<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-12997
MAXIMUS, INC.
(Exact name of registrant as specified in its charter)
----------------------
VIRGINIA 54-1000588
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1356 BEVERLY ROAD
MCLEAN, VIRGINIA 22101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 734-4200
----------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Class Outstanding at February 2, 1998
----- -------------------------------
Common Shares, No Par Value 14,804,970
================================================================================
<PAGE> 2
MAXIMUS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1997
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 1997 (unaudited) and
September 30, 1997
Statements of Income for the three months ended December 31,
1997 and 1996 (unaudited)
Statements of Cash Flows for the three months ended December
31, 1997 and 1996 (unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities; Use of Proceeds from Registered Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
- 2 -
<PAGE> 3
MAXIMUS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $10,960 $10,579
Marketable securities................................................. 40,869 31,502
Accounts receivable, net.............................................. 33,651 33,920
Costs and estimated earnings in excess of billings.................... 5,605 6,546
Prepaid expenses and other current assets............................. 1,292 877
Deferred income taxes ................................................ 729 -
------- -------
Total current assets............................................................. 93,106 83,424
Property and equipment at cost:
Land.................................................................. 662 662
Building and improvements............................................. 1,721 1,721
Office furniture and equipment........................................ 1,645 1,731
Leasehold improvements................................................ 188 188
------- -------
4,216 4,302
Less: Accumulated depreciation and amortization...................... (1,346) (1,430)
------- -------
Total property and equipment, net................................................ 2,870 2,872
Deferred income taxes............................................................ - 404
Other assets..................................................................... 849 752
------- -------
Total assets..................................................................... $96,825 $87,452
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $3,099 $3,508
Accrued compensation and benefits..................................... 5,874 4,384
Billings in excess of costs and estimated earnings.................... 11,749 9,663
Note payable.......................................................... 188 188
Income taxes payable.................................................. 3,881 445
Deferred income taxes................................................. - 531
S Corporation distribution payable 5,748 -
------- -------
Total current liabilities........................................................ 30,539 18,719
Deferred income taxes............................................................ 147 -
------- -------
Total liabilities................................................................ $30,686 $18,719
------- -------
Contingencies (Note 3)
Shareholders' equity:
Common stock, no par value; 30,000,000 shares authorized;
14,790,470 and 14,790,970 shares issued and outstanding at
September 30, 1997 and December 31, 1997, at stated amount............ 66,730 66,731
Retained earnings (deficit)........................................... (591) 2,002
------- -------
Total shareholders' equity....................................................... 66,139 68,733
------- -------
Total liabilities and shareholders' equity....................................... $96,825 $87,452
======= =======
</TABLE>
See notes to financial statements.
- 3 -
<PAGE> 4
MAXIMUS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31,
-------------------------------
1996 1997
--------- --------
<S> <C> <C>
Revenues................................................................ $37,244 $36,356
Cost of revenues........................................................ 29,534 27,300
------- --------
Gross profit............................................................ 7,710 9,056
Selling, general and administrative expenses............................ 4,039 5,346
------- --------
Income from operations.................................................. 3,671 3,710
Interest and other income............................................... 84 575
------- --------
Income before income taxes.............................................. 3,755 4,285
Provision for income taxes.............................................. 57 1,692
------- --------
Net income.............................................................. $ 3,698 $ 2,593
======= ========
Historical basic net income per share................................... $ .18
========
Historical diluted net income per share................................. $ .17
========
Pro forma data:
Historical income before income taxes............................. $ 3,755
Pro forma income tax expense....................................... 1,502
-------
Pro forma net income............................................... $ 2,253
=======
Pro forma diluted net income per share............................. $ 0.18
=======
Shares used in computing basic net income per share..................... 14,791
======
Shares used in computing diluted net income per share 12,627 15,182
====== ======
</TABLE>
See notes to financial statements.
- 4 -
<PAGE> 5
MAXIMUS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
1996 1997
------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $3,698 $2,593
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation.................................................................. 70 84
Change in assets and liabilities:
Accounts receivable, net...................................................... (4,584) (269)
Costs and estimated earnings in excess of billings............................ (1,898) (941)
Prepaid expenses and other current assets..................................... (50) 415
Deferred income taxes......................................................... 30 709
Other assets.................................................................. 59 97
Accounts payable.............................................................. 2,370 409
Accrued compensation and benefits............................................. 833 (1,490)
Billings in excess of costs and estimated earnings............................ 1,319 (2,086)
Income taxes payable.......................................................... - (3,436)
------ -------
Net cash provided by (used in) operating activities...................................... 1,847 (3,915)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................................................. (9) (86)
Sale of marketable securities....................................................... - 9,367
------ -------
Net cash (used in) provided by investing activities...................................... (9) 9,281
CASH FLOWS FROM FINANCING ACTIVITIES:
S Corporation distributions......................................................... - (5,748)
Issuance of common stock ........................................................... - 1
------ -------
Net cash used in financing activities.................................................... - (5,747)
------ -------
Net increase (decrease) in cash and cash equivalents..................................... 1,838 (381)
Cash and cash equivalents, beginning of period........................................... 2,326 10,960
------ -------
Cash and cash equivalents, end of period................................................. $4,164 $10,579
====== =======
</TABLE>
See notes to financial statements.
- 5 -
<PAGE> 6
MAXIMUS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and 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 normally recurring
accruals considered necessary for a fair presentation have been included. The
results of operations for the three month period ended December 31, 1997 is not
necessarily indicative of the results that may be expected for the full fiscal
year. These financial statements should be read in conjunction with the audited
financial statements as of September 30, 1996 and 1997 and for each of the
three years in the period ended September 30, 1997, included in the Company's
Annual Report on Form 10-K (No. 1-12997), as filed with the Securities and
Exchange Commission.
