SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
MARCH 30, 1999
MAXIMUS, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 1-12997 54-10005888
(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
1356 BEVERLY ROAD, MCLEAN, VIRGINIA 22101
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code:
(703) 734-4200
ITEM 5. OTHER EVENTS
On February 26, 1999, MAXIMUS, Inc. ("MAXIMUS") completed a business
combination with Control Software, Inc. ("CSI"). The transaction, which
resulted in CSI becoming a wholly-owned subsidiary of MAXIMUS, was accounted
for as a pooling-of-interests under generally accepted accounting principles.
The following supplemental financial statements and related
supplemental financial information reflecting the combination with CSI are
included as part of this Current Report on Form 8-K. These supplemental
financial statements and related financial information will replace the
financial statements and related financial information included in MAXIMUS'
Annual Report on Form 10-K for the year ended September 30, 1998 after MAXIMUS
reports its financial results for a period subsequent to the combination with
CSI.
Selected Supplemental Consolidated Financial Data;
Management's Discussion and Analysis of Supplemental
Financial Condition and Results of Operations;
Report of Ernst & Young LLP, Independent Auditors;
Report of Grant Thornton LLP, Independent Auditors;
Supplemental Consolidated Balance Sheets as of
September 30, 1997 and 1998;
Supplemental Consolidated Statements of Income for the
years ended September 30, 1996, 1997 and 1998;
Supplemental Consolidated Statements of Changes in
Redeemable Common Stock and Shareholders' Equity for
the years ended September 30, 1996, 1997 and 1998;
Supplemental Consolidated Statements of Cash Flows for
the years ended September 30, 1996, 1997 and 1998; and
Notes to Supplemental Consolidated Financial
Statements for the years ended December 31, 1996, 1997
and 1998
Supplemental Consolidated Balance Sheet as of December
31, 1998
Supplemental Consolidated Statements of Income for the
three months ended December 31, 1997 and 1998
Supplemental Consolidated Statements of Cash Flows for the
three months ended December 31, 1997 and 1998
Notes to Supplemental Consolidated Financial Statements for
the three months ended December 31, 1997 and 1998
Management's Discussion and Analysis of Supplemental
Consolidated Financial Condition and Results of Operations
2
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The selected supplemental consolidated financial data presented below as of
September 30, 1997 and 1998 and for each of the three years in the period ended
September 30, 1998 are derived from the Company's Supplemental Consolidated
Financial Statements and related Notes thereto which have been audited by Ernst
& Young LLP, independent auditors, except for the financial statements of David
M. Griffith and Associates, Ltd. ("DMG"), a consolidated subsidiary, which
through December 31, 1997 were audited by other independent auditors. The
selected financial data give retroactive effect to the combination with DMG and
Control Software Inc. ("CSI"), which were accounted for using the pooling of
interests method. The selected supplemental consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of
Supplemental Financial Condition and Results of Operations" and the
Supplemental Consolidated Financial Statements and related Notes included in
this Form 8-K. The historical results are not necessarily indicative of the
results of operations to be expected in the future.
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
1994 1995 1996 1997 1998 1997 1998
------------------------------------------------------------------------- ---------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SUPPLEMENTAL STATEMENT OF
INCOME DATA
Revenues.................... $61,251 $88,386 $140,492 $173,355 $244,114 $50,394 $72,346
Cost of revenues............ 45,141 62,128 106,258 127,170 181,403 37,647 52,233
------------------------------------------------------------------------- ------ ------
Gross profit............... 16,110 26,258 34,234 46,185 62,711 12,747 20,113
Selling, general and
administrative expenses..... 12,252 16,201 20,584 26,100 34,909 8,426 11,261
Stock option,
merger, deferred
compensation and
ESOP expense (a).......... 436 1,400 1,556 7,372 3,671 467 --
------------------------------------------------------------------------- ------ ------
Income from
operations.................. 3,422 8,657 12,094 12,713 24,131 3,854 8,852
Interest and other
income (expense)............ (186) (64) (47) 921 1,823 537 394
------------------------------------------------------------------------- ------ ------
Income before income tax ... 3,236 8,593 12,047 13,634 25,954 4,391 9,246
Provision for
income taxes (b)............ 1,089 736 530 4,104 10,440 1,592 3,653
------------------------------------------------------------------------- ------ ------
Net income.................. $ 2,147 $ 7,857 $ 11,517 $ 9,530 $ 15,514 $ 2,799 $ 5,593
========================================================================= ====== ======
Earnings per share:
Basic..................... $ 0.16 $ 0.59 $ 0.87 $ 0.67 $ 0.86 $ 0.17 $ 0.29
========================================================================= ====== ======
Diluted................... $ 0.16 $ 0.59 $ 0.87 $ 0.65 $ 0.85 $ 0.16 $ 0.28
========================================================================= ====== ======
Shares used in
computing
earnings per
share:
Basic..................... 13,638 13,207 13,273 14,208 17,937 16,692 19,276
Diluted................... 13,638 13,207 13,273 14,593 18,296 17,083 19,746
========================================================================= ====== ======
AS OF SEPTEMBER,
- ------------------------------------------------------------------------- AS OF
1994 1995 1996 1997 1998 DECEMBER 31, 1998
-------------- --------------- ------------ ------------- --------------- -----------------
SUPPLEMENTAL BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents
and short term investments $ 1,411 $ 2,656 $ 3,397 $ 51,875 $ 32,980 $ 87,429
Working capital............. 10,065 16,680 25,467 66,108 78,478 144,895
Total assets................ 31,056 39,147 50,993 113,884 126,002 190,602
Total debt.................. 5,492 4,558 331 321 620 599
Redeemable common
stock....................... 15,390 21,434 31,758 - - -
Total stockholders'
equity...................... (4,335) (2,819) (3,651) 69,041 86,787 153,391
(a) In January 1997, the Company issued options to various employees to
purchase 403,975 shares of common stock at a formula price based on book value.
During 1997, the Company recorded a non-recurring charge against income of
$5,874,000 for the difference between the IPO price and the formula price for
all options outstanding. The Company recorded a deferred tax benefit relating
to the charge in the amount of $2,055,000. The option exercise price is a
formula price based on the book value of the common stock at September 30,
1996, and was established pursuant to a pre-existing shareholder agreement.
3
(b) For the three years ended September 30, 1996, and during fiscal year 1997
up to and including June 12, 1997, the Company elected to be treated as an S
corporation and the income of the Company was taxed for federal and most state
purposes directly to the Company's shareholders. In connection with its IPO,
the Company's S corporation status terminated and the Company recorded a
deferred tax charge against income of $2,566,000 for the cumulative differences
between the financial reporting and income tax basis of certain assets and
liabilities at June 12, 1997. Subsequent to June 12, 1997, the Company has
recorded state and federal income taxes based on earnings for those periods.
Income taxes provided for periods prior to the IPO related primarily to
operations of DMG.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As an important part of the Company's growth strategy, it has recently
completed combinations with five consulting 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, and Control Software, Inc. (CSI) in February 1999,
all of which were accounted for as poolings of interests combinations. See
"Business Combinations." Prior year amounts have been restated to reflect the
combinations with DMG and CSI. The Spectrum, Carrera and Phoenix combinations
were accounted for as immaterial poolings of interests, and, accordingly, the
Company's previously issued financial statements were not restated to reflect
these combinations.
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 disability services,
managed care enrollment, welfare-to-work and job readiness and child support
enforcement. The Consulting Group provides consulting services to state,
county and local government agencies, including health and human services, law
enforcement, parks and recreation, taxation, housing, motor vehicles, labor,
education and legislatures.
The Company's revenues are generated from contracts with various
payment arrangements, including: (i) costs incurred plus a fixed fee
("cost-plus"); (ii) fixed-price; (iii) performance-based criteria; and (iv)
time and materials reimbursement (utilized primarily by the Consulting Group).
For the fiscal year ended September 30, 1998, revenues from these contract
types were approximately 23%, 46%, 17% and 14%, respectively, of total
revenues. Traditionally, federal government contracts have been cost-plus and a
majority of the contracts with state and local government agencies have been
fixed-price and performance-based. Fixed price and performance-based contracts
generally offer higher margins but typically involve more risk than cost-plus
or time and materials reimbursement contracts because the Company is subject to
the risk of potential cost overruns or inaccurate revenue estimates.
Effective January 1, 1997, the Social Security Act of 1935 was amended
to eliminate Social Security Income and Supplemental Security Disability
Insurance benefits based solely on drug and alcohol disabilities. As a result,
the Social Security Administration terminated the SSA Contract effective at the
end of February 1997. All services provided to the Social Security
Administration were completed in the quarter ended March 31, 1997. The SSA
Contract contributed $56.5 million, $31.6 million and $0 to the Company's
revenues in fiscal years 1996, 1997 and 1998, respectively.
The Government Operations Group's contracts generally contain base
periods of one or more years as well as one or more option periods that may
cover more than half of the potential contract duration. As of September 30,
1998, the Company's average Government Operations contract duration was 3 1/2
years. The Company's Consulting Group involve performance periods of one month
to in excess of two years. Indicative of the long-term nature of the Company's
engagements, approximately 60% of the Company's fiscal 1998 revenues were in
backlog as of September 30, 1997.
The Company's most significant expense is cost of revenues, which
consists primarily of project related employee salaries and benefits,
subcontractors, computer equipment and travel expenses. The Company's ability
to accurately predict personnel requirements, salaries and other costs as well
as to
4
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.
