<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 JUNE 30, 1998
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)
------------------
<TABLE>
<S> <C>
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)
</TABLE>
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 [ ]
<TABLE>
<S> <C>
Class Outstanding at August 5, 1998
----- -----------------------------
Common Shares, No Par Value 16,829,678
</TABLE>
================================================================================
<PAGE> 2
MAXIMUS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 1998 (unaudited) and September 30, 1997
Statements of Income for the three months and nine months ended June
30, 1998 and 1997 (unaudited)
Statements of Cash Flows for the nine months ended June 30, 1998 and
1997 (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. Litigation
Item 2. 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, JUNE 30,
1997 1998
---------------- ----------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $11,000 $19,988
Marketable securities . . . . . . . . . . . . . . . . . . . . 40,869 13,318
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 46,531 66,047
Costs and estimated earnings in excess of billings . . . . . . 5,605 5,717
Prepaid expenses and other current assets . . . . . . . . . . 1,435 655
Deferred income taxes . . . . . . . . . . . . . . . . . . . . - 660
----------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 105,440 106,385
Property and equipment at cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662 662
Building and improvements . . . . . . . . . . . . . . . . . . 1,721 1,721
Office furniture and equipment . . . . . . . . . . . . . . . . 4,902 5,711
Leasehold improvements . . . . . . . . . . . . . . . . . . . . 188 331
----------- -------------
7,473 8,425
Less: Accumulated depreciation and amortization . . . . . . . (3,578) (4,179)
----------- -------------
Total property and equipment, net . . . . . . . . . . . . . . . . . . . 3,895 4,246
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 1,241 62
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 921 1,240
----------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $111,497 $111,933
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $3,914 $6,316
Accrued compensation and benefits . . . . . . . . . . . . . . 10,132 12,145
Billings in excess of costs and estimated earnings . . . . . . 12,277 13,209
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . 1,596 -
Income taxes payable . . . . . . . . . . . . . . . . . . . . . 3,932 1,756
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 2,452 -
S Corporation distribution payable 5,748 -
----------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 40,051 33,426
Deferred compensation, less current portion . . . . . . . . . . . . . . 3,534 -
----------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,585 33,426
----------- -------------
Contingencies (Note 3)
Shareholders' equity:
Common stock, no par value; 30,000,000 shares authorized;
15,991,680 and 16,829,678 shares issued and outstanding at
September 30, 1997 and June 30, 1998, at stated amount . . . . 82,315 82,922
Retained earnings (deficit) . . . . . . . . . . . . . . . . . (14,403) (4,415)
----------- -------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . 52,961 78,507
----------- -------------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . $111,497 $111,933
=========== =============
</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 NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- --------------
1997 1998 1997 1998
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $36,083 $61,238 $124,163 $162,116
Cost of revenues . . . . . . . . . . . . . . 25,524 46,323 91,763 121,232
------- ------- ------- -------
Gross profit . . . . . . . . . . . . . . . . 10,559 14,915 32,400 40,884
Selling, general and administrative expenses 6,190 7,122 18,013 23,788
Stock option compensation and acquisition
expense . . . . . . . . . . . . . . . . . . 5,724 1,849 5,874 2,384
------- ------- ------- -------
Income (loss) from operations . . . . . . . . (1,355) 5,944 8,513 14,712
Interest and other income . . . . . . . . . . 61 384 (29) 1,234
------- ------- ------- -------
Income (loss) before income taxes . . . . . . (1,294) 6,328 8,484 15,946
Provision for income taxes . . . . . . . . . 907 2,549 1,989 6,378
------- ------- ------- -------
Net income (loss) . . . . . . . . . . . . . . ($2,201) $ 3,779 $6,495 $9,568
======= ======= ====== ======
Earnings (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . ($ 0.17) $ 0.22 $ 0.51 $ 0.57
======= ====== ====== ======
Diluted . . . . . . . . . . . . . . . . . . . ($ 0.17) $ 0.22 $ 0.50 $ 0.56
======= ====== ====== ======
Shares used in computing earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . 13,040 16,829 12,670 16,814
====== ====== ====== ======
Diluted . . . . . . . . . . . . . . . . . . . 13,040 17,220 13,024 17,205
====== ====== ====== ======
</TABLE>
See notes to financial statements.