2. INITIAL PUBLIC OFFERING
The Company completed an initial public offering ("IPO") of Common Stock
during June 1997. Of the 6,037,500 shares of Common Stock sold in the IPO,
2,360,000 shares were sold by selling shareholders and 3,677,500 shares were
sold by MAXIMUS, Inc. generating $53,804 in proceeds to the Company, net of
offering expenses.
The Company made cash payments of S corporation distributions (the "S
Corporation Dividend") to shareholders totaling $21,712 and accrued $5,748
during the year ended September 30, 1997. The S Corporation Dividend
represented the undistributed earnings of the Company taxed or taxable to the
shareholders through the date of the IPO. During the quarter ended December 31,
1997, the Company paid the remaining $5,748 of S Corporation Dividend.
See also note 5.
3. CONTINGENCIES
On February 3, 1997, the Company was named as a third party defendant by
Network Six, Inc. ("Network Six") in a legal action brought by the State of
Hawaii against Network Six. Network Six alleges that the Company is liable to
Network Six on various grounds. The Company believes Network Six's claims are
without merit and intends to vigorously defend this action. The Company
believes this action will not have a material adverse effect on its financial
condition or results of operations and has not accrued for any loss related to
this claim.
On November 28, 1997, an individual who was a former officer, director and
shareholder of the Company, filed a complaint in the United States District
Court for the District of Massachusetts, alleging that at the time he resigned
from the Company in 1996, thereby triggering the repurchase of his shares, the
Company and certain of its officers and directors had failed to disclose
material information to him relating to the potential value of the shares. He
further alleges that the Company and its officers and directors violated
Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and
breached various fiduciary duties owed to him and claims damages in excess of
$10 million. The Company does not believe that this action will have a material
adverse effect on the Company's business, and it intends to vigorously defend
this action. However, given the early stage of this litigation, no assurance
may be given that the Company will be successful in its defense.
The Company also is involved in various other legal proceedings in the
ordinary course of business. In the opinion of management, these proceedings
involve amounts that would not have a material effect on the financial position
or results of operations of the Company if such proceedings were disposed of
unfavorably.
- 6 -
<PAGE> 7
4. REVENUES FROM SIGNIFICANT CONTRACT
Government Operations Group revenues for the three month periods ended
December 31, 1997 and 1996 include $0 and $22,511, respectively, from a
significant contract with the U.S. Government Social Security Administration
which was terminated in February 1997 pursuant to legislative action.
5. INCOME TAX PROVISION AND PRO FORMA FINANCIAL DATA
Prior to the IPO, the Company and its shareholders elected to be treated
as an S corporation under the Internal Revenue Code. Under the provisions of
the tax code, the Company's shareholders included their pro rata share of the
Company's income in their personal tax returns. Accordingly, the Company was
not subject to federal and most state income taxes.
Pro forma net income and diluted pro forma net income per share are
presented as if the Company had been taxed as a C corporation for the periods
presented. The pro forma tax provision has been calculated assuming a 40%
combined effective tax rate.
- 7 -
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
MAXIMUS provides program management and consulting services to government
health and human services agencies in the United States. Founded in 1975, the
Company has been profitable every year since inception. The Company conducts
its operations through two groups, the Government Operations Group and the
Consulting Group. The Government Operations Group administers and manages
government health and human services programs, including welfare-to-work and
job readiness, child support enforcement, managed care enrollment and
disability services. The Consulting Group provides health and human services
planning, information technology consulting, strategic program evaluation,
program improvement, communications planning and revenue maximization services.
In October 1996, President Clinton signed into law an amendment to the
Social Security Act of 1935, effective January 1, 1997, that eliminated Social
Security Income and Supplemental Security Disability Insurance benefits based
solely on drug and alcohol disabilities. As a result of this legislative act,
the Social Security Administration terminated a significant contract with the
Company (the "SSA Contract") effective at the end of February 1997. All
services to be provided to the Social Security Administration were completed in
the quarter ended March 31, 1997. The SSA Contract contributed $0 million and
$22.5 million in the three months ended December 31, 1997 and December 31,
1996.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1996
Revenues. Total contract revenues decreased 2.4% to $36.4 million for the
three months ended December 31, 1997 as compared to $37.2 million for the same
period in 1996. Government Operations Group revenues decreased 9.2% to $27.8
million for the three months ended December 31, 1997 from $30.6 million for the
same period in 1996 in part due to the termination of the SSA Contract in
February 1997 (see Overview). For the three months ended December 31, 1997,
revenues from the SSA Contract were $0 as compared to $22.5 million for the
same period in 1996. Excluding the SSA Contract, Government Operations Group
revenues increased 245.9% to $27.8 million in the three months ended December
31, 1997 from $8.1 million for the same period in 1996. This increase was due
to a 58% increase in the number of contracts in the Child Support Enforcement,
Managed Care, and Welfare Reform divisions of the Government Operations Group.
Consulting Group revenues increased 28.0% to $8.6 million for the three months
ended December 31, 1997 from $6.7 million for the same period in 1996 due to an
increase in the number of contracts.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Total gross profit increased 17.5% to $9.1 million for the three
months ended December 31, 1997 as compared to $7.7 million for the same period
in 1996. Government Operations Group gross profit increased 7.1% to $4.9
million for the three months ended December 31, 1997 from $4.6 million for the
three months ended December 31, 1996. As a percentage of revenues, Government
Operations Group gross profit increased to 17.8% in the three months ended
December 31, 1997 from 15.1% in the same period in 1996, primarily due to the
absence of revenue from the SSA Contract in the December 1997 quarter, which
contract had a lower gross profit margin than other contracts in the Group. The
Consulting Group gross profit increased 32.8% to $4.1 million for the three
months ended December 31, 1997 from $3.1 million for the same period in 1996
principally due to the increased revenues. As a percentage of revenues,
Consulting Group gross profit increased to 48.0% for the three months ended
December 31, 1997 from 46.3% for the same period in 1996.
