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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 22, 1999
REGISTRATION NO. 333-*
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NICHOLS TXEN CORPORATION
(Exact name of Registrant as specified in its charter)
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DELAWARE 8741 63-1182099
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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10 INVERNESS CENTER PARKWAY, SUITE 500
BIRMINGHAM, ALABAMA 35242
(205) 995-9898
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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PAUL D. REAVES
CHIEF EXECUTIVE OFFICER
NICHOLS TXEN CORPORATION
10 INVERNESS CENTER PARKWAY, SUITE 500
BIRMINGHAM, ALABAMA 35242
(205) 995-9898
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
JOHN R. WYNN, ESQ. J. VAUGHAN CURTIS, ESQ.
LANIER FORD SHAVER & PAYNE, P.C. ALSTON & BIRD LLP
P.O. BOX 2087 ONE ATLANTIC CENTER, 1201 WEST PEACHTREE ST.
HUNTSVILLE, ALABAMA 35804 ATLANTA, GEORGIA 30309-3424
(256) 535-1100 (404) 881-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC. As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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AMOUNT OF
TITLE OF EACH CLASS OF PROPOSED MAXIMUM REGISTRATION
SECURITIES TO BE REGISTERED AGGREGATE OFFERING AMOUNT(1) FEE(1)
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Common Stock, $0.01 par value.............. $35,000,000 $9,730
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(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
JANUARY 22, 1999
2,175,000 Shares
(NICHOLS TXEN LOGO)
Common Stock
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This is an initial public offering of shares of common stock of Nichols TXEN
Corporation. Nichols Research Corporation, which currently owns all of the
common stock of Nichols TXEN, will own approximately 78% of the outstanding
shares of the common stock after the offering. Accordingly, Nichols Research
will be able to control the management and operation of Nichols TXEN. We
anticipate that the initial public offering price will be between $12.00 and
$14.00 per share.
We have applied to list the common stock on the Nasdaq National Market under the
symbol "NTXN."
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
PER SHARE TOTAL
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Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to the Company..................................... $ $
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Nichols TXEN has granted the underwriters the right to purchase up to 325,000
additional shares to cover any over-allotments.
BT ALEX. BROWN
CIBC OPPENHEIMER
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
THE ROBINSON-HUMPHREY COMPANY
THE DATE OF THIS PROSPECTUS IS , 1999
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(Inside front cover)
Nichols TXEN
Improving the Cost Effectiveness & Quality of Health Care
with Technology-based Outsourcing Solutions for the
Administrative-side of Physician Practices and Managed Care Organizations
Information Technology Outsourcing Administrative Services Outsourcing
(photo -- software screens and (photo -- people in the administration
people working on computer systems department working on computers)
collage)
- Enterprise-Level Complete Back Office -
Software Applications Administrative
Processing Services
- Decision Support
Applications Entire Functional Area -
or Department Specific
- Back Office IT Outsourcing
Management
Nichols TXEN Technology & Nichols TXEN Technology &
the Customer's Personnel Nichols TXEN Personnel
Network Data Center
(photo -- computer center
operation collage)
Comprehensive
Marketplace
Connectivity
Physician Practice Management -integrated solutions- Managed Care Administration
Software Applications Software Applications
MDr98 - billing, insurance TXEN-MHS - premium billing,
processing, appointments, capitation, benefit plan administration
master patient index, membership & provider
advanced payor connectivity management, claim processing
Decision Manager - activity- FirstSTEPP - medical utilization
based cost analysis, care management, case management,
analysis, performance analysis authorizations
Xtend DSS - quality and
performance analysis
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MDr98(TM), Decision Manager 3.0(TM), TXEN MHS(TM), Xtend(TM), Xtend/MHS(TM),
Xtend/HEDIS(TM) and FirstSTEPP(TM) are trademarks of Nichols TXEN. Trade names
and trademarks of other companies appearing in this prospectus are the property
of their respective holders.
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As used in this prospectus, the "Company," "Nichols TXEN," "we," "us" and "our"
mean Nichols TXEN Corporation, and "Nichols Research" means Nichols Research
Corporation and its consolidated subsidiaries.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
The entire prospectus should be read carefully, including the Risk Factors
section and the financial statements and the notes to those statements. This
prospectus contains forward-looking statements that involve risk and
uncertainties. These forward-looking statements can be generally identified
because the content of the statement will usually contain words such as we
"believe," "anticipate," "expect," "plan," "estimate" and words of similar
import. Similarly, statements that describe our future plans, objectives, goals,
or strategies are forward-looking statements. These 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.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors."
NICHOLS TXEN
OUR BUSINESS
We are a leading provider of outsourcing solutions for information
technology and administrative services in the managed care and physician
practice management markets within the health care industry. We offer a broad
range of medical billing and claims processing outsourcing solutions. Our
solutions improve quality and reduce costs by minimizing the time and personnel
needed to process health care transactions. As a result of our fee structure for
these outsourcing solutions, approximately 72% of total revenues in 1997 and
approximately 77% of total revenues in 1998 were recurring. We consider
recurring revenue to be revenue based on the number of enrolled health plan
members per month, the number of transactions processed, fixed monthly fees or a
percentage of customer collections.
Our outsourcing solutions enable customers to concentrate on providing
quality health care. We allow customers the flexibility to perform
administrative functions with their own staffs utilizing our technology, or to
outsource to us certain administrative and processing functions. Each customer
contracts with us for the level of outsourcing service needed. Significant
benefits to our customers include:
- streamlined administrative functions;
- variable rate operating cost structure;
- faster implementation;
- reduced capital expenditures for administrative health care
technologies;
- less technology risk;
- access to knowledgeable and experienced personnel;
- sophisticated enterprise-level application software and decision
support tools;
- enhanced marketplace connectivity; and
- ability to focus on core businesses.
We maintain a centralized network data center to process transactions and
provide technology services for our customers. We believe that our ability to
offer both technical solutions and administrative services through our network
data center differentiates us from competitors that offer only turnkey software
solutions or only administrative services.
We are organized into two divisions, one providing technology and services
to managed care entities, and the other providing technology and services to
physician organizations. As of November 30, 1998, we had 90 managed care
services customers representing over three million lives nationwide, and over
285 practice management services customers representing approximately 3,000
physicians, primarily in the Southeast.
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OUR MARKET OPPORTUNITY
Health care costs in the United States have risen dramatically over the
past two decades to approximately $1.0 trillion in 1996, or approximately 14% of
the gross domestic product. Membership in commercial health maintenance
organizations, or HMOs, is expected to rise from 66 million members in 1997 to
105 million members in 2001. This increase in membership in managed care,
especially Medicaid and Medicare, is creating many new start-up organizations
and fueling rapid growth in existing organizations. Reimbursement for health
care has historically been fee-for-service. However, federal and state
governments, insurance companies and other payors are increasingly using
alternative reimbursement models and complex arrangements to control costs. For
example, payors are using fixed-fee systems, such as a capitation, that shift
the financial risk from payors to health care providers. These organizations
often lack the information technology and operational resources to efficiently
function within this more complex and sophisticated health care environment. As
a result, it is estimated that 32% of every health care dollar spent covers
administrative costs.
To meet these additional requirements, health care information technology
expenditures are expected to grow to over $21.0 billion by 2000 from $13.6
billion in 1997. Historically, health care expenditures for information
technology have lagged behind other industries, with investments averaging 2% to
3% of operating revenues, compared with an average of 6% to 8% for other
industries and 12% to 14% for information-sensitive sectors such as financial
services. A Health Information Management System Society, or HIMSS, 1998 survey
indicates that health care organizations are poorly equipped to support managed
care. Less than 10% of the companies surveyed indicated that they had the
software capability to perform each of the following: utilization management,
capitation and risk management, benefits management, claims management and
health outcomes reporting. The HIMSS survey also indicates an increasing demand
for health care information technology outsourcing solutions. Currently,
approximately 61% of health care organizations surveyed outsource some portion
of their information technology services. Market research also predicts health
care information technology outsourcing will grow from $2.9 billion in 1997 to
$4.0 billion in 2001. In addition, we believe that the demand for administrative
services outsourcing is increasing.
OUR STRATEGY
Our objective is to be the leading national provider of outsourcing
solutions for information technology and administrative services in the managed
care and physician practice management markets of the health care industry. Our
strategy includes the following key elements:
- focus on providing outsourcing solutions for the administrative
challenges of health care;
- continue to capitalize on niche market opportunities;
- expand high recurring revenue model;
- increase internal efficiencies through automation;
- expand decision support and medical utilization management software and
services; and
- acquire complementary businesses and technologies.
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OUR HISTORY
We are the resulting organization of several acquisitions made by our
parent company, Nichols Research Corporation. Nichols Research formed CSC
Acquisition, Inc. as a wholly owned subsidiary on June 6, 1995. On June 30,
1995, CSC Acquisition acquired all of the assets and certain liabilities of
Computer Services Corporation. Since its incorporation in 1967, Computer
Services performed administrative services and information technology services
for, and sold turnkey computer systems to, physician practices. Nichols Research
formed Nichols SELECT Corporation as a wholly owned subsidiary on September 17,
1996. On September 23, 1996, CSC Acquisition was merged into Nichols SELECT. On
December 16, 1994, Nichols Research acquired 19.9% of the capital stock of TXEN,
Inc. with an option to acquire the remaining 80.1% of TXEN. Since its
incorporation in 1989, TXEN provided information technology outsourcing and
administrative services outsourcing for the managed health care industry. On
August 29, 1997, Nichols Research acquired the remaining 80.1% of TXEN through a
merger of TXEN into Nichols SELECT, which after the merger continued to be
wholly owned by Nichols Research. After the TXEN acquisition, Nichols SELECT
changed its name to Nichols TXEN Corporation.
Our executive offices are located at 10 Inverness Center Parkway, Suite
500, Birmingham, Alabama, and our telephone number is (205)995-9898. Our
Internet address is www.nicholstxen.com.
THE OFFERING
Common stock offered........................ 2,175,000 shares
Shares to be outstanding after this
offering(1)................................. 9,675,000 shares
Use of proceeds............................. For working capital, to fund
possible acquisitions and other
general corporate purposes.
Proposed Nasdaq National Market symbol...... NTXN
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(1) Excludes 766,000 shares of common stock issuable upon exercise of employee
and director stock options outstanding on November 30, 1998, pursuant to
the Nichols TXEN 1998 Stock Option Plan and the Non-Employee Director Stock
Option Plan. These options were granted subject to completion of the
offering at an exercise price equal to the initial public offering price.
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Unless we otherwise indicate, all information in this prospectus assumes no
exercise of the over-allotment option to purchase additional shares of 325,000
common stock granted to the underwriters.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NICHOLS TXEN CORPORATION
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THREE MONTHS
ENDED
YEARS ENDED AUGUST 31, NOVEMBER 30,
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1994 1995 1996 1997 1998 1997 1998
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STATEMENTS OF OPERATIONS DATA
(HISTORICAL BASIS)(1):
Revenues........................................ $ 8,357 $ 9,382 $10,370 $12,438 $43,480 $ 8,958 $12,236
Gross profit.................................... 2,653 3,082 3,932 4,669 20,224 4,166 5,602
Selling, general and administrative expenses.... 1,336 1,859 1,932 2,251 7,367 1,523 2,295
Research and development........................ 634 762 710 1,155 2,771 498 760
Write-off of purchased in-process research and
development(2)................................ -- -- -- 8,500 -- -- --
Income (loss) from operations................... 332 112 343 (8,222) 5,539 1,209 1,445
Net income (loss)............................... 228 71 320 (7,673) 3,252 709 867
PER SHARE DATA(3):
Basic earnings per share(3)..................... $ 0.43 $ 0.09 $ 0.12
Weighted average common shares outstanding(3)... 7,500 7,500 7,500
TXEN, INC.
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YEARS ENDED JUNE 30,
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1994 1995 1996 1997
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STATEMENTS OF OPERATIONS DATA
(HISTORICAL BASIS)(1):
Revenues........................................ $ 2,653 $ 4,706 $ 6,860 $14,980
Gross profit.................................... 1,274 2,972 3,648 10,132
Selling, general and administrative expenses.... 1,017 1,371 2,467 2,945
Research and development........................ 126 624 926 1,069
Income (loss) from operations................... (59) 631 (277) 5,409
Net income (loss)............................... (105) 683 (153) 3,421
NICHOLS TXEN CORPORATION
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THREE MONTHS
ENDED
YEARS ENDED AUGUST 31, NOVEMBER 30,
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1994 1995 1996 1997 1998 1997 1998
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STATEMENTS OF OPERATIONS DATA
(COMBINED BASIS)(1):
Revenues........................................ $11,551 $14,140 $18,274 $27,921 $43,480 $ 8,958 $12,236
Gross profit.................................... 4,179 6,122 6,886 14,787 20,224 4,166 5,602
OTHER STATISTICAL DATA (COMBINED BASIS)(1):
Revenue Mix (Percent of Revenues):
Managed care.................................. 27.7% 33.6% 43.3% 55.5% 66.4% 63.5% 68.4%
Practice management........................... 72.3% 66.4% 56.7% 44.5% 33.6% 36.5% 31.6%
Recurring(4).................................. 75.1% 76.4% 78.0% 71.6% 76.6% 73.7% 76.9%
Non-recurring(4).............................. 24.9% 23.6% 22.0% 28.4% 23.4% 26.3% 23.1%
Growth of revenues.............................. 13.8% 22.4% 29.2% 52.8% 55.7% 61.0% 36.6%
Gross profit margin............................. 36.2% 43.3% 37.7% 53.0% 46.5% 46.5% 45.8%
Customer Data:
Number of managed care customers.............. 24 33 50 70 87 76 90
Number of practice management customers(5).... 191 184 202 231 252 231 286
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NOVEMBER 30, 1998
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AS
ACTUAL ADJUSTED(6)
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(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital........................................... $ 6,084 $31,780
Total assets.............................................. 59,068 84,764
Long-term debt............................................ -- --
Total stockholders' equity................................ 49,948 75,644
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(1) The historical statements of operations data include the results of
operations of Nichols TXEN and TXEN, Inc. Combined statements of operations
and other statistical data are presented on a combined basis by combining
the historical data of Nichols TXEN with that of TXEN conformed to 12 month
periods ending August 31.
(2) In December 1994, Nichols Research purchased 19.9% of TXEN for
approximately $1.5 million with an option to purchase the remaining 80.1%
of TXEN. Nichols Research exercised its option to acquire the remaining
80.1% of TXEN on August 29, 1997. Aggregate consideration of approximately
$43.8 million was paid at closing, $17.5 million in cash and 1,084,148
shares of Nichols Research stock valued at approximately $26.3 million. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the purchase price of approximately $45.3 million was
allocated to the individual TXEN assets acquired and liabilities assumed
based upon their respective fair values at the date of acquisition. The
transaction resulted in cost in excess of tangible net assets acquired of
approximately $42.8 million, of which $8.5 million was allocated to
in-process research and development and charged to expense in the fourth
quarter of 1997. In addition, goodwill was valued at $17.4 million and
other intangibles were valued at $16.9 million.
(3) The earnings per share data gives effect to the outstanding capital stock
of Nichols TXEN held by Nichols Research on a pro forma basis applied for
Nichols Research's proportionate share for all periods presented.
(4) We define recurring revenue to be revenue based on the number of enrolled
health plan members per month, the number of transactions processed, fixed
monthly fees or a percentage of customer collections. We consider non-
recurring revenues to be revenues based on sales of computer hardware and
software and professional services based on time and materials.
(5) Turnkey customers are excluded.
(6) Adjusted to give effect to the receipt of the estimated net proceeds of
this offering based upon an assumed initial public offering price of $13.00
per share and the application of the net proceeds.
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RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding to invest in shares of common stock.
WE MAY NOT BE ABLE TO CONTINUE COMPETING SUCCESSFULLY WITH OTHER INFORMATION
TECHNOLOGY AND ADMINISTRATIVE OUTSOURCING COMPANIES
Our business is highly competitive. The market for our technology and
services is rapidly changing and requires potentially expensive technological
advances. We believe our future success will depend, in part, upon our ability
to:
- enhance our current technology and services;
- respond effectively to technological changes;
- sell additional services to our existing client base;
- introduce new technologies; and
- meet the increasingly sophisticated needs of our clients.
Competitors may develop products or technologies that are better or more
attractive than those offered by us or that may render our technology and
services obsolete. In addition, we plan to significantly limit the sale of
turnkey computer systems to customers who desire to process their transactions
internally. Accordingly, we may be at a competitive disadvantage to other
vendors offering such systems. Many of our current and potential competitors are
larger and offer broader services and have significantly greater financial,
marketing and other competitive resources than us.
AFTER THIS OFFERING, WE WILL STILL BE CONTROLLED BY NICHOLS RESEARCH AND THIS
MAY PRESENT CONFLICTS OF INTEREST
Upon completion of this offering, Nichols Research will own approximately
78% of our outstanding common stock (75% if the underwriters' over-allotment
option is exercised in full). Therefore, Nichols Research will control us and
have the power to elect all of our directors and appoint our management. In
addition, Nichols Research will be able to approve actions requiring the consent
of our shareholders. Initially, three of the seven directors will be officers or
directors of Nichols Research, two of the directors will be our employees and
only two directors will be independent directors who are not Nichols Research
affiliates or our employees. Our directors who are also directors of Nichols
Research may favor Nichols Research in certain decisions.
Nichols Research has entered into a Voting Agreement, a Corporate Services
Agreement and a Tax Sharing Agreement with us. The agreements were negotiated
while we were a wholly owned subsidiary of Nichols Research. As a result, the
terms of such agreements may be less favorable to us than the terms we could
have attained from unaffiliated third parties. The concentration of ownership by
Nichols Research could limit the price that certain investors might be willing
to pay in the future for our shares and could make it more difficult for a third
party to acquire us. See "Certain Transactions -- Services Agreement,"
"-- Voting Agreement" and "-- Tax Sharing Agreement."
IF CUSTOMERS TERMINATE OR MODIFY EXISTING CONTRACTS, IT COULD ADVERSELY AFFECT
OUR EARNINGS
We believe that our long-term success largely depends upon our ability to
retain customers and generate recurring revenues from contracts. Although we
enter into multi-year customer agreements, a majority of our customers are able
to reduce or cancel their use of our services before the end of the contract
term. We also provide services to certain customers without long-term contracts.
In addition, our operating expenses are relatively fixed and cannot be reduced
on short notice to compensate for unanticipated contract cancellations or
reductions. As a result, any termination, significant reduction, or modification
of our business relationships with any of our significant
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customers or with a number of smaller customers could have a material adverse
effect on our business, financial condition or results of operations.
WE NEED TO RETAIN OUR KEY PERSONNEL
Our success will depend in large part on the continued services of key
management and skilled personnel. There is substantial competition for key
management personnel from other companies. In addition, our present executives
and managers may accept positions within the Nichols Research family of
companies causing them to be unavailable to serve us. The loss of the services
of one or more of our key management employees, or the inability to hire
additional key management personnel as needed, could have a material adverse
effect on our business. See "Management."
IT MAY BE DIFFICULT TO RECRUIT AND RETAIN SKILLED EMPLOYEES
There is significant competition for employees with the technical skills we
require. Qualified employees are in great demand and are likely to remain a
limited resource for the foreseeable future. We have taken many steps to address
these issues, including in-house training programs for college graduates, but
these steps may not be adequate. In the future, we may not be successful in
attracting and retaining needed personnel. Although we currently experience
relatively low rates of turnover for skilled employees, the rate of turnover may
increase in the future.
ERRORS OR IMPROPER HANDLING OF CUSTOMER TRANSACTIONS MAY OCCUR
Our customers demand reliability and quality when their transactions are
processed. Although we devote substantial resources to meeting these demands,
errors may occur. Errors and mistakes in processing customer transactions may
result in loss of data, inaccurate information and delays. Such errors could
cause us to lose customers and could result in liability. Our service agreements
contain contractual limitations on liability and we maintain insurance to
protect against claims associated with the use of our services. However, the
contractual provisions and insurance coverage may not provide adequate coverage
against all possible claims that may be asserted. In addition, appropriate
insurance may be unavailable in the future at commercially reasonable rates. A
successful claim in excess of our insurance coverage could have a material
adverse effect on our business, financial condition or results of operations.
Even unsuccessful claims could result in the expenditure of funds in litigation,
as well as diversion of management time and resources.
WE MAY INCUR LIABILITY AS A RESULT OF PROVIDING UTILIZATION REVIEW SERVICES
We recommend to our customers whether a claim for payment or service should
be denied or existing coverage should be continued based on the customer's plan
or contract and industry standard clinical support criteria. Our customers are
ultimately responsible for deciding whether to deny claims for payment or
medical services. It is possible, however, that liability may be asserted
against us for denial of medical service or payment of medical claims. Even
though we have certain protections under customer contracts and insurance
policies, such protections may not be adequate. See "Business -- Government
Regulation."
THERE IS INCREASED GOVERNMENT SCRUTINY OF BILLING AND CLAIMS ACTIVITIES
We perform billing and claims services which are governed by numerous
federal and state civil and criminal laws. The federal government in recent
years has placed increased scrutiny on billing and collection practices of
health care providers and related entities and particularly on potential
fraudulent billing practices such as submissions of inflated claims for payment
and upcoding. Violations of the laws regarding billing and coding may result in
civil monetary penalties, criminal fines, imprisonment, or exclusion from
participation in Medicare, Medicaid and other federally funded health care
programs for us and our customers. See "Business -- Government Regulation."
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IF WE ARE UNABLE TO MAKE FUTURE ACQUISITIONS, OUR RATE OF GROWTH MAY BE
ADVERSELY AFFECTED
If we are unable to make acquisitions, we may not meet our growth
expectations. While we are not currently a party to any agreements or
understandings for any material acquisitions, we expect to acquire companies as
part of our growth strategy. However, we may be unable to identify suitable
acquisition candidates. We compete with other companies to acquire other
businesses. We expect this competition to continue to increase, making it more
difficult to acquire suitable companies on favorable terms.
IF WE CANNOT INTEGRATE ACQUIRED COMPANIES WITH OUR BUSINESS, OUR PROFITABILITY
MAY BE ADVERSELY AFFECTED
Even though we may acquire additional companies in the future, we may be
unable to successfully integrate the acquired businesses and realize anticipated
economic, operational and other benefits in a timely manner. Integration of an
acquired business is especially difficult when we acquire a business in a market
in which we have limited or no expertise, or with a corporate culture different
from ours. If we are unable to successfully integrate acquired businesses, we
may incur substantial costs and delays or other operational, technical or
financial problems. In addition, the failure to successfully integrate
acquisitions may divert management's attention from our existing business and
may damage our relationships with our key clients and employees.
ACQUISITIONS MAY DECREASE OUR STOCKHOLDERS' PERCENTAGE OWNERSHIP IN NICHOLS TXEN
AND REQUIRE US TO INCUR DEBT
We may issue equity securities in future acquisitions that could be
dilutive to our stockholders. We also may incur debt and additional amortization
expense related to goodwill and other intangible assets in future acquisitions.
This debt and additional amortization expense may reduce significantly our
profitability and materially and adversely affect our business, financial
condition and results of operations.
IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 CONCERNS, WE MAY LOSE REVENUE OR INCUR
ADDITIONAL COSTS
Many computer programs were designed and developed without considering the
upcoming change in the century, which could lead to failure of computer
applications or create erroneous results by or at the year 2000. This issue is
referred to as the "Year 2000" problem. It is possible that our computer
systems, software products or other business systems, or those of our suppliers
or customers, could malfunction as a result of the Year 2000 problem. In
addition, telecommunication and utility services which are important to our
operations could malfunction due to the Year 2000 problem. We have conducted a
review of our business systems, including computer systems, in an attempt to
identify ways in which these systems could be affected by the Year 2000 problem.
Based on this review, we do not expect the Year 2000 problem will have a
material adverse effect on our systems. Despite our efforts, there is always a
possibility that we may not identify and correct all Year 2000 problems.
We have also requested assurances from our software vendors for
confirmation that their software will correctly process date information. In
addition, we have also questioned other suppliers and significant customers as
to their progress in identifying and addressing potential Year 2000 problems. As
a result of the Year 2000 problem, many of our customers may suffer delays in
reimbursement from Medicare and Medicaid programs, other federal or state health
care programs and other third-party payors. Such delays may also damage us.
Nichols TXEN may not be able to identify, successfully remedy or assess all
date-handling problems in our business systems or operations or those of our
customers and suppliers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000."
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13
A SYSTEM FAILURE COULD ADVERSELY AFFECT OUR BUSINESS
To succeed, we must be able to operate our network data center without
interruption. Substantially all customer transactions are processed at our
network data center, which is located at a single site. Although we have
safeguards for emergencies, we do not have a permanent mirror processing site to
which processing could be transferred in case of a catastrophic event. In order
to operate without interruption, we must guard against:
- power outages, fires, tornadoes and other natural disasters at the
network data center;
- telecommunications failures;
- equipment failures;
- security breaches; and
- other potential interruptions.
