the capital of such Bank's holding company, as a consequence of this Agreement, the Commitment, Advances or the Loan made by such Bank pursuant hereto to a level below that which such Bank or its holding company could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies and the policies of such Bank's holding company with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank or its holding company for any such reduction suffered together with interest on each such amount from the date demanded until payment in full thereof at the rate provided in Paragraph 2.6(b)(ii) hereof with respect to amounts not paid when due. Such Bank will notify Borrower of any event occurring after the date of this Agreement that will entitle such Bank to compensation pursuant to this Paragraph 2.13 as promptly as practicable after it obtains knowledge thereof and determines to request such compensation, and such compensation shall not be charged for any period more than three (3) months prior to the date of such notice. A certificate of such Bank setting forth such amount or amounts as shall be necessary to compensate such Bank or its holding company as specified above shall be delivered to Borrower and shall be conclusive absent manifest error, if calculated and charged in a manner consistent with similar charges made by such Bank to its other customers having similar arrangements with such Bank. Borrower shall pay such Bank the amount shown as due on any such certificate delivered by such Bank within ten (10) days after its receipt of the same. Failure on the part of any Bank to demand compensation for increased costs or reduction in amounts received or receivable or reductions in return on capital with respect to any period shall not constitute a waiver of such Bank's right to demand compensation with respect to any other period except as otherwise limited by the terms of this Paragraph 2.13. SECTION 2A LETTERS OF CREDIT 2A.1 Availability of Credits. Subject to the terms and conditions set forth herein, Banks shall from time to time prior to the Three Year Commitment Termination Date participate in the issuance by Agent of Letters of Credit for the account of Borrower on the following terms and conditions: (a) at the time of issuance of the Letter of Credit, the sum of the amount available to be drawn under such Letter of Credit and all other Letters of Credit then outstanding hereunder plus any unreimbursed draws under Letters of Credit, plus the outstanding principal balance of the Three Year Loan, shall not exceed the Three Year Commitment; (b) at the time of issuance of the Letter of Credit, the amount available to be drawn under such Letter of Credit and all other Letters of Credit then outstanding hereunder plus any unreimbursed draws under Letters of Credit shall not exceed, in the aggregate, the Letter of Credit Sublimit; (c) the final expiration date of each Letter of Credit shall be on or before the earlier of (i) one year, in the case of standby Letters of Credit, and one hundred eighty (180) days, in the case of documentary Letters of Credit, from the date of issuance thereof or (ii) the Three Year Commitment Termination Date; (d) there shall not exist at the time of issuance of the Letter of Credit, or as a result thereof, any Default or Event of Default hereunder; and (e) each Letter of Credit issued under this Section 2A shall be utilized by Borrower for legitimate purposes in the ordinary course of its business. 2A.2 Commitment Availability. The amount available under the Three Year Commitment as from time to time in effect shall be reduced by the amount available to be drawn under all outstanding Letters of Credit and unreimbursed amounts of any draws under Letters of Credit. The amount by which the Three Year Commitment is so reduced shall not be available for Advances under Paragraph 2.6 hereof, except Advances thereunder which are made to reimburse Bank for draws under the Letters of Credit as permitted pursuant to Paragraph 2A.4(b) hereof. 2A.3. Approval and Issuance (a) Borrower shall provide Agent not less than three (3) Business Days' prior written notice of each request for the issuance of a Letter of Credit by delivery of a Letter of Credit Request Form in the form attached as Exhibit B-1 hereto and Agent's Letter of Credit Application in the form attached as Exhibit B-2 hereto. Each Letter of Credit Request Form submitted by Borrower to Agent requesting the issuance of a Letter of Credit shall be certified by the chief financial officer or treasurer of Borrower and shall, in addition to the matters described in Paragraph 2.7(a) hereof, list all Letters of Credit outstanding for the account of Borrower at that time and, for each Letter of Credit so listed, its face amount, outstanding undrawn balance and expiration date. It shall be a condition to the issuance of any Letter of Credit that Agent shall have received a Letter of Credit Request Form and Letter of Credit Application as described above and that the conditions set forth in Paragraph 4.2 shall be satisfied. (b) Agent will promptly provide to Lenders written or telephonic notification of Agent's receipt of the Letter of Credit Request Form and the Letter of Credit Application which shall state (i) the amount of the Letter of Credit requested and (ii) the expiration date of the requested Letter of Credit. 2A.4. Obligations of the Borrower (a) Borrower agrees to pay to Agent in connection with each Letter of Credit issued hereunder: (i) immediately upon the demand of Agent on behalf of Banks, the amount paid by Banks with respect to such Letter of Credit; (ii) immediately upon demand of Agent, the amount of any draft presented purporting to be drawn under such Letter of Credit provided that the draft and accompanying documents conform to the terms of the Letter of Credit but subject to the terms of Paragraph 2A.7 (whether or not Agent has at such time honored such draft) and any other amounts paid thereunder (it being understood that Agent is not required to make demand upon or proceed against any Bank or other party or to resort to any collateral before obtaining payment from Borrowers); (iii) in advance upon the date of issuance or extension of any Letter of Credit, a non-refundable fee for the benefit of Banks in accordance with each Banks percentage share of the Three Year Commitment as set forth on Schedule 1 attached hereto, calculated on the face amount of such standby Letter of Credit for the term of such Letter of Credit at a rate per annum equal to the Applicable Margin for a Libor Portion under the Three Year Loan as set forth in Paragraph 2.6 hereof; (iv) on the date of issuance of each Letter of Credit and on the effective date of any renewal or extension of any Letter of Credit a fee of one-eighth of one percent (0.00125%) per annum on the outstanding face amount of such Letter of Credit, payable to Agent for its own account; and (v) interest on any indebtedness outstanding with respect to such Letter of Credit, whether for funds paid on drafts on such Letter of Credit or otherwise (but such indebtedness shall not include undrawn balances of such Letter of Credit issued hereunder) at the rate set forth in Paragraph 2.5(b)(i)(A) hereof from the date of payment by Agent (if not reimbursed by Borrower on the same day) to the date one (1) Business Day after notice to Borrower of such payment, and thereafter at the rate applicable to Portions bearing interest based on the Base Rate under Paragraph 2.5(b)(ii) hereof; interest under this clause (v) shall be paid at the times and in the manner set forth in Paragraph 2.6 hereof, and shall accrue on amounts paid on a Letter of Credit (if not reimbursed by Borrower on the same day) from the date of payment by Agent, whether or not demand is made, until such amounts are reimbursed by Borrower whether before, at or after demand. (b) On or before the Three Year Commitment Termination Date, in the absence of a Default or Event of Default at such time, and subject to the provisions of Paragraph 2.6 hereof, Banks hereby agree to advance funds to Borrower under the Three Year Loan to make the payments required under Paragraphs 2A.4(a)(i) and (ii) hereof. If any payment by Agent of a draft drawn under a Letter of Credit is for any reason (including without limitation the occurrence or continuation of a Default or Event of Default hereunder) not reimbursed prior to or on the date of such payment, the amount of such payment shall thereupon be deemed for purposes hereof an advance under Paragraph 2.7 hereof. Such reimbursement obligation shall be repayable, prepayable, and otherwise subject to all the terms and conditions thereof as if advanced by Bank pursuant to Paragraph 2.7 hereof (but without duplication). 2A.5. Payment by Banks on Letters of Credit (a) With respect to each Letter of Credit, each Bank agrees that it is irrevocably obligated to pay to Agent, for each such Letter of Credit, such Bank's Pro Rata Share of each and every payment made or to be made by Agent under such Letter of Credit (each such payment to be made, a "LOC Contribution"). Each Bank's LOC Contribution shall be due from such Bank immediately upon, and in any event no later than the same day as, receipt of written notice (which may be sent by telex or telecopier) from Agent (except that if such notice is received after 3:00 p.m. on any Business Day, payment may be made on the following Business Day, together with interest equal to the effective rate for overnight funds in New York as reported by the Federal Reserve Bank of New York for such day (or, if such day is not a Business Day, for the next preceding Business Day)) that (i) it has made a payment or (ii) a draft has been presented purporting to be drawn on a Letter of Credit issued hereunder. Such payment shall be made at Agent's offices in immediately available federal funds. (b) The obligation of each Bank to make its LOC Contribution hereunder is absolute, continuing and unconditional, and Agent shall not be required first to make demand upon or proceed against Borrowers or any guarantor or surety, or any others liable with respect to the applicable Letter of Credit and shall not be required first to resort to any Collateral. LOC Contributions shall be made without regard to termination of this Agreement or the Commitment, the existence of an Event of Default or Default hereunder, the acceleration of indebtedness hereunder or any other event or circumstance. 2A.6. Collateral Security (a) On the termination of the Three Year Commitment or the occurrence of an Event of Default, Required Banks may require (and in the case of an Event of Default occurring under Paragraph 8.1(i) it shall be required automatically) that Borrower deliver to Agent, for the benefit of Banks, cash or U.S. Treasury Bills with maturities of not more than 90 days from the date of delivery (discounted in accordance with customary banking practice to present value to determine amount) in an amount equal at all times to one hundred ten percent (110%)of the outstanding undrawn amount of all Letters of Credit, such cash or U.S. Treasury Bills and all interest earned thereon to constitute cash collateral for all such Letters of Credit. At such time as such collateral is required to be and has not been deposited, Agent and any Bank shall be entitled to liquidate such of the other collateral for the Loan (if any) or any other assets of Borrower or any Guarantor as may be in the possession of such Bank, as is necessary or appropriate in its sole judgment so as to create such cash collateral. (b) Any cash collateral deposited under subparagraph (a) above, and all interest earned thereon, shall be held by Agent and invested and reinvested at the expense and the written direction of Borrower, in U.S. Treasury Bills with maturities of no more than ninety (90) days from the date of investment. 2A.7 General Terms of Credits. The following terms and conditions apply with respect to each Letter of Credit notwithstanding anything to the contrary contained herein: (a) Borrower assumes all risks of the acts or omissions of the beneficiary of each Letter of Credit with respect to the use of the Letter of Credit or with respect to the beneficiary's obligations to Borrower. Neither Agent nor any of the Banks, nor any of their respective officers or directors, shall be liable or responsible for, and Borrower hereby agrees to indemnify and hold Agent and Banks harmless (except for such party's respective gross negligence or willful misconduct) with respect to: (i) the use which may be made of the Letter of Credit or for any acts or omissions of the beneficiary in connection therewith; (ii) the accuracy, truth, validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should in fact prove to be in any or all respects false, misleading, inaccurate, invalid, insufficient, fraudulent, or forged; (iii) any other circumstances whatsoever in making or failing to make payment under a Letter of Credit; or (iv) any inaccuracy, interruption, error or delay in transmission or delivery of correspondence or documents by post, telegraph or otherwise. In furtherance and not in limitation of the foregoing, Agent may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary. (b) Notwithstanding the foregoing, with respect to any Letter of Credit, Borrower shall have a claim against Agent, and Agent shall be liable to Borrower, to the extent, but only to the extent, of any direct, as opposed to indirect or consequential, damages suffered by Borrower caused by the Agent's willful misconduct or gross negligence. (c) To the extent not inconsistent with this Agreement, the Uniform Customs and Practices for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, are hereby made a part of this Agreement with respect to obligations in connection with each Letter of Credit. SECTION 3 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Banks as follows: 3.1 Organization and Good Standing. Each Company is a corporation or other legal entity as set forth on Exhibit D attached hereto, duly formed and validly existing under the laws of the jurisdiction of its formation as set forth in Exhibit D, and each has the power and authority to carry on its business as now conducted and, except as to failures to qualify which do not, either singly or in the aggregate, have a Material Adverse Effect, is qualified to do business in all other states in which the nature of its business or the ownership of its properties requires such qualification. 3.2 Power and Authority: Validity of Agreement. Each Company has the power and authority under applicable law and under its organizational documents to enter into and perform the Loan Documents to the extent that it is a party thereto; and all actions necessary or appropriate for the execution and performance by each Company of the Loan Documents have been taken, and, upon their execution, the same will constitute the valid and binding obligations of each Company to the extent it is a party thereto, enforceable in accordance with their terms, except as such enforceability may be limited by bankruptcy or equitable principles applicable to the enforcement of creditors' rights generally. 3.3 No Violation of Laws or Agreements. The making and performance of the Loan Documents by each Company will not violate any provisions of any law or regulation, federal, state or local, or its partnership agreement, or result in any breach or violation of, or constitute a default under, any material agreement or instruments by which any Company or its property may be bound. 3.4 Material Contracts. Except as set forth on Exhibit D attached hereto, there exists no material default under any contracts material to the businesses of the Companies. 3.5 Compliance (a) Each of the Companies is in compliance with all applicable laws and regulations, federal, state and local (including without limitation those administered by the Local Authorities), except for such failure to comply as would not, either singly or in the aggregate, have a Material Adverse Effect; (b) The Companies possess all the franchises, permits, licenses, certificates of compliance and approval and grants of authority, necessary or required in the conduct of the Companies' respective businesses as of the date hereof; and except as identified on Exhibit D attached hereto, as of the date hereof all such franchises, permits, licenses, certificates and grants are valid, binding, enforceable and subsisting without any defaults thereunder or enforceable adverse limitations thereon and are not subject to any proceedings or claims opposing the issuance, development or use thereof or contesting the validity thereof, except to the extent that the failure to obtain or maintain any of the foregoing would not, either singly or in the aggregate, have a Material Adverse Effect; and (c) No authorization, consent, approval, waiver, license or formal exemptions from, nor any filing, declaration or registration with, any court, governmental agency or regulatory authority (federal, state or local) or non-governmental entity, under the terms of contracts or otherwise, is required by the Companies by reason of or in connection with the Companies' execution and performance of the Loan Documents, except those which have been obtained. 3.6 Litigation. Thereare no actions, suits, proceedings or claims which are pending or, to the best of the Companies' knowledge or information, threatened against any Company which, if adversely resolved, would have a Material Adverse Effect. 3.7 Title to Assests. Each of the Companies has good and marketable title to all of its properties and assets material to the conduct of its business, free and clear of any liens and encumbrances except the liens and encumbrances permitted pursuant to Paragraph 6.4 hereof and the liens and security interests identified on Exhibit D attached hereto. All such assets are fully covered by the insurance required under Paragraph 5.8 hereof. 3.8 Accuracy of Information; Full Disclosure (a) All information furnished to Banks concerning the financial condition of the Companies including Borrower's annual consolidated financial statement for the period ending August 31, 1996 and Borrower's interim consolidated financial statements dated May 31, 1997, copies of which have been furnished to Banks, has been prepared in accordance with GAAP and fairly present in all material respects the financial condition of the Companies as of the dates and for the periods covered and discloses all liabilities of the Companies required to be disclosed in accordance with GAAP, except that interim statements do not have footnotes and are subject to year-end adjustments; and there has been no material adverse change in the financial condition or business of the Companies from the date of such statements to the date hereof; and (b) All financial statements and other documents furnished by the Companies to Banks pursuant to this Agreement and the other Loan Documents do not and will not contain any untrue statement of material fact or omit to state a material fact necessary in order to make the statements contained herein and therein not misleading. The Companies have disclosed to the Banks in writing any and all facts which materially and adversely affect the business, properties, operations or condition, financial or otherwise, of the Companies considered as a whole, or the Companies' ability to perform their obligations under this Agreement and the other Loan Documents. 3.9 Taxes and Assessments (a) Each Company has duly and timely filed all information and tax returns and reports with any federal, state, or local governmental taxing authority, body or agency, and all taxes, including without limitation income, gross receipts, sales, use, excise, withholding and any other taxes, and any governmental charges, penalties, interest or fines with respect thereto, due and payable by any Company, have been paid, withheld or reserved for in accordance with GAAP or, to the extent they relate to periods on or prior to the date of the financial statements referenced in Paragraphs 5.2 and 5.3 hereof, are reflected as a liability on the financial statements in accordance with GAAP. (b) Each Company has properly withheld all amounts required by law to be withheld for income taxes and unemployment taxes including without limitation, all amounts required with respect to social security and unemployment compensation, relating to its employees, and has remitted such withheld amounts in a timely manner to the appropriate taxing authority, agency or body. 3.10 Indebtedness. The Companies have no presently outstanding Indebtedness or obligations, including contingent obligations and obligations under leases of property from others, except the Indebtedness and obligations described in Exhibit D hereto or in the Companies' financial statements which have been furnished to Banks prior to the date hereof pursuant to Paragraph 3.8 hereof, and indebtedness permitted pursuant to Paragraph 6.1 hereof. 3.11 Management Agreements No Company is a party to any management or consulting agreements for the provision of senior executive services to such Company (other than employment agreements with officers of the Companies) except as described on Exhibit D hereto. 3.12 Investments Borrower and each direct and indirect Subsidiary of Borrower is identified on Exhibit D attached hereto, which indicates the number of shares and classes of the capital stock or partnership interests, as applicable, of Borrower and each such Subsidiary, and the ownership thereof. No Company has any other Subsidiaries or any investments in or loans to any other individuals or business entities except for loans and investments permitted pursuant to Paragraphs 6.3 or 6.8 hereof. 