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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 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)
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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 AUGUST 4, 1999
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Common Shares, No Par Value 20,984,215
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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
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(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
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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
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10,300 20,175
Less: Accumulated depreciation and amortization................... (5,433) (5,779)
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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
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Total assets................................................................ $126,002 $206,500
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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
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Total current liabilities 38,595 37,681
Long-term debt.............................................................. 620 1,477
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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
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Total shareholders' equity.................................................. 86,787 167,342
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Total liabilities and shareholders' equity.................................. $126,002 $206,500
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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
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-------- -------- --------- --------
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.
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MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Months
Ended June 30,
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1998 1999
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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
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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)
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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)
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Net cash (used in) provided by financing activities................................... (9,365) 60,175
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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
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Cash and cash equivalents, end of period.............................................. $20,022 $27,000
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See notes to financial statements.
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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.
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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
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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
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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
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------- ------- ------- -------
Diluted $ 0.23 $ 0.35 $ 0.60 $ 0.95
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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
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Total $64,234 $84,168 $170,587 $232,804
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------- ------- -------- --------
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
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Total $ 6,270 $11,617 $15,418 $30,963
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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
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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.
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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.
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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.
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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
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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.
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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. No Current Report on Form 8-K were filed by the Company
during the fiscal quarter ended June 30, 1999.
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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: August 13, 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
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27 Financial Data Schedules (EDGAR)
99 Important Factors Regarding Forward Looking Statements. Filed herewith.
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