- 4 -
<PAGE> 5
MAXIMUS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30,
--------------
1997 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,495 $9,568
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 398 432
Stock option compensation expense . . . . . . . . . . . . . . . 5,874 -
Change in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . (8,522) (17,977)
Costs and estimated earnings in excess of billings . . . . . . . (2,772) (112)
Prepaid expenses and other current assets . . . . . . . . . . . (665) 756
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 1,146 (2,147)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (65) (332)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 50 2,666
Accrued compensation and benefits . . . . . . . . . . . . . . . 3,265 (1,527)
Billings in excess of costs and estimated earnings . . . . . . . 5,826 1,162
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 971 (2,125)
-------- -------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . 12,001 (9,636)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . (688) (600)
Sale (purchase) of marketable securities . . . . . . . . . . . . . . . . (39,805) 27,551
-------- -------
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . (40,493) 26,951
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of expenses . . . . . . . . . 53,804 -
S Corporation distributions . . . . . . . . . . . . . . . . . . . . . . (21,712) (6,368)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . - 125
Payment for purchase of redeemable common stock . . . . . . . . . . . . (238) (188)
Net (payments) proceeds from borrowings. . . . . . . . . . . . . . . . . 1,154 (2,363)
-------- -------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . 33,008 (8,794)
Cash flow adjustment for change in accounting period
for David M. Griffith and Associates, Ltd . . . . . . . . . . . . . . . . . . . - 467
-------- -------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 4,516 8,988
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . 2,387 11,000
-------- -------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . $6,903 $19,988
======== =======
</TABLE>
See notes to financial statements.
- 5 -
<PAGE> 6
MAXIMUS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(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 and nine-month periods ended June 30,
1998 are 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, 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 the S Corporation Dividend.
See also notes 5 and 6.
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
Revenues for the three month periods ended June 30, 1998 and 1997
include $0 and $19, and for the nine month periods ended June 30, 1998 and 1997
include $0 and $31,612, respectively, from a significant contract with the
U.S. Government Social Security Administration that was terminated in February
1997 pursuant to legislative action.
5. INCOME TAX PROVISION
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. Upon
completion of the IPO, the Company's S corporation status terminated for
federal and state taxation purposes, and the Company recorded, in the three-
month period ended June 30, 1997, a deferred tax charge of $2,566 for the
cumulative differences between the financial reporting and income tax basis of
certain assets and liabilities at June 12, 1997. The Company also recorded a
deferred tax benefit of $2,055 related to stock option compensation expense for
options given to employees.
6. BUSINESS COMBINATIONS
On March 16, 1998, the Company issued 840,000 shares of its common
stock in exchange for all of the common stock of Spectrum Consulting Group,
Inc. and an affiliated company ("Spectrum"), both of San Antonio, Texas. This
merger was accounted for as an immaterial pooling of interests and accordingly,
the Company's financial statements, including earnings per share, were not
restated for periods prior to January 1, 1998.
Spectrum contributed revenues and operating income of $4,076 and $373
for the three months ended June 30, 1998, and $7,173 and $897 for the nine
months ended June 30, 1998, respectively to the results of operations of the
Company. Also, during the three months ended March 31, 1998, Spectrum paid S
Corporation Dividends totaling $620 based upon estimated taxable income through
March 15, 1998.
On May 12, 1998, the Company issued 1,166,179 shares of its common
stock in exchange for all of the outstanding common stock of David M. Griffith
and Associates, Ltd. ("DMG"). This merger was accounted for as a pooling of
interests and accordingly, the Company's financial statements, including
earnings per share, have been restated for all periods presented to include the
financial position and results of operations of DMG.
7. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the Statement 128 requirements.