3.13 ERISA Each of the Companies and each ERISA Affiliate is in compliance in all material respects with all applicable provisions of ERISA and the regulations promulgated thereunder; and, (a) No Company nor any ERISA Affiliate maintains or contributes to or has maintained or contributed to any multiemployer plan (as defined in section 4001 of ERISA) under which any Company or any ERISA affiliate could have any withdrawal liability which is reasonably likely to have a Material Adverse Effect; (b) No Company nor any ERISA Affiliate, sponsors or maintains any Plan under which there is an accumulated funding deficiency within the meaning of ss.412 of the Code, whether or not waived which is reasonably likely to have a Material Adverse Effect; (c) The aggregate liability for accrued benefits and other ancillary benefits under each defined benefit pension Plan that is sponsored or maintained by any Company or any ERISA Affiliate (determined on the basis of the actuarial assumptions prescribed for valuing benefits under terminating single-employer defined benefit plans under Title IV of ERISA) does not exceed the aggregate fair market value of the assets under each such defined benefit pension Plan by an amount which is reasonably likely to have a Material Adverse Effect; (d) The aggregate liability of each Company, and each ERISA Affiliate arising out of or relating to a failure of any Plan to comply with the provisions of ERISA or the Code, is not an amount which is reasonably likely to have a Material Adverse Effect on any Company; and (e) There does not exist any unfunded liability (determined on the basis of actuarial assumptions utilized by the actuary for the Plan in preparing the most recent Annual Report) of any Company or ERISA Affiliate under any Plan providing post-retirement life or health benefits which is reasonably likely to have a Material Adverse Effect. 3.14 Fees and Commissions The Companies owe no brokers' or finders' fees or commissions of any kind, and know of no claim for any brokers' or finders' fees or commissions, in connection with the Companies' obtaining the Commitment or the Loan from Banks, except those provided herein. 3.15 No Extension of Credit for Securities The Companies are not now, nor at any time have they been engaged principally, or as one of their respective important activities, in the business of extending or arranging for the extension of credit, for the purpose of purchasing or carrying any margin stock or margin securities; nor will the proceeds of the Loan be used by any Company directly or indirectly, for such purposes. 3.16 Hazardous Wastes, Substances and Petroleum Products. Except as otherwise set forth on Exhibit D attached hereto: (a) Each Company (i) has received all permits and filed all notifications required by the Environmental Control Statutes to carry on its respective business(es); and (ii) is in compliance with all Environmental Control Statutes. (b) Each Company has given any written or oral notice to the EPA or any state or local agency with regard to any actual or imminently threatened Release of Hazardous Substances on properties owned, leased or operated by such Company or used in connection with the conduct of its business and operations. (c) No Company has received notice that it is potentially responsible for clean-up, remediation, costs of clean-up or remediation, fines or penalties with respect to any actual or imminently threatened Release of Hazardous Substances pursuant to any Environmental Control Statute. 3.17 Solvency To the best of each Company's knowledge, excluding intercompany indebtedness, each Company is, and after receipt and application of the first Advance under this Agreement will be, solvent such that (i) the fair value of its assets (including without limitation the fair salable value of the goodwill and other intangible property of such Company) is greater than the total amount of its liabilities, including without limitation, contingent liabilities, (ii) the present fair salable value of its assets (including without limitation the fair salable value of the goodwill and other intangible property of such Company) is not less than the amount that will be required to pay the probable liability on their debts as they become absolute and matured, and (iii) they are able to realize upon their assets and pay their debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business. No Company intends to, nor believes that it will, incur debts or liabilities beyond its ability to pay as such debts and liabilities mature, and no Company is engaged in a business or transaction, or about to engage in a business or transaction, for which its property would constitute unreasonably small capital after giving due consideration to the prevailing practice and industry in which it is engaged. For purposes of this Paragraph 3.17, in computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual matured liability of the applicable Company. Each Company hereby agrees that to the extent a Company shall have paid more than its proportionate share of any payment made hereunder or under the Guaranty, such Company shall be entitled to seek and receive contribution from and against any other Company who has not paid its proportionate share of such payment; provided however such Company shall not seek any such contribution from any other Company until the Loans have been paid in full and all Commitments of the Banks hereunder have been terminated. The provisions of this paragraph shall in no respect limit the obligations and liabilities of any Company to the Agent and the Banks and each Company shall remain liable to the Agent and the Banks for the full amount of its obligations hereunder and under the Guaranty. 3.18 Employee Controversies. There are no material controversies pending or, to the knowledge of the Companies, threatened or anticipated between any Company and any of its respective employees, and there are no labor disputes, grievances, arbitration proceedings or any strikes, work stoppages or slowdowns pending, or to the Companies' knowledge, threatened between any Company and its respective employees and representatives, which in either event could impair the ability of the Company to perform their obligations under the Loan Documents, or which might reasonably be expected to have a Material Adverse Effect. 3.19 Government Contracting. No Company has transferred or received any rights or obligations with respect to any contract with any federal or state governmental agency or instrumentality in violation of the federal Assignment of Claims Act or related federal or state laws, rules or regulations. No Company nor any employee of any Company has been proposed for or received notice of intended suspension or debarment from federal contracting pursuant to Part 9 of the Federal Acquisition Regulations, nor has any similar event occurred under comparable state laws, rules or regulations relating to contracting with state governmental entities. No Company has received notice of cure or of default with respect to any contract with a governmental agency, nor any claim for excess reprocurement costs. SECTION 4 CONDITIONS 4.1 Effectiveness The effectiveness of this Agreement shall be subject to Agent's receipt of the following documents and satisfaction of the following conditions, each in form and substance satisfactory to Banks: (a) Promissory Notes. The Notes duly executed by Borrower. (b) Guaranty. A Guaranty Agreement executed by each Subsidiary of Borrower in favor of Banks. (c) Authorization Documents. A certificate of the secretary of each Company attaching and certifying as to (i) the certificate or articles of incorporation and bylaws or other organizational documents of such Company; (ii) resolutions or other evidence of authorization by the board of directors or other governing body of such Company authorizing its execution and full performance of Loan Documents and all other documents and actions required hereunder; and (iii) incumbency certificates setting forth the name, title and specimen signature of each officer of such Company who is authorized to execute the Loan Documents on behalf of such entity. (d) Good Standing. Certificates of good standing or the equivalent for each Company for which such certificates are available in its state of formation and each of the states in which it is qualified to do business. (e) Opinion of Counsel. An opinion letter from counsel for the Companies, as may be reasonably satisfactory to Banks. (f) Compliance and Borrowing Base Certificates. A Compliance Certificate in the form of Exhibit F attached hereto calculated as of the end of the most recent fiscal quarter of the Borrower for which such certificates would be required hereunder. (g) Fees and Expenses. Payment of all fees required by Paragraph 2.12 hereof. (h) Searches. Uniform Commercial Code, tax and judgment searches against the Companies in those offices and jurisdictions as Agent shall reasonably request. (i) Financial Projections. Projections for Borrower and its consolidated Subsidiary for the period through fiscal year 2000, certified by the chief financial officer of Borrower as constituting a good faith projection based upon assumptions believed to be reasonable. (j) Consents. Receipt of all required consents and approvals under applicable law or contract. (k) Pay-Off of Existing Loan. Payment in full of all indebtedness and obligations of Borrower under the Existing Credit Agreement, and release of all liens and encumbrances thereunder. (l) Other Documents. Such additional documents as Agent reasonably may request. 4.2 Advances. The obligation of Banks to make Advances under the Commitment or issue Letters of Credit shall be subject to Borrower's compliance with Paragraph 2.7 or 2A.3 hereof, as applicable, and it shall be a condition to Banks' obligation hereunder to make any such Advance or issue such Letter of Credit that (a) the representations and warranties set forth herein and in the other Loan Documents shall be true and correct as if made on the date of such Advance or issuance, (b) no Event of Default or Default shall have occurred and not have been waived on the date of such Advance or issuance or be caused by such Advance or issuance, (c) all fees required pursuant to Paragraphs 2.11 and 2.12 hereof have been paid as and when due, and (d) there shall have been no Material Adverse Effect since the date of this Agreement, and no event or circumstance (or combination of events or circumstances) shall have occurred which is reasonably likely to have a Material Adverse Effect. SECTION 5 AFFIRMATIVE COVENANTS Borrower covenants and agrees that so long as the Commitment of Banks to Borrower or any Indebtedness of Borrower to Banks is outstanding, unless Required Banks have otherwise agreed in writing, each of the Companies will (and with respect to Paragraph 5.13, will cause each ERISA Affiliate) to: 5.1 Existence and Good Standing. Preserve and maintain (a) its existence as a corporation, partnership or other legal entity, as applicable, and its good standing in all states in which it conducts business and (b) the effectiveness and validity of all its franchises, licenses, permits, certificates of compliance or grants of authority required in the conduct of its business, except for such instances of ineffectiveness or invalidity as would not, either singly or in the aggregate, have a Material Adverse Effect. 5.2 Interim Financial Statements. Furnish to Agent (with sufficient copies for each Bank) within forty-five (45) days of the end of each of the first three quarterly periods in each fiscal year of Borrower, unaudited quarterly consolidated financial statements, in form and substance as reasonably required by Agent, including (i) a consolidated balance sheet, (ii) a consolidated statement of income, and (iii) a statement of cash flows, prepared in accordance with GAAP consistently applied (except that such interim statements need not contain footnotes and may be subject to year-end adjustments). 5.3 Annual Financial Statements. Furnish to Agent (with sufficient copies for each Bank) within ninety (90) days after the close of each fiscal year audited consolidated annual financial statements, including the information required under Paragraph 5.2 hereof, which financial statements shall be prepared in accordance with GAAP and shall be certified without qualification (except with respect to changes in GAAP as to which Borrower's independent certified public accountants have concurred) by an independent certified public accounting firm reasonably satisfactory to Agent; and cause Agent to be furnished, at the time of the completion of the annual audit, with copies of any management letters prepared by such accountants and with a certificate signed by such accountants to the effect that to the best of their knowledge there exists no Event of Default or Default hereunder. 5.4 Compliance Certificate. At the time of delivery of financial statements pursuant to Paragraph 5.2 and 5.3 hereof, deliver to Agent (with sufficient copies for each Bank) a certificate in the form of Exhibit F attached hereto executed by the chief financial officer or treasurer of Borrower, showing the calculation of the covenants set forth in Paragraph 5.14 through 5.17 hereof. 5.5 Public Information. Deliver to Agent (with sufficient copies for each Bank) promptly upon transmission thereof, copies of all financial statements, proxy statements, notices and reports, and copies of any registration statement or annual or quarterly reports, if any, filed with the Securities and Exchange Commission (or successor entity). 5.6 Books and Records. Keep and maintain satisfactory and adequate books and records of account in accordance with GAAP and make or cause the same to be made available to Agent or its agents or nominees at any reasonable time upon reasonable notice for inspection and to make extracts thereof and permit Agent or its agents or nominees to discuss contents of same with senior officers of the Companies and also with outside auditors and accountants of the Companies. 5.7 Interest Rate Hedging. At such time as the outstanding principal balance of the Loan shall equal or exceed Fifty Million Dollars ($50,000,000), enter into interest rate protection agreements in a form acceptable to Agent and from one or more of the Banks or an institution acceptable to Agent, with respect to at least twenty percent (20%) of the Loan and for a period of at least two years; provided, however, that (a) the protected rate shall be no greater than 1.50% above the all-in rate on the date hereof; and (b) all documentation for such interest rate protection shall conform to ISDA standards and must be acceptable to Agent with respect to intercreditor issues. 5.8 Insurance. Keep and maintain all of its property and assets in good order and repair and covered by insurance with reputable and financially sound insurance companies against such hazards and in such amounts as is customary in the industry, under policies requiring the insurer to furnish reasonable notice to Agent and opportunity to cure any non-payment of premiums prior to termination of coverage and naming Agent, for the benefit of Banks, as loss payee and additional insured. 5.9 Litigation: Event of Default. Notify Agent in writing immediately of the institution of any litigation, the commencement of any administrative proceedings, the happening of any event or the assertion or threat of any claim, to the extent that any of the foregoing, could have a Material Adverse Effect or the occurrence of any Event of Default or Default hereunder. 5.10 Taxes Pay and discharge all taxes, assessments or other governmental charges or levies imposed on it or any of its property or assets prior to the date on which any penalty for non-payment or late payment is incurred, unless the same are currently being contested in good faith by appropriate proceedings, diligently prosecuted and covered by appropriate reserves maintained in accordance with GAAP. 5.11 Costs and Expenses. Pay or reimburse Agent for all reasonable out-of-pocket costs and reasonable expenses (including but not limited to reasonable attorneys' fees and disbursements) Agent may reasonably pay or incur in connection with the preparation and review of this Agreement and all waivers, consents and amendments in connection therewith and all other documentation related thereto, and the making of the Loan hereunder, and pay or reimburse Banks for all costs, liabilities and expenses (including but not limited to reasonable attorneys' fees and disbursements) associated with the collection or enforcement of the same, including without limitation any fees and disbursements incurred in defense of or to retain amounts of principal, interest or fees paid or in connection with any audit or examination of the Companies. All obligations provided for in this Paragraph 5.11 shall survive any termination of this Agreement or the Commitment and the repayment of the Loan. 5. 12 Compliance; Notification (a) Comply in all material respects with all local, state and federal laws and regulations applicable to its business (and in all respects with the Environmental Control Statutes), including without limitation the federal Assignment of Claims Act and any comparable state laws, all laws and regulations relating to government contracting, and all laws and regulations of the Local Authorities, and with the provisions and requirements of all franchises, permits, certificates of compliance, approval and need issued by regulatory authorities and with other like grants of authority held by any Company; and notify Agent immediately in detail of any actual or alleged failure to comply with or perform, breach, violation or default under any such laws or regulations or under the terms of any of such franchises, licenses or grants of authority, or of the occurrence or existence of any facts or circumstances which with the passage of time, the giving of notice or otherwise could create such a breach, violation or default or could occasion the termination of any of such franchises, licenses or grants of authority, to the extent that any of the foregoing could have a Material Adverse Effect. (b) With respect to the Environmental Control Statutes, immediately notify Agent when, in connection with the conduct of the Companies' business(es) or operations, any person (including, without limitation, EPA or any state or local agency) provides oral or written notification to any Company, or any Company otherwise becomes aware, of a condition with regard to an actual or imminently threatened Release of Hazardous Substances which could reasonably be expected to have a Material Adverse Effect; and notify Agent in detail immediately upon the receipt by a Company of an assertion of liability under the Environmental Control Statutes, of any actual or alleged failure to comply with, failure to perform, breach, violation or default under any such statutes or regulations which could reasonably be expected to have a Material Adverse Effect or of the occurrence or existence of any facts, events or circumstances which with the passage of time, the giving of notice, or both, could create such a failure to breach, violation or default. 5.13 ERISA. (a) Comply in all material respects with the provisions of ERISA to the extent applicable to any Plan maintained for the employees of any Company or any ERISA Affiliate; (b) do or cause to be done all such acts and things that are required to maintain the qualified status of each Plan and tax exempt status of each trust forming part of such Plan; (c) not incur any material accumulated funding deficiency (within the meaning of ERISA and the regulations promulgated thereunder), or any material liability to the PBGC (as established by ERISA); (d) not permit any event to occur with respect to any Plan sponsored by any Company or any ERISA Affiliate (i) as described in Section 4042 of ERISA or (ii) which may result in the imposition of a lien on its properties or assets; and (e) notify Agent in writing promptly after it has come to the attention of senior management of any Company of the written assertion or threat of any event described in Section 4042 of ERISA (relating to the soundness of a Plan) (including any "reportable event" described in Section 4042(a)(3) of ERISA) or the PBGC's ability to assert a material liability against it or impose a lien on any Company's, or any ERISA Affiliate's properties or assets; and (f) refrain from engaging in any prohibited transactions or actions causing possible liability under Section 502 of ERISA. 5.14 Maximum Debt to Capitalization Ratio. Maintain at all times a Debt to Capitalization Ratio for Borrower and its consolidated Subsidiaries of not greater than 0.50 to 1. 5.15 Maximum Funded Debt to EBITDA Ratio. Maintain at all times a ratio of (a) Funded Debt of Borrower and its consolidated Subsidiaries to (b) EBITDA of Borrower and its Consolidated Subsidiaries for the most recent Rolling Period, of not greater than 3.00 to 1. 5.16 Minimum Tangible Net Worth. Maintain at all times Tangible Net Worth of Borrower and its consolidated Subsidiaries in an amount not less than the Required Tangible Net Worth. 5.17 Minimum Fixed Charge Coverage Ratio. Maintain at all times a Fixed Charge Coverage Ratio for Borrower and its consolidated Subsidiaries of not less than 1.75 to 1. 5.18 Management Changes. Notify Agent in writing within ten (10) Business Days after any change of the senior executive management of Borrower. 5.19 Transactions Among Affiliates. Cause all transactions between and among it and its Affiliates, other than transactions among the Companies, to be on an arms-length basis and on such terms and conditions as are customary in the applicable industry between and among unrelated entities. 5.20 Joinders. If any Subsidiary becomes a Material Subsidiary or if a new Material Subsidiary is formed or acquired, cause such Material Subsidiary to execute and deliver a joinder to the Guaranty and such other documents as Agent may reasonably require in connection therewith, including without limitation secretary's certificates and opinions of counsel. 