EXHIBIT 99.1
IMPORTANT FACTORS REGARDING FORWARD LOOKING STATEMENTS
IN THIS EXHIBIT 99.1, "WE," "US," "OUR" AND "MAXIMUS" REFER TO MAXIMUS,
INC. AND ITS SUBSIDIARIES.
From time to time, we may make forward-looking public statements, such
as statements concerning our then expected future revenues or earnings or
concerning projected plans, performance, contract procurement as well as other
estimates relating to future operations. Forward-looking statements may be in
reports filed under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), in press releases or informal statements made with the approval
of an authorized executive officer. The words or phrases "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements" within
the meaning of Section 21E of the Exchange Act and Section 27A of the Securities
Act of 1933, as amended, as enacted by the Private Securities Litigation Reform
Act of 1995.
We wish to caution you not to place undue reliance on these
forward-looking statements which speak only as of the date on which they are
made. In addition, we wish to advise you that the factors listed below, as well
as other factors we have not currently identified, could affect our financial or
other performance and could cause our actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods or events in any current statement.
We will not undertake and specifically decline any obligation to
publicly release revisions to these forward-looking statements to reflect either
circumstances after the date of the statements or the occurrence of events which
may cause us to re-evaluate our forward-looking statements.
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act, we are hereby filing cautionary statements
identifying important factors that could cause our actual results to differ
materially from those projected in forward-looking statements made by us or on
our behalf.
RELIANCE ON GOVERNMENT CLIENTS
Substantially all of our clients are state or local government
authorities. To market our services to government clients, we are largely
required to respond to government requests for proposals ("RFPs"). To do so
effectively, we must estimate accurately our cost structure for servicing a
proposed contract, the time required to establish operations and likely terms of
the proposals submitted by competitors. We must also assemble and submit a large
volume of information within a RFP's rigid timetable. Our ability to respond
successfully to RFPs will greatly impact our business, and we cannot guarantee
that we will be awarded contracts through the RFP process or that our proposals
will result in profitable contracts.
RISKS ASSOCIATED WITH GOVERNMENT CONTRACTING
EARLY TERMINATION OF CONTRACTS. Many of our government contracts
contain base periods of one or more years, as well as option periods covering
more than half of the contract's potential duration. Government agencies
generally have the right not to exercise these option periods. A decision not to
exercise option periods could impact the profitability of some of our contracts.
Our contracts typically also contain provisions permitting a government client
to terminate the contract on short notice, with or without cause. The unexpected
termination of one or more significant contracts could result in significant
revenue shortfalls. The natural expiration of especially large contracts can
also present management challenges. If revenue shortfalls occur and are not
offset by corresponding reductions in expenses, our business could be adversely
affected. We cannot be certain if, when or to what extent a client might
terminate any or all of its contracts with us.
CONTRACTS SUBJECT TO AUDIT. The Defense Contract Audit Agency ("DCAA"),
and certain other government agencies, have the authority to audit and
investigate any government contracts. These agencies review a contractor's
performance on its contract, its pricing practices, its cost structure and its
compliance with applicable laws, regulations and standards. Any costs found to
be improperly allocated to a specific contract will not be reimbursed, while
costs already reimbursed must be refunded. Therefore, a DCAA audit could result
in a substantial adjustment to our revenue. No material
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adjustments resulted from audits completed through 1993, and we believe that
adjustments resulting from subsequent audits will not adversely affect our
business. If a government audit uncovers improper or illegal activities, a
contractor may be subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeitures of profits,
suspension of payments, fines and suspension or disqualification from doing
business with the government.
DISCOURAGEMENT OF REVENUE CONSULTING BY FEDERAL OFFICIALS. To avoid
higher than anticipated demands for federal funds, federal government officials
occasionally discourage state and local authorities from engaging private
consultants to advise them on maximizing federal revenues. We cannot be certain
that state and local officials will not be dissuaded from engaging us for
revenue maximization services.
