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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-12997
MAXIMUS, INC.
(Exact name of registrant as specified in its charter)
----------------------
VIRGINIA 54-1000588
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1356 BEVERLY ROAD
MCLEAN, VIRGINIA 22101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 734-4200
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
CLASS OUTSTANDING AT MAY 13, 1999
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Common Shares, No Par Value 20,948,591
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MAXIMUS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 1999 (unaudited) and September 30, 1998
Statements of Income for the three months and six months ended March
31, 1999 and 1998 (unaudited)
Statements of Cash Flows for the six months ended March 31, 1999 and
1998 (unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds from Registered Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
- 2 -
MAXIMUS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, MARCH 31,
1998 1999
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 19,403 $ 24,657
Marketable securities .................................... 13,577 69,194
Accounts receivable, net ................................. 72,251 66,220
Costs and estimated earnings in excess of billings ....... 10,654 12,867
Prepaid income taxes ..................................... -- 1,706
Prepaid expenses and other current assets ................ 1,188 1,190
--------- ---------
Total current assets .............................................. 117,073 175,834
Property and equipment at cost:
Land ..................................................... 662 2,462
Building and improvements ................................ 1,721 7,921
Office furniture and equipment ........................... 7,703 8,133
Leasehold improvements ................................... 214 214
--------- ---------
10,300 18,730
Less: Accumulated depreciation and amortization ......... (5,433) (5,729)
--------- ---------
Total property and equipment, net ................................. 4,867 13,001
Deferred income taxes ............................................. 1,434 1,434
Intangible assets ................................................. 1,035 2,573
Other assets ...................................................... 1,593 2,818
--------- ---------
Total assets ...................................................... $ 126,002 $ 195,660
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 10,006 $ 9,239
Accrued compensation and benefits ........................ 15,877 13,189
Billings in excess of costs and estimated earnings ....... 11,608 12,511
Note payable ............................................. 200 --
Income taxes payable ..................................... 3 --
Deferred income taxes ................................. 901 901
--------- ---------
Total current liabilities ......................................... 38,595 35,840
Long-term debt, less current portion .............................. 620 454
--------- ---------
Total liabilities ................................................. 39,215 36,294
Shareholders' equity:
Common stock, no par value; 30,000,000 shares authorized;
18,925,029 and 20,944,437 shares issued and outstanding at
September 30, 1998 and March 31, 1999, at stated amount .. 68,624 129,804
Retained earnings ........................................ 18,163 29,562
--------- ---------
Total shareholders' equity ........................................ 86,787 159,366
--------- ---------
Total liabilities and shareholders' equity ........................ $ 126,002 $ 195,660
--------- ---------
--------- ---------
See notes to financial statements.
- 3 -
MAXIMUS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1998 1999 1998 1999
-------- -------- -------- --------
Revenues ................................... $ 55,959 $ 76,290 $106,353 $148,636
Cost of revenues ........................... 41,117 52,894 78,764 105,127
-------- -------- -------- --------
Gross profit ............................... 14,842 23,396 27,589 43,509
Selling, general and administrative expenses 8,641 12,784 17,067 24,045
Stock option compensation, merger,
deferred compensation and ESOP expenses ... 907 118 1,374 118
-------- -------- -------- --------
Income from operations ..................... 5,294 10,494 9,148 19,346
Interest and other income .................. 548 881 1,085 1,275
-------- -------- -------- --------
Income before income taxes ................. 5,842 11,375 10,233 20,621
Provision for income taxes ................. 2,237 4,700 3,829 8,353
-------- -------- -------- --------
Net income ................................. $ 3,605 $ 6,675 $ 6,404 $ 12,268
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share:
Basic ...................................... $ 0.21 $ 0.32 $ 0.37 $ 0.61
-------- -------- -------- --------
-------- -------- -------- --------
Diluted .................................... $ 0.20 $ 0.31 $ 0.37 $ 0.60
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computing earnings per share:
Basic ...................................... 17,528 20,944 17,105 20,101
-------- -------- -------- --------
-------- -------- -------- --------
Diluted .................................... 17,919 21,333 17,496 20,467
-------- -------- -------- --------
-------- -------- -------- --------
See notes to financial statements.