5.21 Year 2000 Compliance. The Companies shall take all action necessary to assure that the Companies' computer-based systems are able to operate and effectively process dates on or after January 1, 2000. At the request of Banks, the Companies shall provide Banks assurances acceptable to Banks of the Companies' Year 2000 compatability 5.22 Other Information. Provide any Bank with any other documents and information, financial or otherwise, reasonably requested by such Bank from time to time. SECTION 6 NEGATIVE COVENANTS So long as any Commitment or any Indebtedness of Borrower to Banks remains outstanding hereunder, Borrower covenants and agrees that without Required Banks' prior written consent, each Company will not: 6.1 Indebtedness. Borrow any monies or create or permit to exist any Indebtedness except: (i) borrowings from Banks hereunder; (ii) trade Indebtedness in the normal and ordinary course of business for value received; (iii) Indebtedness under the ASIDA Bonds and the SouthTrust Term Loan, provided, that the aggregate principal thereof shall not be increased after the date of this Agreement; and (iv) additional unsecured Indebtedness or Indebtedness incurred to purchase or lease fixed or capital assets in an aggregate principal amount which, together with guarantees permitted pursuant to Paragraph 6.2(iii) hereof, does not exceed ten Million Dollars ($10,000,000) at any time. 6.2 Guaranties. Guarantee or assume or be or agree to become liable in any way, either directly or indirectly, for any Indebtedness or liability of others except: (i) to endorse checks or drafts in the ordinary course of business, (ii) a Company may guaranty or otherwise agree to be liable for obligations of any other Company, and (iii) additional guarantees by one or more Companies of Indebtedness in an aggregate principal amount which, together with Indebtedness permitted pursuant to Paragraph 6.1(iv) hereof, does not exceed Ten Million Dollars ($10,000,000). 6.3 Loans. Make any loans or advances to others; provided, however, that (a) a Company may make loans and advances to any other Company and (b) the Companies may make investments in companies that are not subsidiaries to the extent permitted pursuant to Paragraph 6.8(b) hereof. 6.4 Liens and Encumbrances. Create, permit or suffer the creation or existence of any liens, security interests, or any other encumbrances on (including any conditional sales arrangement with respect to) any of its property, real or personal, except the security interests in favor of the Agent on behalf of Banks as security for the Loan, and except (i) liens arising in favor of sellers or lessors for indebtedness and obligations incurred to purchase or lease fixed or capital assets permitted under Paragraph 6.1(iv) hereof, provided, however, that such liens secure only the indebtedness and obligations created thereunder and are limited to the assets purchased or leased pursuant thereto and the proceeds thereof; (ii) mechanic's and workman's liens, liens for taxes, assessments or other governmental charges, federal, state or local, which are then being currently contested in good faith by appropriate proceedings and are covered by appropriate reserves maintained in accordance with GAAP; (iii) pledges or deposits to secure obligations under workmen's compensation, unemployment insurance or social security laws or similar legislation; (iv) deposits to secure surety, appeal or custom bonds required in the ordinary course of business and (v) the liens in favor of IBM Credit Corp. disclosed on Exhibit D attached hereto, securing trade indebtedness from IBM to Nichols TXEN Corporation (formerly Computer Services Corporation), provided, that such liens shall be released within thirty (30) days after the date hereof. 6.5 Additional Negative Pledge. Agree or covenant with or promise any person or entity other than the Banks that it will not pledge its assets or properties or otherwise grant any liens, security interests or encumbrances on its property. 6.6 Restricted Payments. Make any Restricted Payments, unless there is no Default or Event of Default hereunder at such time, and such payment will not create a Default or Event of Default. 6.7 Transfer of Assets; Liquidation (a) Sell, lease, transfer or otherwise dispose of all or any portion of its assets, real or personal, other than such transactions in the normal and ordinary course of business for value received; or (b) discontinue, liquidate, or change in any material respect any substantial part of its operations or business(es). 6.8 Acquisitions and Investments. Purchase or otherwise acquire (including without limitation by way of share exchange) any part or amount of the capital stock, partnership interests, or assets of, or make any investments in, any other firm or corporation; or enter into any new business activities or ventures not directly related to its present business; or merge or consolidate with or into any other firm or corporation; or create any Subsidiary; provided, however that in the absence of a Default or an Event of Default at such time and if such transaction will not give rise to a Default or an Event of Default: (a) the Companies may make a Permitted Acquisition and create Subsidiaries, provided that (i) Borrower provides to Agent, with a copy to its counsel, not less than thirty (30) days prior written notice of the proposed Permitted Acquisition or Subsidiary creation in the form of Exhibit G attached hereto, including, in the case of a Permitted Acquisition with respect to which the Acquisition Price is in excess of Twenty-Five Million Dollars ($25,000,000), the following information: (A) a narrative description of the proposed acquisition which demonstrates it to be a Permitted Acquisition, and describes the business to be acquired, the legal structure for the acquisition (including identification of any new subsidiaries that will result from the transaction), the acquisition price to be paid and form thereof, the anticipated closing date, the anticipated borrowings under the Commitment in connection therewith, and other material features of the proposed acquisition; (B) copies of the financial statements, if available, or federal income tax returns if not, dated as of the three (3) most recently ended fiscal years of such business or the seller of such assets; (C) pro forma financial statements of the business or assets and Borrower and its consolidated Subsidiaries giving effect to the proposed acquisition on an historical basis for the two most recent fiscal quarters for which a Compliance Certificate has been delivered and on a projected basis for the period ending on the Three Year Commitment Termination Date, including the information required pursuant to Paragraph 5.2 and showing all adjustments which have been made in connection with such pro forma statements, and demonstrating compliance with the covenants set forth in Paragraph 5.14 through 5.17 as of the end of each fiscal quarter; and (D) such additional documents as Agent may reasonably request, each of the foregoing to be in form and substance reasonably satisfactory to Agent; (ii) Borrower complies with the terms and conditions of Paragraph 5.20 hereof, and (iii) taking into account any supplement or amendment to Exhibit D hereto which is reasonably acceptable to Required Banks, all of the representations and warranties set forth herein are true and correct prior to and following such Permitted Acquisition or the creation of such Subsidiary; and (b) the Companies may make investments in companies that are not Subsidiaries, provided that the aggregate amount of such investments, whether as debt, equity or otherwise, shall not exceed Twenty-Five Million Dollars ($25,000,000). 6.9 Payments to Affiliates. Pay any salaries, compensation, management fees, consulting fees, service fees, licensing fees, or other similar payments to Affiliates of any Company other than on an arms-length basis for value, and on terms and conditions as are customary in the industry between and among unrelated entities. 6.10 Amendments to Documents. Amend or modify the ASIDA Bonds or the SouthTrust Term Loan. 6.11 Use of Proceeds. Use any of the proceeds of the Loan, directly or indirectly, to purchase or carry margin securities within the meaning of Regulation U of the Board of Governors of the Federal Reserve System; or engage as its principal business in the extension of credit for purchasing or carrying such securities. SECTION 7 ADDITIONAL COLLATERAL AND RIGHT OF SET-OFF Each Bank is hereby authorized at any time and from time to time following the occurrence and during the continuation of an Event of Default hereunder, to the fullest extent permitted by law, to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Bank to or for the credit or the account of a Company against any and all of the obligations of a Company now or hereafter existing under this Agreement, the Notes or the Loan Documents, irrespective of whether such Bank shall have made any demand under this Agreement or such Notes and although such obligations may be unmatured and irrespective of whether such Bank is otherwise fully secured. Each Bank agrees promptly to notify the applicable Company after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of Banks under this Section Seven are in addition to other rights and remedies (including, without limitation, other rights of set-off) which Banks may have. SECTION 8 DEFAULT 8.1 Events of Default. Each of the following events shall be an Event of Default hereunder: (a) If Borrower shall fail to pay when due any installment of principal or any interest, fees, costs, expenses or any other sum payable to Banks or Agent hereunder; or (b) If any representation or warranty made herein or in connection herewith or in any statement, certificate or other document furnished hereunder is false or misleading in any material respect when made; or (c) If any Company shall default (after expiration of any applicable cure or grace periods) in the payment or performance of any obligation or Indebtedness to another either singly or in the aggregate in excess of Five Million Dollars ($5,000,000), whether now or hereafter incurred; or (d) If there shall be a default in or failure to observe at any test date the covenants set forth in Paragraphs 5.14 through 5.17 hereof or in Section 6 hereof; or (e) If any Company shall default in the performance of any other agreement or covenant contained herein (other than as provided in subparagraphs (a), (b) or (d) above) or in any document executed or delivered in connection herewith, including without limitation with respect to any Collateral, and such default shall continue uncured for twenty (20) days after notice thereof to Borrower given by Agent; or (f) If the Chairman, Chief Executive Officer or Chief Financial Officer of the Borrower as of the date of this Agreement shall cease to serve in such capacity, unless within ninety (90) days Agent is notified in writing of the identity and qualifications of a person with experience in the business of Borrower to serve in such capacity and such new management is not objected to in writing by Required Banks within sixty (60) days of such notice, or if objected to, then within ninety (90) days after such objection Agent is notified in writing of another such person given such authority and such management is not objected to within sixty (60) days of such subsequent notice; or (g) If: (i) any person or group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the "1934 Act") and the rules and regulations promulgated thereunder, other than any person described in Rule 13d-1(b)(i) (D) or (E) which is eligible to file a Schedule 13G in lieu of a Schedule 13D (only for so long as such person is so eligible), shall have beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act), directly or indirectly, of securities of Borrower (or other securities convertible into such securities)representing twenty percent (20%) of the combined voting power of all securities of Borrower entitled to vote in the election of directors (hereinafter called a "Controlling Person"); or (ii) a majority of the Board of Directors of Borrower shall cease for any reason to consist of (A) individuals who on the date hereof were serving as directors of Borrower or (B) individuals who subsequently become members of the Board if such individuals' nomination for election or election to the board is recommended or approved by a majority of the Board of Directors of Borrower. For purposes of clause (i) above, a person or group shall not be a Controlling Person if such person or group holds voting power in good faith and not for the purpose of circumventing this Paragraph 8.1(g) as an agent, bank, broker, nominee, trustee, or holder of revocable proxies given in response to a solicitation pursuant to the 1934 Act, for one or more beneficial owners who do not individually, or, if they are a group acting in concert, as a group, have the voting power specified in clause (i) above; or (h) If custody or control of any substantial part of the property of any Company shall be assumed by any governmental agency or any court of competent jurisdiction at the instance of any governmental agency; if any license or franchise of a Company shall be suspended, revoked, not renewed or otherwise terminated the loss of which would reasonably be expected to have a Material Adverse Effect; if any company or any employee of any Company shall have been proposed for or received notice of intended suspension or debarment from federal contracting pursuant to Part 9 of the Federal Acquisition Regulations, of if any similar event shall have occurred under comparable state laws; or if any governmental regulatory authority or judicial body shall make any other final non-appealable determination the effect of which would have Material Adverse Effect; or (i) If any Company becomes insolvent, bankrupt or generally fails to pay its debts as such debts become due; is adjudicated insolvent or bankrupt; admits in writing its inability to pay its debts; or shall suffer a custodian, receiver or trustee for it or substantially all of its property to be appointed; makes a general assignment for the benefit of creditors; or suffers proceedings under any law related to bankruptcy, insolvency, liquidation or the reorganization, readjustment or the release of debtors to be instituted against it; if proceedings under any law related to bankruptcy, insolvency, liquidation, or the reorganization, readjustment or the release of debtors is instituted or commenced by any Company; if any order for relief is entered relating to any of the foregoing proceedings; if any Company shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or if any Company shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or (j) any event or condition shall occur or exist with respect to any activity or substance regulated under the Environmental Control Statutes and as a result of such event or condition, the Companies have incurred or in the opinion of Borrower are reasonably likely to incur liabilities in the aggregate in excess of Five Million Dollars ($5,000,000); or (k) if any judgment, writ, warrant or attachment or execution or similar process which calls for payment or presents liability in excess of Five Million Dollars ($5,000,000) shall be rendered, issued or levied against any Company or its respective property and such process shall not be paid, waived, stayed, vacated, discharged, settled, satisfied or fully bonded within thirty (30) days after its issuance or levy unless such judgment is covered by insurance and the insurer has acknowledged coverage in writing with respect thereto. 8.2 Remedies. Upon the happening of any Event of Default and at any time thereafter, and by notice by Agent on behalf of Required Banks to Borrower (except if an Event of Default described in Paragraph 8.1(i) shall occur in which case acceleration of the Loan and termination of the Commitment shall occur automatically without notice), the Agent shall, at the request of the Required Banks, and may, with the consent of the Required Banks, (i) terminate the Short Term Commitment and/or the Three Year Commitment, and (ii) declare the entire unpaid balance, principal, interest, fees, and other amounts of all indebtedness of Borrower to Banks, hereunder or otherwise, to be immediately due and payable. Upon such declaration, Agent and Banks shall have the immediate right to enforce or realize on any collateral granted therefor in any manner or order it deems expedient without regard to any equitable principles of marshaling or otherwise. In addition to any rights granted hereunder or in any of the Loan Documents delivered in connection herewith, Agent and Banks shall have all the rights and remedies granted by any applicable law, all of which shall be cumulative in nature. SECTION 9 AGENCY PROVISIONS This Section sets forth the relative rights and duties of Agent and Banks respecting the Loan and, with the exception of Paragraphs 9.3 and 9.15 hereof, does not confer any enforceable rights on Borrower against Banks or create on the part of Banks any duties or obligations to Borrower. 9.1 Application of Payments. Agent shall apply all payments of principal, interest, commitment fee or other amounts hereunder made to Agent by or on behalf of Borrower with respect to the Loan to Banks on the basis of their Pro Rata Shares of the outstanding principal balance of the Loan, except the fees payable under Paragraph 2.12 and Paragraph 2A.4(a)(iv) hereof, which shall be paid solely to Agent. Such distribution of payments shall be made promptly in federal funds immediately available at the office of each Bank set forth above. 9.2 Set-Off. In the event a Bank, by exercise of its right of set-off, or otherwise, receives any payment of principal or interest, in an amount greater than its Pro Rata Share of such payment based upon the Banks' respective shares of principal Indebtedness outstanding hereunder immediately before such payment, such Bank shall purchase a portion of the Indebtedness hereunder owing to each other Bank so that after such purchase each Bank shall hold its Pro Rata Share of all the Indebtedness then outstanding hereunder, provided that if all or any portion of such excess payment is thereafter recovered from such Bank, such purchase shall be rescinded and the purchase price restored to the extent of any such recovery, but without interest. 9.3 Modifications and Waivers. No modification or amendment hereof, consent hereunder or waiver of any Event of Default shall be effective except by written consent of the Required Banks; provided, however, that the written consent of all Banks shall be required to (i) modify, amend, waive, discharge, terminate or suspend compliance with (A) any rate of interest applicable to the Loan to the extent it is proposed to be decreased, (B) the amount of the Commitment to the extent it is proposed to be increased, or the Banks' respective shares thereof; (C) the date or amounts of payment of the Loan or interest thereon, to postpone or decrease payment thereof, (D) the commitment fee set forth in Paragraph 2.11 hereof or other amounts payable by Borrower hereunder except if payable solely to the Agent, to the extent any such amount is proposed to be decreased or postponed, (E) the definition of Required Banks, (F) this Paragraph 9.3, or (G) the definition of Pro Rata Share; or (ii) release any Guarantor. 9.4 Obligations Several. The obligations of the Banks hereunder are several, and each Bank hereunder shall not be responsible for the obligations of the other Banks hereunder, nor will the failure of one Bank to perform any of its obligations hereunder relieve the other Banks from the performance of their respective obligations hereunder. 9.5 Banks' Representations. Each Bank represents and warrants to the other Banks that (i) it has been furnished all information it has requested for the purpose of evaluating its proposed participation under this Agreement; and (ii) it has decided to enter into this Agreement on the basis of its independent review and credit analysis of Borrower, this Agreement and the documentation in connection therewith and has not relied for such analysis on any information or analysis provided by any other Bank. 9.6 Investigation. No Bank shall have any obligation to the others to investigate the condition of Borrower or any of the Collateral or any other matter concerning the Loan. 9.7 Powers of Agent. Agent shall have and may exercise those powers specifically delegated to Agent herein, together with such powers as are reasonably incidental thereto. 9.8 General Duties of Agent, Immunity and Indemnity. Upon receipt of notices and reports delivered by Borrower to the Agent under this Agreement, the Agent shall promptly deliver the same in the form received to the Banks. Required Banks shall also have the right to request Agent to inspect Borrower's books and records and take the other steps provided in Paragraph 5.6 hereof. In performing its duties as Agent hereunder, Agent will take the same care as it takes in connection with loans in which it alone is interested, subject to the limitations on liabilities contained herein; provided that Agent shall not be obligated to ascertain or inquire as to the performance of any of the terms, covenants or conditions hereof by Borrower. Neither Agent nor any of its directors, officers, agents or employees, shall be liable for any action or omission by any of them hereunder or in connection herewith except for gross negligence or willful misconduct. Subject to such exception, each of the Banks hereby indemnifies Agent (in its capacity as Agent) on the basis of such Bank's Pro Rata Share, against any liability, claim, loss or expense arising from or relating to any action taken or omitted to be taken with respect to this Agreement, any other Loan Document or the transactions contemplated thereby or Borrower, to the extent that the Agent has not been reimbursed therefor by Borrower, without affecting any obligation of Borrower to reimburse. 9.9 No Responsibility for Representations or Validity, etc. Each Bank agrees that Agent shall not be responsible to any Bank for any representations, statements, or warranties of Borrower herein or in the other Loan Documents. Neither Agent nor any of its directors, officers, employees or agents, shall be responsible for the validity, effectiveness, sufficiency, perfection or enforceability of this Agreement or the other Loan Documents, or any collateral, or any documents relating thereto or for the priority of any of Banks' security interests in any such collateral. 