During 1997, the Company recognized two significant charges against
income. The completion of its initial public offering ("IPO") resulted in the
termination of the Company's S corporation status. As a result, the Company
recorded a non-recurring 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, the day prior to the IPO. In
connection with the IPO, on January 31, 1997, certain key employees of the
Company surrendered rights to purchase shares of Common Stock of the Company in
exchange for options to purchase shares of Common Stock at an exercise price of
$1.46 per share. The Company recognized a non-cash compensation charge against
income of $5.9 million, the difference between the initial public offering
price and the option exercise price for all outstanding options. The option
exercise price was based on the adjusted book value of the Common Stock at
September 30, 1996, and was established pursuant to pre-existing compensation
arrangements with these employees.
BUSINESS COMBINATIONS
As part of its growth strategy, the Company expects to continue to
pursue complementary business combinations to expand its geographic reach,
expand the breadth and depth of its service offerings and enhance the Company's
consultant base. In furtherance of this growth strategy, the Company combined
with four consulting firms during 1998 and one firm during 1999 in transactions
accounted for as poolings of interests.
As of March 16, 1998, the Company acquired all of the outstanding
shares of capital stock of Spectrum in exchange for 840,000 shares of Common
Stock. Spectrum, based in Austin, Texas, provides management consulting
services that focus on assisting public sector organizations in solving complex
business problems related to automation. Spectrum's operations complement and
expand the Company's existing information technology and systems planning and
integration consulting service offerings. At the time of the combination,
Spectrum had approximately 37 consultants and three other employees.
As of May 12, 1998, the Company acquired all of the outstanding capital
stock of DMG in exchange for 1,166,179 shares of Common Stock. DMG, based in
Northbrook, Illinois, provides consulting services to state and local
government and other public sector clients throughout the United States. DMG's
operations complement the Company's existing management consulting and
information technology services and expand the Company's service offerings to
include a broad range of financial planning, cost management and various other
consulting services aimed at the public sector. At the time of the combination,
DMG had approximately 375 consultants and 40 other employees.
As of August 31, 1998, the Company acquired all of the outstanding
shares of capital stock of Carrera in exchange for 1,137,420 shares of Common
Stock. Carrera, based in Sacramento, California, provides consulting services
that focus on assisting public sector entities implement large-scale,
software-based human resource and financial systems. At the time of the
combination, Carrera had 78 consultants and eight other employees.
As of August 31, 1998, the Company acquired all of the outstanding
shares of capital stock of Phoenix in exchange for 254,545 shares of Common
Stock. Phoenix, based in Rockville, Maryland, provides consulting services to
public sector entities in planning, implementing and evaluating the utilization
of various electronic commerce technologies, such as electronic benefits
transfer, electronic funds transfer and electronic card technologies. At the
time of the combination, Phoenix had 11 consultants and three other employees.
5
As of February 26, 1999, the Company acquired all of the outstanding
shares of capital stock of CSI in exchange for 700,212 shares of Common Stock.
CSI, based in Wayne, Pennsylvania, provides fleet management software and
related services to public sector entities. At the time of the combination,
CSI had 46 employees.
6
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected statements
of income data as a percentage of revenues:
YEARS ENDED SEPTEMBER 30,
1996 1997 1998
---------------------------------------------------
Revenues:
Government Operations Group 14.7% 38.0% 57.0%
Consulting Group 45.1 43.8 43.0
SSA Contract 40.2 18.2 -
---------------------------------------------------
Total revenues 100.0 100.0 100.0
Gross Profit:
Government Operations Group 20.3 22.3 18.0
Consulting Group 34.3 35.7 35.9
SSA Contract 14.7 13.9 -
---------------------------------------------------
Total gross profit as a percent of revenue 24.4 26.6 25.7
Selling, general and administrative expenses 14.7 15.1 14.3
Stock option compensation, mergers deferred compensation
and ESOP expenses 1.1 4.3 1.5
---------------------------------------------------
Income from operations 8.6 7.2 9.9
Interest and other income (expenses) - 0.5 0.7
---------------------------------------------------
Income before income taxes 8.6 7.9 10.6
Provision for income taxes 0.4 2.4 4.2
---------------------------------------------------
Net income 8.2% 5.5% 6.4%
===================================================
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Revenues. Total revenues increased 40.8% to $244.1 million in fiscal
1998 from $173.4 million in fiscal 1997. Government Operations Group revenues
increased 43.0% to $139.3 million in fiscal 1998 from $97.4 million in fiscal
1997 due to an increase in the number of contracts in the Child Support
Enforcement, Managed Care Enrollment and Welfare Reform divisions of the group
and revenues from three Managed Care contracts totaling $18.1 million purchased
from another company in February 1998. Excluding the SSA Contract, which had
$31.6 million of revenues in fiscal 1997, Government Operations Group revenues
increased 111.8% as compared to fiscal 1997. Consulting Group revenues
increased 38.0% to $104.9 million in fiscal 1998 from $76.0 million in fiscal
1997 due to an increase in the number of contracts and revenues from companies
which merged with the Company in fiscal 1998 in transactions accounted for as
pooling of interests. Revenues from the merged companies accounted for as
immaterial poolings totaled $16.9 million in fiscal 1998.
Gross Profit. Total gross profit increased 35.8% to $62.7 million in
fiscal 1998 from $46.2 million in fiscal 1997. Government Operations Group
gross profit increased 31.4% to $25.1 million in fiscal 1998 from $19.1 million
in fiscal 1997. As a percentage of revenues, Government Operations Group gross
profit decreased to 18.0% in fiscal 1998 from 22.3% in fiscal 1997 primarily
due to anticipated lower gross margins on the three purchased Managed Care
Enrollment contracts. Consulting Group gross profit
7
increased 38.9% to $37.7 million in fiscal 1998 from $27.1 million in fiscal
1997 due principally to the increased revenues. As a percentage of revenues,
Consulting Group gross profit was 35.9% in fiscal 1998 and 35.7% in fiscal
1997.
Selling, General and Administrative Expenses. Total selling, general
and administrative expenses increased 33.8% to $34.9 million in fiscal 1998
from $26.1 million in fiscal 1997. This increase in costs was due to increases
in both professional and administrative personnel and professional fees
necessary to support the Company's growth, marketing and proposal preparation
expenditures incurred to pursue further growth and the impact of business
combinations accounted for as immaterial poolings of interests. From September
30, 1997 to September 30, 1998 administrative and systems personnel increased
18% from 125 to 147 and the Company grew from 1,800 total employees at
September 30, 1997 to more than 2,800 total employees at September 30, 1998. As
a percent of revenues, selling, general and administrative expenses decreased
slightly to 14.3% for fiscal 1998 from 15.1% for fiscal 1997.
Stock Option Compensation, Merger, Deferred Compensation and ESOP
Expenses. During fiscal year 1998, the Company incurred $3.7 million of
non-recurring expenses in connection with the mergers with Spectrum, DMG,
Carrera and Phoenix. These expenses consisted of legal, audit, broker, trustee,
deferred compensation and other expenses and the acceleration of expenses
related to stock appreciation rights for DMG employees totaling $0.9 million.
During fiscal year 1997, in connection with its IPO, the Company recognized a
non-recurring compensation expense of $5.9 million for stock options granted to
employees. Also in fiscal 1997, the Company incurred $1.5 million of deferred
compensation expenses for DMG employees related to plans which were terminated
subsequent to the merger with the Company.
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 income taxes.
Income tax expense for fiscal year increased 154.4% to $10.4 million in
fiscal 1998 from $4.1 million in fiscal 1997. As a percentage of income before
income taxes, the income tax expense for fiscal 1998 is 40.2% compared to 30.1%
for fiscal 1997. The fiscal 1998 tax expense was adversely impacted by $0.5
million due to the nondeductibility of certain merger related expenses.
Additional information regarding income tax expense is in Note 9 to the
consolidated financial statements contained in this document.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Revenues. Total revenues increased 23.4% to $173.4 million in fiscal
1997 from $140.5 million in fiscal 1996. Government Operations Group revenues
increased 26.1% to $97.4 million in fiscal 1997 from $77.2 million in fiscal
1996 due to an increase in the number of projects offset by a decrease in
revenue from the SSA Contract, which was terminated in February 1997. The SSA
Contract contributed $31.6 million to fiscal 1997 revenues as compared to $56.5
million to fiscal 1996 revenues. Excluding the SSA Contract, Government
Operations Group revenues increased 218.0% to $65.8 million in fiscal 1997 from
$20.7 million in fiscal 1996 due to increases in the numbers of contracts in
the Welfare Reform, Managed Care Enrollment Services, and Child Support
Enforcement divisions of the group. Consulting Group revenues increased 20.1%
to $76.0 million in fiscal 1997 from $63.3 million in fiscal 1996 due to an
increase in the number of contracts and increased revenues from management
studies, fleet consulting, franchise fee consulting, revenue maximization
contracts and international business.
Gross Profit. Total gross profit increased 34.9% to $46.2 million in
fiscal 1997 from $34.2 million in fiscal 1996. Government Operations Group
gross profit increased 52.1% to $19.1 million in fiscal 1997 from $12.5 million
in fiscal 1996. As a percentage of revenues, Government Operations Group gross
profit increased to 19.6% in fiscal 1997 from 16.2% in fiscal 1996 primarily
due to the decreased revenue volume of the SSA Contract in fiscal 1997, which
had a lower gross profit margin than other contracts in the group, and to
favorable profit recognition adjustments on two large projects. Excluding the
SSA Contract,
8
Government Operations Group gross profit as a percentage of revenues increased
to 22.3% in fiscal 1997 from 20.3% in fiscal 1996. Consulting Group gross
profit increased 25.0% to $27.1 million in fiscal 1997 from $21.7 million in
fiscal 1996 due to principally to the increased revenues. As a percentage of
revenues, Consulting Group gross profit increased to 35.7% in fiscal 1997 from
34.3% in fiscal 1996 which represents normal variability of gross profit from
period to period.
