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EXHIBIT 99
IMPORTANT FACTORS REGARDING FORWARD LOOKING STATEMENTS
RELIANCE ON GOVERNMENT CLIENTS
Substantially all of the Company's clients are federal, state or local
government authorities. Effective marketing of the Company's services to
government clients requires the ability to respond to government requests for
proposals ("RFPs"). To succeed in the RFP process, the Company must estimate
its cost structure for servicing the proposed contract, the time required to
establish operations and the likely terms of the proposals submitted by
competitors. The Company must assemble and submit a large volume of information
on a rigid timetable set forth in the RFP. The Company's ability to
successfully respond to the RFP process in the future will have an important
impact on the Company's business, financial condition and results of
operations. No assurance can be given that the Company will be awarded
contracts through the RFP process.
RISKS ASSOCIATED WITH GOVERNMENT CONTRACTING
Contracts awarded to the Company typically contain provisions that permit
the government client to terminate the contract on short notice, with or
without cause. The expiration of large contracts presents additional management
challenges. Many contracts 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. Government agencies generally have the right not to exercise
option periods and the failure to exercise such option periods could impact the
profitability of certain of the Company's contracts. While the Company has
experienced a limited number of early terminations since inception, the
unexpected termination of one or more of the Company's more significant
contracts could result in severe revenue shortfalls which, without
corresponding reductions in expenses, could adversely affect the business,
financial condition and results of operations of the Company. There can be no
assurance that such government authorities will not terminate any or all of the
Company's contracts to administer and manage health and human services
programs.
In order to establish and maintain relationships with members of government
agencies, the Company occasionally engages marketing consultants, including
lobbyists. In the event of a significant political change, such consultants may
lose their ability to effectively assist the Company. In addition, the
implementation of term limits on certain elected officials will require the
Company to confront political change on a regular basis. If the Company fails
to manage its relationships effectively with political consultants, its
business, financial condition and results of operations could materially and
adversely be affected. No assurance can be given that the Company will be
successful in managing such relationships.
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To avoid experiencing higher than anticipated demands for federal funds,
federal government officials on occasion advise state and local authorities not
to engage private consultants to advise on maximizing federal revenues. There
can be no assurance that state and local officials will not be influenced by
federal government officials and, therefore, not engage the Company for such
services. To the extent that state and local officials determine not to seek
the Company's services, the business, financial condition and results of
operations of the Company could be adversely affected.
Government contracts generally are subject to audits and investigations by
government agencies, including audits by the Defense Contract Audit Agency
("DCAA"). These audits and investigations involve a review of the government
contractor's performance of its contracts as well as its pricing practices,
cost structure and compliance with applicable laws, regulations and standards.
A substantial portion of payments to the Company from U.S. Government agencies
is subject to adjustment upon audit by the DCAA. Audits through 1993 have been
completed with no material adjustments and the Company believes that
adjustments resulting from audits of subsequent years will not have a material
adverse effect on the Company's business, financial condition and results of
operations. If any costs are improperly allocated to a contract, such costs
are not reimbursable and, if already reimbursed, will be required to be
refunded to the government. Furthermore, if improper or illegal activities are
discovered in the course of any audits or investigations, the contractor may be
subject to various 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. If the Company becomes subject to penalties or sanctions, such
penalties or sanctions could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS INVOLVED IN MANAGING GOVERNMENT PROJECTS
Upon the receipt of a contract for the management of a health and human
services program, the Company's Government Operations Group may incur
significant start-up expenses prior to the receipt of any payments under such
contract. Such expenses include the costs of leasing office space, purchasing
necessary office equipment and hiring sufficient personnel. As a result, for
large contracts, the Company may be required to make significant investments
prior to the receipt of related contract payments.
Approximately 23% (51% after excluding a significant contract with the
Social Security Administration) of the Company's total revenues for the year
ended September 30, 1996 resulted from fixed price contracts pursuant to which
the Company received its fee for meeting specified objectives or upon the
achievement of specified units of work, such as the placement of welfare
recipients into jobs, the collection of child support payments or the
completion of managed care enrollment transfers. The Company's ability to earn
a profit on these contracts is dependent upon accurate estimates of the costs
involved as well as the probability of meeting the specified objectives or
realizing the expected units of work within a certain period of time. In
addition, the Company recognizes revenues on fixed price contracts based on
costs incurred. The Company periodically reviews such contracts and adjusts
revenues to reflect current
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expectations. Such adjustments will affect the timing and amount of revenue
recognized and could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's failure to
accurately estimate the factors on which contract pricing is based could result
in the Company reporting a decrease in revenues or incurring losses on such
contracts and could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's inability or failure to satisfy its contractual obligations in
a manner consistent with the terms of any contract could have a material
adverse effect on the Company's financial condition because the Company is
often required to indemnify clients for its failure to meet performance
standards. Certain of the Company's contracts have liquidated damages
provisions and financial penalties related to performance failures. In
addition, in order for the Company's Government Operations Group to bid for
certain contracts, the Company has been and will continue to be required to
secure its indemnification obligations by obtaining a performance bond from an
insurer, posting a cash performance bond or obtaining a letter of credit from a
suitable financial institution. In the event that a government entity makes a
claim against such performance bond or letter of credit, the premiums demanded
by the insurers for such bonds could increase, thereby limiting the Company's
ability to bid for contracts in the future. In addition, the Company's failure
to meet a client's expectations in the performance of its contractual
obligations could have a material adverse effect on the Company's reputation,
thereby adversely affecting its business, financial condition and results of
operations.