9.10 Action on Instruction of Banks; Right to Indemnity. Agent shall act upon written instruction of Banks or Required Banks, as appropriate, and in all cases Agent shall be fully protected in acting or refraining from acting hereunder in accordance with such written instructions to it signed by Required Banks unless the consent of all the Banks is expressly required hereunder in which case Agent shall be so protected when acting in accordance with such instructions from all the Banks. Such instructions and any action taken or failure to act pursuant thereto shall be binding on all the Banks, provided that except as otherwise provided herein, Agent may act hereunder in its own discretion without requesting such instructions. 9.11 Employment of Agents. In connection with its activities hereunder, Agent may employ agents and attorneys-in-fact and shall not be answerable, except as to money or securities received by it or its authorized agents, for the default or misconduct of agents or attorneys-in-fact selected with reasonable care. 9.12 Reliance on Documents. Agent shall be entitled to rely upon (a) any paper or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons and (b) upon the opinion of its counsel with respect to legal matters. 9.13 Agent's Rights as a Bank. With respect to their share of the indebtedness hereunder, Agent shall have the same rights and powers hereunder as any other Bank and may exercise the same as though it were not Agent. Each of the Banks may accept deposits from and generally engage in other banking or trust business with Borrower as if it were not Agent or a Bank hereunder. 9.14 Expenses. Each of the Banks shall reimburse Agent from time to time at the request of Agent for its Pro Rata Share of any expenses incurred by Agent in connection with the performance of its functions hereunder without affecting any obligation of Borrower to reimburse, provided however that in the event Banks shall reimburse Agent for expenses for which Borrower subsequently reimburses Agent, then Agent shall remit to each Bank the respective amount received from such Bank against such expenses. 9.15 Resignation of Agent. Agent may at any time resign its position as Agent, without affecting its position as a Bank, by giving written notice to Banks and Borrower. Such resignation shall take effect upon the appointment of a successor agent in accordance with this Paragraph 9.15. In the event Agent shall resign, Required Banks with the consent of Borrower, which consent will not be unreasonably withheld, shall appoint a Bank as successor Agent. If within thirty (30) days of the Agent's notice of resignation no successor agent shall have been appointed by Banks and accepted such appointment, then Agent, in its discretion may appoint any other Bank with banking powers as a successor agent. 9.16 Successor Agent. The successor Agent appointed pursuant to Paragraph 9.15 shall execute and deliver to its predecessor and Banks an instrument in writing accepting such appointment, and thereupon such successor, without any further act, deed or conveyance, shall become fully vested with all the properties, rights, duties and obligations of its predecessor Agent. The predecessor Agent shall deliver to its successor Agent forthwith all Collateral, documents and moneys held by it as Agent, if any, whereupon such predecessor Agent shall be discharged from its duties and obligations as Agent under this Agreement. 9.17 Collateral Security. Agent will hold, administer and manage any Collateral pledged from time to time hereunder either in its own name or as Agent on behalf of the Banks, but each Bank shall hold a direct, undivided pro-rata beneficial interest therein, on the basis of its Pro Rata Share, by reason of and as evidenced by this Agreement. 9.18 Enformcement by Agent. All rights of action under this Agreement and under the Notes and all rights to the Collateral hereunder may be enforced by Agent and any suit or proceeding instituted by Agent in furtherance of such enforcement shall be brought in its name as Agent, without the necessity of joining as plaintiffs or defendants any other Banks, and the recovery of any judgment shall be for the benefit of Banks subject to the expenses of Agent. SECTION 10 MISCELLANEOUS 10.1 Indemnification and Release Provisions. Borrower hereby agrees to defend Agent and each Bank and their directors, officers, agents, employees and counsel from, and hold each of them harmless against, any and all losses, liabilities (including without limitation settlement costs and amounts, transfer taxes, documentary taxes, or assessments or charges made by any governmental authority), claims, damages, interest judgments, costs, or expenses, including without limitation reasonable fees and disbursements of counsel, incurred by any of them arising out of or in connection with or by reason of this Agreement, the Commitment, the making of the Loan or any collateral therefor, other than those resulting primarily from any such party's own wilful misconduct or gross negligence, including without limitation, any and all losses, liabilities, claims, damages, interests, judgments, costs or expenses relating to or arising under any Environmental Control Statute or the application of any such Statute to any of the Companies' properties or assets. Borrower hereby releases Agent and each Bank and their directors, officers, agents, employees and counsel from any and all claims for loss, damages, costs or expenses caused or alleged to be caused by any act or omission on the part of any of them other than those resulting primarily from any such party's own wilful misconduct or gross negligence. All obligations provided for in this Paragraph 10.1 shall survive any termination of this Agreement or the Commitment and the repayment of the Loan. 10.2 Participations and Assignments. Borrower hereby acknowledges and agrees that a Bank may at any time: (a) grant participations in all or any portion of its Maximum Principal Amount of the Loan or of its right, title and interest therein or in or to this Agreement (collectively, "Participations") to any other lending office or to any other bank or lending institution ("Participants"); provided, however, that: (i) all amounts payable by Borrower hereunder shall be determined as if such Bank had not granted such Participation; and (ii) any agreement pursuant to which any Bank may grant a Participation: (x) shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provisions of this Agreement; (y) may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement without the consent of the Participant if such modification, amendment or waiver would require approval of all Banks pursuant to Paragraph 9.3 hereof; and (z) shall not relieve such Bank from its obligations, which shall remain absolute, to make Advances hereunder; and (b) assign its rights and obligations under the Commitment and the Loan (i) to any Federal Reserve Bank, (ii) to any Affiliate of such Lender, or (iii) with notice to Borrower and Agent together with the payment to Agent of a $3,500 transfer fee, to any other financial institution, provided, that (x) any such assignment under this clause (iii) shall be in a minimum amount of Five Million Dollars ($5,000,000), and (y) in the absence of an Event of Default hereunder no Bank shall assign under this clause (iii) more than forty-nine percent (49%) of its rights and obligations hereunder. Any grant of an assignment pursuant to this Paragraph 10.2 shall be pro rata as to the Short Term Loan and the Three Year Loan. Borrower may not assign or otherwise transfer its rights or obligation under this Agreement without the prior written consent of Banks. 10.3 Binding and Government Law. This Agreement and all documents executed hereunder shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns and, except as may be required by mandatory provisions of applicable law, shall be governed as to their validity, interpretation and effect by the laws of the Commonwealth of Pennsylvania. 10.4 Survival. All agreements, representations, warranties and covenants of Borrower contained herein or in any documentation required hereunder shall survive the execution of this Agreement and the making of the Loan hereunder, and except for Paragraphs 5.11 and 10.1 which provide otherwise will continue in full force and effect as long as any indebtedness or other obligation of Borrower to Banks remains outstanding. 10.5 No Waiver; Delay. If Banks shall waive any power, right or remedy arising hereunder or under any applicable law, such waiver shall not be deemed to be a waiver upon the later occurrence or recurrence of any of said events with respect to Banks. No delay by Banks in the exercise of any power, right or remedy shall, under any circumstances, constitute or be deemed to be a waiver, express or implied, of the same and no course of dealing between the parties hereto shall constitute a waiver of Banks' powers, rights or remedies. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 10.6 Modification;Waiver. Except as otherwise provided in this Agreement, no modification or amendment hereof, or waiver or consent hereunder, shall be effective unless made in a writing signed by appropriate officers of the parties hereto. 10.7 Headings. The various headings in this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any provision hereof. 10.8 Notices. Any notice, request or consent required hereunder or in connection herewith shall be deemed satisfactorily given if in writing and delivered by hand, mailed (registered or certified mail) or sent by facsimile transmission to Agent or Borrower at their respective addresses or telecopier number set forth below, or to Banks at their respective addresses or telecopier numbers set forth on Schedule 1 attached hereto, or to any party at such other addresses or telecopier numbers as may be given by any party to the others in writing: if to Borrower: Nichols Research Corporation 4040 Memorial Parkway, South Huntsville, Alabama 35802-1326 Attention: Allen Dillard Telecopier: (205) 650-2240 if to Agent: CoreStates Bank, N.A. 1345 Chestnut Street FC 1-8-3-12 Philadelphia, PA 19107 Attention: Karen Leaf Telecopier: (215) 973-6745 with a copy to: Pepper, Hamilton & Scheetz LLP 3000 Two Logan Square Philadelphia, PA 19103 Attention: Lisa D. Kabnick, Esquire Telecopier: (215) 981-4750 10.9 Payment on Non-Business Days. Whenever any payment to be made hereunder shall be stated to be due on a day other than a Business Day, such payment may be made on the next succeeding Business Day, provided however that such extension of time shall be included in the computation of interest due in conjunction with such payment or other fees due hereunder, as the case may be. 10.10 Time of Day. All time of day restrictions imposed herein shall be calculated using Agent's local time. 10.11 Severability. If any provision of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provisions to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 10.12 Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all the signatures on such counterparts appeared on one document, and each such counterpart shall be deemed to be an original. 10.13 Consent to Jurisdiction and Service of Process. Each Company irrevocably appoints each officer of Borrower as its attorney upon whom may be served any notice, process or pleading in any action or proceeding against it arising out of or in connection with this Agreement, the Notes, the Loan Documents or any collateral; each Company hereby consents that any action or proceeding against it be commenced and maintained in any court within the Commonwealth of Pennsylvania or in the United States District Court for the Eastern District of Pennsylvania by service of process on any officer of Borrower; and each Company agrees that the courts of the Commonwealth of Pennsylvania and the United States District Court for the Eastern District of Pennsylvania shall have jurisdiction with respect to the subject matter hereof and the person of each Company and any collateral. Notwithstanding the foregoing, Agent, in its absolute discretion may also initiate proceedings in the courts of any other jurisdiction in which any Company may be found or in which any of its properties or collateral may be located. 10.14 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE NOTES OR OTHER LOAN DOCUMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF AGENT OR BANKS. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BANKS' ENTERING INTO THIS AGREEMENT. 10.15 ACKNOWLEDGMENTS. BORROWER ACKNOWLEDGES THAT IT HAS HAD THE ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THIS AGREEMENT AND, SPECIFICALLY, PARAGRAPH 10.14 HEREOF, AND FURTHER ACKNOWLEDGES THAT THE MEANING AND EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL HAVE BEEN FULLY EXPLAINED TO BORROWER BY SUCH COUNSEL. IN WITNESS WHEREOF, the undersigned, by their duly authorized officers, as applicable, have executed this Agreement the day and year first above written. Attest: NICHOLS RESEARCH CORPORATION By: Patsy L. Hattox By: Allen E. Dillard --------------- ---------------- Name: Patsy L. Hattox Name: Allen E. Dillard Title: Secretary Title:VP CORESTATES BANK, N.A., for itself and as Agent By: Karen Leaf ---------- Name:Karen Leaf Title:Vice President SOUTHTRUST BANK, N.A. By: Meloe K. Barfield ----------------- Name: Meloe K. Barkfield Title:Vice President AMSOUTH BANK By: David W. Cochran ---------------- Name: David W. Cochran Title: Vice President [EXECUTIONS CONTINUED] SUNTRUST BANK, NASHVILLE, N.A. By:Thomas W. Powell ---------------- Name: Thomas W. Powell Title:First Vice President FIRST UNION COMMERCIAL CORPORATION By: Chris Hetterly --------------- Name: Chris Hetterly Title:Vice President NOTE: Schedules available upon request. EX-10.28 4 EMPLOYMENT AGREEMENT By and Among Welkin Associates, Ltd., Nichols Research Corporation and Carl W. Monk, Jr. Dated: July 28, 1998 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into on the 28th day of July, 1998, by Carl W. Monk, Jr., residing at 35795 Dunthorpe Lane, Purcellville, Virginia 20132 (herein called the "Employee"), Welkin Associates, Ltd., a Virginia corporation, with a principal place of business located at 4801 Stonecroft Boulevard, Suite 210, Chantilly, Virginia 20151 (herein called "Welkin"), and Nichols Research Corporation, a Delaware corporation ("Nichols"), whose address is 4040 South Memorial Parkway, Huntsville, Alabama 35802. Unless otherwise defined, capitalized terms used herein shall have the meaning ascribed to such terms in the Merger Agreement as hereinafter defined. W I T N E S S E T H: WHEREAS, Nichols, WAL Acquisition Company, Inc., a wholly owned subsidiary of Nichols ("WAL"), and Welkin have entered into and consummated an Agreement and Plan of Merger dated as of June 26, 1998 (the "Merger Agreement") whereby WAL merged with and into Welkin with Welkin as the surviving corporation; WHEREAS, as a result of the merger Welkin became a wholly-owned subsidiary of Nichols; WHEREAS, the Employee was a shareholder of Welkin prior to the merger and as a result of the merger Employee became a shareholder of Nichols; WHEREAS, prior to the merger Employee was an employee of Welkin; WHEREAS, the Employee's continued employment with Welkin was a material inducement to WAL and Nichols to enter into the Merger Agreement; WHEREAS, Welkin is engaged in the business of providing engineering and management services to national intelligence organizations with emphasis on systems engineering, processing and analysis, mission utility assessment, systems acquisition, and tactical operations and support (the "Welkin Business"); and WHEREAS, Welkin desires to obtain the services of the Employee as President of Welkin and the Employee is willing to render such services to Welkin upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the mutual promises set forth herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Duties. Subject to the terms and provisions of this Agreement, Welkin hereby employs Employee and Employee hereby accepts employment by Welkin as President of Welkin. The Employee's duties shall include the duties and responsibilities identified on Schedule I attached hereto. The Employee shall perform such other tasks and duties as may be assigned by Welkin from time to time, consistent with the Employee's training and experience and with the position of President of Welkin. The Employee shall devote his full time, attention, skill and efforts to the tasks and duties assigned by Welkin. The Employee shall carry out his duties under the general supervision of the Board of Directors of Welkin. The Employee hereby agrees to undertake such travel as may be required in the performance of his duties. The reasonable travel expenses of the Employee shall be reimbursed in accordance with Welkin's reimbursement policy in effect from time to time. The Employee shall not be required to relocate from the Washington, D.C. area without his consent. For this purpose the Washington, D.C. area shall mean Washington, D.C. and an area within seventy-five (75) mile radius of Washington, D.C. (the "D.C. Area"). 2. Compensation. (a) Base Salary. Welkin shall pay the Employee a base monthly salary of Sixteen Thousand Two Hundred Fifty Dollars ($16,250.00) per month payable during the Term of Employment, as hereinafter defined, in accordance with the standard payroll practices of Welkin. Such salary may be increased from time to time in the discretion of the Welkin Board of Directors consistent with Nichols executive compensation practices. (b) Bonus Compensation. The Employee shall be eligible to participate in the Nichols bonus plan on the same basis as other executives of Nichols and its affiliates. It is estimated that the bonus will be approximately $35,000.00. (c) Stock Options. Employee shall be granted the option to purchase ten thousand (10,000) shares of Nichols stock at the fair market value per share of such stock on the date hereof pursuant to the terms and conditions of the Nichols Research Corporation 1997 Stock Option Plan, as maintained by Nichols from time to time. (d) Fringe Benefits. The Employee's current employee benefits shall be continued, or converted to or replaced by the employee benefit plans, as set forth in the Merger Agreement. 3. Term of Employment. This Agreement shall commence on the date hereof and shall end three (3) years from such date (the "Term of Employment"), unless terminated earlier as provided in Section 4 below. 4. Termination Before Expiration of Term of Employment. The termination of the employment of the Employee during the initial Term of Employment may occur in one of the following ways: (a) By Welkin, for Cause. Termination by Welkin shall be deemed to be for cause only upon: (i) Employee's conviction of or pleading guilty to a felony or debarment regarding federal contracts; (ii) Willful and repeated refusal or failure by the Employee, without reasonable excuse or proper authorization, to carry out any reasonable instructions of Welkin consistent with Employee's rights or duties as set forth in this Agreement; (iii) Material breach of this Agreement; (iv) The Employee's willful misconduct in the execution of his duties, including without limitation breach of fiduciary duty, dishonesty, theft of company property or the breach of the duty of loyalty owed Welkin. If Welkin intends to terminate for cause, Welkin shall provide notice to Employee of intent to terminate his employment, stating the termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provisions so indicated, and shall provide Employee with an opportunity to cure the alleged default or breach within thirty (30) days of receipt of the notice, provided that if the matter is not curable within such thirty (30) day period, the Employee shall not be deemed in default if the Employee commences immediately to cure the matter and proceeds diligently thereafter to complete the cure, further provided that the alleged breach or default must be cured within ninety (90) days of receipt of the notice. Welkin shall not be required to give more than one notice with respect to the same matter. Notwithstanding the foregoing, no notice and no cure right shall be required with respect to termination for cause under 4(a)(i) or 4(a)(iv). (b) By Welkin, Without Cause. Any termination of Employee by Welkin for reasons other than as set forth in subsections 4(a), (e), (f) or (g) shall be a termination without cause. Welkin may terminate the employment of Employee without cause by thirty (30) days prior written notice at any time. (c) By Employee, for Good Reason. Termination by the Employee shall be deemed for Good Reason only because of (i) a material breach by Welkin of this Agreement (including without limitation the provisions of Sections 1 or 2 hereof), or (ii) a Change of Control (as defined below). "Change of Control" shall mean any capital reorganization, reclassification, consolidation, merger, sale of capital stock, sale of all or substantially all of Welkin's assets or similar transaction which is effected in such a way that holders of Common Stock of Welkin are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock of Welkin. In all cases in which Employee intends to terminate for Good Reason, the Employee shall provide Welkin with notice of intent to terminate this Agreement, stating the facts and circumstances giving rise to a breach of this Agreement claimed to provide a basis for termination under the provisions so indicated, and shall provide Welkin with an opportunity to cure the alleged default or breach within thirty (30) days of receipt of the notice, provided that if the matter is not curable within such thirty (30) day period, Welkin shall not be deemed in default if it commences immediately to cure the matter and proceeds diligently thereafter to complete the cure, further provided that the alleged breach or default must be cured within ninety (90) days of receipt of the notice. Employee shall not be required to give more than one such notice with respect to the same matter. (d) By the Employee, Without Good Reason. Any termination by Employee for reasons other than as set forth in subsections 4(c), (e), (f), (g) or (h) shall be a termination without Good Reason. The Employee may terminate his employment without Good Reason upon thirty (30) days prior written notice at any time. (e) Death of the Employee. This Agreement shall terminate upon the death of the Employee. (f) Disability of Employee. If, during the Term of Employment, a physician selected by Welkin and the Employee determines that the Employee has become physically or mentally disabled so as to be unable to carry out the normal and usual duties of his employment for six (6) continuous months, and reasonable accommodation cannot be made to allow the Employee to continue to perform his duties full-time, his employment hereunder may be terminated at the election of Welkin or the Employee. (g) Mutual Consent. The parties by mutual consent may terminate Employee's employment. (h) Family Hardship. If, during the Term of Employment, an Employee's spouse becomes employed outside the D.C. Area and as a result the Employee moves from the D.C. Area, or if a spouse or child of the Employee suffers a life-threatening illness or injury reasonably expected to extend for more than 120 days, the Employee may voluntarily terminate employment hereunder upon thirty (30) days prior written notice. 