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, 1997 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 IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 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 issuer's classes of common stock, as of the latest practical date. COMMON STOCK, $.01 PAR VALUE 13,120,828 SHARES OUTSTANDING ON November 30, 1997 _____________________ FORM 10-Q NICHOLS RESEARCH CORPORATION QUARTERLY REPORT FOR THE PERIOD ENDED NOVEMBER 30, 1997 INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Income for the Three Months Ended November 30, 1997 and November 30, 1996 (Unaudited) 1 Balance Sheets as of November 30, 1997 and August 31, 1997 (Unaudited) 2-3 Statements of Changes in Stockholders' Equity for the Three Months Ended November 30, 1997 and November 30, 1996 (Unaudited) 4 Statements of Cash Flows for the Three Months Ended November 30, 1997 and November 30, 1996 (Unaudited) 5 Notes to Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7-12 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 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, 1997 1996 ---------------------------------------- (amounts in thousands except share data) Revenues $ 83,949 $ 82,847 Costs and expenses: Direct and allocable contract costs 69,955 72,648 General and administrative expenses 7,563 5,292 Amortization of intangibles 1,039 510 ------------------------------ Total costs and expenses 78,557 78,450 ------------------------------ Operating profit 5,392 4,397 Other income (expense): Interest expense (90) (68) Other income, principally interest 277 262 Equity in earnings of unconsolidated affiliates 130 137 Minority interest in consolidated affiliates (331) (120) ------------------------------ Income before income taxes 5,378 4,608 Income taxes 2,049 1,673 ------------------------------ Net income $ 3,329 $ 2,935 ============================== Earnings per share $ .25 $ .24 ------------------------------ Weighted average number of common and common equivalent shares 13,581,086 12,193,169 ============================== NOTE: The Company has not declared or paid dividends in any of the periods presented. All references to the number of shares and per share amounts have been restated to reflect the effect of a three-for-two stock split effective October 21, 1996. FORM 10-Q NICHOLS RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) November 30, August 31, 1997 1997 ------------------------------ (amounts in thousands) ASSETS Current assets: Cash and temporary cash investments $ 16,305 $ 23,354 Accounts receivable 92,790 93,425 Deferred income taxes 2,102 2,102 Other 3,637 3,311 ------------------------------ Total current assets 114,834 122,192 Long-term investments 3,280 3,738 Property and equipment: Computers and related equipment 23,829 21,956 Furniture, equipment and improvements 10,641 9,666 Equipment-contracts 5,771 5,771 ------------------------------ 40,241 37,393 Less accumulated depreciation 19,976 18,715 ------------------------------ Net property and equipment 20,265 18,678 Goodwill and other intangibles (net of accumulated amortization) 47,330 48,130 Software development costs (net of accumulated amortization) 4,139 4,271 Investment in affiliates 8,956 8,363 Other assets 751 783 ------------------------------ Total assets $ 199,555 $ 206,155 ============================== FORM 10-Q NICHOLS RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) CONTINUED November 30, August 31, 1997 1997 ------------------------------ (amounts in thousands except per share data) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 24,615 $ 28,448 Accrued compensation and benefits 12,728 11,388 Income taxes payable 1,999 369 Current maturities of long-term debt 761 761 Borrowings on line of credit ----- 10,000 Deferred revenue 3,350 3,114 Other 229 1,534 ------------------------------ Total current liabilities 43,682 55,614 Deferred income taxes 1,816 1,816 Long-term debt: Industrial development bonds 1,558 1,558 Long-term notes 2,332 2,467 ------------------------------ Total long-term debt 3,890 4,025 Minority interest in consolidated subsidiary 638 307 Stockholders' equity: Common stock, par value $.01 per share Authorized - 20,000,000 shares Issued - 13,289,328 and 13,137,657 shares, respectively 133 131 Additional paid-in capital 91,820 90,015 Retained earnings 58,864 55,535 Less cost of treasury stock-168,500 shares (1,288) (1,288) ------------------------------ Total stockholders' equity 149,529 144,393 ------------------------------ Total liabilities and stockholders' equity $ 199,555 $ 206,155 ============================== 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, 1997 -------------------------------------------- Balance,August 31,1997 13,137,657 $ 131 $ 90,015 $ 55,535 $ (1,288) $ 144,393 Exercise of