<PAGE>
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UNITED STATES
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, 1999
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 AUGUST 4, 1999
----- -----------------------------
Common Shares, No Par Value 20,984,215
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<PAGE>
MAXIMUS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
September 30, 1998
Consolidated Statements of Income for the three months and nine months
ended June 30, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows for the nine months ended
June 30, 1999 and 1998 (unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 2. Use of Proceeds from Registered Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
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<PAGE>
MAXIMUS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, June 30,
1998 1999
------------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 19,403 $ 27,000
Marketable securities.............................................. 13,577 60,745
Accounts receivable, net........................................... 72,251 74,005
Notes receivable................................................... - 1,021
Costs and estimated earnings in excess of billings................. 10,654 14,040
Prepaid expenses and other current assets.......................... 1,188 3,264
------------- ---------
Total current assets........................................................ 117,073 180,075
Property and equipment at cost:
Land............................................................... 662 2,462
Building and improvements.......................................... 1,721 7,921
Office furniture and equipment..................................... 7,703 9,539
Leasehold improvements............................................. 214 253
------------- ---------
10,300 20,175
Less: Accumulated depreciation and amortization................... (5,433) (5,779)
-------- -------
Total property and equipment, net........................................... 4,867 14,396
Notes receivable............................................................ - 2,042
Deferred income taxes....................................................... 1,434 1,434
Intangible assets........................................................... 1,035 6,830
Other assets................................................................ 1,593 1,723
------------- ---------
Total assets................................................................ $126,002 $206,500
------------- ---------
------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 10,006 $ 7,770
Accrued compensation and benefits.................................. 15,877 13,471
Billings in excess of costs and estimated earnings................. 11,608 15,200
Note payable....................................................... 200 -
Income taxes payable............................................... 3 -
Deferred income taxes........................................... 901 901
Other current liabilities....................................... - 339
------------- ---------
Total current liabilities 38,595 37,681
Long-term debt.............................................................. 620 1,477
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Total liabilities........................................................... 39,215 39,158
Shareholders' equity:
Common stock, no par value; 30,000,000 shares authorized;
18,925,029 and 20,975,353 shares issued and outstanding at
September 30, 1998 and June 30, 1999, at stated amount............. 68,624 130,329
Retained earnings.................................................. 18,163 37,013
------------- ---------
Total shareholders' equity.................................................. 86,787 167,342
------------- ---------
Total liabilities and shareholders' equity.................................. $126,002 $206,500
------------- ---------
------------- ---------
</TABLE>
See notes to financial statements.
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<PAGE>
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
------------------------ ----------------------------
1998 1999 1998 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues........................................... $64,234 $84,168 $170,587 $232,804
Cost of revenues................................... 48,611 58,467 127,375 163,594
-------- -------- --------- --------
Gross profit....................................... 15,623 25,701 43,212 69,210
Selling, general and administrative expenses....... 7,381 13,932 24,448 37,977
Stock option compensation, merger, deferred
compensation and ESOP expenses..................... 1,972 152 3,346 270
-------- -------- --------- --------
Income from operations............................. 6,270 11,617 15,418 30,963
Interest and other income.......................... 391 965 1,476 2,240
-------- -------- --------- --------
Income before income taxes......................... 6,661 12,582 16,894 33,203
Provision for income taxes......................... 2,549 5,131 6,378 13,484
-------- -------- --------- --------
Net income......................................... $ 4,112 $ 7,451 $ 10,516 $19,719
-------- -------- --------- --------
-------- -------- --------- --------
Earnings per share:
Basic.............................................. $ 0.23 $ 0.36 $ 0.61 $ 0.97
-------- -------- --------- --------
-------- -------- --------- --------
Diluted............................................ $ 0.23 $ 0.35 $ 0.60 $ 0.95
-------- -------- --------- --------
-------- -------- --------- --------
Shares used in computing earnings per share:
Basic.............................................. 17,528 20,957 17,249 20,386
-------- -------- --------- --------
-------- -------- --------- --------
Diluted............................................ 17,919 21,257 17,640 20,731
-------- -------- --------- --------
-------- -------- --------- --------
</TABLE>
See notes to financial statements.
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<PAGE>
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended June 30,
---------------------------
1998 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $10,516 $19,719
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization....................................... 656 1,850
Change in assets and liabilities:
Accounts receivable, net............................................ (19,003) (722)
Costs and estimated earnings in excess of billings.................. (97) (3,393)
Prepaid expenses and other current assets........................... 739 (2,029)
Deferred income taxes............................................... (2,147) -
Other assets........................................................ (321) 918
Accounts payable.................................................... 2,907 (2,997)
Accrued compensation and benefits................................... (388) (2,119)
Billings in excess of costs and estimated earnings.................. 1,798 3,459
Income taxes payable................................................ (2,125) (3)
Other liabilities................................................... 156 996
--------- ---------
Net cash (used in) provided by operating activities................................... (7,309) 15,679
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate.................................................... - (8,000)
Acquisition of businesses.................................................. - (9,645)
Increase in cash resulting from immaterial poolings........................ 52 -
Purchase of property and equipment......................................... (818) (1,921)
Sale (Purchase) of marketable securities................................... 25,989 (48,722)
-------- ---------
Net cash provided by (used in) investing activities................................... 25,223 (68,288)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secondary offering, net of expenses.......................... - 61,010
S Corporation distributions................................................ (6,668) (756)
Issuance of common stock .................................................. 275 694
Payment for purchase of redeemable common stock ........................... (188) -
Repayment of debt.......................................................... (2,784) (773)
-------- --------
Net cash (used in) provided by financing activities................................... (9,365) 60,175
------- -------
Net increase in cash and cash equivalents............................................. 8,549 7,566
Cash flow adjustment for change in accounting period of DMG and CSI................... 467 31
Cash and cash equivalents, beginning of period........................................ 11,006 19,403
------- -------
Cash and cash equivalents, end of period.............................................. $20,022 $27,000
------- -------
------- -------
</TABLE>
See notes to financial statements.
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<PAGE>
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(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,
1999 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, 1997 and 1998 and for each
of the three years in the period ended September 30, 1998, that reflect
restatement for the merger with Control Software, Inc., included in the
Company's Current Report on Form 8-K, as filed with the Securities and Exchange
Commission on March 30, 1999.
2. SECONDARY PUBLIC OFFERING
The Company completed a secondary public offering ("secondary") of
Common Stock during December 1998. Of the 4,200,000 shares of Common Stock sold
in the secondary, 2,000,000 shares were sold by MAXIMUS, Inc. generating
$61,010,000 in proceeds to the Company, net of offering expenses, and 2,200,000
shares were sold by selling shareholders.
3. BUSINESS COMBINATIONS
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. This merger was accounted for as a pooling of
interests, and 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.
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. 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.
On August 31, 1998, the Company issued 1,137,420 shares of its
common stock in exchange for all of the outstanding common stock of Carrera
Consulting Group. 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 July 1, 1998.