5. Consequences of Termination. The termination of the employment of Employee pursuant to Section 4 above will cause the following results: (a) For Cause Termination. If the termination is by Welkin for cause under Section 4(a) above, Welkin will pay the Employee at the next payroll payment date after the date of termination any unpaid base monthly salary under Section 2(a) prorated to the date of termination, the amount of any accrued annual vacation pay to which he may be entitled under Welkin's vacation plan and benefits, with such compensation and benefits (if any) paid only through the date termination occurs. (b) Termination Without Good Reason or Family Hardship; Liquidated Damages from the Employee. If termination is by Employee without Good Reason or without Family Hardship under Section 4(d) above, the Employee shall pay to Welkin, as liquidated damages, and not as a penalty an amount equal to the product of the base monthly salary under Section 2(a) on the date of termination multiplied by the lesser of (i) six (6) or (ii) the number of full months remaining until the end of the initial Term of Employment. The liquidated damages shall be paid in 12 equal, consecutive monthly installments without interest commencing 30 days after termination, provided that, if any monthly installment is not paid within 10 days after notice of default, the entire amount of liquidated damages shall be paid in lump sum immediately. The liquidated damages may be prepaid. (c) Payments on Termination Without Cause or for Good Reason; Liquidated Damages from Welkin. If the termination is by Welkin without cause under Section 4(b) above, or is by the Employee for Good Reason under Section 4(c) above, Welkin shall pay to the Employee, in addition to the amounts set forth in 5(a) above, as liquidated damages and not as a penalty, an amount equal to (i) the product of the base monthly salary under Section 2(a) on the date of termination multiplied by the lesser of (A) six (6), or (B) the number of months remaining until the initial Term of Employment, plus the bonus compensation otherwise payable to the Employee under Section 2(b) over the portion of the bonus measurement period elapsed on the date of termination. The liquidated damages shall be paid in six (6) equal, consecutive monthly installments without interest commencing 30 days after termination, provided that, if any monthly installment is not paid within 10 days after notice of default, the entire amount of liquidated damages shall be paid in lump sum immediately. The liquidated damages may be prepaid. (d) Mutual Grounds for Termination or Consent. If the parties mutually agree to terminate under Section 4(g), neither party shall owe the other party the liquidated damages set forth above in Sections 5(b) or 5(c). (e) Death or Disability or Family Hardship. In the event of termination of employment on account of the Employee's death, disability or family hardship as provided in Sections 4(e), (f) or (h), the following provisions will apply: (i) Upon his death, the Employee's estate will be entitled to receive the amount set forth in Section 5(a) and the benefits set forth in any plans of Welkin then in effect and applicable under the circumstances. The Employee or his estate shall be entitled to no other compensation or benefits in the event of death other than the right of the Employee's estate to exercise any or all stock options exercisable but not yet exercised during the period of three (3) months after the date of death. (ii) Upon termination on account of disability, Employee will be entitled to receive the amount set forth in Section 5(a) and the benefits set forth in any plans of Welkin then in effect and applicable under the circumstances. The Employee or his personal representative shall be entitled to no other compensation or benefits in the event of disability, except as provided in the Nichols Research Corporation 1997 Stock Option Plan, if any. (iii) Upon termination on account of family hardship, the Employee will be entitled to receive the amount set forth in Section 5(a) and the benefits set forth in any plans of Welkin then in effect and applicable under the circumstances. The Employee or his personal representative shall be entitled to no other compensation or benefits in the event of disability, except as provided in the Nichols Research Corporation 1997 Stock Option Plan, if any. (f) Mitigation. The Employee shall not be required to mitigate the amount of payment provided for in this Section 5 by seeking employment. (g) Termination After Initial Term. After the initial Term of Employment, only the amounts specified in Section 5(a) shall be due the Employee upon termination and neither party shall be liable for any other payment hereunder. 6. Non-Disclosure Covenants and Proprietary Matters. (a) Nondisclosure of Confidential Information. Unless authorized or instructed in writing by Welkin, the Employee shall not, except as required in the conduct of Welkin's business or in response to a lawful subpoena or discovery order or as may otherwise be required by law, disclose to others or use any of Welkin's inventions or discoveries or its respective secret or confidential information or data (oral, written, or in machine readable form) which the Employee has obtained prior to entering into this Agreement, whether as an employee, officer, director or shareholder of Welkin or may obtain during the course of or in connection with the Employee's employment under this Agreement (or employment or affiliation with any company that transfers to Welkin such information or data), including such inventions, discoveries, information or data relating to machines, equipment, products, systems, software, contracts, contract performance, research or development, designs, computations, formulas, manufacturing procedures, prices and earnings, customer lists, and suppliers, whether or not developed by the Employee, by others in Welkin or obtained by Welkin from third parties, and irrespective of whether or not such inventions, discoveries, information, knowledge or data have been identified by Welkin as secret or confidential, unless and until, and then to the extent and only to the extent that, such inventions, discoveries, information, knowledge or data become available to the public otherwise than by the Employee's act or omission. (b) Patents. The Employee agrees to disclose immediately to Welkin or any persons designated by it and to transfer and assign to Welkin, or its successors or assigns, all of Employee's rights, title and interest in and to any inventions made, discovered, or first reduced to practice by the Employee, solely or jointly with others, during the Term of Employment (either during or outside of the Employee's working hours and either on or off Welkin's premises as it relates to the subject matter of employment), which inventions are made, discovered or conceived either in the course of such employment, or with the use of Welkin's time, material, facilities or funds, or which are directly related to any investigations or obligations undertaken by Welkin; and the Employee hereby grants and agrees to grant the right to Welkin and its nominees to obtain, for its own benefit and in its own name (entirely at its expense) patents and patent applications including original, continuation, reissue, utility and design patents, and applications, patents of addition, confirmation patents, registration patents, petty patents, utility models, and all other types of patents and the like, and all renewals and extensions of any of them for those inventions in any and all countries; and the Employee shall assist Welkin, at Welkin's expense, without further charge during the term of the Employee's employment, and after termination of the Employee's employment to the extent such assistance does not unreasonably interfere with the Employee's performance of subsequent employment, at the same base salary rate (excluding any bonuses, incentive or deferred compensation or other benefits and based upon a forty hour work week) as during the last year of the Employee's employment (determined on an hourly basis for this purpose), through counsel designated by Welkin, to execute, acknowledge, and deliver all such further papers, including assignments, applications for Letters Patent (of the United States or of any foreign country), oaths, disclaimers or other instruments and to perform such further acts, including giving testimony or furnishing evidence in the prosecution or defense of appeals, interferences, suits and controversies relating to any aforesaid inventions as may reasonably be deemed necessary by Welkin or its nominees to effectuate the vesting or perfecting in Welkin or its nominees of all right, title and interest in and to said inventions, applications and patents. (c) Copyrights. The Employee agrees to disclose immediately to Welkin or any persons designated by it and to assign to Welkin, at its option, or its successors or assigns, all works of authorship, including all writings, computer programs, software, and firmware, written or created by the Employee solely or jointly with others, during the course of his employment by Welkin (either during or outside of the Employee's working hours and either on or off Welkin's premises as it relates to the subject matter of employment), which works are made or conceived either in the course of such employment, or with the use of Welkin's time, material, facilities or funds, or which are directly related to any investigations or obligations undertaken by Welkin; and the Employee hereby agrees that all such works are works made for hire, of which Welkin is the author and the beneficiary of all rights and protections afforded by the law of copyright in any and all states and countries; and the Employee will assist Welkin at Welkin's expense without further charges during the term of his employment, and after termination of his employment to the extent such assistance does not unreasonably interfere with the Employee's performance of subsequent employment, at the same base salary rate (excluding any bonuses, incentive or deferred compensation or other benefits) as during the last year of his employment (determined on an hourly basis for this purpose assuming a forty hour work week), through counsel designated by Welkin, to execute, acknowledge, and deliver all such further papers, including assignments, applications for copyright registration (in the United States or in any foreign country), oaths, disclaimers or other instruments, and to perform such further acts, including giving testimony or furnishing evidence in the prosecution or defense of appeals, interferences, suits and controversies relating to any aforesaid works, as may be deemed necessary by Welkin or by its nominees to effectuate the vesting or perfecting in Welkin or its nominees of all rights and interest in and to said works and copies thereof, including the exclusive rights of copying and distribution. (d) Records. The Employee shall keep complete, accurate and authentic accounts, notes, data and records of all inventions made, discovered or developed and all works of authorship written or created by the Employee as aforesaid in the manner and form requested by Welkin. (e) Return of Welkin Property. All computer or other hardware, computer software, computer programs, source codes, object codes, magnetic tapes, printouts, samples, notes, records, reports, documents, customer lists, photographs, catalogues and other writings, whether copyrightable or not, relating to or dealing with Welkin's business and plans, and those of others entrusted to Welkin, which are prepared or created by the Employee or which may come into his possession during or as a result of his employment, are the property of Welkin, as applicable, and upon termination of his employment, the Employee agrees to return all such computer software, computer programs, source codes, object codes, magnetic tapes, printouts, samples, notes, records, reports, documents, customer lists, photographs, catalogues and writings and all copies thereof to Welkin. The Employee is not required to turn over personal notes unnecessary and unrelated to the Welkin business. 7. Non-Solicitation and Non-Competition. During the "Restriction Period" (as hereinafter defined) and within the "Territory" (as hereinafter defined), the Employee shall not directly or indirectly, compete with Welkin or Nichols with respect to the Welkin Business only, and the Employee shall not (i) solicit the business of Welkin from any customer of Welkin or any entity controlled by Welkin; (ii) directly or indirectly, hire any employees of Welkin or any entity controlled by or controlling Welkin or cause any entity with which the Employee is affiliated to hire any such employees of Welkin; (iii) engage in, represent in any way or be connected with, as a consultant, officer, director, partner, employee, sales representative, proprietor, member, stockholder (except for stock ownership of less than 1% in a publicly owned corporation) or otherwise, any business competing with the Welkin Business as conducted by Welkin on the date hereof or during the period of Employee's employment by Welkin. During the Restriction Period and after termination of Employee's employment, Employee may be employed by Welkin or its affiliates as an independent consultant upon terms and conditions mutually acceptable to the parties. As used herein, the "Restriction Period" shall mean the period while the Employee is employed by Welkin and a period of twenty-four (24) months after the date of termination of the Employee's employment. As used herein, the "Territory" shall mean the United States of America and any other country in which Welkin does business as of or after the date hereof while Employee is employed by Welkin or Nichols and its subsidiaries. As used herein, the term "employees" shall mean persons who are, at the time in question, current employees of Welkin or its affiliates or who were, within six (6) months of the date of the prohibited hiring, employees of Welkin or its affiliates. For this purpose, affiliates of Welkin shall include Nichols and its subsidiaries. 8. No Conflict. Employee represents and warrants that he is not a party to or otherwise subject to or bound by the terms of any contract, agreement or understanding which in any manner would limit or otherwise affect his ability to perform his obligations hereunder, including without limitation any contract, agreement or understanding containing terms and provisions similar in any manner to those contained in Sections 6 and 7 hereof. 9. Survival of Covenants; Effect. (a) Remedy. The covenants on the part of the Employee contained or referred to in Sections 6 and 7 above shall survive termination of this Agreement, and the existence of any claim or cause of action of the Employee against Welkin, whether predicated on this Agreement or otherwise. The Employee agrees that a remedy at law for any breach of the foregoing covenants contained or referred to in Sections 6 and 7 would be inadequate, that Welkin would suffer irreparable harm as a result and that Welkin shall be entitled to a temporary and permanent injunction or an order for specific performance of such covenants without the necessity of proving actual damage to Welkin and without the posting of any bond or other security. Any breach (whether or not material) by Welkin shall not release the Employee from his obligations under Sections 6 and 7. (b) Reasonableness. The Employee hereby represents and acknowledges that Welkin is relying on the covenants in Sections 6 and 7 in entering into this Agreement and that the restrictions in Sections 6 and 7 are fair and reasonable. The Employee acknowledges that Welkin presently intends to do business throughout the United States and that the geographic scope of the covenants in Section 7 is reasonable and necessary to protect the interests of Welkin. The Employee acknowledges that the restrictions in Sections 6 and 7 are a material inducement to Nichols to enter into the Merger Agreement. (c) Intent. It is the intent of the parties that the provisions of Sections 6 and 7 shall be enforced to the fullest extent permissible under the laws and public policies of each jurisdiction in which enforcement is sought. If any particular provision of Sections 6 and 7 shall be adjudicated to be invalid or unenforceable, such provision(s) of Sections 6 and 7 shall be deemed amended to provide restrictions to the fullest extent permissible and consistent with applicable law and policies, and such amendment shall apply only with respect to the particular jurisdiction in which such adjudication is made. If such deemed amendment is not allowed by the adjudicating body, the offending provision, only, shall be deleted and the remainder of Sections 6 and 7 shall not be affected. 10. Assignment. The rights and obligations of Welkin under this Agreement may be assigned or delegated by Welkin to any affiliate of Welkin or to any successors in interest of Welkin or of that part of the business of Welkin to which this Agreement applies so long as the duties of Employee are not materially affected. Any other assignment of this Agreement shall require the written consent of Employee. After the date hereof, Welkin may change its name and such name change shall not affect the rights and duties of the parties hereto. This Agreement may not be assigned and any duties of the Employee may not be delegated by the Employee, but any amounts owing to the Employee upon his death shall inure to the benefit of his estate. In the event of any merger or other corporate reorganization of Welkin wherein Welkin is not the surviving entity, provisions reasonably satisfactory to Employee shall be made to ensure the Employee that the compensation and other benefits of this Agreement are not diminished thereby. 11. Notices. All notices or other communications which may be or are required to be given, served or sent by either party to the other party pursuant to this Agreement shall be in writing, addressed to its/his residence or place of business as set forth above, and shall be mailed by first-class certified mail, return receipt requested, postage prepaid, next-day air delivery, or transmitted by facsimiles or hand delivery. Such notice or other communication shall be deemed sufficiently given, served, sent or received for all purposes at such time as it is delivered to the addressee or at such time as delivery is refused by the addressee upon presentation. Each party may designate by notice in writing an address to which any notice or communication may thereafter be so given, served or sent. 12. Applicable Law Jurisdiction. This Agreement shall be governed by, construed and enforced in accordance with the internal substantive laws and not the choice of law rules of the State of Delaware. 13. Effectiveness/Interpretation. The parties acknowledge and agree that this Agreement has been negotiated at arm's length between parties equally sophisticated and knowledgeable in the matters dealt with herein. Each party has been represented by counsel of its or his own choosing. Accordingly, any rule of law or legal decision that would require interpretation of any ambiguities in this Agreement against the party that drafted it is not applicable and is waived. 14. Severability. If any of the articles, sections, paragraphs, clauses or provisions of this Agreement shall be held by a court of last resort to be invalid, the remainder of this Agreement shall not be affected thereby. 15. Entire Agreement. The foregoing contains the entire agreement between the parties relating to the subject matter of this Agreement, and may not be altered or amended except by an instrument in writing approved by Welkin and signed by the parties hereto, and this Agreement supersedes all prior understandings and agreements relating to employment of the Employee by Welkin. The waiver of any rights under this Agreement on any one or more occasions shall not constitute a waiver on any subsequent occasion. 