-----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, SJw3OuEipgM+Ldf+ql8C+OSUpeb3XEELRUpcSMcUmLOYyB1xvcPsxllUIZJvDjxj eX2fB0RNXtBEGwicl9ZMeg== 0000806388-99-000004.txt : 19990114 0000806388-99-000004.hdr.sgml : 19990114 ACCESSION NUMBER: 0000806388-99-000004 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19990113 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-Q/A SEC ACT: SEC FILE NUMBER: 000-15295 FILM NUMBER: 99505378 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-Q/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 _____________________ FORM 10-Q/A AMENDMENT NO. 1 TO (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended May 31, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _____________ To _____________ _____________________ Nichols Research Corporation (Exact name of registrant as specified in its charter) _____________________ Commission File Number 0-15295 DELAWARE 63-0713665 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification no.) 4040 Memorial Parkway, South Huntsville, Alabama 35802-1326 (256) 883-1140 (Address, including zip code, of principal offices) _____________________ NO CHANGE (Former name, address and fiscal year if changed since last report) _____________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. COMMON STOCK, $.01 PAR VALUE 13,271,712 SHARES OUTSTANDING ON May 31, 1998 _____________________ 1 FORM 10-Q NICHOLS RESEARCH CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Overview and Business Environment --------------------------------- The Company is a leading provider of technical and information technology (IT) services, inlcuding information processing, systems development and systems integration. The Company provides these services to a wide range of clients, including the Department of Defense (DoD), other federal agencies, state and local governments, healthcare and insurance organizations, and commercial enterprises. The Company's business strategy consists of three key elements: (i) maintain the Company's leadership in technology; (ii) apply the Company's technology to create solutions for new clients; and (iii) make strategic acquisitions and investments to expand the business of the Company and gain industry knowledge. The Company's business and financial performance are subject to risks and uncertainties, including those discussed below. The Company is organized in four strategic business units, reflecting the particular market focus of each line of business. The Defense and Intelligence unit, formerly Nichols Federal, provides technical services primarily to U.S. government defense agencies. The Government Information Technology unit, formerly Nichols InfoFed, provides information and technology solutions and services to a variety of governmental agencies. Nichols InfoTec provides information and technology services to various commercial clients, other than healthcare clients. Nichols TXEN provides information services to clients in the healthcare and insurance industries. The Company is currently evaluating whether the services and products provided to the insurance industry should continue to be included with Nichols TXEN or reorganized into Nichols InfoTec. For the nine months ended May 31, 1998, the percentage of total revenues attributable to the four business units was approximately 55% for Defense and Intelligence, 24% for Government Information Technology, 10% for Nichols InfoTec, and 11% for Nichols TXEN. Expansion through acquisitions is an important component of the Company's overall business strategy. The Company has successfully completed nine strategic acquisitions and investments since September 1, 1994. The Company's continued ability to grow by acquisitions is dependent upon, and may be limited by, the availability of compatible acquisition candidates at reasonable prices, the Company's ability to fund or finance acquisitions on acceptable terms, and the Company's ability to maintain or enhance the profitability of any acquired business. 2 As part of the Company's business strategy to enter new markets, the Company intends to pursue large systems integration contracts in both the government and commercial markets, although competition for such contracts is intense and many of the Company's competitors have greater resources than the Company. While such contracts are working capital intensive, requiring large equipment and software purchases to be funded by the Company before payment from the customer, the Company believes such contracts offer attractive revenue growth and margin expansion opportunities for the Company's range of technical expertise and capabilities. The Company's revenues and earnings may fluctuate from quarter to quarter based on such factors as the number, size, and scope of projects in which the Company is engaged, the contractual terms and degree of completion of such projects, expenditures required by the Company in connection with such projects, any delays incurred in connection with such projects, employee utilization rates, the adequacy of provisions for losses, the accuracy of estimates of resources required