When contracts between the Company's Government Operations Group and a state
or local government expire or otherwise terminate, unless the Company can
successfully enter into a new contract using the services of employees formerly
engaged in servicing the terminated contract or otherwise re-assign such
employees, the Company will need to terminate the employment of such employees.
The termination of large Government Operations Group contracts and the
subsequent re-assignment or termination of employees places significant demands
on the Company's management and its administrative resources. If the Company is
unable to manage these challenges, the Company's business could materially and
adversely be affected.
LEGISLATIVE CHANGE AND POLITICAL DEVELOPMENTS
The market for the Company's services is largely dependent on federal and
state legislative programs, any of which may be modified or terminated by acts
of the legislative or executive branches of federal and state government. There
can be no assurance that such legislative change will not occur or that the
Company will be able to anticipate and respond in a timely manner to any such
legislative change. The Company's failure to manage effectively its business in
light of anticipated or unanticipated legislative change could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Welfare Reform Act is expected to be a catalyst for sweeping changes in
the administration and management of the welfare system in the United States.
As part of its
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growth strategy, the Company plans to aggressively pursue the opportunities
created by this legislation by seeking new contracts to administer and manage
welfare programs of state and local government agencies. However, opponents of
welfare reform continue to criticize the advances made by the current
administration and continued progress in the welfare reform area is uncertain.
The repeal of the Welfare Reform Act, in whole or in part, could have a
material adverse effect on the future business, financial condition and results
of operations of the Company. There can be no assurance that additional reforms
will be proposed or enacted, or that previously enacted reforms will not be
challenged, repealed or otherwise invalidated.
The adverse impact that legislative changes can have on the Company was
recently evidenced by the termination of a significant contract with the
federal Social Security Administration. This contract related to the referral
and treatment monitoring of social security or supplemental income
beneficiaries with drug or alcohol-related disabilities (the "SSA Contract").
In its fiscal year ended September 30, 1996, the Company earned revenues of
$56.5 million from the SSA Contract, representing approximately 55% of the
Company's total revenues for such fiscal year. In October 1996, the President
signed into law an amendment to the Social Security Act of 1935, effective
January 1, 1997, that eliminated social security and supplemental income
benefits based solely on drug and alcohol disabilities. As a result of this
amendment, the SSA Contract was terminated and no revenues will be earned
thereunder after March 31, 1997.
In addition, under current law the privatization of certain functions of
government programs, such as determining eligibility for Food Stamps and
Medicaid, requires the consent and/or waiver of the executive branch acting
through the applicable administering government agency. In May 1997, in
response to a request by the State of Texas for a waiver to allow private
corporations to decide the eligibility of applicants for Food Stamps and
Medicaid benefits, the Department of Health and Human Services determined not
to grant a waiver to the existing requirement in these programs that only
public employees may make such decisions. The Company did not bid for any
contracts for these Texas projects, and the determination will not affect any
of the Company's existing contracts. However, there can be no assurance that
the Department of Health and Human Services or other health and human services
agencies will not in the future narrow or eliminate certain future markets for
health and human services contracts in which the Company intends to compete.
OPPOSITION FROM GOVERNMENT UNIONS
The Company's success depends in part on its ability to obtain contracts to
profitably administer and manage health and human services programs that
traditionally have been administered and managed by government employees. Many
of these government employees are members of labor unions which have
considerable financial resources and established lobbying networks that are
effective in applying political pressure to legislators and other government
officials who seek to contract with private companies to administer and manage
government programs. Successful efforts to oppose private management of
government programs by these unions may slow welfare reform and ultimately
result in fewer opportunities for the Company to provide services to government
agencies, thereby adversely affecting the
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business, financial condition and results of operations of the Company. A
recent example of the influence of government unions is the role played by
union lobbyists in promoting a May 1997 determination by the Department of
Health and Human Services, in response to a waiver request by the State of
Texas, that only public employees may make decisions on eligibility of
applicants for Food Stamps and Medicaid benefits. See "Legislative Change and
Political Developments." There can be no assurance that these unions will not
succeed in whole or in part in their efforts to oppose the outsourcing of
government programs.
