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 May 31, 1995 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Transition Period From _____________ To _____________ _____________________ Nichols Research Corporation Commission File Number 0-15295 (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.) 4040 Memorial Parkway, South Huntsville, Alabama 35802-1326 (205) 883-1140 (Address, including zip code, of principal offices) _____________________ NO CHANGE (Former name, address and fiscal year if changed since last report) _____________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __ Indicate the number of shares outstanding of each of the issuerOs classes of common stock, as of the latest practical date. COMMON STOCK, $.01 PAR VALUE 6,203,746 SHARES OUTSTANDING ON May 31, 1995 _____________________ FORM 10-Q NICHOLS RESEARCH CORPORATION QUARTERLY REPORT FOR THE PERIOD ENDED MAY 31, 1995 INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income for the Three Months and Nine Months Ended May 31, 1994 and May 31, 1995 1 Consolidated Balance Sheets as of August 31, 1994, May 31, 1994 and May 31, 1995 2-3 Consolidated Statements of Changes in Stockholders' Equity for the Nine Months Ended May 31, 1994 and May 31, 1995 4 Consolidated Statements of Cash Flows for the Year Ended August 31, 1994 and for the Nine Months Ended May 31, 1994 and May 31, 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-9 Part II OTHER INFORMATION Item 6.(b)Reports on Form 8-K The Company has not filed any reports on Form 8-K for the three months ended May 31, 1995. Signatures 10 NICHOLS RESEARCH CORPORATION PART I - FINANCIAL INFORMATION Item 1 - Financial Statements CONSOLIDATED STATEMENTS OF INCOME For the Three Months Ended For the Nine Months Ended May 31, May 31, May 31, May 31, 1994 1995 1994 1995 _______________________________________________________ (amounts in thousands except per share data) Revenues from contracts $35,561 $44,444 $102,428 $116,848 Costs and expenses: Direct and allocable contract costs 30,943 38,183 88,495 101,165 General and administrative 2,299 3,848 6,801 8,713 ----------------------------------------------------- Total costs and expenses 33,242 42,031 95,296 109,878 ----------------------------------------------------- Operating profit 2,319 2,413 7,132 6,970 Other income 211 516 653 1,188 ----------------------------------------------------- Income before income taxes 2,530 2,929 7,785 8,158 Income taxes 930 1,100 2,860 3,025 ----------------------------------------------------- Net income $1,600 $1,829 $4,925 $5,133 ===================================================== Net income per common share $.26 $.29 $.79 $.83 ===================================================== Weighted average number of common and common equivalent shares 6,189,536 6,299,391 6,272,238 6,211,111 ===================================================== NOTE: The Company has not declared or paid dividends in any of the periods presented. CONSOLIDATED BALANCE SHEETS August 31, May 31, May 31, 1994 1994 1995 ___________________________________________ ASSETS (amounts in thousands) Current assets: Cash and temporary cash investments $19,355 $ 16,609 $ 25,345 Contract receivables 39,620 35,806 43,872 Deferred income taxes 1,283 1,459 1,283 Other 2,010 1,572 1,310 ____________________________________________ Total current assets 62,268 55,446 71,810 Long-term investments 7,894 9,362 4,542 Furniture, fixtures and equipment, at cost: Furniture and equipment 12,472 12,257 14,350 Vehicles 29 29 29 Leasehold improvements 1,160 1,135 1,607 Equipment - contracts 5,771 5,771 5,771 ___________________________________________ 19,432 19,192 21,757 Less accumulated depreciation 8,924 8,342 11,424 ___________________________________________ Net furniture, fixtures and equipment 10,508 10,850 10,333 Other assets 91 135 5,383 ___________________________________________ Total assets $ 80,761 $75,793 $ 92,068 =========================================== NICHOLS RESEARCH CORPORATION BALANCE SHEETS August 31, May 31, May 31, 1994 1994 1995 LIABILITIES AND STOCKHOLDERSO EQUITY Current liabilities: Trade accounts payable $12,483 $8,703 $10,556 Accrued employee leave 2,852 2,911 3,412 Accrued salaries 1,494 1,275 1,965 Income taxes payable - - 833 Accrued profit sharing contribution 385 1,310 1,842 Current maturities of long-term debt 962 962 1,206 Other - - 399 ----------------------------------------- Total current liabilities 18,176 15,161 20,213 Deferred income taxes 949 478 949 Long-term debt: Industrial development bonds - - 2,000 Long-term notes 4,328 4,569 3,607 ------------------------------------------ Total long-term debt 4,328 4,569 5,607 Stockholders' equity: Common stock, par value $.01 per share Authorized - 10,000,000 shares Issued - 6,262,137, 6,246,889, and 6,388,123 shares, respectively 63 62 64 Additional paid-in capital 22,528 22,387 23,778 Retained earnings 38,467 36,886 43,600 Less