UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2003
OR
o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

Commission file number 1-12997

 

 

 

Indicate by check 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  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý   No  o

 

 

 

MAXIMUS, Inc.

 

Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2003

 

INDEX

 

PART I.  FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements.
	Condensed Consolidated Balance Sheets as of September 30, 2002 and March 31, 2003 (unaudited)
	Condensed Consolidated Statements of Income for the three months and six months ended March 31, 2002 and 2003 (unaudited)
	Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2002 and 2003 (unaudited)
	Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.
Item 4.	Controls and Procedures.
PART II.  OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders.
Item 6.	Exhibits and Reports on Form 8-K.
Signature
Certifications
Exhibit Index

 

Throughout this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our” and “MAXIMUS” refer to MAXIMUS, Inc. and its subsidiaries.

 

 

MAXIMUS, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

		September 30, 2002			March 31, 2003
		(Note 1)			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	94,965		$	92,623
Marketable securities		160			140
Accounts receivable - billed		108,074			111,313
Accounts receivable - unbilled		25,102			29,839
Prepaid expenses and other current assets		7,123			7,518
Total current assets		235,424			241,433
Property and equipment, at cost		39,612			43,018
Less accumulated depreciation and amortization		(14,206		)	(16,814		)
Property and equipment, net		25,406			26,204
Software development costs		19,024			20,719
Less accumulated amortization		(4,908		)	(6,829		)
Software development, net		14,116			13,890
Goodwill, net		68,812			71,291
Intangible assets, net		6,540			6,647
Other assets		1,792			2,115
Total assets		$	352,090		$	361,580
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	10,867		$	13,459
Accrued compensation and benefits		19,726			18,361
Deferred revenue		12,939			16,080
Income taxes payable		2,325			3,163
Deferred income taxes		1,811			1,938
Other current liabilities		1,794			1,766
Total current liabilities		49,462			54,767
Other liabilities		499			414
Total liabilities		49,961			55,181
Shareholders’ equity:
Common stock, no par value; 60,000,000 shares authorized; 21,509,444 and 20,888,289 shares issued and outstanding at September 30, 2002 and March 31, 2003, at stated amount, respectively		144,156			131,109
Accumulated other comprehensive income		24			42
Retained earnings		157,949			175,248
Total shareholders’ equity		302,129			306,399
Total liabilities and shareholders’ equity		$	352,090		$	361,580

 

See notes to unaudited condensed consolidated financial statements.

 

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MAXIMUS, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2002			2003			2002			2003
Revenue		$	121,953		$	130,663		$	251,523		$	263,354
Cost of revenue		86,749			92,077			176,743			182,507
Gross profit		35,204			38,586			74,780			80,847
Selling, general and administrative expenses		23,589			27,059			44,909			52,676
Non-cash equity based compensation		—			256			—			512
Amortization of acquisition-related intangibles		250			273			513			553
Income from operations		11,365			10,998			29,358			27,106
Interest and other income		670			390			1,403			937
Income before income taxes		12,035			11,388			30,761			28,043
Provision for income taxes		4,968			4,498			12,458			11,077
Net income		$	7,067		$	6,890		$	18,303		$	16,966
Earnings per share:
Basic		$	0.31		$	0.33		$	0.79		$	0.80
Diluted		$	0.30		$	0.32		$	0.76		$	0.79
Weighted average shares outstanding:
Basic		23,142			21,092			23,121			21,159
Diluted		23,850			21,329			23,937			21,419

 

See notes to unaudited condensed consolidated financial statements.

 

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MAXIMUS, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		Six Months Ended March 31,
		2002			2003
Cash flows from operating activities:
Net income		$	18,303		$	16,966
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,147			2,608
Amortization		1,613			2,474
Deferred income taxes		1,331			294
Tax benefit due to option exercises		915			333
Non-cash equity based compensation		—			512
Change in assets and liabilities, net of effects from acquisitions:
Accounts receivable - billed		455			(3,201		)
Accounts receivable - unbilled		(3,155		)	(4,738		)
Prepaid expenses and other current assets		(3,307		)	(1,253		)
Other assets		470			259
Accounts payable		(1,151		)	2,316
Accrued compensation and benefits		(3,650		)	(1,365		)
Deferred revenue		(5,024		)	3,132
Income taxes payable		1,084			838
Other liabilities		99			(187		)
Net cash provided by operating activities		9,130			18,988
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired		(4,100		)	(2,801		)
Purchases of property and equipment		(4,148		)	(3,382		)
Decrease in notes receivable		90			136
Capitalization of software development costs		(3,415		)	(1,695		)
Decrease in marketable securities		1,040			30
Net cash used in investing activities		(10,533		)	(7,712		)
Cash flows from financing activities:
Employee stock transactions		6,556			1,906
Repurchases of common stock		(5,279		)	(15,465		)
Net payments on capital leases		(123		)	(59		)
Net cash provided by (used in) financing activities		1,154			(13,618		)
Net decrease in cash and cash equivalents		(249		)	(2,342		)
Cash and cash equivalents, beginning of period		114,108			94,965
Cash and cash equivalents, end of period		$	113,859		$	92,623

 

See notes to unaudited condensed consolidated financial statements.

