<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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-12997
MAXIMUS, INC.
(Exact name of registrant as specified in its charter)
----------------------
VIRGINIA 54-1000588
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1356 BEVERLY ROAD
MCLEAN, VIRGINIA 22101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 734-4200
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes / x / No / /
CLASS OUTSTANDING AT MAY 10, 2000
----- ---------------------------
Common Shares, No Par Value 21,071,980
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<PAGE>
MAXIMUS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and
September 30, 1999
Consolidated Statements of Income for the three months and six months
ended March 31, 2000 and 1999 (unaudited)
Consolidated Statements of Cash Flows for the six months ended
March 31, 2000 and 1999 (unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
MAXIMUS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 2000
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 61,647 $ 46,511
Marketable securities .................................... 37,235 26,541
Accounts receivable, net ................................. 75,865 89,424
Costs and estimated earnings in excess of billings ....... 16,150 20,360
Prepaid expenses and other current assets ................ 2,711 3,392
Deferred income taxes .................................... 2,997 2,531
------------- -----------
Total current assets .............................................. 196,605 188,759
Property and equipment at cost:
Land ..................................................... 2,643 2,643
Building and leasehold improvements ...................... 8,174 8,270
Office furniture and equipment ........................... 10,429 12,498
------------- -----------
21,246 23,411
Less: Accumulated depreciation and amortization ......... (6,524) (7,793)
------------- -----------
Total property and equipment, net ................................. 14,722 15,618
Software development costs ........................................ -- 5,181
Deferred income taxes ............................................. 363 --
Intangible assets ................................................. 8,254 32,543
Other assets ...................................................... 3,092 2,104
------------- -----------
Total assets ...................................................... $ 223,036 $ 244,205
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 10,265 $ 9,646
Accrued compensation and benefits ........................ 16,119 13,478
Billings in excess of costs and estimated earnings ....... 16,942 12,770
Income taxes payable ..................................... 2,266 --
Notes payable ............................................ -- 4,045
Other current liabilities ................................ 541 7,703
------------- -----------
Total current liabilities.......................................... 46,133 47,642
Other liabilities ................................................. 1,424 3,347
------------- -----------
Total liabilities ................................................. 47,557 50,989
Shareholders' equity:
Common stock, no par value; 60,000,000 shares authorized;
20,986,322 and 21,070,415 shares issued and outstanding at
September 30, 1999 and March 31, 2000, at stated amount .. 130,518 132,013
Accumulated other comprehensive loss ..................... (280) (264)
Retained earnings ........................................ 45,241 61,467
------------- -----------
Total shareholders' equity ........................................ 175,479 193,216
------------- -----------
Total liabilities and shareholders' equity ........................ $ 223,036 $ 244,205
============= ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------- -------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ............................................. $ 76,290 $ 93,501 $148,636 $183,184
Cost of revenues ..................................... 52,894 64,249 105,127 126,334
-------- -------- -------- --------
Gross profit ......................................... 23,396 29,252 43,509 56,850
Selling, general and administrative expenses ......... 12,784 15,281 24,045 30,707
Deferred compensation, merger and ESOP expenses ...... 118 -- 118 --
Amortization of goodwill and other acquisition related
intangibles........................................... -- 371 -- 645
-------- -------- -------- --------
Income from operations ............................... 10,494 13,600 19,346 25,498
Interest and other income ............................ 881 1,099 1,275 2,149
-------- -------- -------- --------
Income before income taxes ........................... 11,375 14,699 20,621 27,647
Provision for income taxes ........................... 4,700 6,133 8,353 11,421
-------- -------- -------- --------
Net income ........................................... $ 6,675 $ 8,566 $ 12,268 $ 16,226
======== ======== ======== ========
Earnings per share:
Basic ........................................... $ 0.32 $ 0.41 $ 0.61 $ 0.77
======== ======== ======== ========
Diluted ......................................... $ 0.31 $ 0.40 $ 0.60 $ 0.76
======== ======== ======== ========
Shares used in computing earnings per share:
Basic ........................................... 20,944 21,036 20,101 21,019
======== ======== ======== ========
Diluted ......................................... 21,333 21,535 20,467 21,427
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31,
--------------------
1999 2000
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................... $ 12,268 $ 16,226
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization .......................................... 1,229 2,007
Deferred income taxes .................................................. -- 18
Change in assets and liabilities:
Accounts receivable, net ............................................... 4,243 (6,884)
Costs and estimated earnings in excess of billings ..................... (2,221) (2,520)
Prepaid expenses and other current assets .............................. (10) 318
Prepaid income taxes ................................................... (1,706) --
Other assets ........................................................... (747) 853
Accounts payable ....................................................... (926) (2,713)
Accrued compensation and benefits ...................................... (2,397) (3,338)
Billings in excess of costs and estimated earnings ..................... 770 (5,084)
Income taxes payable ................................................... (3) (2,941)
Other liabilities ...................................................... 141 139
-------- --------
Net cash provided by (used in) operating activities ...................................... 10,641 (3,919)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired ............................... (2,637) (21,889)
Capitalization of software development costs .................................. -- (387)
Purchase of property and equipment ............................................ (8,953) (1,564)
(Purchase) sale of marketable securities ...................................... (54,107) 10,710
-------- --------
Net cash used in investing activities .................................................... (65,697) (13,130)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secondary offering, net of expenses ............................. 61,010 --
S Corporation distributions ................................................... (756) --
Issuance of common stock ...................................................... 170 1,495
Net (payments on) proceeds from borrowings .................................... (145) 43
-------- --------
Net cash provided by financing activities ................................................ 60,279 1,538
-------- --------
Net increase (decrease) in cash and cash equivalents ..................................... 5,223 (15,511)
Cash flow adjustment for change in accounting period of CSI .............................. 31 --
Cash and cash equivalents, beginning of period ........................................... 19,403 62,022
-------- --------
Cash and cash equivalents, end of period ................................................. $ 24,657 $ 46,511
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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,
2000 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, 1999 and 1998 and for each
of the three years in the period ended September 30, 1999 included in the
Company's annual report on Form 10-K, as filed with the Securities and Exchange
Commission.