- 4 -
MAXIMUS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS
ENDED MARCH 31,
1998 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 6,404 $ 12,268
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ................................ 434 625
Change in assets and liabilities:
Accounts receivable, net ..................................... (3,105) 4,243
Costs and estimated earnings in excess of billings ........... (2,586) (2,221)
Prepaid expenses and other current assets .................... 899 (10)
Prepaid income taxes ......................................... -- (1,706)
Deferred income taxes ........................................ (7) --
Other assets ................................................. 262 (747)
Accounts payable ............................................. 2,018 (926)
Accrued compensation and benefits ............................ 1,174 (2,397)
Billings in excess of costs and estimated earnings ........... 326 770
Income taxes payable ......................................... (3,026) (3)
Other liabilities ............................................ 48 141
-------- --------
Net cash provided by operating activities ...................................... 2,841 10,037
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate ............................................. -- (8,000)
Acquisition of businesses ........................................... -- (2,637)
Increase in cash resulting from immaterial poolings ................. 52 --
Purchase of property and equipment .................................. (302) (349)
Purchase of marketable securities ................................... 8,820 (54,107)
-------- --------
Net cash provided by (used in) investing activities ............................ 8,570 (65,093)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secondary offering, net of expenses ................... -- 61,010
S Corporation distributions ......................................... (6,668) (756)
Issuance of common stock ............................................ 38 170
Repayment of debt ................................................... (889) (145)
-------- --------
Net cash (used in) provided by financing activities ............................ (7,519) 60,279
-------- --------
Net increase in cash and cash equivalents ...................................... 3,892 5,223
Cash flow adjustment for change in accounting period of DMG and CSI ............ 467 31
Cash and cash equivalents, beginning of period ................................. 11,006 19,403
-------- --------
Cash and cash equivalents, end of period ....................................... $ 15,365 $ 24,657
-------- --------
-------- --------
See notes to financial statements.
- 5 -
MAXIMUS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normally recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for the three-month and six-month periods ended March 31,
1999 are not necessarily indicative of the results that may be expected for the
full fiscal year. These financial statements should be read in conjunction with
the audited financial statements as of September 30, 1997 and 1998 and for each
of the three years in the period ended September 30, 1998, that reflect
restatement for the merger with Control Software, Inc., included in the
Company's Current Report on Form 8-K, as filed with the Securities and Exchange
Commission on March 30, 1999.
2. SECONDARY PUBLIC OFFERING
The Company completed a secondary public offering ("secondary") of
Common Stock during December 1998. Of the 4,200,000 shares of Common Stock
sold in the secondary, 2,000,000 shares were sold by MAXIMUS, Inc. generating
$61,010,000 in proceeds to the Company, net of offering expenses and
2,200,000 shares were sold by Selling Shareholders.
3. BUSINESS COMBINATIONS
On May 12, 1998, the Company issued 1,166,179 shares of its common
stock in exchange for all of the outstanding common stock of David M. Griffith
and Associates, Ltd. ("DMG"). This merger was accounted for as a pooling of
interests, and the Company's financial statements, including earnings per share,
have been restated for all periods presented to include the financial position
and results of operations of DMG.
On December 1, 1998, the Company acquired contracts and certain
assets consisting primarily of computer equipment and office furniture from
Interactive Web Systems, Inc. for $707,000. In conjunction with this
transaction, the Company recorded intangible assets of $150,000.
On February 26, 1999, the Company issued 700,210 shares of its common
stock in exchange for all of the outstanding common stock of Control Software,
Inc. ("CSI"). This merger was accounted for as a pooling of interests, and the
Company's financial statements, including earnings per share, have been restated
for all periods presented to include the financial position and results of
operations of CSI.
On March 31, 1999, the Company acquired Norman Roberts & Associates,
Inc. for $1,930,000. In conjunction with the purchase, the Company recorded
intangible assets of $1,880,000.
4. CONTINGENCIES
On February 3, 1997, the Company was named as a third party defendant
by Network Six, Inc. ("Network Six") in a legal action brought by the State of
Hawaii against Network Six. Network Six alleges that the Company is liable to
Network Six on various grounds including negligence and tortious interference.
The Company believes Network Six's claims are without merit and intends to
defend this action vigorously. The Company believes this action will not have a
material adverse effect on its financial condition or results of operations and
has not accrued for any loss related to this claim.
- 6 -
On November 28, 1997, an individual who was a former officer, director
and shareholder of the Company filed a complaint in the United States District
Court for the District of Massachusetts alleging that, at the time he resigned
from the Company in 1996, thereby triggering the repurchase of his shares, the
Company and certain of its officers and directors had failed to disclose
material information to him relating to the potential value of the shares. He
further alleges that the Company and its officers and directors violated
Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and breached
various fiduciary duties owed to him and claims damages in excess of $10
million. The Company believes these claims are without merit and intends to
defend the matter vigorously. The Company does not believe that this action will
have a material adverse effect on the Company's financial condition or results
of operations and has not accrued for any loss related to this action.