16. Arbitration. Any dispute among the parties shall be submitted to binding arbitration in accordance with Chapter 1, Title 9 of the United States Code (United States Arbitration Act). Arbitration shall be administered by the American Arbitration Association ("AAA") in accordance with its Commercial Arbitration Rules. (a) Situs. The situs of the arbitration shall be Washington, D.C. (b) Number and Qualification of Arbitrators. The arbitration shall be decided by a panel of three (3) neutral arbitrators. AAA shall recommend arbitrators from its commercial panel. Each party shall promptly appoint an arbitrator. The two (2) party-appointed arbitrators shall jointly and promptly appoint the third arbitrator, who shall act as chairperson of the panel. Recognizing intent of the parties to obtain impartial, independent decisions and rulings, each arbitrator shall disclose to the parties and to the other members of the panel, any professional, familial or social relationships, present or past, with any party or counsel. Any party may challenge in writing the appointment or continued service of any arbitrator for lack of independence, partiality or any other case likely to impair such arbitrator's ability to render a fair and equitable decision. Where such challenge is made to an arbitrator, the AAA shall uphold or dismiss the challenge. In the event the challenge is upheld, such arbitrator shall cease to be a member of the panel. Any arbitrator may be removed upon agreement of the parties. (c) Remedies. All decisions or rulings of the panel, as well as any interim or final award, shall be pursuant to the majority vote of the three (3) arbitrators comprising the panel. Except as limited in this Section 16, the arbitrators shall have authority to award any remedy or relief that a court of Delaware could award or grant, including, without limitation, specific performance of any obligation created under this Employment Agreement, the issuance of an injunction, pre-judgment or post-judgment interest, or the imposition of sanctions for abuse or frustration of the arbitration process. The arbitrators shall have no authority to award punitive damages or any other damages not measured by the prevailing party's actual damages. (d) Fees and Expenses. The arbitrators shall have the discretion and authority to award to the prevailing party, if any, as determined by the arbitrators, all of its costs and fees, in such amounts as the arbitrators deem just. "Costs and Fees" means all reasonable pre-award expenses of the arbitration, including the arbitrators' fees, administrative fees, travel expenses, other out-of-pocket expenses, witness fees and attorneys' fees. (e) Finality and Enforcement. Any decision or award rendered by the arbitrators shall be final, binding and conclusive. The parties hereby agree to submit to the personal jurisdiction of the courts of the State of Delaware for the enforcement of the award. IN WITNESS WHEREOF, Welkin and Nichols have caused this Agreement to be executed by its duly authorized officers and the Employee has hereunto set his hand as of the date first above written. WELKIN ASSOCIATES, LTD., a Virginia corporation By: Patsy L. Hattox --------------- Its:Secretary/Treasurer NICHOLS RESEARCH CORPORATION, a Delaware corporation By: Patsy L. Hattox --------------- Patsy L. Hattox, Vice President Carl W. Monk, Jr. ------------------------------------------ Carl W. Monk, Jr., Employee NOTE: Schedules available upon request. EX-10.29 5 AMENDMENT NUMBER TWO TO EMPLOYMENT AGREEMENT NICHOLS TXEN CORPORATION AND THOMAS L. PATTERSON Dated: June 1, 1998 AMENDMENT NUMBER TWO TO EMPLOYMENT AGREEMENT THIS AMENDMENT NUMBER TWO TO EMPLOYMENT AGREEMENT, dated December 16, 1994, as amended August 29, 1997 (the "Employment Agreement"), is entered into on this the 1st day of June, 1998, by NICHOLS TXEN CORPORATION, formerly known as NICHOLS SELECT CORPORATION, a Delaware corporation and the wholly owned subsidiary of NRC ("Nichols TXEN"), and Thomas L. Patterson, ("Employee"). Unless otherwise defined, capitalized terms used herein shall have the meaning ascribed to such terms in the Employment Agreement or Merger Agreement (hereinafter defined). W I T N E S S E T H: WHEREAS, Nichols Research Corporation ("NRC"), NICHOLS SELECT CORPORATION ("Nichols Select"), a wholly owned subsidiary of NRC, TXEN, Inc. ("TXEN"), and the holders of all of the $0.002 par value Class A Common Stock of TXEN (the "Shareholders") entered into and consummated an Agreement of Merger dated as of August 27, 1997 (the "Merger Agreement") whereby TXEN merged with and into Nichols Select with Nichols Select as the surviving corporation; WHEREAS, Nichols Select changed its name to Nichols TXEN after the merger; WHEREAS, Employee entered into the Employment Agreement with TXEN which has been assumed by Nichols TXEN; and WHEREAS, Nichols TXEN, and Employee mutually desire to amend the Employment Agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the undersigned parties do hereby amend the Employment Agreement as follows: 1. Section 1(a) is hereby deleted in its entirety and a new Section 1(a) is hereby substituted as follows: Nichols TXEN agrees to employ the Employee, and the Employee agrees to accept employment by Nichols TXEN on a part-time basis averaging approximately 20 hours per week beginning June 1, 1998, and ending January 31, 1999, at the hourly rate of Seventy-Five and 60/100 Dollars ($75.60), which shall be the Employee's base salary. Effective February 1, 1999, the Employee shall work on a part-time basis averaging approximately ten (10) hours per week at an hourly rate of Seventy-Nine and 08/100 Dollars ($79.08), which shall be the Employee's base salary. 2. Section 1(d) is hereby deleted in its entirety and a new Section 1(d) is hereby substituted as follows: Employee shall be employed in the position of Chairman of the Board of Directors of Nichols TXEN until such time as he is removed from that position by death, resignation, or action of the Nichols TXEN Board of Directors. Employee's duties shall include the duties and responsibilities identified on Schedule I-A attached hereto. The Employee shall perform such other tasks and duties as may be reasonably assigned by Nichols TXEN, from time to time. 3. Section 5 entitled Fringe Benefits is hereby deleted in its entirety and a new Section 5 is hereby substituted as follows: Employee shall participate in any group health insurance, vacation, and sick leave plans, and other benefits available to part-time employees of Nichols TXEN in accordance with their terms and conditions which may be amended or terminated by Nichols TXEN at any time. In addition, the Employee shall be allowed to purchase the prevailing Blue Cross/Blue Shield group coverage offered to full-time employees by directly reimbursing the Company on a monthly basis for the cost of the premiums therefor. Employee may continue this purchase of health care coverage at the applicable monthly insured rate until the plan terminates or until the Employee attains age 65, whichever occurs first. If the Employee's spouse is younger than the Employee, then his spouse may continue to purchase such insurance by paying to Nichols TXEN the premium cost for individual coverage until age 65 or until the plan terminates, whichever occurs first. If group health insurance coverage with Blue Cross/Blue Shield is terminated and group health insurance coverage is placed with another insurer, health maintenance organization (HMO), or other provider of such coverage, the Employee and his spouse shall be entitled to obtain health insurance coverage by paying the premium cost therefor in the same manner as permitted with respect to the Blue Cross/Blue Shield plan, provided such insurer, HMO, or other provider approves such participation by Employee and/or his spouse. Except as amended above, the Employment Agreement shall remain in full force and effect according to its terms and conditions. IN WITNESS WHEREOF, the parties have hereunto executed this Amendment Number Two to Employment Agreement on the date and year first above written. NICHOLS TXEN CORPORATION By:Paul D. Reaves -------------- PAUL D. REAVES Its: Chief Executive Officer Thomas L. Patterson ------------------- Thomas L. Patterson, Employee EX-10.30 6 TXEN, INC. ================================== EMPLOYMENT AGREEMENT with PAUL D. REAVES ================================= Dated: December 16, 1994 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into on the 16th day of December, 1994, by and among Paul D. Reaves, residing at 2933 Clydebank Circle, Birmihgham, AL 35243 (herein called the "Employee"), TXEN, INC. (herein called "TXEN") with a principal place of business at 10 Inverness Center Parkway, Suite 140, Birmingham, Alabama 35242, and NICHOLS RESEARCH CORPORATION, with a principal place of business located at 4040 Memorial Parkway South, Huntsville, Alabama 35802 (herein called "NRC"). W I T N E S S E T H: WHEREAS, TXEN is engaged in the business of managed care administration and providing information systems and services to managed care administrators; WHEREAS, NRC, as purchaser, and TXEN, as seller, entered into and consummated a Convertible Preferred Stock Purchase Agreement dated as of the date hereof (the "Purchase Agreement") whereby NRC acquired one share of Preferred Stock of TXEN, and the Employee's continued employment with TXEN was a material inducement to NRC to enter into the Purchase Agreement; WHEREAS, NRC has also entered into a Stock Purchase Option Agreement of even date herewith giving NRC the option to purchase all of the capital stock of TXEN owned by the Employee together with the capital stock owned by the other shareholders of TXEN provided NRC converts the Preferred Stock into Class B Common Stock; and WHEREAS, TXEN and NRC desire to obtain the services of the Employee as Executive Vice President of TXEN and the Employee is willing to render such services to TXEN upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the mutual promises set forth herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Duties and Salary. (a) TXEN agrees to employ the Employee and the Employee agrees to accept employment by TXEN on a full-time basis as Executive Vice President of TXEN at a base salary of $5,416.66 per month plus such incentive compensation as the Board of Directors of TXEN (the "Board") may determine payable during the Term of Employment, as hereinafter defined. Such salary shall be subject to increases from time to time as authorized by the Board, provided any increase in compensation paid to the Employee shall require the affirmative vote of the director or directors elected to the Board by NRC so long as NRC owns any capital stock of TXEN. (b) The Employee hereby agrees to undertake such travel as may be required in the performance of his duties. The reasonable travel expenses of the Employee shall be reimbursed in accordance with TXEN's reimbursement policy, in effect from time to time. (c) The Employee shall carry out his duties under the general supervision of the Board or its designee. (d) The Employee's duties shall include the duties and responsibilities identified on Schedule I attached hereto. The Employee shall perform such other tasks and duties as may be assigned by TXEN, from time to time and TXEN reserves the right to change the office and/or position of the Employee within TXEN, so long as such change is mutually acceptable. The Employee shall devote his full time, attention, skill and efforts to the tasks and duties assigned by TXEN. The Employee shall not provide services, for compensation, to any other person or business entity while employed by TXEN without approval of the Board and NRC. (e) The Employee shall not be required to relocate beyond the Birmingham, Alabama, metropolitan area without his consent. 2. Term of Employment. This Agreement shall commence as of the date hereof and shall end four years from the date hereof (the "Term of Employment"), unless terminated earlier or extended as provided herein. Upon expiration of the initial Term of Employment unless earlier terminated as provided herein, the Term of Employment shall continue automatically month-to-month until terminated by either party with at least thirty (30) days' prior written notice with or without cause. Notwithstanding the foregoing, if NRC purchases all of the capital stock of TXEN pursuant to the Stock Purchase Option Agreement, NRC may elect to (1) immediately terminate the Employee's employment or (2) extend the Employee's employment for thirty months after the purchase of all of the capital stock of TXEN by NRC in which event the Term of Employment shall be extended by such additional period, unless terminated earlier as provided herein. 3. Termination Before Expiration of Term of Employment. The termination of the employment of the Employee during the Term of Employment may occur in one of the following ways: (a) By TXEN, for Cause. Termination by TXEN shall be deemed to be for cause only upon: (i) Employee's conviction of or pleading guilty to a felony; (ii) A good faith determination by the Board that the Employee has breached either this Agreement, the Purchase Agreement or the Stock Purchase Option Agreement; (iii) Refusal or failure by the Employee, without reasonable excuse or proper authorization, to carry out any reasonable instructions of the Board consistent with Employee's rights or duties as set forth in this Agreement; (iv) Material breach of this Agreement or any material breach of any agreement with NRC; (v) The Employee's demonstration of negligence or willful misconduct in the execution of his duties, including without limitation breach of fiduciary duty or the duty of loyalty owed TXEN. If TXEN intends to terminate for cause, TXEN shall provide notice to Employee of intent to terminate this Agreement, stating the termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provisions so indicated, and shall provide Employee with an opportunity to cure the alleged default or breach within thirty (30) days of receipt of the notice, provided that if the matter is not curable within such thirty (30) day period, the Employee shall not be deemed in default if the Employee commences immediately to cure the matter and proceeds diligently thereafter to complete the cure, further provided that the alleged breach or default must be cured within ninety (90) days of receipt of the notice. TXEN shall not be required to give more than one notice with respect to the same matter. Notwithstanding the foregoing, no notice and no cure right shall be required with respect to termination for cause under 3(a)(i) or an act involving theft of information or property of TXEN. (b) By TXEN, Without Cause. Any termination of Employee by TXEN for reasons other than as set forth in subsections 3(a)(i) through 3(a)(v) above shall be a termination without cause. TXEN may terminate the employment of Employee without cause by thirty (30) days' prior written notice at any time. If NRC purchases all of the capital stock of TXEN pursuant to the Stock Purchase Option Agreement, NRC may cause TXEN to terminate the employment of Employee without cause immediately after the closing of such purchase and without giving 30 days' prior notice. (c) By the Employee. The Employee may by written notice terminate his employment at any time during the Term of Employment: (i) For any reason other than for Good Reason (as defined below) upon thirty (30) days' prior written notice at any time. (ii) For "Good Reason," defined as termination because of a material breach by TXEN of this Agreement including, without limitation, making a material change in the Employee's duties, responsibilities or authority as set forth in this Agreement, without his express written consent. In all cases in which Employee intends to terminate for Good Reason, the Employee shall provide TXEN with notice of intent to terminate this Agreement, stating the facts and circumstances giving rise to a breach of this Agreement claimed to provide a basis for termination under the provisions so indicated, and shall provide TXEN with an opportunity to cure the alleged default or breach within thirty (30) days of receipt of the notice, provided that if the matter is not curable within such thirty (30) day period, TXEN shall not be deemed in default if it commences immediately to cure the matter and proceeds diligently thereafter to complete the cure, further provided that the alleged breach or default must be cured within ninety (90) days of receipt of the notice. Employee shall not be required to give more than one such notice with respect to the same matter. (d) Death of the Employee. (e) Disability of Employee. If, during the Term of Employment, a physician selected by TXEN determines that the Employee has become physically or mentally disabled so as to be unable to carry out the normal and usual duties of his employment for three (3) continuous months, and reasonable accommodation cannot be made to allow the Employee to continue to perform his duties full-time, his employment hereunder may be terminated at the election of TXEN or the Employee. 4. Consequences of Termination. The termination of the employment of Employee will cause the following results: (a) If the termination is by TXEN for cause, or is by the Employee for any reason other than for Good Reason, TXEN will pay the Employee within five (5) days after the date of termination any unpaid salary, the amount of any accrued annual vacation pay to which he may be entitled under TXEN's vacation plan, and benefits. All such compensation and benefits (if any) shall be paid only through the date termination occurs. (b) If the termination is by TXEN without cause or because of death or disability, TXEN shall pay to the Employee, in addition to the amounts set forth in 4(a) above, an amount equal to fifty percent (50%) of the Employee's monthly base salary then in effect in monthly installments over a three-month period immediately following the termination. (c) If the termination is by the Employee for Good Reason, TXEN shall pay to the Employee, in addition to the amounts set forth in 4(a) above, an amount equal to fifty percent (50%) of the Employee's monthly base salary then in effect in monthly installments over a three-month period immediately following the termination. (d) In the event of the Employee's death or disability, the following provisions will apply: (i) Upon his death, the Employee's estate will be entitled to receive the amount set forth in Section 4(b) and the benefits set forth in any plans of TXEN then in effect and applicable under the circumstances. The Employee or his estate shall be entitled to no other compensation or benefits in the event of death. (ii) Upon termination on account of disability, Employee will be entitled to receive the amount set forth in Section 4(b) and the benefits set forth in any plans of TXEN then in effect and applicable under the circumstances. The Employee or his personal representative shall be entitled to no other compensation or benefits in the event of disability. (e) The Employee shall not be required to mitigate the amount of payment provided for in this Section 4 by seeking employment. (f) The amounts set forth above in this Section 4 shall be paid and received in complete discharge of any other obligation of TXEN (or NRC) to Employee resulting from termination of his employment. 5. Fringe Benefits. The Employee shall participate in any group health insurance, vacation and sick leave plans, and other benefit plans available to all employees of TXEN in accordance with their terms and conditions which may be amended or terminated by TXEN at any time. 6. Non-Disclosure Covenants and Proprietary Matters. (a) Unless authorized or instructed in writing by TXEN and NRC, the Employee shall not, except as required in the conduct of TXEN's business, during or at any time after the Term of Employment, disclose to others, or use, any of NRC's or TXEN's inventions or discoveries or their respective secret or confidential information or data (oral, written, or in machine readable form) which the Employee may obtain during the course of or in connection with the Employee's employment, including such inventions, discoveries, information, know-how or data relating to machines, equipment, products, systems, software, contracts, contract performance, research and/or development, designs, compositions, formulae, processes, manufacturing procedures or business methods, whether or not developed by the Employee, by others in NRC or TXEN or obtained by NRC or TXEN from third parties, and irrespective of whether or not such inventions, discoveries, information, knowledge or data have been identified by NRC or TXEN as secret or confidential, unless and until, and then to the extent and only to the extent that, such inventions, discoveries, information, knowledge or data become available to the public otherwise than by the Employee's act or omission. (b) The Employee shall not, except as required in the conduct of TXEN's business, disclose to others, or use, any of the information (which, if disclosed or used, could be harmful to NRC or TXEN) relating to present and prospective customers of NRC or TXEN, business dealings with such customers, prospective sales and advertising programs and agreements with representatives or prospective representatives of NRC or TXEN, present or prospective sources of supply or any other business arrangements of NRC or TXEN, including but not limited to customers, customer lists, costs, prices and earnings, whether or not such information is developed by the Employee, by others in NRC or TXEN or obtained by NRC or TXEN from third parties, and irrespective of whether or not such information has been identified by NRC or TXEN as secret or confidential, unless and until, and then to the extent and only to the extent that, such information becomes available to the public otherwise than by the Employee's act or omission. (c) The Employee agrees to disclose immediately to TXEN or any persons designated by it and to assign to TXEN or its successors or assigns, all inventions made, discovered, or first reduced to practice by the Employee, solely or jointly with others, during the Term of Employment or within a period of six months from the date of termination of such employment (either during or outside of the Employee's working hours and either on or off TXEN's premises), which inventions are made, discovered or conceived either in the course of such employment, or with the use of TXEN's time, material, facilities or funds, or which are directly related to any investigations or obligations undertaken by TXEN; and the Employee hereby grants and agrees to grant the right to TXEN and its nominees to obtain, for its own benefit and in its own name (entirely at its expense) patents and patent applications including original, continuation, reissue, utility and design patents, and applications, patents of addition, confirmation patents, registration patents, petty patents, utility models, and