================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-12997 MAXIMUS, INC. (Exact name of registrant as specified in its charter) ------------------ VIRGINIA 54-1000588 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1356 BEVERLY ROAD MCLEAN, VIRGINIA 22101 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 734-4200 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Class Outstanding at August 5, 1998 ----- ----------------------------- Common Shares, No Par Value 16,829,678
================================================================================ MAXIMUS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 INDEX PART 1. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets as of June 30, 1998 (unaudited) and September 30, 1997 Statements of Income for the three months and nine months ended June 30, 1998 and 1997 (unaudited) Statements of Cash Flows for the nine months ended June 30, 1998 and 1997 (unaudited) Notes to Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Litigation Item 2. Use of Proceeds from Registered Securities Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit Index - 2 - MAXIMUS, INC. BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, JUNE 30, 1997 1998 ---------------- ---------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . $11,000 $19,988 Marketable securities . . . . . . . . . . . . . . . . . . . . 40,869 13,318 Accounts receivable, net . . . . . . . . . . . . . . . . . . . 46,531 66,047 Costs and estimated earnings in excess of billings . . . . . . 5,605 5,717 Prepaid expenses and other current assets . . . . . . . . . . 1,435 655 Deferred income taxes . . . . . . . . . . . . . . . . . . . . - 660 ----------- ------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 105,440 106,385 Property and equipment at cost: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662 662 Building and improvements . . . . . . . . . . . . . . . . . . 1,721 1,721 Office furniture and equipment . . . . . . . . . . . . . . . . 4,902 5,711 Leasehold improvements . . . . . . . . . . . . . . . . . . . . 188 331 ----------- ------------- 7,473 8,425 Less: Accumulated depreciation and amortization . . . . . . . (3,578) (4,179) ----------- ------------- Total property and equipment, net . . . . . . . . . . . . . . . . . . . 3,895 4,246 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 1,241 62 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 921 1,240 ----------- ------------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $111,497 $111,933 =========== ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $3,914 $6,316 Accrued compensation and benefits . . . . . . . . . . . . . . 10,132 12,145 Billings in excess of costs and estimated earnings . . . . . . 12,277 13,209 Note payable . . . . . . . . . . . . . . . . . . . . . . . . . 1,596 - Income taxes payable . . . . . . . . . . . . . . . . . . . . . 3,932 1,756 Deferred income taxes . . . . . . . . . . . . . . . . . . . . 2,452 - S Corporation distribution payable 5,748 - ----------- ------------- Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 40,051 33,426 Deferred compensation, less current portion . . . . . . . . . . . . . . 3,534 - ----------- ------------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,585 33,426 ----------- ------------- Contingencies (Note 3) Shareholders' equity: Common stock, no par value; 30,000,000 shares authorized; 15,991,680 and 16,829,678 shares issued and outstanding at September 30, 1997 and June 30, 1998, at stated amount . . . . 82,315 82,922 Retained earnings (deficit) . . . . . . . . . . . . . . . . . (14,403) (4,415) ----------- ------------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . 52,961 78,507 ----------- ------------- Total liabilities and shareholders' equity . . . . . . . . . . . . . . $111,497 $111,933 =========== =============
See notes to financial statements. - 3 - MAXIMUS, INC. STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED JUNE 30, ENDED JUNE 30, --------------- -------------- 1997 1998 1997 1998 -------- -------- ------- ------- Revenues . . . . . . . . . . . . . . . . . . $36,083 $61,238 $124,163 $162,116 Cost of revenues . . . . . . . . . . . . . . 25,524 46,323 91,763 121,232 ------- ------- ------- ------- Gross profit . . . . . . . . . . . . . . . . 10,559 14,915 32,400 40,884 Selling, general and administrative expenses 6,190 7,122 18,013 23,788 Stock option compensation and acquisition expense . . . . . . . . . . . . . . . . . . 5,724 1,849 5,874 2,384 ------- ------- ------- ------- Income (loss) from operations . . . . . . . . (1,355) 5,944 8,513 14,712 Interest and other income . . . . . . . . . . 61 384 (29) 1,234 ------- ------- ------- ------- Income (loss) before income taxes . . . . . . (1,294) 6,328 8,484 15,946 Provision for income taxes . . . . . . . . . 907 2,549 1,989 6,378 ------- ------- ------- ------- Net income (loss) . . . . . . . . . . . . . . ($2,201) $ 3,779 $6,495 $9,568 ======= ======= ====== ====== Earnings (loss) per share: Basic . . . . . . . . . . . . . . . . . . . . ($ 0.17) $ 0.22 $ 0.51 $ 0.57 ======= ====== ====== ====== Diluted . . . . . . . . . . . . . . . . . . . ($ 0.17) $ 0.22 $ 0.50 $ 0.56 ======= ====== ====== ====== Shares used in computing earnings per share: Basic . . . . . . . . . . . . . . . . . . . . 13,040 16,829 12,670 16,814 ====== ====== ====== ====== Diluted . . . . . . . . . . . . . . . . . . . 13,040 17,220 13,024 17,205 ====== ====== ====== ======