2. SECONDARY PUBLIC OFFERING
The Company completed a secondary public offering (the "secondary
offering") of common stock during December 1998. Of the 4,200,000 shares of
common stock sold in the secondary offering, 2,000,000 shares were sold by
MAXIMUS, Inc. generating $61,024 in proceeds to the Company, net of offering
expenses, and 2,200,000 shares were sold by selling shareholders.
3. BUSINESS COMBINATIONS AND ACQUISITIONS
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 combination was accounted for as a pooling of interests.
On March 31, 1999, the Company acquired all of the outstanding shares
of capital stock of Norman Roberts & Associates, Inc. for $1,930. In conjunction
with the purchase, the Company recorded intangible assets of $1,880.
On June 1, 1999, the Company acquired all of the outstanding shares of
capital stock of Unison Consulting Group, Inc. for $7,589. In conjunction with
the purchase, the Company recorded intangible assets of $6,328.
On September 30, 1999, the Company acquired all of the outstanding
shares of capital stock of Network Design Group, Inc. d/b/a The Center for
Health Dispute Resolution ("CHDR") for $2,070. In conjunction with the purchase,
the Company recorded intangible assets of $827. The purchase is subject to an
upward adjustment of $1,200 if CHDR secures the renewal of a certain contract.
On October 20, 1999, the Company acquired all of the outstanding shares
of capital stock of Public Systems, Inc. for $5,000. In conjunction with the
purchase, the Company recorded intangible assets of $4,735.
On March 20, 2000, the Company acquired all of the outstanding shares
of capital stock of Crawford Consulting, Inc. for $17,500. In conjunction with
the purchase, the Company recorded intangible assets of $13,056.
On March 31, 2000, the Company acquired substantially all of the assets
of the Government Services division of 3-G International, Inc. for $7,000, plus
an earn-out amount of up to $3,000 to be paid by the Company upon the
achievement of certain objectives. In conjunction with the purchase, the Company
recorded intangible assets of $6,708.
<PAGE>
4. COMMITMENTS AND CONTINGENCIES
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 to him
material information 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. This
matter is currently scheduled for trial on September 11, 2000. The Company
believes these claims are without merit and intends to defend the matter
vigorously. Although there can be no assurance of a favorable outcome, 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.
On May 12, 1998, the Company acquired David M. Griffith & Associates,
Ltd. ("DMG"), which was subsequently merged into DMG-MAXIMUS, Inc.
("DMG-MAXIMUS"), a wholly-owned subsidiary of MAXIMUS. A consolidated legal
action was brought against DMG-MAXIMUS and thirteen other named defendants in
the U.S. District Court for the District of Arizona by Superstition Mountains
Community Facilities District No. 1 (the "District") and Allstate Insurance
Company ("Allstate"), alleging that DMG made false and misleading
representations in the reports DMG prepared as a consultant to underwriters
of revenue bonds issued by the District and purchased by Allstate. On May 12,
2000, DMG-MAXIMUS agreed to a confidential settlement agreement with the
District and Allstate. The settlement amount to be paid by DMG-MAXIMUS is not
material and will not have an adverse effect on the Company's financial
condition or results of operations.
In January 2000, the New York City Human Resources Administration
("HRA") submitted two contracts that it had awarded to the Company for
welfare-to-work services to the Comptroller of New York City (the
"Comptroller") to be registered. Under New York law, the contracts must be
registered in order for the Company to receive payment. However, the
Comptroller refused to register the contracts alleging improprieties in the
procurement process and in the Company's conduct. The Mayor of the City of
New York (the "Mayor") and HRA disagreed with the Comptroller's assertions
and, in March 2000, sued the Comptroller in the Supreme Court of the State of
New York - New York County (the "Court"), seeking to require the Comptroller
to register the contracts. On April 13, 2000, the Court issued a decision and
judgment holding that the Comptroller has a mandatory duty to register the
contracts. However, as a matter of judicial discretion, the Court refused to
require registration, finding that the Comptroller had established that the
procurement process had been corrupted. This decision has been appealed by
the Mayor and HRA to the New York Supreme Court Appellate Division - First
Department (the "Appellate Division"). On April 24, 2000, the Company filed a
motion in the Appellate Division to intervene in the lawsuit. The Company is
asking for the Court's decision to be set aside on the grounds that it
contained findings of fact against the Company not supported by the record
and that the Court failed to afford the Company with its constitutional
rights to notice of a hearing and an opportunity to be heard. The Appellate
Division has agreed to hear the appeal on an expedited basis. A hearing is
currently scheduled for June 2000. This matter is also the subject of
investigations being conducted by certain governmental agencies. The District
Attorney's Office of New York County and the United States Attorney's Office
for the Southern District of New York, in response to requests made by the
Comptroller, have announced that they are investigating the facts underlying
this matter. Both offices issued subpoenas for documents to the Company in
early May 2000. The Company believes the Comptroller's claims are without
merit and intends to defend against his allegations vigorously. MAXIMUS is
believes that its actions were lawful and appropriate and plans to cooperate
fully with the governmental reviews of the matter. Although there can be no
assurance of a favorable outcome, the Company does not
<PAGE>
believe that this matter will have a material adverse effect on the Company's
financial condition or results of operations.
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 resolved in an
unfavorable manner to the Company.
