-----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, HhE1kmgNAAk3Lx0aVQpWe4Wb/Ylt8VHPNT0sVzn1bAK/bxU+1NMGFHS1P3fCsgah nHuopc42YEMLeFqvUGquXQ== 0000806388-99-000009.txt : 19990114 0000806388-99-000009.hdr.sgml : 19990114 ACCESSION NUMBER: 0000806388-99-000009 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980831 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-K/A SEC ACT: SEC FILE NUMBER: 000-15295 FILM NUMBER: 99505689 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/A 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 (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 1 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. This Annual Report on Form 10-K/A amends and supersedes, to the extent set forth herein, the Registrant's Annual Report on Form 10-K for the year ended August 31, 1998 previously filed on November 27, 1998 (the Form 10-K). The Company has restated certain of its historical fiscal year end audited financial statements to reflect a $3.5 million reduction in the amount allocated to acquired in-process technology recorded and written off in connection with the Company's 1997 acquisition of TXEN, Inc. (TXEN). As more particularly set forth below, the following financial and related information has been updated in connection with the filing of the restated financial statements included herein: 2
DESCRIPTION PAGE NUMBER IN 10-K/A - ----------- --------------------- PART I Executive Officers of the Registrant 4 PART II Item 6. Selected Financial Data 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 8. Financial Statements and Supplementary Data* 24 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 45
(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 44 of this Form 10-K/A 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) The following exhibits are being filed herewith as a result of the restatement of the Company's audited financial statements: Exhibits: Exhibit 23 Consent of Ernst & Young LLP, Independent Auditor Exhbit 27 Financial Data Schedule *The financial statements included herein supercede and replace the financial statements located on pages 24 through 37 of the Form 10-K. 3 PART I 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. 4 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 self-employed as an Independent Consultant from February 1995 to February 1996. Mr. Romine was employed by Intergraph Corporation, an interactive computer graphics systems company, where he served as Executive Vice-President, Business Operations from October 1992 to February 1995. Mr. Romine served as Intergraph's Executive Vice-President, Corporation Marketing from November 1989 to October 1992, and held various management and technical positions from October 1976 to November 1989. 5 PART II ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR FINANCIAL SUMMARY Pro forma Pro forma 1998 1998 1997 1997 1996 1995 1994 Restated Restated Restated Restated -------- -------- -------- -------- -------- --------- --------- Revenues $ 427,043,000 $427,043,000 $ 398,142,000 $ 398,142,000 $256,605,000 $ 180,698,000 $149,874,000 Net income $16,733,000*** $ 14,198,000 13,199,000** $ 4,699,000 $ 10,063,000 $ 7,651,000 $ 6,858,000 Earnings per common share * $ 1.23 $ 1.04 $ 1.09 $ 0.39 $ 1.00 $ 0.80 $ 0.72 Earnings per common share assuming dilution* $ 1.18 $ 1.01 $ 1.04 $ 0.37 $ 0.94 $ 0.77 $ 0.70 Stockholders' equity $ 169,747,000 $169,747,000 $ 150,468,000 $ 150,468,000 $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 $ 57,262,000 $ 57,262,000 $ 51,346,000 $ 51,346,000 $21,004,000 $ 8,803,000 $ - Total assets $ 227,336,000 $227,336,000 $ 213,632,000 $ 213,632,000 $165,321,000 $ 103,283,000 $82,318,000
* As adjusted for a three-for-two stock split effective October 21, 1996. ** Excludes a $8.5 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. 6 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 7 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. 8 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. 9 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. 10 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 ($42.8 million) was initially 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 $2.5 million to capitalized software development. In-process research and development of $12.0 million was expensed in the fourth quarter of 1997. The fair value of the acquired in-process technology was determined based on an analysis of the markets, cash flows and risk of achieving such cash flows. Goodwill and other intangibles of $27.6 million are being amortized using the straight-line method over an estimated useful life of 20 years. In connection with the Company's filing of a Form S-3 registration statement, the Company engaged in discussions with the Staff of the Securities and Exchange Commission (SEC) regarding the purchase price allocation related to its acquisition of TXEN. These discussions included the amount allocated to in-process research and development. The Company and its independent auditors, Ernst & Young LLP, believed the purchase price allocation recorded, and related amortization charges, were in accordance with widely recognized appraisal practices and generally accepted accounting principles. However, the SEC Staff has recently expressed views on in-process research and development as set forth in a letter dated September 15, 1998 to the American Institute of Certified Public Accountants. The Company, in consultation with its independent auditor and based on its discussion with the Staff, has determined to adjust the amount originally allocated to acquired in-process research and development and, 11 accordingly, restate its 1997 and 1998 consolidated financial statements. As a result, the 1997 write-off of acquired research and development was decreased $3.5 million from the $12.0 million amount previously recorded to $8.5 million. Intangible assets and net income were increased by a like amount because the write-off was not tax deductible. Accordingly, 1997 earnings per common share and earnings per common share assuming dilution were increased $0.29 and $0.28 to $0.39 and $0.37, respectively. For 1998, amortization of intangibles increased $225 thousand or $0.02 per common share and $0.01 per common share assuming dilution, respectively. Of the total purchase price for the acquisition of TXEN, $8.5 million was allocated to ten software programs and systems constituting in-process technology. 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 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. 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: 12
