<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 MARCH 31, 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 / /
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT MAY 13, 1999
----- ---------------------------
<S> <C>
Common Shares, No Par Value 20,948,591
</TABLE>
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<PAGE>
MAXIMUS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 1999 (unaudited) and September 30, 1998
Statements of Income for the three months and six months ended March
31, 1999 and 1998 (unaudited)
Statements of Cash Flows for the six months ended March 31, 1999 and
1998 (unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds from Registered Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
- 2 -
<PAGE>
MAXIMUS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 19,403 $ 24,657
Marketable securities .................................... 13,577 69,194
Accounts receivable, net ................................. 72,251 66,220
Costs and estimated earnings in excess of billings ....... 10,654 12,867
Prepaid income taxes ..................................... -- 1,706
Prepaid expenses and other current assets ................ 1,188 1,190
--------- ---------
Total current assets .............................................. 117,073 175,834
Property and equipment at cost:
Land ..................................................... 662 2,462
Building and improvements ................................ 1,721 7,921
Office furniture and equipment ........................... 7,703 8,133
Leasehold improvements ................................... 214 214
--------- ---------
10,300 18,730
Less: Accumulated depreciation and amortization ......... (5,433) (5,729)
--------- ---------
Total property and equipment, net ................................. 4,867 13,001
Deferred income taxes ............................................. 1,434 1,434
Intangible assets ................................................. 1,035 2,573
Other assets ...................................................... 1,593 2,818
--------- ---------
Total assets ...................................................... $ 126,002 $ 195,660
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 10,006 $ 9,239
Accrued compensation and benefits ........................ 15,877 13,189
Billings in excess of costs and estimated earnings ....... 11,608 12,511
Note payable ............................................. 200 --
Income taxes payable ..................................... 3 --
Deferred income taxes ................................. 901 901
--------- ---------
Total current liabilities ......................................... 38,595 35,840
Long-term debt, less current portion .............................. 620 454
--------- ---------
Total liabilities ................................................. 39,215 36,294
Shareholders' equity:
Common stock, no par value; 30,000,000 shares authorized;
18,925,029 and 20,944,437 shares issued and outstanding at
September 30, 1998 and March 31, 1999, at stated amount .. 68,624 129,804
Retained earnings ........................................ 18,163 29,562
--------- ---------
Total shareholders' equity ........................................ 86,787 159,366
--------- ---------
Total liabilities and shareholders' equity ........................ $ 126,002 $ 195,660
--------- ---------
--------- ---------
</TABLE>
See notes to financial statements.
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<PAGE>
MAXIMUS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ................................... $ 55,959 $ 76,290 $106,353 $148,636
Cost of revenues ........................... 41,117 52,894 78,764 105,127
-------- -------- -------- --------
Gross profit ............................... 14,842 23,396 27,589 43,509
Selling, general and administrative expenses 8,641 12,784 17,067 24,045
Stock option compensation, merger,
deferred compensation and ESOP expenses ... 907 118 1,374 118
-------- -------- -------- --------
Income from operations ..................... 5,294 10,494 9,148 19,346
Interest and other income .................. 548 881 1,085 1,275
-------- -------- -------- --------
Income before income taxes ................. 5,842 11,375 10,233 20,621
Provision for income taxes ................. 2,237 4,700 3,829 8,353
-------- -------- -------- --------
Net income ................................. $ 3,605 $ 6,675 $ 6,404 $ 12,268
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share:
Basic ...................................... $ 0.21 $ 0.32 $ 0.37 $ 0.61
-------- -------- -------- --------
-------- -------- -------- --------
Diluted .................................... $ 0.20 $ 0.31 $ 0.37 $ 0.60
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing earnings per share:
Basic ...................................... 17,528 20,944 17,105 20,101
-------- -------- -------- --------
-------- -------- -------- --------
Diluted .................................... 17,919 21,333 17,496 20,467
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See notes to financial statements.
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<PAGE>
MAXIMUS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 6,404 $ 12,268
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ................................ 434 625
Change in assets and liabilities:
Accounts receivable, net ..................................... (3,105) 4,243
Costs and estimated earnings in excess of billings ........... (2,586) (2,221)
Prepaid expenses and other current assets .................... 899 (10)
Prepaid income taxes ......................................... -- (1,706)
Deferred income taxes ........................................ (7) --
Other assets ................................................. 262 (747)
Accounts payable ............................................. 2,018 (926)
Accrued compensation and benefits ............................ 1,174 (2,397)
Billings in excess of costs and estimated earnings ........... 326 770
Income taxes payable ......................................... (3,026) (3)
Other liabilities ............................................ 48 141
-------- --------
Net cash provided by operating activities ...................................... 2,841 10,037
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate ............................................. -- (8,000)
Acquisition of businesses ........................................... -- (2,637)
Increase in cash resulting from immaterial poolings ................. 52 --
Purchase of property and equipment .................................. (302) (349)
Purchase of marketable securities ................................... 8,820 (54,107)
-------- --------
Net cash provided by (used in) investing activities ............................ 8,570 (65,093)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secondary offering, net of expenses ................... -- 61,010
S Corporation distributions ......................................... (6,668) (756)
Issuance of common stock ............................................ 38 170
Repayment of debt ................................................... (889) (145)
-------- --------
Net cash (used in) provided by financing activities ............................ (7,519) 60,279
-------- --------
Net increase in cash and cash equivalents ...................................... 3,892 5,223
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 ....................................... $ 15,365 $ 24,657
-------- --------
-------- --------
</TABLE>
See notes to financial statements.