Selling, General and Administrative Expenses. Total selling, general and
administrative ("SG&A") expenses increased 32.4% to $5.3 million for the three
months ended December 31, 1997 as compared to $4.0 million in the same period
in 1996. As a percentage of revenues, selling, general and administrative
expenses increased to 14.7% for the three months ended December 31, 1997 from
10.8% for the same period in 1996. This increase in costs was due to increases
in both professional and administrative personnel necessary to support the
Company's growth (a 58% increase in number of Government Operations Group
contracts, see Revenues) and marketing and proposal preparation expenditures to
pursue further growth.
- 8 -
<PAGE> 9
Provision for Income Taxes. Prior to the IPO, the Company and its
shareholders elected to be treated as an S corporation under the Internal
Revenue Code. Under the provisions of the tax code, the Company's shareholders
included their pro rata share of the Company's income in their personal tax
returns. Accordingly, the Company was not subject to federal and most state
income taxes during 1996 and the period to June 12, 1997. Upon completion of
the IPO, the Company's S corporation status was terminated and the Company
became subject to federal and state corporate income taxes.
The Company's income tax provision for the three months ended December 31,
1997 was $1.7 million as compared to $0.1 million for the three months ended
December 31, 1996. The provision for income taxes for the three months ended
December 31, 1996 consisted of state income taxes payable. The provision for
income taxes for the three months ended December 31, 1997 consisted of state
and federal income tax of $1.7 million, which is based on an estimated annual
income tax rate of 40%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flows from operations.
The Company's cash flows from operations for the three months ended December 31,
1997 was ($3.9) million as compared to $1.8 million for the three months ended
December 31, 1996. The use of cash in operations for the three months ended
December 31, 1997 was primarily due to the payment of income taxes totaling
$4.9 million and employee bonuses totaling $2.9 million for the year ended
September 30, 1997, which were paid October 1997.
Certain short-term investments were sold during the current quarterly
period generating $9.4 million in proceeds. These investments were sold to
provide general operating capital and the necessary cash to make income tax
payments and to pay the final S corporation distribution discussed below.
During the three months ended December 31, 1997, the Company made final S
corporation distributions totaling $5.7 million. The distributions to
shareholders were based upon the income previously taxed to the S corporation
shareholders and the fiscal 1997 income taxable to the S corporation
shareholders. The amount of the fiscal 1997 taxable income was determined
during the finalization of the Company's income for the full fiscal year ended
September 30, 1997, and the liability for the $5.7 million distribution was
recognized on the September 30, 1997 balance sheet.
The Company has a $10.0 million revolving credit facility (the "Credit
Facility") with a bank, which may be used for borrowing and the issuance of
letters of credit. Outstanding letters of credit totaled $0.5 million at
December 31, 1997. The Credit Facility bears interest at a rate equal to LIBOR
plus an amount which ranges from 0.65% to 1.25% depending on the Company's debt
to equity ratio. The Credit Facility contains certain restrictive covenants and
financial ratio requirements, including a minimum net worth requirement of $60
million. The Company has not used the Credit Facility to finance its working
capital needs and, at December 31, 1997, the Company had $9.5 million available
under the Credit Facility.
In November 1997, the Company entered into a non-binding letter of intent
with another corporation to acquire 100% of the stock of such other corporation
in exchange for stock of MAXIMUS. In addition, in November 1997, the Company
entered into a non-binding letter of intent to purchase certain Medicaid
enrollment contracts and operations for a cash amount of $5.7 million, subject
to adjustments. It is anticipated that these transactions will be finalized
during the next two fiscal quarters. It is not anticipated that these
acquisitions will have a material effect on the liquidity of the Company.
Management believes that the Company will have sufficient resources to
meet its cash needs over the next 12 months, which may include start-up costs
associated with new contract awards, obtaining additional office space,
establishing new offices, investment in upgraded systems infrastructure or
acquisitions of other businesses and technologies. Cash requirements beyond the
next 12 months depend on the Company's profitability, its ability to manage
working capital requirements and its rate of growth.
- 9 -
<PAGE> 10
YEAR 2000
The Company is aware of the issues that many computer systems will face as
the millennium ("Year 2000") approaches. The Company believes that its own
internal software and hardware is Year 2000 compliant. In addition, in order to
perform on its government contracts, the Company relies to varying extents on
information processing performed by the governmental agencies and entities with
which it contracts. The Company has inquired where necessary of such agencies
and entities of potential Year 2000 problems, and, based on responses to such
inquiries, management believes that the Company will be able to continue to
perform on such contracts without material negative financial impact.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence and strategies and the Company's expectations about future
contracts, market opportunities, market demand or acceptance of the Company's
products are forward looking statements that involve risks and uncertainties.
These uncertainties include reliance on government clients; risks associated
with government contracting; risks involved in managing government projects;
legislative change and political developments; opposition from government
unions; challenges resulting from growth; adverse publicity; and legal,
economic and other risks detailed in Exhibit 99 to the Company's Quarterly
Report on Form 10-Q for the period ended December 31, 1997.
- 10 -
<PAGE> 11
Part II. Other Information.
Item 1. Legal Proceedings.
