- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 JUNE 30, 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 AUGUST 4, 1999 ----- ----------------------------- Common Shares, No Par Value 20,984,215 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MAXIMUS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 1999 (unaudited) and September 30, 1998 Consolidated Statements of Income for the three months and nine months ended June 30, 1999 and 1998 (unaudited) Consolidated Statements of Cash Flows for the nine months ended June 30, 1999 and 1998 (unaudited) Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 2. Use of Proceeds from Registered Securities Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit Index - 2 - MAXIMUS, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
September 30, June 30, 1998 1999 ------------- --------- (Unaudited) ASSETS Current assets: Cash and cash equivalents.......................................... $ 19,403 $ 27,000 Marketable securities.............................................. 13,577 60,745 Accounts receivable, net........................................... 72,251 74,005 Notes receivable................................................... - 1,021 Costs and estimated earnings in excess of billings................. 10,654 14,040 Prepaid expenses and other current assets.......................... 1,188 3,264 ------------- --------- Total current assets........................................................ 117,073 180,075 Property and equipment at cost: Land............................................................... 662 2,462 Building and improvements.......................................... 1,721 7,921 Office furniture and equipment..................................... 7,703 9,539 Leasehold improvements............................................. 214 253 ------------- --------- 10,300 20,175 Less: Accumulated depreciation and amortization................... (5,433) (5,779) -------- ------- Total property and equipment, net........................................... 4,867 14,396 Notes receivable............................................................ - 2,042 Deferred income taxes....................................................... 1,434 1,434 Intangible assets........................................................... 1,035 6,830 Other assets................................................................ 1,593 1,723 ------------- --------- Total assets................................................................ $126,002 $206,500 ------------- --------- ------------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................................... $ 10,006 $ 7,770 Accrued compensation and benefits.................................. 15,877 13,471 Billings in excess of costs and estimated earnings................. 11,608 15,200 Note payable....................................................... 200 - Income taxes payable............................................... 3 - Deferred income taxes........................................... 901 901 Other current liabilities....................................... - 339 ------------- --------- Total current liabilities 38,595 37,681 Long-term debt.............................................................. 620 1,477 ------------- --------- Total liabilities........................................................... 39,215 39,158 Shareholders' equity: Common stock, no par value; 30,000,000 shares authorized; 18,925,029 and 20,975,353 shares issued and outstanding at September 30, 1998 and June 30, 1999, at stated amount............. 68,624 130,329 Retained earnings.................................................. 18,163 37,013 ------------- --------- Total shareholders' equity.................................................. 86,787 167,342 ------------- --------- Total liabilities and shareholders' equity.................................. $126,002 $206,500 ------------- --------- ------------- ---------
See notes to financial statements. - 3 - MAXIMUS, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Nine Months Ended June 30, Ended June 30, ------------------------ ---------------------------- 1998 1999 1998 1999 -------- -------- --------- -------- Revenues........................................... $64,234 $84,168 $170,587 $232,804 Cost of revenues................................... 48,611 58,467 127,375 163,594 -------- -------- --------- -------- Gross profit....................................... 15,623 25,701 43,212 69,210 Selling, general and administrative expenses....... 7,381 13,932 24,448 37,977 Stock option compensation, merger, deferred compensation and ESOP expenses..................... 1,972 152 3,346 270 -------- -------- --------- -------- Income from operations............................. 6,270 11,617 15,418 30,963 Interest and other income.......................... 391 965 1,476 2,240 -------- -------- --------- -------- Income before income taxes......................... 6,661 12,582 16,894 33,203 Provision for income taxes......................... 2,549 5,131 6,378 13,484 -------- -------- --------- -------- Net income......................................... $ 4,112 $ 7,451 $ 10,516 $19,719 -------- -------- --------- -------- -------- -------- --------- -------- Earnings per share: Basic.............................................. $ 0.23 $ 0.36 $ 0.61 $ 0.97 -------- -------- --------- -------- -------- -------- --------- -------- Diluted............................................ $ 0.23 $ 0.35 $ 0.60 $ 0.95 -------- -------- --------- -------- -------- -------- --------- -------- Shares used in computing earnings per share: Basic.............................................. 17,528 20,957 17,249 20,386 -------- -------- --------- -------- -------- -------- --------- -------- Diluted............................................ 17,919 21,257 17,640 20,731 -------- -------- --------- -------- -------- -------- --------- --------