- 5 -
<PAGE>
MAXIMUS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED MARCH 31, 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 six-month periods ended March 31,
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. ("DMG"). 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 December 1, 1998, the Company acquired contracts and certain
assets consisting primarily of computer equipment and office furniture from
Interactive Web Systems, Inc. for $707,000. In conjunction with this
transaction, the Company recorded intangible assets of $150,000.
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. ("CSI"). 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.
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.
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.
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<PAGE>
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.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income ................................ $ 3,605 $ 6,675 $ 6,404 $12,268
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding . 17,528 20,944 17,105 20,101
Stock options ............................. 391 389 391 366
------- ------- ------- -------
Denominator for dilutive earnings per share 17,919 21,333 17,496 20,467
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic ..................................... $ 0.21 $ 0.32 $ 0.37 $ 0.61
------- ------- ------- -------
------- ------- ------- -------
Diluted ................................... $ 0.20 $ 0.31 $ 0.37 $ 0.60
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
- 7 -
<PAGE>
6. SEGMENT INFORMATION (QUARTER ENDED MARCH 31,)
The following table provides certain financial information for each business
segment:
<TABLE>
<CAPTION>
Three Months Six Months
Ended March 31, Ended March 31,
Revenues: 1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Government Operations $ 32,189 $ 42,544 $ 59,961 $ 81,361
Consulting .......... 23,770 33,746 46,392 67,275
-------- -------- -------- --------
Total ................. $ 55,959 $ 76,290 $106,353 $148,636
-------- -------- -------- --------
-------- -------- -------- --------
Three Months Six Months
Ended March 31, Ended March 31,
Income From Operations: 1998 1999 1998 1999
-------- -------- -------- --------
Government Operations 2,500 4,428 4,075 6,995
Consulting .......... 2,794 6,066 5,073 12,351
-------- -------- -------- --------
Total ................. $ 5,294 $ 10,494 $ 9,148 $ 19,346
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
7. RECLASSIFICATION
Certain 1998 balance sheet amounts have been reclassified to conform
with 1999 presentation.
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 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 during the past year combinations with six 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, accounted for as a purchase. 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
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<PAGE>
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 one firm during 1999 accounted for
as a purchase.
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. 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.
On December 1, 1998, the Company acquired contracts and certain
assets, consisting primarily of computer equipment and office furniture from
Interactive Web Systems, Inc. for $707,000. In conjunction with this
transaction, the Company recorded intangible assets of $150,000.
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<PAGE>
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.
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 ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Government Operations Group ................ 57.5% 55.8% 56.4% 54.7%
Consulting Group ........................... 42.5 44.2 43.6 45.3
Total revenues ........................... 100.0 100.0 100.0 100.0
Gross Profit:
Government Operations Group ................ 19.4 20.5 18.7 18.9
Consulting Group ........................... 36.1 43.5 35.4 41.8
Total gross profit as a percent of revenue . 26.5 30.7 25.9 29.3
Selling, general and administrative expenses 15.4 16.8 16.0 16.2
Stock option compensation, merger, deferred
compensation and ESOP expenses.............. 1.6 0.1 1.3 0.1
----- ----- ----- -----
Income from operations ..................... 9.5 13.8 8.6 13.0
Interest and other income (expenses) ....... 0.9 1.1 1.0 0.9
----- ----- ----- -----
Income before income taxes ................. 10.4 14.9 9.6 13.9
Provision for income taxes ................. 4.0 6.2 3.6 5.6
----- ----- ----- -----
Net income ................................. 6.4 8.7 6.0 8.3
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH
31, 1998
REVENUES. Total contract revenues increased 36.3% to $76.3 million
for the three months ended March 31, 1999 as compared to $56.0 million for
the same period in 1998. Government Operations Group revenues increased 32.2%
to $42.5 million for the three months ended March 31, 1999 from $32.2 million
for the same period in 1998. This increase was due to an increase in the
number of contracts in all four divisions in the Government Operations Group.
Consulting Group revenues increased 42.0% to $33.7 million for the three
months ended March 31, 1999 from $23.8 million for the same period in 1998.
The revenue from Carrera and Phoenix, which merged with MAXIMUS subsequent to
March 1998 in mergers accounted for as immaterial poolings of interests, and
for which the March 1998 quarter results were not restated, was $3.5 million
for the March 1998 quarter. The revenue increase for the Consulting Group
from the March 1998 quarter to the March 1999 quarter, including the $3.5
million in the March 1998 quarter, was 23.7%. This increase was due to an
increase in the number of contracts in the Consulting Group.
