-----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, J3Q2icpIEABE0D40IMjuIqLByF2tWLrtkuluc2pfipK93M1Kc92Q5QvfKLIbs7Vs 2ubpoHQRKhXdHb9gcnEhoQ== 0000806388-99-000012.txt : 19990115 0000806388-99-000012.hdr.sgml : 19990115 ACCESSION NUMBER: 0000806388-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NICHOLS RESEARCH CORP /AL/ CENTRAL INDEX KEY: 0000806388 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 630713665 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15295 FILM NUMBER: 99506203 BUSINESS ADDRESS: STREET 1: 4090 SOUTH MEMORIAL PARKWAY STREET 2: P.O. 400002 CITY: HUNTSVILLE STATE: AL ZIP: 35815-1502 BUSINESS PHONE: 256-883-1140 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 --------------------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended November 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _____________ To _____________ --------------------- Commission File Number 0-15295 NICHOLS RESEARCH CORPORATION (Exact name of registrant as specified in its charter) --------------------- DELAWARE 63-0713665 -------- ---------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification no.) 4090 Memorial Parkway, South Huntsville, Alabama 35802-1326 (256) 883-1140 (Address, including zip code, and telephone number of principal offices) --------------------- 4040 Memorial Parkway, South Huntsville, Alabama 35802-1326 (Former name, address and fiscal year if changed since last report) --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. COMMON STOCK, $.01 PAR VALUE 14,074,693 SHARES OUTSTANDING ON November 30, 1998 --------------------- ================================================================================ FORM 10-Q NICHOLS RESEARCH CORPORATION QUARTERLY REPORT FOR THE PERIOD ENDED NOVEMBER 30, 1998
INDEX Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income for the Three Months Ended November 30, 1998 and November 30, 1997 (Unaudited)............. 1 Consolidated Balance Sheets as of November 30, 1998 and August 31, 1998 (Unaudited)........................................... 2-3 Consolidated Statements of Changes in Stockholders' Equity for the Three Months Ended November 30, 1998 and November 30, 1997 (Unaudited)......................................... 4 Consolidated Statements of Cash Flows for the Three Months Ended November 30, 1998 and November 30, 1997 (Unaudited)........................................................... 5 Notes to Financial Statements (Unaudited)............................. 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................ 9-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 19 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...................................... 20 Signatures............................................................ 21
FORM 10-Q NICHOLS RESEARCH CORPORATION PART I - FINANCIAL INFORMATION Item 1 - Financial Statements CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended November 30, November 30, 1998 1997 Restated --------------------------------------- (amounts in thousands except share data) Revenues............................................. $ 101,349 $ 88,540 Costs and expenses: Direct and allocable costs....................... 84,678 73,944 General and administrative expenses.............. 10,033 7,875 Amortization of intangibles...................... 1,021 1,095 --------------------------------------- Total costs and expenses.................. 95,732 82,914 --------------------------------------- Operating profit..................................... 5,617 5,626 Other income (expense): Interest expense................................. (70) (90) Other income, principally interest............... 146 285 Equity in earnings of unconsolidated affiliates.. 128 130 Minority interest in consolidated subsidiaries... (66) (331) --------------------------------------- Income before income taxes........................... 5,755 5,620 Income taxes ....................................... 2,266 2,172 --------------------------------------- Net income........................................... $ 3,489 $ 3,448 ======================================= Earnings per common share............................ $ .25 $ .26 ======================================= Earnings per common share assuming dilution.......... $ .25 $ .25 ======================================= Weighted average common shares....................... 13,849,824 13,463,386 ======================================= Weighted average number of common and common equivalent shares............................................... 14,142,861 14,022,045 =======================================
NOTE: The Company has not declared or paid dividends in any of the periods presented. All prior periods have been restated to reflect the acquisition of Welkin Associates, Ltd., which was accounted for as a pooling of interests. See accompanying notes. 1 FORM 10-Q NICHOLS RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
November 30, August 31, 1998 1998 Restated ----------------------------------- (amounts in thousands) ASSETS Current assets: Cash and temporary cash investments.................. $ 11,150 $ 11,275 Accounts receivable.................................. 121,538 113,392 Deferred income taxes................................ 2,513 2,488 Other................................................ 2,473 3,939 ----------------------------------- Total current assets............................. 137,674 131,094 Long-term investments..................................... 1,513 1,519 Property and equipment: Computers and related equipment...................... 31,443 29,465 Furniture, equipment and improvements................ 12,880 12,210 Equipment-contracts.................................. 5,934 5,771 ----------------------------------- 50,257 47,446 Less accumulated depreciation............................. 26,737 25,011 ----------------------------------- Net property and equipment........................... 23,520 22,435 Goodwill and other intangibles(net of accumulated amortization).......................................... 56,209 57,262 Software development costs (net of accumulated amortization).......................................... 4,024 3,928 Investment in affiliates.................................. 9,819 9,607 Other assets.............................................. 1,457 1,491 ----------------------------------- Total assets.............................................. $ 234,216 $ 227,336 ===================================
NOTE: The Company has not declared or paid dividends in any of the periods presented. All prior periods have been restated to reflect the acquisition of Welkin Associates, Ltd., which was accounted for as a pooling of interests. 2 FORM 10-Q NICHOLS RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) CONTINUED
November 30, August 31, 1998 1998 Restated ------------------------------------ (amounts in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable....................................... $ 20,858 $ 24,278 Accrued compensation and benefits...................... 23,881 18,317 Income taxes payable................................... 3,546 1,681 Current maturities of long-term debt................... 997 997 Borrowings on line of credit........................... 5,000 5,000 Deferred revenue....................................... 797 1,797 Other.................................................. 238 1,040 ------------------------------------ Total current liabilities.......................... 55,317 53,110 Deferred income taxes....................................... 572 354 Long-term debt: Industrial development bonds........................... 1,335 1,335 Long-term notes........................................ 1,484 1,613 ------------------------------------ Total long-term debt............................... 2,819 2,948 Minority interest in consolidated subsidiaries.............. 1,190 1,177 Stockholders' equity: Common stock, par value $.01 per share Authorized - 30,000,000 shares Issued -14,074,693 and 13,997,455 shares........... 141 140 Additional paid-in capital............................. 96,712 95,631 Retained earnings...................................... 78,753 75,264 Less cost of treasury stock - 168,500 shares........... (1,288) (1,288) ------------------------------------ Total stockholders' equity......................... 174,318 169,747 ------------------------------------ Total liabilities and stockholders' equity.................. $ 234,216 $ 227,336 ====================================
NOTE: The Company has not declared or paid dividends in any of the periods presented. All prior periods have been restated to reflect the acquisition of Welkin Associates, Ltd., which was accounted for as a pooling of interests. 3 FORM 10-Q NICHOLS RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Additional Total Common Stock Paid-In Retained Treasury Stockholders' Shares Amount Capital Earnings Stock Equity --------------------------------------------------------------------------------------------- (amounts in thousands except share data) For the Three Months Ended November 30, 1998 -------------------------------------------- Balance, August 31, 1998 (Restated) 13,997,455 $ 140 $ 95,631 $ 75,264 $ (1,288) $ 169,747 Exercise of stock options 43,988 1 477 -- -- 478 Employee stock purchases 33,250 -- 604 -- -- 604 Net Income -- -- -- 3,489 -- 3,489 --------------------------------------------------------------------------------------------- Balance, November 30,1998 14,074,693 $ 141 $ 96,712 $ 78,753 $ (1,288) $ 174,318 ============================================================================================= For the Three Months Ended November 30, 1997 - Restated ------------------------------------------------------- Balance, August 31, 1997 13,533,346 $ 135 $ 90,076 $ 61,545 $ (1,288) $ 150,468 Exercise of stock options 127,398 1 1,321 -- -- 1,322 Employee stock purchases 24,273 1 484 -- -- 485 Adjustment for Welkin -- -- -- (479) -- (479) Net Income -- -- -- 3,448 -- 3,448 --------------------------------------------------------------------------------------------- Balance, November 30,1997 13,685,017 $ 137 $ 91,881 $ 64,514 $ (1,288) $ 155,244 =============================================================================================
