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, 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
(256) 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
13,271,712 SHARES OUTSTANDING ON May 31, 1998
_____________________
FORM 10-Q
NICHOLS RESEARCH CORPORATION
QUARTERLY REPORT FOR THE PERIOD ENDED MAY 31, 1998
INDEX
Part I.FINANCIAL INFORMATION
Item 1.Financial Statements
Condensed Consolidated Statements of
Income for the Three Months and Nine
Months Ended May 31, 1998 and May 31,
1997 (Unaudited)
Condensed Consolidated Balance Sheets as
of May 31, 1998 and August 31, 1997
(Unaudited)
Condensed Consolidated Statements of
Changes in Stockholders' Equity for the
Nine Months Ended May 31, 1998 and May
31, 1997 (Unaudited)
Condensed Consolidated Statements of
Cash Flows for the Nine Months Ended
May 31, 1998 and May 31, 1997
(Unaudited)
Notes to Condensed Consolidated
Financial Statements (Unaudite)
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
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 For the Nine Months Ended
Ended Ended
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
--------------------------------------------
(amounts in thousands except share data)
Revenues............................. $113,429 $94,032 $284,910 $268,853
Costs and expenses:
Direct and allocable costs......... 95,859 83,052 238,491 237,571
General and administrative
expenses.......................... 9,112 5,851 24,807 16,360
Amortization of intangibles........ 1,196 515 3,372 1,534
Purchased in-process
research and development.......... 2,000 - 2,000 -
--------------------------------------------
Total costs and expenses........ 108,167 89,418 268,670 255,465
Operating profit..................... 5,262 4,614 16,240 13,388
Other income (expense):
Interest expense ................... (84) (69) (272) (405)
Other income, principally interest.. 162 277 744 760
Equity in earnings of
unconsolidated affiliates.......... 61 140 351 420
Minority interest in
consolidated subsidiaries.......... (183) 34 (677) (196)
--------------------------------------------
Income before income taxes........... 5,218 4,996 16,386 13,967
Income taxes......................... 1,983 1,814 6,227 5,070
--------------------------------------------
Net income........................... $ 3,235 $ 3,182 $ 10,159 $ 8,897
============================================
Earnings per common share............ $ .24 $ .27 $ .77 $ .77
============================================
Earnings per common share
assuming dilution................... $ .24 $ .26 $ .74 $ .73
Weighted average common shares....... 13,233,833 11,698,417 13,142,654 11,623,020
============================================
Weighted average common shares
and common equivalent shares....... 13,746,487 12,209,607 13,645,757 12,246,427
============================================
NOTE: The Company has not declared or paid dividends in any of the periods pre-
sented. 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.
See accompanying notes.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
May 31, August 31,
1998 1997
--------------------------
ASSETS (amounts in thousands)
Current assets:
Cash and temporary cash investments............ $ 7,678 $ 23,354
Accounts receivable ........................... 106,912 93,425
Deferred income taxes ......................... 2,102 2,102
Other ......................................... 3,528 3,311
--------------------------
Total current assets ........................ 120,220 122,192
Long-term investments .......................... 2,525 3,738
Property and equipment:
Computers and related equipment................ 27,688 21,956
Furniture, equipment and improvements ......... 11,230 9,666
Equipment - contracts ......................... 5,771 5,771
--------------------------
44,689 37,393
Less accumulated depreciation.................. 22,990 18,715
--------------------------
Net property and equipment................... 21,699 18,678
Deferred income taxes .......................... 749 -
Goodwill and other intangibles (net of
accumulated amortization) .................... 55,517 48,130
Software development costs (net of
accumulated amortization) .................... 4,241 4,271
Investment in affiliates ....................... 9,473 8,363
Other assets ................................... 1,540 783
--------------------------
Total assets ................................... $ 215,964 $ 206,155
==========================
NOTE: All references to the number of shares and per share amounts have been
restated to reflect the effect of three-for-two stock split effective
October 21, 1996.
