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 February 28, 1998
OR
( ) TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Transition Period From _____________
To _____________
_____________________
Nichols Research Corporation
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 issuer's
classes of common stock, as of the latest practical date.
COMMON STOCK, $.01 PAR VALUE
13,186,101 SHARES OUTSTANDING ON February 28, 1998
_____________________
FORM 10-Q
NICHOLS RESEARCH CORPORATION
QUARTERLY REPORT FOR THE PERIOD ENDED FEBRUARY 28, 1998
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income for the Three Months and Six Months Ended
February 28, 1998 and February 28, 1997 (Unaudited)
Balance Sheets as of February 28, 1998 and August 31, 1997
(Unaudited)
Statements of Changes in Stockholders' Equity for the Six
Months Ended February 28, 1998 and February 28, 1997
(Unaudited)
Statements of Cash Flows for the Six Months Ended February 28,
1998 and February 28, 1997 (Unaudited)
Notes to Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
NICHOLS RESEARCH CORPORATION
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended For the Six Months Ended
February 28, February 28, February 28, February 28,
1998 1997 1998 1997
------------------------------------------------------
(amounts in thousands except share data)
Revenues................ $ 87,532 $ 91,974 $ 171,481 $ 174,821
Costs and expenses:
Direct and allocable
costs............... 72,677 81,871 142,632 154,519
General and
administrative...... 8,132 5,217 15,695 10,509
Amortization of
intangibles......... 1,137 509 2,176 1,019
------------------------------------------------------
Total costs and
expenses.......... 81,946 87,597 160,503 166,047
------------------------------------------------------
Operating profit........ 5,586 4,377 10,978 8,774
Other income (expense):
Interest expense...... (98) (268) (188) (336)
Other income, principally
interest............ 305 221 582 483
Equity in earnings of
unconsolidated
affiliates.......... 160 143 290 280
Minority interest in
consolidated
subsidiaries........ (163) (110) (494) (230)
------------------------------------------------------
Income before income
taxes................. 5,790 4,363 11,168 8,971
Income taxes............ 2,195 1,583 4,244 3,256
------------------------------------------------------
Net income $ 3,595 $ 2,780 $ 6,924 $ 5,715
======================================================
Earnings per common
share................. $ .27 $ .24 $ .53 $ .49
======================================================
Earnings per common
share-assuming
dilution.............. $ .26 $ .23 $ .51 $ .47
======================================================
Weighted average number
of common shares........ 13,135,241 11,621,652 13,097,064 11,585,322
======================================================
Weighted average number
of common and common
equivalent shares....... 13,609,697 12,336,505 13,595,392 12,264,837
======================================================
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.
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
February 28, August 31,
1998 1997
--------------------------------
(amounts in thousands)
ASSETS
Current assets:
Cash and temporary cash investments.... $ 24,113 $ 23,354
Accounts receivable.................... 87,491 93,425
Deferred income taxes.................. 2,102 2,102
Other.................................. 3,718 3,311
--------------------------------
Total current assets................ 117,424 122,192
Long-term investments.................... 2,679 3,738
Property and equipment:
Computers and related equipment........ 26,067 21,956
Furniture, equipment and improvements.. 10,664 9,666
Equipment - contracts.................. 5,771 5,771
--------------------------------
42,502 37,393
Less accumulated depreciation.......... 21,334 18,715
--------------------------------
Net property and equipment.......... 21,168 18,678
Goodwill and other intangibles (net of
accumulated amortization).............. 46,520 48,130
Software development costs (net of
accumulated amortization).............. 4,241 4,271
Investment in affiliates................. 9,606 8,363
Other assets............................. 1,167 783
--------------------------------
Total assets............................. $ 202,805 $ 206,155
================================
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.