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,
----------------- -----------------
1999 2000 1999 2000
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income ......................................................... $ 6,675 $ 8,566 $12,268 $16,226
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding .......................... 20,944 21,036 20,101 21,019
Stock options ...................................................... 389 499 366 407
-------- ------- ------- -------
Denominator for dilutive earnings per share ........................ 21,333 21,535 20,467 21,427
======== ======= ======= =======
Earnings per share:
Basic .............................................................. $ 0.32 $ 0.41 $ 0.61 $ 0.77
======== ======= ======= =======
Diluted ............................................................ $ 0.31 $ 0.40 $ 0.60 $ 0.76
======== ======= ======= =======
</TABLE>
6. SEGMENT INFORMATION
The following table provides certain financial information
for each business segment:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------- -------------------
Revenues: 1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Government Operations $ 42,544 $ 54,030 $ 81,361 $105,210
Consulting .......... 33,746 39,471 67,275 77,974
-------- -------- -------- --------
Total ................. $ 76,290 $ 93,501 $148,636 $183,184
======== ======== ======== ========
Income From Operations:
Government Operations $ 4,428 $ 6,608 $ 6,995 $ 11,569
Consulting .......... 6,066 6,992 12,351 13,929
-------- -------- -------- --------
Total ................. $ 10,494 $ 13,600 $ 19,346 $ 25,498
======== ======== ======== ========
</TABLE>
<PAGE>
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.
As an important part of the Company's growth strategy, it has completed
combinations with the following firms: Spectrum Consulting Group, Inc. and
Spectrum Consulting Services, 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, Control Software, Inc. ("CSI") in February 1999, Norman Roberts
& Associates, Inc. ("Roberts") in March 1999, Unison Consulting Group, Inc.
("Unison") in June 1999, Network Design Group, Inc. dba The Center for Health
Dispute Resolution ("CHDR") in September 1999, Public Systems, Inc. ("PSI")
in October 1999, and Crawford Consulting, Inc. ("Crawford") in March 2000.
Additionally, the Company acquired substantially all of the assets of the
Government Services division of 3-G International, Inc. ("3GI") in March
2000. Spectrum, DMG, Carrera, Phoenix and CSI was each accounted for as a
pooling of interests combination. Roberts, Unison, CHDR, PSI, Crawford and
3GI was each accounted for as a purchase. See "Business Combinations and
Acquisitions" below. 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, 1999, revenues from these contract types were approximately
25%, 37%, 19% and 19%, 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, 1999, the
Company's average Government Operations contract duration was 2 3/4 years. The
Company's Consulting Group contracts have performance periods of one month to in
excess of two years.
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.
<PAGE>
BUSINESS COMBINATIONS AND ACQUISITIONS
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 services and enhance the Company's
consultant customer base. The Company combined with four consulting firms during
fiscal 1999, one of which was accounted for as a pooling of interests, and two
firms during the first half of fiscal 2000, each accounted for as a purchase.
Additionally, the Company acquired substantially all of the assets of a division
of one firm during the first half of fiscal 2000.
On February 26, 1999, the Company acquired all of the outstanding
shares of capital stock of CSI in exchange for 700,210 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 Roberts for $1,930,000. Roberts, based in Los Angeles,
California, provides executive search services for the public sector. In
connection with the purchase, the Company recorded intangible assets of
$1,880,000. At the time of the combination, Roberts had 18 employees.
On June 1, 1999, the Company acquired all of the outstanding shares of
capital stock of Unison for $7,589,000. Unison, based in Chicago, Illinois,
provides financial consulting for major government owned airports. In connection
with the purchase, the Company recorded intangible assets of $6,328,000. At the
time of the combination, Unison had 39 employees.
On September 30, 1999, the Company acquired all of the outstanding
shares of capital stock of CHDR for $2,070,000. CHDR, based in Rochester, New
York, is the sole national provider of external reviews for Medicare
beneficiaries enrolled in HMOs. In connection with the purchase, the Company
recorded intangible assets of $827,000. The purchase is subject to an upward
adjustment of $1,200,000 if CHDR secures the renewal of a certain contract. At
the time of the combination, CHDR had 35 employees.
On October 20, 1999, the Company acquired all of the outstanding shares
of capital stock of PSI for $5,000,000. PSI, based in Wilmington, Delaware,
provides client-server and internet-enabled case management systems to
government customers. In connection with the purchase, the Company recorded
intangible assets of $4,735,000. At the time of the combination, PSI had 26
employees.
On March 20, 2000, the Company acquired all of the outstanding shares
of capital stock of Crawford for $17,500,000. Crawford, based in Canton, Ohio,
provides web-enabled information systems and consulting services for state and
local government courts and justice agencies. In connection with the purchase,
the Company recorded intangible assets of $13,056,000. At the time of the
combination, Crawford had 101 employees.