all other types of patents and the like, and all renewals and extensions of any of them for those inventions in any and all countries; and the Employee shall assist TXEN, at TXEN's expense, without further charge during the term of the Employee's employment, and after termination of the Employee's employment at the same base salary rate (excluding any bonuses, incentive or deferred compensation or other benefits and based upon a forty hour work week) as during the last year of the Employee's employment (determined on an hourly basis for this purpose), through counsel designated by TXEN, to execute, acknowledge, and deliver all such further papers, including assignments, applications for Letters Patent (of the United States or of any foreign country), oaths, disclaimers or other instruments and to perform such further acts, including giving testimony or furnishing evidence in the prosecution or defense of appeals, interferences, suits and controversies relating to any aforesaid inventions as may reasonably be deemed necessary by TXEN or its nominees to effectuate the vesting or perfecting in TXEN or its nominees of all right, title and interest in and to said inventions, applications and patents. Notwithstanding the foregoing, the Employee need not take any action called for under this Section 6(c) which will cause undue personal hardship to the Employee. (d) The Employee agrees to disclose immediately to TXEN or any persons designated by it and to assign to TXEN, at its option, or its successors or assigns, all works of authorship, including all writings, computer programs, software, and firmware, written or created by the Employee solely or jointly with others, during the course of his employment by TXEN (either during or outside of the Employee's working hours and either on or off TXEN's premises), which works are made or conceived either in the course of such employment, or with the use of TXEN's time, material, facilities or funds, or which are directly related to any investigations or obligations undertaken by TXEN; and the Employee hereby agrees that all such works are works made for hire, of which TXEN is the author and the beneficiary of all rights and protections afforded by the law of copyright in any and all countries; and the Employee will assist TXEN at TXEN's expense without further charges during the term of his employment, and after termination of his employment at the same base salary rate (excluding any bonuses, incentive or deferred compensation or other benefits) as during the last year of his employment (determined on an hourly basis for this purpose assuming a forty hour work week), through counsel designated by TXEN, to execute, acknowledge, and deliver all such further papers, including assignments, applications for copyright registration (in the United States or in any foreign country), oaths, disclaimers or other instruments, and to perform such further acts, including giving testimony or furnishing evidence in the prosecution or defense of appeals, interferences, suits and controversies relating to any aforesaid works, as may be deemed necessary by TXEN or by its nominees to effectuate the vesting or perfecting in TXEN or its nominees of all rights and interest in and to said works and copies thereof, including the exclusive rights of copying and distribution. (e) The Employee shall keep complete, accurate and authentic accounts, notes, data and records of all inventions made, discovered or developed and all works of authorship written or created by the Employee as aforesaid in the manner and form requested by TXEN. (f) All computer or other hardware, computer software, computer programs, source codes, object codes, magnetic tapes, printouts, samples, notes, records, reports, documents, customer lists, photographs, catalogues and other writings, whether copyrightable or not, relating to or dealing with TXEN's or NRC's business and plans, and those of others entrusted to TXEN or NRC, which are prepared or created by the Employee or which may come into his possession during or as a result of his employment, are the property of TXEN or NRC, as applicable, and upon termination of his employment, the Employee agrees to return all such computer software, computer programs, source codes, object codes, magnetic tapes, printouts, samples, notes, records, reports, documents, customer lists, photographs, catalogues and writings and all copies thereof to TXEN or NRC. 7. Non-Solicitation and Non-Competition. During the Restriction Period (as hereinafter defined) within the United States of America, the Employee shall not directly or indirectly: (a) Solicit the business of TXEN from any customer of TXEN or any entity controlled by TXEN or solicit any employees of TXEN to leave the employ of TXEN. (b) Directly or indirectly, hire any employees or former employees of TXEN or any entity controlled by TXEN within one year of the date of termination of his employment with TXEN or cause any entity with which the Employee is affiliated to hire any such employees or former employees of TXEN. (c) Engage in, represent in any way or be connected with, as consultant, officer, director, partner, employee, sales representative, proprietor, stockholder or otherwise (except for the ownership of a less than 1% stock interest in a publicly-traded corporation where Employee is not in a management or control position), any business competing with the business of TXEN as conducted by TXEN on the date hereof or during the period of Employee's employment by TXEN. (d) As used herein, the Restriction Period shall mean the period while the Employee is employed by TXEN and the following periods: (i) 36 months after the date the Employee ceases to be employed by TXEN and/or (ii) 36 months after NRC purchases all of the capital stock of TXEN pursuant to the Stock Purchase Option Agreement. The above periods in sections 7(d)(i) and 7(d)(ii) shall not be mutually exclusive. For example, if NRC purchases the capital stock of TXEN more than 36 months after the Employee ceases to be employed by TXEN, the Restriction Period of 7(d)(ii) shall apply even though the Restriction Period of 7(d)(i) also applied. Similarly, if the Employee ceases to be employed by TXEN more than 36 months after NRC purchases the capital stock of TXEN, the Restriction Period of section 7(d)(i) shall apply even though the Restriction Period of 7(d)(ii) also applied. 8. No Conflict. Employee represents and warrants that he is not a party to or otherwise subject to or bound by the terms of any contract, agreement or understanding which in any manner would limit or otherwise affect his ability to perform his obligations hereunder, including without limitation any contract, agreement or understanding containing terms and provisions similar in any manner to those contained in Sections 6 and 7 hereof. Employee covenants to indemnify and hold NRC, TXEN and any of their affiliates harmless from any cost or damages (including attorneys' fees and expenses) resulting from any breach of the provisions of this Agreement. 9. Survival of Covenants, Effect. (a) The covenants on the part of the Employee contained or referred to in Sections 6 and 7 above shall survive termination of this Agreement, and the existence of any claim or cause of action of the Employee against TXEN or NRC, whether predicated on this Agreement or otherwise. The Employee agrees that a remedy at law for any breach of the foregoing covenants contained or referred to in Sections 6 and 7 would be inadequate, that TXEN and NRC would suffer irreparable harm as a result and that NRC and/or TXEN shall be entitled to a temporary and permanent injunction or an order for specific performance of such covenants without the necessity of proving actual damage to NRC or TXEN and without the posting of any bond or other security. Any breach of this Agreement by TXEN or NRC shall not release the Employee from his obligations under Sections 6 and 7 hereof. (b) The Employee hereby represents and acknowledges that NRC and TXEN are relying on the covenants in Sections 6 and 7 in entering into this Agreement and the Purchase Agreement and other agreements related thereto and that the restrictions in Sections 6 and 7 are fair and reasonable. The Employee acknowledges that TXEN does business throughout the United States and that the geographic scope of the covenants in Section 7 is therefore reasonable and necessary to protect the interests of TXEN. (c) It is the intent of the parties that the provisions of Sections 6 and 7 shall be enforced to the fullest extent permissible under the laws and public policies of each jurisdiction in which enforcement is sought. If any particular provision of Sections 6 and 7 shall be adjudicated to be invalid or unenforceable, such provision(s) of Sections 6 and 7 shall be deemed amended to provide restrictions to the fullest extent permissible and consistent with applicable law and policies, and such amendment shall apply only with respect to the particular jurisdiction in which such adjudication is made. If such deemed amendment is not allowed by the adjudicating body, the offending provision, only, shall be deleted and the remainder of Sections 6 and 7 shall not be effected. 10. Assignment. The rights and obligations of TXEN under this Agreement may be assigned by TXEN to NRC or to any other successors in interest of TXEN and/or NRC of that part of the business of TXEN or NRC to which this Agreement applies or to their respective affiliates. This Agreement may not be assigned and any duties of the Employee may not be delegated by the Employee, but any amounts owing to the Employee upon his death shall inure to the benefit of his estate. 11. Notices. All notices or other communications which may be or are required to be given, served or sent by either party to the other party pursuant to this Agreement shall be in writing, addressed to its/his residence or place of business as set forth above, and shall be mailed by first-class certified mail, return receipt requested, postage prepaid, next-day air delivery, or transmitted by facsimiles or hand delivery. Such notice or other communication shall be deemed sufficiently given, served, sent or received for all purposes at such time as it is delivered to the addressee or at such time as delivery is refused by the addressee upon presentation. Each party may designate by notice in writing an address to which any notice or communication may thereafter be so given, served or sent. Any notice or other communication sent by Employee to TXEN shall also be sent, at the same time, to NRC. Notices hand delivered to TXEN or NRC must be delivered to an officer of TXEN and NRC and all other notices shall be sent to the attention of the Board, in the case of TXEN, or to the President, in the case of NRC. 12. Applicable Law Jurisdiction. This Agreement has been negotiated and executed in the State of Alabama, and it shall be governed by, construed and enforced in accordance with the internal substantive laws and not the choice of law rules of the State of Alabama. 13. Effectiveness/Interpretation. The parties acknowledge and agree that this Agreement has been negotiated at arm's length between parties equally sophisticated and knowledgeable in the matters dealt with herein. Each party has been represented by counsel of its or his own choosing. Accordingly, any rule of law or legal decision that would require interpretation of any ambiguities in the Agreement against the party that drafted it is not applicable and is waived. 14. Third Party Beneficiary. NRC is a third party beneficiary to this entire Agreement but shall have no liability to pay the compensation due Employee and to perform the other obligations of TXEN hereunder. NRC is not a guarantor of any of the TXEN obligations hereunder. 15. Severability. If any of the articles, sections, paragraphs, clauses or provisions of this Agreement shall be held by a court of last resort to be invalid, the remainder of this Agreement shall not be affected thereby. 16. Entire Agreement. The foregoing contains the entire agreement between the parties relating to the subject matter of this Agreement, and may not be altered or amended except by an instrument in writing approved by TXEN and NRC and signed by the parties hereto, and this Agreement supersedes all prior understandings and agreements relating to employment of the Employee by TXEN. The parties acknowledge that any prior oral or written agreements between NRC and the Employee, if any, are hereby terminated. The parties acknowledge that the Employee and NRC have also entered into the Purchase Agreement and Stock Purchase Option Agreement which shall be in addition to and not in lieu of the provisions of this Agreement. IN WITNESS WHEREOF, TXEN and NRC have caused this Agreement to be executed by their duly authorized officers and the Employee has hereunto set his hand as of the date first above written. TXEN, INC. By:Thomas L. Patterson ------------------- Thomas L. Patterson, President NICHOLS RESEARCH CORPORATION By:Louis Rachmeler --------------- Its:VP Acquisitions --------------- Paul D. Reaves --------------- Paul D. Reaves, Employee NOTE: Schedules available upon request. AMENDMENT TO EMPLOYMENT AGREEMENT NICHOLS SELECT CORPORATION AND PAUL D. REAVES Dated: August 29, 1997 AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT TO CERTAIN EMPLOYMENT AGREEMENT, dated 16th of December, 1994, entered into on this the 29th day of August, 1997, by NICHOLS SELECT CORPORATION, a Delaware corporation and the wholly owned subsidiary of NRC ("SELECT") and Paul D. Reaves ("Employee"). Unless otherwise defined, capitalized terms used herein shall have the meaning ascribed to such terms in the Employment Agreement or the Merger Agreement (hereinafter defined). W I T N E S S E T H: WHEREAS, Nichols Research Corporation ("NRC"), SELECT, a wholly owned subsidiary of NRC, TXEN, Inc. ("TXEN"), and the holders of all of the $0.002 par value Class A Common Stock of TXEN (the "Shareholders") have entered into and consummated an Agreement of Merger dated as of August 27, 1997 (the "Merger Agreement") whereby TXEN merged with and into SELECT; WHEREAS, the Employee's continued employment with SELECT was a material inducement to SELECT and NRC to enter into the Merger Agreement; WHEREAS, the Employee owned Class A Common Stock of TXEN and received a portion of the Merger Consideration; WHEREAS, NRC, pursuant to Section 2 of the Employment Agreement, has elected to extend Employee's Term of Employment after the Effective Date of the merger of TXEN into SELECT; and WHEREAS, NRC,SELECT and Employee mutually desire that Employee continue to be employed by SELECT; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the undersigned parties do hereby amend the Employment Agreement as follows: 1. SELECT agrees to the continued employment of the Employee, and the Employee agrees to accept continued employment by SELECT on a full-time basis as Senior Vice President of SELECT with the same Duties and Salary as set forth in the Employment Agreement, except that Employee shall report to the Chief Executive Officer of SELECT. 2. Section 2 of said Employment Agreement is amended to read as follows: 2. Term of Employment. This Agreement shall commence as of the Effective Date of the Merger Agreement and shall end thirty (30) months from the date hereof (the "Term of Employment"), unless terminated earlier or extended as provided herein. 3. Unless the context requires otherwise, all references to TXEN, Inc., in the Employment Agreement shall mean SELECT. Except as amended above, the Employment Agreement shall remain in full force and effect according to its terms and conditions. IN WITNESS WHEREOF, the parties have hereunto executed this Amendment to Employment Agreement on the date and year first above written. NICHOLS SELECT CORPORATION By: Michael J. Mruz --------------- Michael J. Mruz, Its: Chief Executive Officer Paul D. Reaves -------------- Paul D. Reaves, Employee EX-10.31 7 NICHOLS SELECT CORPORATION H. GREY WOOD EMPLOYMENT AGREEMENT Dated: August 29, 1997 EMPLOYMENT AGREEMENT THIS AGREEMENT is entered into on the 29th day of August, 1997, by H. Grey Wood, residing at 3549 Chippenham, Birmingham, Alabama 35242 (herein called the "Employee"), and Nichols SELECT Corporation, with a principal place of business located at 4040 Memorial Parkway South, Huntsville, Alabama 35802 (herein called "SELECT"). Unless otherwise defined, capitalized terms used herein shall have the meaning ascribed to such terms in the Merger Agreement as hereinafter defined. W I T N E S S E T H: WHEREAS, Nichols Research Corporation ("NRC"), SELECT, a wholly owned subsidiary of NRC, TXEN, Inc. ("TXEN"), and the holders of all of the $0.002 par value Class A Common Stock of TXEN (the "Shareholders") have entered into and consummated an Agreement of Merger dated as of August 27, 1997 (the "Merger Agreement") whereby TXEN merged with and into SELECT; WHEREAS, the Employee's continued employment with SELECT was a material inducement to SELECT and NRC to enter into the Merger Agreement; WHEREAS, Employee owned Class A Common Stock of TXEN and received a portion of the Merger Consideration; WHEREAS, SELECT is engaged in the business of health care administration and providing information systems and services to health care providers and administrators throughout the United States; and WHEREAS, SELECT desires to obtain the services of the Employee as Vice President and General Manager of SELECT and the Employee is willing to render such services to SELECT upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the mutual promises set forth herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Duties and Salary. (a) SELECT agrees to employ the Employee and the Employee agrees to accept employment by SELECT on a full-time basis as Vice President and General Manager of SELECT at a base salary of $10,416.67 per month plus such incentive compensation as the Board of Directors of SELECT (the "Board") may determine payable during the Term of Employment, as hereinafter defined. Such salary shall be subject to increases from time to time as authorized by the Board. (b) The Employee hereby agrees to undertake such travel as may be required in the performance of his duties. The reasonable travel expenses of the Employee shall be reimbursed in accordance with SELECT's reimbursement policy, in effect from time to time. (c) The Employee shall carry out his duties under the general supervision of the Board or its designee. (d) The Employee's duties shall include the duties and responsibilities identified on Schedule I attached hereto. The Employee shall perform such other tasks and duties as may be assigned by SELECT, from time to time and SELECT reserves the right to change the office and/or position of the Employee within SELECT, so long as such change is mutually acceptable. The Employee shall devote his full time, attention, skill and efforts to the tasks and duties assigned by SELECT. The Employee shall not provide services, for compensation, to any other person or business entity while employed by SELECT without approval of the Board. (e) The Employee shall not be required to relocate beyond the Birmingham, Alabama, metropolitan area without his consent. 2. Term of Employment. This Agreement shall commence as of the effective date of the Merger Agreement and shall end two years from the date thereof (the "Term of Employment"), unless terminated earlier or extended as provided herein. Upon expiration of the initial Term of Employment unless earlier terminated as provided herein, the Term of Employment shall continue automatically month-to-month until terminated by either party with at least thirty (30) days' prior written notice with or without cause. 3. Termination Before Expiration of Term of Employment. The termination of the employment of the Employee during the Term of Employment may occur in one of the following ways: (a) By SELECT, for Cause. Termination by SELECT shall be deemed to be for cause only upon: (i) Employee's conviction of or pleading guilty to a felony; (ii) A good faith determination by the Board that the Employee has breached this Agreement or the Merger Agreement; (iii) Refusal or failure by the Employee, without reasonable excuse or proper authorization, to carry out any reasonable instructions of the Board consistent with Employee's rights or duties as set forth in this Agreement; (iv) Material breach of this Agreement or any material breach of any agreement with SELECT or NRC; (v) The Employee's demonstration of negligence or willful misconduct in the execution of his duties, including without limitation breach of fiduciary duty or the duty of loyalty owed SELECT. If SELECT intends to terminate for cause, SELECT shall provide notice to Employee of intent to terminate this Agreement, stating the termination provision in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provisions so indicated, and shall provide Employee with an opportunity to cure the alleged default or breach within thirty (30) days of receipt of the notice, provided that if the matter is not curable within such thirty (30) day period, the Employee shall not be deemed in default if the Employee commences immediately to cure the matter and proceeds diligently thereafter to complete the cure, further provided that the alleged breach or default must be cured within ninety (90) days of receipt of the notice. SELECT shall not be required to give more than one notice with respect to the same matter. Notwithstanding the foregoing, no notice and no cure right shall be required with respect to termination for cause under 3(a)(i) or an act involving theft of information or property of SELECT. (b) By SELECT, Without Cause. Any termination of Employee by SELECT for reasons other than as set forth in subsections 3(a)(i) through 3(a)(v) above shall be a termination without cause. SELECT may terminate the employment of Employee without cause by thirty (30) days prior written notice at any time. (c) By the Employee. The Employee may by written notice terminate his employment at any time during the Term of Employment: (i) For any reason other than for Good Reason (as defined below) upon thirty (30) days prior written notice at any time. (ii) For "Good Reason," defined as termination because of a material breach by SELECT of this Agreement including, without limitation, making a material change in the Employee's duties, responsibilities, or authority as set forth in this Agreement, without his express written consent. In all cases in which Employee intends to terminate for Good Reason, the Employee shall provide SELECT with notice of intent to terminate this Agreement, stating the facts and circumstances giving rise to a breach of this Agreement claimed to provide a basis for termination under the provisions so indicated, and shall provide SELECT with an opportunity to cure the alleged default or breach within thirty (30) days of receipt of the notice, provided that if the matter is not curable within such thirty (30) day period, SELECT shall not be deemed in default if it commences immediately to cure the matter and proceeds diligently thereafter to complete the cure, further provided that the alleged breach or default must be cured within ninety (90) days of receipt of the notice. Employee shall not be required to give more than one such notice with respect to the same matter. (d) Death of the Employee. (e) Disability of Employee. If, during the Term of Employment, a physician selected by SELECT determines that the Employee has become physically or mentally disabled so as to be unable to carry out the normal and usual duties of his employment for three (3) continuous months, and reasonable accommodation cannot be made to allow the Employee to continue to perform his duties full-time, his employment hereunder may be terminated at the election of SELECT or the Employee. 