- 7 -
<PAGE> 8
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1997 1998 1997 1998
---------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income . . . . . . . . . . . . . . . . . . . . . . ($2,201) $3,779 $6,495 $9,568
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding . . . . . . . 13,040 16,829 12,670 16,814
------ ------ ------ ------
Stock Options . . . . . . . . . . . . . . . . . . . . . - 391 354 391
------ ------ ------ ------
Denominator for dilutive earnings per share . . . . . . 13,040 17,220 13,024 17,205
</TABLE>
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 and $19
thousand in the three-month periods ended June 30, 1998 and 1997 and $0 and
$31.6 million in the nine-month periods ended June 30, 1998 and 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues. Total contract revenues increased 69.7% to $61.2 million for
the three months ended June 30, 1998 as compared to $36.1 million for the same
period in 1997. Government Operations Group revenues increased 92.1% to $36.8
million for the three months ended June 30, 1998 from $19.2 million for the
same period in 1997. This increase was due to an increase in the number of
contracts in the Child Support, Managed Care Enrollment, and Welfare Reform
divisions of the Government Operations Group. Consulting Group revenues
increased 44.3% to $24.4 million for the three months ended June 30, 1998 from
$16.9 million for the same period in 1997. The increase was due to revenues
totaling $4.1 million resulting from the Spectrum Consulting companies, which
were combined with the Company in a transaction accounted for as a pooling of
interests effective January 1, 1998, and an increase in the number of
contracts.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Total gross profit increased 41.3% to $14.9 million for the three
months ended June 30, 1998 as compared to $10.6 million for the same period in
1997. Government Operations Group gross profit increased 39.6% to $6.5 million
for the three months ended June 30, 1998 from $4.6 million for the three months
ended June 30, 1997. As a percentage of revenues, Government Operations Group
gross profit decreased to 17.6% for the three months ended June 30, 1998 from
24.2% for the same period in 1997. The decrease was due to anticipated lower
gross profit margins on certain Managed Care Enrollment contracts which were
begun during the quarter ended March 31, 1998, a higher amount of pass-through
costs during the three months ended June 30, 1998
- 8 -
<PAGE> 9
on which the Company earns no gross profit, and favorable revenue recognition
adjustments recorded in the June 1997 quarter. The Managed Care Enrollment
contracts are expected to deliver normal Government Operations Group gross
profit margins in subsequent periods. The Consulting Group gross profit
increased 42.5% to $8.4 million for the three months ended June 30, 1998 from
$5.9 million for the same period in 1997 principally due to the increased
revenues. As a percentage of revenues, Consulting Group gross profit decreased
to 34.6% for the three months ended June 30, 1998 from 35.0% for the same period
in 1997, a negligible change.
Selling, General and Administrative Expenses. Total selling, general and
administrative ("SG&A") expenses increased 15.1% to $7.1 million for the three
months ended June 30, 1998 as compared to $6.2 million for the same period in
1997. The increase in costs was due to increases in both professional and
administrative personnel necessary to support the Company's growth, marketing
and proposal preparation expenditures to pursue further growth and the
additional expenses related to operating as a public company. As a percentage
of revenues, SG&A expenses decreased to 11.6% for the three months ended June
30, 1998 from 17.2% for the same period in 1997.
Stock Option Compensation Expense and Acquisition Expense. During the
three months ended June 30, 1998, the Company incurred $1.8 million of
non-recurring expenses in connection with the merger with DMG. These expenses
consisted of legal, audit, broker, trustee and other expenses and the
acceleration of expenses related to stock appreciation rights for DMG employees
totaling $0.8 million. During the three months ended June 30, 1997, the
Company, in connection with its IPO, recognized a non-recurring compensation
expense of $5.7 million for stock options granted to employees.
Interest and Other Income. The increase in interest and other income to
$0.4 million for the three months ended June 30, 1998 as compared to $0.1
million for the same period in 1997 was due to the increase in invested funds
which were generated as a result of the IPO.