GROSS PROFIT. Total gross profit increased 57.6% to $23.4 million
for the three months ended March 31, 1999 as compared to $14.8 million for
the same period in 1998. Government Operations Group gross profit increased
39.5% to $8.7 million for the three months ended March 31, 1999 from $6.3
million for the three months ended March 31, 1998. As a percentage of
Government Operations Group revenues, Government Operations Group gross
profit increased to 20.5% for the
- 10 -
<PAGE>
three months ended March 31, 1999 from 19.4% 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
70.8% to $14.7 million for the three months ended March 31, 1999 from $8.6
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 43.5% for the three
months ended March 31, 1999 from 36.1% for the same period in 1998, due
primarily to favorable revenue recognition adjustments on two Revenue
Maximization type contracts, improved operating efficiencies within the CSI
division, and margins at the Carrera division which were greater than the
Group average of 43.5%, and which were not included in the March 1998 results
as the merger occurred subsequent to that date.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative ("SG&A") expenses increased 47.9% to $12.8 million for the
three months ended March 31, 1999 as compared to $8.6 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 3,025 at March 31, 1999 from 2,576 at March 31, 1998. As a
percentage of revenues, SG&A expenses increased to 16.8% for the three months
ended March 31, 1999 from 15.4% 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 March 31, 1999, the Company incurred $0.1 million of expenses in
connection with the combination with CSI. During the three months ended March
31, 1998, the Company incurred $345 million of expenses in connection with
the combination with DMG, and DMG incurred $562 million of deferred
compensation and employee stock ownership plan (ESOP) expenses. DMG, with
which the Company merged in May 1998, had deferred compensation and ESOP
plans which were terminated after the merger. Therefore, no expense for those
plans was incurred during the three months ended March 31, 1999.
INTEREST AND OTHER INCOME. The increase in interest and other income
to $0.9 million for the three months ended March 31, 1999 as compared to $0.5
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
completed in December 1998.
PROVISION FOR INCOME TAXES. The provision for income tax for the three
months ended March 31, 1999 was 41.3% of income before income taxes as compared
to 38.3% for the three months ended March 31, 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 and the
incurrence of $0.2 million of additional tax expense in connection with the
termination of the S-Corporation status of CSI upon its merger with the Company.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31,
1998
REVENUES. Total contract revenues increased 39.8% to $148.6 million
for the six months ended March 31, 1999 as compared to $106.4 million for the
same period in 1998. Government Operations Group revenues increased 35.7% to
$81.4 million for the six months ended March 31, 1999 from $60.0 million for
the same period in 1998. This increase was due to an increase in the number
of contracts in all four divisions in the Government Operations Group.
Consulting Group revenues increased 45.0% to $67.2 million for the six months
ended March 31, 1999 from $46.4 million for the same period in 1998. The
revenue from Carrera and Phoenix, which merged with MAXIMUS subsequent to
March 1998 in mergers accounted for as immaterial poolings of interests, and
for which the results for the six months ended March 1998 were not restated,
was $8.4 million for the six months ended March 1998. The revenue increase
for the Consulting Group from the six months ended March 1998 to the six
months ended March 1999, including the $8.4 million in the six months ended
March 1998 was 23.7%. This increase was due to an increase in the number of
contracts in the Consulting Group.
GROSS PROFIT. Total gross profit increased 57.7% to $43.5 million
for the six months ended March 31, 1999 as compared to $27.6 million for the
same period in 1998. Government Operations Group gross profit increased 37.7%
to $15.4 million for the six months ended March 31, 1999 from $11.2 million
for the six months ended March 31, 1998. As a percentage of Government
Operations Group revenues, Government Operations Group gross profit increased
to 18.9% for the six months ended
- 11 -
<PAGE>
March 31, 1999 from 18.7% for the same period in 1998. The increase was due
to the improvement in gross margin for the three months ended March 31, 1999.
The Consulting Group gross profit increased 71.3% to $28.1 million for the
six months ended March 31, 1999 from $16.4 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 41.8% for the six months ended March 31, 1999 from 35.4% for the
same period in 1998, due to the improvement in gross margin for the three
months ended March 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative ("SG&A") expenses increased 40.9% to $24.0 million for the
six months ended March 31, 1999 as compared to $17.1 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 3,025 at March 31, 1999 from 2,576 at March 31, 1998. As a
percentage of revenues, SG&A expenses increased to 16.2% for the six months
ended March 31, 1999 from 16.0% 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 six months ended
March 31, 1999, the Company incurred $0.1 million of expenses in connection
with the combination with CSI. During the six months ended March 31, 1998,
the Company incurred $417 million of expenses in connection with the
combination with DMG, and DMG incurred $957 million of deferred compensation
and employee stock ownership plan (ESOP) expenses. DMG, with which the
Company merged in May 1998, had deferred compensation and ESOP plans which
were terminated after the merger. Therefore, no expense for those plans was
incurred during the six months ended March 31, 1999.
