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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, 1998
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 5, 1998
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Common Shares, No Par Value 16,829,678
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MAXIMUS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 1998 (unaudited) and September 30, 1997
Statements of Income for the three months and nine months ended June
30, 1998 and 1997 (unaudited)
Statements of Cash Flows for the nine months ended June 30, 1998 and
1997 (unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Litigation
Item 2. Use of Proceeds from Registered Securities
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
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MAXIMUS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, JUNE 30,
1997 1998
---------------- ----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $11,000 $19,988
Marketable securities . . . . . . . . . . . . . . . . . . . . 40,869 13,318
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 46,531 66,047
Costs and estimated earnings in excess of billings . . . . . . 5,605 5,717
Prepaid expenses and other current assets . . . . . . . . . . 1,435 655
Deferred income taxes . . . . . . . . . . . . . . . . . . . . - 660
----------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 105,440 106,385
Property and equipment at cost:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 662 662
Building and improvements . . . . . . . . . . . . . . . . . . 1,721 1,721
Office furniture and equipment . . . . . . . . . . . . . . . . 4,902 5,711
Leasehold improvements . . . . . . . . . . . . . . . . . . . . 188 331
----------- -------------
7,473 8,425
Less: Accumulated depreciation and amortization . . . . . . . (3,578) (4,179)
----------- -------------
Total property and equipment, net . . . . . . . . . . . . . . . . . . . 3,895 4,246
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 1,241 62
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 921 1,240
----------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $111,497 $111,933
=========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . $3,914 $6,316
Accrued compensation and benefits . . . . . . . . . . . . . . 10,132 12,145
Billings in excess of costs and estimated earnings . . . . . . 12,277 13,209
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . 1,596 -
Income taxes payable . . . . . . . . . . . . . . . . . . . . . 3,932 1,756
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 2,452 -
S Corporation distribution payable 5,748 -
----------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 40,051 33,426
Deferred compensation, less current portion . . . . . . . . . . . . . . 3,534 -
----------- -------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,585 33,426
----------- -------------
Contingencies (Note 3)
Shareholders' equity:
Common stock, no par value; 30,000,000 shares authorized;
15,991,680 and 16,829,678 shares issued and outstanding at
September 30, 1997 and June 30, 1998, at stated amount . . . . 82,315 82,922
Retained earnings (deficit) . . . . . . . . . . . . . . . . . (14,403) (4,415)
----------- -------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . 52,961 78,507
----------- -------------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . $111,497 $111,933
=========== =============
See notes to financial statements.
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MAXIMUS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- --------------
1997 1998 1997 1998
-------- -------- ------- -------
Revenues . . . . . . . . . . . . . . . . . . $36,083 $61,238 $124,163 $162,116
Cost of revenues . . . . . . . . . . . . . . 25,524 46,323 91,763 121,232
------- ------- ------- -------
Gross profit . . . . . . . . . . . . . . . . 10,559 14,915 32,400 40,884
Selling, general and administrative expenses 6,190 7,122 18,013 23,788
Stock option compensation and acquisition
expense . . . . . . . . . . . . . . . . . . 5,724 1,849 5,874 2,384
------- ------- ------- -------
Income (loss) from operations . . . . . . . . (1,355) 5,944 8,513 14,712
Interest and other income . . . . . . . . . . 61 384 (29) 1,234
------- ------- ------- -------
Income (loss) before income taxes . . . . . . (1,294) 6,328 8,484 15,946
Provision for income taxes . . . . . . . . . 907 2,549 1,989 6,378
------- ------- ------- -------
Net income (loss) . . . . . . . . . . . . . . ($2,201) $ 3,779 $6,495 $9,568
======= ======= ====== ======
Earnings (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . ($ 0.17) $ 0.22 $ 0.51 $ 0.57
======= ====== ====== ======
Diluted . . . . . . . . . . . . . . . . . . . ($ 0.17) $ 0.22 $ 0.50 $ 0.56
======= ====== ====== ======
Shares used in computing earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . 13,040 16,829 12,670 16,814
====== ====== ====== ======
Diluted . . . . . . . . . . . . . . . . . . . 13,040 17,220 13,024 17,205
====== ====== ====== ======
See notes to financial statements.