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 until June 12, 1997, the day prior to the completion of the
initial public offering. 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 June 30,
1998 was $2.5 million as compared to $0.9 million for the three months ended
June 30, 1997. The provision for income taxes for the three months ended June
30, 1998 consisted of state and federal income tax based on an estimated
annual income tax rate of 40%. Tax expense for the three months ended June 30,
1997 included a deferred tax charge of $2.6 million for the cumulative
differences between the financial reporting and income tax basis of certain
assets and liabilities at June 12, 1997 and a deferred tax benefit of $2.1
million related to stock option compensation expense for options granted to
employees.
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
Revenues. Total contract revenues increased 30.6% to $162.1 million for
the nine months ended June 30, 1998 as compared to $124.2 million for the same
period in 1997. Government Operations Group revenues increased 30.2% to $96.8
million for the nine months ended June 30, 1998 from $74.4 million for the same
period in 1997. For the nine months ended June 30, 1998, revenues from the SSA
Contract were $0 as compared to $31.6 million for the same period in 1997.
Excluding the SSA Contract, Government Operations Group revenues increased
126.5% to $96.8 million for the nine months ended June 30, 1998 from $42.7
million for the same period in 1997. This increase was due to an increase in
the number of contracts in the Child Support, Managed Care Enrollment, and
Welfare Reform divisions of the Government Operations Group. Consulting Group
revenues increased 31.1% to $65.3 million for the nine months ended June 30,
1998 from $49.8 million for the same period in 1997. The increase was due to
revenues totaling $7.2 million resulting from the Spectrum Consulting
companies, which were combined with the Company in a transaction accounted for
as a pooling of interests effective January 1, 1998, and new contracts secured
by the Company.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Total gross profit increased 26.2% to $40.9 million for the nine
months ended June 30, 1998 as compared to $32.4 million for the same period in
1997. Government Operations Group gross profit increased 24.5% to $17.7
million for the nine months ended June 30, 1998 from $14.2 million for the nine
months ended June 30, 1997. As a percentage of revenues, Government Operations
- 9 -
<PAGE> 10
Group gross profit decreased to 18.3% for the nine months ended June 30, 1998
from 19.1% for the same period in 1997. The decrease was due to anticipated
lower gross profit margins on certain Managed Care Enrollment contracts which
were begun during the quarter ended March 31, 1998. These contracts are
expected to deliver normal Government Operations Group gross profit margins in
subsequent periods. Consulting Group gross profit increased 27.5% to $23.2
million for the nine months ended June 30, 1998 from $18.2 million for the same
period in 1997 principally due to the increased revenues. As a percentage of
revenues, Consulting Group gross profit decreased to 35.5% for the nine months
ended June 30, 1998 from 36.5% for the same period in 1997. This decrease was
due primarily to one contract which, for competitive reasons, was bid using
lower margins.
Selling, General and Administrative Expenses. Total selling, general and
administrative ("SG&A") expenses increased 32.1% to $23.8 million for the nine
months ended June 30, 1998 as compared to $18.0 million for the same period in
1997. As a percentage of revenues, SG&A expenses increased to 14.7% for the
nine months ended June 30, 1998 from 14.5% for the same period in 1997. The
increase in costs was due to increases in both professional and administrative
personnel necessary to support the Company's growth, marketing and proposal
preparation expenditures to pursue further growth and the additional expenses
related to operating as a public company.
Stock Option Compensation Expense and Acquisition Expense. During the
nine months ended June 30, 1998, the Company incurred $2.4 million of
non-recurring expenses in connection with the mergers with DMG and Spectrum.
These expenses consisted of legal, audit, broker, trustee and other expenses
and the acceleration of expenses related to stock appreciation rights for DMG
employees totaling $0.8 million. During the nine months ended June 30, 1997,
the Company recognized a non-recurring compensation expense of $5.9 million for
stock options granted to employees.