4 FORM 10-Q NICHOLS RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three Months Ended November 30, November 30, 1998 1997 Restated -------------------------------------- (amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................... $ 3,489 $ 3,448 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for doubtful accounts.......................... 104 -- Depreciation ............................................ 1,858 1,303 Amortization............................................. 1,021 1,095 Equity in earnings of unconsolidated affiliates.......... (128) (130) Minority interest........................................ 66 331 Deferred Taxes........................................... 193 75 Changes in assets and liabilities net of effects of acquisitions: Accounts receivable...................................... (8,250) 820 Other assets............................................. 1,663 (716) Accounts payable......................................... (3,420) (3,846) Accrued compensation and benefits........................ 5,564 1,556 Income taxes payable..................................... 1,865 1,800 Other current liabilities................................ (1,802) (1,151) -------------------------------------- Total adjustments........................................ (1,266) 1,139 -------------------------------------- Net cash provided/(used) by operating activities........................................... 2,223 4,587 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment............................ (2,943) (2,854) Purchase of long-term investments............................. -- (100) Purchase of capitalized software.............................. (280) (62) Payment for investment in affiliates.......................... (84) (500) Proceeds from maturity of long-term investments............... 6 550 -------------------------------------- Net cash provided/(used) by investing activities......... (3,301) (2,966) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock........................ 1,082 1,807 Payments of long-term debt.................................... (129) (135) Proceeds from line of credit................................... 5,000 -- Payments on line of credit borrowings......................... (5,000) (10,000) -------------------------------------- Net cash provided/(used) by financing activities......... 953 (8,328) -------------------------------------- Net increase/(decrease) in cash and temporary cash investments.............................................. (125) (6,707)
FORM 10-Q NICHOLS RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)CONTINUED
For the Three Months Ended November 30, November 30, 1998 1997 Restated -------------------------------------- (amounts in thousands) Cash and temporary cash investments at beginning of period...................................... 11,275 23,964 -------------------------------------- Cash and temporary cash investments at end of period.......... $ 11,150 $ 17,257 ======================================
5 FORM 10-Q NICHOLS RESEARCH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) November 30, 1998 Note 1 - Basis of Presentation ---------------------- The condensed consolidated financial statements (and all other information in this report) have not been examined by independent auditors, but in the opinion of the Company, all adjustments, consisting of the normal recurring accruals necessary for a fair presentation of the results for the period, have been made. The condensed consolidated financial statements include the accounts of Nichols Research Corporation and its majority-owned subsidiaries and joint ventures. All significant intercompany balances and transactions have been eliminated in consolidation. The Company's earnings in unconsolidated affiliates and joint ventures are accounted for using the equity method. Note 2 - Accounting Pronouncements ------------------------- In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings Per Share. The overall objective of Statement No. 128 is to simplify the calculation of earnings per share (EPS) and achieve comparability with recently issued international accounting standards. The Company first reported on the new EPS basis in the second quarter ended February 28, 1998. All prior period EPS amounts (including information regarding EPS in interim financial statements, earnings summaries, and selected financial data) have been restated to conform to the provisions of Statement No. 128. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income (SFAS 130). Statement No. 130 establishes new rules for the reporting and display of comprehensive income and its components. Adoption of Statement No. 130 by the Company on September 1, 1998 had no impact on the Company's consolidated results of operations or stockholders' equity. In June 1997, the FASB issued Statement No. 131, Disclosures About Segments of an Enterprise and Related Information (SFAS 131). Statement No. 131 changes the method of determining segments from that currently required, and requires the reporting of certain information about such segments. The Company has not finalized how its segments will be reported or whether and to what extent segment information will differ from that currently presented. Note 3 - Reclassification ---------------- Certain prior period amounts have been reclassified to conform with the current period's presentation and the final purchase price allocation for TXEN, Inc. 6 FORM 10-Q NICHOLS RESEARCH CORPORATION Note 4 - Investment in affiliates ------------------------ As of November 30, 1998 the Company holds a 50% interest in NCCIM, LLC. at an aggregate cost of $1,345,000. Undistributed equity earnings of $652,000 are included in the November 30, 1998 Retained Earnings balance reported in the Consolidated Balance Sheet. Note 5 - Line of Credit -------------- The Company has a bank line of credit which provides for unsecured borrowings up to $100,000,000. The credit agreement provides for interest at London Interbank Offered Rate (LIBOR) plus a margin ranging from 0.325% to 0.450% and a facility fee, payable quarterly, of approximately 0.125% on the unused portion of the line of credit. The short-term commitment agreement ($50,000,000) expired in November, 1998 and was renewed for one year. The 100,000,000 line of credit continues to be renewable annually and the long-term commitment agreement ($50,000,000) is renewable in November, 2000. At November 30, 1998, there was $5,000,000 outstanding on this line of credit at an effective interest rate of 5.62 percent. Note 6 - Earnings Per Share ------------------ The following table sets forth the computation of earnings per common share and earnings per common share assuming dilution: FORM 10-Q NICHOLS RESEARCH CORPORATION
For the Three Months Ended November 30, November 30, 1998 1997 Restated ------------------------------------ Numerator: Net income and income available to common stockholders and income available to common stockholders after assumed conversions.................... $ 3,489,000 $ 3,448,000 ==================================== Denominator: Denominator for earnings per common share - weighted average common shares....... 13,849,824 13,463,386 Effect of dilutive securities: Employee stock options....................... 293,037 558,659 Denominator for earnings per common share assuming dilution - adjusted weighted average common shares and assumed coversions....................... 14,142,861 14,022,045 ==================================== Earnings per common share............................. $ .25 $ .26 ==================================== Earnings per common share assuming dilution......................................... $ .25 $ .25 ====================================