RELATIONSHIPS WITH POLITICAL CONSULTANTS. We occasionally engage
marketing consultants, including lobbyists, to establish and maintain
relationships with elected officials and appointed members of government
agencies. The effectiveness of these consultants may be reduced or eliminated if
a significant political change occurs. Implementation of term limits for certain
elected officials, for instance, would require us to confront political change
on a more regular basis. Because we cannot be certain that we will successfully
manage our relationships with political consultants, our business may be
adversely affected.
RISKS INVOLVED IN MANAGING GOVERNMENT PROJECTS
RISK OF FIXED-PRICE AND PERFORMANCE-BASED CONTRACTS. We derived
approximately 37% of our fiscal 1999 revenues from fixed-price contracts and
approximately 19% of our fiscal 1999 revenues from performance-based contracts.
For fixed-price contracts, we receive our fee if we meet specified objectives or
achieve certain units of work. Those objectives might include placing a certain
number of welfare recipients into jobs, collecting target amounts of child
support payments, or completing a particular number of managed care enrollments.
For performance-based contracts, we receive our fee on a per-transaction basis.
Such contracts include, for example, child support enforcement contracts, in
which we often receive a fee based on the amount of child support collected. To
earn a profit on these contracts, we rely upon accurately estimating costs
involved and assessing the probability of meeting the specified objectives,
realizing the expected units of work or completing individual transactions,
within the contracted time period. We recognize revenues on these contracts on a
"costs incurred" method. Therefore, we review these contracts quarterly and
adjust revenues to reflect our current expectations. These adjustments affect
the timing and amount of revenue recognized and could adversely affect our
financial results. If we fail to estimate accurately the factors upon which we
base our contract pricing, then we may have to report a decrease in revenues or
incur losses on these contracts.
FAILURE TO MEET CONTRACT PERFORMANCE STANDARDS. Our inability to
satisfy adequately our contractual obligations could adversely affect our
financial condition. Our contracts often require us to indemnify clients for our
failures to meet certain performance standards. Some contracts contain
liquidated damages provisions and financial penalties related to performance
failures. In addition, in order for our Government Operations Group to bid on
certain contracts, we are required to secure our indemnification obligations by
posting a cash performance bond or obtaining a letter of credit. If a claim is
made against a performance bond or letter of credit, the issuer of the bond
could demand higher premiums. Increased bond premiums would adversely affect our
earnings and could limit our ability to bid for future contracts. In addition, a
failure to meet our client's expectations when performing on a contract could
materially and adversely affect our reputation, which, in turn, would impact our
ability to compete for new contracts.
TERMINATION OF LARGE CONTRACTS. Upon termination or expiration of a
contract between our Government Operations Group and a state or local
government, we have to evaluate whether, and in what capacity, we can continue
employing persons that formerly serviced the contract. Unless we enter into a
new contract using those same employees or otherwise re-assign them, their
employment must be terminated. The reassignment or termination of a large number
of employees makes significant demands on our management and administrative
resources.
RELATIONSHIPS WITH GOVERNMENT ENTITIES. To facilitate our ability to
prepare bids in response to RFPs, we rely in part on establishing and
maintaining relationships with officials of various government entities and
agencies. These relationships enable us to provide informal input and advice to
the government entities and agencies prior to the development of an RFP. Because
we cannot be certain that we will successfully manage our relationships with
government entities and agencies, our business may be adversely affected.
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SIGNIFICANT START UP COSTS. When we are awarded a contract to manage a
government program, our Government Operations Group can incur significant
start-up expenses before we receive any contract payments. These expenses
include leasing office space, purchasing office equipment and hiring personnel.
As a result, in certain large contracts where the government does not fund
program start-up costs, we are required to invest significant sums of money
prior to receiving related contract payments.
LEGISLATIVE CHANGE AND POLITICAL DEVELOPMENTS
DEPENDENCE ON LEGISLATIVE PROGRAMS. The market for our services is
dependent largely on federal and state legislative programs. These programs can
be modified or amended at any time by acts of federal and state governments. For
example, in 1996 Congress amended the Social Security Act to eliminate social
security and supplemental income benefit payments based solely on drug and
alcohol disabilities. That amendment resulted in the termination of our
substantial contract with the federal Social Security Administration, which
related to the referral and monitoring of the treatment of recipients of these
benefits. Future legislative changes that we do not anticipate or respond to
effectively could occur and adversely affect our business.