In January 1997, a lawsuit was filed against a number of defendants,
including DMG, by a purchaser of municipal bonds. DMG had prepared two reports
rendering an opinion on the anticipated debt service coverage of the revenue
bonds for the first five years of operation of the sewer project by Superstition
Mountain Community Facilities District No. 1 (the "District"). The District was
unable to meet its debt service obligations and filed bankruptcy. The purchaser
of the Revenue Bonds, Allstate Insurance company, has sued a number of
defendants, including DMG, for damages of $32.1 million which is the face value
of the revenue bonds, plus interest. The District also filed a lawsuit against
DMG seeking damages, which suit has been consolidated with the purchaser's
action. DMG believes these claims are without merit and intends to defend
against these claims vigorously. The Company does not believe that this action
will have a material adverse effect on the Company's financial condition or
results of operations and has not accrued for any loss related to these claims.
The Company also is involved in various other legal proceedings in the
ordinary course of business. In the opinion of management, these proceedings
involve amounts that would not have a material effect on the financial position
or results of operations of the Company if such proceedings were disposed of
unfavorably.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Six Months
Ended March 31, Ended March 31,
1998 1999 1998 1999
------- ------- ------- -------
Numerator:
Net income ................................ $ 3,605 $ 6,675 $ 6,404 $12,268
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding . 17,528 20,944 17,105 20,101
Stock options ............................. 391 389 391 366
------- ------- ------- -------
Denominator for dilutive earnings per share 17,919 21,333 17,496 20,467
------- ------- ------- -------
------- ------- ------- -------
Earnings per share:
Basic ..................................... $ 0.21 $ 0.32 $ 0.37 $ 0.61
------- ------- ------- -------
------- ------- ------- -------
Diluted ................................... $ 0.20 $ 0.31 $ 0.37 $ 0.60
------- ------- ------- -------
------- ------- ------- -------
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6. SEGMENT INFORMATION (QUARTER ENDED MARCH 31,)
The following table provides certain financial information for each business
segment:
Three Months Six Months
Ended March 31, Ended March 31,
Revenues: 1998 1999 1998 1999
-------- -------- -------- --------
Government Operations $ 32,189 $ 42,544 $ 59,961 $ 81,361
Consulting .......... 23,770 33,746 46,392 67,275
-------- -------- -------- --------
Total ................. $ 55,959 $ 76,290 $106,353 $148,636
-------- -------- -------- --------
-------- -------- -------- --------
Three Months Six Months
Ended March 31, Ended March 31,
Income From Operations: 1998 1999 1998 1999
-------- -------- -------- --------
Government Operations 2,500 4,428 4,075 6,995
Consulting .......... 2,794 6,066 5,073 12,351
-------- -------- -------- --------
Total ................. $ 5,294 $ 10,494 $ 9,148 $ 19,346
-------- -------- -------- --------
-------- -------- -------- --------
7. RECLASSIFICATION
Certain 1998 balance sheet amounts have been reclassified to conform
with 1999 presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company provides program management and consulting services
primarily to government agencies in the United States. Founded in 1975, the
Company has been profitable every year since inception. The Company conducts its
operations through two groups, the Government Operations Group and the
Consulting Group. The Government Operations Group administers and manages
government health and human services programs, including welfare-to-work and job
readiness, child support enforcement, managed care enrollment and disability
services. The Consulting Group provides consulting services to state, county and
local legislatures and government agencies, including health and human services,
law enforcement, parks and recreation, taxation, housing, motor vehicles, labor
and education agencies.
As an important part of the Company's growth strategy, it has
completed during the past year combinations with six consulting firms:
Spectrum Consulting Services, Inc. and Spectrum Consulting Group, Inc.
(collectively, "Spectrum") in March 1998; David M. Griffith & Associates,
Ltd. ("DMG") in May 1998; Carrera Consulting Group ("Carrera") and Phoenix
Planning & Evaluation, Ltd. ("Phoenix") in August 1998; and Control Software,
Inc. ("CSI") in February 1999, all of which were accounted for as poolings of
interests combinations, and Norman Roberts & Associates, Inc. ("Norman
Roberts") in March 1999, accounted for as a purchase. See "Business
Combinations." Prior year amounts have been restated to reflect the
combinations with DMG and CSI. The Spectrum, Carrera and Phoenix combinations
were accounted for as immaterial poolings of interests and, accordingly, the
Company's previously issued financial statements were not restated to reflect
these combinations.
The Company's revenues are generated from contracts with various
payment arrangements, including: (i) costs incurred plus a fixed fee
("cost-plus"); (ii) fixed-price; (iii) performance-based criteria; and (iv) time
and materials reimbursement (utilized primarily by the Consulting Group). For
the fiscal year ended September 30, 1998, revenues from these contract types
were approximately 23%, 46%, 17% and 14%, respectively, of total revenues.
Traditionally, federal government contracts have been cost-plus and a majority
of the contracts with state and local government agencies have been fixed-price
and performance-based. Fixed price and performance-based contracts generally
offer higher margins but typically involve more risk than cost-plus or time and
materials reimbursement contracts because the Company is subject to the risk of
potential cost overruns or inaccurate revenue estimates.