 

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MAXIMUS, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

For the Three-Month and Six-Month Periods Ended March 31, 2003 and 2002

(Dollars in thousands, except per share amounts)

 

In these Notes to Unaudited Condensed Consolidated Financial Statements, the terms the “Company” and “MAXIMUS” refer to MAXIMUS, Inc. and its subsidiaries.

 

1. Organization and Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 six-month periods ended March 31, 2003 are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

 

These financial statements should be read in conjunction with the audited financial statements as of September 30, 2002 and 2001 and for each of the three years in the period ended September 30, 2002, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002 (File No. 1-12997) filed with the Securities and Exchange Commission on December 20, 2002.

 

2. Business Combinations

 

In fiscal 2003, the Company acquired the business described below in a business combination accounted for as a purchase. Accordingly, the accompanying consolidated financial statements include the results of operations of the acquired business since the date of acquisition.

 

On October 1, 2002, the Company acquired Themis Program Management and Consulting Limited and GAEA Management Ltd. (together “Themis”) for $1,898. Per the terms of the agreement, additional consideration may be paid resulting from new contracts awarded to the Company during annual performance periods from April 2002 through April 2005. In conjunction with the purchase, the Company recorded goodwill of $1,238 and intangible assets, primarily non-competition agreements and customer relationships, of $660, which have been assigned to the Human Services Group business segment. Themis operates the Family Maintenance Enforcement Program in the Province of British Columbia, Canada. This program is designed to ensure family maintenance payments are made pursuant to the Family Maintenance Enforcement Act. The primary reason for acquiring Themis was to expand the Company’s presence and services in international markets.

 

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3. Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill for the six months ended March 31, 2003 are as follows (in thousands):

 

		Consulting Group			Health Services Group			Human Services Group			Systems Group			Total
Balance as of September 30, 2002		$	10,113		$	1,792		$	17,944		$	38,963		$	68,812
Acquisition of Themis		—			—			1,238			—			1,238
Goodwill reclassification of prior acquisition								3,698			(3,698		)	—
Additional consideration on prior acquisitions		—			—			1,144			97			1,241
Balance as of March 31, 2003		$	10,113		$	1,792		$	24,024		$	35,362		$	71,291

 

Intangible assets from acquisitions, which consist primarily of non-competition agreements, technology-based intangibles, and customer relationships, are amortized over five to ten years. The weighted-average amortization period for intangible assets is approximately eight years. The estimated amortization expense for the years ending September 30, 2003, 2004, 2005, 2006 and 2007 is $1,089, $1,027, $972, $957, and $905, respectively.

 

The following table sets forth the components of intangible assets (in thousands):

 

		As of September 30, 2002						As of March 31, 2003
		Cost			Accumulated Amortization			Cost			Accumulated Amortization
Non-competition agreements		$	3,065		$	2,709		$	3,225		$	2,782
Technology-based intangibles		1,500			50			1,500			157
Customer contracts and relationships		5,200			466			5,700			839
Total		$	9,765		$	3,225		$	10,425		$	3,778

 

4. Commitments and Contingencies

 

Litigation

 

On December 5, 2000, the Village of Maywood, Illinois (the “Village”) sued Unison MAXIMUS, Inc. (“Unison”), a wholly-owned subsidiary of the Company, in the Circuit Court of Cook County, Illinois. The Company acquired Unison Consulting Group, Inc. in May 1999 and subsequently renamed it “Unison MAXIMUS, Inc.” Unison remains a wholly-owned subsidiary of the Company. The Village had contracted with Unison to provide a variety of financial and consulting services from 1996 through 1999. The Village has alleged inter alia breach of contract, breach of fiduciary duty, and fraud. The action is in the discovery and motion phase and no trial date has been set. The complaint does not specify the Village’s damages. In September 2002, the Village filed a purported expert report with the court that estimated the Village’s damages to be approximately $47 million. The Company and Unison believe that report is deeply flawed and the Village’s claims are without merit. Unison intends to defend the action vigorously. Unison tendered the claim to the Company’s insurance carrier. Although there is no assurance of a favorable outcome, the Company does not believe that this action will have a material adverse effect on its financial condition or results of operations, and the Company has not accrued for any loss related to this action.