4. Consequences of Termination. The termination of the employment of Employee will cause the following results: (a) If the termination is by SELECT for cause, or is by the Employee for any reason other than for Good Reason, SELECT will pay the Employee within five (5) days after the date of termination any unpaid salary, the amount of any accrued annual vacation pay to which he may be entitled under SELECT's vacation plan and benefits. All such compensation and benefits (if any) shall be paid only through the date termination occurs. (b) If the termination is by SELECT without cause or because of death or disability, SELECT shall pay to the Employee, in addition to the amounts set forth in 4(a) above, an amount equal to the Employee's monthly base salary then in effect over a six-month period immediately following the termination. (c) If the termination is by the Employee for Good Reason, SELECT shall pay to the Employee, in addition to the amounts set forth in 4(a) above, an amount equal to the Employee's monthly base salary then in effect over a six-month period immediately following the termination. (d) In the event of the Employee's death or disability, the following provisions will apply: (i) Upon his death, the Employee's estate will be entitled to receive the amount set forth in Section 4(b) and the benefits set forth in any plans of SELECT then in effect and applicable under the circumstances. The Employee or his estate shall be entitled to no other compensation or benefits in the event of death. (ii) Upon termination on account of disability, Employee will be entitled to receive the amount set forth in Section 4(b) and the benefits set forth in any plans of SELECT then in effect and applicable under the circumstances. The Employee or his personal representative shall be entitled to no other compensation or benefits in the event of disability. (e) The Employee shall not be required to mitigate the amount of payment provided for in this Section 4 by seeking employment. (f) The amounts set forth above in this Section 4 shall be paid and received in complete discharge of any other obligation of SELECT to Employee resulting from termination of his employment. 5. Fringe Benefits. The Employee shall participate in any group health insurance, vacation and sick leave plans, and other benefit plans available to all employees of SELECT in accordance with their terms and conditions which may be amended or terminated by SELECT at any time. Effective on August 31, 1997, Employee shall receive an incentive stock option grant to purchase 8,000 shares of NRC Common Stock under the terms and provisions of the Nichols Research Corporation 1991 Incentive Stock Option Plan. 6. Nondisclosure Covenants and Proprietary Matters. (a) Unless authorized or instructed in writing by SELECT, the Employee shall not, except as required in the conduct of SELECT's business, during or at any time after the Term of Employment, disclose to others, or use, any of SELECT's inventions or discoveries or their respective secret or confidential information or data (oral, written, or in machine readable form) which the Employee may obtain during the course of or in connection with the Employee's employment, including such inventions, discoveries, information, know-how or data relating to machines, equipment, products, systems, software, contracts, contract performance, research and/or development, designs, compositions, formulae, processes, manufacturing procedures or business methods, whether or not developed by the Employee, by others in SELECT or obtained by SELECT from third parties, and irrespective of whether or not such inventions, discoveries, information, knowledge or data have been identified by SELECT as secret or confidential, unless and until, and then to the extent and only to the extent that, such inventions, discoveries, information, knowledge or data become available to the public otherwise than by the Employee's act or omission. (b) The Employee shall not, except as required in the conduct of SELECT's business, disclose to others, or use, any of the information (which, if disclosed or used, could be harmful to SELECT relating to present and prospective customers of SELECT, business dealings with such customers, prospective sales and advertising programs and agreements with representatives or prospective representatives of SELECT, present or prospective sources of supply or any other business arrangements of SELECT, including but not limited to customers, customer lists, costs, prices and earnings, whether or not such information is developed by the Employee, by others in SELECT or obtained by SELECT from third parties, and irrespective of whether or not such information has been identified by SELECT as secret or confidential, unless and until, and then to the extent and only to the extent that, such information becomes available to the public otherwise than by the Employee's act or omission. (c) The Employee agrees to disclose immediately to SELECT or any persons designated by it and to assign to SELECT or its successors or assigns, all inventions made, discovered, or first reduced to practice by the Employee, solely or jointly with others, during the Term of Employment or within a period of six months from the date of termination of such employment (either during or outside of the Employee's working hours and either on or off SELECT's premises), which inventions are made, discovered or conceived either in the course of such employment, or with the use of SELECT's time, material, facilities or funds, or which are directly related to any investigations or obligations undertaken by SELECT; and the Employee hereby grants and agrees to grant the right to SELECT and its nominees to obtain, for its own benefit and in its own name (entirely at its expense) patents and patent applications including original, continuation, reissue, utility and design patents, and applications, patents of addition, confirmation patents, registration patents, petty patents, utility models, and all other types of patents and the like, and all renewals and extensions of any of them for those inventions in any and all countries; and the Employee shall assist SELECT, at SELECT's expense, without further charge during the term of the Employee's employment, and after termination of the Employee's employment at the same base salary rate (excluding any bonuses, incentive or deferred compensation or other benefits and based upon a forty hour work week) as during the last year of the Employee's employment (determined on an hourly basis for this purpose), through counsel designated by SELECT, to execute, acknowledge, and deliver all such further papers, including assignments, applications for Letters Patent (of the United States or of any foreign country), oaths, disclaimers or other instruments and to perform such further acts, including giving testimony or furnishing evidence in the prosecution or defense of appeals, interferences, suits and controversies relating to any aforesaid inventions as may reasonably be deemed necessary by SELECT or its nominees to effectuate the vesting or perfecting in SELECT or its nominees of all right, title and interest in and to said inventions, applications and patents. Notwithstanding the foregoing, the Employee need not take any action called for under this Section 6(c) which will cause undue personal hardship to the Employee. (d) The Employee agrees to disclose immediately to SELECT or any persons designated by it and to assign to SELECT, at its option, or its successors or assigns, all works of authorship, including all writings, computer programs, software, and firmware, written or created by the Employee solely or jointly with others, during the course of his employment by SELECT (either during or outside of the Employee's working hours and either on or off SELECT's premises), which works are made or conceived either in the course of such employment, or with the use of SELECT's time, material, facilities or funds, or which are directly related to any investigations or obligations undertaken by SELECT; and the Employee hereby agrees that all such works are works made for hire, of which SELECT is the author and the beneficiary of all rights and protections afforded by the law of copyright in any and all countries; and the Employee will assist SELECT at SELECT's expense without further charges during the term of his employment, and after termination of his employment at the same base salary rate (excluding any bonuses, incentive or deferred compensation or other benefits) as during the last year of his employment (determined on an hourly basis for this purpose assuming a forty hour work week), through counsel designated by SELECT, to execute, acknowledge, and deliver all such further papers, including assignments, applications for copyright registration (in the United States or in any foreign country), oaths, disclaimers or other instruments, and to perform such further acts, including giving testimony or furnishing evidence in the prosecution or defense of appeals, interferences, suits and controversies relating to any aforesaid works, as may be deemed necessary by SELECT or by its nominees to effectuate the vesting or perfecting in SELECT or its nominees of all rights and interest in and to said works and copies thereof, including the exclusive rights of copying and distribution. (e) The Employee shall keep complete, accurate and authentic accounts, notes, data and records of all inventions made, discovered or developed and all works of authorship written or created by the Employee as aforesaid in the manner and form requested by SELECT. (f) All computer or other hardware, computer software, computer programs, source codes, object codes, magnetic tapes, printouts, samples, notes, records, reports, documents, customer lists, photographs, catalogues and other writings, whether copyrightable or not, relating to or dealing with SELECT's business and plans, and those of others entrusted to SELECT, which are prepared or created by the Employee or which may come into his possession during or as a result of his employment, are the property of SELECT, as applicable, and upon termination of his employment, the Employee agrees to return all such computer software, computer programs, source codes, object codes, magnetic tapes, printouts, samples, notes, records, reports, documents, customer lists, photographs, catalogues and writings and all copies thereof to SELECT. 7. Nonsolicitation and Noncompetition. During the Restriction Period (as hereinafter defined) within the United States of America, the Employee shall not directly or indirectly: (a) Solicit the business of SELECT from any customer of SELECT or any entity controlled by SELECT or solicit any employees of SELECT to leave the employ of SELECT. (b) Hire any employees or former employees of SELECT or any entity controlled by SELECT within one year of the date of termination of his employment with SELECT or cause any entity with which the Employee is affiliated to hire any such employees or former employees of SELECT unless such former employee has not been employed by SELECT within 180 days of the hire date. (c) Engage in, represent in any way or be connected with, as consultant, officer, director, partner, employee, sales representative, proprietor, stockholder or otherwise (except for the ownership of a less than one percent (1%) stock interest in a publicly traded corporation where Employee is not in a management or control position), any business competing with the business of SELECT as conducted by SELECT on the date hereof or during the period of Employee's employment by SELECT. (d) As used herein, the Restriction Period shall mean the period while the Employee is employed by SELECT and twelve (12) months after the date the employee ceases to be employed by SELECT. 8. No Conflict. Employee represents and warrants that he is not a party to or otherwise subject to or bound by the terms of any contract, agreement or understanding which in any manner would limit or otherwise affect his ability to perform his obligations hereunder, including without limitation any contract, agreement or understanding containing terms and provisions similar in any manner to those contained in Sections 6 and 7 hereof. Employee covenants to indemnify and hold SELECT and any of its affiliates harmless from any cost or damages (including attorneys' fees and expenses) resulting from any breach of the provisions of this Agreement. 9. Survival of Covenants, Effect. (a) The covenants on the part of the Employee contained or referred to in Sections 6 and 7 above shall survive termination of this Agreement, and the existence of any claim or cause of action of the Employee against SELECT, whether predicated on this Agreement or otherwise. The Employee agrees that a remedy at law for any breach of the foregoing covenants contained or referred to in Sections 6 and 7 would be inadequate, that SELECT would suffer irreparable harm as a result and that SELECT shall be entitled to a temporary and permanent injunction or an order for specific performance of such covenants without the necessity of proving actual damage to SELECT and without the posting of any bond or other security. Any breach of this Agreement by SELECT shall not release the Employee from his obligations under Sections 6 and 7 hereof. (b) The Employee hereby represents and acknowledges that SELECT is relying on the covenants in Sections 6 and 7 in entering into this Agreement and the Merger Agreement and other agreements related thereto and that the restrictions in Sections 6 and 7 are fair and reasonable. The Employee acknowledges that SELECT does business throughout the United States and that the geographic scope of the covenants in Section 7 is therefore reasonable and necessary to protect the interests of SELECT. (c) It is the intent of the parties that the provisions of Sections 6 and 7 shall be enforced to the fullest extent permissible under the laws and public policies of each jurisdiction in which enforcement is sought. If any particular provision of Sections 6 and 7 shall be adjudicated to be invalid or unenforceable, such provision(s) of Sections 6 and 7 shall be deemed amended to provide restrictions to the fullest extent permissible and consistent with applicable law and policies, and such amendment shall apply only with respect to the particular jurisdiction in which such adjudication is made. If such deemed amendment is not allowed by the adjudicating body, the offending provision, only, shall be deleted and the remainder of Sections 6 and 7 shall not be affected. 10. Assignment. The rights and obligations of SELECT under this Agreement may be assigned by SELECT to any other successors in interest of SELECT of that part of the business of SELECT to which this Agreement applies or to their respective affiliates. This Agreement may not be assigned and any duties of the Employee may not be delegated by the Employee, but any amounts owing to the Employee upon his death shall inure to the benefit of his estate. 11. Notices. All notices or other communications which may be or are required to be given, served or sent by either party to the other party pursuant to this Agreement shall be in writing, addressed to its/his residence or place of business as set forth above, and shall be mailed by first-class certified mail, return receipt requested, postage prepaid; next-day air delivery; or transmitted by facsimiles or hand delivery. Such notice or other communication shall be deemed sufficiently given, served, sent or received for all purposes at such time as it is delivered to the addressee or at such time as delivery is refused by the addressee upon presentation. Each party may designate by notice in writing an address to which any notice or communication may thereafter be so given, served or sent. Notices hand delivered to SELECT must be delivered to an officer of SELECT and all other notices shall be sent to the attention of the Board. 12. Applicable Law Jurisdiction. This Agreement has been negotiated and executed in the State of Alabama, and it shall be governed by, construed and enforced in accordance with the internal substantive laws and not the choice of law rules of the State of Alabama. 13. Effectiveness/Interpretation. The parties acknowledge and agree that this Agreement has been negotiated at arm's length between parties equally sophisticated and knowledgeable in the matters dealt with herein. Each party has been represented by counsel of its or his own choosing. Accordingly, any rule of law or legal decision that would require interpretation of any ambiguities in the Agreement against the party that drafted it is not applicable and is waived. 14. Severability. If any of the articles, sections, paragraphs, clauses or provisions of this Agreement shall be held by a court of last resort to be invalid, the remainder of this Agreement shall not be affected thereby. 15. Entire Agreement. The foregoing contains the entire agreement between the parties relating to the subject matter of this Agreement, and may not be altered or amended except by an instrument in writing approved by SELECT and signed by the parties hereto, and this Agreement supersedes all prior understandings and agreements relating to employment of the Employee by SELECT. The parties acknowledge that any prior oral or written agreements between SELECT and the Employee, if any, are hereby terminated. IN WITNESS WHEREOF, SELECT has caused this Agreement to be executed by its duly authorized officers and the Employee has hereunto set his hand as of the date first above written. NICHOLS SELECT CORPORATION By:Michael J. Mruz --------------- Its:Chief Executive Officer ----------------------- H. Grey Wood ------------------------------- H. Grey Wood, Employee NOTE: Schedules available upon request. EX-21 8 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT Name of Subsidiary State of Incorporation 1) Communications & Systems Specialists, Inc. Delaware 2) Nichols TXEN Corporation Delaware 3) NRC Technical Services Corporation Alabama 4) Conway Computer Group Alabama 5) Advanced Marine Enterprises, Inc. Virginia 6) Welkin Associates, Ltd. Virginia 7) Mnemonic Systems, Incorporated Virginia EX-23 9 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the following Registration Statements of Nichols Research Corporation and in the related Prospectuses of our report dated October 7, 1998, with respect to the consolidated financial statements of Nichols Research Corporation included in the Annual Report (Form 10-K) for the year ended August 31, 1998. Form S-8 No. 33-13464 pertaining to the Nichols Research Corporation 1984 Incentive Stock Option Plan; Form S-8, as amended, File Nos. 33-13464 and 333-07164 pertaining to the Nichols Research Corporation 1988 Employees' Stock Purchase Plan; Form S-8, as amended, File Nos. 33-38568 and 333-29791 pertaining to the Nichols Research Corporation Non-Employee Officer and Director Stock Option Plan; Form S-8, as amended, File Nos. 33-44409 and 333-07160 pertaining to the Nichols Research Corporation 1989 Incentive Stock Option Plan; Form S-8, as amended, File Nos. 33-55454 and 333-07162 pertaining to the Nichols Research Corporation 1991 Stock Option Plan; Form S-8 No. 333-60199 pertaining to the Nichols TXEN Corporation Key Employee Incentive Stock Option Plan; Form S-8 No. 333-60193 pertaining to the Nichols TXEN Corporation 1996 Incentive Stock Option Plan; Form S-8 No. 333-61093 pertaining to the Incentive Stock Option Plan of 1988 of Welkin Associates, Ltd.; and Form S-3 No. 333-61143 pertaining to the registration of 415,689 shares of Nichols Research Corporation Common Stock issued to the shareholders of Welkin Associates, Ltd. Ernst & Young LLP Birmingham, Alabama November 25, 1998 EX-27 10
5 1,000 YEAR AUG-31-1998 AUG-31-1998 11,275 0 113,926 534 0 131,094 47,446 25,011 224,061 53,110 2,948 0 0 140 166,332 224,061 427,043 427,043 355,750 355,750 4,126 0 467 23,724 9,301 14,423 0 0 0 14,423 1.06 1.02
EX-99 11 EXHIBIT 99 Consent I, the undersigned, hereby consent to being named as nominee to the Nichols Research Corporation Board of Directors in the Proxy Statement relative to the Annual Meeting of the Shareholders to be held January 14, 1999, and hereby consent to serve as a director of Nichols Research Corporation. Dated this 23rd day of November,1998. Charles A. Leader ----------------- Charles A. Leader -----END PRIVACY-ENHANCED MESSAGE-----