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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2004

 

Commission file number 1-12997

 

MAXIMUS, INC.

(Exact name of registrant as specified in its charter)

 

Virginia

 

54-1000588

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

11419 Sunset Hills Road
Reston, Virginia

 

20190

(Address of principal executive offices)

 

(Zip Code)

 

(703) 251-8500

(Registrant’s telephone number, including area code)

 


 

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 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

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date.

 

Class

 

Outstanding at August 3, 2004

Common stock, no par value

 

21,692,818

 

 



 

MAXIMUS, Inc.

 

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2004

 

INDEX

 

PART I.  FINANCIAL INFORMATION

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements.

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2003 and June 30, 2004 (unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three Months and Nine Months ended June 30, 2003 and 2004 (unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2003 and 2004 (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 1.

Legal Proceedings.

 

 

 

 

Item 2.

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K.

 

 

 

Signature

 

 

 

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,
2003

 

June 30,
2004

 

 

 

(Note 1)

 

(unaudited)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

117,372

 

$

131,611

 

Restricted cash

 

3,653

 

1,601

 

Marketable securities

 

140

 

 

Accounts receivable – billed, net

 

114,992

 

122,659

 

Accounts receivable – unbilled

 

29,142

 

40,522

 

Deferred income taxes

 

3,410

 

413

 

Prepaid expenses and other current assets

 

7,063

 

8,893

 

Total current assets

 

275,772

 

305,699

 

Property and equipment, at cost

 

46,412

 

51,446

 

Less accumulated depreciation and amortization

 

(20,195

)

(25,398

)

Property and equipment, net

 

26,217

 

26,048

 

Capitalized software

 

23,382

 

29,142

 

Less accumulated amortization

 

(8,699

)

(11,528

)

Capitalized software, net

 

14,683

 

17,614

 

Deferred contract costs, net

 

7,283

 

16,367

 

Goodwill

 

81,757

 

84,710

 

Intangible assets, net

 

7,212

 

10,289

 

Other assets, net

 

2,096

 

6,057

 

 

 

 

 

 

 

Total assets

 

$

415,020

 

$

466,784

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

21,578

 

$

25,778

 

Accrued compensation and benefits

 

23,219

 

21,514

 

Deferred revenue

 

22,356

 

25,341

 

Income taxes payable

 

2,837

 

1,866

 

Current portion of capital lease obligations

 

809

 

1,631

 

Other accrued liabilities

 

3,653

 

1,663

 

Total current liabilities

 

74,452

 

77,793

 

Capital lease obligations, less current portion

 

3,821

 

5,527

 

Deferred income taxes

 

2,745

 

10,899

 

Other liabilities

 

725

 

137

 

 

 

 

 

 

 

Total liabilities

 

81,743

 

94,356

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock, no par value; 60,000,000 shares authorized; 21,200,197 and 21,650,875 shares issued and outstanding at September 30, 2003 and June 30, 2004, at stated amount, respectively

 

146,219

 

156,839

 

Accumulated other comprehensive loss

 

(95

)

(150

)

Retained earnings

 

187,153

 

215,739

 

 

 

 

 

 

 

Total shareholders’ equity

 

333,277

 

372,428

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

415,020

 

$

466,784

 

 

See notes to unaudited condensed consolidated financial statements.

 

1



 

MAXIMUS, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

 

 

2003

 

2004

 

2003

 

2004

 

Revenue

 

$

141,741

 

$

160,158

 

$

405,095

 

$

449,759

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

99,321

 

114,696

 

281,828

 

317,083

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

42,420

 

45,462

 

123,267

 

132,676

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

27,933

 

29,340

 

81,674

 

86,245

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

14,487

 

16,122

 

41,593

 

46,431

 

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

331

 

291

 

1,268

 

819

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

14,818

 

16,413

 

42,861

 

47,250

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

5,853

 

6,483

 

16,930

 

18,664

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,965

 

$

9,930

 

$

25,931

 

$

28,586

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.43

 

$

0.46

 

$

1.23

 

$

1.32

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.43

 

$

0.45

 

$

1.22

 

$

1.29

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

20,731

 

21,664

 

21,016

 

21,612

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

21,015

 

22,071

 

21,285

 

22,095

 

 

See notes to unaudited condensed consolidated financial statements.