7 FORM 10-Q NICHOLS RESEARCH CORPORATION Note 7 - Restatement ----------- In connection with the Company's filing of a Form S-3 registration statement unrelated to TXEN, 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 discussions with the Staff, has adjusted the amount originally allocated to acquired in-process research and development and, accordingly, has restated its 1997 and 1998 consolidated financial statements. As a result, the 1997 write-off of acquired research and development was decreased $3.5 million from the $12.0 million amount previously recorded to $8.5 million. 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. Accordingly, 1998 earnings per share and earnings per common share assuming dilution were reduced by $0.02 and $0.01 to $1.04 and $1.01, respectively. For the first quarter of 1999, amoritzation of intangibles increased $56 thousand but had no effect on earnings per common share assuming dilution. 8 FORM 10-Q NICHOLS RESEARCH CORPORATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. THESE RISKS AND UNCERTAINTIES ARE DISCUSSED IN MORE DETAIL IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 1998, AND IN THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECTION OF THIS QUARTERLY REPORT. THESE FORWARD-LOOKING STATEMENTS CAN BE GENERALLY IDENTIFIED AS SUCH BECAUSE THE CONTENT OF THE STATEMENTS WILL USUALLY CONTAIN SUCH WORDS AS THE COMPANY OR MANAGEMENT "BELIEVES," "ANTICIPATES," "EXPECTS," "PLANS," OR WORDS OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES, GOALS OR STRATEGIES ARE FORWARD-LOOKING STATEMENTS. Overview and Business Environment - --------------------------------- The Company is a leading provider of technical and information technology (IT) services, including information processing, systems development and systems integration. The Company provides these services to a wide range of clients, including the Department of Defense (DOD), other federal agencies, state and local governments, healthcare and insurance organizations, and commercial enterprises. The Company's business strategy consists of three key elements: (i) maintain the Company's leadership in technology; (ii) apply the Company's technology to create solutions for new clients; and (iii) make strategic acquisitions and investments to expand the business of the Company and gain industry knowledge. The Company is organized into four strategic business units, reflecting the particular market focus of each line of business. The Defense and Intelligence unit, formerly Nichols Federal, provides technical services primarily to U.S. Government defense agencies. The Government Information Technology unit, formerly Nichols InfoFed, provides information and technology solutions and services to a variety of governmental agencies. The Commercial Information Technology unit, formerly Nichols InfoTec, provides information and technology services to various commercial clients, other than healthcare clients. The Healthcare Information Technology unit, formerly Nichols SELECT, provides information and administrative services to clients in the healthcare and insurance industries. For the quarter ended November 30, 1998, the percentage of total revenues attributable to the four business units was approximately 60% for Defense and Intelligence, 18% for Government IT, 10% for Commercial IT, and 12% for Healthcare IT. Risk Factors - ------------ The Company's business and financial performance are subject to risks and uncertainties, including those discussed below. FORM 10-Q NICHOLS RESEARCH CORPORATION ACQUISITION STRATEGY Expansion through acquisitions is an important component of the Company's overall business strategy. The Company has successfully completed 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. 9 FORM 10-Q NICHOLS RESEARCH CORPORATION PERFORMANCE OF LARGE SYSTEMS INTEGRATION CONTRACTS As part of the Company's business strategy to enter new markets, the Company continues to pursue large systems integration contracts in both the government and commercial markets, although competition for such contracts is intense and many of the Company's competitors have greater resources than the Company. While such contracts are working capital intensive, requiring large equipment and software purchases to be funded by the Company before payment from the customer, the Company believes such contracts offer attractive revenue growth and margin expansion opportunities for the Company's range of technical expertise and capabilities. VARIABILITY OF QUARTERLY EARNINGS OR OPERATING RESULTS The Company's revenues and earnings may fluctuate from quarter to quarter based on such factors as the number, size, and scope of projects in which the Company is engaged, the contractual terms and degree of completion of such projects, expenditures required by the Company in connection with such projects, any delays incurred in connection with such projects, employee utilization rates, the adequacy of provisions for losses, the accuracy of estimates of resources required to complete ongoing projects, and general economic conditions. Under certain contracts, the Company is required to purchase, integrate and deliver to the customer large amounts of computer processing systems and other equipment. Revenues are accrued as costs to deliver these systems are incurred, and as a result, quarterly revenues will be impacted by fluctuations related to equipment purchases which occur on a periodic basis depending on contract terms and modifications. UNCERTAINTIES ASSOCIATED WITH GOVERNMENT CONTRACTS The Company performs its services under U.S. Government contracts that usually require performance over a period of one to five years. Long-term contracts may be conditioned upon continued availability of Congressional appropriations. Variances between anticipated budgets and Congressional 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. 10 FORM 10-Q NICHOLS RESEARCH CORPORATION 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. 11 FORM 10-Q NICHOLS RESEARCH CORPORATION Results of Operations - --------------------- The following tables set forth, for the periods indicated, the percentages which certain items in the consolidated statements of income bear to consolidated revenues, and the percentage change of such items for the periods indicated:
Percentage of Revenues for the Three Months Ended November 30, November 30, Percentage 1998 1997 Change Restated -------------------------------------------------- Revenues 100.0% 100.0% 14.5% Costs and expenses: Direct and allocable costs............. 83.6 83.5 14.5 General and administrative expenses.... 9.9 8.9 27.4 Amortization of intangibles............ 1.0 1.2 (6.8) ----------------------------------- Total costs and expenses........... 94.5 93.6 15.5 ----------------------------------- Operating profit............................ 5.5 6.4 (0.2) Other income (expense): Interest expense............................ (0.1) (0.1) 22.2 Other income, principally interest.......... 0.2 0.3 (48.8) Equity in earnings of unconsolidated affiliates............................... 0.2 0.1 (1.5) Minority interest in consolidated subsidiaries............................. (0.1) (0.4) (80.1) ----------------------------------- Income before income taxes.................. 5.7 6.3 2.4 Income taxes................................ 2.2 2.4 4.3 ----------------------------------- Net income.................................. 3.5% 3.9% 1.2% ===================================
The table below presents contract award and backlog data for the periods indicated: Quarter Ended November 30, 1998 1997 ---------------------------------- (amounts in thousands) Contract award amount..................... $ 32,684 $ 42,428 Backlog (with options).................... $ 1,197,816 $ 1,227,338 Backlog (without options)................. $ 330,568 $ 380,574 12 FORM 10-Q NICHOLS RESEARCH CORPORATION COMPARISON OF OPERATING RESULTS FOR FIRST FISCAL QUARTER 1999 WITH FIRST FISCAL QUARTER 1998 REVENUES: Revenues increased $12.8 million (14.5%) for the fiscal quarter ended November 30, 1998 as compared to the fiscal quarter ended November 30, 1997. The revenues of the Defense and Intelligence unit, representing approximately 60% of the Company's consolidated revenues for the quarter, increased $ 7.7 million (14.6%), primarily the result of continued growth in existing contracts. The revenues of the Government IT unit, representing approximately 18% of the Company's consolidated revenues for the quarter, was $18.0 million as compared to $17.9 million in the prior year. The revenues of the Commercial IT unit, representing approximately 10% of the Company's consolidated revenues for the quarter, increased $ 2.3 million (28.4%), primarily the result of its expanded business base. The revenues of the Healthcare IT, representing approximately 12% of the Company's consolidated revenus for the quarter, increased $ 2.7 million (28.5%), primarily the result of continued growth in number of clients. OPERATING PROFIT: Operating profit was $5.6 million for the fiscal quarter ended November 30, 1998 as compared $5.6 million for the fiscal quarter ended November 30, 1997. Direct and allocable costs increased $10.7 million (14.5%) for the fiscal quarter ended November 30, 1998 as compared to the fiscal quarter ended November 30, 1997, as a result of the increase in revenues. General and administrative expenses increased $2.2 million (27.4%) for the fiscal quarter ended November 30, 1998 as compared to the fiscal quarter ended November 30, 1997, primarily the result of acquisition of Mnemonic System, Incorporated completed in April 1998. Total costs and expenses were 94.5% of revenues for the fiscal quarter ended November 30, 1998 as compared 93.6% for the fiscal quarter ended November 30, 1997. OPERATING MARGINS: The operating margin was 5.5% for the fiscal quarter ended November 30, 1998 as compared to 6.4% the fiscal quarter ended November 30, 1997. The Defense and Intelligence unit realized a 6.4% operating margin for the fiscal quarter ended November 30, 1998 as compared to 4.7% the fiscal quarter ended November 30, 1997. These improved margins are primarily the result of increased margins on time-and-material contracts. The Government IT unit realized a 5.7% operating margin for the fiscal quarter ended November 30, 1998 as compared to 7.8% the fiscal quarter ended November 30, 1997. This decrease in margins is primarily the result of a decrease in high margin contracts. The Commercial IT unit realized a -6.6% operating margin for the fiscal quarter ended November 30, 1998 as compared to 9.2% the fiscal quarter ended November 30, 1997. The decrease in margins is primarily the result of the expenses associated with overstaffing. Healthcare IT realized an 11.8% operating margin for the fiscal quarter ended November 30, 1998 as compared to 11.6% the fiscal quarter ended November 30, 1997. 