cost of treasury stock 322,500, 322,500 and 184,377 shares, respectively (3,750) (3,750) (2,143) ------------------------------------------ Total stockholder'equity 57,308 55,585 65,299 ------------------------------------------ Total liabilities and stockholders' equity $80,761 $75,793 $92,068 ========================================== STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY Additional Common Stock Paid-In Retained Shares Amount Capital Earnings Stock Total (amounts in thousands except per share data) For the Nine Months Ended May 31, 1994 Balance, August 31, 1993 6,030,997 $60 $20,679 $31,961 $ - $52,700 Sale of common stock 215,982 2 1,708 - - 1,710 Net income for the period - - - 4,925 - 4,925 Purchase of 15,000 shares of treasury stock - - - - (3,750) (3,750) --------------------------------------------------------- Balance, May 31, 1994 6,388,123 $62 $22,387 $35,886 $(3,750) $55,585 ========================================================= For the Nine Months Ended May 31, 1995 Balance, May 31, 1994 6,262,137 $63 $22,528 $38,467 $(3,750) $57,308 Sale of common stock 125,896 1 1,037 - - 1,038 Net income for the period - - - 5,133 - 5,133 Reissue 138,123 shares of treasury stock - - 213 - 1,607 1,820 --------------------------------------------------------- Balance, May 31, 1995 6,388,123 $64 $23,778 $43,600 $(2,143) $65,299 ========================================================= STATEMENTS OF CASH FLOWS Year Ended For the Nine Months Ended August 31, May 31, May 31, (amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income for the period $6,056 $4,925 $ 5,133 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 1,858 1,276 2,017 Gain on sale of furniture, fixtures and equipment (14) (14) - Loss on sale of investments - - 34 Deferred income taxes 647 - - Changes in assets and liabilities net of effects of acquisitions: Contract receivables 1,165 4,979 (2,535) Other assets (1,053) (660) 823 Trade accounts payable (107) (3,887) (2,373) Accrued employee leave (181) (121) 468 Accrued salaries (202) (421) 419 Income taxes payable (240) (240) 703 Accrued profit sharing contribution (865) 60 1,413 Other current liabilities (4) (4) 241 ---------------------------------------- Total adjustments 1,004 968 1,210 ---------------------------------------- Net cash provided by operating activities 7,510 5,893 6,343 CASH FLOWS FROM INVESTING ACTIVITIES: Payments for furniture, fixtures and equipment (7,301) (7,057) (1,328) Purchase of long-term investments (7,894) (8,362) - Payment for non-compete agreements - - (900) Payment for the purchase of CSSi, net of cash acquired - - (905) Payment for the purchase of CCG, net of cash acquired - - (1,964) Payment for investment in TXEN, Inc. - - (1,535) Proceeds from maturity of long-term investments 1,000 - 3,284 Proceeds from the sale of furniture, fixtures and equipment 32 28 - ---------------------------------------- Net cash used by investing activities (14,163) (15,391) (3,348) STATEMENTS OF CASH FLOWS Year Ended For the Six MonthsEnded August 31, February 28, February 28, (amounts in thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock 1,851 1,710 1,039 Proceeds from sale of treasury stock - - 734 Proceeds from long-term notes 5,771 5,771 - Proceeds for industrial development bonds - - 2,225 Purchase of treasury stock (3,750) (3,750) - Payment of long-term debt (481) (240) (1,003) ------------------------------------------ Net cash provided by financing activities 3,392 3,491 2,995 ------------------------------------------ Net increase (decrease) in cash (3,261) (6,007) 5,990 Cash and temporary cash investments at beginning of period 22,616 22,616 19,355 Cash and temporary cash investments at end of period $ 19,355 $ 16,609 $25,345 ============================================ Non-cash transactions: Deferred compensation resulting from the exercise on non- statutory stock options $ - $ - $ 81 Issuanceof treasury stock as consideration in purchase of CCG $ - $ - $ 1,005 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation The 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. Note 2 - Acquisitions and New Operations On September 1, 1994 the Company acquired 100% interest in Communications & Systems Specialists, Inc., (CSSi), an information systems development company. Aggregate consideration of approximately $1,800,000 was paid. The financial statements as of and for the three months and nine months ended May 31, 1995 include the results of the acquired company. On April 3, 1995 NRC Technical Services Corporation (NRCTSC), a wholly owned subsidiary, began operations. The financial statements as of and for the three months and nine months ended May 31,1995 include the results of the new company. On May 16, 1995 the Company acquired 100% interest in Conway Computer Group (CCG), a group of three information services companies. Aggregate consideration of $3,000,000 was paid at closing with an additional $900,000 of consideration payable, contingent upon achieving specified operating results as defined in the agreement. The financial statements as of and for the three months and nine months ending May 31, 1995 include the results of the acquired companies from the date of acquisitions. Note 3 - Investment In December 1994 the Company purchased a 19% interest in TXEN, Inc., an information systems development company in the healthcare industry. The Company paid approximately $1,500,000 and holds an option to purchase additional shares in the future. Note 4 - Non-statutory Stock Options On September 1, 1994 the president of the Company was granted and exercised options to purchase 70,000 shares of common stock of the Company. The shares are subject to mandatory repurchase by the Company for a period of two years at the exercise price in accordance with the terms of the employment agreement. Note 5 - Long-term Debt On January 1, 1995 the Company received $2,225,000 in bond proceeds from the Alabama State Industrial Development Authority. The proceeds are restricted for use in acquiring certain capital assets and are included on the balance sheet as cash and temporary cash investments. The bond is payable in equal annual principal installments of $222,500 through January 2005. The bond bears a variable rate of interest computed monthly but contains an option for a fixed rate for a specified length of time. The bond is secured by a letter of credit. Note 6 - Subsequent Event On June 30, 1995 the Company acquired 100% interest in Computer Services Corporation (CSC), a healthcare information system company. Aggregate consideration of $7,550,000 was paid. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition For the nine months ended May 31, 1995, operating activities provided $6,343,000 in cash as compared to $5,893,000 during the nine months ended May 31, 1994. Proceeds from the sale of the Company's common stock during the nine months ended May 31, 1995 were $1,039,000 as compared to $1,710,000 during the nine months ended May 31, 1994. The Company reissued treasury stock, generating $734,000 in cash for the nine months ended May 31, 1995. The Company's working capital was $51,597,000 at May 31, 1995 as compared to $40,285,000 at May 31, 1994. The Company's working capital ratios were 3.55:1 at May 31, 1995 as compared to 3.66:1 at May 31, 1994. The Company also has $4,542,000 invested primarily in fixed income instruments at May 31, 1995, as compared to $9,362,000 at May 31, 1994. The Company increased its bank line of credit to $26,000,000 from $22,000,000 in January 1995. The line of credit consists of $15,000,000 unsecured and $11,000,000 secured by contract receivables. During the six months ended May 31, 1995, the Company had no outstanding borrowings under the provisions of this line of credit. The Company received $2,225,000 in January 1995 of industrial development bond proceeds from the State of Alabama. The funds are restricted for use in acquiring certain capital assets as approved by the State Industrial Development Authority. The bond is secured by a letter of credit. The Company used approximately $3,800,000 and reissued 68,123 shares of treasury stock, valued at approximately $1,000,000, for the acquisition of various companies during the nine months ended May 31, 1995. The Company also invested approximately $1,500,000 in another company with an option to acquire the company at a future date. The Company purchased $1,328,000 of capital assets during the nine months ended May 31, 1995, as compared to $7,057,000 during the nine months ended May 31, 1994. In fiscal year 1994 the capital asset purchases included $5,771,000 of computer hardware for lease to a customer under a computer system integration contract. The Company is actively seeking new contracts for information systems development and computer systems integration which could require the Company to acquire substantial amounts of computer hardware for resale or lease to customers. Significant new awards for computer systems integration programs could require the Company to obtain additional financing from banks or other sources. During the nine months ended May 31, 1995, the Company won new contract awards totaling approximately $135,153,000 as compared to approximately $107,400,000 for the nine months ended May 31, 1994. The trend in contract awards is for increased amounts to be awarded in options. The Company's backlog at May 31, 1995 and May 31, 1994, was as follows: 1994 1995 Base period contracts and exercised options, net of services provided $271,500,000 $289,560,000 Options 205,600,000 230,441,000 Total $477,100,000 $520,001,000 RESULTS OF OPERATIONS For the Nine Months Ended May 31, May 31, Amount of Percent 1994 1995 Change Change --------------------------------------------- (amounts in thousands) Revenues from contracts $ 35,561 $44,444 $8,883 25% Cost and expenses: Direct and allocable contract