The Government Operations Group's contracts generally contain base
periods of one or more years as well as one or more option periods that may
cover more than half of the potential contract duration. As of September 30,
1998, the
- 8 -
Company's average Government Operations contract duration was 3 1/2 years. The
Company's Consulting Group contracts have performance durations ranging from a
few weeks to a few years. Indicative of the long-term nature of the Company's
engagements, approximately 60% of the Company's fiscal 1998 revenues were in
backlog as of September 30, 1997.
The Company's most significant expense is cost of revenues, which
consists primarily of project-related employee salaries and benefits,
subcontractors, computer equipment and travel expenses. The Company's ability to
accurately predict personnel requirements, salaries and other costs as well as
to effectively manage a project or achieve certain levels of performance can
have a significant impact on the service costs related to the Company's fixed
price and performance-based contracts. Service cost variability has little
impact on cost-plus arrangements because allowable costs are reimbursed by the
client. The profitability of the Consulting Group's contracts is largely
dependent upon the utilization rates of its consultants and the success of its
performance-based contracts.
Selling, general and administrative expenses consist of management,
marketing and administration costs including salaries, benefits, travel,
recruiting, continuing education and training, facilities costs, printing,
reproduction, communications and equipment depreciation.
BUSINESS COMBINATIONS
As part of its growth strategy, the Company expects to continue to
pursue complementary business combinations to expand its geographic reach,
expand the breadth and depth of its service offerings and enhance the Company's
consultant base. In furtherance of this growth strategy, the Company combined
with four consulting firms during 1998 and one firm during 1999 in transactions
accounted for as poolings of interests, and one firm during 1999 accounted for
as a purchase.
As of March 16, 1998, the Company acquired all of the outstanding
shares of capital stock of Spectrum in exchange for 840,000 shares of Common
Stock. Spectrum, based in Austin, Texas, provides management consulting services
that focus on assisting public sector organizations in solving complex business
problems related to automation. Spectrum's operations complement and expand the
Company's existing information technology and systems planning and integration
consulting service offerings. At the time of the combination, Spectrum had
approximately 37 consultants and three other employees.
As of May 12, 1998, the Company acquired all of the outstanding capital
stock of DMG in exchange for 1,166,179 shares of Common Stock. DMG, based in
Northbrook, Illinois, provides consulting services to state and local government
and other public sector clients throughout the United States. DMG's operations
complement the Company's existing management consulting and information
technology services and expand the Company's service offerings to include a
broad range of financial planning, cost management and various other consulting
services aimed at the public sector. At the time of the combination, DMG had
approximately 375 consultants and 40 other employees.
As of August 31, 1998, the Company acquired all of the outstanding
shares of capital stock of Carrera in exchange for 1,137,420 shares of Common
Stock. Carrera, based in Sacramento, California, provides consulting services
that focus on assisting public sector entities implement large-scale,
software-based human resource and financial systems. At the time of the
combination, Carrera had 78 consultants and eight other employees.
As of August 31, 1998, the Company acquired all of the outstanding
shares of capital stock of Phoenix in exchange for 254,545 shares of Common
Stock. Phoenix, based in Rockville, Maryland, provides consulting services to
public sector entities in planning, implementing and evaluating the utilization
of various electronic commerce technologies, such as electronic benefits
transfer, electronic funds transfer and electronic card technologies. At the
time of the combination, Phoenix had 11 consultants and three other employees.
On December 1, 1998, the Company acquired contracts and certain
assets, consisting primarily of computer equipment and office furniture from
Interactive Web Systems, Inc. for $707,000. In conjunction with this
transaction, the Company recorded intangible assets of $150,000.
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As of February 26, 1999, the Company acquired all of the outstanding
shares of capital stock of CSI in exchange for 700,212 shares of Common Stock.
CSI, based in Wayne, Pennsylvania, provides fleet management software and
related services to public sector entities. At the time of the combination, CSI
had 46 employees.