13 FORM 10-Q NICHOLS RESEARCH CORPORATION OTHER INCOME (EXPENSE). Other income (expense) increased $0.1 million for the fiscal quarter ended November 30, 1998 as compared to the fiscal quarter ended November 30, 1997. Other income includes equity in earnings of unconsolidated affiliates and interest income; other expense includes interest expense and minority interest in consolidated subsidiaries. Substantially all available cash is invested in interest-bearing accounts or fixed income instruments. Interest expense includes the cost of long-term and short-term borrowings of the Company and the commitment fee on its unused line of credit. Equity in earnings of unconsolidated affiliates for the fiscal quarters ended November 30, 1998 and 1997 primarily represents the Company's share of the earnings of NCCIM, LLC a joint venture, 50% of which is owned by the Company. Minority interest in consolidated subsidiaries primarily represents the minority partner's share of earnings of Nichols ENTEC, LLC a joint venture, 60% of which is owned by the Company. The decrease in minority interest of $0.3 million for the fiscal quarter ended November 30, 1998 as compared to the fiscal quarter ended November 30, 1997 is primarily the result of expenses associated with overstaffing. INCOME TAXES. Income taxes as a percentage of income before taxes was 39.4% in the fiscal quarter ended November 30, 1998 as compared to 38.7% in the fiscal quarter ended November 30, 1997. NET INCOME. Net income increased $0.04 million (1.2%) for the fiscal quarter ended November 30, 1998 as compared to the fiscal quarter ended November 30, 1997. The increase is a result of the items discussed. EARNINGS PER COMMON SHARE ASSUMING DILUTION. Earnings per common share assuming dilution for the fiscal quarter ended November 30, 1998 were $.25 as compared to $.25 for fiscal quarter ended November 30, 1997. Net income increased 1.2% ($0.04 million), while weighted average number of common and common equivalent shares outstanding increased 0.9% (120,816 shares) for fiscal quarter ended November 30, 1998 as compared to fiscal quarter ended November 30, 1997. 14 FORM 10-Q NICHOLS RESEARCH CORPORATION 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 $82.4 million and $73.2 million at November 30, 1998 and 1997, respectively. Operating activities provided cash of $2.2 million for the quarter ended November 30, 1998 and cash of $4.6 million for the quarter ended November 30, 1997. Investing activities used cash of $3.3 million for the quarter ended November 30, 1998 and $3.0 million for the quarter ended November 30, 1997. Financing activities provided cash of $1.0 million for the quarter ended November 30, 1998 and used cash of $8.3 million for the quarter ended November 30, 1997. Cash provided by operating activities decreased $2.4 million for the quarter ended November 30, 1998 as compared to the quarter ended November 30, 1997. The primary difference is changes in operating assets and liabilities. Cash used for investing activities was $3.3 million for the quarter ended November 30, 1998. Purchases of property and equipment were $3.0 million and $2.9 million for the fiscal quarters ended November 30, 1998 and 1997, respectively. Cash provided from financing activities was $1.0 million for the quarter ended November 30, 1998. The Company realized proceeds from the sale of common stock of $1.1 million and $1.8 million for the the fiscal quarters ended November 30, 1998 and 1997, respectively. The Company renegotiated its bank line of credit in November, 1998. The agreement provides for unsecured borrowings up to $100,000,000. The credit agreement provides for interest at London Interbank Offered Rate (LIBOR) plus a margin ranging from 0.325% to 0.450% and a facility fee, payable quarterly, of approximately 0.125% on the unused portion of the line of credit. The short-term commitment agreement ($50,000,000) is renewable annually and the long-term commitment agreement ($50,000,000) is renewable in November, 2000. There was $5,000,000 in outstanding borrowings on this line of credit at November 30, 1998. The Company is regularly evaluating potential acquisition candidates and expects to complete other transactions in fiscal year 1999. 15 FORM 10-Q NICHOLS RESEARCH CORPORATION 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. EFFECTS OF INFLATION Substantially all contracts awarded to the Company have been based on proposals which reflect estimated cost increases due to inflation. Historically, inflation has not had a significant impact on the Company. YEAR 2000 Overview Historically, certain computerized systems have had two digits rather than four digits to define the applicable year, which could result in recognizing a date using "00" as the year 1900 rather than the year 2000. This could cause significant software failures or miscalculations and is generally referred to as the "Year 2000" problem. The Company recognizes that the impact of the Year 2000 problem extends beyond its computer hardware and software and may affect utility and telecommunication services, as well as the systems of customers and suppliers. In response to the Year 2000 problem, the Company has developed a compliance program to evaluate and address date related problems with the Company's internal systems, services, products, and the systems and products of the Company's vendors and suppliers. The compliance program is managed by the Vice President of Corporate Information Systems and Services, and is patterned after the United States General Accounting Office (GAO) and Office of Management and Budget project management model. The Company's Year 2000 compliance program includes five major phases: Awareness Phase. The Year 2000 problem is defined and managers at the executive level are educated about potential date related problems and the potential impact to the Company and its customers from Year 2000 date handling errors. A Year 2000 program team is established and an overall strategy is developed. 16 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 updated status of each major category of mission essential systems is as follows: 17
SYSTEM CATEGORY PHASE ESTIMATED DATE FOR COMPLIANCE ------------------------------------------------------- ----------------- ------------------------------ Mission Essential Software Systems Renovation April 1999 ------------------------------------------------------- ----------------- ------------------------------ Mission Essential Computational Systems Renovation April 1999 ------------------------------------------------------- ----------------- ------------------------------ Mission Essential Network Systems Validation Completed ------------------------------------------------------- ----------------- ------------------------------ Mission Essential Facilities Systems Validation Completed ------------------------------------------------------- ----------------- ------------------------------ Mission Essential Customer Systems Renovation April 1999 ------------------------------------------------------- ----------------- ------------------------------ Mission Essential Vendor-Supplied Services Validation Unknown ------------------------------------------------------- ----------------- ------------------------------
The phases listed above represent the status of the majority of products within each category. There may be, within each "system," components at a lower or higher phase in the Year 2000 assessment. While the Mission Essential Vendor Supplied Services category is listed as having an Unknown estimated date for compliance, many of the Services within this category have had their validation phase completed. Contingency Plans Because the Company's Year 2000 conversions are expected to be completed prior to any potential disruption to the Company's business, the Company has not yet completed the development of a comprehensive Year 2000 contingency plan. However, the Company has minimized its exposure to Year 2000 failures of vendor supplied products by adding Year 2000 compliance as a standard condition to its purchase orders. These contracts also reference Federal Acquisition Regulation 39.106, which addresses Year 2000 compliance issues. The Company is currently negotiating a Risk Management Insurance Policy designed to protect the Company in the event that it is involved in litigation arising from errors and omissions relating to Year 2000 issues. If the Company determines that its business is at material risk of disruption due to the Year 2000 problem, or anticipates that its Year 2000 conversions will not be completed in a timely fashion, the Company will work to develop a detailed contingency plan. Cost for Year 2000 Compliance The Company believes that the total cost of its Year 2000 compliance activity will not be material to the Company's operation, liquidity and capital resources. The Company estimates that the total cost for its Year 2000 compliance will be $688,500 which represents 11,475 hours of analysis, 18 modification and testing, and $34,500 for new equipment purchases. To date, the Company has completed 6,850 hours of Year 2000 compliance work, and purchased new equipment valued at $27,000, for a total cost of $438,000. Year 2000 Risks Faced by the Company Although the Company believes that its Year 2000 compliance program is comprehensive, the Company may not be able to identify, successfully remedy or assess all date-handling problems in its business systems or operations or those of its customers and suppliers. As a result, the Year 2000 problem could have a materially adverse affect on the Company's business financial condition or results of operations. Item 3 - Quantitative and Qualitative Disclosures About Market Risk Not Applicable. 