On March 12, 1997, Network Six, Inc. ("Network Six") served MAXIMUS with a
First Amended Third-Party Complaint filed in the State of Hawaii Circuit Court
of the First Circuit. In this complaint, Network Six named the Company and
other parties as third party defendants in an action by the State of Hawaii
against Network Six. In 1991, the Company's Consulting Group was engaged by the
State of Hawaii to provide assistance in planning for and monitoring the
development and implementation by Hawaii of a statewide automated child support
system. In 1993, Hawaii contracted with Network Six to provide systems
development and implementation services for this project. In 1996 the state
terminated the Network Six contract for cause and filed an action against
Network Six. Network Six counterclaimed against Hawaii that the state breached
its obligations under the contract with Network Six. In the Third Party
Complaint, Network Six alleges that the Company is liable to Network Six on
grounds that: (I) Network Six was an intended third party beneficiary under the
contract between the Company and Hawaii; (ii) the Company engaged in bad faith
conduct and tortiously interfered with the contract and relationship between
Network Six and Hawaii; (iii) the Company negligently breached duties to
Network Six; and (iv) the Company aided and abetted Hawaii in Hawaii's breach
of contract. Network Six's complaint seeks damages, including punitive damages,
from the third party defendants in an amount to be proven at trial. The Company
believes that Network Six was not an intended third party beneficiary under its
contract with Hawaii and that Network Six's claims are without factual or legal
merit. The Company does not believe this action will have a material adverse
effect on the Company's business, and it intends to vigorously defend this
action. However, given the early stage of this litigation, no assurance may be
given that the Company will be successful in its defense. A decision by the
court in Network Six's favor or any other conclusion of this litigation in a
manner adverse to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.
On November 28, 1997, an individual who was a former officer, director and
shareholder of the Company, filed a complaint in the United States District
Court for the District of Massachusetts, alleging that at the time he resigned
from the Company in 1996, thereby triggering the repurchase of his shares, the
Company and certain of its officers and directors had failed to disclose
material information to him relating to the potential value of the shares. He
further alleges that the Company and its officers and directors violated
Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and
breached various fiduciary duties owed to him and claims damages in excess of
$10 million. The Company does not believe that this action will have a material
adverse effect on the Company's business, and it intends to vigorously defend
this action. However, given the early stage of this litigation, no assurance
may be given that the Company will be successful in its defense.
The Company is not a party to any material legal proceedings, except as
set forth above.
Item 2.
(a) Changes in Securities.
Pursuant to the Company's 1997 Equity Incentive Plan, the Company granted
to certain employees options to purchase an aggregate of 176,411 shares of
Common Stock consisting of (a) options to purchase an aggregate of 166,411
shares granted to employees on October 28, 1997, at an exercise price per share
of $26.50 and (b) options to purchase an aggregate of 10,000 shares granted to
new employees on the various hire dates of such employees during the three
months ended December 31, 1997, at an exercise price equal to the closing price
of the Company's Common Stock as reported on the New York Stock Exchange on the
day prior to the commencement of employment. Generally, each of the foregoing
options may be exercised on a cumulative basis with respect to one-fourth of
the shares underlying the option on each of the first, second, third and fourth
anniversaries of the date of grant. Each option expires upon the earlier of the
termination of the holder's employment with the Company or the tenth
anniversary of the date of grant. On December 11, 1997, pursuant to the
Company's 1997 Director Stock Option Plan, the Company granted to two directors
options to purchase 5,000 and 6,000 shares of Common Stock, respectively, at an
exercise price per share of $23.81. The former option became fully exercisable
upon the date of grant, and the latter option became immediately exercisable
with respect to 3,000 shares upon the date of grant and will become exercisable
with respect to the remaining 3,000 shares on the date of the 1998 Annual
Meeting of Shareholders of the Company provided that the option holder is still
a director on such date. Both options expire on December 11, 2008.
No underwriter was engaged in connection with the foregoing issuance of
securities. Such issuance was made in reliance upon the exemption for the
registration requirements afforded by Section 4(2) of the Securities Act of
1933, as amended. The Company has reason to believe that all of the optionees
were familiar with or had access to information concerning the operations and
financial condition of the Company, and all of those individuals acquired their
options for investment and not with a view to the distribution of such options
or the underlying shares of Common Stock.
- 11 -
<PAGE> 12
(b) Use of Proceeds from Registered Securities.
A Registration Statement on Form S-1 (File No. 333-29115) registering
6,037,500 shares of the Company's Common Stock, filed in connection with the
Company's IPO, was declared effective by the Securities and Exchange Commission
on June 12, 1997. The IPO closed on June 18, 1997 and the offering has
terminated.
The Company and its selling shareholders sold, in the aggregate, all
6,037,500 shares registered in the IPO, with an aggregate offering price to the
public of $96,600,000. The managing underwriters of the IPO were Donaldson,
Lufkin & Jenrette Securities Corporation and Lehman Brothers Inc.
In connection with the IPO, the Company incurred total expenses from June
12, 1997 through December 31, 1997 of $7,677,000, including underwriting
discounts and commissions of $6,762,000 and other expenses of $915,000. After
such expenses, the Company's net proceeds from the IPO were $53,804,000. From
June 12, 1997 through December 31, 1997, the amount of net offering proceeds
used by the Company was as follows: $10,138,000 for the payment of the S
corporation distributions (which was paid to shareholders who were shareholders
of the Company prior to the IPO, some of whom are directors and officers of the
Company); and $1,584,000 for general working capital, which included payment of
income taxes, which were accelerated due to the conversion from a cash basis S
corporation to an accrual basis C corporation as a result of the IPO.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The Exhibits filed as part of this Form 10-Q are listed
on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index
is incorporated herein by reference.
(b) Reports on Form 8-K. No reports were filed on Form 8-K during the
quarter ended December 31, 1997.
- 12 -
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXIMUS, INC.