On March 31, 1999, the Company acquired all of the outstanding
shares of capital stock of Norman Roberts for $1,930,000. Norman Roberts,
based in Los Angeles, California, provides executive search services for the
public sector. In conjunction with the purchase, the Company recorded
intangible assets of $1,880,000.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of income data as a percentage of revenues:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1998 1999 1998 1999
----- ----- ----- -----
Revenues:
Government Operations Group ................ 57.5% 55.8% 56.4% 54.7%
Consulting Group ........................... 42.5 44.2 43.6 45.3
Total revenues ........................... 100.0 100.0 100.0 100.0
Gross Profit:
Government Operations Group ................ 19.4 20.5 18.7 18.9
Consulting Group ........................... 36.1 43.5 35.4 41.8
Total gross profit as a percent of revenue . 26.5 30.7 25.9 29.3
Selling, general and administrative expenses 15.4 16.8 16.0 16.2
Stock option compensation, merger, deferred
compensation and ESOP expenses.............. 1.6 0.1 1.3 0.1
----- ----- ----- -----
Income from operations ..................... 9.5 13.8 8.6 13.0
Interest and other income (expenses) ....... 0.9 1.1 1.0 0.9
----- ----- ----- -----
Income before income taxes ................. 10.4 14.9 9.6 13.9
Provision for income taxes ................. 4.0 6.2 3.6 5.6
----- ----- ----- -----
Net income ................................. 6.4 8.7 6.0 8.3
----- ----- ----- -----
----- ----- ----- -----
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH
31, 1998
REVENUES. Total contract revenues increased 36.3% to $76.3 million
for the three months ended March 31, 1999 as compared to $56.0 million for
the same period in 1998. Government Operations Group revenues increased 32.2%
to $42.5 million for the three months ended March 31, 1999 from $32.2 million
for the same period in 1998. This increase was due to an increase in the
number of contracts in all four divisions in the Government Operations Group.
Consulting Group revenues increased 42.0% to $33.7 million for the three
months ended March 31, 1999 from $23.8 million for the same period in 1998.
The revenue from Carrera and Phoenix, which merged with MAXIMUS subsequent to
March 1998 in mergers accounted for as immaterial poolings of interests, and
for which the March 1998 quarter results were not restated, was $3.5 million
for the March 1998 quarter. The revenue increase for the Consulting Group
from the March 1998 quarter to the March 1999 quarter, including the $3.5
million in the March 1998 quarter, was 23.7%. This increase was due to an
increase in the number of contracts in the Consulting Group.
GROSS PROFIT. Total gross profit increased 57.6% to $23.4 million
for the three months ended March 31, 1999 as compared to $14.8 million for
the same period in 1998. Government Operations Group gross profit increased
39.5% to $8.7 million for the three months ended March 31, 1999 from $6.3
million for the three months ended March 31, 1998. As a percentage of
Government Operations Group revenues, Government Operations Group gross
profit increased to 20.5% for the
- 10 -
three months ended March 31, 1999 from 19.4% for the same period in 1998. The
increase was due to improved margins in three of the four divisions of the
Government Operations Group. The Consulting Group gross profit increased
70.8% to $14.7 million for the three months ended March 31, 1999 from $8.6
million for the same period in 1998 due to the increased revenues and an
increased gross profit percentage. As a percentage of Consulting Group
revenues, Consulting Group gross profit increased to 43.5% for the three
months ended March 31, 1999 from 36.1% for the same period in 1998, due
primarily to favorable revenue recognition adjustments on two Revenue
Maximization type contracts, improved operating efficiencies within the CSI
division, and margins at the Carrera division which were greater than the
Group average of 43.5%, and which were not included in the March 1998 results
as the merger occurred subsequent to that date.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative ("SG&A") expenses increased 47.9% to $12.8 million for the
three months ended March 31, 1999 as compared to $8.6 million for the same
period in 1998. The increase in SG&A costs was due to the increased size of the
Company, both in terms of revenue growth and the number of employees, which
increased to 3,025 at March 31, 1999 from 2,576 at March 31, 1998. As a
percentage of revenues, SG&A expenses increased to 16.8% for the three months
ended March 31, 1999 from 15.4% for the same period in 1998, primarily due to
the establishment of a Business Development unit at the end of fiscal year 1998,
a significant increase in the size and capability of the Information Services
unit, and the incurrence of expenses in connection with the integration of the
merged companies into MAXIMUS.
DEFERRED COMPENSATION AND ESOP EXPENSE. During the three months
ended March 31, 1999, the Company incurred $0.1 million of expenses in
connection with the combination with CSI. During the three months ended March
31, 1998, the Company incurred $345 million of expenses in connection with
the combination with DMG, and DMG incurred $562 million of deferred
compensation and employee stock ownership plan (ESOP) expenses. DMG, with
which the Company merged in May 1998, had deferred compensation and ESOP
plans which were terminated after the merger. Therefore, no expense for those
plans was incurred during the three months ended March 31, 1999.
INTEREST AND OTHER INCOME. The increase in interest and other income
to $0.9 million for the three months ended March 31, 1999 as compared to $0.5
million for the same period in 1998 was due to an increase in the average
invested funds. The increase in invested funds is due largely to the receipt
of proceeds of $61.0 million from the secondary public stock offering
completed in December 1998.
PROVISION FOR INCOME TAXES. The provision for income tax for the three
months ended March 31, 1999 was 41.3% of income before income taxes as compared
to 38.3% for the three months ended March 31, 1998. The difference in
percentages was due to differences in the amounts of certain expense items which
are not deductible for tax purposes between the two time periods and the
incurrence of $0.2 million of additional tax expense in connection with the
termination of the S-Corporation status of CSI upon its merger with the Company.