19 FORM 10-Q NICHOLS RESEARCH CORPORATION PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit No. Description ----------- ----------- 10.1 Employment Agreement of Charles A. Leader* 10.2 Supplemental Retirement Benefit Plan between the Registrant and Charles A. Leader* 10.3 Form of Indemnification Agreement between Registrant and Its Directors 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the fiscal quarter ended November 30, 1998. - ----------------- * Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. 20 FORM 10-Q NICHOLS RESEARCH CORPORATION SIGNATURES MANAGEMENT REPRESENTATION ------------------------- The accompanying unaudited Consolidated Balance Sheets at November 30, 1998 as well as the Consolidated Statements of Income, Consolidated Statements of Changes in Stockholders' Equity and Consolidated Statements of Cash Flows for the three months ended November 30, 1998 and 1997, have been prepared in accordance with instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included. January 14 , 1998 Allen E. Dillard ----------------- ---------------- Date Allen E. Dillard Corporate Vice President, Chief Financial Officer and Corporate Treasurer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NICHOLS RESEARCH CORPORATION January 14 , 1998 Allen E. Dillard ----------------- ---------------- Date Allen E. Dillard Corporate Vice President, Chief Financial Officer and Corporate Treasurer (Principal Financial and Accounting Officer) 21 EX-10.1 2 EXHIBIT 10.1 EMPLOYMENT AGREEMENT OF CHARLES A. LEADER EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of October 26, 1998, is entered into by and between Charles A. Leader, residing at 1125 Dogwood Drive, McLean, Virginia 22101 (the "Employee"), and Nichols Research Corporation, a Delaware Corporation, having its principal place of business at 4090 South Memorial Parkway, Huntsville, Alabama 35802 ("Company"). W I T N E S S E T H: -------------------- The Company desires to obtain the services of the Employee and the Employee is willing to render services to the Company upon the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the mutual promises set forth herein and other good and valuable consideration, the parties agree as follows: 1. DUTIES. The Employee shall be employed on a full-time basis as President and Chief Operating Officer of the Company and shall perform such other duties as a president and chief operating officer of a company would normally perform (subject to the direction of the Chief Executive Officer and Board of Directors of the Company), including, but not limited to, the duties set forth on the job description contained in Exhibit "A" attached hereto. The Employee shall perform such other employment duties as the Board of Directors or Chief Executive Officer may, from time to time, reasonably prescribe. The Employee will work from the Company's Arlington, Virginia, office with the understanding he will make frequent trips to corporate headquarters in Huntsville, Alabama. 2. EXCLUSIVE EMPLOYMENT. The Employee shall render his services exclusively to the Company during the term of his employment and shall use his best efforts, judgement and energy to improve and advance the business and interests of the Company in a manner consistent with the duties of his position. 3. NONDEFERRED COMPENSATION. (a) BASE SALARY. The Employee shall receive, as compensation for his services hereunder, an annual salary of $250,000.00 (the "Base Salary"). The Base Salary shall be paid at least bi-weekly or on a more frequent basis or schedule as determined by the Company. The Base Salary may be increased on an annual or more frequent basis if such increase is approved in the discretion of the Board of Directors. (b) DISCRETIONARY BONUSES. In addition to the Base Salary, the Employee may be awarded performance bonuses in accordance with Company policies. 4. STOCK OPTIONS. Effective upon the date of the Employee's employment, the Employee shall be awarded the following options: (a) An incentive stock option issued pursuant to the Company's 1997 Stock Option Plan for such number of shares of common stock of the Company that is equal to the quotient of $300,000 divided by the fair market value per share of the common stock of the Company on November 2, 1998 (the "Grant Date") rounded down to the nearest whole number of shares. This option shall vest in accordance with the provisions of the 1997 Stock Option Plan as follows: (i) one-third of the shares covered by the option may be exercised after two years; (ii) one-third of the shares covered by the option may be exercised after three years; and (iii) one-third of the shares covered by the option may be exercised after four years. The option expires after five years. The incentive stock option shall be subject to all of the terms and provisions of the 1997 Stock Option Plan. (b) A non-statutory stock option issued pursuant to the Company's 1997 Stock Option Plan for such number of shares of the common stock of the Company that is equal to the difference between 90,000 shares and the number of shares of common stock covered by the incentive stock option granted pursuant to subsection (a) above. These options shall vest as follows: (i) after one year, 20,000 shares; (ii) after two years, the difference between 20,000 shares and one-third of the shares subject to the incentive stock option granted under subsection (a) above; (iii) after three years, the difference between 20,000 shares and one-third of the shares subject to the incentive stock option granted under subsection (a) above; (iv) after four years, the difference between 20,000 shares and one-third of the shares subject to the incentive stock option granted under subsection (a) above; and (v) after six years, the balance of the shares covered by the non-statutory stock option. The non-statutory stock option expires after six years. The non-statutory stock option shall be subject to all of the terms and provisions of the 1997 Stock Option Plan. (c) A stock option issued pursuant to the Nichols TXEN Corporation 1998 Stock Option Plan for 10,000 shares of common stock of Nichols TXEN Corporation. This option shall vest as follows: (i) one-third after two years; (ii) one-third after three years; and (iii) one-third after four years. The option expires after five years. The Nichols TXEN Corporation option shall be subject to all of the terms and provisions of the Nichols TXEN Corporation 1998 Stock Option Plan. The Nichols TXEN Corporation option shall have an exercise price equal to the price at which the common stock of Nichols TXEN Corporation is initially offered for sale to the public and as shown on the cover of the prospectus included in the registration statement which is declared effective by the Securities and Exchange Commission. Notwithstanding the foregoing, in the event Nichols TXEN Corporation does not complete an initial public offering of its common stock within four months of the date of this Agreement, then the Company will issue to Employee a stock option for 10,000 shares pursuant to the Company's 1997 Stock Option Plan. Such option shall have the same terms as to vesting and expiration as stated above, but the exercise price for such option shall be the fair market value per share of the Company's common stock on the date Nichols TXEN Corporation determines not to complete an initial public offering of the common stock of Nichols TXEN Corporation. Such option shall be subject to all the terms and provisions of the Company's 1997 Stock Option Plan. 5. NO CONFLICTS. The Employee affirms and represents that he is under no obligation to any former employer, and that his employment by the Company will not violate any covenants or agreements entered into by the Employee. 6. TRAVEL. The Employee will undertake such travel as may be required in the performance of his duties. The reasonable travel expenses of the Employee shall be reimbursed in accordance with the Company's reimbursement policy in effect from time to time. 7. TERM OF EMPLOYMENT. The Employee's employment shall commence November 2, 1998. This Agreement shall have a term of two years unless earlier terminated as provided in Section 8 below. After the initial term of two years and if this agreement is not earlier terminated, this agreement shall be extended on a year-to-year basis. 8. TERMINATION. Notwithstanding the foregoing, the term of employment and the Employee's employment with the Company shall be terminated upon one or more of the following events: (i) the death of the Employee; (ii) the disability of the Employee (disability is defined as the inability of the Employee after reasonable accommodation by the Company to perform substantially his duties by reason of accident or sickness which continues for ninety (90) days within a consecutive twelve (12) month period); (iii) upon sixty (60) days' prior written notice given by either party to the other party which termination may be with or without cause; provided that by mutual written agreement the actual date of employment termination may occur before expiration of such sixty (60) day notice period. (iv) immediately by the Company upon a determination by the Board of Directors that the Employee (A) and has breached the terms of this Agreement, provided that five (5) days' notice has been given Employee of such event and the Employee has not cured such event within such five (5) day period; (B) has refused or failed to carry out any instruction of the Board of Directors, the Chief Executive Officer, or their respective designees, provided that five (5) days' notice has been given Employee of such event and the Employee has not cured such event within such five (5) day period; (C) has demonstrated gross negligence or repeated acts of ordinary negligence in the execution of his duties; (D) has neglected his duties, provided