See notes to financial statements. - 4 - MAXIMUS, INC. STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED JUNE 30, -------------- 1997 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,495 $9,568 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 398 432 Stock option compensation expense . . . . . . . . . . . . . . . 5,874 - Change in assets and liabilities: Accounts receivable, net . . . . . . . . . . . . . . . . . . . . (8,522) (17,977) Costs and estimated earnings in excess of billings . . . . . . . (2,772) (112) Prepaid expenses and other current assets . . . . . . . . . . . (665) 756 Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 1,146 (2,147) Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (65) (332) Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 50 2,666 Accrued compensation and benefits . . . . . . . . . . . . . . . 3,265 (1,527) Billings in excess of costs and estimated earnings . . . . . . . 5,826 1,162 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 971 (2,125) -------- ------- Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . 12,001 (9,636) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment . . . . . . . . . . . . . . . . . . . (688) (600) Sale (purchase) of marketable securities . . . . . . . . . . . . . . . . (39,805) 27,551 -------- ------- Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . (40,493) 26,951 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from initial public offering, net of expenses . . . . . . . . . 53,804 - S Corporation distributions . . . . . . . . . . . . . . . . . . . . . . (21,712) (6,368) Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . - 125 Payment for purchase of redeemable common stock . . . . . . . . . . . . (238) (188) Net (payments) proceeds from borrowings. . . . . . . . . . . . . . . . . 1,154 (2,363) -------- ------- Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . 33,008 (8,794) Cash flow adjustment for change in accounting period for David M. Griffith and Associates, Ltd . . . . . . . . . . . . . . . . . . . - 467 -------- ------- Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 4,516 8,988 Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . 2,387 11,000 -------- ------- Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . $6,903 $19,988 ======== =======
See notes to financial statements. - 5 - MAXIMUS, INC. NOTES TO FINANCIAL STATEMENTS FOR THE NINE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997 (DOLLARS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normally recurring accruals) considered necessary for a fair presentation have been included. The results of operations for the three-month and nine-month periods ended June 30, 1998 are not necessarily indicative of the results that may be expected for the full fiscal year. These financial statements should be read in conjunction with the audited financial statements as of September 30, 1996 and 1997 and for each of the three years in the period ended September 30, 1997 included in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission. 2. INITIAL PUBLIC OFFERING The Company completed an initial public offering ("IPO") of Common Stock during June 1997. Of the 6,037,500 shares of Common Stock sold in the IPO, 2,360,000 shares were sold by selling shareholders and 3,677,500 shares were sold by MAXIMUS, Inc. generating $53,804 in proceeds to the Company, net of offering expenses. The Company made cash payments of S corporation distributions (the "S Corporation Dividend") to shareholders totaling $21,712 and accrued $5,748 during the year ended September 30, 1997. The S Corporation Dividend represented the undistributed earnings of the Company taxed or taxable to the shareholders through the date of the IPO. During the quarter ended December 31, 1997, the Company paid the remaining $5,748 of the S Corporation Dividend. See also notes 5 and 6. 