DEPENDENCE ON WELFARE REFORM ACT. We expect that the Welfare Reform Act
and other federal and state initiatives will continue to encourage long-term
changes in the nation's welfare system. Part of our growth strategy includes
aggressively pursuing these opportunities by seeking new contracts to administer
and new health and welfare programs to manage. However, there are many opponents
of welfare reform. As a result, future progress in the area of welfare reform is
uncertain. The repeal of the Welfare Reform Act, in whole or in part, could
adversely affect our business. Also, we cannot be certain that additional
reforms will be proposed or enacted, or that previously enacted reforms will not
be challenged, repealed or invalidated.
RESTRICTIONS ON PRIVATIZATION. Under current law, in order to privatize
certain functions of government programs, the federal government must grant a
consent and/or waiver to the petitioning state or local agency. For example, in
May 1997 the Department of Health and Human Services refused to grant a waiver
to the State of Texas permitting private corporations, rather than public
employees, to decide eligibility of applicants for Food Stamps and Medicaid
benefits. Although MAXIMUS did not bid on the Texas projects, we may face
similar obstacles in pursuing future health and human services contracts.
RISKS OF ACQUISITION STRATEGY; RISKS OF COMPLETED ACQUISITIONS
Our business strategy includes expanding our operations, breadth of
service offerings and geographic scope by acquiring or combining with related
businesses. To date, we have combined with eight consulting firms and are still
in the process of integrating their operations. We cannot be certain that we
will be able to continue to identify, acquire and manage additional businesses
profitably or integrate them successfully without incurring substantial
expenses, delays or other problems. Furthermore, business combinations may
involve special risks, including:
- - Diversion of management's attention
- - Loss of key personnel
- - Assumption of unanticipated legal liabilities
- - Amortization of acquired intangible assets
- - Dilution to our earnings per share
Also, client dissatisfaction or performance problems at an acquired
firm could materially and adversely affect our reputation as a whole.
Furthermore, we cannot be certain that acquired businesses will achieve
anticipated revenues and earnings.
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CHALLENGES RESULTING FROM GROWTH
Sustaining growth has placed significant demands on management as well
as on our administrative, operational and financial resources. To manage our
growth, we must continue to improve our operational, financial and management
information systems and expand, motivate and manage our workforce. However, our
growth and management of large-scale health and human services programs must not
come at the expense of providing quality service and generating reasonable
profits. We cannot be certain that we will continue to experience growth or
successfully manage it.
OPPOSITION FROM GOVERNMENT UNIONS
Our success derives in part from our ability to win profitable
contracts to administer and manage health and human services programs
traditionally administered by government employees. Government employees,
however, typically belong to labor unions with considerable financial resources
and lobbying networks. Unions are likely to continue to apply political pressure
on legislators and other officials seeking to outsource government programs. For
example, union lobbying was instrumental in influencing the Department of Health
and Human Services to deny a petition to allow private corporations to make Food
Stamp and Medicaid eligibility determinations in Texas. Union opposition may
slow welfare reform and result in fewer opportunities for MAXIMUS to service
government agencies.
RELIANCE ON KEY EXECUTIVES
The abilities of our executive officers, including David V. Mastran and
Raymond B. Ruddy, and our senior managers to generate business and execute
projects successfully is important to our success. While we have employment
agreements with certain of our executive officers, these agreements are
terminable under certain conditions. The loss of a key executive could impair
our ability to secure and manage engagements. To limit some of this risk, we
have obtained key-man life insurance policies on Dr. Mastran and Mr. Ruddy in
the amounts of $6,100,000 and $3,950,000, respectively.