INTEREST AND OTHER INCOME. The increase in interest and other income
to $1.3 million for the six months ended March 31, 1999 as compared to $1.1
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 six
months ended March 31, 1999 was 40.5% of income before income taxes as compared
to 37.4% for the six months ended March 31, 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 and the incurrence of
$0.2 million of additional tax expense in connection with the termination of the
S-Corporation status of CSI upon its merger with the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended March 31, 1999, cash provided by operations
was $10.0 million as compared to $2.8 million for the six months ended March
31, 1998. The principal reason for the increase in cash provided by
operations for the six months ended March 31, 1999 compared to the six
months ended March 31, 1998 was the increase in net income to $12.3 million
from $6.4 million. Additionally, there was a decrease in accounts receivable,
billed and unbilled, to $79.1 million at March 31, 1999 from $82.9 million at
December 1998. This decrease of $3.8 million was achieved due to receipt of
payments on overdue billings from a few large customers.
For the six months ended March 31, 1999, cash used in investing
activities was $65.1 million as compared to $8.6 million cash provided by
investing activities for the six months ended March 31, 1998. The $65.1
million used in investing activities for the six months ended March 31, 1999
primarily consisted of the purchase of marketable securities totaling $54.1
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 and the purchase of Norman Roberts, an executive
search firm, on March 31, 1999, for $1.9 million.
Cash provided by financing during the six months ended March 31,
1999 was $60.3 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 six months ended March 31, 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 six
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<PAGE>
months ended March 31, 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 March 31, 1999. 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 did not use the Credit
Facility to finance its working capital needs for the six months ended March
31, 1999 and 1998. At March 31, 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 is auditing its internal
software and hardware and implementing corrective actions where necessary to
address Year 2000 problems. The Company is also reviewing the software and
hardware of, and implementing corrective actions where necessary at its DMG,
Carrera, Spectrum, Phoenix and CSI divisions. The Company will continue to
assess the need for Year 2000 contingency plans as its remediation efforts
progress. The Company estimates that its remediation efforts will be
completed by July 31, 1999. The Company does not believe that the cost of
these efforts will be material or will have a material impact on its
operations or financial results. However, there can be no assurance that
those costs will not be greater than anticipated, or that corrective actions
undertaken will be completed before any Year 2000 problems could occur.
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.
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 March 31, 1999.
- 13 -
<PAGE>
Part II. Other Information.
Item 2. Changes in Securities and Use of Proceeds.
(a) Changes in Securities.
On February 26, 1999, the Company acquired CSI, a privately-held
Pennsylvania corporation. In connection with the acquisition, the four
shareholders of CSI were issued an aggregate of 700,212 shares of the Company's
Common Stock, no par value, in exchange for 100% of the outstanding stock of
CSI. The issuance was made in reliance upon the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended.
(b) Use of Proceeds from Registered Securities.
A Registration Statement on Form S-1 (File No. 333-29115)
registering 6,037,500 shares of the Company's Common Stock, filed in
connection with the Company's IPO, was declared effective by the Securities
and Exchange Commission on June 12, 1997. The IPO closed on June 18, 1997 and
the offering has terminated. The Company's net proceeds from the IPO were
$53,804,000. Cumulatively through December 31, 1998, the Company used
$39,800,000 of the net proceeds, which was reported in previous Forms 10-Q
and 10-K filed with the SEC. During the quarter ended March 31,1999, the
Company used $4,937,000 of the net proceeds from the IPO. Of that amount,
$1,930,000 was used to purchase the outstanding common stock of Norman
Roberts, an executive search firm, on March 31, 1999, $707,000 was used for
the purchase of contracts and assets from Interactive Web Systems, Inc.,
discussed in the footnotes to the financial statements contained in this Form
10-Q, and $2,300,000 was used to provide general operating capital.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held on February 23, 1999, the
Company's shareholders voted as follows:
(a) To reelect Messrs. Russell A. Beliveau, Jesse Brown and Ms. Susan D.
Pepin to the Board of Directors, each for a three-year term.
<TABLE>
<CAPTION>
Nominee Total Vote "For" Total Vote Withheld
------- ---------------- -------------------
<S> <C> <C>
Russell A. Beliveau 18,949,949 53,127
Jesse Brown 18,950,049 53,027
Susan D. Pepin 18,950,049 53,027
</TABLE>
The terms of office of David V. Mastran, Raymond B. Ruddy, Margaret
Carrera, George C. Casey, Louis E. Chappuie, Lynn P. Davenport, Thomas A.
Grissen, Robert J. Muzzio and Peter B. Pond continued after the meeting.
(b) To amend the Company's 1997 Equity Incentive Plan to increase the number of
shares of the Company's Common Stock as to which awards may be granted under the
plan to 3,000,000 shares.
