SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 2 to
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 31, 1997
------------------------------
NICHOLS RESEARCH CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 0-15295 63-0713665
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
4090 South Memorial Parkway, Huntsville, Alabama 35802-1326
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(Address, including zip code, of principal executive offices)
(256) 883-1140
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(Registrant's telephone number, including area code)
This Current Report on Form 8-K/A amends and supersedes, to the extent set forth
herein, the Registrant's Current Report on Form 8-K (as amended) dated August
31, 1997 previously filed on September 11, 1997 (and Amendment No. 1 filed on
November 10, 1997). Footnote 1 "Accounting Policies" contained in the Notes to
the TXEN, Inc., financial statements has been revised to add a section entitled
"Research and Development" detailing the total research and development costs
incurred by TXEN, Inc. during the fiscal years ended June 30, 1996 and 1997.
Exhibit 99.2, the financial statements of TXEN, Inc. for those fiscal years, is
being filed herewith as a result of that footnote revision. No other changes
were made to the TXEN, Inc. financial statements or notes thereto.
Item 7 - Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits.
99.2 Financial Statements of TXEN, Inc.
Exhibit 99.2
TXEN, Inc.
Financial Statements
YEARS ENDED JUNE 30, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
TXEN, Inc.
Financial Statements
Years ended June 30, 1997 and 1996
CONTENTS
Report of Independent Auditors.............................1
Audited Financial Statements
Balance Sheets.............................................2
Statements of Operations...................................4
Statements of Changes in Stockholders' Equity..............5
Statements of Cash Flows...................................6
Notes to Financial Statements..............................7
Report of Independent Auditors
The Board of Directors and Stockholders
TXEN, Inc.
We have audited the accompanying balance sheets of TXEN, Inc. as of June 30,
1997 and 1996, and the related statements of operations, changes in stock-
holders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our responsi-
bility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and signifi-
cant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TXEN, Inc. at June 30, 1997
and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in 1996 the Company changed
its method of accounting for depreciation.
Ernst & Young LLP
August 1, 1997
1
TXEN, Inc.
Balance Sheets
June 30
1997 1996
-------------------------------
ASSETS
Current assets:
Cash and cash equivalents $1,146,224 $ 630,685
Accounts receivable, net of allowance
for doubtful accounts of $125,000
and $35,000 at June 30, 1997 and
1996, respectively 4,770,342 1,096,365
Prepaid expenses 111,156 84,963
Income taxes receivable - 24,800
Deferred income taxes 211,265 300,666
Inventory 15,056 16,965
Other 347 4,206
-------------------------------
Total current assets 6,254,390 2,158,650
Property and equipment, net 2,917,126 2,271,932
Deferred software development 661,451 -
-------------------------------
Total assets $9,832,967 $4,430,582
===============================
2
June 30
1997 1996
-------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to stockholder $ 8,333 $ 8,333
Customer deposits - 128,518
Accounts payable and accrued expenses 722,067 170,868
Accrued salaries, bonuses and vacation 398,313 208,632
Income taxes payable 433,134 -
Current portion of long-term debt 275,411 252,757
Short-term notes - 135,142
Deferred revenue 2,048,538 1,070,910
Interest payable 231,239 -
Accrued officers salaries 288,000 -
Other 2,581 7,061
------------------------------
Total current liabilities 4,407,616 1,982,221
Interest payable - 199,929
Accrued officers salaries - 288,000
Deferred income taxes 394,956 124,007
Long-term debt to stockholders 274,193 258,193
Long-term debt 366,423 639,274
Stockholders' equity:
Preferred stock, $.002 par value; 1 share
authorized, -0- shares and 1 share issued
and outstanding at 1997 and 1996,
respectively - 1,500,000
Class A common stock, $.002 par value;
5,000,000 shares authorized, 4,000,500
and 5,000,000 shares issued and out-
standing at 1997 and 1996, respectively 8,001 10,000
Class B common stock, $.002 par
value; 1,250,000 shares authorized,
999,500 and -0- shares issued and
outstanding at 1997 and 1996, respectively 1,999 -
Additional paid-in capital 1,909,500 409,500
Retained earnings (deficit) 2,889,112 (531,759)
Notes receivable from stockholders (418,833) (448,783)
-------------------------------
Total stockholders' equity 4,389,779 938,958
-------------------------------
Total liabilities and stockholders' equity $9,832,967 $4,430,582
===============================
See accompanying notes.