On March 31, 2000, the Company acquired substantially all of the assets
of the Government Services division of 3GI for $7,000,000, plus an earn-out
amount of up to $3,000,000 to be paid by the Company upon the achievement of
certain objectives. The division of 3GI acquired by MAXIMUS is based in
Springfield, Virginia and provides integration services of smart card systems
for the public and commercial sectors. In connection with the purchase, the
Company recorded intangible assets of $6,708,000. At the time of the
acquisition, the Government Services division of 3GI had 90 employees.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of income data as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Government Operations Group .............. 55.8% 57.8% 54.7% 57.4%
Consulting Group ......................... 44.2 42.2 45.3 42.6
------ ------ ------ ------
Total revenues ............................. 100.0 100.0 100.0 100.0
Gross Profit:
Government Operations Group .............. 20.5 22.9 18.9 22.3
Consulting Group ......................... 43.5 42.8 41.8 42.8
Total gross profit as a percent of revenue 30.7 31.3 29.3 31.0
Selling, general and administrative expenses 16.8 16.3 16.7 16.8
Amortization of goodwill and other
acquisition related intangibles .......... 0.1 0.4 0.1 0.4
------ ------ ------ ------
Income from operations ..................... 13.8 14.5 13.0 13.9
Interest and other income .................. 1.1 1.2 0.9 1.2
------ ------ ------ ------
Income before income taxes ................. 14.9 15.7 13.9 15.1
Provision for income taxes ................. 6.2 6.5 5.6 6.2
------ ------ ------ ------
Net income ................................. 8.7 9.2 8.3 8.9
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1999
REVENUES. Total contract revenues increased 22.6% to $93.5 million for
the three months ended March 31, 2000 from $76.3 million for the same period in
1999. Government Operations Group revenues increased 27.0% to $54.0 million for
the three months ended March 31, 2000 from $42.5 million for the same period in
1999. This increase was due primarily to $1.3 million of revenue from CHDR,
which was acquired on September 30, 1999 and an increase in the number of
contracts in three of the four divisions in the Government Operations Group.
Consulting Group revenues increased 17.0% to $39.5 million for the three months
ended March 31, 2000 from $33.8 million for the same period in 1999.
Approximately $3.4 million of the $5.7 million increase in the Consulting Group
revenues were revenues from Roberts, Unison, PSI and Crawford, which companies
were acquired subsequent to the quarter ended March 31, 1999. The remainder of
the increased revenues was the result of an increase in the number of contracts
in the Consulting Group.
GROSS PROFIT. Total gross profit increased 25.0% to $29.3 million for
the three months ended March 31, 2000 from $23.4 million for the same period in
1999. Government Operations Group gross profit increased 41.5% to $12.4 million
for the three months ended March 31, 2000 from $8.7 million for the three months
ended March 31, 1999. As a percentage of Government Operations Group revenues,
Government Operations Group gross profit increased to 22.9% for the three months
ended March 31, 2000 from 20.5% for the same period in 1999. The increase was
due primarily to improved margins on certain projects in two of the four
divisions of the Government Operations Group. That increase was offset by the
incurrence of costs related to two contracts with the City of New York for which
no revenue was recognized due to disputes regarding the registration of the
contracts (See "Legal Proceedings.") The Consulting Group gross profit increased
15.2% to $16.9 million for the three months ended March 31, 2000 from $14.7
million for the same period in 1999 due to the increased revenues offset by a
decreased gross profit percentage. As a percentage of Consulting Group revenues,
Consulting Group gross profit decreased to 42.8% for the three months ended
March 31, 2000 from 43.5% for the same period in 1999, due primarily to slightly
reduced margins on a few projects within the Group.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative ("SG&A") expenses increased 19.5% to $15.3 million for the
three months ended March 31, 2000 from $12.8 million for the same period in
1999. SG&A expenses were reduced in the quarter ended March 31, 2000 by the
receipt of $819,000 from the settlement of a legal action settlement and were
increased by the funding of $150,000 towards a charitable foundation established
by the Company. Excluding those two items, SG&A expenses would have been $16.0
million, which is an increase of 24.8% over the same period in 1999. The
increase in SG&A expenses was due to the increased size of the Company in terms
of revenue growth and the increase in the number of employees to 3,797 at March
31, 2000 from 3,025 at March 31, 1999. As a percentage of revenues, SG&A
expenses decreased to 16.3% for the three months ended March 31, 2000 from 16.8%
for the same period in 1999, primarily due to the receipt of the settlement of a
legal action, offset by an increase in the number of personnel and capability of
the Government & Investor Relations unit and the Information Services unit.
AMORTIZATION OF GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLES. In
the quarter ended March 31, 2000, the Company incurred $0.4 million of
amortization expense related to the $33.4 million of goodwill and other
acquisition-related intangible assets it recorded in connection with the
acquisitions of Roberts, Unison, CHDR, PSI, Crawford and 3GI.
INTEREST AND OTHER INCOME. The increase in interest and other income to
$1.1 million for the three months ended March 31, 2000 as compared to $0.9
million for the same period in 1999 was due to an increase in the average
interest rates earned on invested funds.
PROVISION FOR INCOME TAXES. The provision for income tax for the three
months ended March 31, 2000 was 41.7% of income before income taxes as compared
to 41.3% for the three months ended March 31, 1999. The difference in
percentages was due to differences in the amounts of certain expense items which
are not deductible for tax purposes.
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED
MARCH 31, 1999
REVENUES. Total contract revenues increased 23.2% to $183.2 million
for the six months ended March 31, 2000 from $148.6 million for the same
period in 1999. Government Operations Group revenues increased 29.3% to
$105.2 million for the six months ended March 31, 2000 from $81.4 million for
the same period in 1999. This increase was due primarily to $2.6 million of
revenue from CHDR, which was acquired on September 30, 1999 and an increase
in the number of contracts in three of the four divisions in the Government
Operations Group. Consulting Group revenues increased 15.9% to $78.0 million
for the six months ended March 31, 2000 from $67.3 million for the same
period in 1999. Approximately $6.1 million of the $10.7 million increase in
the Consulting Group revenues were revenues from Roberts, Unison, PSI and
Crawford, which companies were acquired subsequent to the quarter ended March
31, 1999. The remainder of the increased revenues was the result of an
increase in the number of contracts in the Consulting Group.