Selling, General and Administrative Expenses. Total selling, general
and administrative expenses increased 26.8% to $26.1 million in fiscal 1997
from $20.6 million in fiscal 1996. This increase in costs was due to increases
in both professional and administrative personnel and professional fees
necessary to support the Company's growth and marketing and proposal
preparation expenditures incurred to pursue further growth. As a percent of
revenues, selling, general and administrative expenses increased to 15.1% for
fiscal 1997 from 14.7% for fiscal 1996.
Stock Option Compensation, Merger, Deferred Compensation and ESOP
Expenses. During fiscal year 1997, in connection with its IPO, the Company
recognized a non-recurring compensation expense of $5.9 million for stock
options granted to employees. The Company incurred $1.5 million in fiscal 1997
and $1.6 million in fiscal 1996 of deferred compensation expenses for DMG
employees related to plans which were terminated subsequent to the merger with
the Company.
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 income taxes.
As a percentage of income before income taxes, the income tax expense
for fiscal 1997 is 30.1% compared to 4.4% for fiscal 1996. Additional
information regarding income tax expense is in Note 9 to the consolidated
financial statements contained in this document.
QUARTERLY RESULTS
Set forth below are selected income statement data for the eight
quarters ended September 30, 1998. This information is derived from unaudited
quarterly financial statements which include, in the opinion of management, all
adjustments necessary for a fair presentation of the information for such
periods. This information should be read in conjunction with the Supplemental
Consolidated Financial Statements and related Notes thereto included in this
Form 8-K. Results of operations for any fiscal quarter are not necessarily
indicative of results for any future period.
QUARTERS ENDED
-------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1997 1997 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Government Operations Group............... $ 8,029 $ 15,551 $ 19,158 $ 23,019
Consulting Group.......................... 18,000 18,523 18,118 21,345
SSA Contract.............................. 22,511 9,082 19 -
------------- ------------- ------------- -------------
Total revenues............................... 48,540 43,156 37,295 44,364
Cost of revenues............................. 37,714 31,113 26,318 32,025
------------- ------------- ------------- -------------
Gross profits................................ 10,826 12,043 10,977 12,339
Selling, general and administrative expenses 5,852 6,308 6,378 7,562
Stock option compensation, merger, deferred
compensation and ESOP expense............. 392 509 6,077 394
------------- ------------- ------------- -------------
Income (loss) from operations................ 4,582 5,226 (1,478) 4,383
Interest and other income.................... 71 107 152 591
------------- ------------- ------------- -------------
Income (loss) before income taxes............ 4,653 5,333 (1,326) 4,974
Provision for income taxes................... 416 666 907 2,115
============= ============= ============= =============
Net income (loss)............................ $ 4,237 $ 4,667 $(2,233) $ 2,859
============= ============= ============= =============
Earnings per share:
Basic..................................... $0.32 $0.36 $(0.16) $0.17
Diluted................................... $0.32 $0.35 $(0.16) $0.17
QUARTERS ENDED
-------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Government Operations Group............... $ 27,772 $ 32,189 $ 36,844 $ 42,458
Consulting Group.......................... 22,622 23,770 27,390 31,069
SSA Contract.............................. - - - -
------------- ------------- ------------- -------------
Total revenues............................... 50,394 55,959 64,234 73,527
Cost of revenues............................. 37,647 41,117 48,611 54,028
------------- ------------- ------------- -------------
Gross profits................................ 12,747 14,842 15,623 19,499
Selling, general and administrative expenses 8,426 8,641 7,381 10,461
Stock option compensation, merger, deferred
compensation and ESOP expense............. 467 907 1,972 325
------------- ------------- ------------- -------------
Income (loss) from operations................ 3,854 5,294 6,270 8,713
Interest and other income.................... 537 548 391 347
------------- ------------- ------------- -------------
Income (loss) before income taxes............ 4,391 5,842 6,661 9,060
Provision for income taxes................... 1,592 2,237 2,549 4,062
============= ============= ============= =============
Net income (loss)............................ $ 2,799 $ 3,605 $ 4,112 $ 4,998
============= ============= ============= =============
Earnings per share:
Basic..................................... $0.17 $0.21 $0.24 $0.26
Diluted................................... $0.16 $0.20 $0.23 $0.26
The results of operations for the quarter ended June 30, 1997 include
two significant nonrecurring charges, a $5.7 million charge ($3.7 million after
tax) for the difference between the IPO price and the formula price for stock
options outstanding, and a $2.6 million charge to record deferred income taxes
upon termination of the Company's S corporation status.
The Company's revenues and operating results are subject to significant
variation from quarter to quarter depending on a number of factors, including
the progress of contracts, revenues earned on contracts, the commencement and
completion of contracts during any particular quarter, the schedule of the
government agencies for awarding contracts, the term of each contract that the
Company has been awarded and general economic conditions. Because a significant
portion of the Company's expenses are relatively fixed, successful contract
performance and variation in the volume of activity as well as in the number of
contracts commenced or completed during any quarter may cause significant
variations in operating results from quarter to quarter. Furthermore, the
Company has on occasion experienced a pattern in its results of
9
operations pursuant to which it incurs greater operating expenses during the
start-up and early stages of significant contracts. In addition, the
termination of the SSA Contract and the absence of revenues thereunder after
March 31, 1997 significantly reduced the Company's revenue base as compared to
previous quarters. No assurances can be given that quarterly results will not
fluctuate, causing a material adverse effect on the Company's operating results
and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operations.
The Company's cash flow from operations was ($7.2) million, $18.6 million and
$4.4 million for the years ended September 30, 1998, 1997 and 1996,
respectively. The decrease in cash flow from operations in fiscal 1998 as
compared to fiscal 1997 is due primarily to increased accounts receivable
related to revenue growth.
Certain marketable securities were sold during the year ended September
30, 1998 generating $27.8 million in proceeds. These investments were sold to
provide general working capital, including necessary income tax payments, and
to pay the final S corporation distribution discussed below. The Company has no
material commitments for capital expenditures and, as a services company, does
not anticipate making any significant capital expenditures during fiscal year
1999.
Cash flow used in financing activities was $10.1 million in fiscal 1998.
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 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. The
Company also made S corporation distributions totaling $2.0 million to former
shareholders of Spectrum, Phoenix, and CSI during fiscal 1998. Cash flow from
financing activities was $31.1 million in fiscal 1997. In June 1997, the
Company received net proceeds of $53.8 million from the sale of stock in its
IPO. The Company made S corporation distributions of $21.7 million,
representing a portion of the estimated income taxed or taxable to the S
corporation shareholders through the date of its IPO.
The Company has a $10.0 million revolving credit facility (the "Credit
Facility") with Crestar Bank in Virginia, which may be used for borrowing and
the issuance of letters of credit. Outstanding letters of credit totaled $0.4
million at September 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 September 30, 1998, the Company
had $9.6 million available under the Credit Facility.
Certain companies that merged into the Company during 1998 and 1999 had
various arrangements for short and long-term borrowings. These credit
arrangements generally were repaid following the related merger and do not
significantly affect the Company's financial statements.
Management believes that the Company will have sufficient resources to
meet its cash needs over the next 12 months. Such cash needs may include
start-up costs associated with new contract awards, obtaining additional office
space, establishing new offices, investment in upgraded systems infrastructure
and acquisitions of other businesses and technologies. Cash requirements beyond
the next 12 months depend on the Company's profitability, its ability to manage
working capital requirements, its rate of growth, the amounts ultimately spent
on business acquisitions, if any, and the leasing of new office space, if any.
YEAR 2000
The Company is aware of the issues that many computer systems will face
as the millennium ("Year 2000") approaches. The Company is auditing its
internal software and hardware and is implementing corrective actions where
necessary to address Year 2000 problems. The Company is also currently
reviewing the software and hardware, and implementing corrective actions where
necessary, of DMG,
10
Carrera, Spectrum and Phoenix, all of which the Company combined with during
1998, and of CSI with which the Company combined with in February 1999. The
Company will continue to assess the need for Year 2000 contingency plans as its
remediation efforts progress. The Company estimates that its remediation
efforts will be completed by March 31, 1999. The Company does not believe that
the cost of its remediation efforts will be material or that these efforts will
have a material impact on its operations or financial results. However, there
can be no assurance that those costs will not be greater than anticipated, or
that corrective actions undertaken will be completed before any Year 2000
problems could occur.
The Company also provides assistance in assessing, evaluating, testing
and certifying government client systems affected by Year 2000 problems, as
well as quality assurance monitoring of Year 2000 compliance conversions
performed for clients by third parties. Although the Company has attempted to
contract to provide such services in a manner that will minimize its liability
for system failures, there can be no assurance that the Company would not
become subject to legal proceedings which, if resolved in a manner adverse to
the Company, could have a material adverse effect on its financial condition.
The Company relies to varying extents on information processing
performed by the governmental agencies and entities with which it contracts.
The Company has inquired where necessary of such agencies and entities of
potential Year 2000 problems, and, based on responses to such inquiries,
management believes that the Company would be able to continue to perform on
such contracts without material negative financial impact. However, the Company
cannot be certain that Year 2000 related systems failures in the information
systems of clients will not occur and, if such failures occur, that they will
not interfere with the Company's ability to properly manage a contracted
project and result in a material adverse effect on the Company's business,
financial condition and results of operations.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about
the Company's confidence and strategies and the Company's expectations
regarding its ability to obtain future contracts, expand its market
opportunities or attract highly-skilled employees, are forward looking
statements that involve risks and uncertainties. These risks and uncertainties
include legislative changes and political developments adverse to the
privatization of the provision of government services; risks related to
possible 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 99.1 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1998.