 

2



 

MAXIMUS, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months
Ended June 30,

 

 

 

2003

 

2004

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

25,931

 

$

28,586

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

3,872

 

5,203

 

Amortization

 

3,725

 

4,366

 

Deferred income taxes

 

(435

)

11,151

 

Tax benefit due to option exercises

 

523

 

3,604

 

Non-cash equity based compensation

 

726

 

809

 

 

 

 

 

 

 

Change in assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

Accounts receivable - billed

 

(11,323

)

(7,667

)

Accounts receivable - unbilled

 

(3,702

)

(11,380

)

Prepaid expenses and other current assets

 

(707

)

(1,511

)

Deferred contract costs

 

(1,148

)

(5,758

)

Other assets

 

262

 

(4,360

)

Accounts payable

 

8,785

 

4,168

 

Accrued compensation and benefits

 

100

 

(1,705

)

Deferred revenue

 

8,795

 

2,195

 

Income taxes payable

 

169

 

(971

)

Other liabilities

 

(1,545

)

(526

)

 

 

 

 

 

 

Net cash provided by operating activities

 

34,028

 

26,204

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

(13,532

)

(6,429

)

Purchases of property and equipment

 

(4,574

)

(4,961

)

Capitalized software costs

 

(2,954

)

(6,212

)

Other

 

(1,611

)

227

 

 

 

 

 

 

 

Net cash used in investing activities

 

(22,671

)

(17,375

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Employee stock transactions

 

3,682

 

21,340

 

Repurchases of common stock

 

(20,394

)

(15,133

)

Payments on capital lease obligations

 

(109

)

(797

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(16,821

)

5,410

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(5,464

)

14,239

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

94,965

 

117,372

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

89,501

 

$

131,611

 

 

See notes to unaudited condensed consolidated financial statements.

 

3



 

MAXIMUS, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

For the Three Months and Nine Months Ended June 30, 2004 and 2003
 

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

 

General

 

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 normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three months and nine months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the full fiscal year. The balance sheet at September 30, 2003 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, 2003 and 2002 and for each of the three years in the period ended September 30, 2003, included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2003 (File No. 1-12997) filed with the Securities and Exchange Commission on December 19, 2003.

 

Stock-Based Compensation

 

The Company accounts for its employee stock option plan under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), 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 Financial Accounting Standard No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (“FAS 148”), to stock-based employee compensation for the periods indicated.

 

4



 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

(in thousands, except per share data)

 

Net income, as reported

 

$

8,965

 

$

9,930

 

$

25,931

 

$

28,586

 

Deduct: Stock compensation expense determined under fair value based method, net of taxes

 

(1,501

)

(1,245

)

(5,108

)

(3,876

)

Net income, as adjusted

 

$

7,464

 

$

8,685

 

$

20,823

 

$

24,710

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic – as reported

 

$

0.43

 

$

0.46

 

$

1.23

 

$

1.32

 

Basic – as adjusted

 

$

0.36

 

$

0.40

 

$

0.99

 

$

1.14

 

 

 

 

 

 

 

 

 

 

 

Diluted – as reported

 

$

0.43

 

$

0.45

 

$

1.22

 

$

1.29

 

Diluted – as adjusted

 

$

0.36

 

$

0.39

 

$

0.98

 

$

1.12

 

 

2. Deferred Contract Costs

 

Deferred contract costs consist of reimbursable direct project costs relating to the transition phase of a long-term contract in progress, which are required to be reimbursed under the terms of the contract. These costs, net of related amortization, include system development and facility build-out costs totaling $7.3 million and $16.4 million at September 30, 2003 and June 30, 2004, respectively, of which $4.2 million and $7.6 million is leased equipment at September 30, 2003 and June 30, 2004, respectively. Deferred contract costs are amortized over five years as services are provided under the contract, beginning January 2004. Amortization of deferred contract costs was $1.1 million and $1.8 million for the three months and nine months ended June 30, 2004, respectively.

 

3. Business Combinations

 

In fiscal 2004, the Company acquired the businesses described below in business combinations accounted for as purchases. Accordingly, the accompanying unaudited condensed consolidated financial statements include the results of operations of the acquired businesses since the dates of their respective acquisition.