Any interruption could cause us to reduce fees charged to customers in
accordance with performance guarantees in customer contracts, require us to
spend money replacing existing equipment or adding redundant facilities, damage
our reputation for reliable services, or make it more difficult for us to
attract new customers.
THERE ARE RISKS RELATED TO THE LICENSING OF OUR CORE PROCESSING SOFTWARE
Our core processing software for the managed care services business, known
as MHS, was licensed in 1989 from CSC Healthcare Services, Inc. We currently
hold three perpetual, non-transferable and non-marketable source code and object
code MHS licenses. Since 1989, we have significantly enhanced and modified our
version of MHS, which is known as TXEN MHS. We have not requested nor received
any updates or enhancements from CSC, and we are not dependent upon CSC for
support of TXEN MHS. As a condition to the license grant from CSC, we are
restricted from offering TXEN MHS or managed care administrative services to a
CSC managed care customer without written consent from CSC. We are also
restricted from selling turnkey versions of TXEN MHS without written consent
from CSC. Although we believe that the managed care services market is
sufficiently large to permit us to expand our customer base, these limitations
may reduce market opportunities and restrict our business growth. In addition,
if we violate the restriction or otherwise breach the licensing agreement and do
not cure such violation or breach, CSC could terminate the licenses. Termination
of the licensing arrangements with CSC could have a material adverse effect on
our business, financial condition or results of operations.
WE MAY BE UNABLE TO PROTECT OUR TECHNOLOGY AND CONFIDENTIAL INFORMATION
Our success depends to a significant degree upon proprietary software and
other confidential information. The software and information technology
industries have experienced widespread unauthorized reproduction of software
products and other proprietary technology. We do not own any patents and we have
not registered any copyrights, trademarks, service marks, or trade names with
the United States Patent and Trademark Office. We rely on a combination of trade
secrets, common law intellectual property rights, license agreements,
nondisclosure and other contractual provisions and technical measures to
establish and protect our proprietary rights in our intellectual property and
confidential information. However, these actions may not protect our technology
or information, and these actions do not prevent independent third-party
development of competitive products or services.
We believe that our proprietary rights do not infringe upon the proprietary
rights of third parties. However, third parties may assert infringement claims
against us in the future, and we could be required to enter into a license
agreement or royalty arrangement with the party asserting the claim. We may also
be required to indemnify customers for claims made against them.
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CHANGES IN THE HEALTH CARE INDUSTRY COULD ADVERSELY AFFECT OUR BUSINESS
The health care industry in the United States is in a period of rapid
change and uncertainty. Certain changes may cause health care organizations to
change the way they operate and pay for services. Our transaction processing
technology and services are designed to function within the current health care
financing and reimbursement system. During the past several years, the health
care industry has been subject to increasing levels of government regulation of,
among other things, reimbursement rates and certain capital expenditures. In
addition, proposals to reform the health care system have been considered by
Congress. These proposals, if enacted, may further increase government
involvement in health care, lower reimbursement rates and otherwise change the
operating environment for our customers. As in the past, health care
organizations may react to these proposals and the uncertainty surrounding such
proposals in ways that could result in a reduction or deferral in the use of our
technologies and services. For example, several HMOs have recently withdrawn
from taking Medicare risk because they felt that reimbursement rates were no
longer adequate. We cannot predict with any certainty what impact, if any, such
proposals or health care reforms might have on our business, financial condition
or results of operations. See "Business -- Government Regulation."
NEW REGULATIONS REGARDING COMPUTER MEDICAL RECORDS COULD INCREASE OUR COSTS
The United States Department of Health and Human Services has proposed
regulations regarding electronic signatures and the maintenance and transmission
of computer medical records. These regulations establish certain standards for
electronic record-keeping. We do not know if these regulations will be adopted
in their present form or a different form, or at all. However, if these
regulations are adopted, they may require modifications to our computer software
and record-keeping practices. These changes may require us to make substantial
capital investments.
WE MAY BE REQUIRED TO COMPLY WITH ADDITIONAL LICENSING REGULATIONS AND CONSUMER
PROTECTION LAWS
Various state laws regulate the operation of companies that provide
administrative and business services to health plans. In addition, federal and
state consumer protection laws may apply to us when we bill patients directly
for the cost of physician services provided. Failure to comply with any of these
laws or regulations could result in a loss of licensure, or other fines and
penalties. See "Business -- Government Regulation."
CHANGES IN LAWS REGARDING THE PROTECTION OF CONFIDENTIAL PATIENT INFORMATION
COULD PREVENT CUSTOMERS FROM USING OUR SERVICES
The confidentiality of patient records is subject to substantial regulation
by state governments. These state laws and regulations govern both the
disclosure and the use of confidential patient medical record information.
Although compliance with these laws and regulations is at present principally
the responsibility of the physician or other health care providers, regulations
governing patient confidentiality rights are evolving rapidly. Additional
legislation governing the dissemination of medical record information has been
proposed at both the state and federal level. This legislation may require
holders of medical information to implement security measures and impose
restrictions on the ability of third-party processors, like us, to transmit
certain patient data without specific patient consent. Any change in legislation
could restrict health care providers from using our services. See
"Business -- Government Regulation."
WE MUST MAINTAIN THE SECURITY OF OUR NETWORK DATA CENTER
We have confidential customer and patient information in our network data
center. Therefore, it is critical that our facilities and infrastructure remain
secure. Despite the implementation of security measures, our infrastructure may
be vulnerable to physical break-ins, computer viruses, program-
12
15
ming errors, attacks by third parties or similarly disruptive problems. Any
material security breach could result in liability and damage to our reputation.
WE HAVE LARGE AMOUNTS OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
TECHNOLOGY WHICH MAY NEVER BE SUCCESSFULLY DEVELOPED
In August 1997, Nichols Research acquired TXEN, Inc. and allocated $8.5
million to in-process technology. The acquired in-process technology consisted
of ten software development projects to perform managed care administrative
functions and provide enhanced information reports. The fair value of the
acquired in-process technology was determined based on an analysis of the
markets, projected cash flows and risks associated with achieving such cash
flows. At the date of acquisition, the technological feasibility of the acquired
technology had not been established and the acquired technology has no
alternative future uses. In addition, at that time, we estimated that the cost
to complete these projects was $1.75 million, of which $445,000 was spent in
fiscal year 1998 and of which $1.3 million is expected to be spent in fiscal
year 1999. The purchased in-process technology may never be successfully
developed. To the extent the in-process technology is not successfully
developed, this could have a material adverse effect on our business, financial
condition or results of operations.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE
The market price for the common stock could drop as a result of sales of a
large number of shares of common stock in the market after the offering or the
perception that such sales could occur. These factors also could make it more
difficult for us to raise funds through future offerings of common stock.
There will be 9,675,000 shares of common stock outstanding immediately
after the offering (10,000,000 shares if the underwriters' over-allotment option
is exercised in full). Of the total shares outstanding, the shares sold in this
offering will be freely transferable without restriction or further registration
under the Securities Act, except for any shares purchased by our "affiliates,"
as defined in Rule 144 under the Securities Act. Persons who may be deemed to be
our affiliates after the offering generally include our directors and executive
officers and principal stockholders. The shares of common stock outstanding
after the offering held by Nichols Research will be "restricted securities" as
defined in Rule 144. These shares may be sold in the future without registration
under the Securities Act to the extent permitted by Rule 144 or another
exemption under the Securities Act. In addition, Nichols Research may cause us
to register for sale any or all of its shares of the common stock. Also,
additional shares of common stock issued upon exercise of options granted under
our stock-based compensation plans will become available for future sale in the
public market. Future sales of our common stock could cause our stock price to
decline.
In connection with the offering, our executive officers and directors,
Nichols Research and executive officers and directors of Nichols Research have
agreed that, with certain exceptions, they will not sell any shares of common
stock for 180 days after the date of this prospectus without the consent of BT
Alex. Brown Incorporated. See "Underwriting."
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16
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The market price of the common stock may fluctuate significantly due to a
variety of factors, including:
- announcements of technological innovations or new products or
services by us or our competitors;
- fluctuations in our results of operations;
- changes in the general condition of the economy or the health care
or information technology industries;
- changes in earnings estimates by public market analysts; and
- changes in our business strategies.
Also, the stock market is subject to other factors outside the control of
Nichols TXEN that can cause extreme price and volume fluctuations.
In addition, prior to this offering, there has not been a public market for
our common stock. The initial public offering price for our common stock was
determined through negotiations with the underwriters, and this price may not be
the price at which our common stock will trade. Although our common stock will
be quoted on the Nasdaq National Market, an active trading market may not
develop or continue after the offering.
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17
USE OF PROCEEDS
The net proceeds from the sale of the 2,175,000 shares of common stock
offered in this offering, after deducting the underwriting discounts and
estimated offering expenses payable by us and assuming an initial offering price
of $13.00 per share, are estimated to be $25,696,000 ($29,625,000 if the
underwriters' over-allotment option is exercised in full). The net proceeds will
be used for working capital and other general corporate purposes. Some of the
net proceeds may be used to fund possible acquisitions of complementary
products, technologies or businesses. While we continually evaluate acquisition
opportunities, no such acquisitions are currently being negotiated.
DIVIDEND POLICY
Currently we intend to retain our earnings to finance future growth, and
therefore do not anticipate paying cash dividends in the foreseeable future. The
Board of Directors may review our dividend policy from time to time to determine
the desirability and feasibility of paying dividends after giving consideration
to our capital requirements, operating results and financial condition and other
factors as the Board of Directors deems relevant.
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18
CAPITALIZATION
The following table sets forth as of November 30, 1998: (i) the
capitalization of Nichols TXEN and (ii) the capitalization of Nichols TXEN as
adjusted to reflect the sale of the shares of common stock offered at an assumed
offering price of $13.00 per share, the application of the estimated net
proceeds from the offering and certain other events, all as if they occurred on
November 30, 1998. This table should be read in conjunction with the financial
statements and related notes appearing elsewhere in this prospectus.
NOVEMBER 30, 1998
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
Total debt.................................................. $ -- $ --
------- -------
Stockholders' equity:
Common stock, $0.01 par value, 30,000,000 shares
authorized; 7,500,000 issued and outstanding; 9,675,000
shares issued and outstanding, as adjusted(1).......... 75 97
Additional paid-in capital............................. 52,833 78,507
Retained earnings (deficit)............................ (2,960) (2,960)
------- -------
Total stockholders' equity........................... 49,948 75,644
------- -------
Total capitalization........................................ $49,948 $75,644
======= =======
- ---------------
(1) The adjusted number of shares issued and outstanding does not include
options to purchase 766,000 shares of common stock at the initial public
offering price per share.
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DILUTION
The net tangible book value of Nichols TXEN as of November 30, 1998 was
approximately $13,052,000, or $1.74 per share of common stock. Net tangible book
value per share is equal to the Nichols TXEN total tangible assets less total
liabilities, divided by 7,500,000 shares of common stock outstanding. After
giving effect to the sale of 2,175,000 shares of common stock from the offering
at an assumed initial public offering price of $13.00 per share and after
deduction of the estimated underwriting discounts and commissions and offering
expenses, net tangible book value of Nichols TXEN as of November 30, 1998 would
have been approximately $38,748,000 or $4.00 per share of common stock. This
represents an immediate increase in net tangible book value of $2.26 per share
of common stock to existing investors and an immediate dilution of $9.00 per
share to new investors purchasing shares in the offering. The following table
illustrates this per share dilution:
Assumed initial public offering price per share............. $13.00
Net tangible book value before the offering(1)......... $1.74
Increase per share attributable to new investors....... 2.26
-----
Net tangible book value per share after the offering........ 4.00
------
Dilution per share to new investors(2)...................... $ 9.00
======
The following table summarizes as of November 30, 1998, the differences
between the number of shares of common stock purchased from Nichols TXEN, the
aggregate cash consideration paid and the average price per share paid by
existing stockholders and new investors purchasing shares of common stock in
this offering:
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
Existing investors............... 7,500,000 77.5% $52,850,000(3) 65.1% $ 7.05
New investors.................... 2,175,000 22.5% 28,275,000 34.9% 13.00
--------- ----- ----------- -----
Total.................. 9,675,000 100.0% $81,125,000 100.0%
========= ===== =========== =====
- ---------------
(1) The adjusted number of shares issued and outstanding does not include
options to purchase 766,000 shares of Common Stock at the initial public
offering price per share.
(2) Dilution is determined, after giving effect of this offering, by
subtracting net tangible book value per share from the assumed initial
public offering price of $13.00 per share. Dilution to new investors will
be $8.73 per share if the underwriters' over-allotment option is exercised
in full.
(3) Represents the book value of the net assets transferred by Nichols Research
to Nichols TXEN.
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SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data for Nichols
TXEN, which should be read in conjunction with our financial statements and
related notes included elsewhere in this prospectus. The statement of operations
data set forth below, for the years ended August 31, 1996, 1997, and 1998 and
the balance sheet data at August 31, 1997 and 1998, have been audited by Ernst &
Young LLP, independent auditors. The statement of operations data for the years
ended August 31, 1994 and 1995, the three-month periods ended November 30, 1997
and 1998 and the balance sheet data at August 31, 1994, 1995, 1996 and at
November 30, 1997 and 1998, are derived from the unaudited financial statements
of Nichols TXEN. We believe that the unaudited financial data fairly reflect the
results of operations and the financial condition of Nichols TXEN for the
respective periods.
NICHOLS TXEN
---------------------------------------------------------------------------------
THREE MONTHS ENDED
YEARS ENDED AUGUST 31, NOVEMBER 30,
--------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA
(HISTORICAL BASIS):
Revenues........................ $ 8,357 $ 9,382 $10,370 $12,438 $43,480 $8,958 $12,236
Cost of revenues................ 5,704 6,300 6,438 7,769 23,256 4,792 6,634
--------- --------- --------- --------- --------- --------- ---------
Gross profit.................... 2,653 3,082 3,932 4,669 20,224 4,166 5,602
Selling, general and
administrative expenses....... 1,336 1,859 1,932 2,251 7,367 1,523 2,295
Research and development........ 634 762 710 1,155 2,771 498 760
Depreciation and amortization... 351 349 947 985 4,547 936 1,102
Write-off of purchased
in-process research and
development(1)................ -- -- -- 8,500 -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations... 332 112 343 (8,222) 5,539 1,209 1,445
Other income (expense)(2)....... 9 -- 94 656 (4) (1) --
Income taxes.................... 113 41 117 107 2,283 499 578
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)............... $228 $71 $320 $(7,673) $3,252 $709 $867
========= ========= ========= ========= ========= ========= =========
Basic earnings per share(3)..... $0.43 $0.09 $0.12
========= ========= =========
Weighted average common shares
outstanding(3)................ 7,500 7,500 7,500
========= ========= =========
AUGUST 31, NOVEMBER 30,
--------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................. $872 $2,224 $900 $2,223 $5,780 $2,589 $6,084
Total assets.................... 2,059 8,349 10,497 52,052 57,715 54,896 59,068
Long-term debt.................. -- -- -- -- -- -- --
Total stockholder's equity...... 1,497 9,382 9,702 45,829 49,081 46,538 49,948
- ---------------
(1) The total purchase price of TXEN was allocated to net assets acquired of
which $8.5 million was allocated to in-process research and development and
was expensed in the fourth quarter of 1997. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- TXEN
Acquisition."
(2) Includes Nichols TXEN's 19.9% proportional share of income for TXEN in
years 1996 and 1997, recorded using the equity method of accounting, and
other miscellaneous items.
(3) The earnings per share data gives effect to the outstanding capital stock
of Nichols TXEN held by Nichols Research on a pro forma basis applied for
Nichols Research's proportionate share for all periods presented.
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On August 29, 1997, TXEN, Inc. was merged with Nichols TXEN. Due to the
significance of TXEN, we have included selected financial data related to TXEN
which should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The following table
summarizes certain selected financial data for TXEN which should be read in
conjunction with the financial statements of TXEN appearing elsewhere in this
prospectus. The income statement data set forth below, for the years ended June
30, 1995, 1996 and 1997 and the balance sheet data at June 30, 1995, 1996 and
1997, have been audited by Ernst & Young LLP, independent auditors. The
statement of operations data for the year ended June 30, 1994 and the balance
sheet data at June 30, 1994 are derived from the unaudited financial statements
of TXEN. We believe that the unaudited financial data fairly reflect the results
of operations and the financial condition of TXEN for the respective periods.
TXEN, INC.
-------------------------------------
YEARS ENDED JUNE 30,
-------------------------------------
1994 1995 1996 1997
------- ------- ------- -------
(IN THOUSANDS)
STATEMENTS OF OPERATIONS DATA (HISTORICAL BASIS):
Revenues.................................................. $ 2,653 $ 4,706 $ 6,860 $14,980
Cost of revenues.......................................... 1,379 1,734 3,212 4,848
------- ------- ------- -------
Gross profit.............................................. 1,274 2,972 3,648 10,132
Selling, general and administrative expenses.............. 1,017 1,371 2,467 2,945
Research and development.................................. 126 624 926 1,069
Depreciation and amortization............................. 190 346 532 709
------- ------- ------- -------
Income (loss) from operations............................. (59) 631 (277) 5,409
Other income (expense).................................... (97) (60) 31 (9)
Income tax expense (benefit).............................. (51) (112) (93) 1,979
------- ------- ------- -------
Net income (loss)......................................... $ (105) $ 683 $ (153) $ 3,421
======= ======= ======= =======
JUNE 30,
-------------------------------------
1994 1995 1996 1997
------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)................................. $ (293) $ 197 $ 176 $ 1,846
Total assets.............................................. 1,873 4,147 4,431 9,833
Long-term debt............................................ 1,072 204 897 640
Total stockholders' equity................................ 497 1,103 939 4,390
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Nichols TXEN is a leading provider of outsourcing solutions for information
technology and administrative services in the managed care and physician
practice management markets of the health care industry. Our outsourcing
services improve quality and reduce costs by minimizing the time and personnel
needed to process health care transactions by offering customers a broad range
of medical billing and claims processing solutions. Nichols TXEN is organized
into two business divisions. The Managed Care Services division provides
outsourcing services to managed health care organizations. The Practice
Management Services division provides outsourcing services to hospital-based and
other physician groups, hospital emergency departments and physician networks.
Nichols TXEN earns revenue under long-term contracts which are primarily
based on the number of transactions processed or the number of enrolled health
plan members per month. As a result of our fee structure, 78.0%, 71.6% and 76.6%
of our revenues on a combined basis for fiscal years 1996, 1997 and 1998,
respectively, were recurring. On a historical basis, 91.4%, 90.8% and 76.6% of
Nichols TXEN's revenues for fiscal years 1996, 1997 and 1998, respectively, were
recurring. We define recurring revenue as revenue based on the number of
enrolled health plan members per month, the number of transactions processed,
fixed monthly fees or a percentage of customer collections.
Background
Nichols Research formed CSC Acquisition, Inc. as a wholly owned subsidiary
on June 6, 1995. On June 30, 1995, CSC Acquisition acquired all of the assets
and certain liabilities of Computer Services Corporation. Since its
incorporation in 1967, Computer Services performed administrative services and
information technology services for, and sold turnkey computer systems to,
physician practices. Nichols Research formed Nichols SELECT Corporation as a
wholly owned subsidiary on September 17, 1996. On September 23, 1996, CSC
Acquisition was merged into Nichols SELECT. On December 16, 1994, Nichols
Research acquired 19.9% of the capital stock of TXEN, Inc. with an option to
acquire the remaining 80.1% of TXEN. Since its incorporation in 1989, TXEN
provided information technology outsourcing and administrative services
outsourcing for the managed health care industry. On August 29, 1997, Nichols
Research acquired the remaining 80.1% of TXEN through a merger of TXEN into
Nichols SELECT, which after the merger continued to be wholly owned by Nichols
Research. After the TXEN merger, Nichols SELECT changed its name to Nichols TXEN
Corporation.
TXEN Acquisition
In December 1994, Nichols Research purchased 19.9% of TXEN for
approximately $1.5 million. In August 1997, Nichols Research exercised its
option to acquire the remaining 80.1% interest in TXEN for aggregate
consideration of approximately $43.8 million. The total purchase price for the
TXEN acquisition was allocated to the TXEN assets and liabilities. The excess of
the purchase price over the fair market value of the tangible net assets
acquired of approximately $42.8 million was allocated to the following
intangibles: $8.5 million to in-process research and development, $17.4 million
to goodwill, $14.1 million to other intangibles and $2.8 million to capitalized
software development. In-process research and development of $8.5 million was
expensed in the fourth quarter of 1997. The acquired in-process technology
consisted of ten software development projects to perform managed care
administrative functions and provide enhanced information reports. The projects
are expected to be completed in fiscal year 1999. Goodwill and other intangibles
of $30.7 million are being amortized using the straight-line method over an
estimated useful life of 20 years. Other intangibles of $0.8 million are being
amortized using the straight line method over an
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23
estimated useful life of seven years. The $2.8 million allocated to capitalized
software development is being amortized using the straight-line method over an
estimated useful life of five years.
Nichols Research Services Agreement
Nichols TXEN is currently a wholly owned subsidiary of Nichols Research.
After the offering, Nichols Research will retain a controlling equity interest
in Nichols TXEN. Nichols Research will furnish administrative services to us
pursuant to a Corporate Services Agreement. Under the Services Agreement,
Nichols Research will provide various administrative services, including public
reporting compliance, certain corporate record keeping, risk management, certain
employee benefit administration, investor and media relations administration,
assistance in preparation of tax returns, centralized cash management and
certain financial and other services for an annual fee. In fiscal year 1999, the
fee will be 2.4% of operating expenses less costs of goods sold which are
defined as direct materials and purchased labor. We believe that the charges
under the Services Agreement are reasonable. For additional items, such as
software development services or administrative services that create unusual
demands for resources, Nichols Research will charge Nichols TXEN based upon
costs actually incurred in performing the services, plus a reasonable fee as
agreed to by Nichols Research and Nichols TXEN. We are not obligated to use
Nichols Research for these additional services. The Services Agreement has an
initial term of one-year and automatically renews for successive one year terms,
unless canceled by either Nichols Research or Nichols TXEN upon 90 days prior
written notice.
Practice Management Reorganization
Historically, we have offered both outsourcing services and turnkey systems
to potential practice management customers. Nichols TXEN has made a strategic
decision to discontinue turnkey computer systems sales to practice management
customers. On November 3, 1997, when Nichols TXEN announced it would discontinue
sales of turnkey systems to practice management customers, we had 84 practice
management customers with turnkey systems. Nichols TXEN offered technical
support to these customers through December 31, 1998. Revenues related to the
support of these practice management turnkey customers for fiscal year 1998 were
approximately $0.4 million or less than 1.0% of Nichols TXEN's total revenues
for 1998.
The conversion of our practice management customers from turnkey systems to
outsourcing services reduced our revenues and increased costs during the
transition period which began in November 1997 and which ended in December 1998.
Since November 1997, Nichols TXEN has not received any revenues from turnkey
system sales to practice management customers. Prior to our announcement,
turnkey system sales for practice management customers were approximately $0.5
million in each of fiscal years 1997 and 1996. Revenues associated with turnkey
sales typically have higher margins in the year installed than outsourcing
services revenues; however, turnkey revenues are non-recurring and less
predictable. We believe that by offering only outsourcing services to practice
management customers, we will achieve a predictable, recurring revenue stream
which over time will exceed the operating margins attained through turnkey
system sales. In order to offer only outsourcing services to practice management
customers, we have increased support staff and infrastructure. If we are
unsuccessful in efficiently executing our strategy to provide outsourcing
services for practice management customers, we may continue to experience margin
pressures within the Practice Management Services division.
REVENUE COMPOSITION -- COMBINED BASIS
We are organized into two divisions. Our Managed Care Services division
represents the business conducted by TXEN prior to the acquisition of TXEN by
Nichols TXEN in 1997. The Practice Management Services division represents the
business conducted by Computer Services prior to its acquisition by Nichols
Research in 1995. The information set forth in the tables below is presented by
combining the historical data of Nichols TXEN with the historical data of TXEN
for the
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24
periods prior to the TXEN acquisition conformed to the 12-month period ended
August 31 ("Combined Basis"). Significant intercompany transactions have been
eliminated. Due to the significance of Nichols TXEN, we believe the presentation
of revenues on a Combined Basis presents a more meaningful and complete
discussion of our business.
Our Managed Care Services division provides technology and services to
managed care customers, such as health maintenance organizations, or HMOs;
physician-hospital organizations, or PHOs; independent practice associations, or
IPAs; integrated delivery systems, or IDSs; provider sponsored organizations, or
PSOs; Medicare and Medicaid HMOs; insurance carriers and managed third-party
administrators. The Practice Management Services division provides technology
and services to hospital-based physicians, hospital emergency departments,
physician groups and physician networks. As of November 30, 1998, Nichols TXEN
had 90 managed care services customers representing over three million lives
nationwide and over 285 practice management services customers representing
approximately 3,000 physicians, primarily in the Southeast.