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) CONTINUED
February 28, August 31,
1998 1997
-------------------------------
(amounts in thousands except
per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 20,682 $ 28,448
Accrued compensation and benefits...... 14,856 11,388
Income taxes payable................... 999 369
Current maturities of long-term debt... 761 761
Borrowings on line of credit........... - 10,000
Deferred revenue....................... 5,224 3,114
Other.................................. 52 1,534
-------------------------------
Total current liabilities............ 42,574 55,614
Deferred income taxes.................... 1,816 1,816
Long-term debt:
Industrial development bonds........... 1,335 1,558
Long-term notes........................ 2,198 2,467
-------------------------------
Total long-term debt................. 3,533 4,025
Minority interest in consolidated
subsidiaries........................... 801 307
Stockholders' equity:
Common stock, par value $.01 per share
Authorized - 20,000,000 shares
Issued - 13,354,601 and 13,137,657
shares, respectively............... 133 131
Additional paid-in capital............. 92,777 90,015
Retained earnings...................... 62,459 55,535
Less cost of treasury stock-168,500
shares............................... (1,288) (1,288)
-------------------------------
Total stockholders' equity......... 154,081 144,393
-------------------------------
Total liabilities and stockholders
equity................................. $ 202,805 $ 206,155
===============================
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.
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
Additional Total
Common Stock Paid-In Retained Treasury Stockholder's
Shares Amount Capital Earnings Stock Equity
-------------------------------------------------------------------
(amounts in thousands except share data)
For the Three Months Ended February 28, 1998
--------------------------------------------
Balance, August 31, 1997 13,137,657 $ 131 $ 90,015 $ 55,535 $ (1,288) $144,393
Exercise of stock options 167,523 2 1,709 - - 1,711
Employee stock purchases 49,421 - 1,053 - - 1,053
Net income - - - 6,924 - 6,924
-------------------------------------------------------------------
Balance,February 28, 1998 13,354,601 $ 133 $ 92,777 $ 62,459 $ (1,288) $154,081
===================================================================
For the Three Months Ended February 28, 1997
--------------------------------------------
Balance, August 31, 1996 11,651,018 $ 117 $ 59,071 $ 55,061 $ (1,288) $112,961
Exercise of stock options 167,594 2 1,504 - - 1,506
Employee stock purchases 34,742 - 734 - - 734
Net income - - - 5,715 - 5,715
-------------------------------------------------------------------
Balance, February 28, 1997 11,853,354 $ 119 $ 61,309 $ 60,776 $ (1,288) $120,916
===================================================================
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.
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended
------------------------
February 28, February 28,
1998 1997
--------------------------
(amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 6,924 $ 5,715
Adjustments to reconcile net income to net
cash provided (used) by operating
activities:
Depreciation.............................. 2,619 1,884
Amortization.............................. 2,176 1,019
Equity in earnings of unconsolidated
affiliates.............................. (290) (280)
Minority interest......................... 494 315
Changes in assets and liabilities net
of effects of acquisitions:
Accounts receivable....................... 5,934 (15,386)
Other assets.............................. (883) (2,370)
Accounts payable.......................... (7,766) 1,792
Accrued compensation and benefits......... 3,468 1,259
Income taxes payable...................... 630 (238)
Other current liabilities................. 628 (351)
--------------------------
Total adjustments......................... 7,010 (12,356)
--------------------------
Net cash provided (used) by operating
activities............................ 13,934 (6,641)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......... (5,109) (2,047)
Purchase long-term investments.............. (100) (75)
Purchase capitalized software............... (355) (362)
Payment for investment in affiliates........ (1,028) (4,092)
Proceeds from long-term investments......... 1,145 250
--------------------------
Net cash used by investing activities..... (5,447) (6,326)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...... 2,764 2,240
Payments of long-term debt.................. (492) (538)
Proceeds from borrowings on line of credit.. - 15,000
Payments on line of credit borrowings....... (10,000) (15,000)
--------------------------
Net cash provided (used) by financing
activities.............................. (7,728) 1,702
--------------------------
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
For the Six Months Ended
--------------------------
February 28, February 28,
1998 1997
--------------------------
(amounts in thousands)
Net increase (decrease) in cash and
temporary cash investments................ 759 (11,265)
Cash and temporary cash investments
at beginning of period.................... 23,354 21,419
--------------------------
Cash and temporary cash investments at
end of period............................... $ 24,113 $ 10,154
==========================
NON-CASH TRANSACTIONS:
Adjustment to purchase price allocation..... $ - $ 200
NICHOLS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 28, 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 - 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 - New Pronouncements
------------------
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share. Statement 128 replaced the previously reported primary
and fully diluted earnings per share with earnings per common
share and earnings per common share assuming dilution. Unlike
primary earnings per common share, earnings per common share
excludes any dilutive effects of options, warrants, and
convertible securities. Earnings per common share assuming
dilution is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all
periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
Note 4 - Investment in Affiliates
------------------------
The Company increased its capital investment in Intertech
Management Group, Inc. by approximately $528,000. As of February
28, 1998 the Company holds a 35% interest at an aggregate cost of
approximately $ 5,663,000.