<TABLE>
<S> <C>
Total Vote For the Proposal 12,200,202
Total Vote Against the Proposal 3,981,962
Abstentions 4,714
</TABLE>
(C) To ratify the selection by the Board of Directors of Ernst & Young LLP as
the Company's independent public accountants for the fiscal year ending
September 30, 1999.
<TABLE>
<S> <C>
Total Vote For the Proposal 18,999,835
Total Vote Against the Proposal 1,327
Abstentions 1,914
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
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<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. The Company filed a Current Report on Form 8-K dated
February 26, 1999 reporting on the completion of the Company's combination with
CSI. The Company filed an additional Current Report on Form 8-K dated March 26,
1999 providing supplemental financial statements and related supplemental
financial information reflecting the Company's combination with CSI. The
following financial statements were filed with the Form 8-K on March 26, 1999:
Supplemental Consolidated Balance Sheets as of September 30, 1997 and
1998;
Supplemental Consolidated Statements of Income for the years ended
September 30, 1996, 1997 and 1998;
Supplemental Consolidated Statements of Changes in Redeemable Common
Stock and Shareholders' Equity for the years ended September 30, 1996,
1997 and 1998;
Supplemental Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1997 and 1998;
Notes to the Supplemental Consolidated Financial Statements for the
years ended September 30, 1996, 1997 and 1998;
Supplemental Consolidated Balance Sheets as of December 31, 1998;
Supplemental Consolidated Statements of Income for the three months
ended December 31, 1997 and 1998;
Supplemental Consolidated Statements of Cash Flows for the three months
ended December 31, 1997 and 1998; and
Notes to the Supplemental Consolidated Financial Statements for the
three months ended December 31, 1997 and 1998.
- 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: May 14, 1999 By: /s/ F. Arthur Nerret
----------------------------------------------
F. Arthur Nerret
Vice President, Finance, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
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<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2 Agreement and Plan of Merger dated February 26, 1999 by and
between MAXIMUS, Inc., Control Acquisition Corp., Control
Software, Inc., James M. Paulits, John H. Hines, III, R. David
Sadoo and John M. Ryan. Filed as Exhibit 2 to the Company's
Current Report on Form 8-K (File No. 001-12997) filed with the
Securities and Exchange Commission on March 4, 1999 and
incorporated herein by reference.
10 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and Thomas A. Grissen.
Filed herewith.
27 Financial Data Schedules (EDGAR)
99 Important Factors Regarding Forward Looking Statements.
Filed herewith.
</TABLE>
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<PAGE>
Exhibit 10
EXECUTIVE EMPLOYMENT, NON-COMPETE
AND CONFIDENTIALITY AGREEMENT
THIS EXECUTIVE EMPLOYMENT, NON-COMPETE AND CONFIDENTIALITY AGREEMENT
("Agreement"), is entered into as of the date set forth on the signature page,
by and between Thomas A. Grissen (the "Executive") and MAXIMUS, Inc., a Virginia
corporation with its principal place of business in McLean, Virginia (the
"Corporation") with reference to the following:
WHEREAS, the parties believe the Executive possesses the experience and
capabilities to provide valuable service on behalf of the Corporation; and
WHEREAS, the Corporation desires to employ the Executive as President of
the Government Operations Group; and
WHEREAS, the Executive desires to be employed by the Corporation at the
salary, benefits and other terms and conditions specified herein.
NOW, THEREFORE, in consideration of these premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. EMPLOYMENT.
1.1 DUTIES. The Corporation hereby employs the Executive, and the
Executive hereby accepts such employment, to serve as the President of the
Corporation's Government Operations Group, reporting directly to David V.
Mastran, the Chief Executive Officer of the Corporation. The Executive hereby
represents and warrants that he is in good health and capable of performing the
services required hereunder. The Executive shall perform such services and
duties as are appropriate to such office or delegated to the Executive by the
Chief Executive Officer. During the term of this Agreement, the Executive shall
be a full-time employee of the Corporation and shall devote such time and
attention to the discharge of his duties as may be necessary and appropriate to
accomplish and complete such duties.
1.2 COMPENSATION.
(a) SALARY AND YEAR-END BONUS. As compensation for performance of his
obligations hereunder, the Corporation shall pay the Executive a monthly salary
of $25,000, such salary to be reviewed annually for adjustment beginning on or
about September 30, 1999. In addition, for the fiscal year ending September 30,
1999, the Executive will receive a combined bonus, consisting of 50% cash and
50% stock options, valued at between 30% and 70% of the Executive's actual
earnings through September 30, 1999. Thereafter, the Executive will participate
in the Corporation's annual bonus program, with any awards dependent on the
performance of the Executive and the Corporation. A target cash bonus for the
Executive would be $100,000 for accomplishing his annual goals.