Date: February 13, 1998 By: /s/ F. Arthur Nerret
--------------------------------
F. Arthur Nerret
Vice President, Finance, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
- 13 -
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
11 Computation of Earnings Per Share
27 Financial Data Schedules (EDGAR)
99 Important Factors Regarding
Forward Looking Statements
</TABLE>
- 14 -
<PAGE> 1
EXHIBIT 11
STATEMENT RE COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Three Months
Ended December 31, Ended December 31,
1996 1997 1996 1997
------------------------ -------------------------
<S> <C> <C> <C> <C>
Historical net income............................................ $2,593
======
Pro forma net income............................................. $2,253
======
Shares used in computing net income per share:
Weighted average shares outstanding for period................... 11,453 14,791
Effect of options granted in January 1997:
Options granted.............................................. 401 401
Options price................................................ $1.46 $1.46
----- ------
Assumed proceeds................................................. $585 $585
Average market price............................................. $16.00 $26.57
------ ------
Shares assumed repurchased....................................... 37 22
------ ------
Shares deemed outstanding........................................ 364 379 364 379
Effect of options granted in June 1997:
Options granted.............................................. 31 31
Option price................................................. $16.00 $16.00
------ ------
Assumed proceeds................................................. $496 $496
Average market price per share................................... $16.00 $26.57
------ ------
Shares assumed repurchased....................................... 31 19
------ ------
Shares deemed outstanding........................................ 0 12 0 12
Effect of distribution to stockholders:
S Corporation Dividend........................................... $27,425
Less: Net income for period from June 13, 1996 to June 12, 15,954
1997............................................................. -------
$11,471
Dividend in excess of income..................................... $14.66
Net IPO proceeds per share....................................... -------
783
Shares deemed outstanding........................................ 783 0
------- -------
Shares used in computing diluted net income per share:........... 12,600 15,182
======= =======
Shares used in computing basic net income per share.............. 14,791
=======
Historical basic net income per share............................ $ 0.18
=======
Historical diluted net income per share.......................... $ 0.17
=======
Pro forma diluted net income per share........................... $ 0.18
=======
</TABLE>
- 1 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,579
<SECURITIES> 31,502
<RECEIVABLES> 33,920
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 83,424
<PP&E> 4,302
<DEPRECIATION> (1,430)
<TOTAL-ASSETS> 87,452
<CURRENT-LIABILITIES> 18,719
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,002
<TOTAL-LIABILITY-AND-EQUITY> 87,452
<SALES> 36,356
<TOTAL-REVENUES> 36,356
<CGS> 27,300
<TOTAL-COSTS> 27,300
<OTHER-EXPENSES> 5,346
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,285
<INCOME-TAX> 1,692
<INCOME-CONTINUING> 2,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,593
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
<PAGE> 1
EXHIBIT 99
IMPORTANT FACTORS REGARDING FORWARD LOOKING STATEMENTS
From time to time, the Company, through its management, may make
forward-looking public statements, such as statements concerning then expected
future revenues or earnings or concerning projected plans, performance,
contract procurement as well as other estimates relating to future operations.
Forward-looking statements may be in reports filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), in press releases or
informal statements made with the approval of an authorized executive officer.
The words or phrases "will likely result," "are expected to," "will continue,"
"is anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of Section 21E of the
Exchange Act and Section 27A of the Securities Act of 1933, as amended, as
enacted by the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on these
forward-looking statements which speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors listed
below, as well as other factors not currently identified by management, could
affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in
any current statement.
The Company will not undertake and specifically declines any
obligation to publicly release any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events which may cause management to re-evaluate such forward-looking
statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially form those projected in forward-looking statements
of the Company made by or on behalf of the Company.
RELIANCE ON GOVERNMENT CLIENTS
Substantially all of the Company's clients are federal, state or local
government authorities. Effective marketing of the Company's services to
government clients requires the ability to respond to government requests for
proposals ("RFPs"). To succeed in the RFP process, the Company must estimate
its cost structure for servicing the proposed contract, the time required to
establish operations and the likely terms of the proposals submitted by
competitors. The Company must assemble and submit a large volume of information
on a rigid timetable set forth in the RFP. The Company's ability to
successfully respond to the RFP process in the future will have an important
impact on the Company's business, financial condition and results of
operations. No assurance can be given that the Company will be awarded
contracts through the RFP process.
RISKS ASSOCIATED WITH GOVERNMENT CONTRACTING
Contracts awarded to the Company typically contain provisions that
permit the government client to terminate the contract on short notice, with or
without cause. The expiration of large contracts presents additional management
challenges. Many contracts contain base periods of one or more years as well as
one or more option periods that may cover more than half of the potential
contract duration. Government agencies generally have the right not to exercise
option periods and the failure to exercise such option periods could impact the
profitability of certain of the Company's contracts. While the Company has
experienced a limited number of early terminations since inception, the
unexpected termination of one or more of the Company's more significant
contracts could result in severe revenue shortfalls which, without
corresponding reductions in expenses, could adversely affect the business,
financial condition and results of operations of the Company. There can be no
assurance that such government authorities will not terminate any or all of the
Company's contracts to administer and manage health and human services
programs.
- 1 -
<PAGE> 2
In order to establish and maintain relationships with members of
government agencies, the Company occasionally engages marketing consultants,
including lobbyists. In the event of a significant political change, such
consultants may lose their ability to effectively assist the Company. In
addition, the implementation of term limits on certain elected officials will
require the Company to confront political change on a regular basis. If the
Company fails to manage its relationships effectively with political
consultants, its business, financial condition and results of operations could
be materially and adversely affected. No assurance can be given that the
Company will be successful in managing such relationships.