3. CONTINGENCIES On February 3, 1997, the Company was named as a third party defendant by Network Six, Inc. ("Network Six") in a legal action brought by the State of Hawaii against Network Six. Network Six alleges that the Company is liable to Network Six on various grounds. The Company believes Network Six's claims are without merit and intends to vigorously defend this action. The Company believes this action will not have a material adverse effect on its financial condition or results of operations and has not accrued for any loss related to this claim. On November 28, 1997, an individual who was a former officer, director and shareholder of the Company, filed a complaint in the United States District Court for the District of Massachusetts, alleging that at the time he resigned from the Company in 1996, thereby triggering the repurchase of his shares, the Company and certain of its officers and directors had failed to disclose material information to him relating to the potential value of the shares. He further alleges that the Company and its officers and directors violated Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and breached various fiduciary duties owed to him and claims damages in excess of $10 million. The Company does not believe that this action will have a material adverse effect on the Company's business, and it intends to vigorously defend this action. However, given the early stage of this litigation, no assurance may be given that the Company will be successful in its defense. The Company also is involved in various other legal proceedings in the ordinary course of business. In the opinion of management, these proceedings involve amounts that would not have a material effect on the financial position or results of operations of the Company if such proceedings were disposed of unfavorably. - 6 - 4. REVENUES FROM SIGNIFICANT CONTRACT Revenues for the three month periods ended June 30, 1998 and 1997 include $0 and $19, and for the nine month periods ended June 30, 1998 and 1997 include $0 and $31,612, respectively, from a significant contract with the U.S. Government Social Security Administration that was terminated in February 1997 pursuant to legislative action. 5. INCOME TAX PROVISION Prior to the IPO, the Company and its shareholders elected to be treated as an S corporation under the Internal Revenue Code. Under the provisions of the tax code, the Company's shareholders included their pro rata share of the Company's income in their personal tax returns. Accordingly, the Company was not subject to federal and most state income taxes. Upon completion of the IPO, the Company's S corporation status terminated for federal and state taxation purposes, and the Company recorded, in the three- month period ended June 30, 1997, a deferred tax charge of $2,566 for the cumulative differences between the financial reporting and income tax basis of certain assets and liabilities at June 12, 1997. The Company also recorded a deferred tax benefit of $2,055 related to stock option compensation expense for options given to employees. 6. BUSINESS COMBINATIONS On March 16, 1998, the Company issued 840,000 shares of its common stock in exchange for all of the common stock of Spectrum Consulting Group, Inc. and an affiliated company ("Spectrum"), both of San Antonio, Texas. This merger was accounted for as an immaterial pooling of interests and accordingly, the Company's financial statements, including earnings per share, were not restated for periods prior to January 1, 1998. Spectrum contributed revenues and operating income of $4,076 and $373 for the three months ended June 30, 1998, and $7,173 and $897 for the nine months ended June 30, 1998, respectively to the results of operations of the Company. Also, during the three months ended March 31, 1998, Spectrum paid S Corporation Dividends totaling $620 based upon estimated taxable income through March 15, 1998. On May 12, 1998, the Company issued 1,166,179 shares of its common stock in exchange for all of the outstanding common stock of David M. Griffith and Associates, Ltd. ("DMG"). This merger was accounted for as a pooling of interests and accordingly, the Company's financial statements, including earnings per share, have been restated for all periods presented to include the financial position and results of operations of DMG. 7. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("Statement 128"). Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. - 7 - The following table sets forth the computation of basic and diluted earnings per share:
Three Months Nine Months Ended June 30, Ended June 30, 1997 1998 1997 1998 --------------------------------------------------- Numerator: Net income . . . . . . . . . . . . . . . . . . . . . . ($2,201) $3,779 $6,495 $9,568 Denominator: Denominator for basic earnings per share: Weighted average shares outstanding . . . . . . . 13,040 16,829 12,670 16,814 ------ ------ ------ ------ Stock Options . . . . . . . . . . . . . . . . . . . . . - 391 354 391 ------ ------ ------ ------ Denominator for dilutive earnings per share . . . . . . 13,040 17,220 13,024 17,205