SIX MONTHS ENDED MARCH 31, 1999 COMPARED TO SIX MONTHS ENDED MARCH 31,
1998
REVENUES. Total contract revenues increased 39.8% to $148.6 million
for the six months ended March 31, 1999 as compared to $106.4 million for the
same period in 1998. Government Operations Group revenues increased 35.7% to
$81.4 million for the six months ended March 31, 1999 from $60.0 million for
the same period in 1998. This increase was due to an increase in the number
of contracts in all four divisions in the Government Operations Group.
Consulting Group revenues increased 45.0% to $67.2 million for the six months
ended March 31, 1999 from $46.4 million for the same period in 1998. The
revenue from Carrera and Phoenix, which merged with MAXIMUS subsequent to
March 1998 in mergers accounted for as immaterial poolings of interests, and
for which the results for the six months ended March 1998 were not restated,
was $8.4 million for the six months ended March 1998. The revenue increase
for the Consulting Group from the six months ended March 1998 to the six
months ended March 1999, including the $8.4 million in the six months ended
March 1998 was 23.7%. This increase was due to an increase in the number of
contracts in the Consulting Group.
GROSS PROFIT. Total gross profit increased 57.7% to $43.5 million
for the six months ended March 31, 1999 as compared to $27.6 million for the
same period in 1998. Government Operations Group gross profit increased 37.7%
to $15.4 million for the six months ended March 31, 1999 from $11.2 million
for the six months ended March 31, 1998. As a percentage of Government
Operations Group revenues, Government Operations Group gross profit increased
to 18.9% for the six months ended
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March 31, 1999 from 18.7% for the same period in 1998. The increase was due
to the improvement in gross margin for the three months ended March 31, 1999.
The Consulting Group gross profit increased 71.3% to $28.1 million for the
six months ended March 31, 1999 from $16.4 million for the same period in
1998 due to the increased revenues and an increased gross profit percentage.
As a percentage of Consulting Group revenues, Consulting Group gross profit
increased to 41.8% for the six months ended March 31, 1999 from 35.4% for the
same period in 1998, due to the improvement in gross margin for the three
months ended March 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general
and administrative ("SG&A") expenses increased 40.9% to $24.0 million for the
six months ended March 31, 1999 as compared to $17.1 million for the same
period in 1998. The increase in SG&A costs was due to the increased size of
the Company, both in terms of revenue growth and the number of employees,
which increased to 3,025 at March 31, 1999 from 2,576 at March 31, 1998. As a
percentage of revenues, SG&A expenses increased to 16.2% for the six months
ended March 31, 1999 from 16.0% for the same period in 1998, primarily due to
the establishment of a Business Development unit at the end of fiscal year
1998, a significant increase in the size and capability of the Information
Services unit, and the incurrence of expenses in connection with the
integration of the merged companies into MAXIMUS.
DEFERRED COMPENSATION AND ESOP EXPENSE. During the six months ended
March 31, 1999, the Company incurred $0.1 million of expenses in connection
with the combination with CSI. During the six months ended March 31, 1998,
the Company incurred $417 million of expenses in connection with the
combination with DMG, and DMG incurred $957 million of deferred compensation
and employee stock ownership plan (ESOP) expenses. DMG, with which the
Company merged in May 1998, had deferred compensation and ESOP plans which
were terminated after the merger. Therefore, no expense for those plans was
incurred during the six months ended March 31, 1999.
INTEREST AND OTHER INCOME. The increase in interest and other income
to $1.3 million for the six months ended March 31, 1999 as compared to $1.1
million for the same period in 1998 was due to an increase in the average
invested funds. The increase in invested funds is due largely to the receipt
of proceeds of $61.0 million from the secondary public stock offering
completed in December 1998.
PROVISION FOR INCOME TAXES. The provision for income tax for the six
months ended March 31, 1999 was 40.5% of income before income taxes as compared
to 37.4% for the six months ended March 31, 1998. The difference in percentages
was due to differences in the amounts of certain expense items which are not
deductible for tax purposes between the two time periods and the incurrence of
$0.2 million of additional tax expense in connection with the termination of the
S-Corporation status of CSI upon its merger with the Company.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended March 31, 1999, cash provided by operations
was $10.0 million as compared to $2.8 million for the six months ended March
31, 1998. The principal reason for the increase in cash provided by
operations for the six months ended March 31, 1999 compared to the six
months ended March 31, 1998 was the increase in net income to $12.3 million
from $6.4 million. Additionally, there was a decrease in accounts receivable,
billed and unbilled, to $79.1 million at March 31, 1999 from $82.9 million at
December 1998. This decrease of $3.8 million was achieved due to receipt of
payments on overdue billings from a few large customers.
