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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q/A
[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)
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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
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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.
FORM 10-Q/A, MARCH 31, 1999
EXPLANATORY NOTE
This Amendment No. 1 to the Quarterly Report on Form 10-Q/A for the fiscal
quarter ended March 31, 1999 has been filed to amend Part I, Item 2 "Management
Discussion and Analysis of Financial Condition and Results of Operations," in
order to correct the following typographical errors:
Under the caption "Deferred Compensation and ESOP Expense" in the discussion of
the Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998, the sentence that reads "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 (emphasis added)" has been revised to read
"During the three months ended March 31, 1998, the Company incurred $345
THOUSAND of expenses in connection with the combination with DMG, and DMG
incurred $542 THOUSAND of deferred compensation and employee stock ownership
plan (ESOP) expenses (emphasis added)."
Similarly, under the caption "Deferred Compensation and ESOP Expense in the
discussion of the Six Months Ended March 31, 1999 Compared to Six Months Ended
March 31, 1998, the sentence that reads "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 (emphasis added)" has been revised
to read "During the six months ended March 31, 1998 the Company incurred $417
THOUSAND of expenses in connection with the combination with DMG, and DMG
incurred $957 THOUSAND of deferred compensation and employee stock ownership
plan (ESOP) expenses (emphasis added)."
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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
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.
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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.
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
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Revenues:
Government Operations Group..................... 57.5% 55.8% 56.4% 54.7%
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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
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Income from operations.......................... 9.5 13.8 8.6 13.0
Interest and other income (expenses)............ 0.9 1.1 1.0 0.9
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Income before income taxes...................... 10.4 14.9 9.6 13.9
Provision for income taxes...................... 4.0 6.2 3.6 5.6
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Net income...................................... 6.4 8.7 6.0 8.3
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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 revenues, Government
Operations Group gross profit increased to 20.5% for the 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.
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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 thousand of expenses in connection with the combination with DMG,
and DMG incurred $562 thousand 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 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 thousand of expenses in connection with the combination with DMG,
and DMG incurred $957 thousand of
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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 which was 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 three 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 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
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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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 to the Quarterly Report on Form
10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized.
MAXIMUS, INC.
Date: June 1, 1999 By: /s/ F. ARTHUR NERRET
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F. Arthur Nerret
Vice President, Finance, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
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