 

On January 3, 2003, the City of San Diego served the Company with a complaint naming DMG-

 

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MAXIMUS (“DMG” – previously a wholly-owned subsidiary of MAXIMUS since merged into MAXIMUS) as a defendant in an on-going lawsuit between the City and Conwell Shonkwiler & Associates, an architectural firm (“CSA”). In 2002 both CSA and the City had sued each other for claims arising out of design services provided by CSA for the City’s Water Department Central Facility Water Project (“Project”). DMG had provided certain assessment and preliminary design services to the City in connection with the Project.  CSA sued the City for payment of approximately $700,000 in unpaid fees, and the City sued CSA for alleged damages caused by CSA’s breach of the contract and professional negligence in rendering those services.  In its defense, CSA has asserted that any deficiencies in its services were due to errors in the master program document prepared for the City by DMG. Consequently, the City named DMG as a defendant in the lawsuit alleging breach of contract and professional negligence and seeking indemnity from DMG. The City alleges damages against both defendants of at least $10 million. The Company believes the claim is without merit and intends to defend the action vigorously. Although there is no assurance of a favorable outcome, the Company does not believe that this action will have a material adverse effect on its financial condition or results of operations, and the Company has not accrued for any loss related to this action.

 

The Company is involved in various legal proceedings in the ordinary course of its business. Management does not expect the ultimate outcome of the legal proceedings to have a material adverse effect on the Company’s financial condition or its results of operations.

 

5. Earnings Per Share

 

The following table sets forth the components of basic and diluted earnings per share:

 

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2002			2003			2002			2003
Numerator:
Net income		$	7,067		$	6,890		$	18,303		$	16,966
Denominator:
Weighted average shares outstanding		23,142			21,092			23,121			21,159
Effect of dilutive securities:
Employee stock options and unvested restricted stock awards		708			237			816			260
Denominator for diluted earnings per share		23,850			21,329			23,937			21,419

 

6. Stock Repurchase Program

 

Under resolutions adopted in May 2000, July 2002, and March 2003, the Board of Directors has authorized the repurchase, at management’s discretion, of up to an aggregate of $90 million of the Company’s common stock.  In addition, in June 2002, the Board of Directors authorized the use of option exercise proceeds for the repurchase of the Company’s common stock. During the six-month period ended March 31, 2003, the Company repurchased approximately 750,000 shares. At March 31, 2003, $31.6 million remained available for future stock repurchases under the program.

 

 

7. Restricted Stock Units

 

In May 2002, the Company issued 170,000 Restricted Stock Units (RSUs) to certain executive officers and employees under its 1997 Equity Incentive Plan. The grant-date fair value of each RSU was $30.14. The

 

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RSUs will vest in full upon the sixth anniversary of the date of grant, provided, however, that the vesting will accelerate if the Company meets certain earnings targets determined by the Board of Directors as set forth in the RSUs. The fair value of the RSUs at the grant date is amortized to expense over the vesting period. Compensation expense recognized related to these RSUs for the six-month period ended March 31, 2003 was $512.

 

8. Employee Stock Option Plan

 

The Company accounts for its employee stock option plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock option based employee compensation cost is reflected in net income, as all employee stock options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant.

 

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of FAS 148, Accounting for Stock-Based Compensation – Transition and Disclosure, to stock-based employee compensation for the periods indicated (dollars in thousands, except per share data).

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2002			2003			2002			2003
Net income, as reported		$	7,067		$	6,890		$	18,303		$	16,966
Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects		(1,738		)	(1,777		)	(3,572		)	(3,607		)
Pro forma net income		$	5,329		$	5,113		$	14,731		$	13,359
Earnings per share:
Basic – as reported		$	0.31		$	0.33		$	0.79		$	0.80
Basic – pro forma		$	0.23		$	0.24		$	0.64		$	0.63
Diluted – as reported		$	0.30		$	0.32		$	0.76		$	0.79
Diluted – pro forma		$	0.22		$	0.24		$	0.62		$	0.62

 

9. Segment Information

 

The following table provides certain financial information for each of the Company’s business segments:

 