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW MAXIMUS provides program management and consulting services to government health and human services agencies in the United States. Founded in 1975, the Company has been profitable every year since inception. The Company conducts its operations through two groups, the Government Operations Group and the Consulting Group. The Government Operations Group administers and manages government health and human services programs, including welfare-to-work and job readiness, child support enforcement, managed care enrollment and disability services. The Consulting Group provides health and human services planning, information technology consulting, strategic program evaluation, program improvement, communications planning and revenue maximization services. In October 1996, President Clinton signed into law an amendment to the Social Security Act of 1935, effective January 1, 1997, that eliminated Social Security Income and Supplemental Security Disability Insurance benefits based solely on drug and alcohol disabilities. As a result of this legislative act, the Social Security Administration terminated a significant contract with the Company (the "SSA Contract") effective at the end of February 1997. All services to be provided to the Social Security Administration were completed in the quarter ended March 31, 1997. The SSA Contract contributed $0 and $19 thousand in the three-month periods ended June 30, 1998 and 1997 and $0 and $31.6 million in the nine-month periods ended June 30, 1998 and 1997. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 Revenues. Total contract revenues increased 69.7% to $61.2 million for the three months ended June 30, 1998 as compared to $36.1 million for the same period in 1997. Government Operations Group revenues increased 92.1% to $36.8 million for the three months ended June 30, 1998 from $19.2 million for the same period in 1997. This increase was due to an increase in the number of contracts in the Child Support, Managed Care Enrollment, and Welfare Reform divisions of the Government Operations Group. Consulting Group revenues increased 44.3% to $24.4 million for the three months ended June 30, 1998 from $16.9 million for the same period in 1997. The increase was due to revenues totaling $4.1 million resulting from the Spectrum Consulting companies, which were combined with the Company in a transaction accounted for as a pooling of interests effective January 1, 1998, and an increase in the number of contracts. Gross Profit. Gross profit consists of total revenues less cost of revenues. Total gross profit increased 41.3% to $14.9 million for the three months ended June 30, 1998 as compared to $10.6 million for the same period in 1997. Government Operations Group gross profit increased 39.6% to $6.5 million for the three months ended June 30, 1998 from $4.6 million for the three months ended June 30, 1997. As a percentage of revenues, Government Operations Group gross profit decreased to 17.6% for the three months ended June 30, 1998 from 24.2% for the same period in 1997. The decrease was due to anticipated lower gross profit margins on certain Managed Care Enrollment contracts which were begun during the quarter ended March 31, 1998, a higher amount of pass-through costs during the three months ended June 30, 1998 - 8 - on which the Company earns no gross profit, and favorable revenue recognition adjustments recorded in the June 1997 quarter. The Managed Care Enrollment contracts are expected to deliver normal Government Operations Group gross profit margins in subsequent periods. The Consulting Group gross profit increased 42.5% to $8.4 million for the three months ended June 30, 1998 from $5.9 million for the same period in 1997 principally due to the increased revenues. As a percentage of revenues, Consulting Group gross profit decreased to 34.6% for the three months ended June 30, 1998 from 35.0% for the same period in 1997, a negligible change. Selling, General and Administrative Expenses. Total selling, general and administrative ("SG&A") expenses increased 15.1% to $7.1 million for the three months ended June 30, 1998 as compared to $6.2 million for the same period in 1997. The increase in costs was due to increases in both professional and administrative personnel necessary to support the Company's growth, marketing and proposal preparation expenditures to pursue further growth and the additional expenses related to operating as a public company. As a percentage of revenues, SG&A expenses decreased to 11.6% for the three months ended June 30, 1998 from 17.2% for the same period in 1997. Stock Option Compensation Expense and Acquisition Expense. During the three months ended June 30, 1998, the Company incurred $1.8 million of non-recurring expenses in connection with the merger with DMG. These expenses consisted of legal, audit, broker, trustee and other expenses and the acceleration of expenses related to stock appreciation rights for DMG employees totaling $0.8 million. During the three months ended June 30, 1997, the Company, in connection with its IPO, recognized