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MAXIMUS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS
ENDED JUNE 30,
--------------
1997 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,495 $9,568
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 398 432
Stock option compensation expense . . . . . . . . . . . . . . . 5,874 -
Change in assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . (8,522) (17,977)
Costs and estimated earnings in excess of billings . . . . . . . (2,772) (112)
Prepaid expenses and other current assets . . . . . . . . . . . (665) 756
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 1,146 (2,147)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (65) (332)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 50 2,666
Accrued compensation and benefits . . . . . . . . . . . . . . . 3,265 (1,527)
Billings in excess of costs and estimated earnings . . . . . . . 5,826 1,162
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . 971 (2,125)
-------- -------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . 12,001 (9,636)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment . . . . . . . . . . . . . . . . . . . (688) (600)
Sale (purchase) of marketable securities . . . . . . . . . . . . . . . . (39,805) 27,551
-------- -------
Net cash (used in) provided by investing activities . . . . . . . . . . . . . . . (40,493) 26,951
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of expenses . . . . . . . . . 53,804 -
S Corporation distributions . . . . . . . . . . . . . . . . . . . . . . (21,712) (6,368)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . - 125
Payment for purchase of redeemable common stock . . . . . . . . . . . . (238) (188)
Net (payments) proceeds from borrowings. . . . . . . . . . . . . . . . . 1,154 (2,363)
-------- -------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . 33,008 (8,794)
Cash flow adjustment for change in accounting period
for David M. Griffith and Associates, Ltd . . . . . . . . . . . . . . . . . . . - 467
-------- -------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 4,516 8,988
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . 2,387 11,000
-------- -------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . $6,903 $19,988
======== =======
See notes to financial statements.
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MAXIMUS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(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,
1998 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, 1996 and
1997 and for each of the three years in the period ended September 30, 1997
included in the Company's Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.
2. INITIAL PUBLIC OFFERING
The Company completed an initial public offering ("IPO") of Common
Stock during June 1997. Of the 6,037,500 shares of Common Stock sold in the
IPO, 2,360,000 shares were sold by selling shareholders and 3,677,500 shares
were sold by MAXIMUS, Inc. generating $53,804 in proceeds to the Company, net
of offering expenses.
The Company made cash payments of S corporation distributions (the "S
Corporation Dividend") to shareholders totaling $21,712 and accrued $5,748
during the year ended September 30, 1997. The S Corporation Dividend
represented the undistributed earnings of the Company taxed or taxable to the
shareholders through the date of the IPO. During the quarter ended December
31, 1997, the Company paid the remaining $5,748 of the S Corporation Dividend.
See also notes 5 and 6.
3. 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. The Company believes Network Six's claims are
without merit and intends to vigorously defend this action. 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 does not believe that this action will have a material
adverse effect on the Company's business, and it 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.
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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4. REVENUES FROM SIGNIFICANT CONTRACT
Revenues for the three month periods ended June 30, 1998 and 1997
include $0 and $19, and for the nine month periods ended June 30, 1998 and 1997
include $0 and $31,612, respectively, from a significant contract with the
U.S. Government Social Security Administration that was terminated in February
1997 pursuant to legislative action.
5. INCOME TAX PROVISION
Prior to the IPO, the Company and its shareholders elected to be
treated as an S corporation under the Internal Revenue Code. Under the
provisions of the tax code, the Company's shareholders included their pro rata
share of the Company's income in their personal tax returns. Accordingly, the
Company was not subject to federal and most state income taxes. Upon
completion of the IPO, the Company's S corporation status terminated for
federal and state taxation purposes, and the Company recorded, in the three-
month period ended June 30, 1997, a deferred tax charge of $2,566 for the
cumulative differences between the financial reporting and income tax basis of
certain assets and liabilities at June 12, 1997. The Company also recorded a
deferred tax benefit of $2,055 related to stock option compensation expense for
options given to employees.