to complete ongoing projects, and general economic conditions. Under certain contracts, the Company is required to purchase, integrate and deliver to the customer large amounts of computer processing systems and other equipment. Revenues are accrued as costs to deliver these systems are incurred, and as a result, quarterly revenues will be impacted by fluctuations related to equipment purchases which occur on a periodic basis depending on contract terms and modifications. The Company's services are provided primarily through three types of contracts: fixed-price, time-and-materials and cost- reimbursement contracts. Fixed-price contracts require the Company to perform services under a contract at a stipulated price. Time-and-materials contracts reimburse the Company for the number of labor hours expended at an established hourly rate negotiated in the contract, plus the cost of materials incurred. Under cost-reimbursement contracts, the Company is reimbursed for all actual costs incurred in performing the contract to the extent that such costs are within the contract ceiling and allowable under the terms of the contract, plus a fee or profit. 3 EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN SECTION 21E OF THE SECRUITIES EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES ARE DISCUSSED IN FORE DETAIL IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 1997, AND IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS SECTION OF THIS QUARTERLY REPORT. THESE FORWARD-LOOKING STATEMENTS CAN BE GENERALLY IDENTIFIED AS SUCH BECUASE THE CONTENT OF THE STATEMENTS WILL USUALLY CONTAIN SUCH WORDS AS THE COMPANY OR MANAGEMENT "BELIEVES," "ANTICIPATES," "EXPECTS," "HOPES," AND WORDS OF SIMILAR IMPORT. SIMILARILY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES, GOALS OR STRATEGIES ARE FORWARD-LOOKING STATEMENTS. 4 FORM 10-Q NICHOLS RESEARCH CORPORATION Results of Operations --------------------- The following table sets forth, for the periods indicated, the percentage which certain items in the consolidated statements of income bear to consolidated revenues: For the Three For the Nine Months Ended Months Ended May 31, May 31, May 31, May 31, 1998 1997 1998 1997 ---------------------------------------- Revenues......................... 100.0% 100.0% 100.0% 100.0% Costs and expenses: Direct and allocable costs...... 84.5 88.3 83.7 88.3 General and administrative expenses....................... 8.0 6.2 8.7 6.1 Amortization of intangibles..... 1.1 0.6 1.2 0.6 Purchased in-process research and development................ 1.8 - 0.7 - ---------------------------------------- Total costs and expenses..... 95.4 95.1 94.3 95.0 ---------------------------------------- Operating profit................. 4.6 4.9 5.7 5.0 Interest expense................. (0.0) (0.0) (0.1) (0.2) Other income, principally interest........................ 0.1 0.3 0.3 0.3 Equity in earnings of unconsolidated affilites........ 0.0 0.1 0.1 0.2 Minority interest in consolidated subsidiaries....... (0.1) (0.0) (0.2) (0.1) ---------------------------------------- Income before income taxes....... 4.6 5.3 5.8 5.2 Income taxes..................... 1.7 1.9 2.2 1.9 ---------------------------------------- Net income....................... 2.9% 3.4% 3.6% 3.3% ======================================== 5 The Company had a backlog of approximately $1.1 billion, including options of $766.1 million, at May 31, 1998. The Company had a backlog of approximately $1.2 billion, including options of $684.4 million, at May 31, 1997. Backlog represents the amount of revenues expected to be realized from awarded contracts. Therefore, the amount in backlog is typically less than the face amount of the contract. The amount includes estimates based on the Company's experience with similar awards and customers and estimates of revenues that would be recognized from the performance of options, under existing contracts, that may be exercised by the customer. These estimates are reviewed periodically and are adjusted based on the latest available information. Historically, these adjustments have not been significant. Because contracts in backlog are typically multi- year contracts, an increase in backlog may not translate into proportional revenue growth in any future period. The table below presents contract award and backlog data for the periods indicated: May 31, May 31, 1998 1997 ---------------------- (amounts in thousands) Contract award amount....... $ 174,996 $ 444,309 Backlog (with options)...... $1,138,331 $1,201,087 Backlog (without options)... $ 372,212 $ 516,681 Comparison of Operating Results for Fiscal Third Quarter 1998 with Fiscal Third Quarter 1997 REVENUES. Revenues increased $19.4 million (20.6%) for the three months and $16.1 million (6.0%) for the nine months ended May 31, 1998 as compared to the three months and nine months ended May 31, 1997. The Defense and Intelligence unit, which represents approximately 55% of consolidated revenue for the nine months ended May 31, 1998, reported an increase of $10.4 million ( 7.0%) for the nine months ended May 31, 1998 as compared to the