that five (5) days' notice has been given Employee of such event and the Employee has not cured such event within such five (5) day period; (E) has been convicted of a felony or an illegal act involving moral turpitude or fraud; or (F) has committed dishonesty, breach of fiduciary duty, or other behavior constituting grounds for termination for good cause under the laws of the State of Alabama. Upon termination of employment, the Employee shall be entitled to receive his Base Salary for the month in which employment terminates, prorated to the date of termination and, if applicable, the severance pay set forth below. Vested and unexercised stock options which are currently exercisable may be exercised by the Employee prior to termination if such options have not previously lapsed. If the Employee is terminated by the Company within five (5) years from the date hereof pursuant to Section 8(iii), the Company shall pay to the Employee as additional compensation beginning from the date of termination of employment his Base Salary prorated for a period of six (6) months and paid in equal installments over such six (6) month period in accordance with the regular pay practices of the Company. [For example, if the Employee's Base Salary were $250,000 and his employment terminated 60 days after notice under Section 8(iii) during the first five years of employment, he would receive $125,000 payable at $20,833.33 per month for six (6) months following termination of employment.] If, however, the Employee becomes employed anytime following termination of his employment with the Company and before full payment of the additional compensation due under this paragraph, the obligation of the Company to pay the Employee the balance due of such additional compensation shall terminate and the Company shall have no further obligation to pay the additional compensation herein set forth. Except as provided by this Section 8, the Employee shall not be entitled to any other compensation or benefits upon termination of employment and all obligations of the Company to the Employee shall cease upon termination of employment. 9. WELFARE BENEFIT PLANS. The Employee shall be entitled to participate in all benefit plans and programs that may be provided by the Company for its key executive employees and/or to its employees generally, in accordance with the provisions of any such plans. 10. ASSIGNMENT. The rights and obligations of the Company under this Agreement may be assigned by the Company to the successors in interest of the Company or of that part of the business of the Company to which this Agreement applies or to its affiliates. This Agreement may not be assigned by the Employee. 11. APPLICABLE LAW; JURISDICTION. This Agreement shall be governed by, construed and enforced in accordance with the internal substantive laws and not the choice of law rules of the State of Alabama. 12. ENTIRE AGREEMENT. The foregoing contains the entire agreement between the parties relating to the subject matter of this Agreement, and may not be altered or amended except by an instrument in writing signed by both parties hereto. This Agreement supersedes all prior understandings and agreements (oral or written) relating to employment of the Employee by the Company. The parties acknowledge that any prior oral or written agreements between the Company and the Employee, if any, are hereby terminated. No oral amendments to this Agree ment and no course of dealing or performance shall be effective to add to, delete from or vary the terms of this Agreement. 13. COMPANY POLICIES. As an employee of the Company, the Employee shall be subject to the policies, procedures, rules and regulations generally applicable to all employees as the same may be published and amended from time to time. 14. WITHHOLDINGS. Any compensation due the Employee shall be subject to payroll taxes and other withholdings as may be required by law. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set his hand as of the date first above written. NICHOLS RESEARCH CORPORATION By: Michael J. Mruz --------------- Michael J. Mruz, Chief Executive Officer Charles A. Leader ----------------- Charles A. Leader, Employee EX-10.2 3 EXHIBIT 10.2 NICHOLS RESEARCH CORPORATION SUPPLEMENTAL RETIREMENT BENEFIT PLAN Between NICHOLS RESEARCH CORPORATION and CHARLES A. LEADER Dated: November 2, 1998 SUPPLEMENTAL RETIREMENT BENEFIT PLAN THIS SUPPLEMENTAL RETIREMENT BENEFIT PLAN (the "Plan") is made and entered into this 2nd day of November, 1998, by and between NICHOLS RESEARCH CORPORATION, a Delaware corporation, having its principal place of business at 4040 South Memorial Parkway, Huntsville, Alabama (the "Company") and CHARLES A. LEADER residing in the City of McLean, Virginia (the "Employee"). W I T N E S S E T H: -------------------- The Company adopted a defined contribution plan containing a cash or deferred arrangement which plan is known as the Nichols Research Corporation Retirement Plan (the "401(k) Plan"). Contributions to the 401(k) Plan by and on behalf of participants are based, in part, on the compensation received by such participants. Under Section 404(l) of the Internal Revenue Code of 1986 (the "Code"), the amount of compensation which may be taken into account is limited to $160,000, plus cost-of-living increases (the "Section 404 Limit"). The Employee's compensation is expected to exceed the Section 404 Limit, and accordingly, the amount contributed to the 401(k) Plan for the Employee's benefit is limited. The Company desires to supplement the Employee's retirement benefits by contributing to a nonqualified retirement plan for the benefit of the Employee. THEREFORE, to provide the Employee with additional incentive and to supplement the deferred compensation benefits payable to the Employee, the Company hereby adopts this Plan and the parties agree as follows: 1. The Company shall supplement the Company provided benefits available under the 401(k) Plan by crediting to a book reserve or deferred compensation account during the period of Employee's employment by the Company commencing November 2, 1998, a sum equal to seven percent (7%) of the Employee's compensation for each such fiscal year above the Section 404 Limit. For this purpose, compensation shall mean all taxable wages reported on Form W-2. 2. The amount credited to the deferred compensation account as provided in Section 1 above shall be paid to the trustee under that certain agreement of trust between the Company and Fidelity Management Trust Company, dated as of the date hereof and shall be held, administered and disposed in accordance with such trust. Any appreciation or depreciation with respect to the funds invested in accordance with the trust shall be credited or charged to the Employee's deferred compensation account. The Employee shall assume the risk of diminution in the value of his deferred compensation account in the event any invested funds depreciate in value. Nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a fiduciary relationship between the Company and the Employee or any other person. Any funds which may be invested under the provisions of this Plan shall continue for all purposes to be part of the general funds of the Company and no person other than the Company by virtue of the provisions of this Plan shall have any interest in such funds. To the extent that any person acquires the right to receive payments from the Company under this Plan, such rights shall be no greater than the right of any unsecured general creditor of the Company. The trust referred to above (and any amendment thereof) shall conform in all material respects to the terms and provisions of the model trust described in Revenue Procedure 92-64 adopted by the Internal Revenue Service. It is the intention of the parties that the Plan constitute an unfunded deferred compensation plan for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974. 3. The benefit to be paid as deferred compensation shall be as follows: (a) Commencing one month after termination of employment and for the next 120 months thereafter, the Company shall pay or cause to be paid to Employee an amount equal to the quotient of the fair market value of his deferred compensation account as of the end of each month divided by 120 less the number of full months since termination of employment. The balance of his deferred compensation account shall be paid to the Employee 120 months after termination of employment. The total amount payable to the Employee shall be increased or decreased as the case may be, to reflect the appreciation or depreciation in value of the deferred compensation account which remains invested. Notwithstanding the foregoing, the Board of Directors of the Company shall have the right in its discretion to accelerate the installment payments due hereunder and may make such distribution in lump sum or over a shorter period of time than 120 months as it may find appropriate. (b) If the Employee should die before the entire supplemental benefit has been credited, the Company shall be obligated to pay the balance of the benefits due hereunder. If the Employee should die prior to termination of his employment or after termination of his employment but before his entire deferred compensation account has been paid to him, the unpaid benefit due hereunder will be paid in a lump sum to a beneficiary or beneficiaries designated in writing to the Company by the Employee. If no designation of beneficiary has been made by the Employee, or if such designation has been revoked, the unpaid balance shall be paid to the Employee's estate. (c) The right of the Employee to payments under this Plan shall be fully vested and nonforfeitable at all times. The right of Employee or any other person to the payment of deferred compensation or other benefits under this Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or the garnishment by creditors of the Employee or the Employee's beneficiary. (d) If the Board of Directors shall determine that the Employee is unable to care for his affairs because of any physical or mental impairment, any payment due (unless a prior claim therefore shall have been made by a duly appointed guardian, conservator or other legal representative) may be paid to or for the benefit of the Employee in such manner as the Board may determine. Any such payment shall be in complete discharge of the liabilities of the Company under this Plan. 4. Nothing contained herein shall be construed as conferring upon the Employee the right to continue in the employ of the Company as an executive or in any other capacity. 