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............. 1.1 0.5 0.5 131.9 53.0 Special charges......................... 1.0 2.1 __ (51.5) n/a --------------------------------------------- Total cost and expenses............. 94.6 97.2 94.0 4.4 60.4 Operating profit............................. 5.4 2.8 6.0 105.9 (27.2) Other income (expense), net.................. 0.1 0.3 0.2 (67.3) 167.5 Income before income taxes................... 5.5 3.1 6.2 90.4 (22.1) Income taxes................................. 2.2 1.9 2.3 21.6 32.0 --------------------------------------------- Net income................................... 3.3% 1.2% 3.9% 202.1% (53.3)% =============================================
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 13 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. 14 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 $8.5 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 $11.9 million (106%) 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 $7.5 million (38.1%) 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 $2.8 million (131.9%) 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 revenues for the year ended August 31, 1998. The $8.5 million pre-tax special charges represents 2.1% of revenues for the year ended August 31, 1997. Total costs and expenses were 94.6% of revenues for the year ended August 31, 1998 as compared to 97.2% of revenues for the year ended August 31, 1997. Operating Margin. Operating margin including the special charges was 5.4% of revenues for the year ended August 31, 1998 as compared to 2.8% 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 11.3% 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. 15 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 39.6% for the year ended August 31, 1998 as compared to 61.9% 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 $8.5 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 $9.5 million (202%) for the year ended August 31, 1998, as compared to the year ended August 31, 1997. Net income excluding the special charges increased $3.5 million (26.8%) 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 $1.01 for the year ended August 31, 1998 as compared to $0.37 for the year ended August 31, 1997. Earnings per common share assuming dilution excluding the special charges were $1.18 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 $9.5 million (202%) for the year ended August 31, 1998 as compared to the year ended August 31, 1997. Net income excluding special charges increased $3.5 million (26.8%) 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. 16 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 $8.5 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 $8.5 million write-off of purchased in-process research and development associated with the acquisition of TXEN, operating profit decreased $4.2 million (27.2%) in fiscal year 1997. Excluding the $8.5 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 97.2% 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 2.1% of revenues. 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 61.9% in fiscal year 1997 and 36.5% in fiscal year 1996. The $8.5 million write-off of purchased in-process research and development in the fourth quarter of fiscal year 1997 is not deductible for tax purposes. 17 Net Income. Including the $8.5 million write-off of purchased in-process research and development, net income decreased $5.4 million (53.3%) for fiscal year 1997 as compared to fiscal year 1996. The decrease is the result of the impact of the $8.5 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 $0.37 as compared to $0.94 for fiscal year 1996, a decrease of 60.6%. Excluding the $8.5 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 $8.5 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 ($0.2 million) and changes in operating assets and liabilities, net of the effects of acquisitions ($16.1 million) offset by increased net income ($9.5 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. 18 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 adjusted as a result of discussions between the Company, its independent auditors, and the SEC Staff. The $42.8 million of purchase price in excess of the fair market value of net assets is allocated to the following intangibles: $8.5 million to in-process research and development, $17.4 million to goodwill, $14.1 million to other intangibles and $2.8 million to capitalized software development. The $8.5 million of in-process research and development was expensed in the fourth quarter of 1997. Goodwill and other intangibles of $30.7 million are being amortized using the straight-line method over an estimated useful life of twenty years. Other intangibles of $0.8 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 $5.2 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. 19 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: 20 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: 21 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 22 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. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS August 31, August 31, August 31, 1998 1997 1996 Restated Restated ---------------------------------------------------- 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 $6,025, $2,946, and $1,246) 57,262 51,346 21,004 (Notes 1, 4, and 11)............................... Software development costs (net of accumulated amortization of $897, $314, and $113) (Notes 1 and 4) 3,928 4,555 1,138 Investment in affiliates (Note 12)....................... 9,607 8,363 4,099 Other assets.............................................. 1,491 828 597 ---------------------------------------------------- Total assets.............................................. $ 227,336 $ 213,632 $ 165,321 ====================================================
The accompanying notes are an integral part of these financial statements. 24 CONSOLIDATED BALANCE SHEETS (CONTINUED)
August 31, August 31, August 31, 1998 1997 1996 Restated Restated ----------------------------------------------------- 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.................................... 75,264 61,545 57,090 Less cost of treasury stock - 168,500 shares......... (1,288) (1,288) (1,288) ----------------------------------------------------- Total stockholders' equity....................... 169,747 150,468 115,052 ----------------------------------------------------- Total liabilities and stockholders' equity................ $ 227,336 $ 213,632 $ 165,321 =====================================================