VARIABILITY OF QUARTERLY OPERATING RESULTS
Variations in the Company's revenues and operating results occur from
quarter to quarter as a result of a number of factors, including the progress
of contracts, 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 each contract that the Company has been awarded and general economic
conditions. Because a significant portion of the Company's expenses are
relatively fixed, successful contract performance and variation in the volume
of activity as well as in the number of contracts commenced or completed during
any quarter may cause significant variations in operating results from quarter
to quarter. Furthermore, the Company has on occasion experienced a pattern in
its results of operations in which it incurs greater operating expenses during
the start-up and early stages of significant contracts. In addition, the
Company's SSA Contract contributed $31.6 million, $56.5 million, $14.3 million
and $2.9 million to the Company's revenues in the nine months ended June 30,
1997 and fiscal years 1996, 1995 and 1994, respectively. The termination of the
SSA Contract will significantly reduce the Company's revenue base as compared
to previous quarters. No assurance can be given that the Company will be able
to generate additional revenues in future periods in amounts sufficient to
replace the revenues received under the SSA Contract and as a result, the
Company may experience materially lower revenues as compared to prior periods.
The Company recognized two significant charges against income during the
quarter ended June 30, 1997. The completion of the offering resulted in the
termination of the Company's S corporation status. As a result the Company
recorded a one-time income statement charge to operations of $5.9 million to
recognize the cumulative deferred tax liabilities as of June 13, 1997. In
connection with the offering, on January 31, 1997, certain key employees of the
Company surrendered rights to purchase shares of Common Stock of the Company in
exchange for options to purchase shares of Common Stock at an exercise price of
$1.46 per share. The Company recognized a non-cash compensation charge against
income equal to the difference between the initial public offering price of
$16.00 per share and the option exercise price for all outstanding options.
Compensation expense totaling $150,000 had been recognized through March 31,
1997, and upon completion of this offering, the Company recognized an
additional charge against income of $5.7 million. The option exercise price is
based on the book value of the Common Stock at September 30, 1996, and was
established pursuant to pre-existing compensation arrangements with these
employees.
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RELIANCE ON KEY EXECUTIVES
The success of the Company is highly dependent upon the efforts,
abilities, business generation and project execution capabilities of certain of
its executive officers and senior managers. While the Company, Raymond B.
Ruddy, Chairman of the Board of Directors and President of the Consulting
Group, Russell A. Beliveau, President of the Government Operations Group, Ilene
R. Baylinson, President of the Disability Services Division, Susan D. Pepin,
President of the Systems Planning and Integration Division and Lynn P.
Davenport, President of the Human Services Division, such agreements are
terminable under certain conditions. Other than these six agreements with
executive officers, the Company does not have employment agreements with any
other senior employees. The loss of the services of any of these key
executives could have a material adverse effect upon the Company's business,
financial condition and results of operations, including its ability to secure
and complete engagements. The Company maintains key-man life insurance
policies on David V. Mastran and Raymond B. Ruddy in the amounts of $10,700,000
and $7,250,000, respectively, with proceeds payable to the Company. Because
the levels of insurance were established to fund stock redemption obligations
of the Company that will terminate upon the closing of this offering, the
Company anticipates that it will substantially reduce these policies subsequent
to this offering.
ATTRACTION AND RETENTION OF EMPLOYEES
The Company's business involves the delivery of professional services
and is labor-intensive. When the Company's Government Operations Group is
awarded a contract by a government agency, the Company is often under a tight
timetable to hire project leaders and case management personnel to meet the
needs of the new project. In addition, the resulting large increases in the
number of the Company's employees create demand for increased administrative
personnel at the Company's headquarters. The Company's success in both the
Government Operations Group and the Consulting Group depends in large part upon
its ability to 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 and information
technology professionals who have designed or implemented complex information
technology projects. Such innovative, experienced and technically proficient
individuals are in great demand and are likely to remain a limited resource for
the foreseeable future. There can be no assurance that the Company will be
able to continue to attract and retain desirable executive officers and senior
managers in the future. The inability to hire sufficient personnel on a timely
basis or the loss of a significant number of executive officers and senior
manages could have a material adverse effect on the Company's business,
financial condition and results of operations, including its ability to obtain
and successfully complete service contracts.