11
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors
MAXIMUS, Inc.
We have audited the supplemental consolidated balance sheets of
MAXIMUS, Inc., formed as a result of the combination of MAXIMUS, Inc. and
Control Software, Inc., as of September 30, 1997 and 1998, and the related
supplemental consolidated statements of income, changes in redeemable common
stock and shareholders' equity, and cash flows for each of the three years in
the period ended September 30, 1998. These supplemental consolidated financial
statements give retroactive effect to the merger of MAXIMUS, Inc. and Control
Software, Inc. on February 26, 1999, which has been accounted for using the
pooling of interests method as described in the notes to the supplemental
consolidated financial statements. These supplemental financial statements are
the responsibility of the management of MAXIMUS, Inc. Our responsibility is
to express an opinion on these supplemental financial statements based on our
audits. We did not audit the financial statements of David M. Griffith &
Associates, Ltd., a wholly-owned subsidiary, which statements reflect total
assets of $15.5 million as of December 31, 1997 and total revenues of $32.6
million and $39.4 million for the years ended December 31, 1996 and 1997. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to data included for David M.
Griffith & Associates, Ltd. is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
MAXIMUS, Inc. at September 30, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1998, after giving retroactive effect to the merger of
Control Software, Inc., as described in the notes to the supplemental
consolidated financial statements, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Washington, DC
November 13, 1998 except for the fifth paragraph of Note 3,
as to which the date is March 22, 1999
12
REPORT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS
Board of Directors
David M. Griffith & Associates, Ltd.
We have audited the balance sheet of David M. Griffith & Associates, Ltd. (an
Illinois corporation) as of December 31, 1997, and the related statements of
earnings, stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 1997 (not presented herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of David M. Griffith &
Associates, Ltd. as of December 31, 1997, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/GRANT THORNTON LLP
Chicago, Illinois
March 18, 1998, except for Note L
which is as of March 23, 1998
13
MAXIMUS, Inc.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
September 30,
-------------
1997 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents................. $ 11,006 $ 19,403
Marketable securities..................... 40,869 13,577
Accounts receivable, net.................. 48,164 76,981
Costs and estimated earnings in excess
of billings (Note 5).................... 5,605 5,924
Prepaid expenses and other current assets. 1,453 1,188
-------- --------
Total current assets........................ 107,097 117,073
Property and equipment at cost:
Land...................................... 662 662
Building and improvements................. 1,721 1,721
Office furniture and equipment............ 6,031 7,703
Leasehold improvements.................... 188 214
-------- --------
8,602 10,300
Less: Accumulated depreciation and
amortization...................... (4,427) (5,433)
-------- --------
Total property and equipment, net........... 4,175 4,867
Deferred income taxes (Note 9).............. 1,241 1,434
Other assets................................ 1,371 2,628
-------- --------
Total assets................................ $113,884 $126,002
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 4,063 $ 10,006
Accrued compensation and benefits......... 10,132 15,877
Billings in excess of costs and estimated
earnings (Note 5)........................ 13,066 11,608
Notes payable............................. 1,596 200
Income taxes payable...................... 3,932 3
Deferred income taxes..................... 2,452 901
S corporation distribution payable
(Note 10)............................... 5,748 --
-------- --------
Total current liabilities................... 40,989 38,595
Long-term debt.............................. 321 620
Deferred compensation, less
current portion............................. 3,533 --
-------- --------
Total liabilities 44,843 39,215
Commitments and contingencies
(Notes 7 and 11)
Shareholders' equity (Note 10):
Common stock, no par value; 30,000,000
shares authorized; 16,691,892 and
18,925,602 shares issued and outstanding
at September 30, 1997 and 1998, at
stated amount............................. 66,783 68,623
Retained earnings ........................ 2,258 18,164
-------- --------
Total shareholders' equity.................. 69,041 86,787
-------- --------
Total liabilities and
shareholders' equity........................ $113,884 $126,002
======== ========
See notes to supplemental consolidated financial statements.
14
MAXIMUS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year ended September 30,
------------------------
1996 1997 1998
---- ---- ----
Revenues...................... $140,492 $173,355 $244,114
Cost of revenues.............. 106,258 127,170 181,403
-------- -------- --------
Gross profit.................. 34,234 46,185 62,711
Selling, general and
administrative
expenses.................... 20,584 26,100 34,909
Stock option compensation,
merger, deferred
compensation and ESOP
expense..................... 1,556 7,372 3,671
-------- -------- --------
Income from operations....... 12,094 12,713 24,131
Interest and other
income (expense).............. (47) 921 1,823
-------- -------- --------
Income before income taxes... 12,047 13,634 25,954
Provision for income taxes... 530 4,104 10,440
-------- -------- --------
Net income.................... $ 11,517 $ 9,530 $ 15,514
======== ======== ========
Earnings per share:
Basic. . . . . . . . . . . . $ 0.87 $ 0.67 $ 0.86
======== ======== ========
Diluted. . . . . . . . . . . $ 0.87 $ 0.65 $ 0.85
======== ======== ========
Weighted average shares
outstanding:
Basic . . . . . . . . . . . 13,273 14,208 17,937
======== ======== ========
Diluted . . . . . . . . . . 13,273 14,593 18,296
======== ======== ========
15
See notes to supplemental consolidated financial statements.
8
MAXIMUS, Inc.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN
REDEEMABLE
COMMON STOCK AND SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
Shareholder's Equity
--------------------
Redeemable
Common Common Retained
Stock Stock Earnings
----- ----- --------
Balance at September 30, 1995................ $21,434 $ -- $(2,819)
Issuance of redeemable common stock to
employees................................. 229 -- --
Net income................................. -- -- 11,517
Adjustment to redemption value of
redeemable common stock................... 10,095 -- (10,095)
S Corporation distributions................ -- -- (2,254)
------- ------- --------
Balance at September 30, 1996................ 31,758 -- (3,651)
Purchase of redeemable common stock from
employee.................................. (1,422) -- --
Issuance of common stock to employees...... -- 778 --
Compensation charge for stock options...... -- 5,874 --
Net income................................. -- -- 9,531
Adjustment to redemption value of
redeemable common stock................... 25 -- (25)
Adjustment to retained earnings upon
initial public offering................... -- (9,083) 9,083
Reclass of redeemable common stock upon
initial public offering................... (30,361) 15,410 14,950
Net proceeds from sale of common stock
in initial public offering................. -- 53,804 --
S Corporation distributions................ -- -- (27,630)
------- ------- --------
Balance at September 30, 1997................ -- 66,783 2, 258
Purchase of common stock from employee..... -- (454) --
Net income................................. -- -- 15,514
Tax benefit due to option exercise......... -- -- 173
Adjustment for DMG results previously
reported.................................. -- -- 156
Increase resulting from immaterial
poolings.................................. -- 137 3,843
Issuance of common stock to employees...... -- 144 --
Issuance of common stock in exchange for
debt...................................... -- 150 --
Reclassification of CSI accumulated
earnings.................................. -- 1,863 (1,863)
S Corporation distributions................ -- -- (1,917)
------- ------- --------
Balance at September 30, 1998................ $ -- $68,623 $ 18,164
======= ======= ========
See notes to supplemental consolidated financial statements.
16
MAXIMUS, Inc.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year ended September 30,
1996 1997 1998
---- ---- ----
Cash flows from
operating activities:
Net income..................... $11,517 $9,530 $15,514
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation................ 933 1,124 1,078
Amortization................ -- -- 1,401
Stock option compensation
expense..................... -- 5,874 --
Other....................... 4 (157) 173
Changes in assets and
liabilities:
Accounts receivable, net.... (9,029) (10,701) (22,922)
Costs and estimated
earnings in excess of
billings................... (2,173) (2,656) (326)
Prepaid expenses and other
current Assets............. (203) (794) 373
Other assets................ (101) (241) (43)
Accounts payable............ 150 2,835 4,845
Accrued compensation and
benefits................... 884 3,497 338
Billings in excess of costs
and estimated earnings..... 2,236 6,725 (1,309)
Income taxes payable........ (81) 3,914 (3,877)
Deferred income taxes....... 279 (319) (2,475)
-------- ------- --------
Net cash provided by (used in)
operating activities............. 4,416 18,631 (7,230)
Cash flows from
investing activities:
Purchase of contracts.......... -- -- (2,436)
Increase in cash resulting from
immaterial Poolings........... -- -- 1,002
Purchase of property and
equipment..................... (807) (1,301) (1,160)
(Purchase) sale of marketable
securities.................... (994) (39,857) 27,822
-------- ------- --------
Net cash (used in)
provided by investing
activities....................... (1,801) (41,158) 25,228
Cash flows from financing
activities:
Proceeds from initial public
offering, net of expenses. . . -- 53,804 --
S Corporation distributions.... (2,254) (21,882) (7,665)
Redeemable common stock
purchased..................... (899) (1,234) --
Common stock issued............ 229 4 144
Net proceeds from (payments
on) borrowings................ 49 452 (2,547)
-------- ------- --------
Net cash (used in) provided by
financing activities.......... (2,875) 31,144 (10,068)
Cash flow adjustment for change
in accounting period of DMG -- -- 467
-------- ------- --------
Net (decrease) increase in cash
and cash equivalents............ (260) 8,617 8,397
Cash and cash equivalents,
beginning of year............... 2,649 2,389 11,006
-------- ------- --------
Cash and cash equivalents, end
of year......................... $2,389 $11,006 $19,403
======== ======= ========
See notes to supplemental consolidated financial statements.