GROSS PROFIT. Total gross profit increased 30.7% to $56.9 million for
the six months ended March 31, 2000 from $43.5 million for the same period in
1999. Government Operations Group gross profit increased 52.6% to $23.5 million
for the six months ended March 31, 2000 from $15.4 million for the six months
ended March 31, 1999. As a percentage of Government Operations Group revenues,
Government Operations Group gross profit increased to 22.3% for the six months
ended March 31, 2000 from 18.9% for the same period in 1999. The increase was
due to improved margins in three of the four divisions of the Government
Operations Group. That increase was offset by the incurrence of costs related to
two contracts with the City of New York for which no revenue was recognized due
to disputes regarding the registration of the contracts (See "Legal
Proceedings.") The Consulting Group gross profit increased 18.6% to $33.3
million for the six months ended March 31, 2000 from $28.1 million for the same
period in 1999 due to the increased revenues and an increased gross profit
percentage. As a percentage of Consulting Group revenues, Consulting Group gross
profit increased to 42.8% for the six months ended March 31, 2000 from 41.8% for
the same period in 1999, due primarily to improved margins within the CSI and
PSI divisions of the Group in the first quarter of fiscal year 2000, offset by
slightly reduced margins on a few projects within the Group in the second
quarter of fiscal year 2000.
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative ("SG&A") expenses increased 27.7% to $30.7 million for the
six months ended March 31, 2000 from $24.0 million for the same period in 1999.
The increase in SG&A expenses was due to the increased size of the Company in
terms of revenue growth and the increase in the number of employees to 3,797 at
March 31, 2000 from 3,025 at March 31, 1999. As a percentage of revenues, SG&A
expenses increased to 16.8% for the six months ended March 31, 2000 from 16.2%
for the same period in 1999, primarily due to the increase in the number of
personnel and capability of the Government & Investor Relations unit and the
Information Services unit, offset by the receipt of $819,000 from the settlement
of a legal action in the second quarter of fiscal year 2000.
AMORTIZATION OF GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLES. In
the six months ended March 31, 2000, the Company incurred $0.6 million of
amortization expense related to the $33.4 million of goodwill and other
acquisition-related intangible assets it recorded in connection with the
acquisitions of Roberts, Unison, CHDR, PSI, Crawford and 3GI.
INTEREST AND OTHER INCOME. The increase in interest and other income
to $2.1 million for the six months ended March 31, 2000 as compared to $1.3
million for the same period in 1999 was due to an increase in the average
interest rates earned on invested funds and to an increase in the amount of
average invested funds. The increase in invested funds was 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, 2000 was 41.3% of income before income taxes as compared
to 40.5% for the six months ended March 31, 1999. The difference in percentages
was due to differences in the amounts of certain expense items which are not
deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended March 31, 2000, cash used in operations was
$3.9 million as compared to cash provided by operations of $10.6 million for the
six months ended March 31, 1999. The primary reasons for the usage of cash in
the six months ended March 31, 2000 were an increase in accounts receivable and
costs and estimated earnings in excess of billings of $9.4 million, a decrease
in billings in excess of costs and estimated earnings of $5.1 million, a
decrease in accrued compensation and benefits of $3.3 million, and a decrease in
income taxes payable of $2.9 million. The increase in accounts receivable and
costs and estimated earnings in excess of billings was due principally to the
increase in revenue to $93.5 million for the three months ended March 31, 2000
from $86.7 million for the three months ended September 30, 1999. The decrease
in billings in excess of costs and estimated earnings of $5.1 million was the
result of differences between the timing of the proper recognition of revenue
and the ability to invoice customers. The decrease in accrued compensation and
benefits of $3.3 million is the result of the October 1999 payment of fiscal
1999 annual incentive compensation to employees in the aggregate amount of $7.0
million. As compared to the six months ended March 31, 2000, accounts receivable
and costs and estimated earnings in excess of billings used cash of $2.0
million, billings in excess of costs and estimated earnings increased $0.7
million, accrued compensation and benefits decreased $2.4 million, and income
taxes payable remained virtually unchanged in the six months ended March 31,
1999.
For the six months ended March 31, 2000, cash used in investing
activities was $13.1 million as compared to $65.7 million for the six months
ended March 31, 1999. During the six months ended March 31, 2000, the Company
generated cash from sales of marketable securities totaling $10.7 million, and
used $21.9 million in cash for the purchase of PSI and Crawford and $1.5 million
in cash for the purchase of property and equipment. Cash 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 offering, which occurred in December 1998, and the purchase of
property and equipment totaling $9.0 million.
Cash provided by financing activities during the six months ended March
31, 2000 was $1.5 million, which consisted primarily of sales of stock to
employees through the Company's employee stock purchase plan and equity
incentive plan. During the six months ended March 31, 1999, cash provided by
financing activities consisted primarily
<PAGE>
of the proceeds of $61.0 million from the secondary stock offering.
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, its rate of growth, the amounts spent on business
acquisitions, if any, and the leasing of new office space, if any.
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, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risk related to the
effect of changes in interest rates, foreign currency exchange rates, commodity
prices and equity prices on instruments entered into for trading and other
purposes is immaterial.
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS
On May 12, 1998, the Company acquired David M. Griffith & Associates,
Ltd. ("DMG"), which was subsequently merged into DMG-MAXIMUS, Inc.
("DMG-MAXIMUS"), a wholly-owned subsidiary of MAXIMUS. A consolidated legal
action was brought against DMG-MAXIMUS and thirteen other named defendants in
the U.S. District Court for the District of Arizona by Superstition Mountains
Community Facilities District No. 1 (the "District") and Allstate Insurance
Company ("Allstate"), alleging that DMG made false and misleading
representations in the reports DMG prepared as a consultant to underwriters
of revenue bonds issued by the District and purchased by Allstate. On May 12,
2000, DMG-MAXIMUS agreed to a confidential settlement agreement with the
District and Allstate. The settlement amount to be paid by DMG-MAXIMUS is not
material and will not have an adverse effect on the Company's financial
condition or results of operations.