5. Any deferred compensation payable under this Plan shall not be deemed salary or other compensation to the Employee for the purpose of computing benefits to which he may be entitled under any other pension plan or other deferred compensation arrangement of the Company for the benefit of its employees. 6. The Board of Directors of the Company shall have full power and authority to interpret, construe and administer this Plan and the Board's interpretation and construction thereof, and actions thereunder, including any valuation of the deferred compensation account, or the amount or recipient of the payment to be made therefrom, shall be binding and conclusive upon all persons for all purposes. No member of the Board shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to willful misconduct. The Company shall indemnify and hold harmless the members of the Board of Directors against any liability or threatened liability, including attorneys' fees, court costs, and damages, related or in any manner connected with decisions and actions or inactions taken by such Board member in connection with the Plan, except for such Board member's willful misconduct. 7. This Plan shall be binding upon and inure to the benefit of the Company, successors and assigns, and the Employee, his heirs, executors, administrator and legal representatives. 8. This Plan shall be construed in accordance with and governed by the laws of the State of Alabama. IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officers and the Employee has hereunto set his hand and seal as of the date and year first above written. NICHOLS RESEARCH CORPORATION By: Michael J. Mruz --------------- Its Chief Executive Officer ----------------------- Charles A. Leader --------------------------- CHARLES A. LEADER, Employee EX-10.3 4 EXHIBIT 10.3 FORM OF INDEMNIFICATION AGREEMENT BETWEEN REGISTRANT AND ITS DIRECTORS THIS INDEMNIFICATION AGREEMENT (the "Agreement") is executed as of ______________, 1998, by and between Nichols Research Corporation, a Delaware Corporation ("Nichols") and Director, a director, officer or representative (as hereinafter defined) of Nichols (the "Indemnitee"). RECITALS: Nichols and the Indemnitee are each aware of the exposure to litigation of officers, directors and representatives of Nichols as such persons exercise their duties to Nichols. Nichols and the Indemnitee are also aware of conditions in the insurance industry that have affected and may continue to affect Nichols' ability to obtain appropriate directors' and officers' liability insurance on an economically acceptable basis. Nichols desires to continue to benefit from the services of highly qualified, experienced and otherwise competent persons such as the Indemnitee; the Indemnitee desires to serve or to continue to serve Nichols as a director or an officer, or as a director, officer or trustee of another corporation, joint venture, trust or other enterprise in which Nichols has a direct or indirect ownership interest, for so long as Nichols continues to provide on an acceptable basis adequate and reliable indemnification against certain liabilities and expenses that may be incurred by the Indemnitee. AGREEMENT: In consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows: 1. INDEMNIFICATION. Subject to the terms of this Agreement, Nichols shall indemnify the Indemnitee with respect to his activities as a director or officer of Nichols and/or as a person who is serving or has served on behalf of Nichols ("representative") as a director, officer, or trustee of another corporation, joint venture, trust or other enterprise, domestic or foreign, in which Nichols has a direct or indirect ownership interest (an "affiliated entity") against expenses (including, without limitation, attorneys' fees, judgments, fines, and amounts paid in settlement) actually and reasonably incurred by him or her ("Expenses") in connection with any claim against Indemnitee which is the subject of any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, investigative or otherwise and whether formal or informal (a "Proceeding"), to which Indemnitee was, is, or is threatened to be made a party by reason of facts which include Indemnitee's being or having been such a director, officer or representative, to the extent of the highest and most advantageous to the Indemnitee, as determined by the Indemnitee, of one or any combination of the following: (a) The benefits provided by the Certificate of Incorporation, or Bylaws or their equivalent of Nichols in effect at the time Expenses are incurred by Indemnitee; (b) The benefits allowable under Delaware law in effect at the date hereof; (c) The benefits allowable under the law of the jurisdiction under which Nichols exists at the time Expenses are incurred by the Indemnitee; (d) The benefits available under liability insurance obtained by Nichols; (e) Such other benefits as are or may be otherwise available to Indemnitee. Combination of two or more of the benefits provided by (a) through (e) shall be available to the extent that the Applicable Document, as hereafter defined, does not require that the benefits provided therein be exclusive of other benefits. The document or law providing for the benefits listed in items (a) through (e) is defined as the "Applicable Document". Nichols hereby undertakes to use its best efforts to assist Indemnitee, in all proper and legal ways, to obtain the benefits selected by Indemnitee under items (a) through (g) above. For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans for employees of Nichols or of any affiliated entity without regard to ownership of such plans; references to "fines" shall include any excise taxes assessed on the Indemnitee with respect to any employee benefit plan. References to "serving on behalf of Nichols" shall include any service as a director, officer, employee or agent of Nichols which imposes duties on, or involves services by, the Indemnitee with respect to an employee benefit plan, its participants or beneficiaries. References to the masculine shall include the feminine; references to the singular shall include the plural and vice versa. If the Indemnitee acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, he shall be deemed to have acted in a manner consistent with the standards required for indemnification by Nichols under the Applicable Documents. 2. INSURANCE. Nichols shall maintain directors' and officers' liability insurance for so long as Indemnitee's services are covered hereunder, provided and only to the extent that such insurance is available in amounts and on terms and conditions determined by Nichols to be acceptable. However, Nichols agrees that the provisions of this agreement shall remain in effect regardless of whether liability or other insurance coverage is at any time obtained or retained by Nichols, except that any payments in fact made to Indemnitee under an insurance policy obtained or retained by Nichols shall reduce the obligation of Nichols to make payments hereunder by the amount of the payments made under any such insurance policy. 3. PAYMENT OF EXPENSES. At Indemnitee's request, Nichols shall pay the Expenses as and when incurred by Indemnitee, but only after receipt of written notice pursuant to Section 5 of this agreement and an undertaking by or on behalf of Indemnitee to repay such amounts so paid on Indemnitee's behalf if it shall ultimately be determined under the Applicable Document that Indemnitee is not entitled to be indemnified by Nichols for such Expenses. The portion of Expenses that represents attorneys' fees and other costs incurred in defending any Proceeding shall be paid by Nichols within thirty (30) days of Nichols' receipt of such request, together with reasonable documentation (consistent, in the case of attorneys' fees, with Nichols' practice in payment of legal fees for outside counsel generally) evidencing the amount and nature of such Expenses, subject to its having received such a notice and undertaking. 4. ADDITIONAL RIGHTS. The indemnification provided in this Agreement shall not be exclusive of any other indemnification or right to which Indemnitee may be entitled and shall continue after Indemnitee has ceased to occupy a position as an officer, director or representative as described in Section 1 above with respect to Proceedings relating to or arising out of Indemnitee's acts or omissions during his service in such position. 5. NOTICE TO NICHOLS. Indemnitee shall provide to Nichols prompt written notice of any Proceeding brought, threatened, asserted or commenced against Indemnitee with respect to which Indemnitee may assert a right to indemnification hereunder, provided that failure to provide such notice shall not in any way limit Indemnitee's rights under this Agreement. 