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EXHIBIT 99.1
Important Factors Regarding Forward Looking Statements
November 1998
From time to time, the Company, through its management, may make
forward-looking public statements, such as statements concerning 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 in oral
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.
The Company wishes to caution readers not to place undue reliance on these
forward-looking statements which speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors listed
below, as well as other factors not currently identified by management, could
affect the Company's financial or other performance and could cause the
Company's 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.
The Company will not undertake and specifically declines any obligation to
publicly release any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events which may
cause management to re-evaluate such forward-looking statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially form those projected in forward-looking statements
of the Company made by or on behalf of the Company.
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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 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.
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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 18% of our fiscal 1998 revenues from fixed-price contracts and
approximately 46% of our fiscal 1998 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
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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.
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 (the "SSA
CONTRACT"), 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.
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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 four 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.
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
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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
Delivery of the services provided by MAXIMUS 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.
- Specialized service providers such as America Works, Inc., Policy
Studies Incorporated, and Benova, Inc.
MAXIMUS's 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 MAXIMUS. 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 are unable to compete for a limited number of
large contracts because, we are sometimes unable to meet a 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.
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Competition from Former Employees. In addition to competition from
existing competitors, we may experience competition from former employees.
Although MAXIMUS has entered into non-competition agreements with some of its
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. MAXIMUS may be subject to
adverse media attention relating to the activities of individuals who are not
under its control. In addition, we cannot assure that the media will accurately
cover our activities or that MAXIMUS 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 Litigation. On May 12, 1998, we acquired DMG. 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 and
thirteen other named defendants. The parties making claims against DMG 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 the accuracy of 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. MAXIMUS intends to defend
against these claims vigorously. However, given the preliminary stage of this
litigation, 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 of MAXIMUS alleging that, at the time
he resigned from the Company 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 his MAXIMUS 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 vigorously. However, given the early stage of this
litigation, we cannot assure that we will be successful in our defense.
Suit by Network Six. We are currently defending a lawsuit that was
commenced against MAXIMUS and other parties by Network Six, Inc. ("NETWORK
SIX"). MAXIMUS had been engaged by the State of Hawaii to monitor the
implementation of a
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statewide automated child support system being performed by Network Six. Network
Six alleges that we tortiously interfered with and abetted Hawaii in the alleged
breach of its contract with Hawaii. We believe that Network Six's claims are
without merit and intend to defend this action vigorously. We do not believe
that this action will have a material adverse effect on our financial condition
or results of operations. Because this action is in the early stages of
discovery, we cannot assure that we will be successful in defending this
lawsuit.
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.
CONTROL BY PRINCIPAL SHAREHOLDERS
Our executive officers own beneficially 53.9% of MAXIMUS's common stock.
Certain executive officers, who hold approximately 47.5% of the outstanding
shares, have agreed to hold their shares until June 2001, subject to certain
exceptions. In addition, each of Dr. Mastran and Mr. Ruddy, who hold together
approximately 44.1% of the common stock, has agreed to vote to elect the other
to the board of directors, as long as the other person owns or controls at least
20% of the outstanding common stock. Mr. Ruddy currently owns less than 20% of
the outstanding shares of common stock and, accordingly, Dr. Mastran is no
longer obligated to vote to elect Mr. Ruddy to the board of directors. Mr. Ruddy
has also agreed to vote his shares of common stock in a manner instructed by Dr.
Mastran until September 30, 2001. As a result, these officers can control the
outcome of matters requiring a shareholder vote, including the election of the
board of directors. This control could adversely affect the market price of our
common stock or delay or prevent a change in control of MAXIMUS.
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POSSIBLE VOLATILITY OF STOCK PRICE
MAXIMUS issued common stock on June 13, 1997 at $16.00 per share upon the
closing of its initial public offering (the "IPO"). Between June 13, 1997 and
November 19, 1998, the closing sale price has ranged from a high of $32.56 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
- 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 MAXIMUS 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. Directors of MAXIMUS 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. As a shareholder of MAXIMUS, you 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. MAXIMUS is auditing its internal software
and hardware and the systems of its acquired companies for Year 2000 compliance
and is implementing corrective actions, where necessary, to address computer
problems associated with the Year 2000. The MAXSTAR case management software
used in all our major
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projects has been upgraded to be Year 2000 compliant. All MAXSTAR-based
applications must also be reviewed and upgraded, where necessary, which is now
scheduled to be completed by March 31, 1999. Our telephone systems must also be
Year 2000 compliant, which is also scheduled for completion by March 31, 1999.
We will continue to implement whatever remedial actions are necessary to make us
Year 2000 compliant. We do not believe that remedial measures taken to correct
any Year 2000 problems will materially impact our operations or financial
results. However, if our remediation plans do not succeed, then we may
experience adverse effects on our business. Furthermore, we cannot assure that
the costs of remediation will not exceed our current estimates, or that our
corrective actions will be completed before any Year 2000 problems occur.
Services Provided by MAXIMUS Affecting Clients' Year 2000 Compliance.
MAXIMUS assists in assessing, evaluating, testing and certifying government
client systems affected by Year 2000 problems. In addition, we provide quality
assurance of Year 2000 compliance conversions performed by third parties for our
clients. Although MAXIMUS has attempted to minimize its 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.
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 inquiries, our management believes
that we would be able to continue to perform contracts without
experiencing material negative financial impact. 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.
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 may encounter a number
of additional risks. The risks to our potential 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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