The accompanying notes are an integral part of these financial statements. 25 CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended August 31, 1998 1997 1996 Restated Restated ---------------------------------------------------- (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........................ 4,932 2,127 1,390 Special charges (Notes 4 and 11)................... 4,126 8,500 __ ---------------------------------------------------- Total costs and expenses....................... 403,907 386,907 241,165 ---------------------------------------------------- Operating profit........................................ 23,136 11,235 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.............................. 23,499 12,345 15,855 Income taxes (Note 5).................................. 9,301 7,646 5,792 ---------------------------------------------------- Net income.............................................. $ 14,198 $ 4,699 $ 10,063 ==================================================== Earnings per common share (Note 7)..................... $ 1.04 $ .39 $ 1.00 ==================================================== Earnings per common share assuming dilution (Note 7)................................ $ 1.01 $ .37 $ .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. 26 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 (Restated)........... __ __ __ 4,699 __ 4,699 ---------------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1997........ 13,553,346 135 90,076 61,545 (1,288) 150,468 Exercise of stock options....... 332,312 4 3,351 __ __ 3,355 Employee stock purchases........ 111,797 1 2,204 __ __ 2,205 Net income (Restated)........... __ __ __ 14,198 __ 14,198 Adjustments for Welkin Associates, Ltd. pooling of interests (Note 11).................... __ __ __ (479) __ (479) ---------------------------------------------------------------------------------------------- BALANCE, AUGUST 31, 1998........ 13,997,455 $140 $95,631 $75,264 $(1,288) $169,747 ==============================================================================================
The accompanying notes are an integral part of these financial statements. 27 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended August 31, 1998 1997 1996 Restated Restated -------- -------- ------ (amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................. $ 14,198 $ 4,699 $ 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........................................................ 4,962 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 8,500 __ 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................................................ (4,144) 12,180 (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 28 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 __
29 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. 30 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. 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 $583,000, $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. 31 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: 32
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 evaluated the operations of its Workers' Compensation Services unit in accordance with Statement of Financial Accounting Standards No. 121, Accounting for Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of. The historical operating results included operating losses and cash flow losses during 1998 and 1997. As a result of the historical performance and projected results expected by the management of this unit, it has been determined that the operating margins would not be sufficient to recover the goodwill and capitalized software development cost recorded on its balance sheet. As a result of expected future operating and cash flow losses and the expected future revenues associated with these assets, the fair value of goodwill and capitalized software development cost has been reduced and these long-lived assets were written down to a book value of zero during the fourth quarter resulting in a pretax charge of $1.9 million which has been 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: 33 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: 34 1998 1997 1996 ---- ---- ---- Statutory federal income tax rate.................. 35.0% 35.0% 34.0% State income taxes, net of federal benefit........... 3.0 4.8 2.9 Non-deductible expenses from acquisitions.......... 2.6 24.1 __ Equity earnings in affiliates................. (0.8) (1.9) __ Other....................... (0.2) (0.1) (0.4) ------------------------------------------ 39.6% 61.9% 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. 35 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 $ 14,198,000 $ 4,699,000 $ 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.......................... $ 1.04 $ 0.39 $ 1.00 ================================================= Earnings per common share assuming dilution...................................... $ 1.01 $ 0.37 $ 0.94 =================================================
36 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. 37 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
38
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: 39
1998 1997 1996 ---- ---- ---- (in thousands except share data) NET INCOME: As reported......................................................... $ 14,198 $ 4,699 $ 10,063 Pro forma........................................................... 11,954 3,340 9,525 EARNINGS PER COMMON SHARE ASSUMING DILUTION: As reported......................................................... $ 1.01 $ 0.37 $ 1.00 Pro forma........................................................... 0.85 0.26 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 (as restated)............................... $ 3,974 $ 9,392 Welkin.......................................................... 725 671 ----------------------------------- Combined........................................................ $ 4,699 $ 10,063