6. BUSINESS COMBINATIONS
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 ("Spectrum"), both of San Antonio, Texas. 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.
Spectrum contributed revenues and operating income of $4,076 and $373
for the three months ended June 30, 1998, and $7,173 and $897 for the nine
months ended June 30, 1998, respectively to the results of operations of the
Company. Also, during the three months ended March 31, 1998, Spectrum paid S
Corporation Dividends totaling $620 based upon estimated taxable income through
March 15, 1998.
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. ("DMG"). This merger was accounted for as a pooling of
interests and accordingly, 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.
7. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the Statement 128 requirements.
- 7 -
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The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Nine Months
Ended June 30, Ended June 30,
1997 1998 1997 1998
---------------------------------------------------
Numerator:
Net income . . . . . . . . . . . . . . . . . . . . . . ($2,201) $3,779 $6,495 $9,568
Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding . . . . . . . 13,040 16,829 12,670 16,814
------ ------ ------ ------
Stock Options . . . . . . . . . . . . . . . . . . . . . - 391 354 391
------ ------ ------ ------
Denominator for dilutive earnings per share . . . . . . 13,040 17,220 13,024 17,205
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
MAXIMUS provides program management and consulting services to government
health and human services agencies in the United States. Founded in 1975, the
Company has been profitable every year since inception. The Company conducts
its operations through two groups, the Government Operations Group and the
Consulting Group. The Government Operations Group administers and manages
government health and human services programs, including welfare-to-work and
job readiness, child support enforcement, managed care enrollment and
disability services. The Consulting Group provides health and human services
planning, information technology consulting, strategic program evaluation,
program improvement, communications planning and revenue maximization services.
In October 1996, President Clinton signed into law an amendment to the
Social Security Act of 1935, effective January 1, 1997, that eliminated Social
Security Income and Supplemental Security Disability Insurance benefits based
solely on drug and alcohol disabilities. As a result of this legislative act,
the Social Security Administration terminated a significant contract with the
Company (the "SSA Contract") effective at the end of February 1997. All
services to be provided to the Social Security Administration were completed in
the quarter ended March 31, 1997. The SSA Contract contributed $0 and $19
thousand in the three-month periods ended June 30, 1998 and 1997 and $0 and
$31.6 million in the nine-month periods ended June 30, 1998 and 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues. Total contract revenues increased 69.7% to $61.2 million for
the three months ended June 30, 1998 as compared to $36.1 million for the same
period in 1997. Government Operations Group revenues increased 92.1% to $36.8
million for the three months ended June 30, 1998 from $19.2 million for the
same period in 1997. This increase was due to an increase in the number of
contracts in the Child Support, Managed Care Enrollment, and Welfare Reform
divisions of the Government Operations Group. Consulting Group revenues
increased 44.3% to $24.4 million for the three months ended June 30, 1998 from
$16.9 million for the same period in 1997. The increase was due to revenues
totaling $4.1 million resulting from the Spectrum Consulting companies, which
were combined with the Company in a transaction accounted for as a pooling of
interests effective January 1, 1998, and an increase in the number of
contracts.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Total gross profit increased 41.3% to $14.9 million for the three
months ended June 30, 1998 as compared to $10.6 million for the same period in
1997. Government Operations Group gross profit increased 39.6% to $6.5 million
for the three months ended June 30, 1998 from $4.6 million for the three months
ended June 30, 1997. As a percentage of revenues, Government Operations Group
gross profit decreased to 17.6% for the three months ended June 30, 1998 from
24.2% for the same period in 1997. The decrease was due to anticipated lower
gross profit margins on certain Managed Care Enrollment contracts which were
begun during the quarter ended March 31, 1998, a higher amount of pass-through
costs during the three months ended June 30, 1998
- 8 -
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on which the Company earns no gross profit, and favorable revenue recognition
adjustments recorded in the June 1997 quarter. The Managed Care Enrollment
contracts are expected to deliver normal Government Operations Group gross
profit margins in subsequent periods. The Consulting Group gross profit
increased 42.5% to $8.4 million for the three months ended June 30, 1998 from
$5.9 million for the same period in 1997 principally due to the increased
revenues. As a percentage of revenues, Consulting Group gross profit decreased
to 34.6% for the three months ended June 30, 1998 from 35.0% for the same period
in 1997, a negligible change.