To avoid experiencing higher than anticipated demands for federal
funds, federal government officials on occasion advise state and local
authorities not to engage private consultants to advise on maximizing federal
revenues. There can be no assurance that state and local officials will not be
influenced by federal government officials and, therefore, not engage the
Company for such services. To the extent that state and local officials
determine not to seek the Company's services, the business, financial condition
and results of operations of the Company could be adversely affected.
Government contracts generally are subject to audits and
investigations by government agencies, including audits by the Defense Contract
Audit Agency ("DCAA"). These audits and investigations involve a review of the
government contractor's performance of its contracts as well as its pricing
practices, cost structure and compliance with applicable laws, regulations and
standards. A substantial portion of payments to the Company from U.S.
Government agencies is subject to adjustment upon audit by the DCAA. Audits
through 1993 have been completed with no material adjustments and the Company
believes that adjustments resulting from audits of subsequent years will not
have a material adverse effect on the Company's business, financial condition
and results of operations. If any costs are improperly allocated to a
contract, such costs are not reimbursable and, if already reimbursed, will be
required to be refunded to the government. Furthermore, if improper or illegal
activities are discovered in the course of any audits or investigations, the
contractor may be subject to various civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeitures of
profits, suspension of payments, fines and suspension or disqualification from
doing business with the government. If the Company becomes subject to penalties
or sanctions, such penalties or sanctions could have a material adverse effect
on the Company's business, financial condition and results of operations.
RISKS INVOLVED IN MANAGING GOVERNMENT PROJECTS
Upon the receipt of a contract for the management of a health and
human services program, the Company's Government Operations Group may incur
significant start-up expenses prior to the receipt of any payments under such
contract. Such expenses include the costs of leasing office space, purchasing
necessary office equipment and hiring sufficient personnel. As a result, for
large contracts, the Company may be required to make significant investments
prior to the receipt of related contract payments.
Approximately 45% of the Company's total revenues for the quarter
ended December 31, 1997 resulted from fixed price contracts pursuant to which
the Company received its fee for meeting specified objectives or upon the
achievement of specified units of work, such as the placement of welfare
recipients into jobs, the collection of child support payments or the
completion of managed care enrollment transfers. The Company's ability to earn
a profit on these contracts is dependent upon accurate estimates of the costs
involved as well as the probability of meeting the specified objectives or
realizing the expected units of work within a certain period of time. In
addition, the Company recognizes revenues on fixed price contracts based on
costs incurred. The Company periodically reviews such contracts and adjusts
revenues to reflect current expectations. Such adjustments will affect the
timing and amount of revenue recognized and could have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's failure to accurately estimate the factors on which
contract pricing is based could result in the Company reporting a decrease in
revenues or incurring losses on such contracts and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's inability or failure to satisfy its contractual
obligations in a manner consistent with the terms of any contract could have a
material adverse effect on the Company's financial condition because the
Company is often required to indemnify clients for its failure to meet
performance standards. Certain of the Company's contracts have liquidated
damages provisions and financial penalties related to performance failures. In
addition, in order for the Company's Government Operations Group to bid for
certain contracts, the Company has been and will continue to be required to
secure its indemnification obligations by obtaining a performance bond from an
insurer, posting a cash
- 2 -
<PAGE> 3
performance bond or obtaining a letter of credit from a suitable financial
institution. In the event that a government entity makes a claim against such
performance bond or letter of credit, the premiums demanded by the insurers for
such bonds could increase, thereby limiting the Company's ability to bid for
contracts in the future. In addition, the Company's failure to meet a client's
expectations in the performance of its contractual obligations could have a
material adverse effect on the Company's reputation, thereby adversely affecting
its business, financial condition and results of operations.
When contracts between the Company's Government Operations Group and a
state or local government expire or otherwise terminate, unless the Company can
successfully enter into a new contract using the services of employees formerly
engaged in servicing the terminated contract or otherwise re-assign such
employees, the Company will need to terminate the employment of such employees.
The termination of large Government Operations Group contracts and the
subsequent re-assignment or termination of employees places significant demands
on the Company's management and its administrative resources. If the Company is
unable to manage these challenges, the Company's business could materially and
adversely be affected.
LEGISLATIVE CHANGE AND POLITICAL DEVELOPMENTS
The market for the Company's services is largely dependent on federal
and state legislative programs, any of which may be modified or terminated by
acts of the legislative or executive branches of federal and state government.
There can be no assurance that such legislative change will not occur or that
the Company will be able to anticipate and respond in a timely manner to any
such legislative change. The Company's failure to manage effectively its
business in light of anticipated or unanticipated legislative change could have
a material adverse effect on the Company's business, operating results and
financial condition.
The Welfare Reform Act is expected to be a catalyst for sweeping
changes in the administration and management of the welfare system in the
United States. As part of its growth strategy, the Company plans to
aggressively pursue the opportunities created by this legislation by seeking
new contracts to administer and manage welfare programs of state and local
government agencies. However, opponents of welfare reform continue to
criticize the advances made by the current administration and continued
progress in the welfare reform area is uncertain. The repeal of the Welfare
Reform Act, in whole or in part, could have a material adverse effect on the
future business, financial condition and results of operations of the Company.
There can be no assurance that additional reforms will be proposed or enacted,
or that previously enacted reforms will not be challenged, repealed or
otherwise invalidated.
The adverse impact that legislative changes can have on the Company
was recently evidenced by the termination of a significant contract with the
federal Social Security Administration. This contract related to the referral
and treatment monitoring of social security or supplemental income
beneficiaries with drug or alcohol-related disabilities (the "SSA Contract").