nine months ended May 31, 1997, primarily as a result of continued growth in existing contract base. The Government Information Technology unit,representing approximately 24% of consolidated revenue for the nine months ended May 31, 1998, reported a decrease of $31.3 million (31.6%) for the nine months ended May 31, 1998 as compared to the nine months ended May 31, 1997. The decrease is due to a reduction in the number of hardware systems integrated during the current period.Nichols InfoTec revenues increased $15.1 million (127%) for the nine months ended May 31, 1998 as compared to the nine months ended May 31, 1997, primarily as a result of SAP software sales and integration services as well as the award of new contracts in the third quarter ended May 31, 1998. Nichols TXEN 6 revenues have increased $21.9 million (209%) for the nine months ended May 31, 1998 as compared to the nine months ended May 31, 1997 primarily as a result of the acquisition of TXEN, Inc. completed in August 1997. OPERATING PROFIT. In the third fiscal quarter the Company expensed, pre-tax, $2 million of purchased in-process research and development activities related to the acquisition of Mnemonic Systems, Inc. (MSI). Operating profit, including the $2 million write-off of purchased in-process research and development, increased $0.6 million (14.0%) for the three months and $2.9 million (21.3%) for the nine months ended May 31, 1998 as compared to the three months and nine months ended May 31, 1997. Operating profit, excluding the $2 million write-off of purchased in-process research and development, increased $2.6 million (57.4%) for the three months and $4.9 million (36.2%) for the nine months ended May 31, 1998 as compared to the three months and nine months ended May 31, 1997. Direct and allocable costs during fiscal year 1998 have decreased as a percent of revenues compared to fiscal year 1997 as a result of fewer hardware purchases for systems integration contracts. General and administrative expense increased $8.5 million (51.6%) for the nine months ended May 31, 1998 compared to the nine months ended May 31, 1997, primarily as a result of the acquisition of TXEN, Inc. completed in August 1997. Amortization of intangibles increased $1.8 million (119.8%) for the nine months ended May 31, 1998 as compared to the nine months ended May 31, 1997 primarily as a result of the amortization of the intangibles recorded with the TXEN, Inc. acquisition completed in August 1997. The $2 million pre-tax write-off of purchased in-process research and development activities related to the MSI acquisition, represents 0.7% of total costs and expenses for the nine months ended May 31, 1998. Total costs and expenses were 95.4% of revenues for the three months and 94.3% for the nine months ended May 31, 1998 as compared to 95.1% for the three months and 95.0% for the nine months ended May 31, 1997. OPERATING MARGIN. Operating margin, including the $2 million write-off of purchased in-process research and development, was 4.6% for the three months and 5.7% for the nine months ended May 31, 1998 as compared to 4.9% for the three months and 5.0% for the nine months ended May 31, 1997. Operating margin, excluding the $2 million write-off of purchased in-process research and 7 development was 6.4% for the three months and nine months ended May 31, 1998. Defense and Intelligence realized a 5.4% operating margin for the nine months ended May 31, 1998 as compared to 4.6% for the nine months ended May 31, 1997 which decrease was primarily because of the adverse affect of the completion of two significant contracts in fiscal 1997. Government Information Technology realized operating margins, excluding the $2 million write-off of purchased in-process research and development, of 6.2% for the nine months ended May 31, 1998 as compared to 5.2% for the nine months ended May 31, 1997. The improved margins are the result of increased margins on modifications awarded to existing contracts during fiscal year 1998. The $2 million write-off of purchased in-process research and development related to MSI is associated with Government Information Technology and represents a decrease of 0.7% operating margin for the nine months ended May 31, 1998. Nichols InfoTec realized operating margins of 6.2% for the nine months ended May 31, 1998 as compared to 9.8% for the nine months ended May 31, 1997. The decrease is attributable to expenses incurred in acquiring and training staff for new client projects and development of additional sales and marketing infrastructure. Nichols TXEN realized operating margins of 11.7% for the nine months ended May 31, 1998 as compared to 3.0% for the nine months ended May 31, 1997. The improved margins are the result of the managed care operations acquired with the acquisition of TXEN, Inc. completed in August 1997. OTHER INCOME (EXPENSE). Other income (expense) decreased $426,000 for the three months and $433,000 for the nine months ended May 31 , 1998 as compared to the three months and nine months ended May 31, 1997. Other income includes equity in earnings of unconsolidated affiliates