See accompanying notes.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) CONTINUED
May 31, August 31,
1998 1997
------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (amounts in thousands
except per share data)
Current liabilities:
Accounts payable ............................ $ 25,058 $ 28,448
Accrued compensation and benefits............ 18,336 11,388
Income taxes payable ........................ 757 369
Current maturities of long-term debt......... 761 761
Borrowing on line of credit ................. - 10,000
Deferred revenue ............................ 5,903 3,114
Other ....................................... 608 1,534
------------------------
Total current liabilities.................. 51,423 55,614
Deferred income taxes......................... 1,816 1,816
Long-term debt:
Industrial development bonds................. 1,335 1,558
Long-term notes ............................. 1,979 2,467
------------------------
Total long-term debt....................... 3,314 4,025
Minority interest in consolidated
subsidiaries ................................ 984 307
Stockholders' equity:
Common stock, par value $.01 per share
Authorized - 30,000,000 and 20,000,000
shares, respectively
Issued - 13,440,212 and 13,137,657 shares,
respectively............................... 134 131
Additional paid-in capital .................. 93,887 90,015
Retained earnings ........................... 65,694 55,535
Less cost of treasury stock - 168,500
shares...................................... (1,288) (1,288)
------------------------
Total stockholders' equity............... 158,427 144,393
------------------------
Total liabilities and stockholders' equity.... $ 215,964 $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.
See accompanying notes.
FORM 10-Q
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 Nine Months Ended May 31, 1998
------------------------------------------
Balance, August 31, 1997 13,137,657 $ 131 $ 90,015 $ 55,535 $ (1,288) $144,393
Exercise of stock options 227,509 2 2,296 - - 2,298
Employee stock purchases 75,046 1 1,576 - - 1,577
Net income - - - 10,159 - 10,159
----------------------------------------------------------------------
Balance, May 31, 1998 13,440,212 $ 134 $ 93,887 $ 65,694 $ (1,288) $158,427
======================================================================
For the Nine Months Ended May 31, 1997
------------------------------------------
Balance, August 31, 1996 11,651,018 $ 117 $ 59,071 $ 55,061 $ (1,288) $112,961
Exercise of stock options 205,615 2 1,854 - - 1,856
Employee stock purchases 58,752 - 1,133 - - 1,133
Net income - - - 8,897 - 8,897
----------------------------------------------------------------------
Balance, May 31, 1997 11,915,358 $ 119 $ 62,058 $ 63,958 $ (1,288) $124,847
======================================================================
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.
See accompanying notes.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
-------------------------
May 31, May 31,
1998 1997
(amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 10,159 $ 8,897
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ............................. 4,275 2,920
Amortization of intangibles .............. 3,372 1,534
Equity in earnings of unconsolidated
affiliates............................... (351) (420)
Minority interest ........................ 677 281
Deferred income taxes .................... (749) -
Purchased in-process research and
development.............................. 2,000 -
Changes in assets and liabilities net of
effects of acquisitions:
Accounts receivable ...................... (9,140) (37,758)
Other assets ............................. (698) (2,337)
Accounts payable ......................... (6,474) 25,172
Accrued compensation and benefits......... 6,291 3,190
Income taxes payable ..................... 388 (200)
Other current liabilities ................ 1,127 429
--------------------------
Total adjustments ........................ 718 (7,189)
--------------------------
Net cash provided by operating
activities............................. 10,877 1,708
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......... (7,061) (3,242)
Purchase of long-term investment............ (100) (75)
Purchase of capitalized software............ (557)
Payments for acquisitions, net of cash
acquired.................................. (12,266) -
Payments for investment in affiliates....... (1,028) (4,271)
Proceeds from long-term investments......... 1,295 275
--------------------------
Net cash used by investing activities..... (19,717) (7,313)
FORM 10-Q
NICHOLS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(CONTINUED)
For the Nine Months Ended
May 31, May 31,
1998 1997
-------------------------
(amounts in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...... 3,875 2,989
Proceeds from line of credit borrowings..... - 15,000
Payments on line of credit borrowings....... (10,000) (15,000)
Payments of long-term debt.................. (711) (628)
--------------------------
Net cash provided (used) by financing
activities............................... (6,836) 2,361
--------------------------
Net decrease in cash........................ (15,676) (3,812)
Cash and temporary cash investments at
beginning of period ........................ 23,354 21,419
--------------------------
Cash and temporary cash investments at
end of period............................... $ 7,678 $ 17,607
==========================
NON-CASH TRANSACTIONS:
Adjustment to purchase price allocation...... $ - $ 200
See accompanying notes.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
May 31, 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 - Acquisition
-----------
On April 15, 1998 the Company acquired 100% of the outstanding
stock of Mnemonic Systems, Inc. (MSI). MSI is a systems
integration company serving clients primarily within the U.S.