17
MAXIMUS, Inc.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
MAXIMUS, Inc. (the "Company") provides a wide range of program management
and consulting services to federal, state and local government health and human
services agencies. The Company conducts its operations through two groups. 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
Services Group provides health and human services planning, information
technology consulting, strategic program evaluation, program improvement,
communications planning, and assistance to state and local governments in
identifying and collecting previously unclaimed federal welfare revenues.
The Company operates predominantly in the United States. Revenues from
foreign-based projects were less than 10% of total revenues for the years ended
September 30, 1998, 1997 and 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the Company's more significant accounting
policies.
Principles of Consolidation
The supplemental consolidated financial statements include the accounts of
wholly-owned subsidiaries. All material intercompany items have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes, in particular, estimates used in the earnings recognition
process. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
Revenue Recognition
The Company generates revenue under various arrangements, generally
long-term contracts under which revenues are based on costs incurred plus a
negotiated fee, a fixed price or various performance-based criteria. Revenues
for cost-plus contracts are recorded as costs are incurred and include a pro
rata amount of the negotiated fee. Revenues on long-term fixed price and
performance-based contracts are recognized as costs are incurred. The timing
of billing to clients varies based on individual contracts and often differs
from the period of revenue recognition. These differences are included in
costs and estimated earnings in excess of billings and billings in excess of
costs and estimated earnings.
Management reviews the financial status of its contracts quarterly and
adjusts revenues to reflect current expectations on realization of costs and
estimated earnings in excess of billings. Provisions for estimated losses on
incomplete contracts are provided in full in the period in which such losses
become known. The Company has various fixed price and performance-based
contracts that may generate profit in excess of the Company's expectations. The
Company recognizes additional revenue and profit in these situations after
management concludes that substantially all of the contractual risks have been
eliminated, which generally is at task or contract completion.
18
Marketable Securities
Marketable securities are classified as available-for-sale and are recorded
at fair market value with unrealized gains and losses, net of taxes, reported
as a separate component of shareholders' equity, if material. Realized gains
and losses and declines in market value judged to be other than temporary are
included in investment income. Interest and dividends are included in
investment income. There are no material unrealized gains or losses on
marketable securities at September 30, 1998 and 1997. Marketable securities
consist primarily of short-term municipal and commercial bonds.
Property and Equipment
Property and equipment is stated at cost and depreciated using both the
straight-line and accelerated methods based on estimated useful lives not to
exceed 39 years for the Company's buildings and between three and ten years for
office furniture and equipment. Leasehold improvements are amortized over the
lesser of their useful life or the remaining term of the lease.
Income Taxes
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted rates expected to be in effect during the year in which the differences
reverse.
Prior to its initial public offering, 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 income tax returns.
Accordingly, the Company was not subject to federal and most state income taxes
during the periods prior to the initial public offering. The completion of the
Company's initial public offering during June 1997 resulted in the termination
of the Company's S Corporation status for income tax purposes. In connection
therewith, the Company recorded a deferred tax charge against income 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 merged with two companies during 1998 that had elected to be
treated as S Corporations. The merger resulted in the termination of the S
Corporation status for those companies and the Company recorded a deferred tax
charge against income of $325 for cumulative differences between the financial
statement and tax basis of assets and liabilities.
Accounting Standards Not Adopted
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" which established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. This statement is effective for fiscal
years beginning after December 15, 1997.
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments
of an Enterprise and Related Information" which established standards for
public business enterprises to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments. The financial information is required to
be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This statement is effective for financial statements for periods
beginning after December 15, 1997.
19
The Company does not expect the impact of adopting these new accounting
standards to be significant.
Fair Value of Financial Instruments
The Company considers the recorded value of its financial assets and
liabilities, which consist primarily of cash and cash equivalents, marketable
securities, accounts receivable and accounts payable, to approximate the fair
value of the respective assets and liabilities at September 30, 1997 and 1998.
3. 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"). This merger was accounted for as an
immaterial pooling of interests and accordingly, the Company's financial
statements, including earnings per share, were not restated for periods prior
to January 1, 1998.
On 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. ("Griffith"). 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 Griffith. Griffith's
operations for the years ended December 31, 1996 and 1997 were combined with
the Company's operations for the fiscal years ended September 30, 1996 and
1997. This resulted in inclusion of Griffith operating results for the three
months ended December 31, 1997 in the Company's operating results for both
fiscal 1997 and 1998. Griffith's revenues and net income for the three months
ended December 31, 1997 were $11,450 and $(156), respectively.
On August 31, 1998, the Company issued 1,137,420 shares of its common stock
in exchange for all of the outstanding common stock of Carrera Consulting Group
("Carrera"). This merger was accounted for as an immaterial pooling of
interests and accordingly, the Company's financial statements, including
earnings per share, were not restated for periods prior to July 1, 1998.
On August 31, 1998, the Company issued 254,545 shares of its common stock
in exchange for all of the outstanding common stock of Phoenix Planning &
Evaluation, Ltd. ("Phoenix"). This merger was accounted for as an immaterial
pooling of interests and accordingly, the Company's financial statements,
including earnings per share, were not restated for periods prior to July 1,
1998.
On February 26, 1999, the Company issued 700,212 shares of its common stock
in exchange for all of the outstanding common stock of Control Software, Inc.
("CSI"). This merger was accounted for as a pooling of interests and
accordingly, the Company's supplemental consolidated financial statements,
including earnings per share, have been restated for all periods presented to
include the financial position and results of operations of CSI. CSI's
operations for the years ended December 31, 1996, 1997 and 1998 were combined
with the Company's operations for the fiscal years ended September 30, 1996,
1997 and 1998. This will result in inclusion of CSI's operating results for the
three months ended December 31, 1998 in the Company's operating results for
both fiscal 1998 and 1999. CSI's revenues and net income for the three months
ended December 31, 1998 were $2,170 and $114, respectively. These supplemental
consolidated financial statements will become the historical financial
statements of the Company after financial statements covering the date of the
consumation of the business combination are issued.
All of the companies involved in the mergers described above are involved
primarily in consulting services for state and local governments. CSI also
derives revenue from the licensing of software. The merged companies accounted
for as immaterial poolings, contributed $16,854 to the Company's revenues for
the year ended September 30, 1998.
A reconciliation of the Company's revenues and net income, as previously
reported, to the restated results that give effect to the DMG and CSI
combinations for the fiscal years ended September 30, 1996, 1997 and 1998
follows:
20
Year Ended September 30,
------------------------------------
1996 1997 1998(1)
---- ---- ----
Revenues as previously reported. . . . $103,113 $127,947 $233,473
DMG revenues . . . . . . . . . . . . . 32,560 39,377 --
CSI revenues . . . . . . . . . . . . . 4,819 6,031 10,641
-------- -------- --------
Combined revenues. . . . . . . . . . . $140,492 $173,355 $244,114
======== ======== ========
Net income as previously reported. . . $11,619 $ 8,589 $ 14,454
DMG net income . . . . . . . . . . . . 174 745 --
CSI net income . . . . . . . . . . . . (276) 196 1,060
-------- -------- --------
Combined net income. . . . . . . . . . $11,517 $ 9,530 $ 15,514
======== ======== ========
(1) DMG revenues and net income are included in the 1998 revenues and net
income previously reported
4. Earnings Per Share
The following table sets forth the computation of basic
and diluted earnings per share:
Year Ended September 30,
------------------------
1996 1997 1998
---- ---- ----
Numerator:
Net income. . . . . . . . . . . $11,517 $ 9,530 $15,514
Denominator:
Weighted average shares 13,273 14,208 17,937
outstanding. . . . . . . .. . .
Effect of dilutive securities:
Employee stock options. . . . . -- 385 359
------- -------- -------
Denominator for dilutive
earnings per share . . . . . . 13,273 14,593 18,296
======= ======== =======
5. Costs and Estimated Earnings on Uncompleted Contracts
Uncompleted contracts consist of the following
components:
Balance Sheet Caption
---------------------
Costs and Billings in
estimated excess of
earnings in costs and
excess of estimated
billings earnings
-------- --------
September 30, 1997:
Costs and estimated earnings. . . . . . . . . . . $136,008 $119,765
Billings. . . . . . . . . . . . . . . . . . . . . 130,403 132,831
-------- --------
$ 5,605 $ 13,066
======== ========
September 30, 1998:
Costs and estimated earnings. . . . . . . . . . . $193,022 $192,219
Billings. . . . . . . . . . . . . . . . . . . . . 187,098 203,827
-------- --------
$ 5,924 $ 11,608
======== ========
Costs and estimated earnings in excess of billings relate primarily to
performance-based contracts
21
which provide for billings based on attainment of results specified in the
contract and differences between actual and provisional billing rates on
cost-based contracts.
6. CREDIT FACILITIES
The Company has a $10 million revolving line of credit with a bank.
Borrowings under this line bear interest at LIBOR plus an amount which ranges
from 0.65% to 1.25% depending on the Company's debt to equity ratio. The
Company had no borrowings under the Credit Facility at September 30, 1998.
Under the terms of the line, the Company is required to maintain at all time:
(i) an excess of current assets to current liabilities of not less than 1.5 to
1, (ii) net worth of $60 million, and (iii) a ratio of total liabilities to net
worth of not more than 1.5 to 1. There were no outstanding borrowings under
the line of credit facility at September 30, 1998. The line of credit expires
on March 31, 1999. At September 30, 1997 and 1998, the Company had letters of
credit outstanding amounting to $508 and $401, respectively.
Certain companies that merged into the Company during 1998 had various
arrangements for short and long-term borrowings. These credit arrangements
generally were repaid following the related merger and do not significantly
affect the Company's financial statements.
7. LEASES
The Company leases office space under various operating leases, the
majority of which contain clauses permitting cancellation upon certain
conditions. The terms of these leases provide for certain minimum payments as
well as increases in lease payments based upon the operating cost of the
facility and the consumer price index. Rent expense for the years ended
September 30, 1996, 1997, and 1998 was $3,408, $5,412 and $7,074, respectively.