In January 2000, the New York City Human Resources Administration
("HRA") submitted two contracts that it had awarded to the Company for
welfare-to-work services to the Comptroller of New York City (the
"Comptroller") to be registered. Under New York law, the contracts must be
registered in order for the Company to receive payment. However, the
Comptroller refused to register the contracts citing improprieties in the
procurement process and in the Company's conduct. The Mayor of the City of
New York (the "Mayor") and HRA disagreed with the Comptroller's assertions
and, in March 2000, sued the Comptroller in the Supreme Court of the State of
New York - New York County (the "Court"), seeking to require the Comptroller
to register the contracts. On April 13, 2000, the Court issued a decision and
judgment holding that the Comptroller has a mandatory duty to register the
contracts. However, as a matter of judicial discretion, the Court refused to
require registration, finding that the Comptroller had established that the
procurement process had been corrupted. This decision has been appealed by
the Mayor and HRA to the New York Supreme Court Appellate Division - First
Department (the "Appellate Division"). On April 24, 2000, the Company filed a
motion in the Appellate Division to intervene in the lawsuit. The Company is
asking for the Court's decision to be set aside on the grounds that it
contained findings of fact against the Company not supported by the record
and that the Court failed to afford the Company with its constitutional
rights to notice of a hearing and an opportunity to be heard. The Appellate
Division has agreed to hear the appeal on an expedited basis. A hearing is
currently scheduled for June 2000. This matter is also the subject of
investigations being conducted by certain governmental agencies.
Specifically, the District Attorney's Office of New York County and the
United States Attorney's Office for the Southern District of New York, in
response to requests made by the Comptroller, have announced that they are
investigating the facts underlying this matter. Both offices issued subpoenas
for documents to the Company in early May 2000. The Company believes the
Comptroller's claims are without merit and intends to defend against his
allegations vigorously. MAXIMUS believes that its actions were lawful and
appropriate and plans to cooperate fully with the governmental investigations
of the matter. However, no assurance can be made that the contracts will
ultimately be registered or that the investigations will not result in civil
or criminal penalties or administrative sanctions against the Company.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on February 23, 2000, the
Company's shareholders voted as follows:
(a) To reelect Messrs. Lynn P. Davenport, Thomas A. Grissen, David V. Mastran
and Raymond B. Ruddy to the Board of Directors, each for a three-year term.
<TABLE>
<CAPTION>
NOMINEE TOTAL VOTE "FOR". TOTAL VOTE WITHHELD
------- ---------------- -------------------
<S> <C> <C>
Lynn P. Davenport 19,275,655 130,461
Thomas A. Grissen 19,275,655 130,561
David V. Mastran 19,275,655 130,461
Raymond B. Ruddy 19,275,655 130,461
</TABLE>
The terms in office of Russell A. Beliveau, Jesse Brown, Margaret
Carrera, George C. Casey, Louis E. Chappuie, Stephen Goldsmith and Peter B. Pond
continued after the meeting.
(b) To approve an amendment to the Company's Amended and Restated Articles of
Incorporation to increase the number of authorized shares of the Company's
Common Stock from 30,000,000 to 60,000,000 shares.
<TABLE>
<CAPTION>
<S> <C>
Total Vote For the Proposal 18,914,305
Total Vote Against the Proposal 467,394
Abstentions 24,412
</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, 2000.
<TABLE>
<CAPTION>
<S> <C>
Total Vote For the Proposal 19,389,616
Total Vote Against the Proposal 3,300
Abstentions 13,200
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The Exhibits filed as part of this Form 10-Q are listed on the
Exhibit Index immediately preceding such Exhibits, which Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by the
Company during the fiscal quarter ended March 31, 2000.
<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 15, 2000 By: /s/ F. ARTHUR NERRET
--------------------------------
F. Arthur Nerret
Vice President, Finance,
Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedules (EDGAR only)
99 Important Factors Regarding Forward Looking Statements. Filed herewith.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> SEP-30-2000 SEP-30-1999
<PERIOD-START> OCT-01-1999 OCT-01-1998
<PERIOD-END> MAR-31-2000 MAR-31-1999
<EXCHANGE-RATE> 1 1
<CASH> 46,511 24,657
<SECURITIES> 26,541 69,194
<RECEIVABLES> 89,424 64,220
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 186,708 175,834
<PP&E> 23,411 18,730
<DEPRECIATION> (7,793) (5,729)
<TOTAL-ASSETS> 244,205 195,660
<CURRENT-LIABILITIES> 46,133 35,840
<BONDS> 0 0
0 0
0 0
<COMMON> 132,013 129,804
<OTHER-SE> 61,203 29,562
<TOTAL-LIABILITY-AND-EQUITY> 244,205 195,660
<SALES> 183,184 148,636
<TOTAL-REVENUES> 183,184 148,636
<CGS> 126,334 105,127
<TOTAL-COSTS> 126,334 105,127
<OTHER-EXPENSES> 30,707 24,163
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 27,647 20,621
<INCOME-TAX> 11,421 8,353
<INCOME-CONTINUING> 16,226 12,268
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 16,226 12,268
<EPS-BASIC> .77 .61
<EPS-DILUTED> .76 .60
</TABLE>
<PAGE>
EXHIBIT 99
IMPORTANT FACTORS REGARDING FORWARD LOOKING STATEMENTS
IN THIS EXHIBIT 99, "WE," "US," "OUR" AND "MAXIMUS" REFER TO MAXIMUS,
INC. AND ITS SUBSIDIARIES.