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		Three Months Ended March 31,						Six Months Ended March 31,
		2002			2003			2002			2003
Revenue:
Consulting Group		$	35,009		$	33,566		$	68,412		$	66,761
Health Services Group		34,567			39,884			74,722			79,408
Human Services Group		34,403			36,014			71,583			74,373
Systems Group		17,974			21,199			36,806			42,812
Total		$	121,953		$	130,663		$	251,523		$	263,354
Gross Profit:
Consulting Group		$	16,560		$	14,090		$	32,090		$	28,050
Health Services Group		2,657			9,407			11,125			19,212
Human Services Group		6,958			6,306			14,507			14,308
Systems Group		9,029			8,783			17,058			19,277
Total		$	35,204		$	38,586		$	74,780		$	80,847
Income from operations:
Consulting Group		$	8,425		$	5,132		$	16,376		$	10,271
Health Services Group		(1,011		)	5,270			4,102			11,670
Human Services Group		2,273			166			5,573			2,123
Systems Group		1,678			430			3,307			3,042
Total		$	11,365		$	10,998		$	29,358		$	27,106

 

10. Recent Accounting Pronouncements

 

In November 2002, the Emerging Issues Task Force issued a final consensus on Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.  Issue 00-21 provides guidance on how and when to recognize revenue on arrangements requiring delivery of more than one product or service.  Issue 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003.  Companies may also elect to apply the provisions of Issue 00-21 to existing arrangements and to record the income statement impact as the cumulative effect of a change in accounting principle.  The Company intends to adopt Issue 00-21 prospectively. While management is still evaluating the impact of Issue 00-21, it does not expect that the adoption of Issue 00-21 will have a significant impact on the Company's financial position and results of operations.

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Business Overview

 

We are a leading provider of program management, consulting services and systems solutions primarily to governments. Since our inception, we have been at the forefront of innovation in meeting our mission of “Helping Government Serve the People^®.” We use our expertise, experience and advanced information technology to make government operations more efficient while improving the quality of services provided to program beneficiaries. We operate primarily in the United States and we have had contracts with government agencies in all 50 states. We have been profitable every year since we were founded in 1975. For the fiscal year ended September 30, 2002, we had revenue of $518.7 million and net income of $40.3 million. For the six months ended March 31, 2003, we had revenue of $263.4 million and net income of $17.0 million.

 

Business Combinations and Acquisitions

 

As part of our growth strategy, we intend to continue to selectively identify and pursue complementary businesses to expand our geographic reach and the breadth and depth of our services and to enhance our customer base. On October 1, 2002, we acquired Themis Program Management and Consulting Limited and GAEA Management Ltd. (together “Themis”), located in British Columbia, Canada, for cash consideration of approximately $1.9 million. Additional consideration may be paid based on Themis achieving certain future performance objectives. In conjunction with the purchase, we recorded approximately $1.2 million of goodwill and $0.7 million of intangible assets, which has been assigned to the Human Services Group business segment.

 

Results of Operations – Consolidated

 

The following table sets forth, for the periods indicated, selected statements of income data.

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2002			2003			2002			2003
		(dollars in thousands, except per share data)
Revenue		$	121,953		$	130,663		$	251,523		$	263,354
Cost of revenue		86,749			92,077			176,743			182,507
Gross profit		$	35,204		$	38,586		$	74,780		$	80,847
Gross margin percentage		28.9		%	29.5		%	29.7		%	30.7		%
Selling, general and administrative		$	23,589		$	27,059		$	44,909		$	52,676
Net income		$	7,067		$	6,890		$	18,303		$	16,966
Earnings per share:
Basic		$	0.31		$	0.33		$	0.79		$	0.80
Diluted		$	0.30		$	0.32		$	0.76		$	0.79

 

Our consolidated revenue increased 7.1% for the three months ended March 31, 2003 compared to the same period in fiscal 2002. Excluding revenue related to acquisitions, our consolidated revenue for the three months ended March 31, 2003 remained unchanged when compared to the three months ended March 31, 2002. Our consolidated revenue increased 4.7% for the six months ended March 31, 2003 compared to the same period in fiscal 2002. Excluding revenue related to acquisitions, we had an overall decline in revenue of 1.7% for the six months ended March 31, 2003 compared to the six months ended March 31, 2002.

 

Financial results for the three months ended March 31, 2003 were impacted by delays in contract signings, work start delays, and some program scope reductions. These factors are primarily reflective of continued state budget pressures, which trend is expected to continue in the short-term.

 

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Our gross margin increased to 29.5% for the three months ended March 31, 2003, an increase of 60 basis points, compared to 28.9% for the same period in the 2002 fiscal year. Our gross margin increased to 30.7% for the six months ended March 31, 2003, an increase of 100 basis points, compared to 29.7% for the same period in the 2002 fiscal year.