Department of Justice. Aggregate consideration of approximately
$12.3 million was paid at closing. Additional consideration is
contingent upon achieving specified operating results during the
twelve months following acquisition as defined in the purchase
agreement. The acquisition was accounted for using the purchase
method of accounting. The allocation of the excess purchase
price to intangible assets includes $2.0 million to in-process
research and development and $9.9 million to goodwill. The
purchased in-process research and development was expensed in
the third quarter and is included in the condensed consolidated
statements of income for the three months and nine months ended
May 31, 1998. The goodwill amount is being amortized using the
straight-line method over an estimated useful life of fifteen
years.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Note 4 - Investment in Affiliates
------------------------
The Company increased its capital investment in Intertech
Management Group, Inc. by approximately $528,000. As of May 31,
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 May 31, 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 May 31, 1998.
Note 6 - 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.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Note 7 - 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 For the Nine Months
Ended Ended
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
------------------------------------------------
Numerator:
Net income and income
available to common
stockholders and income
available to common
stockholders after
assumed conversions......... $ 3,235,000 $ 3,182,000 $10,159,000 $ 8,987,000
================================================
Denominator:
Denominator for earnings
per common share-weighted
average common shares....... 13,233,833 11,698,417 13,142,654 11,623,020
Effect of dilutive
securities:
Employee stock options.... 512,654 511,190 503,103 623,407
Denominator for earnings
per common share assuming
dilution - adjusted weighted
average common shares and
assumed conversions......... 13,746,487 12,209,607 13,645,757 12,246,427
================================================
Earnings per common share..... $ .24 $ .27 $ .77 $ .77
================================================
Earnings per common share
assuming dilution............ $ .24 $ .26 $ .74 $ .73
================================================
Note 8 - Reclassification
----------------
Certain prior period amounts have been reclassified to conform with the current
period's presentation.
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 technical and
information technology (IT) services, inlcuding information
processing, systems development and systems integration. The
Company provides these services to a wide range of clients,
including the Department of Defense (DoD), other federal
agencies, state and local governments, healthcare and insurance
organizations, and commercial enterprises. The Company's
business strategy consists of three key elements: (i) maintain
the Company's leadership in technology; (ii) apply the Company's
technology to create solutions for new clients; and (iii) make
strategic acquisitions and investments to expand the business of
the Company and gain industry knowledge. The Company'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.
The Defense and Intelligence unit, formerly Nichols Federal,
provides technical services primarily to U.S. government defense
agencies. The Government Information Technology unit, formerly
Nichols InfoFed, provides information and technology solutions
and services to a variety of governmental agencies.
Nichols InfoTec provides information and technology services
to various commercial clients, other than healthcare clients.
Nichols TXEN provides information services to clients in the
healthcare and insurance industries. The Company is currently
evaluating whether the services and products provided to the
insurance industry should continue to be included with Nichols
TXEN or reorganized into Nichols InfoTec. For the nine months
ended May 31, 1998, the percentage of total revenues
attributable to the four business units was approximately 55%
for Defense and Intelligence, 24% for Government Information
Technology, 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 nine strategic acquisitions and
investments 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
FORM 10-Q
NICHOLS RESEARCH CORPORATION
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 amounts of computer
processing systems and other equipment. Revenues are accrued as
costs to deliver these systems are incurred, and as a result,
quarterly revenues will be impacted by fluctuations related to
equipment purchases which occur on a periodic basis depending on
contract terms and modifications.