 

On May 3, 2004, the Company acquired substantially all the assets of TIECorp for $3.2 million. In conjunction with the purchase, the Company recorded intangible assets, primarily non-competition agreements and technology related intangibles, of $3.4 million, which have been assigned to the Human Services business segment. Per the terms of the acquisition agreement, additional consideration of up to $16.5 million may be paid based on achievement of certain future performance objectives by TIECorp. The TIECorp business is engaged in the development and marketing of instructional management software programs and related products and services in the educational field. The primary reason for the acquisition was to expand the Company’s presence in the educational software field and to strategically complement the Company’s current product and service offerings in the educational market.

 

On June 1, 2004, the Company acquired certain assets of Manatron, Inc. for $1.8 million. In conjunction with the purchase, the Company recorded goodwill of $1.5 million and intangible assets, primarily customer contracts and relationships, of $0.8 million, which have been assigned to the Technical Services business segment. The acquired assets relate to the design, development, marketing and support of judicial software products for county, city and township governments. The primary reason for the acquisition was to increase the Company’s market share in the justice solutions arena.

 

4. Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill for the nine months ended June 30, 2004 are as follows (in thousands):

 

5



 

 

 

Health
Services

 

Human
Services

 

Technical
Services

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2003

 

$

1,792

 

$

37,288

 

$

42,677

 

$

81,757

 

Acquisition of Manatron, Inc.

 

 

 

1,517

 

1,517

 

Other additions during period

 

 

1,106

 

330

 

1,436

 

Balance as of June 30, 2004

 

$

1,792

 

$

38,394

 

$

44,524

 

$

84,710

 

 

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

 

 

 

As of September 30, 2003

 

As of June 30, 2004

 

 

 

Cost

 

Accumulated
Amortization

 

Intangible
Assets, net

 

Cost

 

Accumulated
Amortization

 

Intangible
Assets, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-competition agreements

 

$

3,425

 

$

2,854

 

$

571

 

$

3,475

 

$

2,958

 

$

517

 

Technology-based intangibles

 

1,500

 

264

 

1,236

 

4,837

 

533

 

4,304

 

Customer contracts and relationships

 

6,700

 

1,295

 

5,405

 

7,475

 

2,007

 

5,468

 

Total

 

$

11,625

 

$

4,413

 

$

7,212

 

$

15,787

 

$

5,498

 

$

10,289

 

 

Intangible assets from acquisitions are amortized over five to ten years. The weighted-average amortization period for intangible assets is approximately seven years. Intangible amortization expense was approximately $0.4 million and $1.1 million for the three and nine months ended June 30, 2004, respectively. The estimated amortization expense for the years ending September 30, 2004, 2005, 2006, 2007 and 2008 is $1.6 million, $2.0 million, $2.0 million, $2.0 million and $1.6 million, respectively.

 

5. Commitments and Contingencies

 

Litigation

 

On January 3, 2003, the City of San Diego served the Company with a complaint naming DMG-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 $0.7 million 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 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 alleged damages against all defendants of at least $10.0 million. All parties have tentatively agreed to settle this matter.  The MAXIMUS share of the settlement is not material and will be covered by insurance.

 

On December 8, 2003, David M. Johnson, a former officer of the Company, sued MAXIMUS, David V. Mastran, and Lynn P. Davenport in the federal District Court for the Northern District of Ohio in connection with the termination of his employment in August 2003. The matter has since been transferred to the federal District Court for the Eastern District of Virginia. In October 2002, Mr. Johnson signed a four-year employment agreement with the Company. His complaint asserts that his employment was wrongfully terminated by the defendants, and alleges breach of contract, promissory estoppel, fraud, interference with contract, and intentional infliction of emotional distress. Mr. Johnson claims damages of at least $11.0 million. MAXIMUS believes that Mr. Johnson’s claims are without merit and intends to defend the action vigorously. Although there can be 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.