On August 31, 1998, the Company issued 254,545 shares of its common
stock in exchange for all of the outstanding common stock of Phoenix Planning
& Evaluation, Ltd. 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 July 1, 1998.
On February 26, 1999, the Company issued 700,210 shares of its
common stock in exchange for all of the outstanding common stock of Control
Software, Inc. This merger was accounted for as a pooling of interests, and
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 CSI.
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<PAGE>
On March 31, 1999, the Company acquired Norman Roberts & Associates,
Inc. for $1,930,000. In conjunction with the purchase, the Company recorded
intangible assets of $1,880,000.
On June 1, 1999, the Company acquired Unison Consulting Group, Inc. for
$7,074,000. In conjunction with the purchase, the Company recorded intangible
assets of $4,979,000.
4. 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 including negligence and tortious interference.
The Company believes Network Six's claims are without merit and intends to
defend this action vigorously. 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 believes these claims are without merit and intends to
defend the matter vigorously. The Company does not believe that this action will
have a material adverse effect on the Company's financial condition or results
of operations and has not accrued for any loss related to this action.
In January 1997, a lawsuit was filed against a number of defendants,
including DMG, by a purchaser of municipal bonds. DMG had prepared two reports
rendering an opinion on the anticipated debt service coverage of the revenue
bonds for the first five years of operation of the sewer project by Superstition
Mountain Community Facilities District No. 1 (the "District"). The District was
unable to meet its debt service obligations and filed bankruptcy. The purchaser
of the Revenue Bonds, Allstate Insurance Company, has sued a number of
defendants, including DMG, for damages of $32.1 million which is the face value
of the revenue bonds, plus interest. The District also filed a lawsuit against
DMG seeking damages, which suit has been consolidated with the purchaser's
action. DMG believes these claims are without merit and intends to defend
against these claims vigorously. The Company does not believe that this action
will have a material adverse effect on the Company's financial condition or
results of operations and has not accrued for any loss related to these claims.
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.
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<PAGE>
5. EARNINGS PER SHARE
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,
1998 1999 1998 1999
---------------------- -------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 4,112 $ 7,451 $10,516 $19,719
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding 17,528 20,957 17,249 20,386
Stock options 391 300 391 345
------- ------- ------- -------
Denominator for dilutive earnings per share 17,919 21,257 17,640 20,731
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic $ 0.23 $ 0.36 $ 0.61 $ 0.97
------- ------- ------- -------
------- ------- ------- -------
Diluted $ 0.23 $ 0.35 $ 0.60 $ 0.95
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
6. SEGMENT INFORMATION (QUARTER ENDED JUNE 30)
The following table provides certain financial information for each business
segment:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1998 1999 1998 1999
---------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues:
Government Operations $36,844 $47,427 $ 96,805 $128,788
Consulting 27,390 36,741 73,782 104,016
------- ------- -------- --------
Total $64,234 $84,168 $170,587 $232,804
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1998 1999 1998 1999
---------------------- -------------------------
<S> <C> <C> <C> <C>
Income From Operations
Government Operations $ 3,132 $ 4,773 $ 7,207 $11,767
Consulting 3,138 6,844 8,211 19,196
------- ------- ------- -------
Total $ 6,270 $11,617 $15,418 $30,963
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company provides program management and consulting services primarily
to government 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
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<PAGE>
welfare-to-work and job readiness, child support enforcement, managed care
enrollment and disability services. The Consulting Group provides consulting
services to state, county and local legislatures and government agencies,
including health and human services, law enforcement, parks and recreation,
taxation, housing, motor vehicles, labor and education agencies.
As an important part of the Company's growth strategy, it has completed
combinations with the following consulting firms: Spectrum Consulting Services,
Inc. and Spectrum Consulting Group, Inc. (collectively, "Spectrum") in March
1998; David M. Griffith & Associates, Ltd. ("DMG") in May 1998; Carrera
Consulting Group ("Carrera") and Phoenix Planning & Evaluation, Ltd. ("Phoenix")
in August 1998; and Control Software, Inc. ("CSI") in February 1999, all of
which were accounted for as poolings of interests combinations, and Norman
Roberts & Associates, Inc. ("Norman Roberts") in March 1999, and Unison
Consulting Group, Inc. ("Unison") in June 1999, accounted for as purchases. See
"Business Combinations." Prior year amounts have been restated to reflect the
combinations with DMG and CSI. The Spectrum, Carrera and Phoenix combinations
were accounted for as immaterial poolings of interests and, accordingly, the
Company's previously issued financial statements were not restated to reflect
these combinations.
The Company's revenues are generated from contracts with various payment
arrangements, including: (i) costs incurred plus a fixed fee ("cost-plus"); (ii)
fixed-price; (iii) performance-based criteria; and (iv) time and materials
reimbursement (utilized primarily by the Consulting Group). For the fiscal year
ended September 30, 1998, revenues from these contract types were approximately
23%, 46%, 17% and 14%, respectively, of total revenues. Traditionally, federal
government contracts have been cost-plus and a majority of the contracts with
state and local government agencies have been fixed-price and performance-based.
Fixed price and performance-based contracts generally offer higher margins but
typically involve more risk than cost-plus or time and materials reimbursement
contracts because the Company is subject to the risk of potential cost overruns
or inaccurate revenue estimates.
The Government Operations Group's contracts generally 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. As of September 30, 1998, the
Company's average Government Operations contract duration was 3 1/2 years. The
Company's Consulting Group contracts have performance durations ranging from a
few weeks to a few years. Indicative of the long-term nature of the Company's
engagements, approximately 60% of the Company's fiscal 1998 revenues were in
backlog as of September 30, 1997.
The Company's most significant expense is cost of revenues, which consists
primarily of project-related employee salaries and benefits, subcontractors,
computer equipment and travel expenses. The Company's ability to accurately
predict personnel requirements, salaries and other costs as well as to
effectively manage a project or achieve certain levels of performance can have a
significant impact on the service costs related to the Company's fixed price and
performance-based contracts. Service cost variability has little impact on
cost-plus arrangements because allowable costs are reimbursed by the client. The
profitability of the Consulting Group's contracts is largely dependent upon the
utilization rates of its consultants and the success of its performance-based
contracts.
Selling, general and administrative expenses consist of management,
marketing and administration costs including salaries, benefits, travel,
recruiting, continuing education and training, facilities costs, printing,
reproduction, communications and equipment depreciation.
BUSINESS COMBINATIONS
As part of its growth strategy, the Company expects to continue to pursue
complementary business combinations to expand its geographic reach, expand the
breadth and depth of its service offerings and enhance the Company's consultant
base. In furtherance of this growth strategy, the Company combined with four
consulting firms during 1998 and one firm during 1999 in transactions accounted
for as poolings of interests, and two firms during 1999 accounted for as
purchases.
As of March 16, 1998, the Company acquired all of the outstanding shares
of capital stock of Spectrum in exchange for 840,000 shares of Common Stock.
Spectrum, based in Austin, Texas, provides management consulting services that
focus on assisting public sector organizations in solving complex business
problems related to automation.