3
TXEN, Inc.
Statements of Operations
Year Ended June 30
1997 1996
-------------------------------
Net revenues $14,979,761 $6,859,678
Cost of sales 1,786,460 676,029
Selling and administrative expenses 7,784,270 6,460,910
Other income (expense):
Interest expense (88,090) (153,355)
Interest income 75,272 103,069
Gain on sale of asset - 50
Other 3,943 201
-------------------------------
Total other income (expense) (8,875) (50,035)
-------------------------------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle 5,400,156 (327,296)
Income tax (expense) benefit (1,979,285) 92,705
------------------------------
Income (loss) before cumulative effect
of a change in accounting principle 3,420,871 (234,591)
Cumulative effect on prior years (June 30,
1995) of changing to a different deprecia-
tion method (net of $32,252 of taxes) - 81,615
-------------------------------
Net income (loss) $ 3,420,871 $ (152,976)
===============================
Pro forma amount assuming the depreciation
method adopted in 1996 was applied
retroactively:
Net income (loss) $ (234,591)
==========
See accompanying notes.
4
TXEN, Inc.
Statements of Changes in
Stockholders' Equity
Class A Class B Additional Retained Notes Total
Preferred Common Common Paid-in Earnings Receivable Stockholders'
Stock Stock Stock Capital (Deficit) from Equity
Stockholders
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Balance, June 30, 1995 $1,500,000 $ 10,000 $ - $ 409,500 $(378,783) $ (437,482) $1,103,235
Issuance of notes
receivable from
stockholders - - - - - (64,740) (64,740)
Payments received on notes - - - - - 89,335 89,335
Accrued interest on notes - - - - - (35,896) (35,896)
Net Loss - - - - (152,976) - (152,976)
-----------------------------------------------------------------------------------------------------
Balance, June 30, 1996 1,500,000 10,000 - 409,500 (531,759) (448,783) 938,958
Issuance of notes receivable
from stockholders - - - - - (16,000) (16,000)
Conversion of preferred
stock to common stock (1,500,000) - 1,999 1,498,001 - - -
Contribution of common
stock to treasury and
subsequent retirement - (1,999) - 1,999 - - -
Payments received on notes - - - - - 72,627 72,627
Accrued interest on notes - - - - - (26,677) (26,677)
Net income - - - - 3,420,871 - 3,420,871
-----------------------------------------------------------------------------------------------------
Balance,June 30,1997 $ - $ 8,001 $1,999 $1,909,500 $2,889,112 $ (418,833) $4,389,779
=====================================================================================================
See accompanying notes.
5
TXEN, Inc.
Statements of Cash Flows
Year ended June 30,
1997 1996
-------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 3,420,871 $ (152,976)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 708,952 531,856
Cumulative effect of change in
accounting principle, net of
tax of $32,252 - (81,615)
Deferred income taxes 360,350 (64,300)
Provision for doubtful accounts 90,000 (65,000)
Gain on sale of equipment - (50)
Loss on sublease - 5,790
Changes in operating assets and
liabilities:
Accounts receivable (3,763,977) 44,264
Prepaid expenses (26,193) (35,615)
Income taxes receivable 24,800 (6,902)
Inventory 1,909 2,752
Other (621) 1,275
Interest payable 31,310 29,373
Customer deposits (128,518) 4,006
Accounts payable and accrued expenses 551,199 (156,294)
Accrued salaries, bonuses and vacation 189,681 75,819
Income taxes payable 433,134 -
Deferred revenue 977,628 436,963
-------------------------------
Net cash provided by operating activities 2,870,525 569,346
INVESTING ACTIVITIES
Purchases of property and equipment (1,328,259) (1,060,284)
Additions to deferred software (687,338) -
development costs ------------------------------
Net cash used in operating activities (2,015,597) (1,060,284)
FINANCING ACTIVITIES
Principal payments on long-term debt (250,197) (188,562)
Notes payable (135,142) 135,142
Payments on debt to stockholders - (9,000)
Increase in debt to stockholders 16,000 63,474
Principal payments on note payable to stockholder - (41,667)
Increase in notes receivable from stockholders 29,950 (11,301)
-------------------------------
Net cash used in financing activities (339,389) (51,914)
-------------------------------
TXEN, Inc.