See notes to financial statements. - 4 - MAXIMUS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED)
Nine Months Ended June 30, --------------------------- 1998 1999 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................................. $10,516 $19,719 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization....................................... 656 1,850 Change in assets and liabilities: Accounts receivable, net............................................ (19,003) (722) Costs and estimated earnings in excess of billings.................. (97) (3,393) Prepaid expenses and other current assets........................... 739 (2,029) Deferred income taxes............................................... (2,147) - Other assets........................................................ (321) 918 Accounts payable.................................................... 2,907 (2,997) Accrued compensation and benefits................................... (388) (2,119) Billings in excess of costs and estimated earnings.................. 1,798 3,459 Income taxes payable................................................ (2,125) (3) Other liabilities................................................... 156 996 --------- --------- Net cash (used in) provided by operating activities................................... (7,309) 15,679 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of real estate.................................................... - (8,000) Acquisition of businesses.................................................. - (9,645) Increase in cash resulting from immaterial poolings........................ 52 - Purchase of property and equipment......................................... (818) (1,921) Sale (Purchase) of marketable securities................................... 25,989 (48,722) -------- --------- Net cash provided by (used in) investing activities................................... 25,223 (68,288) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from secondary offering, net of expenses.......................... - 61,010 S Corporation distributions................................................ (6,668) (756) Issuance of common stock .................................................. 275 694 Payment for purchase of redeemable common stock ........................... (188) - Repayment of debt.......................................................... (2,784) (773) -------- -------- Net cash (used in) provided by financing activities................................... (9,365) 60,175 ------- ------- Net increase in cash and cash equivalents............................................. 8,549 7,566 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.............................................. $20,022 $27,000 ------- ------- ------- -------
See notes to financial statements. - 5 - MAXIMUS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTH PERIODS ENDED JUNE 30, 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 nine-month periods ended June 30, 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. 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 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. 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 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. 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. 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 700,210 shares of its common stock in exchange for all of the outstanding common stock of Control Software, Inc. 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. - 6 - 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. On June 1, 1999, the Company acquired Unison Consulting Group, Inc. for $7,074,000. In conjunction with the purchase, the Company recorded intangible assets of $4,979,000. 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. 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. - 7 - 5. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months Nine Months Ended June 30, Ended June 30, 1998 1999 1998 1999 ---------------------- ------------------------- Numerator: Net income $ 4,112 $ 7,451 $10,516 $19,719 Denominator: Denominator for basic earnings per share: Weighted average shares outstanding 17,528 20,957 17,249 20,386 Stock options 391 300 391 345 ------- ------- ------- ------- Denominator for dilutive earnings per share 17,919 21,257 17,640 20,731 ------- ------- ------- ------- ------- ------- ------- ------- Earnings per share: Basic $ 0.23 $ 0.36 $ 0.61 $ 0.97 ------- ------- ------- ------- ------- ------- ------- ------- Diluted $ 0.23 $ 0.35 $ 0.60 $ 0.95 ------- ------- ------- ------- ------- ------- ------- -------
6. SEGMENT INFORMATION (QUARTER ENDED JUNE 30) The following table provides certain financial information for each business segment:
Three Months Nine Months Ended June 30, Ended June 30, 1998 1999 1998 1999 ---------------------- ------------------------- Revenues: Government Operations $36,844 $47,427 $ 96,805 $128,788 Consulting 27,390 36,741 73,782 104,016 ------- ------- -------- -------- Total $64,234 $84,168 $170,587 $232,804 ------- ------- -------- -------- ------- ------- -------- --------