<PAGE>
(b) STOCK OPTIONS. Upon the effective date of this Agreement, the
Executive shall be awarded Incentive Stock Options (ISOs) to acquire 200,000
shares of MAXIMUS Common Stock in accordance with the MAXIMUS 1997 Equity
Incentive Plan. Such ISOs shall have a strike price equal to the New York Stock
Exchange closing price of MAXIMUS Common Stock as of February 10, 1999, a
four-year vesting schedule, a ten-year term and such other terms and conditions
as are included in the standard MAXIMUS Incentive Stock Option Agreement which
will be subsequently executed by the parties. The Executive shall also be
entitled to participate in stock option plans as currently exist or may be
established by the Corporation from time to time. The Executive shall receive an
annual stock option award equal to the value of his annual cash bonus as
described above.
(c) VACATION, INSURANCE, EXPENSES, ETC. The Executive shall be
entitled to 20 days accrual paid vacation per year, and such benefits, health,
disability and life insurance and other benefits and expense reimbursements in a
manner consistent with the Corporation's past practices and as are provided by
the Corporation to its Chief Executive Officer.
1.3 TERM; TERMINATION. The term of the employment agreement set forth
in this Section 1 shall be for a period commencing at the Effective Date and
continuing for four (4) years thereafter (the "Scheduled Term") provided that
this Agreement shall terminate:
(a) by mutual written consent of the parties;
(b) upon Executive's death or inability, by reason of physical or
mental impairment, to perform substantially all of Executive's duties as
contemplated herein for a continuous period of 120 days or more; or
(c) by the Corporation for cause, which shall mean the Executive's
breach of any material duty or obligation hereunder, or intentional or grossly
negligent misconduct that is materially injurious to the Corporation, as
reasonably determined by the Corporation's Board of Directors, or willful
failure to follow the reasonable directions of the Corporation's Board of
Directors.
Upon any termination of employment under this Section 1.3, neither
party shall have any obligation to the other pursuant to this Section 1, but
such termination shall have no effect on the obligations of the parties under
other provisions of this Agreement.
"Effective Date" shall mean March 1, 1999 or such earlier date as the
Executive shall commence working for the Corporation.
1.4 SEVERANCE. The parties agree that in the event the Corporation
terminates the Executive's employment without cause or the Executive terminates
the employment for "good reason" prior to the expiration of the Scheduled Term,
the Executive shall be entitled to receive salary and benefits (including the
vesting of stock options) for the remainder of the Scheduled Term. "Good reason"
shall mean (i) any action by the Corporation which results in a material
diminution in the Executive's position (including status, titles, salary
decrease or reporting requirements), authority, duties or responsibilities or
(ii) a relocation of the Executive without his consent.
2
<PAGE>
2. NON-COMPETITION.
2.1 UNDERTAKING. The Executive agrees that while the Executive is employed
by the Corporation and for two (2) years following the termination of such
employment, he will not, without the prior written consent of the Corporation,
engage in Competition (as defined below) with the Corporation. For purposes of
this Agreement, "Competition" means participating in the management of any
business enterprise if such enterprise engages in substantial and direct
competition with the Corporation and such enterprise's sales of any product or
service competitive with any product or service of the Corporation amounted to
25% of such enterprise's net sales for its most recently completed fiscal year
and if the Corporation's sales of said product or service amounted to 25% of the
corporation's net sales for its most recently completed fiscal year.
"Competition" will not include (i) the mere ownership of securities in any
enterprise and exercise of rights appurtenant thereto or (ii) participation in
management of any enterprise or business operation thereof other than in
connection with the competitive operation of such enterprise.
2.2 OTHER PROHIBITED ACTIVITIES.
(a) The Executive agrees that, during his employment with the
Corporation and for a period of two (2) years after the termination of such
employment, the Executive will not engage in any Unethical Behavior which may
adversely affect the Corporation. For the purpose of this Section 2.2,
"Unethical Behavior" is defined as:
(i) any attempt, successful or unsuccessful, by the Executive to
divert any existing or pending contracts or subcontracts from the Corporation to
any other firm, whether or not affiliated with the Executive;
(ii) any attempt, successful or unsuccessful, by the Executive,
to adversely influence clients of the Corporation or organizations with which
the Corporation has an existing or pending contract or proposal;
(iii) any attempt, successful or unsuccessful, by the Executive
to offer his services, or to influence any other employee of the Corporation to
offer their services, to any firm to compete against the Corporation; or
(iv) any attempt, successful or unsuccessful, by the Executive to
employ or offer employment to, or cause any other person to employ or offer
employment to any other employee of the Corporation.
(b) The Executive agrees that, in addition to any other remedy available
to the Corporation, in the event of a breach by the Executive of the terms of
this Section 2 the Corporation may set off against any amounts due the
Executive, an amount equal to the gross revenues which such Executive, or any
entity with which the Executive is employed, affiliated or associated, receives
or is entitled to receive, from any existing clients (or potential clients with
whom a proposal is pending) of the Corporation during the two-year period
provided in this Section 2.
3
<PAGE>
(c) The Executive shall notify any new employer, partner, association or
any other firm or corporation actually or potentially in competition with the
Corporation with whom the Executive shall become associated in any capacity
whatsoever of the provisions of this Section 2 and the Executive agrees that the
Corporation may give such notice to such firm, corporation or other person.