The Company increased its capital investment in NCCIM, LLC by
$500,000. As of February 28, 1998 the Company holds a 50%
interest at an aggregate cost of approximately $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 February 28, 1998.
Note 6 - Earnings Per Share
------------------
The following table sets forth the computation of earnings per
common share and earnings per common share assuming dilution:
For the Three Months Ended For the Six Months Ended
February 28, February 28, February 28, February 28,
1998 1997 1998 1997
------------------------------------------------------------
Numerator:
Net income and income and
income available to
common stockholders and
income available to
common stockholders
after assumed
conversions............... $ 3,595,0000 $ 2,780,000 $ 6,924,000 $ 5,715,000
==========================================================
Denominator:
Denominator for earnings
per common share -
weighted average
common shares............. 13,135,241 11,621,652 13,097,064 11,585,322
Effect of dilutive securities:
Employee stock options...... 474,456 714,853 498,328 679,515
Denominator for earnings per
common share assuming
dilution - adjusted weighted
average common shares
and assumed conversions..... 13,609,697 12,336,505 13,595,392 12,264,837
=======================================================
Earnings per common share..... $ .27 $ .24 $ .53 $ .49
=======================================================
Earnings per common share
assuming dilution........... $ .26 $ .23 $ .51 $ .47
========================================================
NICHOLS RESEARCH CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview and Business Environment
- ---------------------------------
The Company is a leading provider of technical and
information technology (IT) services, 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 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.
The Company is organized in four strategic business units,
reflecting 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, other than healthcare or
insurance industry clients. Nichols TXEN provides information
services to clients in the healthcare and insurance industries.
For the six months ended February 28, 1998, the percentage of
total revenues attributable to the four business units were
approximately 60% for Nichols Federal, 20% for Nichols InfoFed,
9% 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. 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 intends to pursue large systems integration
contracts in both the government and commercial markets, although
competition for such contracts is intense and many of the
Company's competitors have greater resources than the Company.
While such contracts are working capital intensive, requiring
large equipment and software purchases to be funded by the
Company before payment from the customer, the Company believes
such contracts offer attractive revenue growth and margin
expansion opportunities for the Company's range of technical
expertise and capabilities.
The Company's revenues and earnings may fluctuate from
quarter to quarter based on such factors as the number, size and
scope of projects in which the Company is engaged, the
contractual terms and degree of completion of such projects,
expenditures required by the Company in connection with such
projects, any delays incurred in connection with such projects,
employee utilization rates, the adequacy of provisions for
losses, the accuracy of estimates of resources required to
complete ongoing projects, and general economic conditions. Under
certain contracts, the Company is required to purchase, integrate
and deliver to the customer large 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 significant system
integration contracts which occur on a periodic basis depending
on contract terms and modifications.
The Company's services are provided primarily through three
types of contracts: fixed-price, time-and-materials and cost-
reimbursement contracts. Fixed-price contracts require the
Company to perform services under a contract at a stipulated
price. Time-and-materials contracts reimburse the Company for
the number of labor hours expended at an established hourly rate
negotiated in the contract, plus the cost of materials incurred.
Under cost-reimbursement contracts, the Company is reimbursed for
all actual costs incurred in performing the contract to the
extent that such costs are within the contract ceiling and
allowable under the terms of the contract, plus a fee or profit.