Combined revenue growth has been primarily driven by market acceptance of
Nichols TXEN's outsourcing solutions for information technology and
administrative services by larger managed care and physician practice entities
resulting in an increase in average contract size. The significant growth in
revenues in the Managed Care Services division versus the growth in revenues in
the Practice Management Services division was the result of a more mature sales
and marketing infrastructure. In conjunction with the TXEN acquisition, the
current management team has formed, and continues to develop, a stronger sales
and marketing infrastructure for the Practice Management Services division. The
following table summarizes our revenues by division for the periods indicated on
a Combined Basis:
THREE MONTHS
ENDED
YEARS ENDED AUGUST 31, NOVEMBER 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
REVENUES:
Managed Care....................... $ 3,194 $ 4,758 $ 7,904 $15,483 $28,861 $ 5,685 $ 8,370
Practice Management................ 8,357 9,382 10,370 12,438 14,619 3,273 3,866
------- ------- ------- ------- ------- ------- -------
Total....................... $11,551 $14,140 $18,274 $27,921 $43,480 $ 8,958 $12,236
======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF REVENUES:
Managed Care....................... 27.7% 33.6% 43.3% 55.5% 66.4% 63.5% 68.4%
Practice Management................ 72.3 66.4 56.7 44.5 33.6 36.5 31.6
------- ------- ------- ------- ------- ------- -------
Total....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= ======= ======= =======
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One of our principal objectives is to increase recurring revenue. We define
recurring revenue as revenue based on the number of enrolled health plan members
per month, the number of transactions processed, a percentage of customer
collections and fixed monthly fees. Revenues from transaction-based or
membership-based fees are recognized as the services are provided. Recurring
revenues as a percentage of total revenues decreased in fiscal 1997 compared to
fiscal 1996 as a result of an increase in software sales in 1997. We consider
our non-recurring revenues to be revenues based on sales of computer hardware
and software and professional services based on time and materials, such as
programming and implementation fees. Revenues from professional services are
recognized when the services are performed. The table below summarizes
information related to our recurring and non-recurring revenues for the periods
indicated on a Combined Basis:
THREE MONTHS
ENDED
YEARS ENDED AUGUST 31, NOVEMBER 30,
----------------------------------------------- -----------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
REVENUES:
Recurring.......................... $ 8,675 $10,801 $14,261 $19,985 $33,320 $ 6,601 $ 9,414
Non-recurring...................... 2,876 3,339 4,013 7,936 10,160 2,357 2,822
------- ------- ------- ------- ------- ------- -------
Total....................... $11,551 $14,140 $18,274 $27,921 $43,480 $ 8,958 $12,236
======= ======= ======= ======= ======= ======= =======
PERCENTAGE OF REVENUES:
Recurring.......................... 75.1% 76.4% 78.0% 71.6% 76.6% 73.7% 76.9%
Non-recurring...................... 24.9 23.6 22.0 28.4 23.4 26.3 23.1
------- ------- ------- ------- ------- ------- -------
Total....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======= ======= ======= =======
THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED NOVEMBER 30,
1997
Revenues. Revenues increased 36.6% to $12.2 million in the first three
months of fiscal year 1999 from $9.0 million in the corresponding period of
fiscal year 1998. The increase in revenues was a result of the addition of new
customers during fiscal year 1998, as well as an increase in the utilization of
Nichols TXEN's services by existing customers.
Cost of Revenues. Cost of revenues increased 38.4% to $6.6 million in the
first three months of fiscal year 1999 from $4.8 million in the corresponding
period of fiscal year 1998. As a percent of revenues, cost of revenues increased
to 54.2% in the first three months of fiscal year 1999 from 53.5% in the
corresponding period of fiscal year 1998. The dollar and percentage increase was
due primarily to the employment of additional support staff required by the
increase in our business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 50.7% to $2.3 million in the first three
months of fiscal year 1999 from $1.5 million in the corresponding period of
fiscal year 1998. As a percent of revenues, selling, general and administrative
expenses increased to 18.8% in the first three months of fiscal year 1999 from
17.0% in the corresponding period of fiscal year 1998. The dollar and percentage
increase was due primarily to the employment of additional staff resulting from
the increase in our business.
Research and Development. Research and development expenses increased
52.6% to $0.8 million in the first three months of fiscal year 1999 from $0.5
million in the corresponding period of fiscal year 1998. As a percent of
revenues, research and development expenses increased to 6.2% in the first three
months of fiscal year 1999 from 5.6% in the corresponding period of fiscal year
1998. The dollar and percentage increase was due primarily to the hiring of
staff to develop additional products for Nichols TXEN.
Depreciation and Amortization. Depreciation and amortization expenses
increased 17.7% to $1.1 million in the first three months of fiscal year 1999
from $0.9 million in the corresponding
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period of fiscal year 1998. As a percent of revenues, depreciation and
amortization expenses decreased to 9.0% in the first three months of fiscal year
1999 from 10.4% in the corresponding period of fiscal year 1998. The dollar
increase was due primarily to additional capital expenditures required by the
increase in our business. The decrease as a percentage of revenues was
attributable to a reduction in fixed capital expenditures required by Nichols
TXEN.
Income Taxes. A tax provision of $0.6 million was recorded in the first
three months of fiscal year 1999 compared to $0.5 million in the corresponding
period of fiscal year 1998. The effective tax rate decreased to 40.0% in the
first three months of fiscal year 1999 from 41.3% in the corresponding period in
fiscal year 1998.
YEAR ENDED AUGUST 31, 1998 COMPARED TO YEAR ENDED AUGUST 31, 1997
The principal reason for the change in Nichols TXEN's historical operating
data from 1998 compared to 1997 was the effect on results of operations of the
TXEN acquisition in August 1997. The year ended 1998 contains a full year of
operating results with TXEN, compared to an equity adjustment which reflects
19.9% of the results of operations of TXEN in 1997.
Revenues. Revenues increased 249.6% to $43.5 million in 1998 from $12.4
million in 1997. The primary reason for this increase in our revenues was the
inclusion of TXEN's operations for 12 months in 1998. The increase in revenues
was also a result of the addition of new customers during the last half of 1997
and throughout 1998, as well as an increase in utilization of our services by
existing customers.
Cost of Revenues. Cost of revenues increased 199.3% to $23.3 million in
1998 compared to $7.8 million in 1997. As a percent of revenues, cost of
revenues decreased to 53.5% in 1998 from 62.5% in 1997. The dollar increase was
due to the inclusion of TXEN's operations for 12 months in 1998 in addition to
our decision to transition the practice management business solely to
outsourcing which required an initial investment in infrastructure and support
staff in order to acquire and maintain those customers. The decrease as a
percentage of revenues was attributable to the inclusion of TXEN's operations in
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 227.3% to $7.4 million in 1998 from $2.3
million in 1997. As a percent of revenues, selling, general and administrative
expenses decreased to 16.9% in 1998 from 18.1% in 1997. The dollar increase was
due to the inclusion of TXEN's operations for 12 months in 1998, and an increase
in the staff necessary to support our increase in revenues. The decrease as a
percentage of revenues was attributable to our ability to generate synergies
resulting from the TXEN acquisition.
Research and Development. Research and development expenses increased
139.9% to $2.8 million in 1998 from $1.2 million in 1997. As a percent of
revenues, research and development expenses decreased to 6.4% in 1998 from 9.3%
in 1997. The dollar increase was due primarily to the inclusion of TXEN's
operations in 1998 and the employment of additional staff needed to develop new
products. The decrease as a percentage of revenues was attributable to our
ability to leverage our research and development infrastructure resulting from
the TXEN acquisition.
Depreciation and Amortization. Depreciation and amortization expenses
increased 361.6% to $4.5 million in 1998 from $1.0 million in 1997. As a percent
of revenues, depreciation and amortization expenses increased to 10.5% in 1998
from 7.9% in 1997. The dollar and percentage increase was due to the inclusion
of TXEN's operations for 12 months in 1998 as well as the amortization of
approximately $2.0 million related to intangible assets acquired in the TXEN
acquisition in August 1997.
Write-off of Purchased In-Process Research and Development. The
acquisition of TXEN was accounted for under the purchase method of accounting.
Accordingly, the purchase price was allocated to the individual TXEN assets
acquired and liabilities assumed based upon their respective fair values at the
date of acquisition. The transaction resulted in the allocation of $42.8 million
of
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acquisition costs to intangible assets, of which $8.5 million was allocated to
in-process research and development and charged to expense in the fourth quarter
of 1997.
Other Income (Expense). Other expense in 1998 was $(0.01) million compared
to other income of $0.7 million in 1997. The dollar change was due to the
inclusion of TXEN's operations for 12 months in 1998 in the statement of
operations compared to the 19.9% investment in TXEN reflected in other income in
1997.
Income Taxes. A tax provision of $2.3 million was recorded in 1998
compared to $0.1 million in 1997. The effective tax rate was 41.2% in 1998. A
tax provision was recorded for the loss before income taxes in 1997 as a result
of the difference between financial and taxable income, primarily the $8.5
million write-off of purchased in-process research and development in 1997 which
was not deductible for tax purposes.
YEAR ENDED AUGUST 31, 1997 COMPARED TO YEAR ENDED AUGUST 31, 1996
The discussion and analysis below includes information on a historical
basis for Nichols TXEN prior to the acquisition of TXEN. The acquisition of TXEN
materially affected our results of operations after the acquisition and the
information presented below should be considered in light of the acquisition.
Revenues. Revenues increased 19.9% to $12.4 million in 1997 from $10.4
million in 1996. The primary reason for this increase in our revenues was an
increase in outsourcing services generated from new customers during fiscal year
1997.
Cost of Revenues. Cost of revenues increased 20.7% to $7.8 million in 1997
from $6.4 million in 1996. As a percent of revenues, cost of revenues increased
to 62.5% in 1997 from 62.1% in 1996. The dollar and percentage increase was due
primarily to the employment of additional support staff required by the increase
in our business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.5% to $2.3 million in 1997 from $1.9
million in 1996. As a percent of revenues, selling, general and administrative
expenses decreased to 18.1% in 1997 from 18.6% in 1996. The dollar increase was
due primarily to the employment of additional staff resulting from the increase
in our business. The decrease as a percentage of revenues was attributable to
our ability to leverage our selling, general and administrative infrastructure.
Research and Development. Research and development expenses increased
62.7% to $1.2 million in 1997 from $0.7 million in 1996. As a percent of
revenues, research and development expenses increased to 9.3% in 1997 from 6.8%
in 1996. The dollar and percentage increase was due primarily to the hiring of
staff to develop additional products.
Depreciation and Amortization. Depreciation and amortization expenses
increased 4.0% to $1.0 million in 1997 from $0.9 million in 1996. As a percent
of revenues, combined depreciation and amortization expense decreased to 7.9% in
1997 from 9.1% in 1996. The dollar increase was due primarily to completion of
certain development projects, whose costs were amortized beginning in 1997 over
a useful life of five years. The decrease as a percentage of revenues was
attributable to a reduction in fixed capital expenditures.
Write-off of Purchased In-Process Research and Development. The
acquisition of TXEN was accounted for under the purchase method of accounting.
Accordingly, the purchase price was allocated to the individual TXEN assets
acquired and liabilities assumed based upon their respective fair values at the
date of acquisition. The transaction resulted in the allocation of $42.8 million
of acquisition costs to intangible assets, of which $8.5 million was allocated
to in-process research and development and charged to expense in the fourth
quarter of 1997.
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Other Income. Other income increased to $0.7 million in 1997 from $0.1
million in 1996. As a percent of revenues, other income increased to 5.3% in
1997 from 0.9% in 1996. The dollar and percentage increase was due primarily to
the 19.9% investment in TXEN.
Income Taxes. An income tax provision of $0.1 million was recorded in 1997
compared to a $0.1 million tax provision in 1996. The tax provision in 1997 was
affected by the non-deductible $8.5 million write-off of purchased in-process
research and development in 1997.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth certain unaudited quarterly financial data
for each of the most recent five quarters through the period ended November 30,
1998. Nichols TXEN believes that the unaudited data reflect all adjustments
necessary to present fairly the results of operations for the periods presented:
THREE MONTHS ENDED
------------------------------------------------------------------------
NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31, NOVEMBER 30,
1997 1998 1998 1998 1998
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
Revenues........................... $ 8,958 $10,092 $11,404 $13,026 $12,236
Gross profit....................... 4,166 4,692 5,367 5,999 5,602
Income from operations............. 1,209 1,194 1,523 1,613 1,445
Net income......................... 709 695 896 952 867
LIQUIDITY AND CAPITAL RESOURCES
Since 1995, we have financed our operations primarily through a combination
of cash from operations and capital contributions on an as-needed basis from
Nichols Research. Working capital was $6.1 million at November 30, 1998 compared
to $2.6 million at November 30, 1997. Included in working capital are cash and
cash equivalents of $0.9 million at November 30, 1998 compared to $0.4 million
at November 30, 1997. During the three months ended November 30, 1998, operating
activities provided $0.8 million in cash. Investing activities used $1.8 million
for the three months ended November 30, 1998, of which $1.7 million was used to
acquire property, plant and equipment. Accounts receivable from customers were
outstanding on average approximately 85 days during the three months ended
November 30, 1998 compared to approximately 88 days during the three months
ended November 30, 1997.
Working capital was $5.8 million at August 31, 1998 compared to $2.2
million at August 31, 1997. Included in working capital are cash and cash
equivalents of $1.8 million at August 31, 1998 compared to $0.2 million at
August 31, 1997. During 1998, operating activities provided $6.3 million of
cash. Investing activities used $4.7 million for the year ended August 31, 1998,
of which $4.2 million was used to acquire property, plant and equipment.
Accounts receivable from customers were outstanding on average approximately 82
days during fiscal year 1998 compared to approximately 52 days during fiscal
year 1997 excluding the TXEN acquisition. The increase in payment time in fiscal
year 1998 compared to fiscal year 1997 was due primarily to the addition of the
Managed Care business where customers typically take longer to pay their
invoices. The historical time to pay outstanding invoices for the Practice
Management division has been under 60 days and we believe that by applying the
collection procedures used in the Practice Management division to the Managed
Care division that total days outstanding can be reduced.
We believe that the net proceeds from this offering, together with other
available funds, will be sufficient to meet our capital requirements for the
next 12 months. We may also utilize cash to acquire or invest in complementary
products, technologies or businesses. While Nichols TXEN continually evaluates
acquisition opportunities, no such acquisitions are currently being negotiated.
Although we generally expect to have positive cash flow from our existing
operations, we may require additional amounts of cash for acquisitions of
complementary businesses. Nichols TXEN expects to finance any acquisitions
through a combination of the net proceeds from this offering,
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internally-generated funds, additional debt or equity financing from capital
markets and short-term or long-term borrowings from Nichols Research. We have no
agreement with Nichols Research to ensure that funds will be available on
acceptable terms or at all. Nichols TXEN does not have an independent credit
facility.
YEAR 2000
Overview
Historically, certain computerized systems have had two digits rather than
four digits to define the applicable year, which could result in recognizing a
date using "00" as the year 1900 rather than the year 2000. This could cause
significant software failures or miscalculations and is generally referred to as
the "Year 2000" problem.
We recognize that the impact of the Year 2000 problem extends beyond our
computer hardware and software and may affect utility and telecommunication
services, as well as the systems of customers and suppliers. The Year 2000
problem is being addressed within Nichols TXEN by the individual business
divisions and progress is reported periodically to management. We have committed
resources to conduct extensive risk assessments and to take corrective action,
where appropriate.
Managed Care. The core managed care applications, consisting of TXEN MHS
and FirstSTEPP were designed with a century date field. As a result, these
applications have no pervasive architectural problems with dates spanning the
Year 2000. To ensure no minor programming related issues exist, we have
dedicated an IBM AS/400 server for testing and have set its internal clock for
the middle of the Year 2000. As a result of Year 2000 testing, we identified
minor server and processing issues related to Year 2000 problems that required
approximately 1,500 hours to correct and 300 hours to test. Year 2000 upgrades
and testing of the managed care applications were completed in December, 1998.
We have made our test AS/400 available to customers to perform their own Year
2000 simulations.
Practice Management. Nichols TXEN has identified all of the active
applications specific to the Practice Management Services division including
MDr98, a transaction-based medical practice management application. These
applications are processed by an IBM mainframe computer. We designed a
comprehensive plan to analyze each of these active applications, determine any
Year 2000 problems, implement appropriate modifications and validate the final
changes. As of December 31, 1998, we had completed 1,020 hours of programming
changes. We estimate that there remains 200 hours of programming work and 500
hours of testing before the Practice Management systems are Year 2000 compliant.
We believe that these modifications will be completed by the end of April, 1999.
We believe that our decision support application, Decision Manager 3.0, is Year
2000 compliant.
Internal Information Systems
Nichols TXEN's internal information systems utilize hardware and software
from several commercial suppliers. We have investigated our internal information
systems for Year 2000 compliance and have not identified any hardware or
software applications that require modification. Our accounting software is
installed in an IBM AS/400 and was designed to be Year 2000 compliant.
Third Parties
We have had communications with our significant suppliers and customers to
evaluate their Year 2000 compliance plans and states of readiness and to
determine the extent to which our systems may be affected by the failure of
others to remediate their own Year 2000 issues. However, we have not
independently confirmed all information received from other parties with respect
to
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Year 2000 issues. As such, there can be no assurance that such other parties
will complete their Year 2000 conversion in a timely fashion or will not suffer
a Year 2000 business disruption.
Contingency Plans
Because our Year 2000 conversions are expected to be completed prior to any
potential disruption to our business, we have not yet completed the development
of a comprehensive Year 2000 specific contingency plan. However, Nichols TXEN
has minimized its exposure to Year 2000 failure of significant third-party
suppliers by purchasing electronic data interchange software and database
resources from multiple suppliers of these products and services. In addition,
we have the ability to manually replicate many of the electronic services
provided by significant suppliers. If we determine that our business is at
material risk of disruption due to the Year 2000 problem, or anticipate that the
Year 2000 conversions will not be completed in a timely fashion, we will work to
enhance our contingency plan.
Cost for Year 2000 Compliance
We believe that the total cost of Year 2000 compliance activity will not be
material to our operations, liquidity and capital resources. We estimate that
the total cost for Year 2000 compliance will be $211,000, which represents 3,520
hours of analysis, modification and testing. As of December 31, 1998, we had
completed 2,820 hours of Year 2000 compliance work at a cost of $169,200.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, which requires changes in comprehensive income to be shown
in a financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for our 1999 fiscal year.
Management does not believe that Nichols TXEN has material other comprehensive
income which would require such separate disclosure.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2, Software Revenue
Recognition, to supersede SOP 91-1, the previously released SOP on this topic.
SOP 97-2 provides additional guidance on when revenue should be recognized and
in what amounts, for licensing, selling, leasing or otherwise marketing computer
software. The provisions of SOP 97-2 are effective for transactions entered into
in fiscal years beginning after December 15, 1997. Adoption of SOP 97-2 is not
expected to have a material adverse effect on our financial statements.
During 1998, the AICPA issued SOP 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. Nichols TXEN believes that it is
substantially in compliance with this pronouncement and that the implementation
of this pronouncement will not have a material adverse effect on our financial
statements.
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BUSINESS
THE COMPANY
Nichols TXEN is a leading provider of outsourcing solutions for information
technology and administrative services in the managed care and physician
practice management markets within the health care industry. Our outsourcing
services improve quality and reduce costs by minimizing the time and personnel
needed to process health care transactions by offering customers a broad range
of medical billing and claims processing solutions. As a result of our fee
structure for these outsourcing solutions, approximately 72% and 77% of our
revenues for fiscal years 1997 and 1998, respectively, were recurring. We
consider recurring revenue to be revenue based on the number of enrolled health
plan members per month, the number of transactions processed, fixed monthly fees
or a percentage of customer collections.
Nichols TXEN offers a broad range of products and services which allow
customers the flexibility to perform administrative functions with their staff
utilizing our technology or to outsource to us certain administrative and
processing functions. Each customer contracts with Nichols TXEN for the level of
outsourcing service needed. Our outsourcing solutions provide customers with
significant benefits, including:
- streamlined administrative functions;
- variable rate operating cost structure;
- faster implementation;
- reduced capital expenditures for administrative health care
technologies;
- less technology risk;
- access to knowledgeable and experienced personnel;
- sophisticated enterprise-level application software and decision
support tools; and
- enhanced marketplace connectivity.
As a result, our services enable customers to concentrate on providing
quality health care by focusing on core competencies. Nichols TXEN maintains a
centralized network data center to process transactions and provide technology
services for our customers. We believe that our ability to offer both technical
solutions and administrative services through a network data center
differentiates us from competitors that offer only turnkey software solutions or
only administrative services.
Nichols TXEN is organized into two divisions. Our Managed Care Services
division provides technology and services to HMOs, PHOs, IPAs, IDSs, PSOs,
Medicare and Medicaid HMOs, insurance carriers and managed third-party
administrators. Our Practice Management Services division provides technology
and services to hospital-based and other physician groups, hospital emergency
departments and physician networks. As of November 30, 1998, we had 90 managed
care services customers representing over three million lives nationwide and
over 285 practice management services customers representing approximately 3,000
physicians, primarily in the Southeast.
INDUSTRY BACKGROUND
Health care costs in the United States have risen dramatically over the
past two decades to approximately $1.0 trillion in 1996, or approximately 14% of
the gross domestic product. Since 1977, on average, health care costs have grown
approximately 10% per year compared to 5% for the annual increase in the
consumer price index. Pressures from both the private and public sectors to
reduce costs have caused significant changes in the health care industry.
Although reimbursement for health care has historically been fee-for-service
reimbursement, federal and state governments, corporations and other payors are
increasingly using alternative reimbursement models. A fixed-fee
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32
payment system, such as capitation, shifts the financial risk of delivering
health care from payors to health care providers. Risk shifting and other cost
reduction factors have resulted in complex arrangements among employers,
providers, and public and private payors. These organizations often lack the
technical and operational resources to function within this more complex and
sophisticated health care environment. In addition, these organizations need
access to a greater spectrum of information related to cost and quality of
health care. As a result of these information requirements, industry research
indicates that the number of health care transactions to be processed will grow
by approximately 42% in the next three years. It is estimated that 32% of every
health care dollar spent covers administrative costs.
Membership in commercial HMOs is expected to rise from 66 million members
in 1997 to 105 million members in 2001. In addition, the Health Care Financing
Administration, or HCFA, estimates that enrollment in Medicare and Medicaid
managed care arrangements will double by 2003. This increase in membership in
managed care, especially Medicaid and Medicare, is creating many new start-up
organizations and fueling rapid growth in existing organizations. Many of these
managed care organizations lack capital to acquire the needed technology or lack
the expertise to perform increasingly complex administrative functions. This
shift to managed care has also increased the level of review and audit by
government and other payors. Regulatory changes and increased scrutiny result in
information and administrative requirements outside the capabilities of many
health care organizations. For example, industry studies indicate approximately
30% to 40% of claim forms are either incomplete or inaccurate. Furthermore,
providers need information to evaluate the profitability of their contracts with
managed care organizations and to assess the overall performance of their
practices.
Health care information expenditures were estimated to be $13.6 billion in
1997 and are expected to grow to over $21.0 billion by 2000. Historically,
health care expenditures for information technology have lagged behind other
industries, with investments averaging 2% to 3% of operating revenues, compared
with an average of 6% to 8% for other industries and 12% to 14% for
information-sensitive sectors such as financial services. A 1998 Health
Information Management System Society, or HIMSS, survey indicates that health
care organizations are poorly equipped to support managed care. Less than 10% of
the companies surveyed indicated they had the software capability to perform
each of the following: utilization management, capitation/risk management,
benefits management, claims management and health outcomes reporting. The HIMSS
survey also indicates an increasing demand for health care information
technology outsourcing solutions with approximately 61% of health care
organizations surveyed outsourcing some portion of their information technology
services. Market research also predicts health care information technology
outsourcing to grow from $2.9 billion in 1997 to $4.0 billion in 2001. In
addition to information technology outsourcing, the change and complexity
affecting the health care industry has resulted in an increase in demand for
administrative services outsourcing. In 1997, approximately 24% of all
hospital-based physicians outsourced their administrative functions.
Outsourcing offers significant advantages through better automation of
eligibility, referrals and billing through electronic data interchange claims
and other contractual and clinical information. Automating the administrative
tasks of health care reduces the cost of administering a single outpatient case
by as much as 32%. By automating the movement of administrative information, it
is estimated that health care administrative management expenses may be reduced
by 20%. For example, cost savings from $0.50 to $2.25 per claim may be realized
by automating claims submission. Private networks, such as Nichols TXEN's
network data center, and public networks, such as the Internet, enable rapid
communication of data among participants in the health care industry. We believe
that HCFA's recent approval of secure transmissions over the Internet will
increase the utilization of electronic health care transactions. In addition,
network data centers improve software systems operations and provide better
decision support information because the integration and access is centralized
and easier to manage. Outsourcing also improves compliance with regulations
governing health care claims and reimbursements.