and interest income; other expense includes interest expense and minority interest. Interest income is from the investment of the Company's cash reserves. Substantially all available cash is invested in interest-bearing accounts or fixed income instruments. Interest expense is primarily from the long-term borrowings of the Company and the commitment fee on unused line of credit. Equity in earnings of unconsolidated affiliates for the nine months ended May 31, 1998 primarily represents the Company's share of the earnings of NCCIM, LLC a joint venture, 50% of which is owned by the Company; while the comparable amount for the nine months ended May 31, 1997 primarily represents the Company's share of earnings of TXEN, Inc. As of August 1997, TXEN, Inc. became a wholly-owned subsidiary of the Company. Minority interest primarily represents the minority partner's share of earnings of Nichols ENTEC, LLC a joint venture, 60% of which is owned by the Company. The increase in minority interest of $0.5 million for the nine months ended May 31, 1998 as compared to the nine months ended May 31,1997 is primarily the result of an increase in SAP software sales and integration services in this Nichols InfoTec unit. 8 INCOME TAXES. Income taxes as a percentage of income before taxes was 38.0% for the nine months ended May 31, 1998 as compared to 36.3% for the nine months ended May 31, 1997. The increase is primarily a result of the differences between financial and taxable income related to the amortization of intangibles. NET INCOME. Net income, including the $2 million pre-tax write-off of purchased in-process research and development, increased $0.1 million (1.7%) for the three months and $1.3 million (14.2%) for the nine months ended May 31, 1998 as compared to the three months and nine months ended May 31, 1997. Net income, excluding the $2 million pre-tax write-off of purchased in-process research and development, increased $0.9 million (51.2%) for the three months and $1.9 million (37.8%) for the nine months ended May 31, 1998 as compared to the three months and nine months ended May 31, 1997. The increases are a result of the discussions above. EARNINGS PER COMMON SHARE ASSUMING DILUTION. Earnings per common share assuming dilution, including the $2 million pre-tax write-off of purchased in-process research and development for the three months and nine months ended May 31, 1998 were $0.24 and $0.74 as compared to $0.24 and $0.73 for the three months and nine months ended May 31, 1997. Earnings per common share assuming dilution, excluding the $2 million pre-tax write-off of purchased in-process research and development for the three months and nine months ended May 31, 1998 were $0.33 and $0.84. Net income, including the $2 million pre-tax write-off of purchased in-process research and development, increased $1.3 million (14.2%) for the nine months ended May 31, 1998 as compared to the nine months ended May 31, 1997. Net income, excluding the $2 million pre-tax write-off of purchased in- process research and development, increased $1.9 million (37.8%) for the nine months ended May 31, 1998 as compared to the nine months ended May 31, 1997. Weighted average common shares and common equivalent shares increased 11.4% (1,399,330 shares) for the nine months ended May 31, 1998 as compared to the nine months ended May 31, 1997. Liquidity And Capital Resources ------------------------------- Historically, the Company's positive cash flow from operations and available credit facilities have provided adequate liquidity and working capital to fully fund the Company's operational needs and support the acquisition program. Working capital was $68.8 million and $79.8 million at May 31, 1998 and 1997, respectively. Operating activities provided cash of $10.9 million and $1.7 million for the nine months ended May 31, 1998 and 1997, respectively. 9 Investing activities used cash of $19.7 million and $7.3 million for the nine months ended May 31, 1998 and 1997, respectively. Financing activities used cash of $6.8 million for the nine months ended May 31, 1998 and provided cash of $2.4 million for the nine months ended May 31, 1997. Cash provided by operating activities increased $9.2 million for the nine months ended May 31, 1998 as compared to the nine months ended May 31, 1997. The increase is the result of increased net income ($1.3 million), an increase in the non-cash adjustments to reconcile net income to net cash provided by operations ($4.9 million) and changes in operating assets and liabilities, net of the effects of acquisitions ($3.0 million). Cash used for investing activities was $19.7 million for the nine months ended May 31, 1998. The Company acquired all of the capital stock of Mnemonic Systems, Inc. for aggregate consideration of approximately $12.3 million. Purchases of property and equipment were $7.1 million and $3.2 million for the nine months ended May 31, 1998 and 1997, respectively. The Company realized net proceeds of $1.3 million from the maturity of long-term investments. An additional $1.0 million capital investment was made for affiliates