Three Months Nine Months Ended June 30, Ended June 30, 1998 1999 1998 1999 ---------------------- ------------------------- Income From Operations Government Operations $ 3,132 $ 4,773 $ 7,207 $11,767 Consulting 3,138 6,844 8,211 19,196 ------- ------- ------- ------- Total $ 6,270 $11,617 $15,418 $30,963 ------- ------- ------- ------- ------- ------- ------- -------
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 - 8 - 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 combinations with the following 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, and Unison Consulting Group, Inc. ("Unison") in June 1999, accounted for as purchases. 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. 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 two firms during 1999 accounted for as purchases. 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. - 9 - 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. 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. On June 1, 1999, the Company acquired all of the outstanding shares of capital stock of Unison for $7,074,000. Unison, based in Chicago, Illinois, provides financial consulting for major government owned airports. In conjunction with the purchase, the Company recorded intangible assets of $4,979,000. - 10 - RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected statements of income data as a percentage of revenues:
Three Months Nine Months Ended June 30, Ended June 30, 1998 1999 1998 1999 ---------------------- ------------------------- Revenues: Government Operations Group ..................... 57.4% 56.4% 56.8% 55.3% Consulting Group ................................ 42.6 43.6 43.2 44.7 Total revenues ................................ 100.0 100.0 100.0 100.0 Gross Profit: Government Operations Group ..................... 17.6 20.0 18.3 19.3 Consulting Group ................................ 33.4 44.1 34.6 42.6 Total gross profit as a percent of revenue ...... 24.3 30.5 25.3 29.7 Selling, general and administrative expenses .... 11.5 16.6 14.3 16.3 Stock option compensation, merger, deferred compensation and ESOP expenses .................. 3.1 0.2 2.0 0.1 ------- ------- ------- ------- Income from operations .......................... 9.8 13.8 9.0 13.3 Interest and other income (expenses) ............ 0.6 1.1 0.9 1.0 ------- ------- ------- ------- Income before income taxes ...................... 10.4 14.9 9.9 14.3 Provision for income taxes ...................... 4.0 6.1 3.7 5.8 ------- ------- ------- ------- Net income ...................................... 6.4 8.9 6.2 8.5 ------- ------- ------- ------- ------- ------- ------- -------
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED --------------------------------------------------------------- JUNE 30, 1998 ------------- REVENUES. Total contract revenues increased 31.0% to $84.2 million for the -------- three months ended June 30, 1999 as compared to $64.2 million for the same period in 1998. Government Operations Group revenues increased 28.7% to $47.4 million for the three months ended June 30, 1999 from $36.8 million for the same period in 1998. This increase was due to an increase in the number of contracts in three of the four divisions in the Government Operations Group. Consulting Group revenues increased 34.1% to $36.7 million for the three months ended June 30, 1999 from $27.4 million for the same period in 1998. The revenue from Carrera and Phoenix, which merged with MAXIMUS subsequent to June 1998 in mergers accounted for as immaterial poolings of interests, and for which the June 1998 quarter results were not restated, was $5.3 million for the June 1998 quarter. The revenue increase for the Consulting Group from the June 1998 quarter to the June 1999 quarter, including the $5.3 million from Carrera and Phoenix in the June 1998 quarter, was 12.5%. This increase was due to an increase in the number of contracts in the Consulting Group. GROSS PROFIT. Total gross profit increased 64.5% to $25.7 million for ------------ the three months ended June 30, 1999 as compared to $15.6 million for the same period in 1998. Government Operations Group gross profit increased 46.4% to $9.5 million for the three months ended June 30, 1999 from $6.5 million for the three months ended June 30, 1998. As a percentage of Government Operations Group revenues, Government Operations Group gross profit increased to 20.0% for the three months ended June 30, 1999 from 17.6% 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 77.3% to $16.2 million for the three months ended June 30, 1999 from $9.1 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 44.1% for the three months ended June 30, 1999 from 33.4% for the same period in 1998, due primarily to improved operating efficiencies within the DMG and CSI divisions, and margins at the Carrera division which were greater than the Group average margin, and which were not included in the June 1998 results as the merger occurred subsequent to that date. - 11 - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and -------------------------------------------- administrative ("SG&A") expenses increased 88.8% to $13.9 million for the three months ended June 30, 1999 as compared to $7.4 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 3,155 at June 30, 1999 from 2,682 at June 30, 1998. As a percentage of revenues, SG&A expenses increased to 16.6% for the three months ended June 30, 1999 from 11.5% 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 June -------------------------------------- 30, 1999, the