From time to time, we may make forward-looking public statements, such as
statements concerning our then-expected future revenues or earnings or
concerning projected plans, performance, contract procurement as well as other
estimates relating to future operations. Forward-looking statements may be in
reports filed under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), in press releases or informal statements made with the approval
of an authorized executive officer. The words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of Section 21E of the Exchange Act and Section 27A of the Securities
Act of 1933, as amended, as enacted by the Private Securities Litigation Reform
Act of 1995.
We wish to caution you not to place undue reliance on these forward-looking
statements which speak only as of the date on which they are made. In addition,
we wish to advise you that the factors listed below, as well as other factors we
have not currently identified, could affect our financial or other performance
and could cause our actual results for future periods to differ materially from
any opinions or statements expressed with respect to future periods or events in
any current statement.
We will not undertake and specifically decline any obligation to publicly
release revisions to these forward-looking statements to reflect either
circumstances after the date of the statements or the occurrence of events which
may cause us to re-evaluate our forward-looking statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act, we are hereby filing cautionary statements identifying
important factors that could cause our actual results to differ materially from
those projected in forward-looking statements made by us or on our behalf.
RELIANCE ON GOVERNMENT CLIENTS
Substantially all of our clients are state or local government authorities.
To market our services to government clients, we are largely required to respond
to government requests for proposals ("RFPs"). To do so effectively, we must
estimate accurately our cost structure for servicing a proposed contract, the
time required to establish operations and likely terms of the proposals
submitted by competitors. We must also assemble and submit a large volume of
information within a RFP's rigid timetable. Our ability to respond successfully
to RFPs will greatly impact our business, and we cannot guarantee that we will
be awarded contracts through the RFP process or that our proposals will result
in profitable contracts.
RISKS ASSOCIATED WITH GOVERNMENT CONTRACTING
EARLY TERMINATION OF CONTRACTS. Many of our government contracts contain
base periods of one or more years, as well as option periods covering more than
half of the contract's potential duration. Government agencies generally have
the right not to exercise these option periods. A decision not to exercise
option periods could impact the profitability of some of our contracts. Our
contracts typically also contain provisions permitting a government client to
terminate the contract on short notice, with or without cause. The unexpected
termination of one or more significant contracts could result in significant
revenue shortfalls. The natural expiration of especially large contracts can
also present management challenges. If revenue shortfalls occur and are not
offset by corresponding reductions in expenses, our business could be adversely
affected. We cannot be certain if, when or to what extent a client might
terminate any or all of its contracts with us.
CONTRACTS SUBJECT TO AUDIT. The Defense Contract Audit Agency ("DCAA"), and
certain other government agencies, have the authority to audit and investigate
any government contracts. These agencies review a contractor's performance on
its contract, its pricing practices, its cost structure and its compliance with
applicable laws, regulations and standards. Any costs found to be improperly
allocated to a specific contract will not be reimbursed, while costs already
reimbursed must be refunded. Therefore, a DCAA audit could result in a
substantial adjustment to our revenue. No material 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
-1-
<PAGE>
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 37% of our fiscal 1999 revenues from fixed-price contracts and
approximately 19% of our fiscal 1999 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. Added demands on our resources could adversely
affect our business.
RELATIONSHIPS WITH GOVERNMENT ENTITIES. To facilitate our ability to
prepare bids in response to RFPs, we rely in part on establishing and
maintaining relationships with officials of various government entities and
agencies. These relationships enable us to provide informal input and advice to
the government entities and agencies prior to the development of an RFP. We
cannot be certain that we will be successful in managing our relationships with
government entities and agencies, and any failure to do so may adversely affect
our business.
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.
-2-
<PAGE>
LEGISLATIVE CHANGE AND POLITICAL DEVELOPMENTS
DEPENDENCE ON LEGISLATIVE PROGRAMS. The market for our services
depends 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 ten consulting firms and have
acquired substantially all of the assets of a division of another firm. We are
still in the process of integrating the operations of several of these firms. We
cannot be certain that we will be able to continue to identify, acquire and
manage additional businesses profitably or integrate them successfully without
incurring substantial expenses, delays or other problems. Furthermore, business
combinations may involve special risks, including:
- Diversion of management's attention
- Loss of key personnel
- Assumption of unanticipated legal liabilities
- Amortization of acquired intangible assets
- Dilution to our earnings per share
Also, client dissatisfaction or performance problems at an acquired firm
could materially and adversely affect our reputation as a whole. Furthermore, we
cannot be certain that acquired businesses will achieve anticipated revenues and
earnings.
CHALLENGES RESULTING FROM GROWTH
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
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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 can be
terminated 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
COMPETITION FROM OTHER ORGANIZATIONS. Our Government Operations Group
competes for program management contracts with the following:
- Local non-profit organizations such as the United Way and
Goodwill Industries
- Government services divisions of large organizations such as Andersen
Consulting, Lockheed Martin Corporation and Electronic Data
Systems, Inc.
- Specialized service providers such as America Works, Inc., Policy
Studies Incorporated, and Benova, Inc.
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Our Consulting Group competes with:
- The consulting divisions of the "Big 5" accounting firms
- Electronic Data Systems, Inc.
Many of these companies are national and international in scope and have
greater resources than we have. Substantial resources could enable certain
competitors to initiate severe price cuts or take other measures in an effort to
gain market share. In addition, we may be unable to compete for a limited number
of large contracts because we may not be able to meet an RFP's requirement to
obtain and post large cash performance bonds. Also, in certain geographic areas,
we face competition from smaller consulting firms with established reputations
and political relationships. We cannot be certain that we will compete
successfully against our existing or any new competitors.
COMPETITION FROM FORMER EMPLOYEES. In addition to competition from existing
competitors, we may experience competition from former employees. Although we
have entered into non-competition agreements with some of our senior level
employees, we cannot be certain that a court would enforce these contracts.