 

Selling, general and administrative expense (“SG&A”) consists of management, marketing and administration costs (including salaries, benefits, bid and proposal efforts, travel, recruiting, continuing education and training), facilities costs, printing, reproduction, communications and equipment depreciation. SG&A increased in the three months and six months ended March 31, 2003 compared to the same periods in fiscal 2002 due to the increase in expenses necessary to support higher revenue and to strengthen the infrastructure to market and grow the Company, including our proposal facilities and systems, and new finance, operational, and compliance personnel. The increase was also due to additional SG&A related to businesses acquired in fiscal 2002.

 

Our provision for income tax for the three-month and six-month periods ended March 31, 2003 was 39.5% of income before income taxes as compared to 41.3% and 40.5% for the three-month and six-month periods ended March 31, 2002, respectively.

 

Net income for the three months ended March 31, 2003 was $6.9 million, or $0.32 per diluted share, compared with net income of $7.1 million, or $0.30 per diluted share, for the three months ended March 31, 2002. Net income for the six months ended March 31, 2003 was $17.0 million, or $0.79 per diluted share, compared with net income of $18.3 million, or $0.76 per diluted share, for the six months ended March 31, 2002.

 

Consulting Group

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2002			2003			2002			2003
		(dollars in thousands)
Revenue		$	35,009		$	33,566		$	68,412		$	66,761
Cost of revenue		18,449			19,476			36,322			38,711
Gross Profit		$	16,560		$	14,090		$	32,090		$	28,050
Gross Margin percentage		47.3		%	42.0		%	46.9		%	42.0		%

 

Revenue of our Consulting Group decreased 4.1% for the three months ended March 31, 2003 compared to the same period in fiscal 2002, and decreased 2.4% for the six months ended March 31, 2003 compared to the same period in fiscal 2002. Gross margin decreased to 42.0% for the three months ended March 31, 2003 from 47.3% for the same period in fiscal 2002, and decreased to 42.0% for the six months ended March 31, 2003 from 46.9% for the same period in fiscal 2002. These declines in revenue and gross margin were primarily due to continued weaknesses in our management consulting and IT consulting practices as government procurement of large system projects has declined.

 

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Health Services Group

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2002			2003			2002			2003
		(dollars in thousands)
Revenue		$	34,567		$	39,884		$	74,722		$	79,408
Cost of revenue		31,910			30,477			63,597			60,196
Gross Profit		$	2,657		$	9,407		$	11,125		$	19,212
Gross Margin percentage		7.7		%	23.6		%	14.9		%	24.2		%

 

Revenue of our Health Services Group increased 15.4% for the three months ended March 31, 2003 compared to the same period in fiscal 2002, and increased 6.3% for the six months ended March 31, 2003 compared to the same period in fiscal 2002. These increases were due primarily to expanded volume of certain existing contracts and increases in certain discretionary components, such as revenue from project related mailing and advertising activities. Gross margin increased to 23.6% for the three months ended March 31, 2003 from 7.7% for the same period in fiscal 2002, and to 24.2% for the six months ended March 31, 2003 from 14.9% for the same period in fiscal 2002. These improvements were due primarily to improved project profitability in fiscal 2003. Fiscal 2002 results were adversely impacted by losses related to a certain project, which losses were non-recurring.

 

Human Services Group

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2002			2003			2002			2003
		(dollars in thousands)
Revenue		$	34,403		$	36,014		$	71,583		$	74,373
Cost of revenue		27,445			29,708			57,076			60,065
Gross Profit		$	6,958		$	6,306		$	14,507		$	14,308
Gross Margin percentage		20.2		%	17.5		%	20.3		%	19.2		%

 

Revenue of our Human Services Group increased 4.7% for the three months ended March 31, 2003 compared to the same period in fiscal 2002. This increase was principally due to $8.1 million of revenue from entities acquired in fiscal 2002, including approximately $0.5 million resulting from the resolution of pre-acquisition gain contingencies at APG. Revenue of our Human Services Group increased 3.9% for the six months ended March 31, 2003 compared to the same period in fiscal 2002. This increase was principally due to $15.7 million of revenue from entities acquired in fiscal 2002, including approximately $1.2 million resulting from the resolution of pre-acquisition gain contingencies at APG.  Gross margins decreased to 17.5% for the three months ended March 31, 2003 from 20.2% for the same period in fiscal 2002, and to 19.2% for the six months ended March 31, 2003 from 20.3% for the same period in fiscal 2002. The fiscal 2003 results of the Human Services Group reflects weakened demand in certain lines of business, particularly Workforce Services where we have experienced certain program reductions.