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 31,1997,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 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:
For the Three Months Ended For the Six Months Ended
February 28, February 28, February 28, February 28,
1998 1997 1998 1997
-----------------------------------------------------
Revenues................. 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Direct and allocable
costs................ 83.0 89.0 83.2 88.4
General and
administrative
expenses............. 9.3 5.7 9.1 6.0
Amortization of
intangibles......... 1.3 0.5 1.3 0.6
-----------------------------------------------------
Total costs and
expenses........ 93.6 95.2 93.6 95.0
-----------------------------------------------------
Operating profit......... 6.4 4.8 6.4 5.0
Interest expense......... (0.1) (0.3) (0.1) (0.2)
Other income, principally
interest............... 0.3 0.2 0.3 0.3
Equity in earnings of
unconsolidated
affiliates............. 0.2 0.1 0.2 0.1
Minority interest in
consolidated
subsidiaries........... (0.2) (0.1) (0.3) (0.1)
-----------------------------------------------------
Income before income
taxes.................. 6.6 4.7 6.5 5.1
Income taxes............. 2.5 1.7 2.5 1.8
-----------------------------------------------------
Net income 4.1% 3.0% 4.0% 3.3%
=====================================================
The table below presents contract award and backlog data for the periods
indicated:
February 28, February 28,
1998 1997
----------------------------
(amounts in thousands)
Contract award amount............. $ 98,041 $ 391,261
Backlog (with options)............ $ 1,155,036 $ 1,246,000
Backlog (without options)......... $ 485,103 $ 542,958
NICHOLS RESEARCH CORPORATION
COMPARISON OF OPERATING RESULTS FOR FISCAL SECOND QUARTER 1998
WITH FISCAL SECOND QUARTER 1997
REVENUES. Revenues decreased $4.4 million (4.8%) for the
three months and $3.3 million (1.9%) for the six months ended
February 28, 1998 as compared to the three months and six months
ended February 28, 1997. Nichols Federal revenue increased 10%
($10 million) for the six months ended February 28, 1998 compared
to the six months ended February 28, 1997 primarily as a result
of continued growth in existing contract base. Nichols InfoFed
revenues decreased 50% ($33 million) for the six months ended
February 28, 1998 as compared to the six months ended February
28, 1997 primarily due to the timing of significant hardware and
software purchases related to systems integration contracts. An
increase in contract activity on systems integration contracts is
expected during the next six months. Nichols InfoTec revenues
increased 90% ($7 million) for the six months ended February 28,
1998 as compared to the six months ended February 28, 1997
primarily as a result of SAP software sales and integration
services. Nichols TXEN revenue more than doubled ($13 million
increase) during the six months ended February 28, 1998 as
compared to the six months ended February 28, 1997 primarily as a
result of the TXEN, Inc. acquisition completed in August 1997.
OPERATING PROFIT. Operating profit increased $1.2 million
(27.6%) for the three months and $2.2 million (25.1%) for the six
months ended February 28, 1998 as compared to the three months
and six months ended February 28, 1997. Operating margin for the
six months ended February 28, 1998 was 6.4% as compared to 5.0%
for the six months ended February 28, 1997.
Nichols Federal operating profit increased 20% ($0.9 million)
for the six months ended February 28, 1998 both as a result of
increased contract activity and because in fiscal year 1997
operating profit was adversely affected by the completion of two
significant contracts. Nichols InfoFed operating profit
decreased 29% ($1.0 million) for the six months ended February
28, 1998 as a result of a decrease in systems integration
hardware and software purchases, while margins on existing work
improved. Nichols InfoTec operating profit increased 125% ($0.6
million) primarily as a result of increased SAP software sales
and integration. Nichols TXEN operating profit increased
substantially ($2 million) for the six months ended February 28,
1998 primarily as a result of the contribution from the
acquisition of TXEN, Inc. completed in August 1997.
Costs and expenses were 93.6% of revenues for the three
months and six months ended February 28, 1998 as compared to
95.2% for the three months and 95.0% for the six months ended
February 28, 1997. The decrease in direct and allocable costs as
a percentage of revenues was primarily the result of significant
hardware and software purchases for systems integration
contracts. The $5.2 million (49.3%) increase in general and
administrative expenses is primarily a result of the acquisition
of TXEN, Inc. completed in August 1997. Amortization of
intangibles increased $1.2 million (113.5%) primarily as a result
of the amortization of intangibles recorded for the acquisition
of TXEN, Inc. completed in August 1997.