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<PAGE>
Spectrum's operations complement and expand the Company's existing information
technology and systems planning and integration consulting service offerings. At
the time of the combination, Spectrum had approximately 37 consultants and three
other employees.
As of May 12, 1998, the Company acquired all of the outstanding capital
stock of DMG in exchange for 1,166,179 shares of Common Stock. DMG, based in
Northbrook, Illinois, provides consulting services to state and local government
and other public sector clients throughout the United States. DMG's operations
complement the Company's existing management consulting and information
technology services and expand the Company's service offerings to include a
broad range of financial planning, cost management and various other consulting
services aimed at the public sector. At the time of the combination, DMG had
approximately 375 consultants and 40 other employees.
As of August 31, 1998, the Company acquired all of the outstanding shares
of capital stock of Carrera in exchange for 1,137,420 shares of Common Stock.
Carrera, based in Sacramento, California, provides consulting services that
focus on assisting public sector entities implement large-scale, software-based
human resource and financial systems. At the time of the combination, Carrera
had 78 consultants and eight other employees.
As of August 31, 1998, the Company acquired all of the outstanding shares
of capital stock of Phoenix in exchange for 254,545 shares of Common Stock.
Phoenix, based in Rockville, Maryland, provides consulting services to public
sector entities in planning, implementing and evaluating the utilization of
various electronic commerce technologies, such as electronic benefits transfer,
electronic funds transfer and electronic card technologies. At the time of the
combination, Phoenix had 11 consultants and three other employees.
As of February 26, 1999, the Company acquired all of the outstanding
shares of capital stock of CSI in exchange for 700,212 shares of Common Stock.
CSI, based in Wayne, Pennsylvania, provides fleet management software and
related services to public sector entities. At the time of the combination, CSI
had 46 employees.
On March 31, 1999, the Company acquired all of the outstanding shares of
capital stock of Norman Roberts for $1,930,000. Norman Roberts, based in Los
Angeles, California, provides executive search services for the public sector.
In conjunction with the purchase, the Company recorded intangible assets of
$1,880,000.
On June 1, 1999, the Company acquired all of the outstanding shares of
capital stock of Unison for $7,074,000. Unison, based in Chicago, Illinois,
provides financial consulting for major government owned airports. In
conjunction with the purchase, the Company recorded intangible assets of
$4,979,000.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of income data as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1998 1999 1998 1999
---------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues:
Government Operations Group ..................... 57.4% 56.4% 56.8% 55.3%
Consulting Group ................................ 42.6 43.6 43.2 44.7
Total revenues ................................ 100.0 100.0 100.0 100.0
Gross Profit:
Government Operations Group ..................... 17.6 20.0 18.3 19.3
Consulting Group ................................ 33.4 44.1 34.6 42.6
Total gross profit as a percent of revenue ...... 24.3 30.5 25.3 29.7
Selling, general and administrative expenses .... 11.5 16.6 14.3 16.3
Stock option compensation, merger, deferred
compensation and ESOP expenses .................. 3.1 0.2 2.0 0.1
------- ------- ------- -------
Income from operations .......................... 9.8 13.8 9.0 13.3
Interest and other income (expenses) ............ 0.6 1.1 0.9 1.0
------- ------- ------- -------
Income before income taxes ...................... 10.4 14.9 9.9 14.3
Provision for income taxes ...................... 4.0 6.1 3.7 5.8
------- ------- ------- -------
Net income ...................................... 6.4 8.9 6.2 8.5
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED
---------------------------------------------------------------
JUNE 30, 1998
-------------
REVENUES. Total contract revenues increased 31.0% to $84.2 million for the
--------
three months ended June 30, 1999 as compared to $64.2 million for the same
period in 1998. Government Operations Group revenues increased 28.7% to $47.4
million for the three months ended June 30, 1999 from $36.8 million for the same
period in 1998. This increase was due to an increase in the number of contracts
in three of the four divisions in the Government Operations Group. Consulting
Group revenues increased 34.1% to $36.7 million for the three months ended June
30, 1999 from $27.4 million for the same period in 1998. The revenue from
Carrera and Phoenix, which merged with MAXIMUS subsequent to June 1998 in
mergers accounted for as immaterial poolings of interests, and for which the
June 1998 quarter results were not restated, was $5.3 million for the June 1998
quarter. The revenue increase for the Consulting Group from the June 1998
quarter to the June 1999 quarter, including the $5.3 million from Carrera and
Phoenix in the June 1998 quarter, was 12.5%. This increase was due to an
increase in the number of contracts in the Consulting Group.
GROSS PROFIT. Total gross profit increased 64.5% to $25.7 million for
------------
the three months ended June 30, 1999 as compared to $15.6 million for the
same period in 1998. Government Operations Group gross profit increased 46.4%
to $9.5 million for the three months ended June 30, 1999 from $6.5 million
for the three months ended June 30, 1998. As a percentage of Government
Operations Group revenues, Government Operations Group gross profit increased
to 20.0% for the three months ended June 30, 1999 from 17.6% for the same
period in 1998. The increase was due to improved margins in three of the four
divisions of the Government Operations Group. The Consulting Group gross
profit increased 77.3% to $16.2 million for the three months ended June 30,
1999 from $9.1 million for the same period in 1998 due to the increased
revenues and an increased gross profit percentage. As a percentage of
Consulting Group revenues, Consulting Group gross profit increased to 44.1%
for the three months ended June 30, 1999 from 33.4% for the same period in
1998, due primarily to improved operating efficiencies within the DMG and CSI
divisions, and margins at the Carrera division which were greater than the
Group average margin, and which were not included in the June 1998 results as
the merger occurred subsequent to that date.
- 11 -
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and
--------------------------------------------
administrative ("SG&A") expenses increased 88.8% to $13.9 million for the three
months ended June 30, 1999 as compared to $7.4 million for the same period in
1998. The increase in SG&A costs was due to the increased size of the Company,
both in terms of revenue growth and the number of employees, which increased to
3,155 at June 30, 1999 from 2,682 at June 30, 1998. As a percentage of revenues,
SG&A expenses increased to 16.6% for the three months ended June 30, 1999 from
11.5% for the same period in 1998, primarily due to the establishment of a
Business Development unit at the end of fiscal year 1998, a significant increase
in the size and capability of the Information Services unit, and the incurrence
of expenses in connection with the integration of the merged companies into
MAXIMUS.
DEFERRED COMPENSATION AND ESOP EXPENSE. During the three months ended June
--------------------------------------
30, 1999, the Company incurred $0.2 million of expenses in connection with the
combination with Unison. During the three months ended June 30, 1998, the
Company incurred $2.0 million of expenses in connection with the merger with
DMG. These expenses consisted of legal, audit, broker, trustee and other
expenses, deferred compensation and ESOP plan expenses for the employees of DMG
and the acceleration of expenses related to stock appreciation rights for DMG
employees totaling $0.9 million. These plans were terminated after the merger
with DMG, which occurred in May 1998. Therefore, no expense for those plans was
incurred during the three months ended June 30, 1999.