stock options 127,398 1 1,321 ---- ---- 1,322 Employee stock purchases 24,273 1 484 ---- ---- 485 Net Income ---- ---- ---- 3,329 ---- 3,329 -------------------------------------------------------------------------------------- Balance, November 30, 1997 13,289,328 $ 133 $ 91,820 $ 58,864 $ (1,288) $ 149,529 ====================================================================================== For the Three Months Ended November 30, 1996 -------------------------------------------- Balance, August 31, 1996 11,651,018 $ 117 $ 59,071 $ 55,061 $ (1,288) $ 112,961 Exercise of stock options 102,051 1 809 ---- ---- 810 Employee stock purchases 16,279 ---- 337 ---- ---- 337 Net income ---- ---- ---- 2,935 ---- 2,935 -------------------------------------------------------------------------------------- Balance, November 30, 1996 11,769,348 $ 118 $ 60,217 $ 57,996 $ (1,288) $ 117,043 ===================================================================================== NOTE: All references to the number of shares and per share amounts have been restated to reflect the effect of a three-for-two stock split effective October 21, 1996. FORM 10-Q NICHOLS RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Three Months Ended November 30, November 30, 1997 1996 --------------------------------- (amounts in thousands) Cash flows from operating activities: Net income $ 3,329 $ 2,935 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 1,261 842 Amortization 1,039 510 Equity in earnings of unconsolidated affiliates (130) (137) Minority interest 331 120 Changes in assets and liabilities net of effects of acquisitions: Accounts receivable 635 (20,163) Other assets (294) (627) Accounts payable (3,833) (1,581) Accrued compensation and benefits 1,340 1,035 Income taxes payable 1,630 1,635 Other current liabilities (1,069) (902) -------------------------------- Total adjustments 910 (19,268) -------------------------------- Net cash provided (used) by operating activities 4,239 (16,333) Cash flows from investing activities: Purchase of property and equipment (2,848) (1,021) Purchase of long-term investments (100) ---- Purchase of capitalized software (62) (167) Payment for investment in affiliates (500) (189) Proceeds from maturity of long-term investments 550 ---- -------------------------------- Net cash used by investing activities (2,960) (1,377) Cash flows from financing activities: Proceeds from issuance of common stock 1,807 1,147 Payments of long-term debt (135) (135) Payments on line of credit borrowings (10,000) ---- -------------------------------- Net cash provided (used) by financing activities (8,328) 1,012 -------------------------------- Net decrease in cash and temporary cash investments (7,049) (16,698) Cash and temporary cash investments at beginning of period 23,354 21,419 -------------------------------- Cash and temporary cash investments at end of period $ 16,305 $ 4,721 ================================ Supplemental disclosure of non-cash transactions: Issuance of stock as consideration in acquisitions ---- ---- Adjustment to purchase price allocation ---- $ 200 FORM 10-Q NICHOLS RESEARCH CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) November 30, 1997 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 - Stock Split On October 9, 1996 the Board of Directors declared a three-for-two stock split which was paid to shareholders of record on October 21, 1996. The split was effected on November 4, 1996 by a stock dividend of one share for every two shares of common stock outstanding, with cash paid in lieu of fractional shares based on the stock value on record date. All references to the number of shares and per share amounts have been restated to reflect the effect of the split for all periods 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. Note 4 - Investment in affiliates The Company increased its capital investment by $500,000 in NCCIM, LLC. As of November 30, 1997 the Company holds a 50% interest at an aggregate cost of $1,345,000. Note 5 - Line of Credit The Company renegotiated its bank line of credit in November, 1997. The agreement provides for unsecured borrowings up to $100,000,000. The credit agreement provides for interest at London Interbank Offered Rate (LIBOR) plus a margin ranging from 0.325% to 0.450% and a facility fee, payable quarterly, of approximately 0.125% on the unused portion of the line of credit. The short-term commitment agreement ($50,000,000) is renewable annually and the long-term commitment agreement ($50,000,000) is renewable in November, 2000. There were no outstanding borrowings on this line of credit at November 30, 1997. FORM 10-Q NICHOLS RESEARCH CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Overview and Business Environment The Company is a leading provider of high-performance technology-based