Interest and Other Income. The increase in interest and other income to
$1.2 million for the nine months ended June 30, 1998 as compared to a net
expense of $29 thousand for the same period in 1997 was due to the increase in
invested funds which were generated as a result of the IPO.
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 until June 12, 1997, when the initial public offering was
completed. . 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 nine months ended June 30, 1998
was $6.4 million as compared to $2.0 million for the nine months ended June 30,
1997. The provision for income taxes for the nine months ended June 30, 1998
consisted of state and federal income tax based on an estimated annual income
tax rate of 40%. Tax expense for the nine months ended June 30, 1997 included
a deferred tax charge of $2.6 million for the cumulative differences between
the financial reporting and income tax basis of certain assets and liabilities
at June 12, 1997 and a deferred tax benefit of $2.1 million related to stock
option compensation expense for options given to employees.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash used in operations for the nine months ended June 30,
1998 was $9.6 million as compared to $14.2 million cash provided by operations
for the nine months ended June 30, 1997. The decrease in cash provided by
operations during the nine months ended June 30, 1998 compared to the nine
months ended June 30, 1997 was primarily due to increases in accounts
receivable totalling $18.0 million caused by the increase in revenue volume,
the payment of income taxes totaling $4.4 million for the year ended September
30, 1997, and the payment by DMG of deferred compensation to employees
totalling $4.4 million, offset by other net changes in working capital.
Certain marketable securities were sold during the nine months ended June
30, 1998, generating $27.6 million in proceeds. These investments were sold to
provide general operating capital and the necessary cash to fund the cash used
in operations discussed previously 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
- 10 -
<PAGE> 11
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. Also, during the three
months ended March 31, 1998, Spectrum paid S Corporation Dividends totaling $620
based upon estimated taxable income through March 15, 1998.
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 $0.4 million at June
30, 1998. 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 June 30, 1998, the Company had $9.6 million available
under the Credit Facility.
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 will depend on the Company's profitability, its ability to
manage working capital requirements and its rate of growth.
IMPACT OF 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 June 30, 1998.
- 11 -
<PAGE> 12
- 12 -
<PAGE> 13
Part II. Other Information.
Item 1. Litigation.
On May 12, 1998, the Company acquired DMG, which currently operates as a
wholly-owned subsidiary of the Company. DMG is defending against two lawsuits.
In 1994, DMG was engaged as a consultant by underwriters of revenue bonds
issued by Superstition Mountains Community Facilities District No. 1 (the
"District") to finance construction of a waste water treatment plant in
Arizona. The bonds were later defaulted upon when the District declared
bankruptcy. Two actions arising out of those events were filed against Griffth
in the U.S. District Court for the District of Arizona, one filed on January
20, 1997 by Allstate Insurance Company (the "Allstate") against DMG and 13
other named defendants, and another filed on December 2, 1996 by the District
against DMG and nine other named defendants. The complaints allege that DMG
made false and misleading representations in the bond offering memorandum with
respect to the accuracy of certain financial projections made by the District
regarding its ability to service the bonds. Allstate seeks as damages the
principal amount of the face value of the bonds it purchased together with
accrued and unpaid interest; the District seeks actual and special damages,
prejudgment interest and costs. MAXIMUS intends to defend both of these actions
vigorously. However, a decision by the court in favor of either or both
plaintiffs could have a material adverse effect on MAXIMUS's business,
financial condition and results of operations.
Item 2. 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's net proceeds from the IPO were $53,804,000. The
Company used $9,300,000 of the net proceeds from the IPO during the three months
ended June 30, 1998 to fund the cash needs of DMG including the liquidation of
deferred compensation liabilities of approximately $4,400,000, the discharge of
a note payable to a bank in the amount of $1,400,000, payment of current
accounts payable totalling approximately $2,000,000, and general operating
capital.
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. The Company filed a Current Report on Form 8-K dated
May 12, 1998 reporting on the completion of the merger of DMG with and
into the Company and providing certain financial information in connection
therewith.
- 13 -
<PAGE> 14
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.
<TABLE>
<S> <C> <C>
MAXIMUS, INC.