INTEREST AND OTHER INCOME. The increase in interest and other income to
-------------------------
$1.0 million for the three months ended June 30, 1999 as compared to $0.4
million for the same period in 1998 was due to an increase in the average
invested funds. The increase in invested funds is due largely to the receipt of
proceeds of $61.0 million from the secondary public stock offering completed in
December 1998.
PROVISION FOR INCOME TAXES. The provision for income tax for the three
--------------------------
months ended June 30, 1999 was 40.8% of income before income taxes as compared
to 38.3% for the three months ended June 30, 1998. The difference in percentages
was due to differences in the amounts of certain expense items which are not
deductible for tax purposes between the two time periods.
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED
-------------------------------------------------------------
JUNE 30, 1998
-------------
REVENUES. Total contract revenues increased 36.5% to $232.8 million for
--------
the nine months ended June 30, 1999 as compared to $170.6 million for the
same period in 1998. Government Operations Group revenues increased 33.0% to
$128.8 million for the nine months ended June 30, 1999 from $96.8 million for
the same period in 1998. This increase was due to an increase in the number
of contracts in three of the four divisions in the Government Operations
Group. Consulting Group revenues increased 41.0% to $104.0 million for the
nine months ended June 30, 1999 from $73.8 million for the same period in
1998. The revenue from Spectrum, which merged with MAXIMUS in March 1998, and
Carrera and Phoenix, which merged with MAXIMUS in August 1998 in mergers
accounted for as immaterial poolings of interests, and for which the results
for the periods prior to the mergers were not restated, was $13.7 million for
the nine months ended June 1998. The revenue increase for the Consulting
Group at the nine months ended June 1999 from the nine months ended June
1998, including the $13.7 million from Spectrum, Carrera and Phoenix in the
nine months ended June 1998 was 18.9%. This increase was due to an increase
in the number of contracts in the Consulting Group.
GROSS PROFIT. Total gross profit increased 60.2% to $69.2 million for the
------------
nine months ended June 30, 1999 as compared to $43.2 million for the same period
in 1998. Government Operations Group gross profit increased 40.9% to $24.9
million for the nine months ended June 30, 1999 from $17.7 million for the nine
months ended June 30, 1998. As a percentage of Government Operations Group
revenues, Government Operations Group gross profit increased to 19.3% for the
nine months ended June 30, 1999 from 18.3% for the same period in 1998. The
increase was due primarily to the improvement in gross margin for the three
months ended June 30, 1999. The Consulting Group gross profit increased 73.5% to
$44.3 million for the nine months ended June 30, 1999 from $25.5 million for the
same period in 1998 due to the increased revenues and an increased gross profit
percentage. As a percentage of Consulting Group revenues, Consulting Group gross
profit increased to 42.6% for the nine months ended June 30, 1999 from 34.6% for
the same period in 1998, due primarily to improved operating efficiencies within
the DMG and CSI divisions, and margins at the Carrera division which were
greater than the Group average margin, and which were not included in the June
1998 results as the merger occurred subsequent to that date.
- 12 -
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and
--------------------------------------------
administrative ("SG&A") expenses increased 55.3% to $38.0 million for the nine
months ended June 30, 1999 as compared to $24.4 million for the same period in
1998. The increase in SG&A costs was due to the increased size of the Company,
both in terms of revenue growth and the number of employees, which increased to
3,155 at June 30, 1999 from 2,682 at June 30, 1998. As a percentage of revenues,
SG&A expenses increased to 16.3% for the nine months ended June 30, 1999 from
14.3% for the same period in 1998, primarily due to the establishment of a
Business Development unit at the end of fiscal year 1998, a significant increase
in the size and capability of the Information Services unit, and the incurrence
of expenses in connection with the integration of the merged companies into
MAXIMUS.
DEFERRED COMPENSATION AND ESOP EXPENSE. During the nine months ended June
--------------------------------------
30, 1999, the Company incurred $0.3 million of expenses in connection with the
combinations with CSI and Unison. During the nine months ended June 30, 1998,
the Company incurred $3.3 million of expenses in connection with the mergers
with Spectrum and DMG. These expenses consisted of legal, audit, broker, trustee
and other expenses, deferred compensation and ESOP plan expenses for the
employees of DMG and the acceleration of expenses related to stock appreciation
rights for DMG employees totaling $0.9 million. These plans were terminated
after the merger with DMG, which occurred in May 1998. Therefore, no expense for
those plans was incurred during the nine months ended June 30, 1999.
INTEREST AND OTHER INCOME. The increase in interest and other income to
-------------------------
$2.2 million for the nine months ended June 30, 1999 as compared to $1.5 million
for the same period in 1998 was due to an increase in the average invested
funds. The increase in invested funds is due largely to the receipt of proceeds
of $61.0 million from the secondary public stock offering which was completed in
December 1998.
PROVISION FOR INCOME TAXES. The provision for income tax for the nine
--------------------------
months ended June 30, 1999 was 40.6% of income before income taxes as compared
to 37.8% for the nine months ended June 30, 1998. The difference in percentages
was due to differences in the amounts of certain expense items which are not
deductible for tax purposes between the two time periods.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended June 30, 1999, cash provided by operations
was $15.7 million as compared to cash used in operations of $7.3 million for
the nine months ended June 30, 1998. There are two principal reasons for the
increase in cash provided by operations. First, net income increased to $19.7
million from $10.5 million . Second, the increase in accounts receivable,
billed and unbilled, used $4.1 million of cash during the nine months ended
June 30, 1999, whereas during the nine months ended June 30, 1998 the cash
used by the increase in receivables was $19.1 million. Through effective
collection efforts, receivables have been reduced to 95 days of sales
outstanding at June 30, 1999 from 103 days of sales at September 30, 1998.
For the nine months ended June 30, 1999, cash used in investing activities
was $68.3 million as compared to $25.2 million cash provided by investing
activities for the nine months ended June 30, 1998. The $68.3 million used in
investing activities for the nine months ended June 30, 1999 primarily consisted
of the purchase of marketable securities totaling $48.7 million with the
proceeds from the secondary, $8.0 million for the purchase of a 60,000 square
foot office building in Reston, Virginia to serve as corporate headquarters ,
the purchase of Norman Roberts, an executive search firm, on March 31, 1999, for
$1.9 million, and the purchase of Unison, a government consulting firm, on June
1, 1999, for $7.1 million.
Cash provided by financing during the nine months ended June 30, 1999 was
$60.2 million, which consisted primarily of the $61.0 million of proceeds, net
of offering expenses, from the secondary stock offering completed in December
1998. During the nine months ended June 30, 1998, cash used in financing
activities consisted primarily of $5.7 million of S-corporation cash
distributions paid to the S-corporation shareholders, based upon the
undistributed earnings of the Company taxable to the shareholders through the
date of the IPO. Also, during the nine months ended June 30, 1998, consistent
with their past practices, Spectrum, Phoenix and CSI paid S-corporation cash
distributions totaling $1.0 million based upon pre-merger taxable income.