 

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Systems Group

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2002			2003			2002			2003
		(dollars in thousands)
Revenue		$	17,974		$	21,199		$	36,806		$	42,812
Cost of revenue		8,945			12,416			19,748			23,535
Gross Profit		$	9,029		$	8,783		$	17,058		$	19,277
Gross Margin percentage		50.2		%	41.4		%	46.3		%	45.0		%

 

Revenue of our Systems Group increased 17.9% for the three months ended March 31, 2003 compared to the same period in fiscal 2002. This increase was due to new contracts won by certain divisions within the Group and to revenue of $0.5 million from entities acquired in fiscal 2002. Revenue of our Systems Group increased 16.3% for the six months ended March 31, 2003 compared to the same period in fiscal 2002. This increase was due to new contracts won by certain divisions within the Group and to revenue of $1.0 million from entities acquired in fiscal 2002. Gross margin decreased to 41.4% for the three months ended March 31, 2003 from 50.2% for the same period in fiscal 2002, and decreased to 45.0% for the six months ended March 31, 2003 from 46.3% for the same period in fiscal 2002. These decreases were primarily due to declines in software license revenue, which carries higher gross margins.

 

Other (income) expenses

 

		Three Months Ended March 31,						Six Months Ended March 31,
		2002			2003			2002			2003
		(dollars in thousands)
Non-cash equity based compensation		—			$	256		—			$	512
Percentage of revenue		—			0.2		%	—			0.2		%
Amortization of acquisition related intangibles		$	250		$	273		$	513		$	553
Percentage of revenue		0.2		%	0.2		%	0.2		%	0.2		%
Interest and other income		$	(670	)	$	(390	)	$	(1,403	)	$	(937	)
Percentage of revenue		0.5		%	0.3		%	0.6		%	0.4		%

 

We recognized approximately $0.3 million and $0.5 million of non-cash equity-based compensation expense for the three-month and six-month periods ended March 31, 2003, respectively, related to the issuance of restricted stock units in May 2002. In future periods, the quarterly amortization expense related to these restricted stock units is estimated to be approximately $0.2 million, which amount may increase if certain earnings targets are achieved.

 

Interest and other income decreased due to less average cash on hand and lower interest rates.

 

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Liquidity and Capital Resources

 

		Six Months Ended March 31,
		2002			2003
		(dollars in thousands)
Net cash provided by (used in):
Operating activities		$	9,130		$	18,988
Investing activities		(10,533		)	(7,712		)
Financing activities		1,154			(13,618		)
Net decrease in cash and cash equivalents		$	(249	)	$	(2,342	)

 

For the six months ended March 31, 2003, cash provided by our operations was $19.0 million as compared to cash provided of $9.1 million for the six months ended March 31, 2002. Cash provided by operating activities for the six months ended March 31, 2003 primarily consisted of net income of $17.0 million plus non-cash items aggregating $6.2 million offset by net uses of working capital of $4.2 million. Non-cash items included $5.1 million of depreciation and amortization. The net uses of working capital reflect an increase in accounts receivable-billed and accounts receivable-unbilled totaling $7.9 million offset by an increase in deferred revenue of $3.1 million. During the six months ended March 31, 2002, cash provided by operating activities consisted primarily of net income of $18.3 million plus non-cash items of $5.0 million offset by net uses of working capital of $14.2 million. Non-cash items included $2.8 million of depreciation and amortization. The net uses of working capital were primarily due to an increase in accounts receivable-unbilled of $2.7 million, a decrease in deferred revenue of $5.0 million and a decrease in accrued compensation of $3.7 million.

 

For the six months ended March 31, 2003, cash used in investing activities was $7.7 million as compared to $10.5 million for the six months ended March 31, 2002. Cash used in investing activities for the six months ended March 31, 2003 primarily consisted of $2.8 million for acquisitions of businesses, $1.7 million for expenditures for capitalized software costs, and purchases of property and equipment of $3.4 million. During the six months ended March 31, 2002, we used $4.1 million for the acquisition of a business, $3.4 million for expenditures related to capitalized software costs, and purchases of property and equipment of $4.1 million.

 

For the six months ended March 31, 2003, cash used in financing activities was $13.6 million as compared to cash provided by financing activities of $1.2 million for the six months ended March 31, 2002. Cash used in financing activities for the six months ended March 31, 2003 primarily consisted of $15.5 million of common stock repurchases offset by $2.0 million of sales of stock to employees through our Employee Stock Purchase Plan and Equity Incentive Plan. Cash provided by financing activities for the six months ended March 31, 2002 primarily consisted of common stock repurchases of $5.3 million offset by $6.6 million of proceeds from sales of stock to employees through our Employee Stock Purchase Plan and Equity Incentive Plan.