Company incurred $0.2 million of expenses in connection with the combination with Unison. During the three months ended June 30, 1998, the Company incurred $2.0 million of expenses in connection with the merger with DMG. These expenses consisted of legal, audit, broker, trustee and other expenses, deferred compensation and ESOP plan expenses for the employees of DMG and the acceleration of expenses related to stock appreciation rights for DMG employees totaling $0.9 million. These plans were terminated after the merger with DMG, which occurred in May 1998. Therefore, no expense for those plans was incurred during the three months ended June 30, 1999. INTEREST AND OTHER INCOME. The increase in interest and other income to ------------------------- $1.0 million for the three months ended June 30, 1999 as compared to $0.4 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 June 30, 1999 was 40.8% of income before income taxes as compared to 38.3% for the three months ended June 30, 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. NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED ------------------------------------------------------------- JUNE 30, 1998 ------------- REVENUES. Total contract revenues increased 36.5% to $232.8 million for -------- the nine months ended June 30, 1999 as compared to $170.6 million for the same period in 1998. Government Operations Group revenues increased 33.0% to $128.8 million for the nine months ended June 30, 1999 from $96.8 million for the same period in 1998. This increase was due to an increase in the number of contracts in three of the four divisions in the Government Operations Group. Consulting Group revenues increased 41.0% to $104.0 million for the nine months ended June 30, 1999 from $73.8 million for the same period in 1998. The revenue from Spectrum, which merged with MAXIMUS in March 1998, and Carrera and Phoenix, which merged with MAXIMUS in August 1998 in mergers accounted for as immaterial poolings of interests, and for which the results for the periods prior to the mergers were not restated, was $13.7 million for the nine months ended June 1998. The revenue increase for the Consulting Group at the nine months ended June 1999 from the nine months ended June 1998, including the $13.7 million from Spectrum, Carrera and Phoenix in the nine months ended June 1998 was 18.9%. This increase was due to an increase in the number of contracts in the Consulting Group. GROSS PROFIT. Total gross profit increased 60.2% to $69.2 million for the ------------ nine months ended June 30, 1999 as compared to $43.2 million for the same period in 1998. Government Operations Group gross profit increased 40.9% to $24.9 million for the nine months ended June 30, 1999 from $17.7 million for the nine months ended June 30, 1998. As a percentage of Government Operations Group revenues, Government Operations Group gross profit increased to 19.3% for the nine months ended June 30, 1999 from 18.3% for the same period in 1998. The increase was due primarily to the improvement in gross margin for the three months ended June 30, 1999. The Consulting Group gross profit increased 73.5% to $44.3 million for the nine months ended June 30, 1999 from $25.5 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 42.6% for the nine months ended June 30, 1999 from 34.6% for the same period in 1998, due primarily to improved operating efficiencies within the DMG and CSI divisions, and margins at the Carrera division which were greater than the Group average margin, and which were not included in the June 1998 results as the merger occurred subsequent to that date. - 12 - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and -------------------------------------------- administrative ("SG&A") expenses increased 55.3% to $38.0 million for the nine months ended June 30, 1999 as compared to $24.4 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 3,155 at June 30, 1999 from 2,682 at June 30, 1998. As a percentage of revenues, SG&A expenses increased to 16.3% for the nine months ended June 30, 1999 from 14.3% 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 nine months ended June -------------------------------------- 30, 1999, the Company incurred $0.3 million of expenses in connection with the combinations with CSI and Unison. During the nine months ended June 30, 1998, the Company incurred $3.3 million of expenses in connection with the mergers with Spectrum and DMG. These expenses consisted of legal, audit, broker, trustee and other expenses, deferred compensation and ESOP plan expenses for the employees of DMG and the acceleration of expenses related to stock appreciation rights for DMG employees totaling $0.9 million. These plans were terminated after the merger with DMG, which occurred in May 1998. Therefore, no expense for those plans was incurred during the nine months ended June 30, 1999. INTEREST AND OTHER INCOME. The increase in interest and other income to ------------------------- $2.2 million for the nine months ended June 30, 1999 as compared to $1.5 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 which was completed in December 1998. PROVISION FOR INCOME TAXES. The provision for income tax for the nine -------------------------- months ended June 30, 1999 was 40.6% of income before income taxes as compared to 37.8% for the nine months ended June 30, 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. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended June 30, 1999, cash provided by operations was $15.7 million as compared to cash used in operations of $7.3 million for the nine months ended June 30, 1998. There are two principal reasons for the increase in cash provided by operations. First, net income increased to $19.7 million from $10.5 million . Second, the increase in accounts receivable, billed and unbilled, used $4.1 million of cash during the nine months ended June 30, 1999, whereas during the nine months ended June 30, 1998 the cash used by the increase in receivables was $19.1 million. Through effective collection efforts, receivables have been reduced to 95 days of sales outstanding at June 30, 1999 from 103 days of sales at September 30, 1998. For the nine months ended June 30, 1999, cash used in investing activities was $68.3 million as compared to $25.2 million cash provided by investing activities for the nine months ended June 30, 1998. The $68.3 million used in investing activities for the nine months ended June 30, 1999 primarily consisted of the purchase of marketable securities totaling $48.7 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 , the purchase of Norman Roberts, an executive search firm, on March 31, 1999, for $1.9 million, and the purchase of Unison, a government consulting firm, on June 1, 1999, for $7.1 million. Cash provided by financing during the nine months ended June 30, 1999 was $60.2 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 nine months ended June 30, 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 nine months ended June 30, 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 June 30, 1999. The - 13 - 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 nine months ended June 30, 1999 and 1998. At June 30, 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 has audited its internal software and hardware and implemented corrective actions where necessary to address Year 2000 problems. The Company has also reviewed the software and hardware of, and implemented corrective actions where necessary at its DMG, Carrera, Spectrum, Phoenix, CSI, and Unison divisions. Although the assessment and remediation efforts have been substantially completed, the Company continues to develop Year 2000 contingency plans in the event a service not in the control of the Company experiences processing problems or failures. The cost of these efforts has not been material and the Company does not anticipate that future costs will be material or will have a material impact on its operations or financial results. However, there can be no assurance that the corrective actions or contingency plans will eliminate all Year 2000 risk or that a Year 2000 problem will not have a material adverse effect on the Company. 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. While the Company believes that it has addressed all material Year 2000 problems, there are a number of risks associated with Year 2000, only some of which are within the control of the Company. These risks include unforeseen difficulties in identifying and correcting Year 2000 problems, an incomplete audit of internal hardware and software, and the failure of one or more government clients to adequately address the Year 2000 problem. The Company's Year 2000 efforts are meant to help manage and mitigate these risks. The Company is developing and intends to adopt contingency plans, if deemed necessary, to address any issues raised as it completes remedial work on its internal systems and assesses the state of readiness of its key external government clients. As no specific instance of material Year 2000 non-compliance has been discovered to date, the Company has not yet adopted any specific contingency plans to deal with Year 2000 issues. 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 June 30, 1999. Part II. Other Information. Item 2. Use of Proceeds from Registered Securities. A Registration Statement on Form S-1 (File No. 333-29115) registering 6,037,500 shares of the Company's Common Stock, filed in connection with the Company's IPO, was declared effective by the Securities and Exchange Commission on June 12, 1997. The IPO closed on June 18, 1997 and the offering has terminated. The Company's net proceeds from the IPO were $53,804,000. Cumulatively through March 31, 1999, the Company used $44,737,000 of the net proceeds, which was reported in previous Forms 10-Q and 10-K filed with the SEC. During the quarter ended June 30, 1999, the Company used the remaining $9,067,000 of the net proceeds from the IPO. Of that amount, $7,074,000 was used to purchase the outstanding common stock of Unison Consulting Group, a consulting firm, on June 1, 1999, discussed in the footnotes to the financial statements contained in this Form 10-Q, and $1,993,000 was used to provide general operating capital. Item 6. Exhibits and Reports on Form 8-K. - 14 - (a) Exhibits. The Exhibits filed as part of this Form 10-Q are listed on the Exhibit Index immediately preceding such Exhibits, which Exhibit Index is incorporated herein by reference. (b) Reports on Form 8-K. No Current Report on Form 8-K were filed by the Company during the fiscal quarter ended June 30, 1999. - 15 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MAXIMUS, INC. Date: August 13, 1999 By: /S/ F. ARTHUR NERRET ----------------------- F. Arthur Nerret Vice President, Finance, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) - 16 - EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 27 Financial Data Schedules (EDGAR) 99 Important Factors Regarding Forward Looking Statements. Filed herewith.
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