Statements of Cash Flows
(Continued)
Year ended June 30,
1997 1996
-------------------------------
OPERATING ACTIVITIES
Net increase (decrease) in cash and cash equivalents 515,539 (542,852)
Cash and cash equivalents at beginning of year 630,685 1,173,537
-------------------------------
Cash and cash equivalents at end of year $ 1,146,224 $ 630,685
===============================
See accompanying notes.
6
TXEN, Inc.
Notes to Financial Statements
June 30, 1997 and 1996
1. ACCOUNTING POLICIES
Organization
- -------------
TXEN, Inc. (the Company) facilitates the administration of health benefits by
providing healthcare organizations hardware and software solutions through
either outsourcing or turnkey agreements primarily in the United States. The
Company also provides data processing services through management service
organization (MSO) agreements.
Cash and Cash Equivalents
- --------------------------
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Revenue Recognition
- --------------------
Outsourcing/MSO: Outsourcing and MSO fees are recognized in the period they
are earned.
System Sales: Software license fees and equipment revenue are recognized upon
delivery of the software product to the customer, unless the Company has
significant related obligations remaining. Revenue requiring any significant
obligations to customers is deferred and recognized once the remaining obliga-
tions become insignificant.
Professional Services: Revenue from professional services is recognized either
(i) as the services are performed based on the Company's standard rates for the
applicable services; or, (ii) as contract milestones are achieved, if specified
and required under the contract with the customer. Revenue from postcontract
customer support is recognized in the period the customer support services are
provided.
Concentration of Credit Risk and Financial Instruments: Financial instruments
which subject the Company to credit risk are primarily trade accounts receiv-
able. Concentrations of credit risk with respect to trade accounts receivable
are limited due to the large number and diversity of customers comprising the
Company's customer base. Management believes that any risk associated with
trade accounts receivable is adequately provided for in the allowance for
doubtful accounts. The Company generally does not require collateral on its
trade accounts receivable.
7
1. ACCOUNTING POLICIES (CONTINUED)
Software Development Costs
- ---------------------------
Under Statement of Financial Accounting Standards No. 86, "Accounting for Soft-
ware Costs", once technological feasibility is established related to software
development costs for new products or for enhancements to existing products
which extend the product's useful life, the costs are capitalized until the
product or enhancement is available for release to customers, after which the
capitalized costs are amortized over the product's estimated life giving con-
sideration to estimates of recoverability and net realizable value. Total
costs capitalized for software development were $687,338 and $-0- during the
years ended June 30, 1997 and 1996, respectively.
Capitalized software development costs are being amortized over five years.
Accumulated amortization of capitalized software development cost was $25,887
at June 30, 1997. The Company capitalized interest cost of $27,177 for the
year ended June 30, 1997 related to software development costs.
Research and Development
- ------------------------
Research and development is conducted by the Company under both customer
sponsored and Company sponsored programs. Total research and development costs
incurred by the Company were $926,000 and $1,069,000 during the years ended June
30, 1996 and 1997, respectively.
Inventory
- ----------
Inventory is carried at the lower of cost or market using the specific identi-
fication method.
Property and Equipment and Change in Depreciation Method
- ---------------------------------------------------------
Property and equipment is stated on the basis of cost. Property and equip-
ment are depreciated over the estimated useful lives of the assets (generally
three to seven years). Depreciation and amortization had been provided using
the straight-line method for items purchased prior to July 1, 1994, and
double-declining balance for items purchased after July 1, 1994. During the
year ended June 30, 1996 the Company adopted the straight-line method of
depreciation for all assets. The new method of depreciation was adopted to
better match the cost of the property and equipment with the revenues genera-
ted by those assets and has been applied retroactively to property and
equipment acquired in prior years. The effect of the change in fiscal 1996 was
to decrease loss before cumulative effect of the change in accounting princi-
ple by approximately $28,400. The adjustment of $81,615 (after reduction for
income taxes of $32,252) to apply retroactively the new method, is included
in net loss for fiscal 1996.
8
1. ACCOUNTING POLICIES (CONTINUED)
Income Taxes
- -------------
All income tax amounts and balances have been computed in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under Statement No. 109, the liability method is used in accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Stock Options
- --------------
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpreta-
tions in accounting for its employee stock options because the alternative fair
value accounting provided for under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS 123)
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of the grant, no compensation expense is recognized.