 

Under resolutions adopted in May 2000, July 2002, and March 2003, our Board of Directors has authorized the repurchase, at management’s discretion, of up to an aggregate of $90 million of our common stock. In addition, in June 2002, the Board of Directors authorized the use of option exercise proceeds for the repurchase of our common stock. During the six-month period ended March 31, 2003, we repurchased approximately 750,000 shares. At March 31, 2003, $31.6 million remained available for future stock repurchases under the program.

 

Our working capital at March 31, 2003 was $186.7 million. At March 31, 2003, we had cash, cash equivalents, and marketable securities of $92.8 million and no debt. Management believes this strong liquidity and financial position allows the Company to continue its stock repurchase program, depending on the price of the Company’s common stock, and to pursue selective acquisitions.

 

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Our management believes that we will have sufficient resources to meet our currently anticipated capital expenditure and working capital requirements for at least the next twelve months.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenue and expenses. On an ongoing basis, we evaluate our estimates including those related to revenue recognition and cost estimation on certain contracts, the realizability of goodwill, and amounts related to income taxes, certain accrued liabilities and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.

 

Our management believes that we do not have significant off-balance sheet risk or exposure to liabilities that are not recorded or disclosed in our financial statements. While we have significant operating lease commitments for office space, those commitments are generally tied to the period of performance under related contracts. Additionally, although on certain contracts we are bound by performance bond commitments, we have not had any defaults resulting in draws on performance bonds. Also, we do not speculate in derivative transactions.

 

We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

 

Revenue recognition. Our revenue is generated from contracts with various payment arrangements, including:  (1) fixed-price; (2) costs incurred plus a negotiated fee (“cost-plus”); (3) performance-based criteria; and (4) time and materials (used primarily by the Consulting Group). Also, some contracts contain “not-to-exceed” provisions. For the six months ended March 31, 2003, revenue from fixed-price contracts was approximately 32% of total revenue; revenue from cost-plus contracts was approximately 18% of total revenue; revenue from performance-based contracts was approximately 38% of total revenue; and revenue from time and materials contracts was approximately 12% of total revenue. A majority of our contracts with state and local government agencies have been fixed-price and performance-based and our contracts with the federal government have been cost-plus. Fixed-price and performance-based contracts generally offer higher margins but typically involve more risk than cost-plus or time and materials reimbursement contracts.

 

We recognize revenue on fixed-priced contracts as services are provided using the percentage of completion method, which relies on estimates of total expected contract revenue and costs. The cumulative impact of any revisions in estimated revenue and costs are recognized in the period in which the facts that give rise to the revision become known. Also, with fixed-price contracts, we are subject to the risk of potential cost overruns. We recognize revenue on our performance-based contracts as such revenue becomes fixed or determinable, which generally occurs when amounts are billable to clients. For certain contracts, this may result in revenue being recognized in large, irregular increments. Additionally, costs related to certain contracts are incurred in periods prior to recognizing revenue. Certain of these costs may be deferred until services are provided and revenue begins to be recognized when reimbursement of such costs is contractually guaranteed.  These factors may result in irregular revenue and profit margins for performance-based contracts, which exist in our Consulting Group, Health Services Group and Human Services Group. As a result, with performance-based contracts we have more uncertainty regarding expected future revenue.

 

Our most significant expense is cost of revenue, which consists primarily of project-related costs such as employee salaries and benefits, subcontractors, computer equipment and travel expenses. Management uses

 

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its judgment and experience to estimate cost of revenue expected on projects. Our ability to accurately predict personnel requirements, salaries and other costs as well as to effectively manage a project or achieve certain levels of performance can have a significant impact on the gross margins related to our fixed-price, performance-based and time and materials contracts. If actual costs are higher than our estimates, profitability may be adversely affected. Service cost variability has little impact on cost-plus arrangements because allowable costs are reimbursed by the client.

 

The Company also licenses software under non-cancelable license agreements. License fee revenue is recognized when a non-cancelable license agreement is in force, the product has been shipped, the license fee is fixed or determinable, and collection is probable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the client. In addition, when software license contracts contain post-contract customer support as part of a multiple element arrangement, revenue is recognized based upon the vendor-specific objective evidence of the fair value of each element. Maintenance and post-contract customer support revenue are recognized ratably over the term of the related agreements, which in most cases is one year. Revenue from software-related consulting services under time and material contracts and for training is recognized as services are performed. Revenue from other software-related contract services requiring significant modification or customization to software is recognized under the percentage-of-completion method.