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STRATEGY
Nichols TXEN's objective is to be the leading national provider of
outsourcing solutions for information technology and administrative services in
the managed care and physician practice management markets within the health
care industry. Our strategy includes the following key elements:
Focus on providing outsourcing solutions for the administrative challenges
of health care. Nichols TXEN believes contractual complexity and an increase in
the volume of health care transactions caused by managed care will continue to
force health care companies to outsource solutions for information technology,
especially administrative services. We plan to focus additional resources on
providing administrative services to meet the increased demand for complete
administrative solutions versus information technology outsourcing or turnkey
alternatives. Our outsourcing solutions provide a faster and more efficient
response to the needs of payors and providers than the alternative of buying a
turnkey system and expanding in-house administrative infrastructure. We believe
that we have an advantage over companies that provide only administrative
services because we control our own technology and can directly and more quickly
address the new, changing information demands of the health care industry.
Continue to capitalize on niche market opportunities. We have successfully
focused our efforts in the managed care and physician practice management
markets of the health care industry, such as hospital emergency departments,
Medicaid HMOs, Medicare HMOs, provider organizations accepting Medicaid and
Medicare risk, managed third-party administrators, hospital-based physicians and
hospital-sponsored managed care organizations. Often, these organizations are
expanding into new lines of business and lack the capability to adequately
process new and increased information demands. To be successful, these
organizations must acquire new information technology to manage contractual
complexity and improve communication connectivity. Our ability to scale our
outsourcing solutions enables us to provide outsourcing solutions to start-up
organizations, as well as established companies within targeted markets.
Expand high recurring revenue model. Nichols TXEN maintains a significant
recurring revenue stream resulting from long-term, transaction-based and
membership-based contracts. In addition, our focus on quality and customer
satisfaction results in high customer retention rates enabling our revenues to
increase as customers grow their businesses. We have identified many
opportunities to provide additional solutions to our existing customers
including operations consulting, software enhancements, add-on software and
outsourcing services, such as information analysis and medical management.
Increase internal efficiencies through automation. Nichols TXEN believes
that improvements in automatic claim filing, automatic claim adjudication and
automatic generation of payments will increase operating efficiencies and
improve customer services. Improvements in technology and services can be made
efficiently because we control the supporting software, technology, centralized
network data center and communications connectivity. We invest in high-speed
peripheral technology in the areas of document imaging, mail room operations and
EDI. Because we actually perform administrative functions using our own
technology, we maintain a dedicated team focused on reengineering processes for
maximum efficiency. We have the ability to link physician practice processing
software and managed care processing software to integrate claims and billing
activities between our managed care clients and our practice management clients
providing for increased efficiency, quality and customer satisfaction.
Increasing efficiency through automation enables us to realize economies of
scale as additional customers are added.
Expand decision support and medical utilization management software and
services. We plan to add new decision support and medical utilization
management services that complement our application software suites. The
diffusion of managed care risk has created a demand for actuarial service plans
requiring new levels of information to evaluate health care costs and outcomes
effectiveness. Employer-sponsored groups, such as the National Coalition for
Quality Assurance, or
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NCQA, are pressuring health plans for comparative information using standard
industry measures, such as the Health Plan Employer Data and Information Set.
Acquire complementary businesses and technologies. We will focus on
acquisitions of businesses, product lines, or technologies that can increase our
customer base or enhance our capabilities. We intend to acquire other companies
whose customer base, product lines or technologies would be complementary to our
network data center operating model.
MANAGED CARE SERVICES DIVISION
The Managed Care Services division's goal is to reduce the time and
personnel needed to perform managed care administrative tasks through an
optimized combination of technology, process automation and well-trained
personnel. Our solutions improve the management of complex benefits plans,
sophisticated provider reimbursement contracts, premium billing, capitation and
risk management. Customers contract for services on a per enrolled health plan
member per month basis which provides predictable administrative costs and
enables customers to expand their business quickly without the need for
additional infrastructure. These services lower the start-up costs and barriers
to entry facing managed care organizations, enabling large organizations to
enter niche markets easily and enabling small organizations to gain market
entry. Our managed care solutions are characterized by ease of use, speed of
implementation, minimal capital requirements, incentive-based pricing, less
technology risk, better decision support information, access to advanced
technology and superior automation. We have identified over 7,000 organizations
that may benefit from our outsourcing services. The chart on the following page
illustrates our Managed Care Services.
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Managed Care Services
- ------------------------------------------------------------ ----------------------------------------------------------
MCT Services - Managed Care MCA Services - Managed Care
Technology Outsourcing Administration Outsourcing
- ------------------------------------------------------------ ----------------------------------------------------------
Customers outsource their software and system functions to Customers outsource all their information technology needs
Nichols TXEN but use their own administrative staff. and some or all administrative functions. Through Nichols
Through our centralized network data-center, customers access TXEN's back office service centers, customers utilize our
high-end software systems for managed care administration, personnel and technology to perform claims processing,
decision support, medical management and electronic data eligibility verification, member/provider data management,
interchange. capitation processing, premium billing, check processing,
mail room and other related administrative services.
- ------------------------------------------------------------ ----------------------------------------------------------
Nichols TXEN Technology Nichols TXEN Technology
& Customer Personnel & Nichols TXEN Personnel
-------------------------------- ---------------------------------- -------------------------
Marketplace Connectivity Nichols TXEN - Network Data Center Supporting Technology
-------------------------------- ---------------------------------- -------------------------
Electronic Data Interchange National Wide Area Network Highly Automated Mailroom
Integrated 3rd Party Applications IBM AS/400s High Speed Scanners
Direct, On-line Connections NT Servers Image Server
Connected LANs High Speed Laser Printers
--------------------------------- ---------------------------------- -------------------------
Intra-Network Integration with Nichols TXEN
Practice Management Services Applications
- ------------------------------------ --------------------------------------------- -----------------------------------------
First STEPP TXEN-MHS Xtend-DSS
Medical Management Software Managed Care Administration Software Decision Support Software
- ------------------------------------ --------------------------------------------- -----------------------------------------
Distributed Client/Server medical Enterprise-level managed care administration Executive information and decision support
utilization management software software system for managing and controlling software application suite for analyzing
system for managing tasks and premium billing, capitation, benefit plans transaction data and evaluating
workflow associated with approval of and membership data, eligibility, provider performance and quality. Xtend uses
surgical procedures, hospital contracts, referrals, authorizations, claims, replicated data captured from the
admissions, case management, productivity reporting, accounts receivable, TXEN-MHS and FirstSTEPP applications.
utilization review and specialist accounts payable and general ledger.
referrals. First STEPP is fully
integrated with TXEN-MHS.
- ------------------------------------ --------------------------------------------- -----------------------------------------
Nichols TXEN High-End
Software
Technology Foundation
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Managed Care Technology (MCT) Services
MCT customers outsource their software and system functions to us but use
their own administrative staff. Customers access our internally-developed,
high-end software systems for managed care administration, decision support and
medical management. In addition, we offer integrated third party supporting
software and marketplace connectivity through our network data center. The
customers' local area networks are connected to our high-speed wide area
network. MCT customers may use the following software products of Nichols TXEN:
- TXEN MHS -- to manage and control premium billing, capitation, benefit
plans, membership data, eligibility, provider contracts, referrals,
authorizations, claims and accounts payable;
- Xtend -- to analyze transaction data and evaluate performance and
quality; and
- FirstSTEPP -- to automate functions previously performed manually, such
as the approval of surgical procedures, hospital admissions, utilization
review and specialist referrals.
We also provide software support, implementation, consulting and software
development services. As of November 30, 1998, we provided MCT services to 58
customers, of which 13 were turnkey customers.
Managed Care Administrative (MCA) Services
MCA customers outsource all of their information technology and some or all
of their administrative functions to our Managed Care Services division. Through
Nichols TXEN's back office service centers, customers utilize our personnel and
technology to perform claims processing, eligibility management, capitation risk
management, premium billing, check processing, mailroom and other related
administrative services. For our MCA customers, we may use TXEN MHS, FirstSTEPP
and Xtend to perform the administrative functions. We create and maintain
membership and eligibility data and provider and employer databases for
customers. We enter claim information which is furnished by customers
electronically or on paper. Our specialized software processes the claim based
upon the applicable plan rules or the provider benefit contract rules. The claim
is then paid or held for further examination. Depending on the nature of the
claim, this adjudication process may be performed automatically by our
specialized software or manually by our trained personnel. As part of our
strategy, we intend to increase our ability to offer automatic claims
adjudication to improve efficiency. Nichols TXEN also performs utilization
review services based on customer approval criteria which include determining
the necessity of medical procedures and issuing certificates of admission or
specialists referrals when appropriate. All denial recommendations are forwarded
to the customer for final decision. We also offer customers in-patient care
management services to monitor quality of care and length of stay. Many of the
managed care organizations in our selected markets do not possess the resources
to initiate a comprehensive utilization review program. We offer this capability
with our internal professional medical staff consisting of physicians and
nurses. As of November 30, 1998, we provided MCA services to 32 customers.
Managed Care Services Supporting Software
TXEN MHS Managed Care Administration System. Over the past nine years, we
have modified and enhanced our licensed core software for managed care
transaction processing in order to offer a comprehensive solution to the entire
spectrum of managed care companies. TXEN MHS is the core software supporting our
MCT and MCA services. We have combined TXEN MHS with third-party products to
provide integrated processing of related transactions. This provides our
customers a single point of access to imaging and workflow management, clinical
editing, provider credentialing and other functions. TXEN MHS has electronic
data interchange features that permit electronic transmission of information.
The modular design and integrated database of TXEN MHS provide the user with
flexibility in system configuration for efficient operation without programmer
intervention.
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We believe TXEN MHS offers higher rates of automatic adjudication, automation
and administrative efficiencies than competitive systems.
FirstSTEPP Medical Management System. FirstSTEPP, our medical management
system, improves the efficiency of utilization review activities. FirstSTEPP,
which is fully integrated with TXEN MHS, supports pre-certification,
authorization and utilization management requirements. FirstSTEPP is a
distributed client-server system with "point and click" functionality for ease
of use. User-defined medical protocols assist medical management staff to comply
with the terms of individual benefit plans. In the FirstSTEPP application, menus
are work driven, with most functions employing "drag and drop" functionality.
Because FirstSTEPP is integrated with TXEN MHS, information is instantly
accessible concerning provider contracts, fee schedules, current enrollment,
eligibility and member demographic data. FirstSTEPP allows utilization review
nurses and physicians to perform quality outcomes management and assign patterns
of treatment criteria. FirstSTEPP guides users through a predetermined task list
of integrated functions that include pre-certifications and admission
processing, review and discharge processing, authorization templates, document
templates, incidents of care templates, correspondence processing, and staff and
workgroup management. FirstSTEPP eliminates paperwork, minimizes compliance
issues, eliminates double data entries and reduces administrative problems.
FirstSTEPP features automated data storage and retrieval as well as internal and
external correspondence capabilities.
Xtend Decision Support Application Suite. The Xtend decision support
application suite assists users in finding, analyzing and interpreting
mission-critical information from managed care transaction data. The Xtend
architecture is divided into two key components. The first component, Xtend/MHS,
is a powerful transaction data replication engine and customized report writer.
Xtend/MHS offers the following features: integration with TXEN MHS, transaction
data replication, easy information retrieval, reporting templates and "point and
click" visual interface. The second component of Xtend is an executive
information system, or EIS, into which specific modules may be connected. The
first module available for the EIS system is the Xtend/HEDIS module which is
based on industry standards for quality comparisons as published by NCQA.
Xtend/HEDIS offers the following features: easy manipulation of HEDIS reporting
measures and other benchmarking measures, quality of care analysis, utilization
and member analysis, and integration with industry-standard spreadsheet and word
processing software.
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PRACTICE MANAGEMENT SERVICES DIVISION
The Practice Management Services division's goal is to reduce the time and
personnel needed to perform practice management administrative tasks through an
optimized combination of technology, process automation and well-trained
personnel. Our solutions assist clients by accelerating collections, improving
compliance, reducing fixed expenses and providing timely data through electronic
connectivity. These solutions also improve the management of patient
information, coding and chart information, claims submission, managed care
requirements, insurance follow-up, statement processing, payment processing and
detailed performance analysis. Customers contract for services on a per
transaction or percentage of revenues basis which provides customers with
predictable administrative costs and enables them to expand their businesses
quickly without the need for additional infrastructure. Our practice management
solutions are characterized by ease-of-use, speed of implementation, minimal
capital requirements, variable cost pricing, reliability, better compliance,
less technology risk and increased decision support information.
The Practice Management Services division targets hospital-based and other
physician groups, hospital emergency departments and physician networks. As of
November 30, 1998, Nichols TXEN had more than 285 practice management customers
representing approximately 3,000 physicians in eight states: Alabama,
Mississippi, Georgia, Tennessee, Florida, North Carolina, Missouri and Texas. We
have initiated marketing efforts in South Carolina, Kentucky, Virginia,
Maryland, Louisiana and Arkansas. We estimate that there are approximately 8,000
potential customers within this fourteen-state region. The chart on the
following page illustrates our Practice Management Services.
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Practice Management Services
- ------------------------------------------------------------- -------------------------------------------------------------
PMT Services - Practice Management PMA Services - Practice Management
Technology Outsourcing Administrative Outsourcing
- ------------------------------------------------------------- -------------------------------------------------------------
PMT Customers outsource their software and system PMA customers outsource all of their information
functions but use their own administrative staff. Through our technology systems and some or all administrative functions.
centralized network data center, customers access high-end Through Nichols TXEN's back office service centers, customers
software systems for complete practice management utilize our personnel and technology to perform billing, data
administration and decision support. Customers connect entry, chart development, coding, claims submission,
directly to payors, hospitals and other providers. statement processing, insurance follow-up, payment posting,
first level collections and performance analysis.
- ------------------------------------------------------------- -------------------------------------------------------------
Nichols TXEN Technology Nichols TXEN Technology
& Customer Personnel & Nichols TXEN Personnel
- -------------------------------- ---------------------------------- ----------------------------
Marketplace Connectivity Nichols TXEN - Network Data Center Supporting Technology
- -------------------------------- ---------------------------------- ----------------------------
Electronic Data Interchange Wide Area Network Highly Automated Mailroom
Integrated 3rd Party Applications IBM Mainframe High Speed Scanners
Direct, On-line Connections NT Servers Image Server
Connected LANs High Speed Laser Printers
- -------------------------------- ---------------------------------- ----------------------------
Intra-Network Integration with Nichols TXEN
Managed Care Services Applications
- -------------------------------------------------------- ------------------------------------------------------
MDr98 Decision Manger 3.0
Physician Practice Management Software Decision Support Software
- -------------------------------------------------------- ------------------------------------------------------
MDr98 is a network-based practice management Decision Manager is a decision support application
software solution for large physician networks, hospital- designed for Microsoft Access, which enables detailed
based physicians, emergency departments and MSOs. analysis of a physician group's operations. Features of
MDr98 capabilities include: billing management, Decision Manager include activity-based cost analysis,
insurance processing and tracking, appointment procedure analysis and diagnosis, reimbursement
scheduling, windows or text based screens, payments analysis and referral summary, easy data selection and
and statement management, electronic claim filing and sorting, and flexible customized report writer.
remittance, secondary filing, decision management,
master patient index, medical records interfaces and
claims submission management.
- -------------------------------------------------------- ------------------------------------------------------
Nichols TXEN High-End
Software
Technology Foundation
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Practice Management Technology (PMT) Services
PMT customers outsource their software and system functions to Nichols
TXEN, but use their own administrative staff. Customers access our internally
developed, high-end software systems for practice management administration,
decision support and financial management. In addition, we offer integrated
third party supporting software and marketplace connectivity through our network
data center. Customers connect via LANs or directly to our network data center.
We differentiate our physician practice management solutions by enabling
customers to connect through the network data center directly to payors,
hospitals and other providers. PMT customers may use MDr98, which enables
physician practices to manage and control appointment scheduling, medical
billing, electronic claims submission, electronic remittance, insurance
follow-up and payment processing; and Decision Manager 3.0, which enables
physician practices to analyze billing and practice information to detect trends
regarding payments, utilization, costs and demographics. In addition, we offer
PMT customers access to our automated mailroom and customized statement
processing capabilities. We also provide software support, implementation,
consulting and software development services. As of November 30, 1998, we
provided PMT services to 221 customers.
Practice Management Administrative (PMA) Services
PMA customers outsource all of their information technology systems and
some or all administrative functions to the Practice Management Services
division. Through our back office service centers, customers utilize our
personnel and technology to perform billing, data entry, chart development,
coding, claims submission, statement processing, insurance follow-up, payment
posting, first level collections and performance analysis. For PMA customers, we
may use MDr98 and Decision Manager 3.0 to perform administrative functions. We
create and maintain patient, medical chart, physician credentials, insurance and
referral data bases for customers. Nichols TXEN enters billing information that
is furnished by customers electronically or on paper. Our specialized software
processes the bills based upon payor plan rules, current procedural technology
or CPT guidelines, and applicable provider fee schedules. In addition, our
specialized software edits the bill to ensure accuracy based on predetermined
rules. The bill is then submitted electronically or mailed to the appropriate
payor. As part of our strategy, we intend to increase our ability to automate
billing submissions and remittances electronically to improve efficiency.
Nichols TXEN also performs physician procedure and diagnosis coding based on CPT
guidelines, international classification of diseases (known as ICD-9 Codes)
guidelines, and public and private payor guidelines. In addition, we provide
trained temporary staffing for physician offices for administrative work and
billing-oriented tasks. As of November 30, 1998, we provided PMA services to 65
customers.
Practice Management Services Supporting Software
MDr98 Physician Practice Management System. Over the past 30 years,
Nichols TXEN has modified and enhanced our core software for physician practice
transaction processing. We believe MDr98 is the only software product that
offers practice management organizations the complete functionality and market
place connectivity necessary to succeed in today's complex health care
environment. MDr98 is the core software supporting our PMT and PMA services. Our
MDr98 is a complete medical practice management system consisting of one or more
terminals and printers installed in medical offices and linked by dedicated
communication lines to our network data center. MDr98 is a network-based
practice management solution for large physician networks, hospital-based
physicians, hospital emergency departments and management services
organizations. MDr98 is integrated with the Managed Care Services transaction
processing software so customers may receive real-time eligibility verification,
preliminary claims editing, on-line claims submission and electronic remittance.
MDr98 capabilities include the following functions: billing management,
insurance processing and tracking, appointment scheduling, windows and text
based screens, payments and statement management, electronic claim filing and
remittance, secondary filing,
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decision management, master patient index, medical records interfaces and claims
submission management.
We can file claims electronically from our network data center to more than
300 insurance carriers, Medicare and Medicaid. Explanation of benefits or
payments information appears on-screen for medical office staff to review,
adjust and post with a single keystroke. A claim screening system using edits
and error checking techniques helps assure that the claim has the correct
information before it is transmitted for payment. MDr98 also provides on-line
access to selected payors and hospitals through our network data center. This
capability affords customers the ability to obtain information regarding claim
status, patient eligibility, benefit plan, referring physician,
pre-certification and other data which reduces errors that delay payments.
Customers can also access hospital admission data to apply charges to patient
accounts. We added a master patient index that enables any physician to securely
share information with any other physician on the network and facilitates
integration with hospital systems.
Decision Manager 3.0. Decision Manager 3.0 support application assists
users in finding, analyzing and interpreting mission-critical information from
physician practice transaction data. Decision Manager 3.0 has a powerful
transaction data replication engine and customized report writer. Decision
Manager 3.0 offers the following features: integration with MDr98, transaction
data replication, easy information retrieval, reporting templates and "point and
click" visual interface. Decision Manager 3.0 is a Microsoft Windows-based
decision support application designed for Microsoft Access. Options available
with Decision Manager 3.0 include activity-based cost analysis, procedure
analysis and diagnosis, reimbursement analysis and referral summary. Decision
Manager 3.0 offers improved control over data selection and sorting, along with
greater flexibility to customize reports.
OPERATIONS
Network Data Center
We believe that our method of delivering and accessing health care
information technology utilizing a network data center is superior to a turnkey
system. The accessibility of network resources from a central location gives us
the ability to implement systemwide software upgrades without the delay
experienced by typical turnkey system vendors. The network data center, located
in Birmingham, Alabama, is connected by Microsoft Windows NT or Novell
networking software to over 150 LANs. Customers may connect to the network
directly or through their own LANs utilizing high-speed digital communications.
The network data center presently processes over 500 million transactions per
year. The network uses IBM AS/400 midrange and IBM S/390 massively parallel
servers as the core transaction servers. The servers currently have over 2.5
terabytes of disk space with approximately 7,000 devices attached.
We believe that our network connection with customers adds value to the
technology and services we offer. The cost of computer systems necessary to
process health care related transactions is substantial. Our network data center
model eliminates or reduces costs associated with the following: hardware and
software upgrades and maintenance, performance monitoring, floor space, system
training, insurance, computer operations, electrical power, security
administration, climate control, back-up processes and off-site storage. The
centralized network data center enables Nichols TXEN to achieve economies of
scale utilizing a single system for many customers. This allows us to offer
efficiencies in transaction processing and the ability to supplement our basic
services with more advanced technologies, such as decision support information,
Internet connectivity and higher quality peripheral and supporting technology.
Customers using our network data center have immediate access to new software
products developed by Nichols TXEN, upgrades of existing products and
third-party software connected to the network. In addition, enhancements made to
address issues for one customer may be shared by all users of our network. The
center also facilitates
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customer support because customer representatives can access software and
customer data while answering customer inquiries.
Nichols TXEN has an extensive disaster recovery plan for our network data
center. Our data center is protected from power outages and all data is backed
up daily to a remote location. It is possible, however, that a disaster, such as
a tornado or fire, could disable or destroy our equipment and facilities. As a
contingency plan for such disasters, Nichols TXEN has contracted with a third
party to provide temporary computer facilities, utilizing our data back-ups and
software. We should be able to resume network data center operations within 72
hours of major damage.
Sales and Marketing
We market and sell our services through our own direct sales force. We
divide our sales and marketing activities between obtaining new customers and
expanding services offered to existing customers. Nichols TXEN employs 15 sales
representatives with geographic and market segment assignments to market our
services and technology to new customers. We employ four account managers to
sell additional services and technology to existing customers. These
representatives also support existing customers in obtaining new business by
assisting their marketing programs.
We consider our approach to sales and marketing a competitive advantage.
Nichols TXEN utilizes specialized software to manage marketing and sales
activities. The software helps manage market research, sales management reports,
forecasting and sales-cycle tracking. At the core of all sales and marketing
efforts is a strategic, internally-developed database with detailed records of
each prospect in target markets. Sales prospects are generated through customer
references, requests for proposals, direct mail, trade shows and our internal
telemarketing efforts. We employ seven representatives whose primary function is
to generate sales leads from activities that include telephone calls, Internet
searches, market research and direct mail solicitations. We estimate that we
will make telemarketing calls to approximately 15,000 potential customers in
1999.
Implementation, Support and Training Services
We believe that a close and active service and support relationship is
important to customer satisfaction and provides us with important information
regarding customer requirements and additional sales opportunities. Proper
implementation, training and on-going technical support are necessary for the
solutions to operate effectively and efficiently. Each customer goes through a
detailed implementation process which includes the set-up of business rules and
databases, the conversion of historical data and classroom training conducted at
our training facilities. Nichols TXEN supports each customer with technical
support analysts and account coordinators who oversee customer software and
business issues and answer questions. In addition to on-going support, the
customer receives software updates. Customers may also request custom software
modifications to meet specific customer requirements. These custom modifications
are implemented into our regular upgrades and can, therefore, be shared with all
customers. We provide on-line and printed documentation for software and
implementation information.
Research and Development
Typically, software product vendors primarily rely on customer comments
regarding their products in order to decide upon software enhancements. In
addition to this approach, because we use our own software, we have a unique
insight into enhancements that will improve productivity. These enhancements
improve automation and, therefore, contribute to the efficiency of all users.
Nichols TXEN also leverages customer-funded modifications by making them
available to all network users. Research and development costs were $1.0 million
in 1996, $1.6 million in 1997 and $3.3 million in 1998 of which 3%, 4% and 19%,
respectively, were customer-sponsored research and development related to the
modification and development of software products. As of November 30, 1998, the
research and development staff consisted of 60 employees.
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Nichols TXEN uses graphical user interface, or GUI, tools to make set-up,
information review and workflow on software systems faster, easier and more
intuitive. Planned enhancements designed to achieve this goal include a customer
service module, benefit plan building assistant, Java-based user interface for
TXEN MHS and more extensive care management tracking for FirstSTEPP. We focus a
substantial part of our research and development effort on improving automatic
claim filing and automatic claim adjudication. Planned enhancements to achieve
this goal include computer-aided claims classification, enhanced MDr98 pre-claim
submission audits, increased integration between TXEN MHS and MDr98, optical
character recognition, improved mail room capabilities and enhanced electronic
verifications, submissions and receipts. Currently, we offer two primary
decision support products, Xtend for managed care and Decision Manager 3.0 for
practice management. We also plan to adopt an ORACLE database, create a medical
management module for Xtend and add key indicator views in Decision Manager 3.0
and MDr98 for reporting.