OTHER INCOME (EXPENSE). Other income (expense) increased
$218,000 for the three months and decreased $7,000 for the six
months ended February 28, 1998 as compared to the three months
and six months ended February 28, 1997. Other income includes
equity in earnings of unconsolidated affiliates and interest
income; other expense includes interest expense and minority
interest. Interest income is from the investment of the
Company's cash reserves. Substantially all available cash is
invested in interest-bearing accounts or fixed income
instruments. Interest expense is primarily from the long-term
borrowings of the Company and the commitment fee on unused line
of credit.
Equity in earnings of unconsolidated affiliates for the six
months ended February 28, 1998 primarily represents the Company's
share of the earnings of NCCIM, LLC a joint venture, 50% of which
is owned by the Company; while the comparable amount for the six
months ended February 28, 1997 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 $264,000 for the six months ended February 28, 1998 as
compared to the six months ended February 28, 1997 is primarily
the result of an increase in SAP software and implementation
services in the Nichols InfoTec unit.
INCOME TAXES. Income taxes as a percentage of income before
taxes was 38.0% for the six months ended February 28, 1998 as
compared to 36.2% for the six months ended February 28, 1997.
The increase is primarily a result of the differences between
financial and taxable income related to the amortization of
intangibles.
NET INCOME . Net income increased $0.8 million (29.3%) for
the three months and $1.2 million (21.2%) for the six months
ended February 28, 1998 as compared to the three months and six
months ended February 28, 1997. The increase is a result of the
matters discussed above.
EARNINGS PER SHARE ASSUMING DILUTION. Earnings per share
assuming dilution for the three months and six months ended
February 28, 1998 were $0.26 and $0.51 as compared to $0.23 and
$0.47 for three months and six months ended February 28, 1997, an
increase of 17.2% and 9.3%, respectively. Net income increased
21.2% ($1.2 million), while weighted average common shares and
common equivalent shares increased 10.8% (1,330,555 shares) for
the six months ended February 28, 1998 as compared to the six
months ended February 28, 1997.
Liquidity And Capital Resources
- -------------------------------
Historically, the Company's positive cash flow from
operations and available credit facilities have provided adequate
liquidity and working capital to fully fund the Company's
operational needs and support the acquisition program. Working
capital was $74.8 million and $76.0 million at February 28, 1998
and 1997, respectively. Operating activities provided cash of
$13.9 million for the six months ended February 28, 1998 and used
cash of $6.6 million for the six months ended February 28, 1997.
Investing activities used cash of $5.4 million for the six months
ended February 28, 1998 and $6.3 million for the six months ended
February 28, 1997. Financing activities used cash of $7.7
million for the six months ended February 28, 1998 and provided
cash of $1.7 million for the six months ended February 28, 1997.
Cash provided by operating activities increased $20.6 million
for the six months ended February 28, 1998 as compared to the six
months ended February 28, 1997. The primary difference is the
result of a temporary increase in Accounts Receivable at February
28, 1997 due to systems integration contract invoices.
Cash used for investing activities was $5.4 million for the
six months ended February 28, 1998. Purchases of property and
equipment were $5.1 million and $2.0 million for the six months
ended February 28, 1998 and 1997, respectively. The Company
realized net proceeds of $1.1 million from the maturity of long-
term investments. An additional $0.5 million capital
contribution was made to Intertech Management Group, Inc. in the
second fiscal quarter and $0.5 million to NCCIM, LLC in the first
fiscal quarter.
Cash used for financing activities was $7.7 million for the
six months ended February 28, 1998. The primary use of cash for
financing activities was during the first fiscal quarter of 1998
for the repayment of $10 million indebtedness under the bank line
of credit. The Company realized proceeds from the sale of common
stock of $2.8 million and $2.2 million for the six months ended
February 28, 1998 and 1997, respectively.
The Company renegotiated its bank line of credit in November,
1997. The agreement provides for unsecured borrowings up to
$100,000,000. The credit agreement provides for interest at
London Interbank Offered Rate (LIBOR) plus a margin ranging from
0.325% to 0.450% and a facility fee, payable quarterly, of
approximately 0.125% on the unused portion of the line of credit.