Use of Estimates
- -----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1997 1996
-------------------------------
Computer equipment $ 3,015,586 $2,161,657
Software 334,518 285,443
Furniture and fixtures 1,112,140 922,812
-------------------------------
4,462,244 3,369,912
Less accumulated depreciation (1,545,118) (1,097,980)
-------------------------------
$ 2,917,126 $2,271,932
===============================
9
3. LONG-TERM DEBT AND LINES OF CREDIT
The Company has two revolving credit lines with a bank payable on demand
totaling $1,000,000 which are collateralized by certain assets of the Company
and the general guaranty of the primary stockholders. There were no borrowings
under the credit lines at June 30, 1997 and 1996.
On March 17, 1994, the Company borrowed $1,342,719 from the bank under a long-
term note. The note, which has a balance of $641,834 and $892,031 at June 30,
1997 and 1996, respectively, and matures on October 17, 1998, bears interest at
prime plus 1/2% and is cross-collateralized with assets pledged under the
revolving credit lines.
Annual maturities of long-term debt are as follows: 1998 - $275,411 and 1999
- - - $366,423.
The Company incurred $19,500 and $54,474 during the years ended June 30, 1997
and 1996, respectively, of long-term debt to two stockholders for the purchase
of common stock of the Company that was then sold to various employees of the
Company in exchange for notes receivable. Interest accrues at 8.0% and matures
on October 1, 1997.
The Company paid $115,268 and $146,975 in interest during the years ended June
30, 1997, and 1996, respectively.
4. LEASES
The Company operates in leased premises and also leases certain equipment.
The future minimum lease payments under operating leases for the next five
years and in the aggregate are as follows:
1998 $277,588
1999 98,065
2000 224,200
--------
$599,853
========
Rent expense for the year ended June 30, 1997 and 1996 was $251,985 and
$263,668, respectively. The Company is also subleasing space to another tenant
over the next two years. The total estimated minimum sublease rentals to be
received in the future under this sublease are $6,642 and $33,209 at June 30,
1997 and 1996, respectively.
5. STOCKHOLDERS' EQUITY
On December 16, 1994, the Company entered into a Stock Purchase Option Agree-
ment with a third-party. Under the terms of the agreement, the Company sold
sold one share of convertible preferred stock to the third-party for
$1,500,000. The Company also authorized 1,250,000 shares of Class B common
stock which was reserved for issuance upon the conversion of the preferred
stock.
10
On July 17, 1996, the Stock Purchase Option Agreement with the holder of the
preferred stock was amended to allow the holder of the preferred stock to
accelerate the date to exercise the option to purchase all of the issued and
outstanding Class A common stock of the Company. The option is exercisable
for a period of thirty days after release of the Company's audited financial
statements for the year ended June 30, 1997. The holder of the preferred stock
converted all of the preferred stock to Class B common stock which is a
condition precedent to the right to exercise the option to purchase all of the
outstanding shares of Class A common stock of the Company. The Company
expects the option to be exercised which will require all related party
balances to be settled prior to the purchase. As a result, accrued officers
salaries and the related interest payable have been classified as current
liabilities on the balance sheet.
6. INCOME TAXES
The Company paid $1,161,001 and $-0- in income taxes during the years ended
June 30, 1997 and 1996, respectively.
Significant components of the Company's current deferred tax liabilities and
assets at June 30, 1997 and 1996 are as follows:
1997 1996
------------------------------
Deferred tax liabilities:
Tax over book depreciation $ 259,692 $ 228,320
Software development costs 239,578 -
-----------------------------
499,270 228,320
Deferred tax assets:
Allowance for doubtful accounts 45,275 12,677
Accrued salaries and interest 188,068 184,877
Accrued leave 77,914 44,477
Other 4,322 5,943
Net operating loss carryforwards - 157,005
------------------------------
Total deferred tax assets 315,579 404,979
------------------------------
Net deferred tax (liability) assets $ (183,691) $ 176,659
==============================
11
Significant components of the provision for income taxes (benefit) are as
follows:
1997 1996
------------------------------
Current:
Federal $ 1,598,610 $ 3,847
State 163,325 -
Benefit of operating loss carryforward (143,000) -
------------------------------
Total current 1,618,935 3,847
Deferred:
Federal 314,150 (56,056)
State 46,200 (8,244)
------------------------------
Total deferred 360,350 (64,300)
------------------------------
$ 1,979,285 $ (60,453)
==============================
7. RELATED PARTY TRANSACTIONS
The Company has a note payable to a stockholder of the Company for $8,333 at
June 30, 1997 and 1996 bearing interest at 8%. Payment of the principal
balance and accrued interest will be made upon demand except where the
Company is restricted from doing so by any agreements with third-parties in
force at that time.