For the six months ended March 31, 1999, cash used in investing
activities was $65.1 million as compared to $8.6 million cash provided by
investing activities for the six months ended March 31, 1998. The $65.1
million used in investing activities for the six months ended March 31, 1999
primarily consisted of the purchase of marketable securities totaling $54.1
million with the proceeds from the secondary, $8.0 million for the purchase
of a 60,000 square foot office building in Reston, Virginia to serve as
corporate headquarters and the purchase of Norman Roberts, an executive
search firm, on March 31, 1999, for $1.9 million.
Cash provided by financing during the six months ended March 31,
1999 was $60.3 million, which consisted primarily of the $61.0 million of
proceeds, net of offering expenses, from the secondary stock offering
completed in December 1998. During the six months ended March 31, 1998, cash
used in financing activities consisted primarily of $5.7 million of
S-Corporation cash distributions paid to the S-Corporation shareholders,
based upon the undistributed earnings of the Company taxable to the
shareholders through the date of the IPO. Also, during the six
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months ended March 31, 1998, consistent with their past practices, Spectrum,
Phoenix and CSI paid S-Corporation cash distributions totaling $1.0 million
based upon pre-merger taxable income.
The Company has a $10.0 million revolving credit facility (the
"Credit Facility") with a bank, which may be used for borrowing and the
issuance of letters of credit. Outstanding letters of credit totaled $0.5
million at March 31, 1999. The Credit Facility bears interest at a rate equal
to LIBOR plus an amount which ranges from 0.65% to 1.25% depending on the
Company's debt-to-equity ratio. The Credit Facility contains certain
restrictive covenants and financial ratio requirements, including a minimum
net worth requirement of $60 million. The Company did not use the Credit
Facility to finance its working capital needs for the six months ended March
31, 1999 and 1998. At March 31, 1999, the Company had $9.5 million available
under the Credit Facility.
Management believes that the Company will have sufficient resources to
meet its cash needs over the next 12 months, which may include start-up costs
associated with new contract awards, obtaining additional office space,
establishing new offices, investment in upgraded systems infrastructure or
acquisitions of other businesses and technologies. Cash requirements beyond the
next 12 months will depend on the Company's profitability, its ability to manage
working capital requirements and its rate of growth.
YEAR 2000
The Company is aware of the issues that many computer,
telecommunication and other infrastructure systems will face as the
millennium ("Year 2000") approaches. The Company is auditing its internal
software and hardware and implementing corrective actions where necessary to
address Year 2000 problems. The Company is also reviewing the software and
hardware of, and implementing corrective actions where necessary at its DMG,
Carrera, Spectrum, Phoenix and CSI divisions. The Company will continue to
assess the need for Year 2000 contingency plans as its remediation efforts
progress. The Company estimates that its remediation efforts will be
completed by July 31, 1999. The Company does not believe that the cost of
these efforts will be material or will have a material impact on its
operations or financial results. However, there can be no assurance that
those costs will not be greater than anticipated, or that corrective actions
undertaken will be completed before any Year 2000 problems could occur.
The Company also provides assistance in assessing, evaluating, testing
and certifying government client systems affected by Year 2000 problems, as well
as quality assurance monitoring of Year 2000 compliance conversions performed
for clients by third parties. Although the Company has attempted to contract to
provide such services in a manner that will minimize its liability for system
failures, there can be no assurance that the Company would not become subject to
legal proceedings which, if resolved in a manner adverse to the Company, could
have a material adverse effect on its financial condition.
The Company relies to varying extents on information processing
performed by the governmental agencies and entities with which it contracts. The
Company has inquired where necessary of such agencies and entities of potential
Year 2000 problems, and, based on responses to such inquires, management
believes that the Company would be able to continue to perform on such contracts
without material negative financial impact. However, the Company cannot be
certain that Year 2000 related systems failures in the information systems of
clients will not occur and, if such failures occur, that they will not interfere
with the Company's ability to properly manage a contracted project and result in
a material adverse effect on the Company's business, financial condition and
results of operations.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about
the Company's confidence and strategies and the Company's expectations regarding
its ability to obtain future contracts, expand its market opportunities or
attract highly-skilled employees, are forward looking statements that involve
risks and uncertainties. These risks and uncertainties include legislative
changes and political developments adverse to the privatization of the provision
of government services; risks related to completed or future acquisitions;
opposition from government employee unions; reliance on key executives; impact
of competition from similar companies; and legal, economic and other risks
detailed in Exhibit 99 to this Quarterly Report on Form 10-Q for the period
ended March 31, 1999.
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Part II. Other Information.
Item 2. Changes in Securities and Use of Proceeds.