Minimum future payments under these leases are as follows:
YEARS ENDED SEPTEMBER 30,
1999. . . . . . . . . . . . . . . . . . $ 8,984
2000. . . . . . . . . . . . . . . . . . 5,610
2001. . . . . . . . . . . . . . . . . . 4,041
2002. . . . . . . . . . . . . . . . . . 2,884
2003. . . . . . . . . . . . . . . . . . 1,938
Thereafter. . . . . . . . . . . . . . . 997
-------
$24,454
=======
8. EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION
The Company has 401(k) plans and other defined contribution plans for the
benefit of all employees who meet certain eligibility requirements. The Plans
provide for Company match, specified Company contributions, and/or
discretionary Company contributions. During the years ended September 30,
1996, 1997 and 1998, the Company contributed $688, $806 and $1,387 to the
plans, respectively.
Prior to its merger with the Company, Griffith had an employee stock
ownership plan covering substantially all of its employees. During 1996, 1997
and 1998, amounts charged to operations for the plan were $643, $897, and $394,
respectively.
Prior to its merger with the Company, Griffith had deferred compensation
arrangements with certain
22
officers and employees and had granted stock appreciation rights to certain
current and retired officers and employees. The stock appreciation rights
provided for full vesting and current settlement at the time of the merger.
During 1996, 1997, and 1998, amounts charged to operations under these
arrangements were $461, $216, and $972, including a one-time income
statement charge of $942 in 1998 as a result of the merger.
23
9. INCOME TAXES
The Company's provision for income taxes is as follows:
Year ended September 30,
------------------------
1996 1997 1998
---- ---- ----
Current provision:
State. . . . . . . . . . . . . $ 250 $ 701 1,894
Federal. . . . . . . . . . . . -- 3,722 10,676
Deferred tax expense (benefit). . . 280 (319) (2,130)
---------- ------- --------
$ 530 $ 4,104 $ 10,440
====================================
The provision for income taxes resulted in effective tax rates that varied
from the federal statutory income tax rate as follows:
Year ended September 30,
------------------------
1996 1997 1998
---- ---- ----
Expected federal income tax
provision $ 4,102 $ 4,640 $ 9,074
Effect of income taxed directly
to S Corporation shareholders . . (3,934) (3,964) (658)
State income taxes. . . . . . . . 250 607 1,245
Effect of termination of S -- 2,566 325
Corporation status. . . . . . . .
Effect of nondeductible merger
costs . . . . . . . . . . . . . . -- -- 531
Other . . . . . . . . . . . . . . 112 255 (77)
-------- --------- --------
$ 530 $ 4,104 $ 10,440
======== ========= ========
24
The significant items comprising the Company's deferred tax assets and
liabilities as of September 30, 1997 and 1998 are as follow:
September 30,
-------------
1997 1998
---- ----
Deferred tax assets - current:
Liabilities for costs deductible in future periods. . . . . . . . . . . . . $ 425 $ 810
Billings in excess of costs and estimated earnings. . . . . . . . . . . . . 4,699 4,126
-------- --------
Total Deferred tax assets - current. . . . . . . . . . . . . . . . . . . . . 5,124 4,936
Deferred tax liabilities - current:
Cash versus accrual accounting. . . . . . . . . . . . . . . . . . . . . . 5,334 2,915
Costs and estimated earnings and excess of billing. . . . . . . . . . . . . 2,242 2,512
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 410
-------- --------
Total deferred tax liabilities - current. . . . . . . . . . . . . . . . . . . 7,576 5,837
-------- --------
Net deferred tax (liability) - current . . . . . . . . . . . . . . . . . . . $(2,452) $ (901)
======== ========
Deferred tax assets (liabilities) - non-current:
Stock option compensation . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,055 $ 1,874
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,388 --
Cash versus accrual accounting. . . . . . . . . . . . . . . . . . . . . . . (2,202) (795)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 355
-------- --------
Net deferred tax asset - non-current. . . . . . . . . . . . . . . . . . . . . $ 1,241 $ 1,434
======== ========
Cash paid for income taxes during the years ended September 30, 1996, 1997,
and 1998 was $313, $274 and $16,507, respectively.
10. SHAREHOLDERS' EQUITY
Initial Public Offering
The Company completed an initial public offering (the "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 were sold
by MAXIMUS, Inc. generating $53,804 in proceeds to the Company, net of offering
expenses.
S Corporation Distributions
During fiscal year 1997, the Company made cash distributions to its S
Corporation Shareholders prior to the IPO totaling $1,212. In connection with
the IPO, the Company made an additional distribution of $20,500 to its S
Corporation Shareholders and accrued an additional distribution at September
30, 1997 in the amount of $5,748, such aggregate amount representing the
undistributed earnings of the Company taxed or taxable to shareholders through
the date of the IPO.
Consistent with their past practices, Spectrum, Phoenix, and CSI paid S
Corporation dividends totaling $1,917 during 1998, based upon pre-merger
taxable income.
Reclassification of Undistributed Earnings
The Company has reclassified CSI's undistributed earnings to capital as a
result of the Company's change in tax status to that of a C-corporation.
Redeemable Common Stock
Prior to the IPO, a shareholders' agreement obligated the Company to
purchase all shares offered for sale by the Company's shareholders at a formula
price based on the book value of the Company. In addition, shareholders were
obligated to sell and the Company was obligated to purchase at the formula price
all of the shares owned by the shareholders upon the shareholder's death,
disability or termination of employment. DMG had agreements with certain of its
shareholders to repurchase its shares under certain circumstances at fair value.
The Company's obligation to purchase common shares from shareholders terminated
upon completion of the IPO. Accordingly, amounts classified previously as
redeemable common stock were reclassified into shareholder's equity.
25
Employee Stock Purchase Plan
During fiscal 1998, the company implemented a plan which permits employees
to purchase shares of the company's common stock each quarter at 85% of the
market value on the last day of the quarter. The initial sale of shares under
the plan occurred subsequent to September 30, 1998.
Stock Option Plans
The Company's Board of Directors established stock option plans during 1997
pursuant to which the Company may grant incentive and non-qualified stock
options to officers, employees and directors of the Company. Such plans also
provide for stock awards and direct purchases of the Company's common stock.
The vesting period and share price for awards are determined by the
Company's Board of Director at the date of grant. Options granted during 1997
include those which were fully vested on issuance and others which vest over
periods from two to four years. The Company's Board of Directors has reserved
3 million shares of common stock for issuance under the Company's stock option
plans. At September 30, 1998, 2.0 million shares were available for grants
under the Company's option plans.
In January 1997, the Company issued options to various employees to
purchase 403,975 shares of the Company's common stock at a formula price based
on book value. During 1997, the Company recorded a non-recurring charge against
income of $5,874 for the difference between the IPO price and the formula price
for all options outstanding. The Company recorded a deferred tax benefit
relating to the charge in the amount of $2,055.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting and Disclosure for
Stock-Based Compensation," which provides for a fair value based methodology of
accounting for all stock option plans. Under SFAS 123, companies may account
for stock options under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations and provide
pro forma disclosure of net income, as if the fair value based method of
accounting defined in SFAS 123 had been applied. The Company has elected to
follow APB 25 and related interpretations in accounting for its employee stock
options and provide pro forma fair value disclosure under SFAS 123.
Pro forma information regarding net income has been determined as if the
Company had accounted for its stock options under the fair value method of SFAS
123. The fair value for these options was estimated at the date of grant using
a minimal valuation method in 1997 and the Black-Scholes method in 1998 with
the following assumptions - Volatility 42% for 1998, risk free interest rate
6.5% for 1997 and 5.5% for 1998, dividend yield 0% and an expected life of the
option of 4 years. The grant-date fair value of options granted was $3.58 for
1997 and $9.61 for 1998.
26
For purposes of the pro forma disclosure, the estimated fair value of the
options is amortized to reflect such expense over the options' vesting period.
For the years ended September 30, 1997 and 1998 pro forma net income and pro
forma net income per share resulting from the adjustment for stock option
compensation was as follows:
September 30,
-------------
1997 1998
---- ----
Net Income. . . . . . . . . . . . . . . $ 9,530 $ 15,514
FAS 123 compensation expense. . . . . . (972) (780)
-------- --------
Net income, as adjusted. . . . . . . . $ 8,558 $ 14,734
======== ========
Net income per share, as adjusted:
Basic. . . . . . . . . . . . . . . $ 0.60 $ 0.82
Diluted. . . . . . . . . . . . . . $ 0.59 $ 0.81
A summary of the Company's stock option activity for the years ended
September 30, 1997 and 1998 is as follows:
Weighted-
Average
Exercise
Options Price
------- ---------
Activity during 1997:
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . 531,975 $5.05
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . (3,025) 1.46
---------
Outstanding at September 30, 1997 . . . . . . . . . . . . . . 528,950 5.07
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . 626,989 24.06
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . (36,300) 3.46
Canceled due to termination . . . . . . . . . . . . . . . . . (25,887) 25.05
---------
Outstanding at September 30, 1998 . . . . . . . . . . . . . . 1,093,752 15.33
=========
The ranges of exercise prices for outstanding options were as follows at
September 30, 1998:
$0.01 - $1.46. . . . . . . . . 369,150
$12.31 - $16.00. . . . . . . . 251,338
$23.38 - $31.56. . . . . . . . 473,264
---------
1,093,752
=========
The Company had approximately 468,995 options exercisable at September 30,
1998 at a weighted average exercise price of $5.54 per share. Outstanding
options have a weighted average remaining exercise period of 9.2 years at
September 30, 1998.