40 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. 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 (42.8 million) was initially 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 $2.5 million to capitalized software development. In-process research and development of $12.0 million was expensed in the fourth quarter of 1997. The fair value of the acquired in-process technology was determined based on an analysis of the markets, cash flows and risk of achieving such cash flows. Goodwill and other intangibles of $27.6 million are being amortized using the straight-line method over an estimated useful life of 20 years. In connection with the Company's filing of a Form S-3 registration statement, the Company engaged in discussions with the Staff of the Securities and Exchange Commission (SEC) regarding the purchase price allocation related to its acquisition of TXEN. These discussions included the amount allocated to in-process research and development. The Company and its independent auditors, Ernst & Young LLP, believed the purchase price allocation recorded and related amortization charges, were in accordance with widely recognized appraisal practices and generally accepted accounting principles. However, the SEC Staff has recently expressed views on in-process research and development as set forth in a letter dated September 15, 1998 to the American Institute of Certified Public Accountants. The Company, in consultation with its independent auditor and based on its discussion with the Staff, has determined to adjust the amount originally allocated to acquired in-process research and development and, 41 accordingly, restate its 1997 and 1998 consolidated financial statements. As a result, the 1997 write-off of acquired research and development was decreased $3.5 million from the $12.0 million amount previously recorded to $8.5 million. Intangible assets and net income were increased by a like amount because the write-off was not tax deductible. Accordingly, 1997 earnings per common share and earnings per common share assuming dilution were increased $0.29 and $0.28 to $0.39 and $0.37, respectively. For 1998, amortization of intangibles increased $225 thousand or $0.02 per common share and $0.01 per common share assuming dilution, respectively. Of the total purchase price for the acquisition of TXEN, $8.5 million was allocated to ten software programs and systems constituting in-process technology. 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 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. 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.................................... 16,116 4,883 Earnings per share assuming dilution.......... $ 1.14 $ 0.35 42 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 $ 5,626 $ 3,448 $ 0.25 Second Quarter.................. 92,509 5,907 3,763 0.27 Third Quarter................... 118,478 5,533 3,371 0.24 Fourth Quarter.................. 127,516 6,070 3,616 0.25 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 (3,145) (5,071) (0.40)
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. 43 Fourth quarter for the year ended August 31, 1997 and all four quarters for the year ended August 31, 1998 have been restated to reflect the adjustment to the purchase price allocation of TXEN as described in Note 11. 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. As more fully discussed in Note 11, the Company has revised the amount allocated to acquired in-process research and development in connection with its 1997 acquisition of TXEN, Inc. and has restated its 1997 consolidated financial statements, accordingly. ERNST & YOUNG LLP BIRMINGHAM, ALABAMA October 7, 1998, except for the restatement related to acquired in-process technology referred to in Note 11, as to which the date is January 7, 1999. 44 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 page 24 through 44 of this Form 10-K/A 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. 45 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.* 46 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 Amendment 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 V Consent of Ernst & Young LLP, Independent Auditors. 24 A Power of Attorney. 27 V Financial Data Schedule. 99 A Consent of Charles A. Leader.
- ---------------------- A Previously filed. 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. 47 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). 48 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. V Filed herewith. * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. (b) Reports on Form 8-K. 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. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to Form 10-K Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. NICHOLS RESEARCH CORPORATION January 13, 1999 By: Allen E. Dillard ----------------- --------------- Corporate Vice President, Chief Financial Officer, and Corporate Treasurer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment No. 1 to Form 10-K Annual 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 * Chairman of the Board (Principal January 13, 1999 --------------- Executive Officer) Chris H. Horgen * Chief Exective Officer and Director January 13, 1999 --------------- Michael J. Mruz * Corporate Vice President, Chief Administrative January 13, 1999 --------------- Officer, Secretary and Director Patsy L. Hattox * Vice Chairman and Senior Vice President January 13, 1999 -------------- Roy J. Nichols * Director January 13, 1999 ----------------- Roger P. Heinisch 50 * Director January 13, 1999 ----------------- John R. Wynn * Director January 13, 1999 --------------- William E. Odom * Director January 13, 1999 ---------------------- James R. Thompson, Jr. * Director January 13, 1999 ------------- Phil E. Depoy * ------------------- Chairman of Nichols TXEN Corporation and January 13, 1999 Thomas L. Patterson Director * Director January 13, 1999 --------------------- Daniel W. McGlaughlin * Director January 13, 1999 --------------------- David Friend Allen E. Dillard Corporate Vice President, Chief Financial Officer, January 13, 1999 ---------------- and Corporate Treasurer (Principal Financial Allen E. Dillard and Accounting Officer)
* By: Allen E. Dillard ---------------- Allen E. Dillard Attorney-in-Fact 51 EX-23 2 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/A Amendment No. 1)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. /s/ Ernst & Young LLP ----------------- Ernst & Young LLP Birmingham, Alabama January 13, 1999 EX-27 3
5 1,000 YEAR AUG-31-1998 AUG-31-1998 11,275 0 113,926 534 0 131,094 47,446 25,011 227,336 53,110 2,948 0 0 140 169,607 227,336 427,043 427,043 355,750 355,750 4,126 0 467 23,499 9,301 14,198 0 0 0 14,198 1.04 1.01
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