accounted for using the equity method. Cash used for financing activities was $6.8 million for the nine months ended May 31, 1998. The primary use of cash for financing activities was during the first fiscal quarter of 1998 for the repayment of $10 million indebtedness under the bank line of credit. The Company realized proceeds from the sale of common stock of $3.9 million and $3.0 million for the nine months ended May 31, 1998 and 1997, respectively. The Company renegotiated its bank line of credit in November, 1997. The agreement provides for unsecured borrowings up to $100,000,000. The credit agreement provides for interest at London Interbank Offered Rate (LIBOR) plus a margin ranging from 0.325% to 0.450% and a facility fee, payable quarterly, of approximately 0.125% on the unused portion of the line of credit. The short-term commitment agreement ($50,000,000) is renewable annually and the long-term commitment agreement ($50,000,000) is renewable in November, 2000. There were no outstanding borrowings on this line of credit at May 31, 1998. The Company is regularly evaluating potential acquisition candidates and expects to complete other transactions this fiscal year. The purchase price allocation for TXEN, Inc. was finalized during the first fiscal quarter of 1998. Of the total purchase prince of $43.8 million, $29.9 million was allocated to the following intangibles: $15.4 million to goodwill, $12.7 million to other intangibles and $1.8 million to capitalized software development. Goodwill and other 10 intangibles of $27.4 million are being amortized using the straight-line method over an estimated useful life of twenty years. Other intangibles of $0.7 million are being amortized using the straight-line method over an estimated useful life of seven years. The amount allocated to capitalized software development is being amortized using the straight-line method over an estimated useful life of five years. The acquisition of MSI was completed during the third fiscal quarter of 1998. The MSI acquisition resulted in the write-off of $2 million, pre-tax, purchased in-process research and development and the recording of approximately $9.9 million in goodwill which is being amortized using the straight- line method over an estimated useful life of fifteen years. The Company is evaluating the realignment of certain business areas, including the insurance business activities, in the fourth quarter of fiscal 1998. In connection with this evaluation, it will be determined whether any required reductions in the carrying amount of certain intangibles will be required. The Company continues to actively pursue contracts for information system development and computer system integration activities, which could require the Company to acquire substantial amounts of computer hardware for resale or lease to customers. The timing of payments to suppliers and payments from customers under the Company's system integration contracts could cause cash flows from operations to fluctuate from period to period. The Company believes that its existing capital resources, together with available borrowing capacity, will be sufficient for the next four fiscal quarters to fund operating needs, finance acquisitions of property and equipment, and make strategic acquisitions. Recent Accounting Pronouncements -------------------------------- In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings Per Share. The overall objective of Statement No. 128 is to simplify the calculation of earnings per share (EPS) and achieve comparability with recently issued international accounting standards. The company has reported using the new EPS basis beginning in the second quarter ending February 28, 1998 and has restated all prior period EPS amounts to conform to the provisions of Statement No. 128. Effects of Inflation -------------------- Substantially all contracts awarded to the Company have been based on proposals which reflect estimated cost increases due to inflation. Historically, inflation has not had a significant impact on the Company. 11 FORM 10-Q NICHOLS RESEARCH CORPORATION MANAGEMENT REPRESENTATION The accompanying unaudited Consolidated Balance Sheets at May 31, 1998, and August 31, 1997 as well as the Consolidated Statements of Income, Consolidated Statements of Changes in Stockholders' Equity and Consolidated Statements of Cash Flows for the nine months ended May 31, 1998 and 1997, have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. January 13, 1999 By:Allen E. Dillard ---------------------- ----------------------- Date Allen E. Dillard Corporate Vice President,Chief Financial Officer and Corporate Treasurer (Principal Finance and Accounting Officer) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the registrant's Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. NICHOLS RESEARCH CORPORATION January 13, 1999 By:Allen E. Dillard ---------------------- ----------------------- Date Allen E. Dillard Corporate Vice President,Chief Financial Officer and Corporate Treasurer (Principal Finance and Accounting Officer) 12 -----END PRIVACY-ENHANCED MESSAGE-----