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 June
30, 1999. The
- 13 -
<PAGE>
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 did not use the Credit Facility to finance its working capital needs for
the nine months ended June 30, 1999 and 1998. At June 30, 1999, the Company had
$9.5 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.
YEAR 2000
The Company is aware of the issues that many computer, telecommunication
and other infrastructure systems will face as the millennium ("Year 2000")
approaches. The Company has audited its internal software and hardware and
implemented corrective actions where necessary to address Year 2000 problems.
The Company has also reviewed the software and hardware of, and implemented
corrective actions where necessary at its DMG, Carrera, Spectrum, Phoenix, CSI,
and Unison divisions. Although the assessment and remediation efforts have been
substantially completed, the Company continues to develop Year 2000 contingency
plans in the event a service not in the control of the Company experiences
processing problems or failures. The cost of these efforts has not been material
and the Company does not anticipate that future costs will be material or will
have a material impact on its operations or financial results. However, there
can be no assurance that the corrective actions or contingency plans will
eliminate all Year 2000 risk or that a Year 2000 problem will not have a
material adverse effect on the Company.
The Company also provides assistance in assessing, evaluating, testing and
certifying government client systems affected by Year 2000 problems, as well as
quality assurance monitoring of Year 2000 compliance conversions performed for
clients by third parties. Although the Company has attempted to contract to
provide such services in a manner that will minimize its liability for system
failures, there can be no assurance that the Company would not become subject to
legal proceedings which, if resolved in a manner adverse to the Company, could
have a material adverse effect on its financial condition.
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 inquires, management believes
that the Company would be able to continue to perform on such contracts without
material negative financial impact. However, the Company cannot be certain that
Year 2000 related systems failures in the information systems of clients will
not occur and, if such failures occur, that they will not interfere with the
Company's ability to properly manage a contracted project and result in a
material adverse effect on the Company's business, financial condition and
results of operations.
While the Company believes that it has addressed all material Year 2000
problems, there are a number of risks associated with Year 2000, only some of
which are within the control of the Company. These risks include unforeseen
difficulties in identifying and correcting Year 2000 problems, an incomplete
audit of internal hardware and software, and the failure of one or more
government clients to adequately address the Year 2000 problem. The Company's
Year 2000 efforts are meant to help manage and mitigate these risks.
The Company is developing and intends to adopt contingency plans, if
deemed necessary, to address any issues raised as it completes remedial work
on its internal systems and assesses the state of readiness of its key
external government clients. As no specific instance of material Year 2000
non-compliance has been discovered to date, the Company has not yet adopted
any specific contingency plans to deal with Year 2000 issues.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence and strategies and the Company's expectations regarding its
ability to obtain future contracts, expand its market opportunities or attract
highly-skilled employees, are forward looking statements that involve risks and
uncertainties. These risks and uncertainties include legislative changes and
political developments adverse to the privatization of the provision of
government services; risks related to completed or future acquisitions;
opposition from government employee unions; reliance on key executives; impact
of competition from similar companies; and legal, economic and other risks
detailed in Exhibit 99 to this Quarterly Report on Form 10-Q for the period
ended June 30, 1999.
Part II. Other Information.
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.
Cumulatively through March 31, 1999, the Company used $44,737,000 of the net
proceeds, which was reported in previous Forms 10-Q and 10-K filed with the
SEC. During the quarter ended June 30, 1999, the Company used the remaining
$9,067,000 of the net proceeds from the IPO. Of that amount, $7,074,000 was
used to purchase the outstanding common stock of Unison Consulting Group, a
consulting firm, on June 1, 1999, discussed in the footnotes to the financial
statements contained in this Form 10-Q, and $1,993,000 was used to provide
general operating capital.
Item 6. Exhibits and Reports on Form 8-K.
- 14 -
<PAGE>
(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 Current Report on Form 8-K were filed by the Company
during the fiscal quarter ended June 30, 1999.
- 15 -
<PAGE>
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: August 13, 1999 By: /S/ F. ARTHUR NERRET
-----------------------
F. Arthur Nerret
Vice President, Finance, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
- 16 -
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedules (EDGAR)
99 Important Factors Regarding Forward Looking Statements. Filed herewith.
</TABLE>
- 17 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> JUN-30-1999 JUN-30-1998
<EXCHANGE-RATE> 1 1
<CASH> 27,000 20,022
<SECURITIES> 60,745 14,828
<RECEIVABLES> 74,005 68,706
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 180,075 110,605
<PP&E> 20,175 9,642
<DEPRECIATION> (5,779) (5,073)
<TOTAL-ASSETS> 206,500 116,918
<CURRENT-LIABILITIES> 37,681 36,291
<BONDS> 0 0
0 0
0 0
<COMMON> 130,329 65,711
<OTHER-SE> 37,013 14,916
<TOTAL-LIABILITY-AND-EQUITY> 206,500 116,918
<SALES> 232,804 170,587
<TOTAL-REVENUES> 232,804 170,587
<CGS> 163,594 127,375
<TOTAL-COSTS> 163,594 127,375
<OTHER-EXPENSES> 37,977 24,448
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 33,203 16,894
<INCOME-TAX> 13,484 6,378
<INCOME-CONTINUING> 19,719 10,516
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19,719 10,516
<EPS-BASIC> .97 .61
<EPS-DILUTED> .95 .60
</TABLE>
<PAGE>
EXHIBIT 99
IMPORTANT FACTORS REGARDING FORWARD LOOKING STATEMENTS
IN THIS EXHIBIT 99, "WE," "US," "OUR" AND "MAXIMUS" REFER TO MAXIMUS, INC. AND
ITS SUBSIDIARIES.
From time to time, we may make forward-looking public statements, such
as statements concerning our 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.
We wish to caution you not to place undue reliance on these
forward-looking statements which speak only as of the date on which they are
made. In addition, we wish to advise you that the factors listed below, as well
as other factors we have not currently identified, could affect our financial or
other performance and could cause our 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.
We will not undertake and specifically decline any obligation to
publicly release revisions to these forward-looking statements to reflect either
circumstances after the date of the statements or the occurrence of events which
may cause us to re-evaluate our forward-looking statements.
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act, we are hereby filing cautionary statements
identifying important factors that could cause our actual results to differ
materially from those projected in forward-looking statements made by us or on
our behalf.
RELIANCE ON GOVERNMENT CLIENTS
Substantially all of our clients are state or local government
authorities. To market our services to government clients, we are largely
required to respond to government requests for proposals ("RFPs"). To do so
effectively, we must estimate accurately our cost structure for servicing a
proposed contract, the time required to establish operations and likely terms of
the proposals submitted by competitors. We must also assemble and submit a large
volume of information within a RFP's rigid timetable. Our ability to respond
successfully to RFPs will greatly impact our business, and we cannot guarantee
that we will be awarded contracts through the RFP process or that our proposals
will result in profitable contracts.