COMPETITION
The business of providing information technology and administrative
services outsourcing to managed care organizations and medical practices is
highly competitive. The market for our transaction processing technology and
services is characterized by rapid change and technological advances requiring
ongoing expenditures for research and development and the timely introduction of
new technology and enhancements of existing technology. Our future success will
depend, in part, upon our ability to enhance our current technology and
services, respond effectively to technological changes, sell additional services
to our existing client base, introduce new technologies and meet the
increasingly sophisticated needs of our clients. Nichols TXEN's competitors vary
in the size, scope and breadth of the products and services they offer. Most of
our sales are derived from competitive procurement processes that require
specific, highly detailed presentations from all qualified vendors. We compete
with firms that sell turnkey computer systems and with firms that offer
information technology outsourcing services. A turnkey system is characterized
by a stand-alone package of hardware and software designed to perform specific
functions. We plan to significantly limit our sale of turnkey computer systems
to customers who desire to process their transactions internally. Accordingly,
Nichols TXEN may be at a competitive disadvantage to other vendors offering such
systems. In certain instances, potential customers may be influenced to select a
turnkey system by the customer's management information systems department who
may believe that our service solutions will reduce the department's internal
staff and equipment requirements. Many of our current and potential competitors
have significantly greater financial, marketing and other competitive resources
than Nichols TXEN. Current and potential competitors, including providers of
information technology to other segments of the health care industry, may
establish joint marketing arrangements or other relationships to compete more
effectively against us and new competitors may emerge.
INTELLECTUAL PROPERTY
Our success is dependent, in part, on our ability to protect our
proprietary software and confidential information from unauthorized use and
disclosure. We do not own any patents and have not registered any copyrights,
trademarks, service marks or trade names with the United States Patent and
Trademark Office. We rely on a combination of trade secrets, common law
intellectual property rights, license agreements, nondisclosure and other
contractual provisions and technical measures to establish and protect our
proprietary rights in our intellectual property and confidential information.
There can be no assurance that the legal protections afforded to us or the steps
taken by us will be adequate to prevent misappropriation of our technology and
confidential information. In addition, these protections do not prevent
independent third-party development of competitive products or services. We
believe that our proprietary rights do not infringe upon the proprietary rights
of third parties. There can be no assurance, however, that third parties will
not assert infringement claims against us in the future or that any such
assertion will not require us to enter into a license agreement or royalty
arrangement with the party asserting the claim.
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FACILITIES
We currently occupy approximately 87,500 square feet in four facilities in
Birmingham, Alabama. We have signed a lease agreement for approximately 74,000
square feet of office space in Birmingham scheduled to be completed for
occupancy by April 1, 1999. At that time, Nichols TXEN's Birmingham operations
will be consolidated into two facilities totalling approximately 109,000 square
feet. Our network data center will remain in its current location. In addition,
we have leased approximately 25,000 square feet in Birmingham that is scheduled
to be occupied by April 2000.
We currently lease approximately 4,800 square feet in Auburn, Alabama to
house a portion of our Managed Care Administration operations and approximately
5,000 square feet in Gadsden, Alabama, and Huntsville, Alabama, to house a
portion of our Practice Management Administration operations.
EMPLOYEES
Nichols TXEN had 606 employees as of November 30, 1998, of which 346 were
in the Managed Care Services division, 204 were in the Practice Management
Services division, and 56 were in Corporate Support Services such as finance,
administration, marketing and internal information technology support.
We believe our relationship with our employees is good. None of our
employees are governed by a collective bargaining agreement. In order to augment
our hiring of ready-to-work skilled individuals, we have employed several
programs to educate and train our work force.
We offer our employees extensive training courses covering software,
managed care and practice management markets, management, claims examination,
project management, and human resources. We augment our regular recruiting
efforts of university visits, job fairs, and employee referral programs with a
special recruiting and training program for college graduates from a variety of
disciplines with high grade point averages. These college graduates are placed
in an intense sixteen-week training program. The training program educates these
new employees on the managed care market and also provides concentrated training
on business division products and service. During fiscal year 1998, we conducted
fall, spring and summer classes training 48 new employees. At the end of the
training program, these new employees were assigned positions with Nichols TXEN.
To recruit and train additional personnel, Nichols TXEN participates in a
six-week pre-employment screening program developed and funded primarily by the
State of Alabama. Instruction provides participants with the basic skills
necessary for a position with us. The State of Alabama screens and selects
applicants expressing an interest in the program. Individuals are not paid for
participation in the program and we are not obligated to hire any of the
participants at the end of the program. We use a database of scanned resumes and
specialized software to manage our recruiting and hiring efforts.
GOVERNMENT REGULATION
The health care industry is subject to intensive regulation by both the
federal and state governments. One of Nichols TXEN's services, the preparation
and submission of claims for payment, has been subject to periodic and
continuing scrutiny for compliance with laws and regulations regarding, among
other things, inducements for patients referrals or services which are
government-reimbursed, incentives to improperly code for procedures, and
licensure. This regulatory framework is complex and the laws are very broad in
scope, subject to differing interpretations and lack substantive court decisions
addressing many arrangements under which we have conducted and expect to conduct
our business. Any failure to comply, or alleged failure to comply, with
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applicable laws and regulations could have a material adverse effect on our
business, financial condition or results of operations.
Licensure, Registration and Consumer Protection
In general, Nichols TXEN's third party administration and utilization
review operations are regulated by statutes and regulations of various states.
We are currently licensed as a Third Party Administrator or Private Review
Agent, or have been deemed to have achieved licensure by virtue of our URAC
accreditation by the American Accreditation Health Care Commission, in all
states in which we provide these services. We believe that we are in substantial
compliance with the licensing laws of each state in which we conduct business.
In addition, federal and state consumer protection laws may apply to our billing
activities in which we bill patients directly for the cost of physician services
provided. We believe that we are in substantial compliance with the consumer
protection laws of each state in which we conduct business.
Professional Practice
Persons engaged in the practice of medicine and nursing must be licensed in
various states. The professional practice of each profession is regulated by its
respective professional board. Professional practice rules and regulations are
comprehensive and generally set forth various activities which constitute
professional misconduct, or for which a professional may be subject to
sanctions, including loss of professional license. We believe that all of our
physicians and nurses are in substantial compliance with all applicable
professional regulations.
Anti-Kickback Statute
Under Medicare, Medicaid and other government funded health care programs,
federal and state governments enforce a federal Anti-Kickback Statute that
prohibits the offer, payment, solicitation or receipt of any remuneration,
directly or indirectly, overtly or covertly, in cash or in kind to induce or in
exchange for (i) the referral of patients covered by the programs, or (ii) the
leasing, purchasing, ordering or arranging for or recommending the lease,
purchase or order of any item, good, facility or service covered by the
programs. Prohibited remuneration includes any kickbacks, bribes, or rebates.
A person or entity that violates the Anti-Kickback Statute may be
penalized. These penalties include criminal fines of up to $25,000 per violation
and imprisonment. In addition, civil penalties can be imposed up to $50,000 per
violation, plus three times the actual damages. Further, the Secretary of the
Department of Health and Human Services has the authority to exclude or bar
individuals or entities who violate the Anti-Kickback Statute from participating
in Medicare and Medicaid. Exclusion may be imposed even if participation is
indirect. If Nichols TXEN, our personnel, or any significant customer is
penalized under the Anti-Kickback Statute, for whatever reason, there may be a
significant loss in our revenue.
The Anti-Kickback Statute is broad in scope and courts have not been
consistent in their interpretations of the law. To clarify what acts or
arrangements will not be subject to prosecution by the DHHS Office of Inspector
General or the United States Attorney, DHHS adopted a set of safe harbor
regulations. DHHS continues to publish clarifications to such safe harbors.
Arrangements that meet all the requirements of an applicable safe harbor are
considered not to violate the Anti-Kickback Statute. The activities covered by
the safe harbors include, but are not limited to, certain investments, rental of
space, land, equipment, personal services and management contracts, sales of
physician practices, physician referral services, warranties, discounts,
payments to employees, group purchasing organizations, and waivers of
beneficiary deductibles and co-payments. Failure to fit within a safe harbor
provision does not necessarily mean that the structure of a transaction is
illegal or that it will be prosecuted under the Anti-Kickback Statute.
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We do not believe that the final regulations contain a safe harbor which
covers all the arrangements under which we provide billing services to our
customers. However, we believe that our billing arrangements with physicians and
other customers do not violate the federal Anti-Kickback Statute, or similar
state laws.
The Health Insurance Portability and Accountability Act of 1996
In an effort to combat health care fraud, Congress included several
anti-fraud measures in the Health Insurance Portability and Accountability Act
of 1996, or HIPAA. HIPAA broadened the scope of certain fraud and abuse laws,
such as the Anti-Kickback Statute, to include all health care services, whether
or not they are reimbursed under a federal program. Federal health care offenses
include health care fraud and making false statements relative to health care
matters. Any person or entity that knowingly and willfully defrauds or attempts
to defraud a health care benefit program or obtains by means of false or
fraudulent pretenses, representations or promises, any of the money or property
of any health care benefit program in connection with the delivery of health
care services is subject to a fine and/or imprisonment. In addition, any person
or entity that knowingly and willfully falsifies or conceals or covers up a
material fact or makes any materially false or fraudulent statements in
connection with the delivery of or payment of health care services by a health
care benefit plan is subject to a fine and/or imprisonment. Civil fines and
exclusion may be imposed on individuals who retain an ownership or control
interest in a Medicare or Medicaid participating entity after such individuals
have been excluded from participating in the Medicare or Medicaid program. In
particular, civil monetary penalties or exclusion may be imposed on any person
who engages in a pattern or practice of presenting or causing to be presented a
claim for an item or services that is based on a code that the person knows or
should know will result in a greater payment to the person than the code the
person knows or should know is applicable to the item or service actually
provided. We believe that all of our operations comply with HIPAA.
False Claims Act
Under the Federal False Claims Act, liability may be imposed on any person
who knowingly submits or participates in submitting claims for payment to the
federal government which are false or fraudulent, or which contain false or
misleading information. Liability may also be imposed on persons who knowingly
make or use a false record or statement to avoid an obligation to pay the
federal government. "Person" includes an individual, company or corporation.
Various state laws impose liability for similar acts. Claims under the Federal
False Claims Act may be brought by the federal government or private
"whistleblowers." If we are found liable for a violation of the Federal False
Claims Act, or any similar state law, it may result in substantial civil and
criminal penalties. In addition, Nichols TXEN could be prohibited from
processing Medicaid or Medicare claims for payment.
Prompt Payment Laws
Various states have passed laws regarding the prompt payment of medical
claims by health plans. If a claim is brought against us, and we are found to
have violated a law regarding the prompt processing of claims for payment, we
may incur civil or other penalties.
Government Investigations
There is increasing scrutiny by law enforcement authorities, the DHHS
Office of Inspector General, the courts and Congress of arrangements between
health care providers and suppliers or other contractors which have a potential
to increase utilization of government health care resources. In particular,
scrutiny has been placed on coding of claims for payment and contracted billing
arrangements. Investigators have demonstrated a willingness to look beyond the
formalities of business arrangements to determine the underlying purposes of
payments between health care providers and suppliers and contractors. Although,
to our knowledge, neither Nichols TXEN nor any
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of its customers is the subject of any investigation, we cannot tell whether
Nichols TXEN, or its customers, will be the target of governmental
investigations in the future.
Confidentiality
Various federal and state laws establish minimum standards for the
maintenance of medical records to protect the confidentiality of patient medical
information. In the course of our business, we receive medical records for
various patients of our customers. As a result, Nichols TXEN is subject to one
or more of these medical records and confidentiality laws. In addition, we may
become subject to new rules recently mandated by federal law and proposed by the
HCFA to ensure the integrity and confidentiality of patient data by creating
mandatory security standards for entities which maintain or transmit health
information electronically.
LEGAL PROCEEDINGS
We are involved in various lawsuits and claims arising in the normal course
of business. In our opinion, although the outcomes of these suits and claims are
uncertain, in the aggregate they should not have a material adverse effect on
our business, financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
NAME AGE POSITION
---- --- --------
Thomas L. Patterson(1)............... 56 Chairman of the Board
Paul D. Reaves(1).................... 41 Chief Executive Officer and Director
H. Grey Wood......................... 42 President, Chief Operating Officer and Director
John D. McKay........................ 36 Chief Financial Officer
W. Sanders Pitman.................... 36 Vice President and General Manager, Managed Care
W. Luckey Crocker.................... 43 Vice President and General Manager, Practice Management
Chris H. Horgen(1)................... 52 Director
Michael J. Mruz(1)................... 53 Director
James D. Kever(2)(3)................. 46 Director
James I. Harrison, Jr.(2)(3)......... 66 Director
Patsy L. Hattox...................... 49 Secretary
Allen E. Dillard..................... 38 Treasurer
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(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
All directors of the Company hold office until the next annual meeting of
the stockholders and the election and qualification of their successors.
Officers serve at the discretion of the Board of Directors.
Thomas L. Patterson has been employed since 1989 by the Company and one of
its predecessors, TXEN, Inc. Mr. Patterson has been Chairman of the Board of
Nichols TXEN since the acquisition of TXEN, Inc. in August 1997. Since May 1998,
Mr. Patterson has been employed part-time in the capacity of Chairman of the
Board. From 1989 to August 1997, Mr. Patterson served as Chief Executive Officer
and President of TXEN, Inc., which he co-founded. In 1980, Mr. Patterson founded
SEAKO, Inc., an information technology company for practice management and
managed care systems. From 1980 to 1989, Mr. Patterson served as President of
SEAKO, Inc. He also serves on the Board of Directors of Nichols Research.
Paul D. Reaves has been employed since 1989 by the Company and TXEN, Inc.
Mr. Reaves has served as Chief Executive Officer of the Company since May 1998.
Mr. Reaves was a co-founder of TXEN, Inc. and he served as Executive Vice
President of TXEN, Inc. from 1989 to 1997. From 1981 to 1989, Mr. Reaves was
employed by SEAKO, Inc. in programming, implementation, customer support and
sales and marketing. Mr. Reaves served as Vice President of SEAKO, Inc. from
1985 to 1989.
H. Grey Wood has been employed since 1995 by the Company and TXEN, Inc. Mr.
Wood has served as President of the Company since January 1998 and as Chief
Operating Officer of the Company since August 1997. Mr. Wood served as Vice
President and General Manager of TXEN, Inc. from 1995 to 1997. From 1993 to
1995, he was Director and General Manager of the physician Practice Management
Group of CSC Healthcare Systems, Inc., a vendor of turnkey practice management
and managed care software.
John D. McKay has been employed since 1988 by the Company and one of its
predecessors, Computer Services Corporation. Mr. McKay has served as Chief
Financial Officer of the Company since 1997. From 1988 to 1996, he served as
Controller of Computer Services Corporation. From 1982 to 1988, Mr. McKay held
various staff and management positions with Ernst & Young LLP,
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focusing on health care related companies, including HMOs, hospitals and large
physicians groups. Mr. McKay is a Certified Public Accountant.
W. Sanders Pitman has been employed since May 1997 by the Company and TXEN,
Inc. and has served as Vice President and General Manager of the Company's
Managed Care Services division. In 1990, Mr. Pitman assisted in the formation of
MACESS Corporation, a supplier of imaging and workflow solutions for the managed
care industry. From 1990 to 1997, Mr. Pitman served in various positions with
MACESS, most recently as Chief Operating Officer. From 1986 until 1990, Mr.
Pitman held practice management and managed care sales positions with SEAKO,
Inc.
W. Luckey Crocker has been employed since 1996 by the Company and TXEN,
Inc. Mr. Crocker has served as Vice President and General Manager of the
Company's Practice Management Services division since September 1998. Mr.
Crocker served as Vice President of existing account sales from June 1998 to
September 1998. Mr. Crocker was Director of Existing Account Sales from 1996 to
June 1998. Mr. Crocker worked in sales for International Business Machines from
1993 to 1996. He was Director of the Practice Management Division for CSC
Healthcare Systems, Inc., from 1989 to 1993, Vice President for Special Projects
for SEAKO, Inc. from 1988 to 1989, and Vice President of Sales and Customer
Support for Computer Services Corporation from 1987 to 1988.
Chris H. Horgen became a director of the Company in 1998. Mr. Horgen served
as a director of TXEN, Inc. from 1992 to 1994. Mr. Horgen is a co-founder of
Nichols Research and has served as its Chairman of the Board since 1991. Mr.
Horgen served as Chief Executive Officer of Nichols Research from 1983 to 1997.
Mr. Horgen was Co-Chairman of the Board of Nichols Research from 1984 to 1991
and its Executive Vice President from 1976 to 1983. Mr. Horgen also serves as a
director of SouthTrust Bank of Alabama, N.A.
Michael J. Mruz became a director of the Company in 1998. From 1994 to
1997, Mr. Mruz served as President and Chief Operating Officer of Nichols
Research. Mr. Mruz became Chief Executive Officer of Nichols Research in 1997.
Mr. Mruz has been a director of Nichols Research since 1994. From 1989 to 1994,
Mr. Mruz served as Executive Vice President, Chief Financial and Administrative
Officer and a member of the Board of Directors of BDM International, Inc., a
defense contractor.
James D. Kever became a director of the Company in 1998. Mr. Kever has
served as President and Co-Chief Executive Officer of ENVOY Corporation, an
electronics data interchange company, since 1995. He has served as a director of
ENVOY Corporation since 1991. Mr. Kever joined ENVOY Corporation as Treasurer
and General Counsel in 1981. From 1984 to 1995, he served as Executive Vice
President of ENVOY. Mr. Kever is a Certified Public Accountant and an attorney.
James I. Harrison, Jr. became a director of the Company in 1998. Mr.
Harrison is the owner of Carport, Incorporated, a retail automotive parts store
chain, and has served as its Chairman of the Board and Chief Executive Officer
since 1983. Mr. Harrison founded Harco Drug, Inc., a retail drug-store chain, in
1961 and served as its Chairman of the Board and Chief Executive Officer from
1961 to 1997, at which time it was merged with the RiteAid Corporation. Mr.
Harrison serves as a director of AmSouth Bank Corporation and ALFA, Inc.
Patsy L. Hattox became the Company's Secretary in 1998. Ms. Hattox has been
employed by Nichols Research since 1976, and has served as the Secretary and
Chief Administrative Officer of Nichols Research since 1991. Ms. Hattox serves
on the Board of Directors of Nichols Research. Ms. Hattox's compensation is paid
by Nichols Research.
Allen E. Dillard became the Company's Treasurer in 1998. Mr. Dillard has
been employed by Nichols Research since 1992 and has served as the Chief
Financial Officer of Nichols Research since 1994. Mr. Dillard's compensation is
paid by Nichols Research.
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COMMITTEES OF THE BOARD OF DIRECTORS
The Executive Committee is empowered to exercise all authority of the Board
of Directors of the Company except as limited by the Delaware General
Corporation Law. Under Delaware law, an executive committee may not, among other
things, recommend to shareholders actions required to be approved by
shareholders, fill vacancies on the Board of Directors, amend the bylaws or
approve the reacquisition or issuance of shares of the corporation's capital
stock.
The Compensation Committee is responsible for reviewing and recommending
salaries, bonuses and other compensation for the Company's executive officers.
The Compensation Committee also is responsible for administering the Company's
stock option plans and for establishing the terms and conditions of all stock
options granted under these plans, unless these functions have been retained by
the Board of Directors.
The Audit Committee is responsible for recommending independent auditors,
reviewing with the independent auditors the scope and results of the audit
engagement, monitoring the Company's financial policies and control procedures
and reviewing and monitoring the provisions of non-audit services performed by
the Company's auditors.
DIRECTOR COMPENSATION
Prior to completion of this offering, non-employee directors received no
compensation for service on the Board of Directors. Following completion of this
offering, directors not employed by the Company or Nichols Research will receive
a fee of $2,500 for each board meeting attended and $500 for each committee
meeting attended which is held independently of a board meeting.
After completion of this offering, the non-employee directors will be
eligible to receive options pursuant to the Company's Non-Employee Director
Stock Option Plan. The Director Stock Option Plan will become effective upon
consummation of this offering. Under the Director Stock Option Plan, each
director who is not an officer or employee of the Company, Nichols Research or
an officer or employee of a majority-owned subsidiary or joint venture of the
Company (a "Non-Employee Director"), will be granted an option to purchase 5,000
shares of common stock at the initial public offering price. Each subsequently
appointed or elected Non-Employee Director will be granted an option to purchase
1,000 shares of common stock at an exercise price equal to the fair market value
on the date of the grant. In addition, each Non-Employee Director will be
granted an option at each annual meeting of shareholders to purchase 1,000
shares of common stock at an exercise price equal to the fair market value on
the date of the grant. A total of 50,000 shares of common stock are available
for awards under the Director Stock Option Plan.
DIRECTOR INDEMNIFICATION
The Company has Indemnification Agreements with each of its directors that
provide the maximum indemnification allowed to directors under Delaware law,
subject to certain exceptions. In addition, as authorized by the Company's
Amended and Restated Bylaws and Delaware law, the Indemnification Agreements
provide generally that the Company will advance expenses incurred by directors
in any action or proceeding as to which they may be entitled to indemnification,
subject to certain exceptions.
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EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Company for the fiscal year ended August 31, 1998, for its Chief Executive
Officer and the four highest compensated executive officers of the Company whose
total annual salary and bonuses determined at August 31, 1998, exceeded $100,000
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
YEAR ENDED AUGUST 31, ALL OTHER
1998(1) COMPENSATION(2)
--------------------- ---------------
NAME AND PRINCIPAL POSITION SALARY BONUS
--------------------------- --------- --------
Paul D. Reaves.................................. $125,000 $78,432 $1,993
Chief Executive Officer
Thomas L. Patterson............................. 133,529 -- 2,000
Chairman of the Board
H. Grey Wood.................................... 125,000 69,368 2,000
President and Chief Operating Officer
W. Sanders Pitman............................... 110,000 187,704 1,420
Vice President and General Manager, Managed
Care
W. Luckey Crocker............................... 78,750 25,000 2,000
Vice President and General Manager,
Practice Management
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(1) "Annual Compensation" for each of the named executives does not include the
value of certain perquisites or other personal benefits, if any, furnished
by the Company to the Named Executive Officers (or for which it reimburses
the Named Executive Officers), unless the value of such benefits in total
exceeds the lesser of $50,000 or 10% of the total annual salary and bonus
reported in the above table for any Named Executive Officer.
(2) Amounts matched into a 401(k) Plan by the Company under the Nichols
Research Retirement Plan for the fiscal year ended August 31, 1998.
EMPLOYEE BENEFIT PLANS
401(k) Plan
Substantially all full-time employees of Nichols TXEN are covered by a
defined contribution plan offered through Nichols Research. Employees are
permitted to defer up to 15% of their salary. Nichols Research matches the
employee contribution's up to a maximum of 2% of the employee's salary.
Discretionary contributions may also be made to the plan as determined annually
by the Nichols Research Board of Directors. Amounts charged to the Company's
earnings with respect to the plan were approximately $38,000, $38,000 and
$124,000 for fiscal years 1996, 1997 and 1998, respectively.
The Company intends to establish its own defined contribution plan with
similar terms in the future. Until that time, the Company will bear its
allocable share of the costs of the Nichols Research plan.
1998 Stock Option Plan
The Company adopted the Nichols TXEN Corporation 1998 Stock Option Plan
(the "1998 Plan") on November 6, 1998. The Company has reserved 1,700,000 shares
of common stock (subject to certain adjustments) for issuance to key employees
(including officers) of the Company, its subsidiaries and its parent
corporation, Nichols Research. As of November 30, 1998, options
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exercisable for 766,000 shares of common stock at an exercise price equal to the
initial public offering price were granted subject to the completion of this
offering.
The 1998 Plan permits a committee composed of either the entire Board of
Directors or two or more disinterested non-employee directors of the Company to
issue incentive stock options ("Incentive Stock Options"), as defined in Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), and stock
options that do not conform to the requirements of that Code section
("Non-Statutory Options") (collectively, "Options"). The committee has
discretionary authority to determine the individuals to whom Options will be
granted from among those individuals who are eligible, as well as the number of
Options to be granted to each individual. The exercise price of each Incentive
Stock Option shall not be less than 100% of the fair market value of the common
stock at the time of the grant, except in the case of a grant to an employee who
owns (within the meaning of the Code Section 422(b)(6)) 10% or more of the
outstanding stock of the Company, the exercise price shall be not less than 110%
of such fair market value. The exercise price of each Non-Statutory Option will
be determined by the committee at the time of the grant of the Non-Statutory
Stock Option, which price may not be less than the fair market value of the
shares at the time the option is granted, except that with respect to not more
than 10% of the shares of common stock authorized under the 1998 Plan, a
committee composed solely of disinterested non-employee directors may establish
an exercise price below fair market value. In addition, Options may not be
repriced to specify a price less than the initial exercise price, except that
with respect to not more than 10% of the shares of common stock authorized under
the 1998 Plan, a committee composed solely of disinterested non-employee
directors may approve a repricing of options specifying a lower price.