 

6



 

In the third quarter of fiscal 2004, the Company learned that two former employees who were principals in a small business MAXIMUS acquired in 2000 had signed fraudulent guarantees on behalf of MAXIMUS for computer equipment leases apparently used in a competitive enterprise completely unrelated to MAXIMUS business. The Company never had any knowledge of the leases or guarantees. On July 14, 2004, the Company filed suit against those individuals. Solarcom LLC, the leasing company, has demanded $31.0 million from MAXIMUS under the guarantees, which amount represents the remaining payments under the leases. On August 6, 2004, De Lage Landen Financial Services, Inc. sued MAXIMUS and Solarcom in the federal District Court for the Eastern District of Pennsylvania in connection with this matter.  Solarcom had sold and assigned certain of the lease payments to De Lage Landen.  De Lage Landen has sued MAXIMUS to enforce the guarantees, and has claimed damages of at least $10.0 million.  The Company believes that amount is part of the $31.0 million demanded by Solarcom. Because the guarantees were fraudulently signed, and because the leasing company did not perform appropriate due diligence, the Company believes that it is not liable under the guarantees and will vigorously contest any claim for payment. The Company has also reported the matter to law enforcement authorities. Although there can be 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 other legal proceedings, including contract claims, in the ordinary course of its business. Management does not expect the ultimate outcome of any of these legal proceedings to have a material adverse effect on the Company’s financial condition or its results of operations.

 

Financial Instruments – Letter of Credit

 

On June 18, 2003, in connection with a long-term contract, the Company issued a standby letter of credit in an initial amount of up to $20.0 million, which amount shall be reduced to $10.0 million on April 1, 2005. The letter of credit, which expires on March 31, 2009, may be called by the customer in the event the Company defaults under the terms of the contract. The facility contains financial covenants that establish minimum levels of tangible net worth and earnings before interest, tax, depreciation and amortization (EBITDA) and require the maintenance of certain cash balances. The Company was in compliance with all covenants at June 30, 2004.

 

Lease Obligations

 

On July 15, 2003, the Company entered into a capital lease financing arrangement with a financial institution, whereby the Company may acquire assets pursuant to an equipment lease agreement. Rental payments for assets leased are payable over a 60-month period at a rate of 4.05% commencing in January 2004. On March 29, 2004, the Company entered into a supplemental capital lease financing arrangement with the same financial institution whereby the Company may acquire additional assets pursuant to an equipment lease agreement. Rental payments for assets leased under the supplemental arrangement are payable over a 57-month period at a rate of 3.61% commencing in April 2004. At June 30, 2004, capital lease obligations of approximately $7.6 million were outstanding related to these lease arrangements for new equipment. Capital leases entered into during the nine months ended June 30, 2004 were approximately $3.3 million.

 

7



 

6. Earnings Per Share

 

The following table sets forth the components of basic and diluted earnings per share (in thousands):

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

 

 

2003

 

2004

 

2003

 

2004

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

8,965

 

$

9,930

 

$

25,931

 

$

28,586

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

20,731

 

21,664

 

21,016

 

21,612

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options and unvested restricted stock awards

 

284

 

407

 

269

 

483

 

Denominator for diluted earnings per share

 

21,015

 

22,071

 

21,285

 

22,095

 

 

7. 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 $90.0 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 nine months ended June 30, 2004, the Company repurchased approximately 439,000 shares. At June 30, 2004, $42.2 million remained authorized for future stock repurchases under the program.

 

8. Stock Option Plans

 

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 RSUs vest annually with full vesting 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 was approximately $0.7 million and $0.6 million for the nine months ended June 30, 2003 and 2004, respectively.

 

In March 2004, the Company issued 96,800 RSUs to certain executive officers and employees under its 1997 Equity Incentive Plan. The grant-date fair value of each RSU was $34.90. The RSUs vest annually with full vesting 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 was approximately $0.2 million for the nine months ended June 30, 2004.

 

For the nine months ended June 30, 2004, approximately 815,000 stock options were exercised under the Company’s stock option plan and approximately 25,000 RSU’s were vested and released.

 

9. Segment Information

 

Effective April 1, 2004, we implemented certain internal organizational changes to better manage our business. As a result, we now report each of our three Strategic Business Units as separate external reporting segments.

 

8



 

The following table provides certain financial information for each of the Company’s business segments. The earlier periods are reflective of the change in the composition of our reportable segments as if we had operated under the new organizational structure during those periods.