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 SECRUITIES 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 FORE 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 BECUASE THE CONTENT OF THE STATEMENTS
WILL USUALLY CONTAIN SUCH WORDS AS THE COMPANY OR MANAGEMENT
"BELIEVES," "ANTICIPATES," "EXPECTS," "HOPES," AND WORDS OF SIMILAR
IMPORT. SIMILARILY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE
PLANS, OBJECTIVES, GOALS OR STRATEGIES ARE FORWARD-LOOKING STATEMENTS.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Results of Operations
---------------------
The following table sets forth, for the periods indicated,
the percentage which certain items in the consolidated
statements of income bear to consolidated revenues:
For the Three For the Nine
Months Ended Months Ended
May 31, May 31, May 31, May 31,
1998 1997 1998 1997
----------------------------------------
Revenues......................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Direct and allocable costs...... 84.5 88.3 83.7 88.3
General and administrative
expenses....................... 8.0 6.2 8.7 6.1
Amortization of intangibles..... 1.1 0.6 1.2 0.6
Purchased in-process research
and development................ 1.8 - 0.7 -
----------------------------------------
Total costs and expenses..... 95.4 95.1 94.3 95.0
----------------------------------------
Operating profit................. 4.6 4.9 5.7 5.0
Interest expense................. (0.0) (0.0) (0.1) (0.2)
Other income, principally
interest........................ 0.1 0.3 0.3 0.3
Equity in earnings of
unconsolidated affilites........ 0.0 0.1 0.1 0.2
Minority interest in
consolidated subsidiaries....... (0.1) (0.0) (0.2) (0.1)
----------------------------------------
Income before income taxes....... 4.6 5.3 5.8 5.2
Income taxes..................... 1.7 1.9 2.2 1.9
----------------------------------------
Net income....................... 2.9% 3.4% 3.6% 3.3%
========================================
The Company had a backlog of approximately $1.1 billion,
including options of $766.1 million, at May 31, 1998. The
Company had a backlog of approximately $1.2 billion, including
options of $684.4 million, at May 31, 1997. Backlog represents
the amount of revenues expected to be realized from awarded
contracts. Therefore, the amount in backlog is typically less
than the face amount of the contract. The amount includes
estimates based on the Company's experience with similar awards
and customers and estimates of revenues that would be recognized
from the performance of options, under existing contracts, that
may be exercised by the customer. These estimates are reviewed
periodically and are adjusted based on the latest available
FORM 10-Q
NICHOLS RESEARCH CORPORATION
information. Historically, these adjustments have not been
significant. Because contracts in backlog are typically multi-
year contracts, an increase in backlog may not translate into
proportional revenue growth in any future period.
The table below presents contract award and backlog data for the
periods indicated:
May 31, May 31,
1998 1997
----------------------
(amounts in thousands)
Contract award amount....... $ 174,996 $ 444,309
Backlog (with options)...... $1,138,331 $1,201,087
Backlog (without options)... $ 372,212 $ 516,681
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Comparison of Operating Results for Fiscal Third Quarter 1998
with Fiscal Third Quarter 1997
Revenues. Revenues increased $19.4 million (20.6%) for the
three months and $16.1 million (6.0%) for the nine months ended
May 31, 1998 as compared to the three months and nine months
ended May 31, 1997. The Defense and Intelligence unit, which
represents approximately 55% of consolidated revenue for the
nine months ended May 31, 1998, reported an increase of $10.4
million ( 7.0%) for the nine months ended May 31, 1998 as
compared to the nine months ended May 31, 1997, primarily as a
result of continued growth in existing contract base. The
Government Information Technology unit,representing approximately
24% of consolidated revenue for the nine months ended May 31,
1998, reported a decrease of $31.3 million (31.6%) for the nine
months ended May 31, 1998 as compared to the nine months ended
May 31, 1997. The decrease is due to a reduction in the number
of hardware systems integrated during the current period.Nichols
InfoTec revenues increased $15.1 million (127%) for the
nine months ended May 31, 1998 as compared to the nine months
ended May 31, 1997, primarily as a result of SAP software sales
and integration services as well as the award of new contracts
in the third quarter ended May 31, 1998. Nichols TXEN
revenues have increased $21.9 million (209%) for the nine
months ended May 31, 1998 as compared to the nine months ended
May 31, 1997 primarily as a result of the acquisition of TXEN,
Inc. completed in August 1997.