solutions and services where information access, movement, and evaluation are mission-critical to an organization's success. The Company provides these services to a wide range of clients, 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 in its current markets; (ii) apply the Company's technology to create solutions for new clients; and (iii) make strategic acquisitions and form alliances to expand the business of the Company and gain industry knowledge. The Company's business and financial performance are subject to risks and uncertainties, including those discussed below. In July 1996, the Company announced a formal organization definition for its four strategic business units. The organizations reflect the particular market focus of each line of business. Nichols Federal provides technical services primarily to U.S. Government defense agencies. Nichols InfoFed provides information and technology services to a variety of governmental agencies. Nichols InfoTec provides information and technology services to various commercial clients. Nichols TXEN provides information services to clients in the healthcare and insurance industries. For the quarter ended November 30, 1997, the percentage of total revenues attributable to the four business units was approximately 56% for Nichols Federal, 23% for Nichols InfoFed, 10% for Nichols InfoTec, and 11% for Nichols TXEN. Expansion through acquisitions is an important component of the Company's overall business strategy. The Company has successfully completed eight strategic acquisitions and alliances since September 1, 1994, most of which have centered on information technology (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. 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. 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 and resell to the customer large amounts of computer hardware and other equipment. Revenues are accrued when this equipment is acquired for resale, 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. The Company performs a majority of 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. 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. EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS QUARTERLY REPORT CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN SECIONT 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT COULD CASUE 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, 1997, AND IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS SECTION OF THIS QUARTERLY REPORT. THESE FORWARD-LOOKING STATEMENTS CAN BE GENERALLY IDENTIFIED AS SUCH BECAUSE THE CONTENT OF THE STATEMENTS WILL USUALLY CONTAIN SUCH WORDS AS THE COMPANY OR MANAGEMENT "BELIEVES," "ANTICIPATES," "EXPECTS," "HOPES," AND WORDS OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES, GOALS OR STRATEGIES ARE FORWARD-LOOKING STATEMENTS. Results of Operations The following tables set forth, for the periods indicated, the percentage 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 Revenue For the Three Months Ended November 30, November 30, Percentage 1997 1996 Change --------------------------------- ---------- Revenues 100.0% 100.0% 1.3% Costs and expenses: Direct and allocable costs 83.3 87.7 (3.7) General and administrative expenses 9.0 6.4 42.9 Amortization of intangibles 1.3 0.6 103.7 --------------------------------- Total costs and expenses 93.6 94.7 0.1 --------------------------------- Operating profit 6.4 5.3 22.6 Interest expense (0.1) (0.1) 32.4 Other income,principally interest 0.3 0.2 5.7 Equity in earnings of unconsolidated affiliates 0.2 0.2 (5.1) Minority interest in consolidated subsidiaries (0.4) (0.1) 175.8 -------------------------------- Income before income taxes 6.4 5.5 16.7 Income taxes 2.4 2.0 22.5 -------------------------------- Net income 4.0% 3.5% 13.4% ================================ The table below presents contract award and backlog data for the periods indicated: Quarter Ended November 30, 1997 1996 ---------------------------- (amounts in thousands) Contract award amount $ 37,928 $ 21,000 Backlog (with options) $ 1,203,338 $ 946,783 Backlog (without options) $ 372,574 $ 498,882 FORM 10-Q NICHOLS RESEARCH CORPORATION Comparison of Operating Results for Fiscal First Quarter 1998 with Fiscal First Quarter 1997 Revenues. Revenues increased $1.1 million (1.3%) for the fiscal quarter ended November 30, 1997 as compared to the fiscal quarter ended November 30, 1996. First quarter 1998 revenues increased as a result of revenues from SAP software and implementation services and the acquisition of TXEN, Inc. completed in August 1997, and decreased as a result of the completion of a series of system integration contracts. Operating Profit. Operating profit increased $1.0 million (22.6%) for the fiscal quarter ended November 30, 1997 as compared to the