 

Human Services Group and Health Services Group contracts generally contain base periods of one or more years as well as one or more option periods that may cover more than half of the potential contract duration. As of September 30, 2002, our average Human Services Group and Health Services Group contract duration was approximately 2.5 years. Our Consulting Group contracts had performance periods ranging from one month to approximately two years. Our average Systems Group contract duration was one year.

 

Impairment of goodwill. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations (“FAS 141”), and No. 142, Goodwill and Other Intangible Assets (“FAS 142”). Under the new rules, goodwill is no longer amortized but is subject to annual impairment tests in accordance with FAS 141 and FAS 142. We elected to adopt FAS 141 and 142 effective October 1, 2001, and as a result, amortization of goodwill was discontinued as of the beginning of the fiscal year ended September 30, 2002. Upon adoption, the required impairment tests were performed. Results of these impairment tests did not generate any impairment loss. Goodwill will be tested on an annual basis, or more frequently as impairment indicators arise. Annual impairment tests involve the use of estimates related to the fair market values of the business operations with which goodwill is associated. Losses, if any, resulting from annual impairment tests will be reflected in operating income in our income statement.

 

Forward Looking Statements

 

From time to time, we may make forward-looking statements that are not historical facts, including statements about our confidence and strategies and our expectations about revenue, results of operations, profitability, current and future contracts, market opportunities, market demand or acceptance of our products and services. Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be forward-looking statements. The words “could,” “estimate,” “future,” “intend,” “may,” “opportunity,” “potential,” “project,” “will,” “believes,” “anticipates,” “plans,” “expect” and similar expressions are intended to identify forward-looking statements. These statements may involve risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. Examples of these risks include reliance on government clients; risks associated with government contracting; risks involved in managing government projects; legislative changes and political developments; opposition from government unions; challenges resulting from growth; adverse publicity; and legal, economic, and other risks detailed in Exhibit 99.1 to this Quarterly Report on Form 10-Q for the period ended March 31, 2003.

 

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

 

We believe that our exposure to market risk related to the effect of changes in interest rates, foreign currency exchange rates, commodity prices and equity prices with regard to instruments entered into for trading or for other purposes is immaterial.

 

Item 4.    Controls and Procedures.

 

a)             Evaluation of disclosure controls and procedures. Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this Quarterly Report on Form 10-Q, have concluded that, as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that the information required to be disclosed in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the requisite time periods.

 

b)            Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the Evaluation Date.

 

PART II.  OTHER INFORMATION

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

At our Annual Meeting of Shareholders held on March 18, 2003, our shareholders voted as follows:

 

(a)                                  To elect Lynn P. Davenport, Thomas A. Grissen, and David V. Mastran as Class III Directors of the Company for a three-year term.

 

Nominee		Total Votes For		Total Votes Withheld
Lynn P. Davenport		18,991,618		1,291,972
Thomas A. Grissen		18,991,618		1,291,972
David V. Mastran		18,985,518		1,298,072

 

Peter B. Pond, James R. Thompson, Jr., Lynn P. Davenport, Russell A. Beliveau, John J. Haley, and Marilyn R. Seymann continued their terms in office after the meeting.

 

(b)                                 To consider the proposal submitted by a shareholder regarding establishing a policy and practice of expensing the costs of future grants of executive stock options.

 

Total Votes For the Proposal		7,394,181
Total Votes Against the Proposal		10,932,722
Abstentions		55,699
Broker Non-votes		1,900,988

 

Item 6. Exhibits and Reports on Form 8-K.

 

(a)          Exhibits.  The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed on the Exhibit Index immediately preceding the Exhibits. The Exhibit Index is incorporated herein by reference.

 

(b)         Reports on Form 8-K. We did not file any Current Reports on Form 8-K during the quarter ended March 31, 2003.

 

 

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SIGNATURE

 

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:  May 14, 2003	By:	/s/ Richard A. Montoni
		Richard A. Montoni
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

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CERTIFICATION

 

I, David V. Mastran, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of MAXIMUS, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
	a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: May 14, 2003
	/s/ David V. Mastran
	David V. Mastran
	President and Chief Executive Officer

 

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CERTIFICATION

 

I, Richard A. Montoni, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q of MAXIMUS, Inc.;
2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
	a)	Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
	a)	All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: May 14, 2003
	/s/ Richard A. Montoni
	Richard A. Montoni
	Chief Financial Officer

 

 

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EXHIBIT INDEX

 

Exhibit No.		Description
99.1		Important Factors Regarding Forward Looking Statements. Filed herewith.
99.2		Section 906 Principal Executive Officer Certification. Filed herewith.
99.3		Section 906 Principal Financial Officer Certification. Filed herewith.

 

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