Selling, General and Administrative Expenses. Total selling, general and
administrative ("SG&A") expenses increased 15.1% to $7.1 million for the three
months ended June 30, 1998 as compared to $6.2 million for the same period in
1997. The increase in costs was due to increases in both professional and
administrative personnel necessary to support the Company's growth, marketing
and proposal preparation expenditures to pursue further growth and the
additional expenses related to operating as a public company. As a percentage
of revenues, SG&A expenses decreased to 11.6% for the three months ended June
30, 1998 from 17.2% for the same period in 1997.
Stock Option Compensation Expense and Acquisition Expense. During the
three months ended June 30, 1998, the Company incurred $1.8 million of
non-recurring expenses in connection with the merger with DMG. These expenses
consisted of legal, audit, broker, trustee and other expenses and the
acceleration of expenses related to stock appreciation rights for DMG employees
totaling $0.8 million. During the three months ended June 30, 1997, the
Company, in connection with its IPO, recognized a non-recurring compensation
expense of $5.7 million for stock options granted to employees.
Interest and Other Income. The increase in interest and other income to
$0.4 million for the three months ended June 30, 1998 as compared to $0.1
million for the same period in 1997 was due to the increase in invested funds
which were generated as a result of the IPO.
Provision for Income Taxes. Prior to the IPO, the Company and its
shareholders elected to be treated as an S corporation under the Internal
Revenue Code. Under the provisions of the tax code, the Company's shareholders
included their pro rata share of the Company's income in their personal tax
returns. Accordingly, the Company was not subject to federal and most state
income taxes until June 12, 1997, the day prior to the completion of the
initial public offering. Upon completion of the IPO, the Company's S
corporation status was terminated and the Company became subject to federal and
state corporate income taxes.
The Company's income tax provision for the three months ended June 30,
1998 was $2.5 million as compared to $0.9 million for the three months ended
June 30, 1997. The provision for income taxes for the three months ended June
30, 1998 consisted of state and federal income tax based on an estimated
annual income tax rate of 40%. Tax expense for the three months ended June 30,
1997 included a deferred tax charge of $2.6 million for the cumulative
differences between the financial reporting and income tax basis of certain
assets and liabilities at June 12, 1997 and a deferred tax benefit of $2.1
million related to stock option compensation expense for options granted to
employees.
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
Revenues. Total contract revenues increased 30.6% to $162.1 million for
the nine months ended June 30, 1998 as compared to $124.2 million for the same
period in 1997. Government Operations Group revenues increased 30.2% to $96.8
million for the nine months ended June 30, 1998 from $74.4 million for the same
period in 1997. For the nine months ended June 30, 1998, revenues from the SSA
Contract were $0 as compared to $31.6 million for the same period in 1997.
Excluding the SSA Contract, Government Operations Group revenues increased
126.5% to $96.8 million for the nine months ended June 30, 1998 from $42.7
million for the same period in 1997. This increase was due to an increase in
the number of contracts in the Child Support, Managed Care Enrollment, and
Welfare Reform divisions of the Government Operations Group. Consulting Group
revenues increased 31.1% to $65.3 million for the nine months ended June 30,
1998 from $49.8 million for the same period in 1997. The increase was due to
revenues totaling $7.2 million resulting from the Spectrum Consulting
companies, which were combined with the Company in a transaction accounted for
as a pooling of interests effective January 1, 1998, and new contracts secured
by the Company.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Total gross profit increased 26.2% to $40.9 million for the nine
months ended June 30, 1998 as compared to $32.4 million for the same period in
1997. Government Operations Group gross profit increased 24.5% to $17.7
million for the nine months ended June 30, 1998 from $14.2 million for the nine
months ended June 30, 1997. As a percentage of revenues, Government Operations
- 9 -
10
Group gross profit decreased to 18.3% for the nine months ended June 30, 1998
from 19.1% for the same period in 1997. The decrease was due to anticipated
lower gross profit margins on certain Managed Care Enrollment contracts which
were begun during the quarter ended March 31, 1998. These contracts are
expected to deliver normal Government Operations Group gross profit margins in
subsequent periods. Consulting Group gross profit increased 27.5% to $23.2
million for the nine months ended June 30, 1998 from $18.2 million for the same
period in 1997 principally due to the increased revenues. As a percentage of
revenues, Consulting Group gross profit decreased to 35.5% for the nine months
ended June 30, 1998 from 36.5% for the same period in 1997. This decrease was
due primarily to one contract which, for competitive reasons, was bid using
lower margins.