fiscal quarter ended November 30, 1996. Total costs and expenses were 93.6% of revenues for the fiscal quarter ended November 30, 1997 as compared to 94.7% for the fiscal quarter ended November 30, 1996. Direct and allocable costs decreased as a percent of revenues (83.3% compared to 87.7%) as a result of fewer hardware purchases under systems integration contracts. General and administrative expense increased $2.2 million (42.9%), primarily as a result of the acquisition of TXEN, Inc. completed in August 1997. Amortization of intangibles increased $0.5 million (103.7%) for the fiscal quarter ended November 30, 1997 as compared to the fiscal quarter ended November 30, 1996 primarily as a result of the amortization of the intangibles recorded for the TXEN, Inc. acquisition completed in August 1997. Other Income (Expense). Other income (expense) decreased $225,000 for the fiscal quarter ended November 30, 1997 as compared to the fiscal quarter ended November 30, 1996. Other income includes equity in earnings of unconsolidated affiliates and interest income; other expense includes interest expense and minority interest. Interest income is from the investment of the Company's cash reserves. Substantially all available cash is invested in interest-bearing accounts or fixed income instruments. Interest expense is primarily from the long-term borrowings of the Company and the commitment fee on unused line of credit. Equity in earnings of unconsolidated affiliates for the fiscal quarter ended November 30, 1997 primarily represents the Company's share of the earnings of NCCIM, LLC a joint venture, 50% of which is owned by the Company; while the comparable amount for the fiscal quarter ended November 30,1996 represented the Company's share of earnings of TXEN, Inc. As of August 1997, TXEN, Inc. became a wholly-owned subsidiary of the Company. Minority interest primarily represents the minority partner's share of earnings of Nichols ENTEC, LLC a joint venture, 60% of which is owned by the Company. The increase in minority interest of $0.2 million for the fiscal quarter ended November 30, 1997 as compared to the fiscal quarter ended November 30, 1996 is primarily the result of an increase in SAP software and implementation services. FORM 10-Q NICHOLS RESEARCH CORPORATION Income Taxes. Income taxes as a percentage of income before taxes was 38.1% in the fiscal quarter ended November 30, 1997 as compared to 36.3% in the fiscal quarter ended November 30, 1996. The increase is a result of the differences between financial and taxable income related to the amortization of intangibles. Net Income. Net income increased $0.4 million (13.4%) for the fiscal quarter ended November 30, 1997 as compared to the fiscal quarter ended November 30, 1996. The increase is a result of the discussions above. Earnings per share. Earnings per share for the fiscal quarter ended November 30, 1997 were $0.25 as compared to $0.24 for fiscal quarter ended November 30, 1996, an increase of 4.2%. Net income increased 13.4% ($0.4 million), while weighted average shares outstanding increased 11.4% (1,387,917 shares) for fiscal quarter ended November 30, 1997 as compared to fiscal quarter ended November 30, 1996. Liquidity And Capital Resources Historically, the Company's positive cash flow from operations and available credit facilities have provided adequate liquidity and working capital to fully fund the Company's operational needs and support the acquisition program. Working capital was $71.2 million and $76.2 million at November 30, 1997 and 1996, respectively. Operating activities provided cash of $4.2 million for the quarter ended November 30, 1997 and used cash of $16.3 million for the quarter ended November 30, 1996. Investing activities used cash of $3.0 million for the quarter ended November 30, 1997 and $1.4 million for the quarter ended November 30, 1996. Financing activities used cash of $8.3 million for the quarter ended November 30, 1997 and provided cash of $1.0 million for the quarter ended November 30, 1996. Cash provided by operating activities increased $20.5 million for the quarter ended November 30, 1997 as compared to the quarter ended November 30, 1996. The primary difference is the result of a temporary increase in Accounts Receivable at November 30, 1996 due to systems integration contract invoices. Cash used for investing activities was $3.0 million for the quarter ended November 30, 1997. Purchases of property and equipment were $2.8 million and $1.0 million for the fiscal quarters ended November 30, 1997 and 1996, respectively. The Company realized net proceeds of $0.5 million from the maturity of long-term investments. An additional $0.5 million capital contribution was made to NCCIM, LLC. Cash used for financing activities was $8.3 million for the quarter ended November 