The short-term commitment agreement ($50,000,000) is renewable
annually and the long-term commitment agreement ($50,000,000) is
renewable in November, 2000. There were no outstanding
borrowings on this line of credit at February 28, 1998.
The Company is regularly evaluating potential acquisition
candidates and expects to complete other transactions this fiscal
year. The purchase price allocation for TXEN, Inc. was finalized
during the first fiscal quarter of 1998. The $29.9 million was
allocated 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 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 has
reported using the new EPS basis in the second quarter ending
February 28, 1998 and has restated all prior period EPS amounts
to conform to the provisions of Statement No. 128.
Effects of Inflation
- --------------------
Substantially all contracts awarded to the Company have been
based on proposals which reflect estimated cost increases due to
inflation. Historically, inflation has not had a significant
impact on the Company.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On January 8, 1998, the annual meeting of the Company's
stockholders was held at the Corporate Headquarters in
Huntsville, Alabama. Proxies were solicited and cast by the
Company's transfer agent, ChaseMellon Shareholder Services, New
York, New York. Matters put to vote and acted upon were the
proposal to elect Directors to the Board of Directors, adoption
of the Nichols Research Corporation 1997 Stock Option Plan,
amendment to the Company's Certification of Incorporation to
increase authorized shares of stock, adoption of the Nichols
Research Corporation 1997 Stock Bonus Plan, ratify appointment of
Ernst & Young LLP.
All directors were elected for a term of one year and will serve
until the next annual meeting. Directors elected were as
follows:
For Withheld
---------- --------
Chris H. Horgen 11,368,098 298,067
Michael J. Mruz 11,363,320 302,845
Roy J. Nichols 11,371,633 294,532
Patsy L. Hattox 11,368,741 297,424
Roger P. Heinisch 11,403,074 263,091
John R. Wynn 11,363,525 302,640
William E. Odom 11,402,085 264,080
James R. Thompson, Jr. 11,403,064 263,101
Phil E. DePoy 11,403,074 263,091
Thomas L. Patterson 11,369,564 296,601
David Friend 11,403,074 263,091
Daniel W. McGlaughlin 11,177,415 488,750
The Nichols Research Corporation 1997 Stock Option Plan was
approved. Voting for approval were 8,144,440 shares, voting
against were 2,302,580 shares, and 48,302 shares abstained.
The Amendment to the Company's Certificate of Incorporation was
amended to increase the authorized shares of common stock.
Voting for amendment were 11,549,345 shares, voting against
101,037 shares, and 15,783 shares abstained.
The Nichols Research Corporation 1997 Stock Bonus Plan was
approved. Voting for approval were 9,531,127 shares, voting
against 888,578 shares, and 75,617 shares abstained.
Ernst & Young, LLP was ratified to serve as the Company's
independent auditors for the fiscal year ending August 31, 1998.
Voting for ratification were 11,541,031 shares, voting against
were 32,336 shares and 92,798 shares abstained.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits.
Exhibit No. Description
3.1 Certificate of Amendment to the Certificate of
Incorporation of Nichols Research Corporation
10.1 Nichols Research Corporation 1997 Stock Option Plan
10.2 Nichols Research Corporation 1997 Stock Bonus Plan
10.3 Nichols Research Corporation Supplemental Retirement
Benefit Plan between Nichols Research Corporation
and Michael J. Mruz
10.4 Nichols Research Corporation Supplemental Retirement
Benefit Plan between Nichols Research Corporation
and Chris H. Horgen
27 Financial Data Schedule
(b) The Company has not filed any reports on Form 8-K for the three
months ended February 28, 1998.
NICHOLS RESEARCH CORPORATION
SIGNATURES
MANAGEMENT REPRESENTATION
-------------------------
The accompanying unaudited Consolidated Balance Sheets at
February 28, 1998, and August 31, 1997 as well as the
Consolidated Statements of Income, Consolidated Statements of
Changes in Stockholders' Equity and Consolidated Statements of
Cash Flows for the six months ended February 28, 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.
April 13, 1998 /s/ 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
April 13, 1998 By: /s/ Allen E. Dillard
- -------------------- ---------------------
Date Allen E. Dillard
Vice President and Chief
Financial Officer
(Principal Finance and
Accounting Officer)