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

(in thousands)

 

2003

 

2004

 

2003

 

2004

 

Revenue:

 

 

 

 

 

 

 

 

 

Health Services

 

$

40,923

 

$

59,193

 

$

123,032

 

$

149,505

 

Human Services

 

60,363

 

60,043

 

172,543

 

182,829

 

Technical Services

 

40,455

 

40,922

 

109,520

 

117,425

 

Total

 

$

141,741

 

$

160,158

 

$

405,095

 

$

449,759

 

 

 

 

 

 

 

 

 

 

 

Gross Profit:

 

 

 

 

 

 

 

 

 

Health Services

 

$

8,532

 

$

12,628

 

$

28,474

 

$

33,908

 

Human Services

 

17,851

 

17,346

 

47,027

 

53,727

 

Technical Services

 

16,037

 

15,488

 

47,766

 

45,041

 

Total

 

$

42,420

 

$

45,462

 

$

123,267

 

$

132,676

 

 

 

 

 

 

 

 

 

 

 

Income from Operations:

 

 

 

 

 

 

 

 

 

Health Services

 

$

4,034

 

$

7,612

 

$

15,326

 

$

19,822

 

Human Services

 

6,925

 

4,266

 

15,641

 

15,953

 

Technical Services

 

3,218

 

3,707

 

9,602

 

9,526

 

Consolidating adjustments

 

310

 

537

 

1,024

 

1,130

 

Total

 

$

14,487

 

$

16,122

 

$

41,593

 

$

46,431

 

 

9



 

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

 

Business Overview

 

We are a leading provider of health and human services program management, consulting services and systems solutions primarily to government agencies. 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, 2003, we had revenue of $558.3 million and net income of $35.3 million. For the nine months ended June 30, 2004, we had revenue of $449.8 million and net income of $28.6 million.

 

Effective April 1, 2004, we implemented certain internal organizational changes to better manage our business. As a result, we now report each of our three Strategic Business Units (i.e., Health Services, Human Services, and Technical Services) as separate external reporting segments. The financial segment information provided below is reflective of this change in the composition of our reportable segments as if we had operated under the new organizational structure during prior periods.

 

Business Combinations

 

In fiscal 2004, we acquired the businesses described below in business combinations accounted for as purchases.

 

On May 3, 2004, we acquired substantially all the assets of TIECorp for $3.2 million. In conjunction with the purchase, we recorded intangible assets, primarily non-competition agreements and technology related intangibles, of $3.4 million, which have been assigned to the Human Services business segment. Per the terms of the acquisition agreement, additional consideration of up to $16.5 million may be paid based on achievement of certain future performance objectives by TIECorp. The TIECorp business is engaged in the development and marketing of instructional management software programs and related products and services in the educational field. The primary reason for the acquisition was to expand our presence in the educational software field and to strategically complement our current product and service offerings in the educational market.

 

On June 1, 2004, we acquired certain assets of Manatron, Inc. for $1.8 million. In conjunction with the purchase, we recorded goodwill of $1.5 million and intangible assets, primarily customer contracts and relationships, of $0.8 million, which have been assigned to the Technical Services business segment. The acquired assets relate to the design, development, marketing and support of judicial software products for county, city and township governments. The primary reason for the acquisition was to increase our market share in the justice solutions arena.

 

10



 

Results of Operations

 

Consolidated

 

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

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

(dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

141,741

 

$

160,158

 

$

405,095

 

$

449,759

 

Cost of revenue

 

99,321

 

114,696

 

281,828

 

317,083

 

Gross profit

 

$

42,420

 

$

45,462

 

$

123,267

 

$

132,676

 

 

 

 

 

 

 

 

 

 

 

Gross margin percentage

 

29.9

%

28.4

%

30.4

%

29.5

%

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

$

27,935

 

$

29,340

 

$

81,674

 

$

86,245

 

Selling, general and administrative percentage

 

19.7

%

18.3

%

20.2

%

19.2

%

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,965

 

$

9,930

 

$

25,931

 

$

28,586

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.43

 

$

0.46

 

$

1.23

 

$

1.32

 

Diluted

 

$

0.43

 

$

0.45

 

$

1.22

 

$

1.29

 

 

Our revenue increased 13.0% for the three months ended June 30, 2004 compared to the same period in fiscal 2003. Excluding revenue of $3.5 million related primarily to an acquisition in May 2003, our revenue for the three months ended June 30, 2004 increased 12.3% when compared to the three months ended June 30, 2003. For the nine months ended June 30, 2004 compared to the same period in fiscal 2003, our revenue increased 11.0%. Excluding revenue of $9.9 million related primarily to an acquisition in May 2003, our revenue for the nine months ended June 30, 2004 increased 9.2% when compared to the nine months ended June 30, 2003.