In the first two quarters of the fiscal year ended September 30, 1997, the
Company earned revenues of $31.6 million from the SSA Contract, representing
approximately 46% of the Company's total revenues for such fiscal quarters. In
October 1996, the President signed into law an amendment to the Social Security
Act of 1935, effective January 1, 1997, that eliminated social security and
supplemental income benefits based solely on drug and alcohol disabilities. As
a result of this amendment, the SSA Contract was terminated and no revenues
were earned thereunder after March 31, 1997.
In addition, under current law the privatization of certain functions
of government programs, such as determining eligibility for Food Stamps and
Medicaid, requires the consent and/or waiver of the executive branch acting
through the applicable administering government agency. In May 1997, in
response to a request by the State of Texas for a waiver to allow private
corporations to decide the eligibility of applicants for Food Stamps and
Medicaid benefits, the Department of Health and Human Services determined not
to grant a waiver to the existing requirement in these programs that only
public employees may make such decisions. The Company did not bid for any
contracts for these Texas projects, and the determination will not affect any
of the Company's existing contracts. However, there can be no assurance that
the Department of Health and Human Services or other health and human services
agencies will not in the future narrow or eliminate certain future markets for
health and human services contracts in which the Company intends to compete.
OPPOSITION FROM GOVERNMENT UNIONS
The Company's success depends in part on its ability to obtain
contracts to profitably administer and manage health and human services
programs that traditionally have been administered and managed by government
employees. Many
- 3 -
<PAGE> 4
of these government employees are members of labor unions which have
considerable financial resources and established lobbying networks that are
effective in applying political pressure to legislators and other government
officials who seek to contract with private companies to administer and manage
government programs. Successful efforts to oppose private management of
government programs by these unions may slow welfare reform and ultimately
result in fewer opportunities for the Company to provide services to government
agencies, thereby adversely affecting the business, financial condition and
results of operations of the Company. A recent example of the influence of
government unions is the role played by union lobbyists in promoting a May 1997
determination by the Department of Health and Human Services, in response to a
waiver request by the State of Texas, that only public employees may make
decisions on eligibility of applicants for Food Stamps and Medicaid benefits.
There can be no assurance that these unions will not succeed in whole or in
part in their efforts to oppose the outsourcing of government programs.
VARIABILITY OF QUARTERLY OPERATING RESULTS
Variations in the Company's revenues and operating results occur from
quarter to quarter as a result of a number of factors, including the progress
of contracts, levels of revenues earned on contracts (including any adjustments
in expectations on revenue recognition on fixed price contracts), the
commencement, completion or termination of contracts during any particular
quarter, the schedules of government agencies for awarding contracts, the term
of each contract that the Company has been awarded and general economic
conditions. Because a significant portion of the Company's expenses are
relatively fixed, successful contract performance and variation in the volume
of activity as well as in the number of contracts commenced or completed during
any quarter may cause significant variations in operating results from quarter
to quarter. Furthermore, the Company has on occasion experienced a pattern in
its results of operations in which it incurs greater operating expenses during
the start-up and early stages of significant contracts. In addition, the
Company's SSA Contract contributed $31.6 million, $56.5 million, $14.3 million
and $2.9 million to the Company's revenues in the fiscal years 1997, 1996, 1995
and 1994, respectively. The termination of the SSA Contract will significantly
reduce the Company's revenue base as compared to previous quarters. No
assurance can be given that the Company will be able to generate additional
revenues in future periods in amounts sufficient to replace the revenues
received under the SSA Contract and as a result, the Company may experience
materially lower revenues as compared to prior periods.
RELIANCE ON KEY EXECUTIVES
The success of the Company is highly dependent upon the efforts,
abilities, business generation and project execution capabilities of certain of
its executive officers and senior managers. While the Company entered into
executive employment agreements with each of David V. Mastran, President and
Chief Executive officer of the Company, Raymond B. Ruddy, Chairman of the Board
of Directors and President of the Consulting Group, Russell A. Beliveau,
President of the Government Operations Group, Ilene R. Baylinson, President of
the Disability Services Division, Susan D. Pepin, President of the Systems
Planning and Integration Division and Lynn P. Davenport, President of the Human
Services Division, such agreements are terminable under certain conditions.
Other than these six agreements with executive officers, the Company does not
have employment agreements with any other senior employees. The loss of the
services of any of these key executives could have a material adverse effect
upon the Company's business, financial condition and results of operations,
including its ability to secure and complete engagements. The Company maintains
key-man life insurance policies on David V. Mastran and Raymond B. Ruddy in the
amounts of $6,100,000 and $3,950,000, respectively, with proceeds payable to
the Company. Because the previous levels of insurance were established to fund
stock redemption obligations of the Company that terminated upon the closing of
the initial public offering in June 1997,
- 4 -
<PAGE> 5
the Company reduced the coverage levels from $10,700,000 and $7,250,000,
respectively, in the quarter ended December 31, 1997.
ATTRACTION AND RETENTION OF EMPLOYEES
The Company's business involves the delivery of professional services
and is labor-intensive. When the Company's Government Operations Group is
awarded a contract by a government agency, the Company is often under a tight
timetable to hire project leaders and case management personnel to meet the
needs of the new project. In addition, the resulting large increases in the
number of the Company's employees create demand for increased administrative
personnel at the Company's headquarters. The Company's success in both the
Government Operations Group and the Consulting Group depends in large part upon
its ability to attract, develop, motivate and retain experienced and innovative
executive officers, senior managers who have successfully managed or designed
health and human services programs in the public sector and information
technology professionals who have designed or implemented complex information
technology projects. Such innovative, experienced and technically proficient
individuals are in great demand and are likely to remain a limited resource for
the foreseeable future. There can be no assurance that the Company will be able
to continue to attract and retain desirable executive officers and senior
managers in the future. The inability to hire sufficient personnel on a timely
basis or the loss of a significant number of executive officers and senior
manages could have a material adverse effect on the Company's business,
financial condition and results of operations, including its ability to obtain
and successfully complete service contracts.