Date: August 13, 1998 By: /s/ F. Arthur Nerret
--------------------------------------------------------------------
F. Arthur Nerret
Vice President, Finance and Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
</TABLE>
- 14 -
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10 Amendment No. 1, dated June 23, 1998, to the 1997 Employee Stock Purchase Plan.
27 Financial Data Schedules (EDGAR).
99 Important Factors Regarding Forward Looking Statements.
</TABLE>
- 15 -
<PAGE> 1
EXHIBIT 10
MAXIMUS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN
First Amendment
The MAXIMUS, Inc. 1997 Employee Stock Purchase Plan is hereby amended
by the First Amendment effective July 1, 1998 as follows:
1. Section 2 is amended in its entirety as follows:
"Subject to the provisions of Sections 7, 8 and 9 below, any
individual who is an eligible employee (as defined below) of the
Company, or any of its subsidiaries (as defined in Section 424(f) of
the Code), the employees of which are designated by the Board of
Directors as eligible to participate in the Plan, is eligible to
participate in any Offering of Shares (as defined in Section 3
below), made by the Company hereunder. Eligible employees shall
include each employee of the Company or participating subsidiary who:
(a) has completed at least six months of employment,
(b) is a "full-time employee," and
(c) who is not a "highly compensated employee."
For purposes of this Plan, a "full-time employee" is any employee
whose customary employment is 20 hours or more per week and five
months per year in the calendar year during which said Offering Date
(as defined in Section 3) occurs or in the calendar year immediately
preceding such year. A "highly compensated employee" is any employee
who is a 5% owner (as defined in Section 416(i)(1) of the Code) of
the Company or participating subsidiary during the calendar year
during which the Offering Date occurs or the immediately preceding
calendar year or an employee who earned more than $80,000 (as
adjusted for inflation) in the calendar year immediately preceding
the Offering Date."
2. Section 4 is hereby amended in its entirety as follows:
"The price per share for each grant of rights hereunder shall be
eighty-five percent (85%) of the fair market value of a Share on the
date such right is exercised. At its discretion, the Board of
Directors may determine a higher price for a grant of rights."
3. Section 5(b) is hereby amended in its entirety as follows:
"(b) The method of payment for Shares purchased upon exercise of
rights granted hereunder shall be through regular payroll deductions,
as determined by the Board of Directors. All payments for Shares
purchased upon exercise of rights hereunder shall be from an eligible
employee's basic or regular compensation, and shall not be permitted
from lump sum payments, bonuses, overtime, vacation payouts,
severance pay. No interest shall be paid upon payroll deductions
unless specifically provided for by the Board of Directors."
1
<PAGE> 2
4. Section 5(c) is hereby amended in its entirety as follows:
"(c) Any payments received by the Company from a participating
employee and not utilized for the purchase of Shares upon exercise of
a right granted hereunder shall be promptly returned to such employee
by the Company after termination of the right to which the payment
relates or, if the participating employee, elects to participate in
the next Offering of Shares, applied toward of the purchase of shares
in the next Offering."
Executed this 23rd day of June, 1998.
MAXIMUS, INC.
By: /s/ F. Arthur Nerret
--------------------------------
Vice President, Finance
2
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 19,988 6,903
<SECURITIES> 13,318 40,812
<RECEIVABLES> 66,047 44,462
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 106,385 101,020
<PP&E> 8,425 7,470
<DEPRECIATION> (4,179) (3,626)
<TOTAL-ASSETS> 111,933 107,107
<CURRENT-LIABILITIES> 33,426 26,313
<BONDS> 0 0
0 0
0 0
<COMMON> 82,922 73,560
<OTHER-SE> (4,415) (17,372)
<TOTAL-LIABILITY-AND-EQUITY> 111,933 107,107
<SALES> 162,116 124,163
<TOTAL-REVENUES> 162,116 124,163
<CGS> 121,232 91,763
<TOTAL-COSTS> 121,232 91,763
<OTHER-EXPENSES> 26,172 23,887
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 15,946 8,484
<INCOME-TAX> 6,378 1,989
<INCOME-CONTINUING> 9,568 6,495
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,568 6,495
<EPS-PRIMARY> .57 .51
<EPS-DILUTED> .56 .50
</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 June 30, 1998 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 June 30, 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.