Operating Profit. In the third fiscal quarter the Company
expensed, pre-tax, $2 million of purchased in-process research
and development activities related to the acquisition of
Mnemonic Systems, Inc. (MSI). Operating profit, including the $2
million write-off of purchased in-process research and
development, increased $0.6 million (14.0%) for the three months
and $2.9 million (21.3%) for the nine months ended May 31, 1998
as compared to the three months and nine months ended May 31,
1997. Operating profit, excluding the $2 million write-off of
purchased in-process research and development, increased $2.6
million (57.4%) for the three months and $4.9 million (36.2%)
for the nine months ended May 31, 1998 as compared to the three
months and nine months ended May 31, 1997. Direct and allocable
costs during fiscal year 1998 have decreased as a percent of
revenues compared to fiscal year 1997 as a result of fewer
hardware purchases for systems integration contracts. General
and administrative expense increased $8.5 million (51.6%) for
the nine months ended May 31, 1998 compared to the nine months
ended May 31, 1997, primarily as a result of the acquisition of
TXEN, Inc. completed in August 1997. Amortization of
intangibles increased $1.8 million (119.8%) for the nine months
ended May 31, 1998 as compared to the nine months ended May 31,
1997 primarily as a result of the amortization of the
FORM 10-Q
NICHOLS RESEARCH CORPORATION
intangibles recorded with the TXEN, Inc. acquisition completed
in August 1997. The $2 million pre-tax write-off of purchased
in-process research and development activities related to the
MSI acquisition, represents 0.7% of total costs and expenses for
the nine months ended May 31, 1998.
Total costs and expenses were 95.4% of revenues for the three
months and 94.3% for the nine months ended May 31, 1998 as
compared to 95.1% for the three months and 95.0% for the nine
months ended May 31, 1997.
Operating Margin. Operating margin, including the $2 million
write-off of purchased in-process research and development, was
4.6% for the three months and 5.7% for the nine months ended May
31, 1998 as compared to 4.9% for the three months and 5.0% for
the nine months ended May 31, 1997. Operating margin, excluding
the $2 million write-off of purchased in-process research and
development was 6.4% for the three months and nine months ended
May 31, 1998. Defense and Intelligence realized a 5.4%
operating margin for the nine months ended May 31, 1998 as
compared to 4.6% for the nine months ended May 31, 1997 which
decrease was primarily because of the adverse affect of the
completion of two significant contracts in fiscal 1997.
Government Information Technology realized operating margins,
excluding the $2 million write-off of purchased in-process
research and development, of 6.2% for the nine months ended May
31, 1998 as compared to 5.2% for the nine months ended May 31,
1997. The improved margins are the result of increased margins
on modifications awarded to existing contracts during fiscal
year 1998. The $2 million write-off of purchased in-process
research and development related to MSI is associated with
Government Information Technology and represents a decrease of
0.7% operating margin for the nine months ended May 31, 1998.
Nichols InfoTec realized operating margins of 6.2% for the nine
months ended May 31, 1998 as compared to 9.8% for the nine months
ended May 31, 1997. The decrease is attributable to expenses
incurred in acquiring and training staff for new client projects
and development of additional sales and marketing infrastructure.
Nichols TXEN realized operating margins of 11.7% for the nine
months ended May 31, 1998 as compared to 3.0% for the nine months
ended May 31, 1997. The improved margins are the result of
the managed care operations acquired with the acquisition of
TXEN, Inc. completed in August 1997.