costs 30,943 38,183 7,240 23 General and administrative 2,299 3,849 1,550 67 ------------------------------------------- Total cost and expenses 33,242 42,031 8,789 26 ------------------------------------------- Operating profit 2,319 2,413 94 4 Other income 211 516 305 144 ------------------------------------------- Income before income taxes 2,530 2,929 399 16 Income taxes 930 1,100 170 18 ------------------------------------------- Net income $ 1,600 $ 1,829 $ 229 14% =========================================== For the Nine Months Ended May 31, May 31, Amount of Percent 1994 1995 Change Change (amounts in thousands) Revenues from contracts $102,427 $116,849 $14,422 14% Cost and expenses: Direct and allocable contract costs 88,496 101,165 12,669 14 General and administrative 6,800 8,714 1,914 28 ------------------------------------------- Total cost and expenses 95,296 109,878 14,582 15 ------------------------------------------- Operating profit 7,131 6,971 (160) (2) Other income 654 1,187 533 82 ------------------------------------------- Income before income taxes 7,785 8,158 373 5 Income taxes 2,860 3,025 165 6 ------------------------------------------- Net income $ 4,925 $ 5,133 $ 208 4% =========================================== RESULTS OF OPERATIONS For the Three Months Ended For the NineMonths Ended February 28, February 28, 1994 1995 1994 1995 Revenues from contracts 100 % 100 % 100 % 100 % Cost and expenses: Direct and allocable contract costs 87 86 86 87 General and administrative 7 9 7 7 --------------------------------------------- Total cost and expenses 94 95 93 94 --------------------------------------------- Operating profit 6 5 7 6 Other income 1 1 1 1 --------------------------------------------- Income before income taxes 7 6 8 7 Income taxes 2 2 3 3 --------------------------------------------- Net income 5 % 4 % 5 % 4 % =================================================== Revenues from contracts increased 25 percent for the three months ended May 31, 1995 and 14 percent for the nine months ended May 31, 1995, as compared to the three months and nine months ended May 31, 1994. Revenues from contracts are dependent upon the Company's ability to obtain new contracts and the continued funding of awarded contracts. The Company has not experienced significant funding reductions with respect to existing contracts, although such reductions could occur in the future. Costs and expenses as a percentage of revenues from contracts were 86 percent for the three months and 87 percent for the nine months ended May 31, 1995, as compared to 87 percent for the three months and 86 percent for the nine months ended May 31, 1994. Operating profit as a percentage of revenues from contracts was 5 percent for the three months and 6 percent for the nine months ended May 31, 1995, as compared to 6 percent for the three months and 7 percent for the nine months ended May 31, 1994. The decrease in operating profit is a result of planned increases in business development efforts and an increase in subcontractor and direct material costs on time and material contracts, which are passed through to customers with no fee. Increased competition may result in reduced fees on new contract awards. Significant changes in the level of subcontractor and direct material costs could impact profit margins. Other income increased to $516,000 for the three months and $1,187,000 for the nine months ended May 31, 1995 from $211,000 for the three months and $654,000 for the nine months ended May 31, 1994. Other income consists primarily of interest income. Substantially all available cash is invested in interest bearing accounts and fixed income instruments. Net income was $1,829,000 for the three months and $5,133,000 for the nine months ended May 31, 1995, as compared to $1,600,000 for the three months and $4,925,000 for the nine months ended May 31, 1994, for an increase of 14 percent and 4 percent, respectively. Net income as a percentage of revenues from contracts decreased from 5 percent for the three months and nine months ended May 31, 1994 to 4 percent for the three months and nine months ended May 31, 1995. SIGNATURES MANAGEMENT REPRESENTATION The Balance Sheets at May 31, 1995, and May 31, 1994 as well as the Statements of Income, Statements of Changes in Stockholders' Equity and Statements of Cash Flows for the three months and nine months ended May 31, 1995, and May 31, 1994, are unaudited by independent public accountants; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for the periods presented and financial position for the dates presented have been made. Date: July 14, 1995 Allen E. Dillard ---------------------------- Allen E. Dillard Chief Financial Officer (Principal Finance 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. Date: July 14, 1995 Allen E. Dillard ---------------------------- Allen E. Dillard Chief Financial Officer (Principal Finance and Accounting Officer)