a non-recurring compensation expense of $5.7 million for stock options granted to employees. Interest and Other Income. The increase in interest and other income to $0.4 million for the three months ended June 30, 1998 as compared to $0.1 million for the same period in 1997 was due to the increase in invested funds which were generated as a result of the IPO. Provision for Income Taxes. Prior to the IPO, the Company and its shareholders elected to be treated as an S corporation under the Internal Revenue Code. Under the provisions of the tax code, the Company's shareholders included their pro rata share of the Company's income in their personal tax returns. Accordingly, the Company was not subject to federal and most state income taxes until June 12, 1997, the day prior to the completion of the initial public offering. Upon completion of the IPO, the Company's S corporation status was terminated and the Company became subject to federal and state corporate income taxes. The Company's income tax provision for the three months ended June 30, 1998 was $2.5 million as compared to $0.9 million for the three months ended June 30, 1997. The provision for income taxes for the three months ended June 30, 1998 consisted of state and federal income tax based on an estimated annual income tax rate of 40%. Tax expense for the three months ended June 30, 1997 included a deferred tax charge of $2.6 million for the cumulative differences between the financial reporting and income tax basis of certain assets and liabilities at June 12, 1997 and a deferred tax benefit of $2.1 million related to stock option compensation expense for options granted to employees. NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997 Revenues. Total contract revenues increased 30.6% to $162.1 million for the nine months ended June 30, 1998 as compared to $124.2 million for the same period in 1997. Government Operations Group revenues increased 30.2% to $96.8 million for the nine months ended June 30, 1998 from $74.4 million for the same period in 1997. For the nine months ended June 30, 1998, revenues from the SSA Contract were $0 as compared to $31.6 million for the same period in 1997. Excluding the SSA Contract, Government Operations Group revenues increased 126.5% to $96.8 million for the nine months ended June 30, 1998 from $42.7 million for the same period in 1997. This increase was due to an increase in the number of contracts in the Child Support, Managed Care Enrollment, and Welfare Reform divisions of the Government Operations Group. Consulting Group revenues increased 31.1% to $65.3 million for the nine months ended June 30, 1998 from $49.8 million for the same period in 1997. The increase was due to revenues totaling $7.2 million resulting from the Spectrum Consulting companies, which were combined with the Company in a transaction accounted for as a pooling of interests effective January 1, 1998, and new contracts secured by the Company. Gross Profit. Gross profit consists of total revenues less cost of revenues. Total gross profit increased 26.2% to $40.9 million for the nine months ended June 30, 1998 as compared to $32.4 million for the same period in 1997. Government Operations Group gross profit increased 24.5% to $17.7 million for the nine months ended June 30, 1998 from $14.2 million for the nine months ended June 30, 1997. As a percentage of revenues, Government Operations - 9 - Group gross profit decreased to 18.3% for the nine months ended June 30, 1998 from 19.1% for the same period in 1997. The decrease was due to anticipated lower gross profit margins on certain Managed Care Enrollment contracts which were begun during the quarter ended March 31, 1998. These contracts are expected to deliver normal Government Operations Group gross profit margins in subsequent periods. Consulting Group gross profit increased 27.5% to $23.2 million for the nine months ended June 30, 1998 from $18.2 million for the same period in 1997 principally due to the increased revenues. As a percentage of revenues, Consulting Group gross profit decreased to 35.5% for the nine months ended June 30, 1998 from 36.5% for the same period in 1997. This decrease was due primarily to one contract which, for competitive reasons, was bid using lower margins. Selling, General and Administrative Expenses. Total selling, general and administrative ("SG&A") expenses increased 32.1% to $23.8 million for the nine months ended June 30, 1998 as compared to $18.0 million for the same period in 1997. As a percentage of revenues, SG&A expenses increased to 14.7% for the nine months ended June 30, 1998 from 14.5% for the same period in 1997. The increase in costs was due to increases in both professional and administrative personnel necessary to support the Company's growth, marketing and proposal preparation expenditures to pursue further growth and the additional expenses related to