RISKS ASSOCIATED WITH GOVERNMENT CONTRACTING
EARLY TERMINATION OF CONTRACTS. Many of our government contracts
contain base periods of one or more years, as well as option periods covering
more than half of the contract's potential duration. Government agencies
generally have the right not to exercise these option periods. A decision not to
exercise option periods could impact the profitability of some of our contracts.
Our contracts typically also contain provisions permitting a government client
to terminate the contract on short notice, with or without cause. The unexpected
termination of one or more significant contracts could result in significant
revenue shortfalls. The natural expiration of especially large contracts can
also present management challenges. If revenue shortfalls occur and are not
offset by corresponding reductions in expenses, our business could be adversely
affected. We cannot be certain if, when or to what extent a client might
terminate any or all of its contracts with us.
CONTRACTS SUBJECT TO AUDIT. The Defense Contract Audit Agency ("DCAA"),
and certain other government agencies, have the authority to audit and
investigate any government contracts. These agencies review a contractor's
performance on its contract, its pricing practices, its cost structure and its
compliance with applicable laws, regulations and standards. Any costs found to
be improperly allocated to a specific contract will not be reimbursed, while
costs already reimbursed must be refunded. Therefore, a DCAA audit could result
in a substantial adjustment to our revenue. No material
- 1 -
<PAGE>
adjustments resulted from audits completed through 1993, and we believe that
adjustments resulting from subsequent audits will not adversely affect our
business. If a government audit uncovers improper or illegal activities, a
contractor may be subject to 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.
DISCOURAGEMENT OF REVENUE CONSULTING BY FEDERAL OFFICIALS. To avoid
higher than anticipated demands for federal funds, federal government officials
occasionally discourage state and local authorities from engaging private
consultants to advise them on maximizing federal revenues. We cannot be certain
that state and local officials will not be dissuaded from engaging us for
revenue maximization services.
RELATIONSHIPS WITH POLITICAL CONSULTANTS. We occasionally engage
marketing consultants, including lobbyists, to establish and maintain
relationships with elected officials and appointed members of government
agencies. The effectiveness of these consultants may be reduced or eliminated if
a significant political change occurs. Implementation of term limits for certain
elected officials, for instance, would require us to confront political change
on a more regular basis. Because we cannot be certain that we will successfully
manage our relationships with political consultants, our business may be
adversely affected.
RISKS INVOLVED IN MANAGING GOVERNMENT PROJECTS
RISK OF FIXED-PRICE AND PERFORMANCE-BASED CONTRACTS. We derived
approximately 18% of our fiscal 1998 revenues from fixed-price contracts and
approximately 46% of our fiscal 1998 revenues from performance-based contracts.
For fixed-price contracts, we receive our fee if we meet specified objectives or
achieve certain units of work. Those objectives might include placing a certain
number of welfare recipients into jobs, collecting target amounts of child
support payments, or completing a particular number of managed care enrollments.
For performance-based contracts, we receive our fee on a per-transaction basis.
Such contracts include, for example, child support enforcement contracts, in
which we often receive a fee based on the amount of child support collected. To
earn a profit on these contracts, we rely upon accurately estimating costs
involved and assessing the probability of meeting the specified objectives,
realizing the expected units of work, or completing individual transactions,
within the contracted time period. We recognize revenues on these contracts on a
"costs incurred" method. Therefore, we review these contracts quarterly and
adjust revenues to reflect our current expectations. These adjustments affect
the timing and amount of revenue recognized and could adversely affect our
financial results. If we fail to estimate accurately the factors upon which we
base our contract pricing, then we may have to report a decrease in revenues or
incur losses on these contracts.
FAILURE TO MEET CONTRACT PERFORMANCE STANDARDS. Our inability to
satisfy adequately our contractual obligations could adversely affect our
financial condition. Our contracts often require us to indemnify clients for our
failures to meet certain performance standards. Some contracts contain
liquidated damages provisions and financial penalties related to performance
failures. In addition, in order for our Government Operations Group to bid on
certain contracts, we are required to secure our indemnification obligations by
posting a cash performance bond or obtaining a letter of credit. If a claim is
made against a performance bond or letter of credit, the issuer of the bond
could demand higher premiums. Increased bond premiums would adversely affect our
earnings and could limit our ability to bid for future contracts. In addition, a
failure to meet our client's expectations when performing on a contract could
materially and adversely affect our reputation, which, in turn, would impact our
ability to compete for new contracts.
TERMINATION OF LARGE CONTRACTS. Upon termination or expiration of a
contract between our Government Operations Group and a state or local
government, we have to evaluate whether, and in what capacity, we can continue
employing persons that formerly serviced the contract. Unless we enter into a
new contract using those same employees or otherwise re-assign them, their
employment must be terminated. The reassignment or termination of a large number
of employees makes significant demands on our management and administrative
resources.
RELATIONSHIPS WITH GOVERNMENT ENTITIES. To facilitate our ability to
prepare bids in response to RFPs, we rely in part on establishing and
maintaining relationships with officials of various government entities and
agencies. These relationships enable us to provide informal input and advice to
the government entities and agencies prior to the development of an RFP. Because
we cannot be certain that we will successfully manage our relationships with
government entities and agencies, our business may be adversely affected.
- 2 -
<PAGE>
SIGNIFICANT START UP COSTS. When we are awarded a contract to manage a
government program, our Government Operations Group can incur significant
start-up expenses before we receive any contract payments. These expenses
include leasing office space, purchasing office equipment and hiring personnel.
As a result, in certain large contracts where the government does not fund
program start-up costs, we are required to invest significant sums of money
prior to receiving related contract payments.
LEGISLATIVE CHANGE AND POLITICAL DEVELOPMENTS
DEPENDENCE ON LEGISLATIVE PROGRAMS. The market for our services is
dependent largely on federal and state legislative programs. These programs can
be modified or amended at any time by acts of federal and state governments. For
example, in 1996 Congress amended the Social Security Act to eliminate social
security and supplemental income benefit payments based solely on drug and
alcohol disabilities. That amendment resulted in the termination of our
substantial contract with the federal Social Security Administration, which
related to the referral and monitoring of the treatment of recipients of these
benefits. Future legislative changes that we do not anticipate or respond to
effectively could occur and adversely affect our business.
DEPENDENCE ON WELFARE REFORM ACT. We expect that the Welfare Reform Act
and other federal and state initiatives will continue to encourage long-term
changes in the nation's welfare system. Part of our growth strategy includes
aggressively pursuing these opportunities by seeking new contracts to administer
and new health and welfare programs to manage. However, there are many opponents
of welfare reform. As a result, future progress in the area of welfare reform is
uncertain. The repeal of the Welfare Reform Act, in whole or in part, could
adversely affect our business. Also, we cannot be certain that additional
reforms will be proposed or enacted, or that previously enacted reforms will not
be challenged, repealed or invalidated.
RESTRICTIONS ON PRIVATIZATION. Under current law, in order to privatize
certain functions of government programs, the federal government must grant a
consent and/or waiver to the petitioning state or local agency. For example, in
May 1997 the Department of Health and Human Services refused to grant a waiver
to the State of Texas permitting private corporations, rather than public
employees, to decide eligibility of applicants for Food Stamps and Medicaid
benefits. Although MAXIMUS did not bid on the Texas projects, we may face
similar obstacles in pursuing future health and human services contracts.