Competition by former employees could adversely affect our business.
RISKS ASSOCIATED WITH PROCEEDINGS INVOLVING NEW YORK CONTRACTS
In January 2000, the New York City Human Resources Administration
("HRA") submitted two contracts that it had awarded to MAXIMUS for the
performance of welfare-to-work services to the Comptroller of New York City
to be registered. Under New York law, the contracts must be registered in
order for us to receive payment. However, the Comptroller refused to register
contracts alleging improprieties in the procurement process and in MAXIMUS's
conduct. The Mayor of the City of New York and HRA vehemently disagreed with
the Comptroller's assertions and, in March 2000, sued the Comptroller in the
Supreme Court of the State of New York - New York County (the "Court"),
seeking to require the Comptroller to register the contracts. On April 13,
2000, the Court issued a decision and judgment holding that the Comptroller
has a mandatory duty to register the contracts. However, as a matter of
judicial discretion, the Court refused to require registration, finding that
the Comptroller had established that the contract procurement process had
been corrupted. This decision has been appealed by the Mayor and HRA to the
New York Supreme Court Appellate Division - First Department. On April 24,
2000, we filed a motion in the Appellate Division to intervene in the
lawsuit. We are asking for the Court's decision to be set aside on the
grounds that it contained findings of fact against MAXIMUS not supported by
the record and that the Court failed to afford us with our constitutional
rights to notice of a hearing and an opportunity to be heard. The Appellate
Division has agreed to hear the appeal on an expedited basis. A hearing is
currently scheduled for June 2000. We believe that the Comptroller's claims
are without merit and intend to defend against his allegations vigorously.
However, we cannot provide assurance that the contracts will ultimately be
registered by the Comptroller.
This matter is also the subject of investigations being conducted by
certain governmental agencies. Specifically, the District Attorney's Office
of New York County and the United States Attorney's Office for the Southern
District of New York, in response to requests made by the Comptroller, have
announced that they are investigating the facts underlying this matter. Both
offices issued subpoenas to us in early May 2000. We believe that our actions
were lawful and appropriate and plan to cooperate fully with the governmental
investigations of the matter. Although there can be no assurance of a
favorable outcome, we do not believe that these investigations will have a
material adverse effect on our financial condition or results of operations.
However, if we are found to have engaged in illegal or improper activities,
we could be subject to civil and criminal penalties and administrative
sanctions, which could adversely affect our business.
LITIGATION
On May 12, 1998, we acquired David M. Griffith & Associates, Ltd.
("DMG"), which was subsequently merged into DMG-MAXIMUS, Inc. ("DMG_MAXIMUS"),
a wholly-owned subsidiary of MAXIMUS. A consolidated legal action was brought
against DMG-MAXIMUS and thirteen other named defendants in the U.S. District
Court for the District of Arizona by Superstition Mountains Community
Facilities District No. 1 (the "District") and Allstate Insurance Company
("Allstate"), alleging that DMG made false and misleading representations in
the reports DMG prepared as a consultant to underwriters of revenue bonds
issued by the District and purchased by Allstate. On May 12, 2000,
DMG-MAXIMUS agreed to a confidential settlement agreement with the District
and Allstate. The settlement amount to be paid by DMG-MAXIMUS is not material
and will not have an adverse effect on the Company's financial condition or
results of operations.
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representations in the reports DMG prepared included among the exhibits to the
bond offering memoranda. DMG's reports concerned certain financial projections
made by the District regarding its ability to service the bonds. Allstate seeks
as damages $32.1 million, the principal amount of bonds it purchased together
with accrued and unpaid interest; the District seeks actual and special damages,
prejudgment interest and costs. DMG-MAXIMUS believes these claims are without
merit and intends to defend against this action vigorously. We do not believe
these claims will have a material adverse effect on our financial condition or
results of operations. However, we cannot assure that we will be successful in
defending this lawsuit.
SUIT BY FORMER OFFICER. On November 28, 1997, an individual who was a
former officer, director and shareholder of MAXIMUS 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, we had failed to disclose to him material
information relating to the potential value of the shares. He further alleges
that we violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 and breached various fiduciary duties owed to him. The officer has also
named certain of our officers and directors in this lawsuit and brought the
same claims against them. The officer claims damages in excess of $10
million. This matter is currently scheduled for trial on September 11, 2000.
We do not believe that this claim has merit and intend to oppose it
vigorously. We do not believe this action will have a material adverse effect
on our financial condition or results of operations. However, we cannot
assure that we will be successful in our defense.
ADVERSE PUBLICITY
The nature of our contracts with state and local government authorities
frequently generates media attention. For example, the circumstances surrounding
the refusal of the Comptroller of New York City to register two welfare-to-work
contracts awarded to us has recently received a good amount of media coverage in
the New York area. Additionally, 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.
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
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Our executive officers own beneficially approximately 40% of our common
stock. Certain executive officers, who beneficially own approximately 34% 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, 2000, the closing sale price has ranged from a high of $41.50 per
share to a low of $17.00 per share. Even though the market price of our stock
has not been highly volatile during this time, the market price of our common
stock could fluctuate substantially due to a variety of factors, including:
- Quarterly fluctuations in results of operations
- The failure to be awarded a significant contract on which we have
bid
- The termination by a government client of a material contract
- The announcement of new services by competitors
- Acquisitions and mergers
- 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.
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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 could encounter a
number of additional risks. The potential risks to our expected international
revenues include:
- Adverse currency exchange rate fluctuations
- Inability to collect receivables
- Difficulty in enforcing contract terms through a foreign
country's legal system
Foreign countries could also impose tariffs, impose additional withholding
taxes or otherwise tax our foreign income.
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