2.3 BUSINESS OPPORTUNITIES; CONFLICTS OF INTEREST; OTHER EMPLOYMENT AND
ACTIVITIES OF THE EXECUTIVE.
(a) The Executive agrees promptly to advise the Corporation of, and
provide the Corporation with an opportunity to pursue, all business
opportunities that reasonably relate to the present business conducted by the
Corporation.
(b) The Executive, in his capacity as an employee of the Corporation,
shall not engage in any business with any member of the Executive's immediate
family or with any person or business entity in which the Executive or any
member of the Executive's immediate family has any ownership interest or
financial interest, unless and until the Executive has first fully disclosed
such interest to and received written consent from the Chief Executive Officer.
As used herein, the term "immediate family" means the Executive's spouse,
natural or adopted children, parents or siblings and the term "financial
interest" means any relationship with such person or business entity that may
monetarily benefit the Executive or member of the Executive's immediate family,
including any lending relationship or the guarantying of any obligations of such
person or business entity by the Executive or member of his immediate family.
(c) The parties hereto agree that the Executive may, consistent with
this Section 2.3, receive and retain speaking fees, referral fees from business
opportunities not accepted by the Corporation, and fees from outside business
activities and opportunities of the Executive consented to by the Chief
Executive Officer.
3. CONFIDENTIALITY. The Executive agrees that the Corporation's books,
records, files and all other non-public information relating to the Corporation,
its business, clients and employees are proprietary in nature and contain trade
secrets and shall be held in strict confidence by the Executive, and shall not,
either during the term of this Agreement or after the termination hereof, be
disclosed, directly or indirectly, to any third party, except to the extent such
disclosure is in furtherance of the Corporation's business or required by court
order or other legal process. The trade secrets or other proprietary or
confidential information referred to in the prior sentence includes, without
limitation, all proposals to clients or potential clients, contracts, client or
potential client lists, fee policies, financial information, administration or
marketing practices or procedures and all other information regarding the
business of the Corporation and its clients not generally known to the public.
4. MISCELLANEOUS.
4.1 NOTICES. All notices, requests, demands or other communications
provided for in this Agreement shall be in writing and shall be delivered by
hand, sent prepaid by overnight
4
<PAGE>
delivery service or sent by the United States mail, certified, postage prepaid,
return receipt request, to the following:
If to the Corporation:
MAXIMUS, Inc.
1356 Beverly Road
McLean, Virginia 22101
Attention: David V. Mastran
If to the Executive:
Thomas A Grissen
10903 Willow Creek Lane
Oakton, Virginia 22124
Any notice, request, demand or other communication delivered or sent in the
foregoing manner shall be deemed given or made (as the case may be) upon the
earliest of (i) the date it is actually received, (ii) the business-day after
the day on which it is delivered by hand, (iii) the business day after the day
on which it is properly delivered to Federal Express (or a comparable overnight
delivery service), or (iv) the third business day after the date on which it is
deposited in the United States mail. Either party may change its address by
notifying the other party of the new address in any manner permitted by this
paragraph.
4.2 REMEDIES. The parties agree and acknowledge that any violation by the
Executive of the terms hereof may result in irreparable injury and damage to the
Corporation or its clients, which will not adequately be compensable in monetary
damages, that the Corporation will have no adequate remedy at law therefor, and
that the Corporation may obtain such preliminary, temporary or permanent
mandatory or restraining injunctions, orders or decrees as may be necessary to
protect it against, or on account of, any breach of the provisions contained in
this Agreement.
4.3 NO OBLIGATION OF CONTINUED EMPLOYMENT. The Executive understands that
this Agreement does not create an obligation on the part of the Corporation to
continue the Executive's employment with the Corporation after the termination
of this Agreement.
4.4 BENEFIT; ASSIGNMENT. This Agreement shall bind and inure to the
benefit of the parties and their respective personal representatives, heirs,
successors and assigns, provided this Agreement may not be assigned by either
party without the consent of the other, except that the Corporation may assign
this Agreement in connection with the merger, consolidation or sale of all or
substantially all of its business or assets.
4.5 ENTIRE AGREEMENT. This Agreement supersedes all prior agreements,
written or oral, with respect to the subject matter of this Agreement.
4.6 SEVERABILITY. In the event that any one or more of the provisions
contained herein shall be held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or
5
<PAGE>
unenforceability shall not affect any other provisions of this Agreement, and
all other provisions shall remain in full force and effect. If any of the
provisions of this Agreement is held to be excessively broad, it shall be
reformed and construed by limiting and reducing it so as to be enforceable to
the maximum extent permitted by law.
4.7 WAIVERS. No delay or omission by the Corporation in exercising any
right under this Agreement will operate as a waiver of that or any other right.
A waiver or consent given by the Corporation on any occasion is effective only
in that instance and will not be construed as a bar to or waiver of any right on
any other occasion.
4.8 CAPTIONS. The captions of the various sections and paragraphs of this
Agreement have been inserted only for the purpose of convenience; such captions
are not a part of this Agreement and shall not be deemed in any manner to
modify, explain, enlarge or restrict any of the provisions of this Agreement.