- 3 -
<PAGE> 4
Many 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. While the Company was able to generate additional
revenues to replace the revenues received under the SSA Contract, no assurance
can be given that the Company will be able to generate additional revenues in
future periods in amounts sufficient to replace current contracts, if canceled.
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 Federal Services Division, Louis E. Chappuie, President of the Company's
DMG-MAXIMUS subsidiary, Susan D. Pepin, President of the Systems Planning and
Integration Division, Lynn P. Davenport, President of the Human Services
Division, George C. Casey, President of the Spectrum Division, and John Parker,
an Executive Vice President of the Company, such agreements are terminable under
certain conditions. Other than these nine 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.
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
- 4 -
<PAGE> 5
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 OF ACQUISITION STRATEGY; RISKS OF COMPLETED ACQUISITIONS
The Company has expanded and intends to continue to expand its
operations, breadth of service offerings and geographic scope through the
acquisition of related businesses. The Company has a limited history of making
such acquisitions. To date, the Company has acquired Spectrum and DMG in March
and May 1998, respectively, and is in the process of integrating the operations
of these companies. There can be no assurance that the Company will be able to
continue to identify, acquire and manage additional businesses profitably or
integrate successfully any acquired businesses into the Company without
incurring substantial expenses, delays or other operational or financial
problems, if at all. 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 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
- 5 -
<PAGE> 6
DMG-MAXIMUS litigation. On May 12, 1998, the Company acquired DMG,
which currently operates as a wholly-owned subsidiary of the Company. DMG is
defending against two lawsuits. In 1994, DMG was engaged as a consultant by
underwriters of revenue bonds issued by Superstition Mountains Community
Facilities District No. 1 (the "District") to finance construction of a waste
water treatment plant in Arizona. The bonds were later defaulted upon when the
District declared bankruptcy. Two actions arising out of those events were filed
against Griffth in the U.S. District Court for the District of Arizona, one
filed on January 20, 1997 by Allstate Insurance Company (the "Allstate") against
DMG and 13 other named defendants, and another filed on December 2, 1996 by the
District against DMG and nine other named defendants. The complaints allege that
DMG made false and misleading representations in the bond offering memorandum
with respect to the accuracy of certain financial projections made by the
District regarding its ability to service the bonds. Allstate seeks as damages
the principal amount of the face value of the bonds it purchased together with
accrued and unpaid interest; the District seeks actual and special damages,
prejudgment interest and costs. MAXIMUS intends to defend both of these actions
vigorously. However, a decision by the court in favor of either or both
plaintiffs could have a material adverse effect on MAXIMUS's business, financial
condition and results of operations.
Suit by Former Officer. The Company is currently defending a lawsuit
brought by a former officer, director and shareholder of the Company 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
failed to disclose material information to him regarding the potential value of
his shares. The claimant seeks damages in excess of $10 million. The Company
does not believe that this action will have a material adverse effect on its
business and intends to defend this action vigorously. However, given the early
stage of this litigation, no assurance may be given that the Company will be
successful in its defense.
Suit by Network Six. The Company is currently defending a lawsuit
that was commenced against it and other third party defendants by Network Six,
Inc. ("Network Six"). The complaint alleges, among other things, that the
Company, which had been engaged by the State of Hawaii to monitor the
implementation of a statewide automated child support system, tortiously
interfered with and abetted Hawaii in the alleged breach of the state's
development and implementation services contract with Network Six. The Company
believes that Network Six's claims are without factual or legal merit and
intends to defend this action vigorously . However, given the early stage of
this litigation, no assurance may be given that the Company will be successful
in its defense and, a decision by the court in Network Six's favor, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
- 6 -