No Non-Statutory Option is exercisable either in whole or in part prior to
the earlier of: (i) the date specified in the Non-Statutory Option; or (ii) six
months from the date the Non-Statutory Option is granted. No Non-Statutory
Option is exercisable after the earlier of: (i) the date specified in the
Non-Statutory Option; or (ii) the expiration of ten years from the date the
Non-Statutory Option is granted. No Incentive Option is exercisable, either in
whole or in part, prior to two years from the date it is granted and in no event
is an Incentive Option exercisable after the expiration of five years from the
date it is granted. Each Incentive Option is exercisable in three installments.
Up to one-third of the total shares granted may be purchased after 24 months
from the date of the grant, up to an additional one-third may be purchased after
36 months and up to the final one-third may be purchased after 48 months.
Incentive Option recipients may accumulate installments not yet exercised, which
may be exercised, in whole or in part, in any subsequent period but not later
than five years from the date the Incentive Option is granted.
The Board of Directors may amend the 1998 Plan without stockholder
approval, except with respect to: (i) a change in the number of shares for which
Options may be granted under the 1998 Plan either in the aggregate or as to any
individual employee; (ii) a change in the provisions relating to the
determination of employees to whom Options may be granted; (iii) removal of the
administration of the 1998 Plan from the committee; (iv) a decrease in the price
at which Incentive Options may be granted; or (v) a change in the restrictions
on repricing Options.
Employees' Stock Purchase Plan
On November 6, 1998, the Board of Directors and Nichols Research, as the
sole shareholder, adopted and approved the Nichols TXEN Corporation Employees'
Stock Purchase Plan (the "Plan"). A total of 500,000 shares of common stock
(subject to adjustments) have been reserved for purchase by employees upon the
exercise of options granted under the Plan. The Plan will be administered by a
committee composed of either the entire Board of Directors or two or more non-
employee directors who do not have a material financial relationship with the
Company or any of its subsidiaries (the "Committee"). Persons serving on the
Plan's Committee may receive option grants under the Plan.
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All regular, full-time employees of the Company and such subsidiaries as
are designated by the Board are eligible to receive options under the Plan. On
each March 1, June 1, September 1 and December 1, beginning after the effective
date of this offering, each eligible employee will be granted a non-transferable
option to purchase common stock from the Company on the last day of the option
period. Option periods are three month periods beginning on March 1, June 1,
September 1 and December 1 and ending on the next May 31, August 31, November 30
and February 28. Options expire at the end of the option period. The price for
stock purchased under each option is 85% of its fair market value on the first
day or the last day of the option period, whichever is less. Fair market value
on any day means the closing price of the common stock on the Nasdaq National
Market on such day, or if not traded on such day, on the last preceding day on
which the stock was traded.
An employee may exercise the option granted to him only by authorizing
payroll deductions. As of the last day of the option period, the amount of
payroll deductions during such option period will be used to purchase from the
Company whole shares of common stock under the employee's option. If during an
option period an employee becomes ineligible to purchase stock under the Plan
because of the termination of employment or if payroll deductions are
discontinued during an option period, the employee's payroll deductions will be
returned without interest to the employee.
EMPLOYMENT AGREEMENTS
The Company's predecessor, TXEN, Inc., entered into an Employment Agreement
with Thomas L. Patterson on December 16, 1994. His Employment Agreement was
amended by the Company on August 29, 1997, June 1, 1998 and November 6, 1998.
Under the provisions of the Employment Agreement, Mr. Patterson is employed as
the Chairman of the Board of Directors of the Company on a part-time basis for a
term that ends two years after the effective date of this offering. His base
salary is an hourly rate for each hour of service performed by him. The
employment of Mr. Patterson will terminate upon his death or disability, upon 30
days prior written notice by either party, or for good cause. If Mr. Patterson
is terminated by the Company on 30 days prior written notice or if Mr. Patterson
terminates his employment for good cause or due to his death or disability, he
will be paid, as additional compensation, 50% of his annualized base salary for
six months after the date of termination.
The Company's predecessor, TXEN, Inc., entered into an Employment Agreement
with Paul D. Reaves on December 16, 1994. His Employment Agreement was amended
by the Company on August 29, 1997 and November 6, 1998. Under the provisions of
the Employment Agreement, Mr. Reaves is employed as the Chief Executive Officer
for a term that ends two years after the effective date of this offering. The
Employment Agreement automatically renews on a month-to-month basis thereafter.
The Employment Agreement provides that Mr. Reaves will be paid a monthly base
salary of $12,500, subject to increases as authorized by the Board of Directors.
He may be awarded discretionary performance bonuses. The employment of Mr.
Reaves will terminate upon his death or disability, upon 30 days prior written
notice by either party, or for good cause. If Mr. Reaves is terminated by the
Company on 30 days prior written notice or if Mr. Reaves terminates his
employment for good cause or due to his death or disability, he will be paid, as
additional compensation, 50% of his annualized base salary for six months after
the date of termination.
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The Company entered into an Employment Agreement with H. Grey Wood on
August 29, 1997. His Employment Agreement was amended on November 6, 1998. Under
the provisions of the Employment Agreement, Mr. Wood is employed as President
and Chief Operating Officer of the Company for a term that ends two years after
the effective date of this offering. The Employment Agreement automatically
renews on a month-to-month basis thereafter. The Employment Agreement provides
that Mr. Wood will be paid a monthly base salary of $12,500, subject to
increases as authorized by the Board of Directors. He may be awarded
discretionary performance bonuses. The employment of Mr. Wood will terminate
upon his death or disability, upon 30 days prior written notice by either party,
or for good cause. If Mr. Wood is terminated by the Company on 30 days prior
written notice or if Mr. Wood terminates his employment for good cause or due to
his death or disability, he will be paid, as additional compensation, an amount
equal to his monthly base salary for six months after the date of termination.
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CERTAIN TRANSACTIONS
SERVICES AGREEMENT
After this offering, Nichols Research will retain a controlling equity
interest in Nichols TXEN. Nichols Research will furnish administrative services
to the Company pursuant to a Corporate Services Agreement (the "Services
Agreement"). Under the Services Agreement, Nichols Research will provide various
administrative services, including public reporting compliance, certain
corporate record keeping, risk management, certain employee benefits
administration, administration of investor and media relations, tax return
preparation assistance, centralized cash management and certain financial and
other services for an annual fee. In fiscal year 1999, the fee is 2.4% of
operating expenses less costs of goods sold defined as direct materials and
purchased labor. In fiscal years 1996, 1997, and 1998 under a similar
arrangement, the Company paid $192,453, $249,577, and $696,214, respectively, to
Nichols Research for administrative services. The Company believes that the
charges under the Services Agreement are reasonable. For additional items, such
as software development services or administrative services that create unusual
demands for resources, Nichols Research will charge the Company costs actually
incurred in performing such services plus a mutually acceptable fee. For the
fiscal years ended August 31, 1996, 1997 and 1998, the Company paid $145,506,
$174,070 and $0, respectively, to Nichols Research for these additional
services. The Company is not obligated to use Nichols Research for these
additional services. During the term of the Services Agreement, the Nichols TXEN
Board of Directors will elect as Secretary of Nichols TXEN the Secretary of
Nichols Research and will elect as Treasurer of Nichols TXEN the Chief Financial
Officer of Nichols Research. The Secretary and Treasurer of Nichols TXEN will
serve in such capacities without compensation from Nichols TXEN. The Services
Agreement automatically renews for successive one-year terms, unless canceled by
either Nichols Research or the Company upon 90 days prior notice following the
initial one-year term.
VOTING AGREEMENT
Nichols Research has entered into a Voting Agreement with Nichols TXEN
dated November 6, 1998, which will become effective upon completion of this
offering. Pursuant to the Voting Agreement, Nichols Research has agreed to vote
all of its shares of Nichols TXEN common stock at any meeting at which directors
of Nichols TXEN are elected in favor of the election of independent directors so
that after such election, if such persons are elected, there will be at least
two independent directors of Nichols TXEN. The Voting Agreement will terminate
upon the earlier of five years from the date of the Voting Agreement or the date
upon which Nichols Research beneficially owns 50% or less of the common stock of
the Company.
TAX SHARING AGREEMENT
Nichols Research and the Company have entered into a Tax Sharing Agreement
which generally provides for the manner in which the parties will bear taxes for
the period beginning on September 1, 1998, and ending upon the sale by the
Company of the common stock pursuant to this offering and income tax
deficiencies or refunds resulting from future audit adjustments. The Company
will be required to pay to Nichols Research an amount equal to the excess of the
income tax liability which the Company would have for the short period over the
amount which the Company has previously paid (or been charged with by Nichols
Research) with respect to such taxes. If additional taxes must be paid by the
Company or Nichols Research as a result of an adjustment made by a tax
regulatory authority, and as a result of that adjustment the other party would
obtain an offsetting tax benefit, the party obtaining the tax benefit pays an
amount equal to the additional tax to the party whose income tax liability was
increased. Likewise, if income taxes are reduced as a result of an adjustment
made by a tax regulatory authority, and as a result of that adjustment the other
party would suffer an offsetting tax detriment, the party whose taxes were
reduced must pay such amount to the other party. The Tax Sharing Agreement also
contains
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provisions dealing with contesting adjustments made by tax regulatory
authorities, determining who will bear the expense of any such challenge and
cooperation between the parties.
THE TXEN ACQUISITION
Nichols Research formed CSC Acquisition Inc. ("CSC Acquisition"), as a
wholly owned subsidiary on June 6, 1995. On June 30, 1995, CSC Acquisition
acquired all of the assets and certain liabilities of Computer Services
Corporation ("Computer Services"). Since its incorporation in 1967, Computer
Services performed administrative services and information technology services
for, and sold turnkey computer systems to, physician practices. Nichols Research
formed Nichols SELECT Corporation ("Nichols SELECT") as a wholly owned
subsidiary on September 17, 1996. On September 23, 1996, CSC Acquisition was
merged into Nichols SELECT. On December 16, 1994, Nichols Research acquired
19.9% of the capital stock of TXEN, Inc. ("TXEN") with an option to acquire the
remaining 80.1% of TXEN. Since its incorporation in 1989, TXEN provided
information technology outsourcing and administrative services outsourcing for
the managed health care industry. On August 29, 1997, Nichols Research acquired
the remaining 80.1% of TXEN through a merger of TXEN into Nichols SELECT, which
after the merger continued to be wholly owned by Nichols Research. After the
TXEN acquisition, Nichols SELECT changed its name to Nichols TXEN Corporation.
As part of the TXEN acquisition, the TXEN shares of the following Named
Executive Officers and directors of Nichols TXEN were purchased by Nichols
Research for the following consideration consisting of cash and common stock of
Nichols Research:
AGGREGATE
NAME CONSIDERATION
---- --------------
(IN THOUSANDS)
Thomas L. Patterson.................. $19,855
Paul D. Reaves....................... 8,519
H. Grey Wood......................... 1,800
W. Luckey Crocker.................... 463
Chris H. Horgen...................... 2,672
54
57
PRINCIPAL STOCKHOLDERS
Prior to this offering, Nichols Research owned 7,500,000 shares, or 100% of
Nichols TXEN. The Company will sell 2,175,000 shares in connection with this
offering, and thereafter Nichols Research will own 7,500,000 shares, or
approximately 78% of the Company, 75% if the underwriters' over-allotment option
is exercised. In addition, Chris H. Horgen, the Chairman of the Board of Nichols
Research, has authority to direct the voting and disposition of Nichols
Research's shares of Nichols TXEN and, therefore, beneficially owns these
shares. Mr. Horgen disclaims beneficial ownership of these shares.
As of November 30, 1998, options covering 766,000 shares of common stock
pursuant to the 1998 Stock Option Plan and the Non-Employee Director Stock
Option Plan were granted subject to completion of this offering. The tables
below set forth the option grants to the executive officers and directors of
Nichols TXEN, other officers and employees of Nichols TXEN as a group, and other
officers and employees of Nichols Research as a group.
1998 STOCK OPTION PLAN
NUMBER OF SHARES
SUBJECT TO OPTIONS
------------------
Nichols TXEN executive officers and directors:
Thomas L. Patterson....................................... 40,000
Paul D. Reaves............................................ 89,000
H. Grey Wood.............................................. 94,000
W. Sanders Pitman......................................... 79,000
W. Luckey Crocker......................................... 22,500
John D. McKay............................................. 22,500
Chris H. Horgen........................................... 35,000
Michael J. Mruz........................................... 35,000
Allen E. Dillard.......................................... 5,000
Patsy L. Hattox........................................... 5,000
Other officers and employees of Nichols TXEN................ 319,000
Other officers and employees of Nichols Research............ 10,000
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
NUMBER OF SHARES
SUBJECT TO OPTIONS
------------------
James D. Kever.............................................. 5,000
James I. Harrison, Jr....................................... 5,000
The right to exercise options under the 1998 Stock Option Plan will not
vest until 24 months from the grant date. Up to one-third of the shares subject
to these initial grants may be purchased after 24 months from the date of grant,
up to an additional one-third may be purchased after 36 months from the date of
grant, and up to the final one-third may be purchased after 48 months from the
date of grant. None of the options may be exercised later than five years from
the grant date. The right to exercise options under the Non-Employee Director
Stock Option Plan will not vest until six months from the grant date. The
exercise price per share for all of the stock options listed above is the
initial public offering price.
55
58
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 30,000,000 shares of
common stock, par value $0.01 per share. As of November 30, 1998, the Company
had issued and outstanding 7,500,000 shares of common stock. After this
offering, the Company will have 9,675,000 shares of common stock outstanding.
COMMON STOCK
Holders of shares of common stock are entitled to one vote per share for
the election of directors and all matters to be submitted to a vote of the
Company's stockholders. The holders of shares of common stock are entitled to
share ratably in such dividends as may be declared by the Board of Directors and
paid by the Company out of funds legally available therefor. In the event of a
dissolution, liquidation, or winding up of the Company, holders of shares of
common stock are entitled to share ratably in all assets remaining after payment
of all liabilities and liquidation preferences, if any. Holders of shares of
common stock have no preemptive, subscription, redemption, or conversion rights.
The outstanding shares of common stock are, and the shares of common stock to be
issued by the Company in connection with this offering will be, duly authorized,
validly issued, fully paid and nonassessable. The transfer agent and registrar
for the common stock is ChaseMellon Shareholder Services.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). In general, Section 203 prohibits a
publicly held Delaware corporation, such as the Company shall become upon
completion of this offering, from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction pursuant to which the person became an interested stockholder,
unless the business combination is approved in a manner prescribed by Delaware
law. For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the Company's voting stock. Section 203 could prohibit or
delay mergers or other takeover or change in control attempts with respect to
the Company and, accordingly, may discourage attempts to acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Amended and Restated Certificate of Incorporation provides
that a director of the Company shall not be personally liable to the Company or
its shareholders, except liability for:
- breach of the director's duty of loyalty;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
- the unlawful payment of a dividend or unlawful stock purchase or
redemption; and
- any transaction from which the director derives an improper personal
benefit.
The Amended and Restated Certificate of Incorporation and the Amended and
Restated Bylaws also provide that the Company shall indemnify directors and
officers of the Company to the fullest extent permitted by the Delaware General
Corporation Law. The Company has entered into Indemnification Agreements with
each of its directors.
56
59
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no market for the shares of the
common stock of the Company. The Company can make no predictions as to the
effect, if any, that sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
significant amounts of the common stock in the public market, or the perception
that such sales may occur, could adversely affect prevailing market prices.
Upon consummation of this offering, the Company will have outstanding
9,675,000 shares of common stock. Of the 9,675,000 shares outstanding upon
completion of this offering, the 2,175,000 shares sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act, unless they are purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act (which sales would be subject to
certain limitations and restrictions described below). The remaining 7,500,000
outstanding shares of common stock may be sold in the public market only if
registered or sold pursuant to an exemption from registration such as Rule 144
or 144(k) promulgated under the Securities Act. Nichols Research may cause the
Company to register for sale any or all of its shares of common stock. Nichols
Research, the officers and directors of the Company and certain officers of
Nichols Research have agreed not to offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of, or agree to dispose of (other than
as gifts), any shares of common stock until 180 days after the date of this
prospectus without the prior written consent of BT Alex. Brown Incorporated. BT
Alex. Brown Incorporated, in its sole discretion and without notice, may earlier
release for sale in the public market all or any portion of the shares subject
to such lock-up agreements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned shares for at least one year (including the holding
period of any prior owner except an affiliate) is entitled to sell in "brokers'
transactions" or to market makers, within any three-month period a number of
shares that does not exceed the greater of:
- 1% of the number of shares of common stock outstanding
(approximately 9,675,000 shares immediately after this offering); or
- the average weekly trading volume in the common stock during the
four calendar weeks preceding the required filing of a Form 144 with
respect to such sale.
Sales under Rule 144 are subject to the availability of current public
information about the Company.
Under Rule 144(k), a person who is not deemed to have been an affiliate of
the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation, or notice filing provisions of Rule 144.
Unless otherwise restricted, such "144(k) shares" may therefore be sold
immediately upon the completion of this offering. After the expiration of the
180-day lock-up period, 7,500,000 shares owned by Nichols Research will be
eligible for sale in the public market subject to compliance with Rule 144.
After the completion of this offering, the Company intends to file a
Registration Statement on Form S-8 under the Securities Act to register:
- the 1,700,000 shares of common stock reserved for issuance under the
1998 Stock Option Plan;
- the 50,000 shares reserved under the Non-Employee Director Stock
Option Plan; and
- the 500,000 shares reserved for issuance under the Employees' Stock
Purchase Plan.
57
60
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement, the underwriters named below through their representatives, BT Alex.
Brown Incorporated, CIBC Oppenheimer Corp., Friedman, Billings, Ramsey & Co.,
Inc. and The Robinson-Humphrey Company, LLC, have severally agreed to purchase
from the Company, the following respective numbers of shares of common stock at
the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
BT Alex. Brown Incorporated.................................
CIBC Oppenheimer Corp.......................................
Friedman, Billings, Ramsey & Co., Inc.......................
The Robinson-Humphrey Company, LLC..........................
---------
Total.................................................. 2,175,000
=========
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent and that the
underwriters will purchase all shares of the common stock offered hereby if any
of such shares are purchased.
The Company has been advised by the representatives of the underwriters
that the underwriters propose to offer the shares of common stock to the public
at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow, and such dealers may allow,
a concession not in excess of $ per share to certain other dealers.
After the initial public offering, the offering price and other selling terms
may be changed by the representatives.
The Company has granted to the underwriters an option, exercisable not
later than 30 days after the date of this prospectus, to purchase up to 325,000
additional shares of common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. To the extent that the underwriters exercise such option, each of
the underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of common stock to be purchased by
it shown in the above table bears to 2,175,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the underwriters. The
underwriters may exercise such option only to cover over-allotments made in
connection with the sale of common stock offered hereby. If purchased, the
underwriters will offer such additional shares on the same terms as those on
which the 2,175,000 shares are being offered.
The following table shows the underwriting fees to be paid to the
underwriters by Nichols TXEN in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.
NO FULL
EXERCISE EXERCISE
-------- --------
Per Share................................................... $ $
Total....................................................... $ $
The underwriters will offer the shares, including the shares from the
over-allotment option if it is exercised, on a firm commitment basis. BT Alex.
Brown Incorporated expects to deliver the shares of common stock to purchasers
on , 1999.
58
61
The Company has agreed to indemnify the underwriters and their contracting
persons against certain liabilities, including liabilities under the Securities
Act of 1933, as amended.
The Company, Nichols Research, the officers and directors of the Company
and certain officers of Nichols Research, holding in the aggregate approximately
7,500,000 shares of common stock have agreed, subject to certain exceptions, not
to offer, sell or otherwise dispose of any shares of common stock for a period
of 180 days after the date of this prospectus without the prior written consent
of BT Alex. Brown Incorporated. When determining whether to release shares from
the lock-up agreements, BT Alex. Brown Incorporated may consider, among other
factors, market conditions at the time, the number of shares for which the
release is requested and the shareholder's reasons for requesting the release.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the common stock. Specifically, the underwriters may over-allot
shares of the common stock in connection with this offering, thereby creating a
short position in the common stock for their own account. Additionally, to cover
such over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of the common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
The representatives of the underwriters have advised the Company that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the common stock will
be determined by negotiations among the Company and the representatives of the
underwriters. Among the factors to be considered in such negotiations will be:
- prevailing market conditions;
- the results of operations of the Company in recent periods;
- the market capitalizations and stages of development of other companies
that the Company and the representatives of the underwriters believe to
be comparable to the Company;
- estimates of the business potential of the Company; and
- the present state of the Company's development and other factors deemed
relevant.
59
62
LEGAL MATTERS
The validity of the issuance of the shares of the common stock offered
hereby will be passed upon for the Company by Lanier Ford Shaver & Payne P.C.,
Huntsville, Alabama. John R. Wynn is a member of the law firm Lanier Ford Shaver
& Payne, P.C. and is a director of Nichols Research. As of the date of this
prospectus, six attorneys of Lanier Ford Shaver & Payne, P.C., including Mr.
Wynn, beneficially owned an aggregate of 31,321 shares of Nichols Research
common stock. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The financial statements and schedule of Nichols TXEN and financial
statements of TXEN, Inc. appearing in this prospectus and the registration
statement have been audited by Ernst & Young LLP, independent auditors, to the
extent indicated in their reports thereon also appearing elsewhere herein and in
the registration statement. Such financial statements and schedule have been
included herein in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
60
63
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto, the "registration statement") under
the Securities Act with respect to the shares of common stock offered hereby.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
common stock offered hereby, reference is made to the registration statement.
Statements made in this prospectus as to the contents of any contract,
agreement, or other document are not necessarily complete and in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. The registration statement and the exhibits and
schedules thereto may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following regional offices of the Commission:
Seven World Trade Center, Room 1400, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, at
prescribed rates. In addition, the Company is required to file electronic
versions of these documents with the Commission through the Commission's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Commission
maintains a World Wide Web Site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.
The Company intends to make available to its stockholders annual reports
containing financial statements audited by an independent public accounting firm
and quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial information.
61
64
INDEX TO FINANCIAL STATEMENTS
NICHOLS TXEN CORPORATION:
Report of Independent Auditors.............................. F-2
Balance Sheets as of August 31, 1997 and 1998 and November
30, 1997 (unaudited) and November 30, 1998 (unaudited).... F-3
Statements of Operations for the three years ended August
31, 1996, 1997 and 1998 and the three months ended
November 30, 1997 (unaudited) and November 30, 1998
(unaudited)............................................... F-4
Statements of Changes in Stockholder's Equity for the three
years ended August 31, 1996, 1997 and 1998 and the three
month period ended November 30, 1998 (unaudited).......... F-5
Statements of Cash Flows for the three years ended August
31, 1996, 1997 and 1998 and the three months ended
November 30, 1997 (unaudited) and November 30, 1998
(unaudited)............................................... F-6
Notes to Financial Statements............................... F-7
TXEN, INC.:
Report of Independent Auditors.............................. F-16
Balance Sheets as of June 30, 1996 and 1997................. F-17
Statements of Operations for the two years ended June 30,
1996 and 1997............................................. F-18
Statements of Changes in Stockholders' Equity for the two
years ended June 30, 1996 and 1997........................ F-19
Statements of Cash Flows for the two years ended June 30,
1996 and 1997............................................. F-20
Notes to Financial Statements............................... F-21
F-1
65
REPORT OF INDEPENDENT AUDITORS
To the Stockholder of
Nichols TXEN Corporation
We have audited the accompanying balance sheets of Nichols TXEN Corporation
as of August 31, 1997 and 1998, and the related statements of operations,
changes in stockholder's equity and cash flows for each of the three years in
the period ended August 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility 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 significant 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 aspects, the financial position of Nichols TXEN Corporation as
of August 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended August 31, 1998 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Birmingham, Alabama
January 7, 1999
F-2
66
NICHOLS TXEN CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
AUGUST 31, NOVEMBER 30,
----------------- -----------------
1997 1998 1997 1998
------- ------- ------- -------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 237 $ 1,804 $ 384 $ 859
Accounts receivable, less allowance for doubtful
accounts of $150 and $500 at August 31, 1997 and
1998, respectively................................ 6,946 9,919 8,755 11,563
Deferred income taxes................................ 156 436 216 461
Other................................................ 575 1,455 1,060 1,421
------- ------- ------- -------
Total current assets................................... 7,914 13,614 10,415 14,304
Property and equipment, net............................ 4,783 6,527 5,359 7,868
Intangible assets, net................................. 39,355 37,574 39,122 36,896
------- ------- ------- -------
Total assets........................................... $52,052 $57,715 $54,896 $59,068
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable..................................... $ 1,105 $ 751 $ 1,760 $ 539
Accrued compensation and benefits.................... 459 1,444 712 1,799
Income taxes payable................................. 419 2,126 559 529
Payable to Nichols Research and affiliates........... 1,003 2,635 1,852 4,553
Deferred revenue..................................... 2,371 379 2,646 491
Other................................................ 334 499 297 309
------- ------- ------- -------
Total current liabilities.............................. 5,691 7,834 7,826 8,220
Deferred income taxes.................................. 532 800 532 900
Commitments
Stockholder's equity:
Common stock......................................... 1 1 1 75
Additional paid-in capital........................... 52,907 52,907 52,907 52,833
Retained earnings (deficit).......................... (7,079) (3,827) (6,370) (2,960)
------- ------- ------- -------
Total stockholder's equity............................. 45,829 49,081 46,538 49,948
------- ------- ------- -------
Total liabilities and stockholder's equity............. $52,052 $57,715 $54,896 $59,068
======= ======= ======= =======
See accompanying notes.