Other Income (Expense). Other income (expense) decreased
$426,000 for the three months and $433,000 for the nine months
ended May 31 , 1998 as compared to the three months and nine
months ended May 31, 1997. Other income includes equity in
earnings of unconsolidated affiliates and interest income; other
expense includes interest expense and minority interest.
Interest income is from the investment of the Company's cash
reserves. Substantially all available cash is invested in
interest-bearing accounts or fixed income instruments. Interest
expense is primarily from the long-term borrowings of the
Company and the commitment fee on unused line of credit.
Equity in earnings of unconsolidated affiliates for the nine
months ended May 31, 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 nine months ended May 31, 1997 primarily represents 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 $0.5 million for the nine months ended May 31, 1998
as compared to the nine months ended May 31,1997 is primarily
the result of an increase in SAP software sales and integration
services in this Nichols InfoTec unit.
Income Taxes. Income taxes as a percentage of income before
taxes was 38.0% for the nine months ended May 31, 1998 as
compared to 36.3% for the nine months ended May 31, 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, including the $2 million pre-tax
write-off of purchased in-process research and development,
increased $0.1 million (1.7%) for the three months and $1.3
million (14.2%) for the nine months ended May 31, 1998 as
compared to the three months and nine months ended May 31, 1997.
Net income, excluding the $2 million pre-tax write-off of
purchased in-process research and development, increased $0.9
million (51.2%) for the three months and $1.9 million (37.8%)
for the nine months ended May 31, 1998 as compared to the three
months and nine months ended May 31, 1997. The increases are a
result of the discussions above.
Earnings Per Common Share Assuming Dilution. Earnings per
common share assuming dilution, including the $2 million pre-tax
write-off of purchased in-process research and development for
the three months and nine months ended May 31, 1998 were $0.24
and $0.74 as compared to $0.24 and $0.73 for the three months
and nine months ended May 31, 1997. Earnings per common share
assuming dilution, excluding the $2 million pre-tax write-off of
purchased in-process research and development for the three
months and nine months ended May 31, 1998 were $0.33 and $0.84.
Net income, including the $2 million pre-tax write-off of
purchased in-process research and development, increased $1.3
million (14.2%) for the nine months ended May 31, 1998 as
compared to the nine months ended May 31, 1997. Net income,
excluding the $2 million pre-tax write-off of purchased in-
process research and development, increased $1.9 million (37.8%)
for the nine months ended May 31, 1998 as compared to the nine
months ended May 31, 1997. Weighted average common shares and
common equivalent shares increased 11.4% (1,399,330 shares) for
the nine months ended May 31, 1998 as compared to the nine
months ended May 31, 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 $68.8 million and $79.8 million at May 31,
1998 and 1997, respectively. Operating activities provided cash
of $10.9 million and $1.7 million for the nine months ended May
31, 1998 and 1997, respectively.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Investing activities used cash of $19.7 million and $7.3
million for the nine months ended May 31, 1998 and 1997,
respectively. Financing activities used cash of $6.8 million
for the nine months ended May 31, 1998 and provided cash of
$2.4 million for the nine months ended May 31, 1997.
Cash provided by operating activities increased $9.2 million
for the nine months ended May 31, 1998 as compared to the nine
months ended May 31, 1997. The increase is the result of
increased net income ($1.3 million), an increase in the non-cash
adjustments to reconcile net income to net cash provided by
operations ($4.9 million) and changes in operating assets and
liabilities, net of the effects of acquisitions ($3.0 million).
Cash used for investing activities was $19.7 million for the
nine months ended May 31, 1998. The Company acquired all of the
capital stock of Mnemonic Systems, Inc. for aggregate
consideration of approximately $12.3 million. Purchases of
property and equipment were $7.1 million and $3.2 million for
the nine months ended May 31, 1998 and 1997, respectively. The
Company realized net proceeds of $1.3 million from the maturity
of long-term investments. An additional $1.0 million capital
investment was made for affiliates accounted for using the
equity method.