ATTRACTION AND RETENTION OF EMPLOYEES
Our delivery of services is labor-intensive. When we are awarded a
government contract, we must quickly hire project leaders and case management
personnel. The additional staff also creates a concurrent demand for increased
administrative personnel. The success of our Government Operations Group and
Consulting Group requires that we attract, develop, motivate and retain:
- - Experienced and innovative executive officers
- - Senior managers who have successfully managed or designed health and human
services programs in the public sector
- - Information technology professionals who have designed or implemented complex
information technology projects
Innovative, experienced and technically proficient individuals are in great
demand and are likely to remain a limited resource. We cannot be certain that we
can continue to attract and retain desirable executive officers and senior
managers. A failure to hire sufficient personnel on a timely basis could
adversely affect our business. The loss of significant numbers of executive
officers and senior managers could produce similar adverse consequences.
COMPETITORS; EFFECTS OF COMPETITION
INTENSIFICATION OF COMPETITION. Competition to provide certain program
management and consulting services to state and local government agencies has
intensified. Our Government Operations Group competes for program management
contracts with the following:
- - Local non-profit organizations such as the United Way and Goodwill Industries
- - Government services divisions of large organizations such as Andersen
Consulting, Lockheed Martin Corporation and Electronic Data Systems, Inc.
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- - Specialized service providers such as America Works, Inc., Policy Studies
Incorporated, and Benova, Inc.
Our Consulting Group competes with:
- - The consulting divisions of the "Big 5" accounting firms
- - Electronic Data Systems, Inc.
Many of these companies are national and international in scope and have
greater resources than we have. Substantial resources could enable certain
competitors to initiate severe price cuts or take other measures in an effort to
gain market share. In addition, we may be unable to compete for a limited number
of large contracts because we may not be able to meet an RFP's requirement to
obtain and post large cash performance bonds. Also, in certain geographic areas,
we face competition from smaller consulting firms with established reputations
and political relationships. We cannot be certain that we will compete
successfully against our existing or any new competitors.
COMPETITION FROM FORMER EMPLOYEES. In addition to competition from existing
competitors, we may experience competition from former employees. Although we
have entered into non-competition agreements with some of our senior level
employees, we cannot be certain that a court would enforce these contracts.
Competition by former employees could adversely affect our business.
ADVERSE PUBLICITY
The nature of our contracts with state and local government authorities
frequently generates media attention. In particular, our management of health
and human services programs and revenue maximization services have occasionally
received negative media coverage. This negative coverage could influence
government officials and slow the pace of welfare reform. The media also focuses
its attention on the activities of political consultants engaged by us, even
when their activities are unrelated to our business. We may be subject to
adverse media attention relating to the activities of individuals who are not
under our control. In addition, we cannot assure that the media will accurately
cover our activities or that we will be able to anticipate and respond in a
timely manner to all media contacts. Inaccurate or misleading media coverage or
our failure to manage adverse coverage could adversely affect our reputation.
LITIGATION
DMG-MAXIMUS LITIGATION. On May 12, 1998, we acquired DMG, which was
subsequently merged into DMG-MAXIMUS, a wholly-owned subsidiary of MAXIMUS. DMG
is currently defending against a lawsuit arising out of consultation services
provided to underwriters of revenue bonds issued by Superstition Mountains
Community Facilities District No. 1 (the "District") in 1994. The bonds were
issued to finance construction of a water waste treatment plant in Arizona.
However, the District was unable to service the bonds and eventually declared
bankruptcy. The District voluntarily came out of bankruptcy and is currently
operating under a forbearance agreement with the sole purchaser of the bonds,
Allstate Insurance Company ("Allstate"). A consolidated action arising out of
these events is pending in the U.S. District Court for the District of Arizona
against DMG-MAXIMUS and thirteen other named defendants. The parties making
claims against DMG-MAXIMUS in the lawsuit, Allstate and the District, allege
that DMG made false and misleading representations in the reports DMG prepared
included among the exhibits to the bond offering memoranda. DMG's reports
concerned certain financial projections made by the District regarding its
ability to service the bonds. Allstate seeks as damages $32.1 million, the
principal amount of bonds it purchased together with accrued and unpaid
interest; the District seeks actual and special damages, prejudgment interest
and costs. DMG-MAXIMUS believes these claims are without merit and intends to
defend against these actions vigorously. We do not believe these actions will
have a material adverse effect on our financial condition or results of
operations. However, we cannot assure that we will be successful in defending
this lawsuit.