RISKS OF ACQUISITION STRATEGY; RISKS OF COMPLETED ACQUISITIONS
Our business strategy includes expanding our operations, breadth of
service offerings and geographic scope by acquiring or combining with related
businesses. To date, we have combined with seven consulting firms and are still
in the process of integrating their operations. We cannot be certain that we
will be able to continue to identify, acquire and manage additional businesses
profitably or integrate them successfully without incurring substantial
expenses, delays or other problems. Furthermore, business combinations may
involve special risks, including:
- -- Diversion of management's attention
- -- Loss of key personnel
- -- Assumption of unanticipated legal liabilities
- -- Amortization of acquired intangible assets
- -- Dilution to our earnings per share
Also, client dissatisfaction or performance problems at an acquired
firm could materially and adversely affect our reputation as a whole.
Furthermore, we cannot be certain that acquired businesses will achieve
anticipated revenues and earnings.
CHALLENGES RESULTING FROM GROWTH
- 3 -
<PAGE>
Sustaining growth has placed significant demands on management as well
as on our administrative, operational and financial resources. To manage our
growth, we must continue to improve our operational, financial and management
information systems and expand, motivate and manage our workforce. However, our
growth and management of large-scale health and human services programs must not
come at the expense of providing quality service and generating reasonable
profits. We cannot be certain that we will continue to experience growth or
successfully manage it.
OPPOSITION FROM GOVERNMENT UNIONS
Our success derives in part from our ability to win profitable
contracts to administer and manage health and human services programs
traditionally administered by government employees. Government employees,
however, typically belong to labor unions with considerable financial resources
and lobbying networks. Unions are likely to continue to apply political pressure
on legislators and other officials seeking to outsource government programs. For
example, union lobbying was instrumental in influencing the Department of Health
and Human Services to deny a petition to allow private corporations to make Food
Stamp and Medicaid eligibility determinations in Texas. Union opposition may
slow welfare reform and result in fewer opportunities for MAXIMUS to service
government agencies.
RELIANCE ON KEY EXECUTIVES
The abilities of our executive officers, including David V. Mastran and
Raymond B. Ruddy, and our senior managers to generate business and execute
projects successfully is important to our success. While we have employment
agreements with certain of our executive officers, these agreements are
terminable under certain conditions. The loss of a key executive could impair
our ability to secure and manage engagements. To limit some of this risk, we
have obtained key-man life insurance policies on Dr. Mastran and Mr. Ruddy in
the amounts of $6,100,000 and $3,950,000, respectively.
ATTRACTION AND RETENTION OF EMPLOYEES
Our delivery of services is labor-intensive. When we are awarded a
government contract, we must quickly hire project leaders and case management
personnel. The additional staff also creates a concurrent demand for increased
administrative personnel. The success of our Government Operations Group and
Consulting Group requires that we 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
- -- Information technology professionals who have designed or implemented
complex information technology projects
Innovative, experienced and technically proficient individuals are in great
demand and are likely to remain a limited resource. We cannot be certain that we
can continue to attract and retain desirable executive officers and senior
managers. A failure to hire sufficient personnel on a timely basis could
adversely affect our business. The loss of significant numbers of executive
officers and senior managers could produce similar adverse consequences.
COMPETITORS; EFFECTS OF COMPETITION
INTENSIFICATION OF COMPETITION. Competition to provide certain program
management and consulting services to state and local government agencies has
intensified. Our Government Operations Group competes for program management
contracts with the following:
- -- Local non-profit organizations such as the United Way and Goodwill Industries
- -- Government services divisions of large organizations such as Andersen
Consulting, Lockheed Martin Corporation and Electronic Data Systems, Inc.
- -- Specialized service providers such as America Works, Inc., Policy Studies
Incorporated, and Benova, Inc.
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Our Consulting Group competes with:
- -- The consulting divisions of the "Big 5" accounting firms
- -- Electronic Data Systems, Inc.
Many of these companies are national and international in scope and have
greater resources than we have. Substantial resources could enable certain
competitors to initiate severe price cuts or take other measures in an effort to
gain market share. In addition, we may be unable to compete for a limited number
of large contracts because we may not be able to meet an RFP's requirement to
obtain and post large cash performance bonds. Also, in certain geographic areas,
we face competition from smaller consulting firms with established reputations
and political relationships. We cannot be certain that we will compete
successfully against our existing or any new competitors.
COMPETITION FROM FORMER EMPLOYEES. In addition to competition from existing
competitors, we may experience competition from former employees. Although we
have entered into non-competition agreements with some of our senior level
employees, we cannot be certain that a court would enforce these contracts.
Competition by former employees could adversely affect our business.
ADVERSE PUBLICITY
The nature of our contracts with state and local government authorities
frequently generates media attention. In particular, our management of health
and human services programs and revenue maximization services have occasionally
received negative media coverage. This negative coverage could influence
government officials and slow the pace of welfare reform. The media also focuses
its attention on the activities of political consultants engaged by us, even
when their activities are unrelated to our business. We may be subject to
adverse media attention relating to the activities of individuals who are not
under our control. In addition, we cannot assure that the media will accurately
cover our activities or that we will be able to anticipate and respond in a
timely manner to all media contacts. Inaccurate or misleading media coverage or
our failure to manage adverse coverage could adversely affect our reputation.
LITIGATION
DMG LITIGATION. On May 12, 1998, we acquired DMG. DMG is currently
defending against a lawsuit arising out of consultation services provided to
underwriters of revenue bonds issued by Superstition Mountains Community
Facilities District No. 1 (the "District") in 1994. The bonds were issued to
finance construction of a water waste treatment plant in Arizona. However,
the District was unable to service the bonds and eventually declared
bankruptcy. The District voluntarily came out of bankruptcy and is currently
operating under a forbearance agreement with the sole purchaser of the bonds,
Allstate Insurance Company ("Allstate"). A consolidated action arising out of
these events is pending in the U.S. District Court for the District of
Arizona against DMG and thirteen other named defendants. The parties making
claims against DMG in the lawsuit, Allstate and the District, allege that DMG
made false and misleading representations in the reports DMG prepared
included among the exhibits to the bond offering memoranda. DMG's reports
concerned certain financial projections made by the District regarding its
ability to service the bonds. Allstate seeks as damages $32.1 million, the
principal amount of bonds it purchased together with accrued and unpaid
interest; the District seeks actual and special damages, prejudgment interest
and costs. DMG believes these claims are without merit and intends to defend
against these actions vigorously. We do not believe these actions will have a
material adverse effect on our financial condition or results of operations.
However, we cannot assure that we will be successful in defending this
lawsuit.