11. COMMITMENTS AND CONTINGENCIES
Litigation
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
27
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 financial condition or results of
operations, and it intends to vigorously defend this action.
In January 1997, a lawsuit was filed against a number of defendants,
including Griffith, by a purchaser of municipal bonds. The Company prepared
two reports rendering an opinion on the anticipated debt service coverage of
the Revenue Bonds for the first five years of operation of the sewer project by
Superstition Mountain Community Facilities District No. 1 (the "District"). The
District was unable to meet its debt service obligations and filed bankruptcy.
The purchaser of the Revenue Bonds, Allstate Insurance Company, has sued a
number of defendants, including the Company, for damages of $32.1 million which
is the face value of the Revenue bonds, plus interest. The District has also
filed a lawsuit against Griffith seeking damages. Given the early stage of the
litigation, legal counsel is unable to express an opinion concerning the
ultimate resolution of either case or the liability of the Company, if any, in
connection therewith.
The Company also is involved in various other legal proceedings in the
ordinary course of its 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.
DCAA Audits
A substantial portion of payments to the Company from United States
Government agencies is subject to adjustments upon audit by the Defense
Contract Audit Agency. Audits through 1993 have been completed with no
material adjustments. In the opinion of management, the audits of subsequent
years are not expected to have a material adverse effect on the Company's
financial position or results of operations.
Employment Agreements
The Company has employment agreements with 14 of its executives that
provide for base salaries of approximately $3.5 million per year. The term of
the employment obligations are through 2000.
12. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable and
costs and estimated earnings in excess of billings on uncompleted contracts. To
date, these financial instruments have been derived from contract revenues
earned primarily from federal, state and local government agencies located in
the United States.
At September 30, 1997 and 1998, $1,436 and $1,004, respectively, of the
Company's accounts receivable were due from the United States Government.
Revenues under contracts with various agencies of the United States Government
were $61,317, $35,802 and $3,738 for the years ended September 30, 1996, 1997
and 1998, respectively. Of these amounts, $56,530, $31,611 and $0 for the
years ended September 30, 1996, 1997 and 1998, respectively, were revenues of
the government operations segment. As a result of legislation that eliminated
certain Social Security Administration program benefits, a contract with the
United States Government that contributed substantially all of the revenues of
the government operations segment for 1996 and 1997 was terminated by the
United States Government. This contract concluded during the second quarter of
1997.
28
At September 30, 1997 and 1998, $10,482 and $9,706 of
the Company's accounts receivable were due from one state
government. Revenues from contracts with this state,
principally by the government operations segment, were
$26,189 and $30,934 for the years ended September 30, 1997
and 1998.
13. BUSINESS SEGMENTS
The following table provides certain financial information for each
business segment:
1996 1997 1998
---- ---- ----
Revenues:
Government Operations. . . . . . . . . $ 77,211 $ 97,369 $139,263
Consulting . . . . . . . . . . . . . . 63,281 75,986 104,851
--------- ---------- --------
$ 140,492 $ 173,355 $244,114
========= ========== ========
Income from operations:
Government Operations. . . . . . . . . $ 4,936 $ 6,164 $ 10,642
Consulting . . . . . . . . . . . . . . 7,158 6,549 13,489
--------- ---------- --------
$ 12,094 $ 12,713 $ 24,131
========= ========== ========
Identifiable assets:
Government Operations. . . . . . . . . $ 19,369 $ 26,610 $ 42,429
Consulting . . . . . . . . . . . . . . 25,410 31,273 46,160
Corporate. . . . . . . . . . . . . . . 6,214 56,001 37,413
--------- ---------- --------
$ 50,993 $ 113,884 $126,002
========= ========== ========
Capital expenditures:
Government Operations. . . . . . . . . $ 4 $ 2 $ --
Consulting . . . . . . . . . . . . . . 532 884 699
Corporate. . . . . . . . . . . . . . . 271 415 461
--------- ---------- --------
$ 807 $ 1,301 $ 1,160
========= ========== ========
Depreciation and amortization:
Government Operations. . . . . . . . . $ 99 $ 204 $ 1,518
Consulting . . . . . . . . . . . . . . 653 740 875
Corporate. . . . . . . . . . . . . . . 181 180 86
--------- ---------- --------
$ 933 $ 1,124 $ 2,479
========= ========== ========
29
MAXIMUS, Inc.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(UNAUDITED)
DECEMBER 31,
1998
----------------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 18,945
Marketable securities................................... 68,484
Accounts receivable, net................................ 86,189
Costs and estimated earnings in excess of billings...... 6,579
Prepaid expenses and other current assets............... 1,310
---------
Total current assets......................................... 181,507
Property and equipment at cost:
Land.................................................... 662
Building and improvements............................... 1,721
Office furniture and equipment.......................... 8,238
Leasehold improvements.................................. 214
---------
10,835
Less: Accumulated depreciation and amortization........ (5,680)
---------
Total property and equipment, net............................ 5,155
Deferred income taxes........................................ 1,434
Other assets................................................. 2,506
---------
Total assets................................................. $190,602
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 8,091
Accrued compensation and benefits....................... 12,237
Billings in excess of costs and estimated earnings...... 12,825
Notes payable........................................... 200
Income taxes payable.................................... 2,358
Deferred income taxes................................... 901
---------
Total current liabilities.................................... 36,612
Long-term debt, less current portion......................... 599
---------
Total liabilities............................................ 37,211
Contingencies
Shareholders' equity:
Common stock, no par value; 30,000,000 shares authorized;
20,938,044 shares issued and
outstanding, at stated amount........................ 129,741
Retained earnings.................................... 23,650
---------
Total shareholders' equity................................... 153,391
---------
Total liabilities and shareholders' equity $190,602
=========
See notes to supplemental consolidated financial statements.
30
MAXIMUS, Inc.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months
Ended December 31,
----------------------
1997 1998
---- ----
Revenues........................................... $ 50,394 $72,346
Cost of revenues................................... 37,647 52,233
-------- -------
Gross profit....................................... 12,747 20,113
Selling, general and administrative expenses....... 8,426 11,261
Deferred compensation and ESOP..................... 467 -
-------- -------
Income from operations............................. 3,854 8,852
Interest and other income.......................... 537 394
-------- -------
Income before income taxes......................... 4,391 9,246
Provision for income taxes......................... 1,592 3,653
-------- -------
Net income......................................... $ 2,799 $ 5,593
======== =======
Earnings per share:
Basic.............................................. $ .17 $ .29
======== =======
Diluted............................................ $ .16 $ .28
======== =======
Shares used in computing basic net
income per share................................... 16,692 19,276
======== =======
Shares used in computing diluted
net income per share............................... 17,083 19,746
======== =======
See notes to supplemental consolidated financial statements.
31
MAXIMUS, Inc.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months
Ended December 31,
---------------------
1997 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................................... $2,799 $ 5,593
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization................................... 335 608
Change in assets and liabilities:
Accounts receivable, net........................................ 39 (11,051)
Costs and estimated earnings in excess of billings.............. (941) (655)
Prepaid expenses and other current assets....................... 391 (130)
Other assets.................................................... 84 29
Accounts payable................................................ 710 (1,932)
Accrued compensation and benefits............................... (1,127) (3,349)
Billings in excess of costs and estimated earnings.............. (1,457) 1,084
Income taxes payable............................................ (3,385) 2,355
Other assets and liabilities ................................... 655 5
------- ---------
Net cash used in operating activities............................... (1,897) (7,443)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business assets.................................... - (707)
Purchase of property and equipment................................ (232) (260)
Sale (purchase) of marketable securities.......................... 8,567 (53,397)
------- ---------
Net cash provided by (used in) investing
activities.......................................................... 8,335 (54,364)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secondary offering, net of expenses................. - 61,010
S Corporation distributions....................................... (5,848) -
Common stock issued............................................... 150 107
Payment for purchase of redeemable common stock................... (102) -
Net (payments) proceeds from borrowings........................... (1,173) 200
------- ---------
Net cash (used in) provided by financing activities................. (6,973) 61,317
Cash flow adjustment for change in accounting period of CSI......... - 32
------- ---------
Net decrease in cash and cash equivalents........................... (535) (458)
Cash and cash equivalents, beginning of period...................... 11,472 19,403
------- ---------
Cash and cash equivalents, end of period............................ $10,937 $ 18,945
======= =========
See notes to supplemental consolidated financial statements.
32
MAXIMUS, Inc.
Notes to Supplemental Consolidated Financial Statements
For the Three Month Periods Ended December 31, 1997 and 1998
(Unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited supplemental consolidated
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 period ended December 31, 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 supplemental consolidated financial
statements as of September 30, 1997 and 1998 and for each of the
three years in the period ended September 30, 1998, included in
this Report on Form 8-K.
2. SECONDARY PUBLIC OFFERING
The Company completed a secondary public offering
("secondary") of Common Stock during December 1998. Of the
4,200,000 shares of Common Stock sold in the secondary,
2,200,000 shares were sold by selling shareholders and 2,000,000
shares were sold by MAXIMUS, Inc. generating $61,010,000 in
proceeds to the Company, net of offering expenses.
3. BUSINESS COMBINATIONS
On May 12, 1998, the Company issued 1,166,179 shares of its
common stock in exchange for all of the outstanding common stock
of David M. Griffith and Associates, Ltd. ("DMG"). This merger
was accounted for as a pooling of interests and 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.
On December 1, 1998, the Company acquired certain assets
consisting primarily of computer equipment and office furniture
from Interactive Web Systems, Inc. for $707,000. In conjunction
with this transaction, the Company recorded intangible assets of
$150,000.