F-3
67
NICHOLS TXEN CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED
YEARS ENDED AUGUST 31, NOVEMBER 30,
--------------------------- -------------------
1996 1997 1998 1997 1998
------- ------- ------- -------- --------
(UNAUDITED)
Revenues............................ $10,370 $12,438 $43,480 $ 8,958 $12,236
Cost of revenues.................... 6,438 7,769 23,256 4,792 6,634
------- ------- ------- ------- -------
Gross profit........................ 3,932 4,669 20,224 4,166 5,602
Selling, general and administrative
expenses.......................... 1,932 2,251 7,367 1,523 2,295
Research and development............ 710 1,155 2,771 498 760
Depreciation and amortization....... 947 985 4,547 936 1,102
Write-off of purchased in-process
research and development.......... -- 8,500 -- -- --
------- ------- ------- ------- -------
Income (loss) from operations....... 343 (8,222) 5,539 1,209 1,445
Other income (expense):
Interest expense.................. -- -- (4) (1) --
Equity in earnings of TXEN,
Inc............................ 94 656 -- -- --
------- ------- ------- ------- -------
Income (loss) before income taxes... 437 (7,566) 5,535 1,208 1,445
Income taxes........................ 117 107 2,283 499 578
------- ------- ------- ------- -------
Net income (loss)................... $ 320 $(7,673) $ 3,252 $ 709 $ 867
======= ======= ======= ======= =======
See accompanying notes.
F-4
68
NICHOLS TXEN CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------ PAID-IN EARNINGS STOCKHOLDER'S
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- --------- -------------
BALANCE AT AUGUST 31, 1995............. 1,000 $ 1 $ 9,107 $ 274 $ 9,382
Net income............................. -- -- 320 320
--------- --- ------- ------- -------
BALANCE AT AUGUST 31, 1996............. 1,000 1 9,107 594 9,702
Contribution from Nichols Research for
acquisition of TXEN.................. -- 43,800 -- 43,800
Net loss............................... -- -- (7,673) (7,673)
--------- --- ------- ------- -------
BALANCE AT AUGUST 31, 1997............. 1,000 1 52,907 (7,079) 45,829
Net income............................. -- -- 3,252 3,252
--------- --- ------- ------- -------
BALANCE AT AUGUST 31, 1998............. 1,000 1 52,907 (3,827) 49,081
Stock dividend affected in the form of
a 7500 to 1 stock split.............. 7,499,000 74 (74) -- --
Net income (unaudited)................. -- -- 867 867
--------- --- ------- ------- -------
BALANCE AT NOVEMBER 30, 1998
(UNAUDITED).......................... 7,500,000 $75 $52,833 $(2,960) $49,948
========= === ======= ======= =======
See accompanying notes.
F-5
69
NICHOLS TXEN CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS ENDED
YEARS ENDED AUGUST 31, NOVEMBER 30,
------------------------------ -------------------
1996 1997 1998 1997 1998
-------- -------- -------- -------- --------
(UNAUDITED)
----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................... $ 320 $(7,673) $3,252 $ 709 $ 867
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization......... 947 985 4,547 936 1,102
Provision for doubtful accounts....... -- -- 350 -- --
Equity in earnings of TXEN, Inc....... (94) (656) -- -- --
Deferred income taxes................. 54 (4) (12) (60) 75
Write-off of purchased in-process
research and development............ -- 8,500 -- -- --
Changes in assets and liabilities, net
of effects of acquisition:
Accounts receivable................. (531) (584) (3,323) (1,809) (1,644)
Other assets........................ (228) (73) (880) (485) 34
Accounts payable.................... 2 5 (354) 655 (212)
Accrued compensation and benefits... 59 44 985 253 355
Payable to Nichols Research and
affiliates....................... 438 309 1,632 849 (208)
Other current liabilities........... 115 79 120 378 451
-------- -------- -------- -------- --------
Net cash provided by operating
activities............................ 1,082 932 6,317 1,426 820
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment..... (684) (909) (4,185) (1,110) (1,699)
Payments for acquisitions, net of cash
acquired.............................. -- (17,439) -- -- --
Additions to deferred software
development cost...................... (280) (490) (565) (169) (66)
-------- -------- -------- -------- --------
Net cash used by investing activities... (964) (18,838) (4,750) (1,279) (1,765)
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfers from Nichols Research......... -- 17,892 -- -- --
-------- -------- -------- -------- --------
Net cash provided by financing
activities............................ -- 17,892 -- -- --
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents........................... 118 (14) 1,567 147 (945)
Cash and cash equivalents at beginning
of year............................... 133 251 237 237 1,804
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
year.................................. $251 $237 $1,804 $384 $859
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Issuance of Nichols Research common
stock as consideration in
acquisitions.......................... $ -- $26,325 $ -- $ -- $ --
See accompanying notes.
F-6
70
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Nichols SELECT Corporation ("the Company"), a wholly owned subsidiary of
Nichols Research Corporation ("Nichols Research"), was incorporated under the
laws of the State of Delaware on September 17, 1996. The Company is a provider
of outsourcing solutions for information technology and administrative services
in the managed care and physician practice management markets. All references to
the Company in the notes to the Financial Statements refer to Nichols TXEN
Corporation and its predecessor businesses and divisions, as discussed below.
Nichols Research formed CSC Acquisition, Inc. ("Acquisition") as a wholly
owned subsidiary on June 6, 1995. On June 30, 1995, Acquisition acquired all of
the assets and certain liabilities of Computer Services Corporation ("Computer
Services"). Nichols Research formed Nichols SELECT Corporation ("Nichols
SELECT") as a wholly owned subsidiary on September 17, 1996. On September 23,
1996, Acquisition was merged into Nichols SELECT. On December 16, 1994, Nichols
Research acquired 19.9% of the capital stock of TXEN, Inc. ("TXEN") with an
option to acquire the remaining 80.1% of TXEN. On August 29, 1997, Nichols
Research exercised its option and acquired the remaining 80.1% of TXEN through a
merger of TXEN into Nichols SELECT, which after the merger continued to be
wholly owned by Nichols Research. After the TXEN merger, Nichols SELECT changed
its name to Nichols TXEN Corporation.
Basis of Presentation
The accompanying financial statements have been prepared using Nichols
Research's historical basis in the selected assets and liabilities of the
Company. The financial statements reflect the results of operations, financial
condition and cash flows of the Company as a component of Nichols Research and
may not be indicative of the actual results of operations and financial position
of the Company. The Company believes the statements of operations include a
reasonable allocation of administrative costs, which are described in Note 2,
incurred by Nichols Research on behalf of the Company.
On November 6, 1998, the Company amended its Certificate of Incorporation
to change the authorized capital stock from 1,000 shares of $1.00 par value
common stock to 30,000,000 shares of $0.01 par value common stock and effected a
7,500-for-1 stock split in the form of a stock dividend of 7,499 shares for each
one share outstanding. As a result of the stock split, the outstanding shares of
common stock of the Company increased to 7,500,000 shares.
Revenue Recognition
Revenue from 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 post-contract 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 receivable. 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. The Company believes that
any risk associated with trade accounts receivable is adequately provided for
F-7
71
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
in the allowance for doubtful accounts. The Company generally does not require
collateral on its trade accounts receivable.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives of three to ten years for
equipment and furniture and over the terms of the related leases for leasehold
improvements.
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement No. 121 in the first quarter of fiscal year 1997 with
no impact to the financial statements.
Income Taxes
Historically, the Company's operations have been included in the
consolidated federal income tax returns filed by Nichols Research. Income tax
expense as presented in the accompanying financial statements has been
calculated on a separate tax return basis. Deferred income taxes are provided
for temporary differences between financial and taxable income, primarily
related to accrued liabilities, intangible amortization and use of accelerated
depreciation methods for income tax purposes.
Earnings Per Share
Historical earnings per share have not been presented since they would not
be meaningful because the Company is a wholly owned subsidiary of Nichols
Research.
Cash and Temporary Cash Investments
The Company considers cash equivalents as those securities that are
available upon demand or have maturities of three months or less at the time of
purchase. At August 31, 1998, temporary cash investments consisted of various
money market accounts, primarily with an Alabama bank.
Intangible Assets
Intangible assets, including goodwill, customer lists and deferred software
development costs, are being amortized on a straight-line basis over five to
twenty year time periods, as applicable. The Company periodically evaluates the
recoverability of such intangibles resulting from business acquisitions and
measures the amount of impairment, if any, by assessing current and future
levels of income and cash flows as well as other factors, such as business
trends and prospects and market and economic conditions. The Company assesses
long-lived assets, of which goodwill associated with assets acquired in a
purchase business combination is included, for impairment evaluations under
Statement No. 121.
Stock Options
From time to time Nichols Research has granted stock options for the
purchase of shares of the common stock of Nichols Research to certain of the
Company's employees. These grants had an
F-8
72
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
exercise option price equal to the fair value of the shares at the date of
option grant. Nichols Research accounts for stock option grants in accordance
with the Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and intends to continue to do so; accordingly, no
compensation expense for such stock option grants is included in the financial
statements of the Company.
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 the estimates.
Interim Financial Statements (Unaudited)
The accompanying unaudited financial statements as of November 30, 1997 and
November 30, 1998 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they 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 of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended November 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended August 31, 1999.
2. RELATED PARTY TRANSACTIONS
The Company utilized central cash management systems of Nichols Research to
finance its operations. Cash requirements are satisfied either by intercompany
transactions between Nichols Research and the Company or by cash from
operations. Such intercompany transactions are included in the payable to
Nichols Research account. Intercompany transactions between Nichols Research and
the Company do not bear interest and, therefore, no interest charge is reflected
in the accompanying statements of operations.
Nichols Research provides certain administrative and oversight services for
the Company. Such corporate administrative expenses amounting to $192,453,
$249,577 and $696,214 have been allocated to the Company during the fiscal years
ended August 31, 1996, 1997 and 1998, respectively, and are reflected in the
accompanying statements of operations as selling, general and administrative
expenses. These costs were allocated to the Company by multiplying certain
direct operating expenses by a standard overhead rate for each period presented.
The standard overhead rate was developed through analysis of actual services and
related estimated costs provided to the Company on a historical basis. However,
the costs of these transactions may differ from those that would result from
transactions with unrelated parties.
Substantially all full-time employees of the Company are covered by a
defined contribution plan offered through Nichols Research. Employees are
permitted to defer up to 15% of their salary. Nichols Research matches the
employee's contribution up to a maximum of 2% of the employee's salary.
Discretionary contributions may also be made to the plan as determined annually
by the Nichols Research Board of Directors. Amounts charged to the Company's
earnings with respect to the plan were approximately $38,000, $38,000 and
$124,000 for 1996, 1997 and 1998, respectively.
The Company intends to establish its own defined contribution plan with
similar terms in the future. Until that time, the Company will bear its
allocable share of the costs of the Nichols Research plan.
F-9
73
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
3. INCOME TAXES
Income taxes allocated to the Company were determined as if the Company
filed on a separate income tax return basis. The provisions for income taxes for
the years ended August 31, consist of the following :
1996 1997 1998
---- ---- ------
(IN THOUSANDS)
Current:
Federal................................................... $154 $101 $2,070
State..................................................... 16 10 225
---- ---- ------
170 111 2,295
---- ---- ------
Deferred:
Federal................................................... (46) (4) (11)
State..................................................... (7) -- (1)
---- ---- ------
(53) (4) (12)
==== ==== ======
$117 $107 $2,283
==== ==== ======
The significant components of deferred tax assets and liabilities as of
August 31:
1997 1998
----- -----
(IN THOUSANDS)
Current deferred tax assets:
Accrued liabilities not currently deductible.............. $ 92 $255
Allowance for doubtful accounts receivable................ 64 181
---- ----
Total current deferred tax assets........................... 156 436
---- ----
Non-current deferred tax liabilities:
Basis difference for property and equipment............... 311 472
Amortization of intangibles............................... 221 328
---- ----
Total non-current deferred tax liabilities.................. 532 800
---- ----
$376 $364
==== ====
F-10
74
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
3. INCOME TAXES (CONTINUED)
Income tax expense as a percentage of income before income taxes for the
years ended August 31, varies from the federal statutory rate due to the
following:
1996 1997 1998
----- ------ -----
Statutory federal income tax rate........................... 34.0% (34.0)% 34.0%
State income taxes, net of federal benefit.................. 3.7 -- 4.1
Non-deductible write-off of purchased in-process research
and development........................................... -- 38.2 --
Equity in earnings of TXEN, Inc............................. (7.3) (2.9) --
Other....................................................... (3.6) 0.1 3.1
----- ------ -----
26.8% 1.4% 41.2%
===== ====== =====
The Company made payments in lieu of income taxes to Nichols Research of
approximately $100,000, $75,000 and $1,800,000 in 1996, 1997, and 1998,
respectively.
4. COMMITMENTS
The Company leases office facilities under various operating leases. The
leases generally have terms of one to ten years. Rent expense for all operating
leases for the years ended August 31, was as follows:
1996 1997 1998
----- ------ -----
(IN THOUSANDS)
Total rent expense.......................................... $ 299 $ 333 $ 821
Future minimum lease payments under operating leases with remaining terms
of one year or more for the years ended August 31, are (in thousands):
1999 2000 2001 2002 2003 THEREAFTER
------ ------ ------ ------ ------ ----------
Total............................... $1,535 $1,659 $1,659 $1,659 $1,659 $8,163
5. PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following as of August 31:
1997 1998
------ ------
(IN THOUSANDS)
Furniture and fixtures...................................... $1,152 $1,400
Data processing and computer equipment...................... 2,627 5,275
Other....................................................... 1,511 2,042
------ ------
5,290 8,717
Less accumulated depreciation............................... 507 2,190
====== ======
$4,783 $6,527
====== ======
F-11
75
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
6. INTANGIBLE ASSETS
Intangible assets were comprised of the following as of August 31:
1997 1998
------- -------
(IN THOUSANDS)
Goodwill.................................................... $23,536 $23,536
Deferred software development costs......................... 2,864 3,872
Other intangibles, primarily customer base.................. 14,145 14,145
------- -------
40,545 41,553
Less accumulated amortization............................... 1,190 3,979
------- -------
$39,355 $37,574
======= =======
7. EMPLOYEE STOCK OPTIONS AND STOCK PURCHASE PLANS
Nichols Research has employee stock option plans that provide for the
issuance of incentive stock options (as defined by the Internal Revenue Code)
and nonstatutory stock options to key employees, including officers of the
Company. Options are nontransferable and exercisable only during employment,
with certain exceptions. Options expire five years from the date of grant.
A summary of activity relating to Nichols Research stock options of the
Company's employees is as follows:
INCENTIVE NONSTATUTORY
TOTAL STOCK OPTIONS TOTAL
------- ------------- ------------
Outstanding at August 31, 1996....................... 104,460 93,996 10,464
Outstanding at August 31, 1997....................... 133,564 123,063 10,501
Outstanding at August 31, 1998....................... 131,385 125,374 6,011
Exercisable at August 31, 1998....................... 19,291 19,291 --
WEIGHTED
NUMBER WEIGHTED WEIGHTED AVERAGE AVERAGE
RANGE OF OPTIONS AVERAGE REMAINING NUMBER EXERCISABLE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE PRICE
- --------------- ----------- -------------- ---------------- ------------ ------------
$10.00 -- $15.50 43,615 $12.02 1.93 years 18,541 $11.88
$20.38 -- $23.50 52,770 22.49 3.74 years 750 21.50
$24.50 -- $25.00 35,000 24.93 3.94 years -- --
Nichols Research has an employee stock purchase plan that allows eligible
employees to purchase common stock at less than fair value. The purchase price
is 85% of fair market value on each quarterly purchase date. Purchases are
limited to the lesser of 10% of an employee's annual compensation or $25,000.
Shares of common stock issued under this plan were 2,018, 3,482 and 20,373 in
1996, 1997, and 1998, respectively.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation, which requires that financial
statements include certain disclosures about the stock-based employees
compensation and allows, but does not require, a fair value-based method of
accounting for such compensation. As allowed under the provisions of Statement
No. 123, the Company has elected to apply APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
stock based plans. Accordingly, no compensation cost has been recognized for the
qualified stock option plans and the employee stock purchase plans. Had
compensation cost for these programs been determined based on the fair value
F-12
76
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
7. EMPLOYEE STOCK OPTIONS AND STOCK PURCHASE PLANS (CONTINUED)
at the grant dates for awards under these programs consistent with Statement No.
123, the Company's net (loss) would have been reduced to the pro forma amounts
indicated below. The effects of applying Statement No. 123 on a pro forma basis
are not likely to be representative of the effects on reported pro forma net
income (loss) for future years as the estimated compensation cost reflects only
options granted subsequent to August 31, 1995.
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
Net income (loss):
As reported............................................. $ 320 $(7,673) $ 3,252
Pro forma............................................... 302 (7,766) 2,934
The fair value of each option grant is estimated on the date of grant using
a type of Black-Scholes option-pricing model with the following weighted-average
assumptions used for option grants in fiscal 1996, 1997 and 1998, respectively;
dividend yield of 0% for all years, expected volatility factors of 0.378, 0.312
and 0.391; risk-free interest rates of 6.64%, 6.23% and 6.37%; and expected
lives of 4 years.
8. BUSINESS COMBINATIONS
On August 29, 1997, Nichols Research exercised its option to acquire the
remaining 80.1% of TXEN. Aggregate consideration of approximately $43.8 million
was paid at closing, $17.5 million in cash and 1,084,148 shares of Nichols
Research common stock, valued at approximately $26.3 million. The total purchase
price with respect to the TXEN acquisition has been allocated to the TXEN assets
and liabilities. The excess of the purchase price over the fair market value of
the tangible net assets acquired was approximately $42.8 million and has been
allocated to the following intangibles: $8.5 million to in-process research and
development, $17.4 million to goodwill, $14.1 million to other intangibles and
$2.8 million to capitalized software development. The in-process research and
development of $8.5 million was expensed in the fourth quarter of 1997. The
acquired in-process technology consisted of ten software development projects to
reduce the time and personnel needed to perform managed care administrative
functions and provide enhanced information reports. The projects are expected to
be completed in fiscal year 1999. The acquisition of TXEN has been accounted for
as a purchase and the operations of TXEN have been included in the accompanying
financial statements from the date of acquisition.
The following unaudited pro forma summary presents information as if the
TXEN acquisition had occurred at the beginning of the fiscal year ended August
31, 1996. The charge of $8.5 million related to the write-off of purchased
in-process research and development has been included in the pro forma results
for the year ended August 31, 1996. The pro forma information is presented for
informational purposes only. It is based on historical information and does not
necessarily reflect the actual results that would have occurred nor is it
necessarily indicative of future results of operations of the combined
companies.
1996 1997
-------- -------
(IN THOUSANDS)
Revenues........................................ $ 18,274 $27,921
Net income (loss)............................... $(10,266) $ 1,030
F-13
77
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
9. SUBSEQUENT EVENTS (UNAUDITED):
In connection with a proposed public offering of a portion of the Company's
common stock, the Company and Nichols Research would execute and deliver certain
related agreements, the proposed forms of which are summarized below.
SERVICES AGREEMENT
Nichols Research will furnish administrative services to the Company
pursuant to a Corporate Services Agreement (the "Services Agreement"). Under the
Services Agreement, Nichols Research will provide various administrative
services, including public reporting compliance, certain corporate record
keeping, risk management, certain employee benefit administration,
administration of investor and media relations, tax return preparation
assistance, centralized cash management and certain financial and other services
for an annual fee. In fiscal year 1999, the fee is 2.4% of operating expenses
less costs of goods sold defined as direct materials and purchased labor. In
fiscal years 1996, 1997, and 1998 under a similar arrangement, the Company paid
$192,453, $249,577, and $696,214, respectively, to Nichols Research for
administrative services. The Company believes that the charges under the
Services Agreement are reasonable. For additional items, such as software
development services or administrative services that create unusual demands for
resources, Nichols Research will charge the Company costs actually incurred in
performing such services plus a mutually acceptable fee. For the fiscal years
ended August 31, 1996, 1997 and 1998, the Company paid $145,506, $174,070 and
$0, respectively, to Nichols Research for these additional services. The Company
is not obligated to use Nichols Research for these additional services. During
the term of the Services Agreement, the Nichols TXEN Board of Directors will
elect as Secretary the Secretary of Nichols Research and will elect as Treasurer
the Chief Financial Officer of Nichols Research. The Secretary and Treasurer
will serve in such capacities without compensation from Nichols TXEN. The
Services Agreement automatically renews for successive one year terms, unless
canceled by either Nichols Research or the Company upon 90 days prior notice
following the initial one year term.
VOTING AGREEMENT
Nichols Research has entered into a Voting Agreement with Nichols TXEN
dated November 6, 1998 which will become effective upon completion of an initial
public offering. Pursuant to the Voting Agreement, Nichols Research has agreed
to vote all of its shares of Nichols TXEN common stock at any meeting at which
directors are elected in favor of the election of independent directors so that
after such election, if such persons are elected, there will be at least two
independent directors of Nichols TXEN. The Voting Agreement will terminate upon
the earlier of five years from the date of the Voting Agreement or the date upon
which Nichols Research owns beneficially 50% or less of the common stock of the
Company.
TAX SHARING AGREEMENT
Nichols Research and the Company have entered into a Tax Sharing Agreement
which generally provides for the manner in which the parties will bear taxes for
the period beginning on September 1, 1998, and ending upon the sale by the
Company of the common stock pursuant to this offering and income tax
deficiencies or refunds resulting from future audit adjustments. The Company
will be required to pay to Nichols Research an amount equal to the excess of the
income tax liability which the Company would have for the short period over the
amount which the Company has previously paid (or been charged with by Nichols
Research) with respect to such taxes. If additional taxes must be paid by the
Company or Nichols Research as a result of an adjustment made by a tax
regulatory authority, and as a result of that adjustment, the other party would
obtain an offsetting tax
F-14
78
NICHOLS TXEN CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
AUGUST 31, 1998
9. SUBSEQUENT EVENTS (UNAUDITED): (CONTINUED)
benefit, the party obtaining the tax benefit pays an amount equal to the
additional tax to the party whose income tax liability was increased. Likewise,
if income taxes are reduced as a result of an adjustment made by a tax
regulatory authority, and as a result of that adjustment, the other party would
suffer an offsetting tax detriment, the party whose taxes were reduced must pay
such amount to the other party. The Tax Sharing Agreement also contains
provisions dealing with contesting adjustments made by tax regulatory
authorities, determining who will bear the expense of any such challenge and
cooperation between the parties.
F-15
79
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, 1996 and 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility 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 significant 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, 1996
and 1997, 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
F-16
80
TXEN, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
---------------
1996 1997
------ ------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 631 $1,146
Accounts receivable, net of allowance for doubtful
accounts of $35 and $125 at June 30, 1996 and 1997,
respectively........................................... 1,096 4,771
Prepaid expenses.......................................... 85 111
Income taxes receivable................................... 25 --
Deferred income taxes..................................... 301 211
Inventory................................................. 17 15
Other..................................................... 4 --
------ ------
Total current assets........................................ 2,159 6,254
Property and equipment, net................................. 2,272 2,917
Deferred software development............................... -- 662
------ ------
Total assets................................................ $4,431 $9,833
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to stockholder............................... $ 8 $ 8
Customer deposits......................................... 129 --
Accounts payable and accrued expenses..................... 171 722
Accrued salaries, bonuses and vacation.................... 209 398
Income taxes payable...................................... -- 433
Current portion of long-term debt......................... 253 276
Short-term notes.......................................... 135 --
Deferred revenue.......................................... 1,071 2,049
Interest payable.......................................... -- 231
Accrued officers salaries................................. -- 288
Other..................................................... 7 3
------ ------
Total current liabilities................................... 1,983 4,408
Interest payable............................................ 200 --
Accrued officers salaries................................... 288 --
Deferred income taxes....................................... 124 395
Long-term debt to stockholders.............................. 258 274
Long-term debt.............................................. 639 366
Stockholders' equity:
Preferred stock, $.002 par value; 1 share authorized, 1
share and 0 shares issued and outstanding at 1996 and
1997, respectively..................................... 1,500 --
Class A common stock, $.002 par value; 5,000,000 shares
authorized, 5,000,000 and 4,000,500 shares issued and
outstanding at 1996 and 1997, respectively............. 10 8
Class B common stock, $.002 par value; 1,250,000 shares
authorized, 0 and 999,500 shares issued and outstanding
at 1996 and 1997, respectively......................... -- 2
Additional paid-in capital................................ 410 1,910
Retained earnings (deficit)............................... (532) 2,889
Notes receivable from stockholders........................ (449) (419)
------ ------
Total stockholders' equity............................. 939 4,390
------ ------
Total liabilities and stockholders' equity.................. $4,431 $9,833
====== ======
See accompanying notes.