(a) Changes in Securities.
On February 26, 1999, the Company acquired CSI, a privately-held
Pennsylvania corporation. In connection with the acquisition, the four
shareholders of CSI were issued an aggregate of 700,212 shares of the Company's
Common Stock, no par value, in exchange for 100% of the outstanding stock of
CSI. The issuance was made in reliance upon the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended.
(b) Use of Proceeds from Registered Securities.
A Registration Statement on Form S-1 (File No. 333-29115)
registering 6,037,500 shares of the Company's Common Stock, filed in
connection with the Company's IPO, was declared effective by the Securities
and Exchange Commission on June 12, 1997. The IPO closed on June 18, 1997 and
the offering has terminated. The Company's net proceeds from the IPO were
$53,804,000. Cumulatively through December 31, 1998, the Company used
$39,800,000 of the net proceeds, which was reported in previous Forms 10-Q
and 10-K filed with the SEC. During the quarter ended March 31,1999, the
Company used $4,937,000 of the net proceeds from the IPO. Of that amount,
$1,930,000 was used to purchase the outstanding common stock of Norman
Roberts, an executive search firm, on March 31, 1999, $707,000 was used for
the purchase of contracts and assets from Interactive Web Systems, Inc.,
discussed in the footnotes to the financial statements contained in this Form
10-Q, and $2,300,000 was used to provide general operating capital.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held on February 23, 1999, the
Company's shareholders voted as follows:
(a) To reelect Messrs. Russell A. Beliveau, Jesse Brown and Ms. Susan D.
Pepin to the Board of Directors, each for a three-year term.
Nominee Total Vote "For" Total Vote Withheld
------- ---------------- -------------------
Russell A. Beliveau 18,949,949 53,127
Jesse Brown 18,950,049 53,027
Susan D. Pepin 18,950,049 53,027
The terms of office of David V. Mastran, Raymond B. Ruddy, Margaret
Carrera, George C. Casey, Louis E. Chappuie, Lynn P. Davenport, Thomas A.
Grissen, Robert J. Muzzio and Peter B. Pond continued after the meeting.
(b) To amend the Company's 1997 Equity Incentive Plan to increase the number of
shares of the Company's Common Stock as to which awards may be granted under the
plan to 3,000,000 shares.
Total Vote For the Proposal 12,200,202
Total Vote Against the Proposal 3,981,962
Abstentions 4,714
(C) To ratify the selection by the Board of Directors of Ernst & Young LLP as
the Company's independent public accountants for the fiscal year ending
September 30, 1999.
Total Vote For the Proposal 18,999,835
Total Vote Against the Proposal 1,327
Abstentions 1,914
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits. The Exhibits filed as part of this Form 10-Q are listed on the
Exhibit Index immediately preceding such Exhibits, which Exhibit Index is
incorporated herein by reference.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K dated
February 26, 1999 reporting on the completion of the Company's combination with
CSI. The Company filed an additional Current Report on Form 8-K dated March 26,
1999 providing supplemental financial statements and related supplemental
financial information reflecting the Company's combination with CSI. The
following financial statements were filed with the Form 8-K on March 26, 1999:
Supplemental Consolidated Balance Sheets as of September 30, 1997 and
1998;
Supplemental Consolidated Statements of Income for the years ended
September 30, 1996, 1997 and 1998;
Supplemental Consolidated Statements of Changes in Redeemable Common
Stock and Shareholders' Equity for the years ended September 30, 1996,
1997 and 1998;
Supplemental Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1997 and 1998;
Notes to the Supplemental Consolidated Financial Statements for the
years ended September 30, 1996, 1997 and 1998;
Supplemental Consolidated Balance Sheets as of December 31, 1998;
Supplemental Consolidated Statements of Income for the three months
ended December 31, 1997 and 1998;
Supplemental Consolidated Statements of Cash Flows for the three months
ended December 31, 1997 and 1998; and
Notes to the Supplemental Consolidated Financial Statements for the
three months ended December 31, 1997 and 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAXIMUS, INC.
Date: May 14, 1999 By: /s/ F. Arthur Nerret
----------------------------------------------
F. Arthur Nerret
Vice President, Finance, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2 Agreement and Plan of Merger dated February 26, 1999 by and
between MAXIMUS, Inc., Control Acquisition Corp., Control
Software, Inc., James M. Paulits, John H. Hines, III, R. David
Sadoo and John M. Ryan. Filed as Exhibit 2 to the Company's
Current Report on Form 8-K (File No. 001-12997) filed with the
Securities and Exchange Commission on March 4, 1999 and
incorporated herein by reference.
10 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and Thomas A. Grissen.
Filed herewith.
27 Financial Data Schedules (EDGAR)
99 Important Factors Regarding Forward Looking Statements.
Filed herewith.
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