4.9 GOVERNING LAW. This Agreement shall in all events and for all purposes
be governed by, and construed in accordance with, the laws of the Commonwealth
of Virginia.
4.10 AMENDMENTS. No changes to this Agreement shall be binding unless in
writing and signed by both the parties.
4.11 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, and all such counterparts shall
constitute one instrument.
THE EXECUTIVE HAS READ ALL OF THE PROVISIONS OF THIS AGREEMENT AND THE
EXECUTIVE UNDERSTANDS, AND AGREES TO, EACH OF SUCH PROVISIONS. THE EXECUTIVE
UNDERSTANDS THAT THIS AGREEMENT MAY AFFECT THE EXECUTIVE'S RIGHT TO ACCEPT
EMPLOYMENT WITH OTHER COMPANIES SUBSEQUENT TO THE EXECUTIVE'S EMPLOYMENT WITH
THE CORPORATION.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
EXECUTIVE MAXIMUS, Inc.
/s/ Thomas A. Grissen By /s/ David V. Mastran
- --------------------- -----------------------
Thomas A. Grissen David V. Mastran
Chief Executive Officer
Date 2/10/99
--------
6
<PAGE>
AMENDMENT NO. 1 TO
EXECUTIVE EMPLOYMENT, NON-COMPETE
AND CONFIDENTIALITY AGREEMENT
THIS AMENDMENT NO. 1 TO EXECUTIVE EMPLOYMENT, NON-COMPETE AND
CONFIDENTIALITY AGREEMENT ("Amendment"), is entered into as of March 2, 1999, by
and between Thomas A. Grissen (the "Executive") and MAXIMUS, Inc., a Virginia
corporation with its principal place of business in McLean, Virginia (the
"Corporation") with reference to the following:
WHEREAS, the parties entered into an Executive Employment, Non-Compete and
Confidentiality Agreement dated February 10, 1999 ("Agreement"); and
WHEREAS, the parties desire to amend the Agreement as set forth herein.
NOW, THEREFORE, in consideration of these premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. Section 1.2(b) of the Agreement is deleted in its entirety and replaced
with the following:
STOCK OPTIONS. The Executive is awarded Incentive Stock Options (ISOs) to
acquire 200,000 shares of MAXIMUS Common Stock in accordance with the
MAXIMUS 1997 Equity Incentive Plan. Such ISOs shall have a strike price
equal to the New York Stock Exchange closing price of MAXIMUS Common Stock
as of February 23, 1999, the date such award was approved by the Board of
Directors, a four-year vesting schedule, a ten-year term and such other
terms and conditions as are included in the standard MAXIMUS Incentive
Stock Option Agreement which will be subsequently executed by the parties.
The Executive shall also be entitled to participate in stock option plans
as currently exist or may be established by the Corporation from time to
time. The Executive shall receive an annual stock option award equal to the
value of his annual cash bonus as described above.
2. Except as described above, the Agreement shall remain in full force and
effect in all other respects.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
EXECUTIVE MAXIMUS, Inc.
/s/ Thomas A. Grissen By /s/ David V. Mastran
- --------------------- ---------------------
Thomas A. Grissen David V. Mastran
Chief Executive Officer
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<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
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already reimbursed must be refunded. Therefore, a DCAA audit could result in a
substantial adjustment to our revenue. No material 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
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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.
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 six 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.
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CHALLENGES RESULTING FROM GROWTH
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.
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- - Specialized service providers such as America Works, Inc., Policy Studies
Incorporated, and Benova, Inc.
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 the accuracy of 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, given the preliminary stage of this
litigation, 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
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condition or results of operations. However, given the early stage of this
litigation, we cannot assure that we will be successful in our defense.
SUIT BY NETWORK SIX. We are currently defending a lawsuit that was
commenced against us and other parties by Network Six, Inc. ("Network Six"). We
had been engaged by the State of Hawaii to monitor the implementation of a
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. Because this action is in the early stages of
discovery, 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 beneficially own approximately 43% 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
March 31, 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
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- - 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
- - 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 are auditing our internal software and
hardware and the systems of our acquired companies for Year 2000 compliance and
are implementing 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 must also be reviewed and upgraded,
where necessary, which is scheduled to be completed by July 31, 1999. Our
telephone systems must also be Year 2000 compliant, which is also scheduled for
completion by July 31, 1999. We will continue to implement whatever remedial
actions are necessary to make us Year 2000 compliant. We do not believe that
remedial measures taken to correct any Year 2000 problems will materially impact
our operations or financial results. However, if our remediation plans do not
succeed, then we may experience adverse effects on our business. Furthermore, we
cannot assure that the costs of remediation will not exceed our current
estimates, or that our corrective actions will be completed before any Year 2000
problems occur.
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 has attempted to minimize our liability for potential clients' system
failures, we cannot assure that we will not become subject to legal
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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. 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
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.