CHALLENGES RESULTING FROM GROWTH
The Company's continued growth has placed significant demands on the
Company's management as well as its administrative, operational and financial
resources. The Company's ability to manage its growth will require the Company
to continue to implement new and to improve existing operational, financial and
management information systems and to continue to expand, motivate and manage
its workforce. In addition, the Company's growth will depend in large part on
its ability to manage large-scale health and human services programs while
continuing to ensure quality service and reasonable profits. If the Company is
unable to manage effectively any of these factors, the quality of the Company's
services, its financial condition and results of operations could be materially
and adversely affected. No assurance can be given that the Company will
continue to experience growth or that the Company will be successful in
managing its growth, if any.
ADVERSE PUBLICITY
The Company has received and expects to continue to receive media
attention as a result of its contracts with state and local government
authorities. In particular, the management of health and human services
programs by the Company's Government Operations Group and the establishment of
revenue maximization programs by the Company's Consulting Group have been the
subject of highly controversial media coverage. Negative coverage of the types
of program management services provided by the Company could influence
government officials and slow the pace of welfare reform, thereby reducing the
Company's growth prospects. In addition to media attention arising out of the
types of services provided by the Company, the Company is also vulnerable to
media attention as a result of the activities of political consultants engaged
by the Company, even when such activities are unrelated to the Company. Such an
event occurred in connection with a marketing representative hired by the
Company to assist in responding to an RFP promulgated by the State of West
Virginia. After learning that the marketing representative was also a state
employee, the Company voluntarily withdrew from the bidding. Certain media
coverage relating to this incident was inaccurate and incorrectly suggested
wrongdoing by the Company. The Company has become aware that certain of its
competitors have sought to exploit such suggestions in connection with other
competitive-bidding situations. There can be no assurance that the Company will
not receive adverse media attention as the result of activities of individuals
not under the Company's control. In addition, there can be no assurance that
media attention focused on the Company will be accurate or that the Company
will be able to anticipate and respond in a timely manner to all media
contacts. Inaccurate or misleading media coverage or the Company's failures to
manage such coverage could have a material adverse effect on the Company's
reputation, thereby adversely affecting its business, financial condition and
results of operations.
RISKS RELATED TO POSSIBLE ACQUISITIONS
- 5 -
<PAGE> 6
A part of the Company's growth strategy is to expand its operations
through the acquisition of additional businesses. The Company has no prior
history of making acquisitions and there can be no assurance that the Company
will be able to identify, acquire or profitably manage additional businesses or
successfully integrate any acquired businesses into the Company without
incurring substantial expenses, delays or other operational or financial
problems. Furthermore, acquisitions may involve a number of special risks,
including diversion of management's attention, failure to retain key personnel,
unanticipated events or circumstances, legal liabilities and amortization of
acquired intangible assets, some or all of which could have a material adverse
effect on the Company's business, financial condition and results of
operations. Client dissatisfaction or performance problems at a single acquired
firm could have a material adverse effect on the reputation of the Company as a
whole. In addition, there can be no assurance that acquired businesses, if any,
will achieve anticipated revenues and earnings. The failure of the Company to
manage its acquisition strategy successfully could have a material adverse
effect on the Company's business, financial condition and results of
operations.
LITIGATION
On March 12, 1997, Network Six, Inc. ("Network Six") served MAXIMUS
with a First Amended Third-Party Complaint filed in the State of Hawaii Circuit
Court of the First Circuit. In this complaint, Network Six named the Company
and other parties as third party defendants in an action by the State of Hawaii
against Network Six. In 1991, the Company's Consulting Group was engaged by the
State of Hawaii to provide assistance in planning for and monitoring the
development and implementation by Hawaii of a statewide automated child support
system. In 1993, Hawaii contracted with Network Six to provide systems
development and implementation services for this project. In 1996, the state
terminated the Network Six contract for cause and filed an action against
Network Six. Network Six counterclaimed against Hawaii that the state breached
its obligations under the contract with Network Six. In the Third Party
Complaint, Network Six alleges that the Company is liable to Network Six on
grounds that: (I) Network Six was an intended third party beneficiary under the
contract between the Company and Hawaii; (ii) the Company engaged in bad faith
conduct and tortiously interfered with the contract and relationship between
Network Six and Hawaii; (iii) the Company negligently breached duties to
Network Six; and (iv) the Company aided and abetted Hawaii in Hawaii's breach
of contract. Network Six's complaint seeks damages, including punitive damages,
from the third party defendants in an amount to be proven at trial. The Company
believes that Network Six was not an intended third party beneficiary under its
contract with Hawaii and that Network Six's claims are without factual or legal
merit. The Company does not believe this action will have a material adverse
effect on its business and intends to vigorously defend this action. However,
given the early stage of this litigation, no assurance may be given that the
Company will be successful in its defense. A decision by the court in Network
Six's favor or any other conclusion of this litigation in a manner adverse to
the Company could have a material adverse effect on the Company's business,
financial condition and results of operations.
On November 28, 1997, an individual who was a former officer, director
and shareholder of the Company, filed a complaint in the United States District
Court for the District of Massachusetts, alleging that at the time he resigned
from the Company in 1996, thereby triggering the repurchase of his shares, the
Company and certain of its officers and directors had failed to disclose
material information to him relating to the potential value of the shares. He
further alleges that the Company and its officers and directors violated
Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and
breached various fiduciary duties owed to him and claims damages in excess of
$10 million. The Company does not believe that this action will have a material
adverse effect on the Company's business, and it intends to vigorously defend
this action. However, given the early stage of this litigation, no assurance
may be given that the Company will be successful in its defense.
- 6 -