On February 26, 1999, the Company issued 700,212 shares of
its common stock in exchange for all of the outstanding common
stock of Control Software, Inc. ("CSI"). This merger was
accounted for as a pooling of interests and 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 CSI. These
supplemental consolidated financial statements will become the
historical financial statements of the Company after financial
statements covering the date of the consummation of the business
combination are issued.
4. CONTINGENCIES
On February 3, 1997, the Company was named as a third party
defendant by Network Six, Inc. ("Network Six") in a legal action
brought by the State of Hawaii against Network Six. Network Six
alleges that the Company is liable to Network Six on various
grounds. 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
financial condition or results of operations, and it intends to
vigorously defend this action.
33
In January 1997, a lawsuit was filed against a number of
defendants, including DMG, by a purchaser of municipal bonds.
DMG had prepared two reports rendering an opinion on the
anticipated debt service coverage of the revenue bonds for the
first five years of operation of the sewer project by
Superstition Mountain Community Facilities District No. 1 (the
"District"). The District was unable to meet its debt service
obligations and filed bankruptcy. The purchaser of the Revenue
Bonds, Allstate Insurance company, has sued a number of
defendants, including DMG, for damages of $32.1 million which is
the face value of the revenue bonds, plus interest. The
District also filed a lawsuit against DMG seeking damages, which
suit has been consolidated with the purchaser's action. DMG
intends to vigorously defend against these claims. However,
given the early stage of litigation, legal counsel is unable to
express an opinion concerning the ultimate resolution of either
case or DMG's liability, if any, in connection therewith.
The Company also is involved in various other legal
proceedings in the ordinary course of business. In the opinion
of management, these proceedings involve amounts that would not
have a material effect on the financial position or results of
operations of the Company if such proceedings were disposed of
unfavorably.
5. EARNINGS PER SHARE
The following table sets forth the computation of
basic and diluted earnings per share:
Three Months
Ended December 31,
1997 1998
------------------------
(Thousands)
Numerator:
Net income...................................... $2,799 $5,593
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding........ 16,692 19,276
Stock Options................................... 391 470
------- -------
Denominator for diluted earnings per share ..... 17,083 19,746
======= =======
6. OTHER SIGNIFICANT TRANSACTIONS
In December 1998, the Company entered into an agreement
to purchase an office building consisting of approximately
60,000 square feet of office space for $8 million. In January
1999, the Company concluded the transaction and paid the seller
in cash.
7. SEGMENT INFORMATION (QUARTER ENDED DECEMBER 31,)
The following table provides certain financial information for
each business segment:
Revenues: 1997 1998
---- ----
Government Operations........................ $27,772 $38,817
Consulting................................... 22,622 33,529
Income From Operations: 1997 1998
---- ----
Government Operations........................ $1,575 $2,568
Consulting................................... 2,279 6,284
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL CONSOLIDATED 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS
ENDED DECEMBER 31, 1997
Revenues. Total contract revenues increased 43.6% to
$72.3 million for the three months ended December 31, 1998 as
compared to $50.4 million for the same period in 1997.
Government Operations Group revenues increased 39.8% to $38.8
million for the three months ended December 31, 1998 from $27.8
million for the same period in 1997. This increase was due to
an increase in the number of contracts in all four divisions in
the Government Operations Group. Consulting Group revenues
increased 48.2% to $33.5 million for the three months ended
December 31, 1998 from $22.6 million for the same period in
1997. Of the $10.9 million increased revenue, $10.0 million was
from companies which combined with the Company during fiscal
year 1998 in transactions accounted for as immaterial poolings
of interests
Gross Profit. Gross profit consists of total revenues
less cost of revenues. Total gross profit increased 57.8% to
$20.1 million for the three months ended December 31, 1998 as
compared to $12.7 million for the same period in 1997.
Government Operations Group gross profit increased 35.5% to $6.7
million for the three months ended December 31, 1998 from $4.9
million for the three months ended December 31, 1997. As a
percentage of revenues, Government Operations Group gross profit
decreased to 17.2% for the three months ended December 31, 1998
from 17.8% for the same period in 1997. The decrease was due to
anticipated lower gross profit margins on certain Managed Care
contracts. The Consulting Group gross profit increased 71.9% to
$13.4 million for the three months ended December 31, 1998 from
$7.8 million for the same period in 1997 due to the increased
revenues and an increased gross profit percentage. As a
percentage of revenues, Consulting Group gross profit increased
to 40.0% for the three months ended December 31, 1998 from 34.5%
for the same period in 1997, due primarily to an improved margin
in the DMG division.
Selling, General and Administrative Expenses. Total
selling, general and administrative ("SG&A") expenses increased
33.6% to $11.3 million for the three months ended December 31,
1998 as compared to $8.4 million for the same period in 1997.
The increase in SG&A costs was due to the increased size of the
Company, both in terms of revenue growth and the number of
employees, which increased from 2,100 at December 31, 1997 to
2,900 at December 31, 1998. As a percentage of revenues, SG&A
expenses decreased to 15.6% for the three months ended December
31, 1998 from 16.7% for the same period in 1997, reflecting some
economy of scale.
Deferred Compensation and ESOP Expense. DMG, with which
the Company merged in May 1998, had deferred compensation and
employee stock option (ESOP) plans which were terminated after
the merger. Therefore, no expense for those plans was incurred
during the three months ended December 31, 1998.
Interest and Other Income. The decrease in interest
and other income to $0.4 million for the three months ended
December 31, 1998 as compared to $0.5 million for the same
period in 1997 was due to the decrease in the average invested
funds. The decrease can be attributed to the use of cash to
grow the business, both internally and through acquisitions.
Provision for Income Taxes. The provision for income
tax for the three months ended December 31, 1998 was 39.5% of
income before income taxes as compared to 36.3% for the three
months ended December 31, 1997. The difference in percentages
was due to differences in the amounts of certain expense items
which are not deductible for tax purposes between the two time
periods and as a result of changes in the historical income
provided by CSI which was not subject to taxes at the Corporate
level due to its S-corporation status. CSI's S-corporation
status was terminated upon its merger with the Company.
35
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash used in operations for the three
months ended December 31, 1998 was $7.4 million as compared to
$5.0 million cash used in operations for the three months ended
December 31, 1997. The principal reason for the use of cash in
operations for the three months ended December 31, 1998 was the
increase in accounts receivable from $77.0 million at September
30, 1998 to $86.2 million at December 31, 1998. This increase
was due primarily to increases in receivables of $4.8 million
related to three large contracts which were in the first months
of performance, and a general slowness in payment on amounts
totaling $4.4 million by customers on ten other mid-to large-sized
contracts.
Of the $61.0 million of proceeds (net of expenses) from
the secondary offering, the Company purchased marketable
securities totaling $53.4 million and the remainder, $7.6
million, was invested in cash equivalents at the Company's bank
to provide general funding for operations.
In December 1998 the Company entered into an agreement
to purchase an office building consisting of approximately
60,000 square feet of office space for $8 million. In January,
1999 the Company concluded the transaction and paid the seller
in cash.
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 $0.3 million at December 31, 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 for the three months ended December 31, 1998 and
1997. At December 31, 1998, the Company had $9.7 million
available under the Credit Facility.
Management believes that the Company will have
sufficient resources to meet its cash needs over the next 12
months, which may include start-up costs associated with new
contract awards, obtaining additional office space, establishing
new offices, investment in upgraded systems infrastructure or
acquisitions of other businesses and technologies. Cash
requirements beyond the next 12 months will depend on the
Company's profitability, its ability to manage working capital
requirements and its rate of growth.
YEAR 2000
The Company is aware of the issues that many computer,
telecommunication and other infrastructure systems will face as
the millennium ("Year 2000") approaches. The Company is
auditing its internal software and hardware and is implementing
corrective actions where necessary to address Year 2000
problems. The Company is also currently reviewing the software
and hardware, and implementing corrective actions where
necessary, of DMG, Carrera Consulting Group, Spectrum Consulting
Group and Phoenix Planning and Evaluation, all divisions which
resulted from business combinations completed during 1998. The
Company will continue to assess the need for Year 2000
contingency plans as its remediation efforts progress. The
Company estimates that its remediation efforts will be completed
by July 31, 1999. The Company does not believe that the cost of
its remediation efforts will be material or that these efforts
will have a material impact on its operations or financial
results. However, there can be no assurance that those costs
will not be greater than anticipated, or that corrective actions
undertaken will be completed before any Year 2000 problems could
occur.
The Company also provides assistance in assessing,
evaluating, testing and certifying government client systems
affected by Year 2000 problems, as well as quality assurance
monitoring of Year 2000 compliance conversions performed for
clients by third parties. Although the Company has attempted to
contract to provide such services in a manner that will minimize
its liability for system failures, there can be no assurance
that the Company would not become subject to legal proceedings
which, if resolved in a manner adverse to the Company, could
have a material adverse effect on its financial condition.
The Company relies to varying extents on information
processing performed by the governmental agencies and entities
with which it contracts. The Company has inquired where
necessary of such agencies and entities of potential Year 2000
problems, and, based on responses to such inquires, management
believes that the Company would be able to continue to perform
on such contracts without material negative financial impact.
However, the Company cannot be certain that Year 2000 related
systems failures in the information systems of clients will not
occur and, if such failures occur, that they will not interfere
with the Company's ability to properly manage a contracted
project and result in a material adverse effect on the Company's
business, financial condition and results of operations.
36
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 possible 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 the Company's Quarterly
Report on Form 10-Q for the period ended December 31, 1998.
37
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 hereunto duly authorized.
MAXIMUS, INC.
Date: March ___, 1999 By:
-------------------------
David V. Mastran
President
38
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Grant Thornton LLP, independent auditors
27 Financial Data Schedules (EDGAR)
39