operating as a public company. Stock Option Compensation Expense and Acquisition Expense. During the nine months ended June 30, 1998, the Company incurred $2.4 million of non-recurring expenses in connection with the mergers with DMG and Spectrum. These expenses consisted of legal, audit, broker, trustee and other expenses and the acceleration of expenses related to stock appreciation rights for DMG employees totaling $0.8 million. During the nine months ended June 30, 1997, the Company recognized a non-recurring compensation expense of $5.9 million for stock options granted to employees. Interest and Other Income. The increase in interest and other income to $1.2 million for the nine months ended June 30, 1998 as compared to a net expense of $29 thousand for the same period in 1997 was due to the increase in invested funds which were generated as a result of the IPO. Provision for Income Taxes. Prior to the IPO, the Company and its shareholders elected to be treated as an S corporation under the Internal Revenue Code. Under the provisions of the tax code, the Company's shareholders included their pro rata share of the Company's income in their personal tax returns. Accordingly, the Company was not subject to federal and most state income taxes until June 12, 1997, when the initial public offering was completed. . Upon completion of the IPO, the Company's S corporation status was terminated and the Company became subject to federal and state corporate income taxes. The Company's income tax provision for the nine months ended June 30, 1998 was $6.4 million as compared to $2.0 million for the nine months ended June 30, 1997. The provision for income taxes for the nine months ended June 30, 1998 consisted of state and federal income tax based on an estimated annual income tax rate of 40%. Tax expense for the nine months ended June 30, 1997 included a deferred tax charge of $2.6 million for the cumulative differences between the financial reporting and income tax basis of certain assets and liabilities at June 12, 1997 and a deferred tax benefit of $2.1 million related to stock option compensation expense for options given to employees. LIQUIDITY AND CAPITAL RESOURCES The Company's cash used in operations for the nine months ended June 30, 1998 was $9.6 million as compared to $14.2 million cash provided by operations for the nine months ended June 30, 1997. The decrease in cash provided by operations during the nine months ended June 30, 1998 compared to the nine months ended June 30, 1997 was primarily due to increases in accounts receivable totalling $18.0 million caused by the increase in revenue volume, the payment of income taxes totaling $4.4 million for the year ended September 30, 1997, and the payment by DMG of deferred compensation to employees totalling $4.4 million, offset by other net changes in working capital. Certain marketable securities were sold during the nine months ended June 30, 1998, generating $27.6 million in proceeds. These investments were sold to provide general operating capital and the necessary cash to fund the cash used in operations discussed previously and to pay the final S corporation distribution discussed below. During the three months ended December 31, 1997, the Company made final S corporation distributions totaling $5.7 million. The distributions to shareholders were based upon the income previously taxed to the S corporation - 10 - shareholders and the fiscal 1997 income taxable to the S corporation shareholders. The amount of the fiscal 1997 taxable income was determined during the finalization of the Company's income for the full fiscal year ended September 30, 1997, and the liability for the $5.7 million distribution was recognized on the September 30, 1997 balance sheet. Also, during the three months ended March 31, 1998, Spectrum paid S Corporation Dividends totaling $620 based upon estimated taxable income through March 15, 1998. The Company has a $10.0 million revolving credit facility (the "Credit Facility") with a bank, which may be used for borrowing and the issuance of letters of credit. Outstanding letters of credit totaled $0.4 million at June 30, 1998. The Credit Facility bears interest at a rate equal to LIBOR plus an amount which ranges from 0.65% to 1.25% depending on the Company's debt to equity ratio. The Credit Facility contains certain restrictive covenants and financial ratio requirements, including a minimum net worth requirement of $60 million. The Company has not used the Credit Facility to finance its working capital needs and, at June 30, 1998, the Company had $9.6 million available under the Credit Facility. Management believes that the Company will have sufficient resources to meet its cash needs over the next 12 months, which may include start-up costs associated with new contract awards, obtaining additional office space, establishing new offices, investment in upgraded