30, 1997. The primary use of cash for financing activities during the first fiscal quarter of 1998 was the repayment of the $10 million indebtedness under the bank line of credit. The Company realized proceeds from the sale of common stock of $1.8 million and $1.1 million for the the fiscal quarters ended November 30, 1997 and 1996, respectively. FORM 10-Q NICHOLS RESEARCH CORPORATION The Company renegotiated its bank line of credit in November, 1997. The agreement provides for unsecured borrowings up to $100,000,000. The credit agreement provides for interest at London Interbank Offered Rate (LIBOR) plus a margin ranging from 0.325% to 0.450% and a facility fee, payable quarterly, of approximately 0.125% on the unused portion of the line of credit. The short-term commitment agreement ($50,000,000) is renewable annually and the long-term commitment agreement ($50,000,000) is renewable in November, 2000. There were no outstanding borrowings on this line of credit at November 30, 1997. The Company is regularly evaluating potential acquisition candidates. The purchase price allocation for TXEN, Inc. was finalized during the first fiscal quarter of 1998. The $29.9 million preliminarily classified as goodwill has been reallocated as follows: $15.4 million to goodwill, $12.7 million to other intangibles and $1.8 million to capitalized software development. Goodwill and other intangibles of $27.4 million are being amortized using the straight-line method over an estimated useful life of twenty years. Other intangibles of $0.7 million are being amortized using the straight-line method over an estimated useful life of seven years. The amount allocated to capitalized software development is being amortized using the straight-line method over an estimated useful life of five years. The final allocation will result in an earlier recognition of amortization expense of approximately $0.3 million per year for the first five years following acquisition. The Company continues to actively pursue contracts for information system development and computer system integration activities, which could require the Company to acquire substantial amounts of computer hardware for resale or lease to customers. The timing of payments to suppliers and payments from customers under the Company's system integration contracts could cause cash flows from operations to fluctuate from period to period. The Company believes that its existing capital resources, together with available borrowing capacity, will be sufficient to fund operating needs, finance acquisitions of property and equipment, and make strategic acquisitions, if appropriate. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, Earnings Per Share. The overall objective of Statement No. 128 is to simplify the calculation of earnings per share (EPS) and achieve comparability with recently issued international accounting standards. The Company will first report on the new EPS basis in the second quarter ending February 28, 1998. Subsequent to the effective date, all prior period EPS amounts (including information regarding EPS in interim financial statements, earnings summaries, and selected financial data) are required to be restated to conform to the provisions of Statement No. 128. Effects of Inflation Substantially all contracts awarded to the Company have been based on proposals which reflect estimated cost increases due to inflation. Historically, inflation has not had a significant impact on the Company. FORM 10-Q NICHOLS RESEARCH CORPORATION PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit No. Description ----------- ----------- 27 Financial Data Schedule (b) Reports on Form 8-K. A current report on Form 8-K dated August 31, 1997, (i) reporting on the Registrant's acquisition of TXEN, Inc. (TXEN) and (ii) providing the audited financial statements of TXEN for the years ended June 30, 1997 and 1996, was filed with the Commission September 11, 1997. An amendment to that Form 8-K was filed with the Commission on November 10, 1997, to file the proforma financial information of TXEN. FORM 10-Q NICHOLS RESEARCH CORPORATION SIGNATURES MANAGEMENT REPRESENTATION The accompanying unaudited Consolidated Balance Sheets at November 30, 1997, and August 31, 1997 as well as the Consolidated Statements of Income, Consolidated Statements of Changes in Stockholders' Equity and Consolidated Statements of Cash Flows for the three months ended November 30, 1997 and 1996, 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 Vice President and 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. NICHOLS RESEARCH CORPORATION January 14, 1998 By: Allen E. Dillard - --------------------- ----------------------------------------- Date Allen E. Dillard Vice President and Chief Financial Officer (Principal Finance and Accounting Officer)