The Company has notes and accrued interest receivable from stockholders of
the Company of $418,833 and $448,783 at June 30, 1997 and 1996, respect-
tively, which bear interest at 8%.
The Company incurred $269,202 in expenses with an affiliated company for con-
tracted services of which $38,857 is included in accounts payable at June 30,
1997. The Company had $188,037 of revenue from an affiliated company during
the year ended June 30, 1997.
8. SAVINGS AND RETIREMENT PLAN
The Company has a savings and retirement plan (Plan) for all eligible
employees pursuant to Section 401(k) of the Internal Revenue Code. The Company
will match employee contributions to the Plan at a level determined
annually by the Company's Board of Directors. The Company's contribution for
the years ended June 30, 1997 and 1996 was $6,009 and $3,400, respectively.
12
9. STOCKHOLDERS' AGREEMENT
Certain members of management are also stockholders of the Company and owned
approximately 60% of the Class A common stock at June 30, 1997. Under a
stock purchase agreement, the Company is committed to purchase management's
common stock in the event of death, retirement or termination of employ-
ment. The price to be paid for the common stock is set by formula in the
Employee Stock Purchase Agreement. As discussed in Note 5, the holder of the
Class B common stock has the right to exercise an option to purchase all of
the outstanding shares of Class A common stock of the Company for a period of
30 days after release of the Company's audited financial statements for
the year ended June 30, 1997 which would include all the stock held by members
of management.
10. CONTINGENCY
The Company entered into an agreement with a customer whereby the Company must
deliver the final version of software currently under development by August 1,
1999. If the software is not ready to be released to the customer by
August 1, 1999, the Company must pay a penalty of $195,000. Management
estimates that delivery of the software under development will occur prior to
the deadline and no penalty will be incurred and, therefore, no accrual
for this contingency has been recorded in the financial statements.
11. STOCK OPTION PLANS
During 1996, the Board of Directors approved the TXEN, Inc., 1996 Incentive
Stock Option Plan which authorized the issuance of options to purchase up to
100,000 shares of common stock and the Key Employee Incentive Stock Option
Plan which authorized the issuance of options to purchase up to 40,000 shares
of common stock. All options under the 1996 Plans have 5-year terms. Incen-
tive stock options vest and become exercisable at the end of 2 years of
continued employment while non-qualified stock options are exercisable upon
grant. Pro forma information regarding net income is required by SFAS 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method required by SFAS 123. The fair value for
these options was estimated at the date of grant using the minimum value method
with the following assumptions for 1996: risk-free interest rates of 6.30%;
weighted-average expected life of the options of 4 years; no volatility factors
of the expected market price of the Company's common stock because the Company
is privately held; and no dividend yields.
If the Company had adopted SFAS 123 in accounting for its stock options granted
in fiscal year 1996, its net income would have been decreased by approximately
$31,000. For purposes of pro forma disclosures, the estimated fair value
of the options is amortized to expense over the options' vesting period.
The effect of applying pro-forma disclosures based on SFAS 123 are not likely
to be representative of the effects on future net income. As of June 30,
1996, there were no options which had been exercised. During fiscal 1997,
123,371 shares were granted with an exercise price of $6.20 and remain out-
standing at June 30, 1997. The weighted average fair value of options
granted during the year was $6.78 with a weighted average contractual life of
4.2 years.
13
SIGNATURE
---------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Amendment No. 2 to the Current Report on
Form 8-K to be signed on its behalf by the undersigned hereunto duly authorized.
NICHOLS RESEARCH CORPORATION
January 15, 1999 By: Allen E. Dillard
- ---------------- ----------------
Date Allen E. Dillard
Corporate Vice President, Chief
Financial Officer and Corporate
Treasurer