systems infrastructure or acquisitions of other businesses and technologies. Cash requirements beyond the next 12 months will depend on the Company's profitability, its ability to manage working capital requirements and its rate of growth. IMPACT OF YEAR 2000 The Company is aware of the issues that many computer systems will face as the millennium ("Year 2000") approaches. The Company believes that its own internal software and hardware is Year 2000 compliant. In addition, in order to perform on its government contracts, the Company relies to varying extents on information processing performed by the governmental agencies and entities with which it contracts. The Company has inquired where necessary of such agencies and entities of potential Year 2000 problems, and, based on responses to such inquiries, management believes that the Company will be able to continue to perform on such contracts without material negative financial impact. FORWARD LOOKING STATEMENTS Statements that are not historical facts, including statements about the Company's confidence and strategies and the Company's expectations about future contracts, market opportunities, market demand or acceptance of the Company's products are forward looking statements that involve risks and uncertainties. These uncertainties include reliance on government clients; risks associated with government contracting; risks involved in managing government projects; legislative change and political developments; opposition from government unions; challenges resulting from growth; adverse publicity; and legal, economic and other risks detailed in Exhibit 99 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1998. - 11 - - 12 - Part II. Other Information. Item 1. Litigation. On May 12, 1998, the Company acquired DMG, which currently operates as a wholly-owned subsidiary of the Company. DMG is defending against two lawsuits. In 1994, DMG was engaged as a consultant by underwriters of revenue bonds issued by Superstition Mountains Community Facilities District No. 1 (the "District") to finance construction of a waste water treatment plant in Arizona. The bonds were later defaulted upon when the District declared bankruptcy. Two actions arising out of those events were filed against Griffth in the U.S. District Court for the District of Arizona, one filed on January 20, 1997 by Allstate Insurance Company (the "Allstate") against DMG and 13 other named defendants, and another filed on December 2, 1996 by the District against DMG and nine other named defendants. The complaints allege that DMG made false and misleading representations in the bond offering memorandum with respect to the accuracy of certain financial projections made by the District regarding its ability to service the bonds. Allstate seeks as damages the principal amount of the face value of the bonds it purchased together with accrued and unpaid interest; the District seeks actual and special damages, prejudgment interest and costs. MAXIMUS intends to defend both of these actions vigorously. However, a decision by the court in favor of either or both plaintiffs could have a material adverse effect on MAXIMUS's business, financial condition and results of operations. Item 2. Use of Proceeds from Registered Securities. A Registration Statement on Form S-1 (File No. 333-29115) registering 6,037,500 shares of the Company's Common Stock, filed in connection with the Company's IPO, was declared effective by the Securities and Exchange Commission on June 12, 1997. The IPO closed on June 18, 1997 and the offering has terminated. The Company's net proceeds from the IPO were $53,804,000. The Company used $9,300,000 of the net proceeds from the IPO during the three months ended June 30, 1998 to fund the cash needs of DMG including the liquidation of deferred compensation liabilities of approximately $4,400,000, the discharge of a note payable to a bank in the amount of $1,400,000, payment of current accounts payable totalling approximately $2,000,000, and general operating capital. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The Exhibits filed as part of this Form 10-Q are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K dated May 12, 1998 reporting on the completion of the merger of DMG with and into the Company and providing certain financial information in connection therewith. - 13 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MAXIMUS, INC. Date: August 13, 1998 By: /s/ F. Arthur Nerret -------------------------------------------------------------------- F. Arthur Nerret Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
- 14 - EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 10 Amendment No. 1, dated June 23, 1998, to the 1997 Employee Stock Purchase Plan. 27 Financial Data Schedules (EDGAR). 99 Important Factors Regarding Forward Looking Statements.
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