Selling, General and Administrative Expenses. Total selling, general and
administrative ("SG&A") expenses increased 32.1% to $23.8 million for the nine
months ended June 30, 1998 as compared to $18.0 million for the same period in
1997. As a percentage of revenues, SG&A expenses increased to 14.7% for the
nine months ended June 30, 1998 from 14.5% for the same period in 1997. The
increase in costs was due to increases in both professional and administrative
personnel necessary to support the Company's growth, marketing and proposal
preparation expenditures to pursue further growth and the additional expenses
related to operating as a public company.
Stock Option Compensation Expense and Acquisition Expense. During the
nine months ended June 30, 1998, the Company incurred $2.4 million of
non-recurring expenses in connection with the mergers with DMG and Spectrum.
These expenses consisted of legal, audit, broker, trustee and other expenses
and the acceleration of expenses related to stock appreciation rights for DMG
employees totaling $0.8 million. During the nine months ended June 30, 1997,
the Company recognized a non-recurring compensation expense of $5.9 million for
stock options granted to employees.
Interest and Other Income. The increase in interest and other income to
$1.2 million for the nine months ended June 30, 1998 as compared to a net
expense of $29 thousand for the same period in 1997 was due to the increase in
invested funds which were generated as a result of the IPO.
Provision for Income Taxes. Prior to the IPO, the Company and its
shareholders elected to be treated as an S corporation under the Internal
Revenue Code. Under the provisions of the tax code, the Company's shareholders
included their pro rata share of the Company's income in their personal tax
returns. Accordingly, the Company was not subject to federal and most state
income taxes until June 12, 1997, when the initial public offering was
completed. . Upon completion of the IPO, the Company's S corporation status
was terminated and the Company became subject to federal and state corporate
income taxes.
The Company's income tax provision for the nine months ended June 30, 1998
was $6.4 million as compared to $2.0 million for the nine months ended June 30,
1997. The provision for income taxes for the nine months ended June 30, 1998
consisted of state and federal income tax based on an estimated annual income
tax rate of 40%. Tax expense for the nine months ended June 30, 1997 included
a deferred tax charge of $2.6 million for the cumulative differences between
the financial reporting and income tax basis of certain assets and liabilities
at June 12, 1997 and a deferred tax benefit of $2.1 million related to stock
option compensation expense for options given to employees.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash used in operations for the nine months ended June 30,
1998 was $9.6 million as compared to $14.2 million cash provided by operations
for the nine months ended June 30, 1997. The decrease in cash provided by
operations during the nine months ended June 30, 1998 compared to the nine
months ended June 30, 1997 was primarily due to increases in accounts
receivable totalling $18.0 million caused by the increase in revenue volume,
the payment of income taxes totaling $4.4 million for the year ended September
30, 1997, and the payment by DMG of deferred compensation to employees
totalling $4.4 million, offset by other net changes in working capital.
Certain marketable securities were sold during the nine months ended June
30, 1998, generating $27.6 million in proceeds. These investments were sold to
provide general operating capital and the necessary cash to fund the cash used
in operations discussed previously and to pay the final S corporation
distribution discussed below.