SUIT BY FORMER OFFICER. We are currently defending a lawsuit brought by a
former officer, director and shareholder alleging that, at the time he resigned
from MAXIMUS in 1996 and became obligated to sell his MAXIMUS shares back to the
Company, we failed to disclose to him material information regarding the
potential value of those shares. The former officer seeks damages in excess of
$10 million. We do not believe that this claim has merit and intend to oppose it
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vigorously. We do not believe this action will have a material adverse effect on
our financial condition or results of operations. However, we cannot assure that
we will be successful in our defense.
SUIT BY NETWORK SIX. In 1997, we were named as a third-party defendant by
Network Six, Inc. ("Network Six") in a lawsuit brought by the State of Hawaii
against Network Six. Network Six alleged that we tortiously interfered with and
abetted Hawaii in the alleged breach of its contract with Hawaii. We paid
Network Six $50,000 in full settlement of all claims in October 1999. The
settlement was made without admission of fault or liability on our part.
VARIABILITY OF QUARTERLY OPERATING RESULTS
A number of factors cause our revenues and operating results to vary from
quarter to quarter. These factors include:
- - The progress of contracts
- - The levels of revenues earned on contracts (including any adjustments in
expectations on revenue recognition on fixed-price contracts)
- - The commencement, completion or termination of contracts during any particular
quarter
- - The schedules of government agencies for awarding contracts
- - The term of awarded contracts
- - The reactions of the market to announcements of potential acquisitions
- - General economic conditions
Changes in the volume of activity and the number of contracts commenced or
completed during any quarter may cause significant variations in our operating
results because a relatively large amount of our expenses are fixed.
Furthermore, on occasion we incur greater operating expenses during the start-up
and early stages of significant contracts.
CONCENTRATION OF OWNERSHIP BY PRINCIPAL SHAREHOLDERS
Our executive officers own beneficially approximately 41% of our common
stock. Certain executive officers, who beneficially own approximately 34% of the
outstanding shares, have agreed to hold their shares until June 2001, subject to
certain exceptions. In addition, Mr. Ruddy has agreed to vote his shares of
common stock in a manner instructed by Dr. Mastran until September 30, 2001.
Together, Dr. Mastran and Mr. Ruddy beneficially own approximately 32% of our
common stock. As a result, these officers can exercise significant influence
over the outcome of matters requiring a shareholder vote, including the election
of the board of directors. This significant influence could delay or prevent a
change in control of the company, which could adversely affect the market price
of our common stock.
POSSIBLE VOLATILITY OF STOCK PRICE
MAXIMUS first publicly issued common stock on June 13, 1997 at $16.00 per
share in its initial public offering (the "IPO"). Between June 13, 1997 and
September 30, 1999, the closing sale price has ranged from a high of $41.50 per
share to a low of $17.00 per share. The market price of our common stock could
continue to fluctuate substantially due to a variety of factors, including:
- - Quarterly fluctuations in results of operations
- - The failure to be awarded a significant contract on which we have bid
- - The termination by a government client of a material contract
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- - The announcement of new services by competitors
- - Acquisitions and mergers
- - Political and legislative developments adverse to the privatization of
government services
- - Changes in earnings estimates by securities analysts
- - Changes in accounting principles
- - Sales of common stock by existing shareholders
- - Negative publicity
- - Loss of key personnel
Our ability to meet securities analysts' quarterly expectations may also
influence the market price of our common stock. In addition, overall volatility
has often significantly affected the market prices of securities for reasons
unrelated to a company's operating performance. In the past, securities class
action litigation has often been commenced against companies that have
experienced periods of volatility in the price of their stock. Securities
litigation initiated against us could cause us to incur substantial costs and
could lead to the diversion of management's attention and resources.