SUIT BY FORMER OFFICER. We are currently defending a lawsuit brought by a
former officer, director and shareholder alleging that, at the time he resigned
from MAXIMUS in 1996 and became obligated to sell his MAXIMUS shares back to the
Company, we failed to disclose to him material information regarding the
potential value of those shares. The former officer seeks damages in excess of
$10 million. We do not believe that this claim has merit and intend to oppose it
vigorously. We do not believe this action will have a material adverse effect on
our financial condition or results of operations. However, we cannot assure that
we will be successful in our defense.
SUIT BY NETWORK SIX. We are currently a third party defendant in a
lawsuit that was commenced against us by Network Six, Inc.
("Network Six"). We had been engaged by the State of Hawaii to monitor the
implementation of a
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statewide automated child support system being performed by Network Six. Network
Six alleges that we tortiously interfered with and abetted Hawaii in the alleged
breach of its contract with Hawaii. We believe that Network Six's claims are
without merit and intend to defend this action vigorously. We do not believe
that this action will have a material adverse effect on our financial condition
or results of operations. However, we cannot assure that we will be successful
in defending this lawsuit.
VARIABILITY OF QUARTERLY OPERATING RESULTS
A number of factors cause our revenues and operating results to vary from
quarter to quarter. These factors include:
- -- The progress of contracts
- -- The 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 awarded contracts
- -- The reactions of the market to announcements of potential acquisitions
- -- General economic conditions
Changes in the volume of activity and the number of contracts commenced or
completed during any quarter may cause significant variations in our operating
results because a relatively large amount of our expenses are fixed.
Furthermore, on occasion we incur greater operating expenses during the start-up
and early stages of significant contracts.
CONCENTRATION OF OWNERSHIP BY PRINCIPAL SHAREHOLDERS
Our executive officers own beneficially approximately 42% of our common
stock. Certain executive officers, who beneficially own approximately 35% of the
outstanding shares, have agreed to hold their shares until June 2001, subject to
certain exceptions. In addition, Mr. Ruddy has agreed to vote his shares of
common stock in a manner instructed by Dr. Mastran until September 30, 2001.
Together, Dr. Mastran and Mr. Ruddy beneficially own approximately 32% of our
common stock. As a result, these officers can exercise significant influence
over the outcome of matters requiring a shareholder vote, including the election
of the board of directors. This significant influence could delay or prevent a
change in control of the company, which could adversely affect the market price
of our common stock.
POSSIBLE VOLATILITY OF STOCK PRICE
MAXIMUS first publicly issued common stock on June 13, 1997 at $16.00 per
share in its initial public offering (the "IPO"). Between June 13, 1997 and June
30, 1999, the closing sale price has ranged from a high of $41.50 per share to a
low of $17.00 per share. The market price of our common stock could continue to
fluctuate substantially due to a variety of factors, including:
- -- Quarterly fluctuations in results of operations
- -- The failure to be awarded a significant contract on which we have bid
- -- The termination by a government client of a material contract
- -- The announcement of new services by competitors
- -- Acquisitions and mergers
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- -- Political and legislative developments adverse to the privatization of
government services
- -- Changes in earnings estimates by securities analysts
- -- Changes in accounting principles
- -- Sales of common stock by existing shareholders
- -- Negative publicity
- -- Loss of key personnel
Our ability to meet securities analysts' quarterly expectations may also
influence the market price of our common stock. In addition, overall volatility
has often significantly affected the market prices of securities for reasons
unrelated to a company's operating performance. In the past, securities class
action litigation has often been commenced against companies that have
experienced periods of volatility in the price of their stock. Securities
litigation initiated against us could cause us to incur substantial costs and
could lead to the diversion of management's attention and resources.
CERTAIN ANTI-TAKEOVER EFFECTS
Virginia law and our Articles of Incorporation and By-Laws include
provisions that may be deemed to have anti-takeover effects. These provisions
may delay, deter or prevent a takeover attempt that shareholders might consider
desirable. Our directors are divided into three classes and are elected to serve
staggered three-year terms. This structure could impede or discourage an attempt
to obtain control of the company. Shareholders of MAXIMUS do not possess the
power to take any action in writing without a meeting. In addition, Virginia law
imposes certain limitations and special voting requirements on affiliated
transactions. Furthermore, Virginia law denies voting rights to shares acquired
in control share acquisitions, unless granted by a shareholder vote.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
INTERNAL YEAR 2000 COMPLIANCE. We have audited our internal software,
hardware, and telephone systems and those of our acquired companies for Year
2000 compliance and have implemented corrective actions where necessary. The
MAXSTAR case management software used in all our major projects has been
upgraded to be Year 2000 compliant. All MAXSTAR-based applications have also
been reviewed and upgraded, where necessary. Although our audit and remediation
work has been substantially completed, we continue to monitor systems,
infrastructure and vendor performance and to develop contingency plans where
advisable. We are developing and intend to adopt contingency plans, if deemed
necessary, to address any issues raised as we complete remedial work on our
internal systems. As we have not discovered any specific instance of material
Year 2000 non-compliance to date, we have not yet adopted any specific
contingency plans to deal with Year 2000 issues. Our costs for these efforts
have not been material and we do not expect future costs to materially affect
our financial results. Nevertheless, we cannot be certain that all Year 2000
risks have been eliminated, and a Year 2000-related problem could have a
material adverse impact on our business.
SERVICES PROVIDED BY MAXIMUS AFFECTING CLIENTS' YEAR 2000 COMPLIANCE. We
assist in evaluating, testing and certifying government client systems affected
by Year 2000 problems. In addition, we provide quality assurance of Year 2000
compliance conversions performed by third parties for our clients. Although we
have attempted to minimize our liability for potential clients' system
failures, we cannot assure that we will not become subject to legal action if a
client sustains Year 2000 problems. If such legal action is brought and resolved
against us, we could suffer adverse effects on our business.
RELIANCE ON VENDORS' AND CLIENTS' YEAR 2000 COMPLIANCE. In order to
perform our government contracts, we rely to varying extents on information
processing performed by vendors, governmental agencies and entities with
which we contract. We have inquired about these parties' potential Year 2000
problems where necessary. Based on responses to these inquiries, our
management believes that we would be able to continue to perform contracts
without experiencing material negative financial impact. We are developing
and intend to adopt contingency plans, if deemed necessary, to address any
issues raised as we assess the state of readiness of our key external vendors
and government clients. As we have not discovered any specific instance of
material Year 2000 non-compliance to date, we have not yet adopted any
specific contingency plans to deal with Year 2000 issues. However, we cannot
assure that Year 2000 related failures in the information systems of vendors
or clients will not occur. Any system failures could interfere with our
ability to properly manage contracted projects and could adversely affect our
business.
UNCERTAINTIES RELATED TO INTERNATIONAL OPERATIONS
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Most of our international operations are currently paid for by the World
Bank and the U.S. Agency for International Development in U.S. dollars. However,
as we expand our operations into developing countries we may encounter a number
of additional risks. The risks to our potential expected international revenues
include:
- -- Adverse currency exchange rate fluctuations
- -- Inability to collect receivables
- -- Difficulty in enforcing contract terms through a foreign country's legal
system
Foreign countries could also impose tariffs, impose additional withholding
taxes or otherwise tax our foreign income.
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