During the three months ended December 31, 1997, the Company made final S
corporation distributions totaling $5.7 million. The distributions to
shareholders were based upon the income previously taxed to the S corporation
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shareholders and the fiscal 1997 income taxable to the S corporation
shareholders. The amount of the fiscal 1997 taxable income was determined
during the finalization of the Company's income for the full fiscal year ended
September 30, 1997, and the liability for the $5.7 million distribution was
recognized on the September 30, 1997 balance sheet. Also, during the three
months ended March 31, 1998, Spectrum paid S Corporation Dividends totaling $620
based upon estimated taxable income through March 15, 1998.
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 $0.4 million at June
30, 1998. The Credit Facility bears interest at a rate equal to LIBOR plus an
amount which ranges from 0.65% to 1.25% depending on the Company's debt to
equity ratio. The Credit Facility contains certain restrictive covenants and
financial ratio requirements, including a minimum net worth requirement of $60
million. The Company has not used the Credit Facility to finance its working
capital needs and, at June 30, 1998, the Company had $9.6 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.
IMPACT OF YEAR 2000
The Company is aware of the issues that many computer systems will face as
the millennium ("Year 2000") approaches. The Company believes that its own
internal software and hardware is Year 2000 compliant. In addition, in order
to perform on its government contracts, 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 inquiries, management believes that the Company will be able to
continue to perform on such contracts without material negative financial
impact.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence and strategies and the Company's expectations about future
contracts, market opportunities, market demand or acceptance of the Company's
products are forward looking statements that involve risks and uncertainties.
These uncertainties include reliance on government clients; risks associated
with government contracting; risks involved in managing government projects;
legislative change and political developments; opposition from government
unions; challenges resulting from growth; adverse publicity; and legal,
economic and other risks detailed in Exhibit 99 to the Company's Quarterly
Report on Form 10-Q for the period ended June 30, 1998.
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Part II. Other Information.
Item 1. Litigation.
On May 12, 1998, the Company acquired DMG, which currently operates as a
wholly-owned subsidiary of the Company. DMG is defending against two lawsuits.
In 1994, DMG was engaged as a consultant by underwriters of revenue bonds
issued by Superstition Mountains Community Facilities District No. 1 (the
"District") to finance construction of a waste water treatment plant in
Arizona. The bonds were later defaulted upon when the District declared
bankruptcy. Two actions arising out of those events were filed against Griffth
in the U.S. District Court for the District of Arizona, one filed on January
20, 1997 by Allstate Insurance Company (the "Allstate") against DMG and 13
other named defendants, and another filed on December 2, 1996 by the District
against DMG and nine other named defendants. The complaints allege that DMG
made false and misleading representations in the bond offering memorandum with
respect to the accuracy of certain financial projections made by the District
regarding its ability to service the bonds. Allstate seeks as damages the
principal amount of the face value of the bonds it purchased together with
accrued and unpaid interest; the District seeks actual and special damages,
prejudgment interest and costs. MAXIMUS intends to defend both of these actions
vigorously. However, a decision by the court in favor of either or both
plaintiffs could have a material adverse effect on MAXIMUS's business,
financial condition and results of operations.
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. The
Company used $9,300,000 of the net proceeds from the IPO during the three months
ended June 30, 1998 to fund the cash needs of DMG including the liquidation of
deferred compensation liabilities of approximately $4,400,000, the discharge of
a note payable to a bank in the amount of $1,400,000, payment of current
accounts payable totalling approximately $2,000,000, and general operating
capital.
Item 6. Exhibits and Reports on Form 8-K.
(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. The Company filed a Current Report on Form 8-K dated
May 12, 1998 reporting on the completion of the merger of DMG with and
into the Company and providing certain financial information in connection
therewith.
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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, 1998 By: /s/ F. Arthur Nerret
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F. Arthur Nerret
Vice President, Finance and Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
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10 Amendment No. 1, dated June 23, 1998, to the 1997 Employee Stock Purchase Plan.
27 Financial Data Schedules (EDGAR).
99 Important Factors Regarding Forward Looking Statements.
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