F-17
81
TXEN, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
---------------------
1996 1997
--------- ---------
Revenues.................................................... $ 6,860 $14,980
Cost of revenues............................................ 3,212 4,848
------- -------
Gross profit................................................ 3,648 10,132
Selling, general and administrative expenses................ 2,467 2,945
Research and development.................................... 926 1,069
Depreciation and amortization............................... 532 709
------- -------
Income (loss) from operations............................... (277) 5,409
Other income (expense):
Interest expense.......................................... (153) (88)
Interest income........................................... 102 75
Other..................................................... -- 4
------- -------
Income (loss) before income taxes and cumulative effect of a
change in accounting principle............................ (328) 5,400
Income tax expense (benefit)................................ (93) 1,979
------- -------
Income (loss) before cumulative effect of a change in
accounting principle...................................... (235) 3,421
Cumulative effect on prior years of changing to a different
depreciation method (net of taxes of $32)................. 82 --
------- -------
Net income (loss)........................................... $ (153) $ 3,421
======= =======
See accompanying notes.
F-18
82
TXEN, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
NOTES
CLASS A CLASS B ADDITIONAL RETAINED RECEIVABLE TOTAL
PREFERRED COMMON COMMON PAID-IN EARNINGS FROM STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL (DEFICIT) STOCKHOLDERS EQUITY
--------- ------- ------- ---------- --------- ------------ -------------
BALANCE, JUNE 30, 1995........... $1,500 $10 $-- $ 410 $ (379) $(437) $1,104
Issuance of notes receivable from
stockholders................... -- -- -- -- -- (65) (65)
Payments received on notes....... -- -- -- -- -- 89 89
Accrued interest on notes........ -- -- -- -- -- (36) (36)
Net loss......................... -- -- -- -- (153) -- (153)
------ --- -- ------ ------ ----- ------
BALANCE, JUNE 30, 1996........... 1,500 10 -- 410 (532) (449) 939
Issuance of notes receivable from
stockholders................... -- -- -- -- -- (16) (16)
Conversion of preferred stock to
common stock................... (1,500) -- 2 1,498 -- -- --
Contribution of common stock to
treasury and subsequent
retirement..................... -- (2) -- 2 -- -- --
Payments received on notes....... -- -- -- -- -- 73 73
Accrued interest on notes........ -- -- -- -- -- (27) (27)
Net income....................... -- -- -- -- 3,421 -- 3,421
------ --- -- ------ ------ ----- ------
BALANCE, JUNE 30, 1997........... $ -- $ 8 $2 $1,910 $2,889 $(419) $4,390
====== === == ====== ====== ===== ======
See accompanying notes.
F-19
83
TXEN, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED JUNE 30,
-------------------
1996 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................... $(153) $ 3,421
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................. 532 709
Cumulative effect of change in accounting principle, net
of tax of $32.......................................... (82) --
Deferred income taxes..................................... (64) 360
Provision for doubtful accounts........................... (65) 90
Loss on sublease.......................................... 6 --
Changes in operating assets and liabilities:
Accounts receivable.................................... 44 (3,764)
Prepaid expenses....................................... (36) (26)
Income taxes receivable................................ (7) 25
Inventory.............................................. 3 2
Other.................................................. 1 (1)
Interest payable....................................... 29 31
Customer deposits...................................... 4 (129)
Accounts payable and accrued expenses.................. (156) 551
Accrued salaries, bonuses and vacation................. 76 190
Income taxes payable................................... -- 433
Deferred revenue....................................... 437 978
------- -------
Net cash provided by operating activities................... 569 2,870
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment......................... (1,060) (1,328)
Additions to deferred software development costs............ -- (688)
------- -------
Net cash used in operating activities....................... (1,060) (2,016)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt........................ (188) (250)
Notes payable............................................... 135 (135)
Payments on debt to stockholders............................ (9) --
Increase in debt to stockholders............................ 63 16
Principal payments on note payable to stockholder........... (42) --
Increase in notes receivable from stockholders.............. (11) 30
------- -------
Net cash used in financing activities....................... (52) (339)
------- -------
Net (decrease) increase in cash and cash equivalents........ (543) 515
Cash and cash equivalents at beginning of year.............. 1,174 631
------- -------
Cash and cash equivalents at end of year.................... $ 631 $ 1,146
======= =======
See accompanying notes.
F-20
84
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
TXEN, Inc. (the Company) facilitates the administration of health benefits by
providing health care 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 as services are
provided.
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
obligations 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 post-contract
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
receivable. 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. Nichols TXEN 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.
Software Development Cost
Under Statement of Financial Accounting Standards No. 86, "Accounting for
Software 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
consideration to estimates of recoverability and net realizable value. Total
costs capitalized for software development were $0 and $687,338 during the
fiscal years ended June 30, 1996 and 1997, respectively.
Capitalized software development costs are being amortized over five years.
Accumulated amortization of capitalized software development cost were $0 and
$25,887 during fiscal years ended June 30, 1996 and 1997, respectively. The
Company capitalized interest related to software development costs of $0 and
$27,177 during the fiscal years ended June 30, 1996 and 1997, respectively.
F-21
85
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $1,756,338 during the fiscal years
ended June 30, 1996 and 1997, respectively.
Inventory
Inventory is carried at the lower of cost or market using the specific
identification method.
Property and Equipment and Change in Depreciation Method
Property and equipment is stated on the basis of cost. Property and equipment
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
fiscal 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 generated
by those assets and has been applied retroactively to property and equipment
acquired in prior years. The effect of the change in fiscal year 1996 was to
decrease loss before cumulative effect of the change in accounting principle by
approximately $28,400. The adjustment of $81,615 (after reduction for income
taxes of $32,252) to apply the new method, is included in net loss for fiscal
year 1996.
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 interpretations
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.
F-22
86
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of June 30:
1996 1997
------ ------
(IN THOUSANDS)
Computer equipment.......................................... $2,162 $3,016
Software.................................................... 285 334
Furniture and fixtures...................................... 923 1,112
------ ------
3,370 4,462
Less accumulated depreciation............................... 1,098 1,545
------ ------
$2,272 $2,917
====== ======
3. LONG-TERM DEBT AND LINES OF CREDIT
The Company has two revolving credit lines with a bank which are 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, 1996 and 1997.
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 $892,031 and $641,834 at June
30, 1996 and 1997, 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 $54,474 and $19,500 during the fiscal years ended June 30,
1996 and 1997, 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 $146,975 and $115,268 in interest during the fiscal years ended
June 30, 1996, and 1997, 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 three
years and in the aggregate are as follows:
(IN THOUSANDS)
1998........................................................ $278
1999........................................................ 98
2000........................................................ 224
----
$600
====
Rent expense for the fiscal years ended June 30, 1996 and 1997 was $263,668 and
$251,985, 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 $33,209 and $6,642 at June 30,
1996 and 1997, respectively.
F-23
87
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY
On December 16, 1994, the Company entered into a Stock Purchase Option Agreement
with a third-party. Under the terms of the agreement, the Company 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.
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 fiscal 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 $0 and $1,161,001 in income taxes during the fiscal years ended
June 30, 1996 and 1997, respectively.
Significant components of the Company's current deferred tax liabilities and
assets at June 30, 1996 and 1997 are as follows:
1996 1997
----- ------
(IN THOUSANDS)
Deferred tax liabilities:
Tax over book depreciation................................ $228 $ 260
Software development costs................................ -- 239
---- -----
228 499
Deferred tax assets:
Allowance for doubtful accounts........................... 13 45
Accrued salaries and interest............................. 185 188
Accrued leave............................................. 44 78
Other..................................................... 6 4
Net operating loss carryforwards.......................... 157 --
---- -----
405 315
---- -----
$177 $(184)
==== =====
F-24
88
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES (CONTINUED)
Significant components of the provision for income taxes (benefit) are as
follows:
1996 1997
----- ------
(IN THOUSANDS)
Current:
Federal................................................... $ 4 $1,599
State..................................................... -- 163
Benefit of operating loss carryforward.................... -- (143)
----- ------
Total current............................................... 4 1,619
Deferred:
Federal................................................... (56) 314
State..................................................... (8) 46
----- ------
Total deferred.............................................. (64) 360
----- ------
$ (60) $1,979
===== ======
7. RELATED PARTY TRANSACTIONS
The Company has a note payable to a stockholder of the Company for $8,333 at
June 30, 1996 and 1997 bearing interest at 8.0%. 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 $448,783 and $418,833 at June 30, 1996 and 1997, respectively, which
bear interest at 8.0%.
The Company incurred $269,202 in expenses with an affiliated company for
contracted 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
fiscal year ended June 30, 1997.
8. SAVINGS AND RETIREMENT PLAN
The Company has a savings and retirement plan administered by Nichols Research
(the "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 fiscal years ended June 30, 1996 and 1997 was
$3,400 and $6,009 respectively.
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 employment. 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 fiscal year ended June 30, 1997
which would include all the stock held by members of management.
F-25
89
TXEN, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. Incentive 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 year 1997, 123,371
shares were granted with an exercise price of $6.20 and remain outstanding 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.
F-26
90
(Inside back cover)
(Photo - busy office environment)
The Nichols TXEN
High Technology-Driven
Outsourcing Services
Value Proposition
(Photo - Health care claim) - streamlined administrative functions
- variable rate operating cost structure
- faster implementation
(Photo - CD Rom and - reduced capital expenditures for administrative
circuit board) health care technologies
- less technology risk
- access to knowledgeable and experienced personnel
(Photo - person looking - sophisticated enterprise-level application
at computer) software and decision support tools
- enhanced marketplace connectivity
(Photo - Doctors in surgery) - ability to focus on core
businesses
Directions for the Future in health care information technology
91
- ----------------------------------------------------------
- ----------------------------------------------------------
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
---------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................ 3
Risk Factors.............................. 8
Use of Proceeds........................... 15
Dividend Policy........................... 15
Capitalization............................ 16
Dilution.................................. 17
Selected Financial Data................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 20
Business.................................. 29
Management................................ 46
Certain Transactions...................... 53
Principal Stockholders.................... 55
Description of Capital Stock.............. 56
Shares Eligible for Future Sale........... 57
Underwriting.............................. 58
Legal Matters............................. 60
Experts................................... 60
Additional Information.................... 61
Index to Financial Statements............. F-1
---------------------
DEALER PROSPECTUS DELIVERY OBLIGATION:
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THESE SHARES OF COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
2,175,000 Shares
(NICHOLS TXEN LOGO)
Common Stock
-------------------
PROSPECTUS
-------------------
BT ALEX. BROWN
CIBC OPPENHEIMER
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
THE ROBINSON-HUMPHREY COMPANY
, 1999
- ----------------------------------------------------------
- ----------------------------------------------------------
92
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses in connection with the issuance and distribution of the
securities being registered are:
Securities and Exchange Commission registration fee......... $ 9,730
--------
National Association of Securities Dealers, Inc. filing
fee....................................................... 4,000
--------
Nasdaq National Market listing fee..........................
--------
Accountants' fees and expenses.............................. *
Legal fees and expenses..................................... *
Blue Sky fees and expenses.................................. *
Transfer Agent's fees and expenses.......................... *
Printing and engraving expenses............................. *
Miscellaneous............................................... *
--------
Total Expenses.................................... $ *
========
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits indemnification
by the Company of any director, officer, employee or agent of the Company or
person who is serving or was serving at the Company's request as a director,
officer, employee or agent of another corporation or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred by him in connection with the
defense of any threatened, pending or completed action (whether civil, criminal,
administrative or investigative), to which he is or may be a party by reason of
having been such director, officer, employee or agent provided that he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company, and, with respect to any criminal action or
proceeding had no reasonable cause to believe his conduct was unlawful. The
Company also has the power under Section 145 to indemnify persons set forth
above from threatened, pending or completed actions or suits by or in the right
of the Company to procure a judgment in its favor by reason of the fact that
such person was a director, officer, employee or agent of the Company or is or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation or enterprise against expenses actually and
reasonably incurred by him in connection with the defense or settlement of the
action if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Company, except that no
indemnification can be made with regard to any claim, issue or matter as to
which the person has been adjudged to be liable for negligence or misconduct in
the performance of his duty to the Company unless and only to the extent that
the Delaware Court of Chancery or the court in which the action was brought
determines that the person was fairly and reasonably entitled to indemnity. Any
indemnification (unless ordered by a court) must be made by the Company only as
authorized in the specific case upon a determination that indemnification of the
person is proper in the circumstances because he has met the applicable
standards of conduct. The determination must be made by the Board of Directors
by a majority vote of a quorum consisting of directors who are not parties to
the action, or if a quorum is not obtainable or, even if obtainable, a quorum of
disinterested directors so directs, by independent counsel in a written opinion,
or by the stockholders. The Company may pay the expenses of an action in advance
of final disposition if authorized by the Board of Directors in a specific case,
upon receipt of an undertaking by the person to be indemnified to repay any such
advances unless it shall
II-1
93
ultimately be determined that such person is entitled to be indemnified by the
Company as authorized by law.
Article XI of the Company's Amended and Restated Certificate of
Incorporation and Article Eight of the Company's Amended and Restated Bylaws
provide for indemnification of the Company's directors, officers, employees or
agents to the extent permitted by Section 145 of the Delaware General
Corporation Law. Article XI of the Company's Amended and Restated Certificate of
Incorporation and Article Eight of the Company's Amended and Restated Bylaws
further provide that the Company may purchase and maintain insurance on behalf
of those persons described above as eligible for indemnification for liability
arising out of such person's duties or status with the Company whether or not
indemnification in respect of such liability would be permissible.
The Company has entered into Indemnification Agreements with each of its
directors to give such directors additional contractual assurances regarding the
scope of the indemnification set forth in the Company's Amended and Restated
Certificate of Incorporation and to provide additional procedural protections.
At present, there is no pending litigation or proceeding involving a director,
officer or employee of the Company regarding which indemnification is sought,
nor is the Company aware of any threatened litigation that may result in claims
for indemnification.
The Company has in effect an officers and directors liability insurance
policy with National Union Fire Insurance Company. The policy provides indemnity
to the directors and officers of the Company for the loss arising from any claim
by reason of a wrongful act where there is no corporate indemnification. The
insurance provides for the Company to be reimbursed for any indemnification it
may be required by statute or the Company's Amended and Restated Bylaws to make
to any of its directors and officers in connection with a claim by reason of a
wrongful act. Pursuant to exclusions, the policy covers negligent acts, errors,
omissions or breach of duty by a director or officer. The principal exclusions
from coverage include the following: (i) claims involving various violations of
Section 16(b) of the Securities Exchange Act of 1934; (ii) dishonest acts; and
(iii) libel, slander, or non-monetary damages. The policy has no deductible
amount per director or officer for each loss. A $100,000 deductible
self-insurance retention applies to the Company, except for securities law
claims for which a $250,000 deductible applies. The limit of liability under the
policy is $15,000,000 in the aggregate annually in excess of deductibles and
participations.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Upon incorporation of the Company on September 17, 1996, five hundred
shares of the Company's $1.00 par value common stock were issued to the founder
and sole stockholder, Nichols Research, in exchange for its initial capital
contribution of $1,000.00 in cash. Upon the merger of Computer Services
Corporation with and into the Company on September 23, 1996, five hundred shares
of the common stock were issued to Nichols Research, the sole stockholder of
Computer Services Corporation, in exchange for all of its shares of Computer
Services Corporation. All 1,000 shares sold were issued pursuant to Section 4(2)
of the Securities Act of 1933, in an exempt transaction by the Company not
involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1* -- Proposed form of Underwriting Agreement
2.1 -- Agreement of Merger among Nichols Research Corporation,
Nichols SELECT Corporation, TXEN, Inc. and the shareholders
of TXEN, Inc., dated August 27, 1997
3.1 -- Registrant's Amended and Restated Certificate of
Incorporation
3.2 -- Registrant's Amended and Restated Bylaws
II-2
94
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
4.1* -- Specimen Stock Certificate
5.1* -- Opinion and Consent of Lanier Ford Shaver & Payne P.C.
10.1 -- Nichols TXEN Corporation 1998 Stock Option Plan**
10.2 -- Nichols TXEN Corporation Employees' Stock Purchase Plan**
10.3 -- Nichols TXEN Corporation Non-Employee Director Stock Option
Plan**
10.4 -- Employment Agreement dated December 16, 1994, as amended,
between Registrant and Thomas L. Patterson**
10.5 -- Employment Agreement dated December 16, 1994, as amended,
between Registrant and Paul D. Reaves**
10.6 -- Employment Agreement dated August 29, 1997, as amended,
between Registrant and H. Grey Wood**
10.7 -- Corporate Services Agreement dated November 6, 1998, between
Registrant and Nichols Research Corporation
10.8 -- Tax Sharing Agreement dated November 6, 1998, between
Registrant and Nichols Research Corporation
10.9 -- Form of Indemnification Agreement between Registrant and its
directors
10.10 -- Software Licensing Agreement between CSC Healthcare Systems,
Inc. and TXEN, Inc. dated June 1, 1993
10.11 -- Voting Agreement dated November 6, 1998, between Registrant
and Nichols Research Corporation
10.12 -- Commercial Lease dated September 1, 1996, between Computer
Services Corporation and Birmingham S.S.P., Inc.
10.13 -- Commercial Lease dated October 31, 1985, between Computer
Services Corporation and Wimberly & Thomas Building
Restoration Partnership
10.14 -- Lease between Nichols SELECT Corporation and Birmingham
S.S.P., Inc.
10.15 -- Office Space Lease dated May 6, 1998, between the Registrant
and Raytheon Engineers & Constructors, Inc.
10.16 -- Office Lease dated April 13, 1998, between the Registrant
and Metropolitan Life Insurance Company
10.17 -- Sublease dated May 5, 1997, between TXEN, Inc. and ABB
Environmental Systems, Inc.
10.18* -- Lease dated May 8, 1998, between the Registrant and Daniel
Meadow Brook South, LLC
11.1 -- Computation of Earnings Per Share
23.1 -- Consent of Ernst & Young LLP, independent auditors, with
respect to Nichols TXEN Corporation
23.2 -- Consent of Ernst & Young LLP, independent auditors, with
respect to TXEN, Inc.
23.3* -- Consent of Lanier Ford Shaver & Payne P.C. (included in
Exhibit 5.1)
24.1 -- Power of Attorney (included on page II-5)
27.1 -- Financial Data Schedule (for SEC use only)
- ---------------
* To be filed by amendment.
** Management contract or compensatory plan or arrangement.
(b) Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts.
II-3
95
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant as been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama, on the 22nd day of January, 1999.
Nichols TXEN Corporation
By: Paul D. Reaves
------------------------------------
Paul D. Reaves,
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Paul D. Reaves and John D. McKay, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and any subsequent
registration statements pursuant to Rule 462 of the Securities Act of 1993, and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each said
attorney-in-fact, or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Paul D. Reaves Chief Executive Officer January 22, 1999
- ------------------------------------------------ and Director (Principal
Paul D. Reaves Executive Officer)
Thomas L. Patterson Chairman of the Board January 22, 1999
- ------------------------------------------------
Thomas L. Patterson
H. Grey Wood President, Chief Operating January 22, 1999
- ------------------------------------------------ Officer and Director
H. Grey Wood
CHRIS H. HORGEN Director January 22, 1999
- ------------------------------------------------
Chris H. Horgen
Michael J. Mruz Director January 22, 1999
- ------------------------------------------------
Michael J. Mruz
James D. Kever Director January 22, 1999
- ------------------------------------------------
James D. Kever
James I. Harrison, Jr. Director January 22, 1999
- ------------------------------------------------
James I. Harrison, Jr.
John D. McKay Chief Financial Officer January 22, 1999
- ------------------------------------------------ (Principal Financial and
John D. McKay Accounting Officer)
II-5
97
AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Stockholder of
Nichols TXEN Corporation
We have audited the financial statements of Nichols TXEN Corporation as of
August 31, 1997 and 1998, and for each of the three years in the period ended
August 31, 1998, and have issued our report thereon dated January 7, 1999,
included elsewhere in this Registration Statement. Our audit also included the
financial statement schedule listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Birmingham, Alabama
January 7, 1999
S-1
98
NICHOLS TXEN CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
CHARGED TO ADDITIONS
BALANCE AT COSTS AND CHARGED TO BALANCE
BEGINNING EXPENSES OTHER ACCOUNTS DEDUCTIONS AT END
----------- ----------- -------------- ---------- --------
(IN THOUSANDS)
For the three months ended
November 30, 1998
Allowance for doubtful
accounts................... $500 -- -- $(137) $363
---- ---- ---- ----- ----
Total valuation and
qualifying
accounts............ $500 -- -- $(137) $363
==== ==== ==== ===== ====
For the year ended August 31,
1998
Allowance for doubtful
accounts................... $145 $512 -- $(157) $500
---- ---- ---- ----- ----
Total valuation and
qualifying
accounts............ $145 $512 -- $(157) $500
==== ==== ==== ===== ====
For the year ended August 31,
1997
Allowance for doubtful
accounts................... $ 5 -- $140(1) -- $145
---- ---- ---- ----- ----
Total valuation and
qualifying
accounts............ $ 5 -- $140 -- $145
==== ==== ==== ===== ====
For the year ended August 31,
1996
Allowance for doubtful
accounts................... $ 5 -- -- -- $ 5
---- ---- ---- ----- ----
Total valuation and
qualifying
accounts............ $ 5 -- -- -- $ 5
==== ==== ==== ===== ====
- ---------------
(1) Acquisition of TXEN, Inc.
S-2
99
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1* -- Proposed form of Underwriting Agreement
2.1 -- Agreement of Merger among Nichols Research Corporation,
Nichols SELECT Corporation, TXEN, Inc. and the shareholders
of TXEN, Inc., dated August 27, 1997
3.1 -- Registrant's Amended and Restated Certificate of
Incorporation
3.2 -- Registrant's Amended and Restated Bylaws
4.1* -- Specimen Stock Certificate
5.1* -- Opinion and Consent of Lanier Ford Shaver & Payne P.C.
10.1 -- Nichols TXEN Corporation 1998 Stock Option Plan**
10.2 -- Nichols TXEN Corporation Employees' Stock Purchase Plan**
10.3 -- Nichols TXEN Corporation Non-Employee Director Stock Option
Plan**
10.4 -- Employment Agreement dated December 16, 1994, as amended,
between Registrant and Thomas L. Patterson**
10.5 -- Employment Agreement dated December 16, 1994, as amended,
between Registrant and Paul D. Reaves**
10.6 -- Employment Agreement dated August 29, 1997, as amended,
between Registrant and H. Grey Wood**
10.7 -- Corporate Services Agreement dated November 6, 1998, between
Registrant and Nichols Research Corporation
10.8 -- Tax Sharing Agreement dated November 6, 1998, between
Registrant and Nichols Research Corporation
10.9 -- Form of Indemnification Agreement between Registrant and its
directors
10.10 -- Software Licensing Agreement between CSC Healthcare Systems,
Inc. and TXEN, Inc. dated June 1, 1993
10.11 -- Voting Agreement dated November 6, 1998, between Registrant
and Nichols Research Corporation
10.12 -- Commercial Lease dated September 1, 1996, between Computer
Services Corporation and Birmingham S.S.P., Inc.
10.13 -- Commercial Lease dated October 31, 1985, between Computer
Services Corporation and Wimberly & Thomas Building
Restoration Partnership
10.14 -- Lease between Nichols SELECT Corporation and Birmingham
S.S.P., Inc.
10.15 -- Office Space Lease dated May 6, 1998, between the Registrant
and Raytheon Engineers & Constructors, Inc.
10.16 -- Office Lease dated April 13, 1998, between the Registrant
and Metropolitan Life Insurance Company
10.17 -- Sublease dated May 5, 1997, between TXEN, Inc. and ABB
Environmental Systems, Inc.
10.18* -- Lease dated May 8, 1998, between the Registrant and Daniel
Meadow Brook South, LLC
11.1 -- Computation of Earnings Per Share
23.1 -- Consent of Ernst & Young LLP, independent auditors, with
respect to Nichols TXEN Corporation
23.2 -- Consent of Ernst & Young LLP, independent auditors, with
respect to TXEN, Inc.
23.3* -- Consent of Lanier Ford Shaver & Payne P.C. (included in
Exhibit 5.1)
24.1 -- Power of Attorney (included on page II-5)
27.1 -- Financial Data Schedule (for SEC use only)
- ---------------
* To be filed by amendment.
** Management contract or compensatory plan or arrangement.