6. COOPERATION IN DEFENSE AND SETTLEMENT. Indemnitee shall not make any admission or effect any settlement of any Proceeding without Nichols' written consent unless Indemnitee shall have determined to undertake his own defense in such matter and has waived the benefits of this Agreement. Nichols shall not settle any Proceeding to which Indemnitee is a party in any manner which would impose any Expense on Indemnitee without his written consent. Neither Indemnitee nor Nichols will unreasonably withhold consent to any proposed settlement. Indemnitee and Nichols shall cooperate to the extent reasonably possible with each other and with Nichols' insurers, in attempts to defend or settle such Proceeding. 7. ASSUMPTION OF DEFENSE. Except as otherwise provided below, to the extent that it may wish, Nichols jointly with any other indemnifying party similarly notified will be entitled to assume Indemnitee's defense in any Proceeding, with counsel mutually satisfactory to Indemnitee and Nichols. After notice from Nichols to Indemnitee of Nichols' election to assume such defense, Nichols will not be liable to Indemnitee under this Agreement for Expenses subsequently incurred by Indemnitee in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from Nichols of its assumption of the defense thereof shall be at Indemnitee's expense unless: (a) The employment of counsel by Indemnitee has been authorized by Nichols; (b) Counsel employed by Nichols initially is unacceptable or later becomes unacceptable to Indemnitee and such unacceptability is reasonable under then existing circumstances; (c) Indemnitee shall have reasonably concluded that there may be a conflict of interest between Indemnitee and Nichols in the conduct of the defense of such Proceeding; or (d) Nichols shall not have employed counsel promptly to assume the defense of such Proceeding. In each of these cases the fees and expenses of counsel shall be at the expense of Nichols and subject to payment pursuant to this Agreement. Nichols shall not be entitled to assume the defense of Indemnitee in any Proceeding brought by or on behalf of Nichols or as to which Indemnitee shall have made either of the conclusions provided for in clauses (b) or (c) above. 8. ENFORCEMENT. In the event that any dispute or controversy shall arise under this Agreement between Indemnitee and Nichols with respect to whether the Indemnitee is entitled to indemnification in connection with any Proceeding or with respect to the amount of Expenses incurred, then with respect to each such dispute or controversy Indemnitee may seek to enforce the Agreement through legal action or, at Indemnitee's sole option and written request, through arbitration. If arbitration is requested, such dispute or controversy shall be submitted by the parties to binding arbitration in the City of Huntsville, Alabama, before a single arbitrator agreeable to both parties. If the parties cannot agree on a designated arbitrator within 15 days after arbitration is requested in writing by Indemnitee, the arbitration shall proceed in the City of Huntsville, Alabama, before an arbitrator appointed by the American Arbitration Association. In either case, the arbitration proceeding shall commence promptly under the rules then in effect of that Association. The arbitrator agreed to by the parties or appointed by that Association shall be an attorney other than an attorney who has been or is associated with a firm having associated with it an attorney who has been retained by or performed services for Nichols or Indemnitee at any time during the five years preceding the commencement of arbitration. The award shall be rendered in such form that judgment may be entered thereon in any court having jurisdiction thereof. The prevailing party shall be entitled to prompt reimbursement of any costs and expenses (including, without limitation, reasonable attorneys' fees) incurred in connection with such legal action or arbitration; provided that Indemnitee shall not be obligated to reimburse Nichols unless the arbitrator or court which resolves the dispute determines that Indemnitee acted in bad faith in bringing such action or arbitration. 9. EXCLUSIONS. Notwithstanding the scope of indemnification which may be available to Indemnitee from time to time under any Applicable Document, no indemnification, reimbursement or payment shall be required of Nichols hereunder with respect to: (a) Any claim or any part thereof as to which Indemnitee shall have been adjudged by a court of competent jurisdiction from which no appeal is or can be taken to have acted in willful misfeasance, or willful disregard of his duties, except to the extent that such court shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses as the court shall deem proper; (b) Any claim or any part thereof arising under Section 16(b) of the Securities Exchange Act of 1934 pursuant to which Indemnitee shall be obligated to pay any penalty, fine, settlement or judgment; (c) Any obligation of Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal gain, profit or advantage to which he was not entitled; or (d) Any Proceeding initiated by Indemnitee without the consent or authorization of the Board of Directors of Nichols, provided that this exclusion shall not apply with respect to any claims brought by Indemnitee to enforce his rights under this Agreement or in any Proceeding initiated by another person or entity whether or not such claims were brought by Indemnitee against a person or entity who was otherwise a party to such Proceeding. Nothing in this Section 9 shall eliminate or diminish Nichols' obligations to advance that portion of Indemnitee's Expenses which represent attorneys' fees and other costs incurred in defending any Proceeding pursuant to Section 3 of this Agreement. 10. EXTRAORDINARY TRANSACTIONS. Nichols' covenants and agrees that, in the event of any merger, consolidation or reorganization in which Nichols is not the surviving entity, any sale of all or substantially all of the assets of Nichols or any liquidation of Nichols(each such event is hereinafter referred to as an "Extraordinary Transaction"), Nichols shall: (a) Have the obligations of Nichols under this Agreement expressly assumed by the survivor, purchaser or successor, as the case may be, in such Extraordinary Transaction; or (b) Otherwise adequately provide for the satisfaction of the Company's obligations under this Agreement, in a manner acceptable to Indemnitee. 11. NO PERSONAL LIABILITY. Indemnitee agrees that neither the directors nor any officer, employee, representative or agent of Nichols shall be personally liable for the satisfaction of Nichols' obligations under this Agreement, and Indemnitee shall look solely to the assets of Nichols for satisfaction of any claims hereunder. 12. SEVERABILITY. If any provision, phrase, or other portion of this Agreement should be determined by any court of competent jurisdiction to be invalid, illegal or unenforceable, in whole or in part, and such determination should become final, such provision, phrase or other portion shall be deemed to be severed or limited, but only to the extent required to render the remaining provisions and portions of the Agreement enforceable, and the Agreement as thus amended shall be enforced to give effect to the intention of the parties insofar as that is possible. 13. SUBROGATION. In the event of any payment under this Agreement, Nichols shall be subrogated to the extent thereof to all rights to indemnification or reimbursement against any insurer or other entity or person vested in the Indemnitee, who shall execute all instruments and take all other actions as shall be reasonably necessary for Nichols to enforce such rights. 14. GOVERNING LAW. The parties hereto agree that this Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Alabama. 15. NOTICES. All notices, billings, requests, demands, approvals, consents, and other communications which are required or may be given under this Agreement shall be in writing and will be deemed to have been duly given if delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid to the parties at their respective addresses set forth below: IF TO NICHOLS: IF TO INDEMNITEE: Patsy L. Hattox {{Director}} Nichols Research Corporation Nichols Research Corporation 4090 South Memorial Parkway 4090 South Memorial Parkway Huntsville, AL 35801 Huntsville, AL 35801 or to such other or further address as shall be designated from time to time by the Indemnitee or Nichols to the other. 16. TERMINATION. This Agreement may be terminated by either party upon not less than ninety (90) days prior written notice delivered to the other party, but termination shall not in any way diminish the obligations of Nichols hereunder with respect to Indemnitee's activities prior to the effective date of termination. 17. AMENDMENTS AND BINDING EFFECT. This Agreement and the rights and duties of Indemnitee and Nichols hereunder may not be amended, modified or terminated except by written instrument signed and delivered by the parties hereto. This Agreement is and shall be binding upon and shall inure to the benefits of the parties thereto and their respective heirs, executors, administrators, successors and assigns. IN WITNESS WHEREOF, the undersigned have executed this Agreement in triplicate as of the date first above written. Nichols Research Corporation By: ___________________ Michael J. Mruz Chief Executive Officer Indemnitee By: _________________________ Title: Director EX-27 5
5 3-MOS AUG-31-1999 NOV-30-1998 11,150 0 122,176 638 0 137,674 50,257 26,737 234,216 55,317 2,819 0 0 141 174,178 234,216 101,349 101,349 84,678 84,678 0 0 70 5,755 2,266 3,489 0 0 0 3,489 .25 .25
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