Cash used for financing activities was $6.8 million for the
nine months ended May 31, 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 $3.9 million and $3.0 million for the nine
months ended May 31, 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 May 31, 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. Of the total
purchase prince of $43.8 million, $29.9 million was allocated
to the following intangibles: $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 acquisition of MSI
was completed during the third fiscal quarter of 1998.
The MSI acquisition resulted in the write-off of $2 million,
pre-tax, purchased in-process research and development and the
recording of approximately $9.9 million in goodwill which is being
amortized using the straight- line method over an estimated useful
life of fifteen years.
The Company is evaluating the realignment of certain business
areas, including the insurance business activities, in the fourth
quarter of fiscal 1998. In connection with this evaluation, it
will be determined whether any required reductions in the
carrying amount of certain intangibles will be required.
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.
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
beginning 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.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On May 31, 1996, the Company purchased all of the capital
stock of Advanced Marine Enterprises, Inc. (AME), pursuant to an
agreement which provides indemnification of the Company by the
sellers against all damages arising out of litigation pending
against AME. One of the pending cases was PRC, Inc. v. AME, et
al., instituted on January 2, 1996, in the Circuit Court of
Arlington, Virginia, Chancery No. 96.1, wherein PRC, Inc.
alleged that, among other matters, AME and certain of its
employees conspired to illegally acquire the PRC Engineering
Department, including its employees, customers, property and
proprietary information. The trial of the action resulted in a
judgment against the defendants which was appealed to the
Supreme Court of Virginia wherein the decree of the trial court
was affirmed in part, reversed in part, and remanded. This
matter was settled on June 17, 1998, by a payment of
$5,158,119.39 to PRC from an escrow account funded by the
sellers.
Pursuant to a purchase agreement dated April 15, 1998, the
Company purchased all of the capital stock of Mnemonic Systems,
Inc. (MSI), from Artis B. Isaac (Isaac). The purchase agreement
contains an indemnity from Isaac in favor of the Company against
damages arising out of that certain litigation pending in the
United District Court for the District of Columbia captioned
Otto B. Isaac and Kathryn Isaac, Plaintiffs, v. Mnemonic Systems
Inc. and Artis B. Isaac, Defendants instituted on August 8,
1996, wherein the plaintiffs alleged, among other matters,
breach of contract, promissory estoppel, fraud, and negligent
misrepresentation in connection with the employment of Otto B.
Isaac by MSI and the subsequent termination of such employment
relationship. MSI and Isaac have denied the allegations and
have counterclaimed for breach of contract and fraud. In
addition to the contractual indemnity, an escrow account funded
by the seller in the amount of approximately $800,000 exists to
secure Isaac's indemnity obligation to the Company, which the
Company believes will be adequate to cover the potential
liability associated with this litigation.
On July 1, 1998, Forensic Technology WAI, Inc. (Forensic),
filed suit against MSI in United States District Court for the
Eastern District of Virginia, Alexandria Division, seeking
injunctive relief, as well as monetary damages. Forensic has
alleged that the Drugfire system offered by MSI and used for the
examination of fired cartridges infringes a United States patent
issued to Forensic on August 5, 1997. MSI believes that the
Drugfire system is non-infringing, and that there are various
grounds for invalidating the Forensic patent. The Company has
made a claim for indemnity from Isaac pursuant to the
contractual indemnity provisions of the purchase agreement.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
Item 6 - Exhibits and Reports on Form 8-K
(a)Exhibits.
Exhibit No. Description
----------- -----------
10 Mnemonic Systems, Inc. Stock
Purchase Agreement
27 Financial Data Schedule
(b)The Company has not filed any reports on Form 8-K for the
nine months ended May 31,1998.
FORM 10-Q
NICHOLS RESEARCH CORPORATION
SIGNATURES
MANAGEMENT REPRESENTATION
The accompanying unaudited Consolidated Balance Sheets at May
31, 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 nine months ended May 31, 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.
July 14, 1998 By:/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
July 14, 1998 By:/s/ Allen E. Dillard
------------------- --------------------
Date Allen E. Dillard
Vice President and Chief
Financial Officer
(Principal Finance and
Accounting Officer)