CERTAIN ANTI-TAKEOVER EFFECTS
Virginia law and our Articles of Incorporation and By-Laws include
provisions that may be deemed to have anti-takeover effects. These provisions
may delay, deter or prevent a takeover attempt that shareholders might consider
desirable. Our directors are divided into three classes and are elected to serve
staggered three-year terms. This structure could impede or discourage an attempt
to obtain control of the company. Shareholders of MAXIMUS do not possess the
power to take any action in writing without a meeting. In addition, Virginia law
imposes certain limitations and special voting requirements on affiliated
transactions. Furthermore, Virginia law denies voting rights to shares acquired
in control share acquisitions, unless granted by a shareholder vote.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
INTERNAL YEAR 2000 COMPLIANCE. We have audited our internal software,
hardware, and telephone systems and those of our divisions and acquired
companies for Year 2000 compliance and have implemented corrective actions where
necessary. The MAXSTAR case management software used in all our major projects
has been upgraded to be Year 2000 compliant. All MAXSTAR-based applications have
also been reviewed and upgraded, where necessary. Although our audit and
remediation efforts have been completed, we continue to evaluate contingency
plans in the event that a service outside of our control experiences processing
problems or failures. As we have not discovered any specific instance of
material Year 2000 non-compliance to date, we have not yet adopted any specific
contingency plans to deal with Year 2000 issues. Our costs for these efforts
have not been material and we do not expect future costs to be material or to
materially affect our financial results. Nevertheless, we cannot be certain that
our corrective actions and contingency plans have eliminated all Year 2000
risks, and a Year 2000-related problem could have a material adverse impact on
our business.
SERVICES PROVIDED BY MAXIMUS AFFECTING CLIENTS' YEAR 2000 COMPLIANCE. We
assist in evaluating, testing and certifying government client systems affected
by Year 2000 problems. In addition, we provide quality assurance monitoring of
Year 2000 compliance conversions performed by third parties for our clients.
Although we have attempted to minimize our liability for potential clients'
system failures, we cannot assure that we will not become subject to legal
action if a client sustains Year 2000 problems. If such legal action is brought
and resolved against us, we could suffer adverse effects on our business and
financial results.
RELIANCE ON VENDORS' AND CLIENTS' YEAR 2000 COMPLIANCE. In order to perform
our government contracts, we rely to varying extents on information processing
performed by vendors, governmental agencies and entities with which we contract.
We have inquired about these parties' potential Year 2000 problems where
necessary. Based on responses to these
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inquiries, our management believes that we would be able to continue to
perform on these contracts without experiencing material negative financial
impact. Even though we have been satisfied with the results of our inquiries,
we continue to evaluate contingency plans in the event of Year 2000-related
problems or failures are experienced by any of our vendors or clients. As we
have not discovered any specific instance of material Year 2000
non-compliance by our vendors or clients to date, we have not yet adopted any
specific contingency plans to deal with Year 2000 issues. However, we cannot
assure that Year 2000 related failures in the information systems of vendors
or clients will not occur. Any system failures could interfere with our
ability to properly manage contracted projects and could adversely affect our
business and results of operations.
While we believe that we have addressed all material Year 2000 problems,
there are a number of risks associated with Year 2000, only some of which are
within our control. These risks include unforeseen difficulties in completing
certain 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. Our Year 2000 efforts are meant to help manage
and mitigate these risks. However, we cannot be certain that our efforts have
eliminated all Year 2000 risks, and a Year 2000-related problem could have a
material adverse impact on our business.
UNCERTAINTIES RELATED TO INTERNATIONAL OPERATIONS
Most of our international operations are currently paid for by the World
Bank and the U.S. Agency for International Development in U.S. dollars. However,
as we expand our operations into developing countries we could encounter a
number of additional risks. The potential risks to our expected international
revenues include:
- - Adverse currency exchange rate fluctuations
- - Inability to collect receivables
- - Difficulty in enforcing contract terms through a foreign country's legal
system
Foreign countries could also impose tariffs, impose additional withholding
taxes or otherwise tax our foreign income.
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