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CHALLENGES RESULTING FROM GROWTH
The Company's continued growth has placed significant demands on the
Company's management as well as its administrative, operational and financial
resources. The Company's ability to manage its growth will require the Company
to continue to implement new and to improve existing operational, financial and
management information systems and to continue to expand, motivate and manage
its workforce. In addition, the Company's growth will depend in large part on
its ability to manage large-scale health and human services programs while
continuing to ensure quality service and reasonable profits. If the Company is
unable to manage effectively any of these factors, the quality of the Company's
services, its financial condition and results of operations could be materially
and adversely affected. No assurance can be given that the Company will
continue to experience growth or that the Company will be successful in
managing its growth, if any.
ADVERSE PUBLICITY
The Company has received and expects to continue to receive media attention
as a result of its contracts with state and local government authorities. In
particular, the management of health and human services programs by the
Company's Government Operations Group and the establishment of revenue
maximization programs by the Company's Consulting Group have been the subject
of highly controversial media coverage. Negative coverage of the types of
program management services provided by the Company could influence government
officials and slow the pace of welfare reform, thereby reducing the Company's
growth prospects. In addition to media attention arising out of the types of
services provided by the Company, the Company is also vulnerable to media
attention as a result of the activities of political consultants engaged by the
Company, even when such activities are unrelated to the Company. Such an event
occurred in connection with a marketing representative hired by the Company to
assist in responding to an RFP promulgated by the State of West Virginia. After
learning that the marketing representative was also a state employee, the
Company voluntarily withdrew from the bidding. Certain media coverage relating
to this incident was inaccurate and incorrectly suggested wrongdoing by the
Company. The Company has become aware that certain of its competitors have
sought to exploit such suggestions in connection with other competitive-bidding
situations. There can be no assurance that the Company will not receive adverse
media attention as the result of activities of individuals not under the
Company's control. In addition, there can be no assurance that media attention
focused on the Company will be accurate or that the Company will be able to
anticipate and respond in a timely manner to all media contacts. Inaccurate or
misleading media coverage or the Company's failures to manage such coverage
could have a material adverse effect on the Company's reputation, thereby
adversely affecting its business, financial condition and results of
operations.
RISKS RELATED TO POSSIBLE ACQUISITIONS
A part of the Company's growth strategy is to expand its operations through
the acquisition of additional businesses. The Company has no prior history of
making acquisitions and there
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can be no assurance that the Company will be able to identify, acquire or
profitably manage additional businesses or successfully integrate any acquired
businesses into the Company without incurring substantial expenses, delays or
other operational or financial problems. Furthermore, acquisitions may involve
a number of special risks, including diversion of management's attention,
failure to retain key personnel, unanticipated events or circumstances, legal
liabilities and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Client dissatisfaction or performance
problems at a single acquired firm could have a material adverse effect on the
reputation of the Company as a whole. In addition, there can be no assurance
that acquired businesses, if any, will achieve anticipated revenues and
earnings. The failure of the Company to manage its acquisition strategy
successfully could have a material adverse effect on the Company's business,
financial condition and results of operations.
LITIGATION
On March 12, 1997, Network Six, Inc. ("Network Six") served MAXIMUS with a
First Amended Third-Party Complaint filed in the State of Hawaii Circuit Court
of the First Circuit. In this complaint, Network Six named the Company and
other parties as third party defendants in an action by the State of Hawaii
against Network Six. In 1991, the Company's Consulting Group was engaged by the
State of Hawaii to provide assistance in planning for and monitoring the
development and implementation by Hawaii of a statewide automated child support
system. In 1993, Hawaii contracted with Network Six to provide systems
development and implementation services for this project. In 1996, the state
terminated the Network Six contract for cause and filed an action against
Network Six. Network Six counterclaimed against Hawaii that the state breached
its obligations under the contract with Network Six. In the Third Party
Complaint, Network Six alleges that the Company is liable to Network Six on
grounds that: (I) Network Six was an intended third party beneficiary under the
contract between the Company and Hawaii; (ii) the Company engaged in bad faith
conduct and tortiously interfered with the contract and relationship between
Network Six and Hawaii; (iii) the Company negligently breached duties to
Network Six; and (iv) the Company aided and abetted Hawaii in Hawaii's breach
of contract. Network Six's complaint seeks damages, including punitive damages,
from the third party defendants in an amount to be proven at trial. The Company
believes that Network Six was not an intended third party beneficiary under its
contract with Hawaii and that Network Six's claims are without factual or legal
merit. The Company does not believe this action will have a material adverse
effect on its business and intends to vigorously defend this action. However,
given the early stage of this litigation, no assurance may be given that the
Company will be successful in its defense. A decision by the court in Network
Six's favor or any other conclusion of this litigation in a manner adverse to
the Company could have a material adverse effect on the Company's business,
financial condition and results of operations.
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