 

Our gross margin decreased to 28.4% for the three months ended June 30, 2004, a decrease of 1.5%, compared to 29.9% for the same period in the 2003 fiscal year. For the nine months ended June 30, 2004, our gross margin decreased to 29.5%, a decrease of 0.9%, compared to 30.4% for the same period in the 2003 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, employee training and non-chargeable labor costs), facilities costs, printing, reproduction, communications, equipment depreciation, intangible amortization and non-cash equity based compensation. SG&A increased in the three months and nine months ended June 30, 2004 compared to the same periods in fiscal 2003 due to the increase in expenses necessary to support higher revenue and to strengthen the infrastructure to market our products and grow our business, including our proposal facilities and systems, and new finance, operational, and compliance personnel. Our SG&A as a percentage of revenue decreased to 18.3% for the three months ended June 30, 2004 compared to 19.7% for the same period in the 2003 fiscal year. For the nine months ended June 30, 2004, our SG&A as a percentage of revenue decreased to 19.2% compared to 20.2% for the same period in the 2003 fiscal year.

 

Also included in SG&A is approximately $0.4 million and $0.8 million of non-cash equity-based compensation expense for the three months and nine months ended June 30, 2004, respectively, and approximately $0.2 million and $0.7 million for the three months and nine months ended June 30, 2003, respectively, related to the issuance of restricted stock units in May 2002 and March 2004. In future quarters, the quarterly amortization expense related to these restricted stock units is estimated to be approximately $0.4 million, which amount may increase if certain earnings targets are achieved.

 

11



 

Our provision for income taxes for both the three month and nine months ended June 30, 2004 and 2003 was 39.5% of income before income taxes.

 

Net income for the three months ended June 30, 2004 was $9.9 million, or $0.45 per diluted share, compared with net income of $9.0 million, or $0.43 per diluted share, for the three months ended June 30, 2003. Net income for the nine months ended June 30, 2004 was $28.6 million, or $1.29 per diluted share, compared with net income of $25.9 million, or $1.22 per diluted share, for the nine months ended June 30, 2003. The increase in net income is attributed primarily due to the contributions of our Health Services segment and Technical Services segment as discussed in more detail below.

 

Health Services

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

40,923

 

$

59,193

 

$

123,032

 

$

149,505

 

Cost of revenue

 

32,391

 

46,565

 

94,558

 

115,597

 

Gross profit

 

$

8,532

 

$

12,628

 

$

28,474

 

$

33,908

 

 

 

 

 

 

 

 

 

 

 

Gross margin percentage

 

20.8

%

21.3

%

23.1

%

22.7

%

 

Revenue of our Health Services segment increased 44.6% for the three months ended June 30, 2004 compared to the same period in fiscal 2003, and increased 21.5% for the nine months ended June 30, 2004 compared to the same period in fiscal 2003. These increases were due primarily to the contribution of revenue from the California Healthy Families project which commenced operations on January 1, 2004. Gross margin increased to 21.3% for the three months ended June 30, 2004 from 20.8% for the same period in fiscal 2003 as a result of improved profitability on certain projects. Gross margin decreased to 22.7% for the nine months ended June 30, 2004 from 23.1% for the same period in fiscal 2003. 

 

Human Services

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

60,363

 

$

60,043

 

$

172,543

 

$

182,829

 

Cost of revenue

 

42,512

 

42,697

 

125,516

 

129,102

 

Gross profit

 

$

17,851

 

$

17,346

 

$

47,027

 

$

53,727

 

 

 

 

 

 

 

 

 

 

 

Gross margin percentage

 

29.6

%

28.9

%

27.3

%

29.4

%

 

Revenue of our Human Services segment was relatively flat for the three months ended June 30, 2004 compared to the same period in fiscal 2003, and increased 6.0% for the nine months ended June 30, 2004 compared to the same period in fiscal 2003. Included in revenue for the nine months ended June 30, 2004, was revenue related to the Correctional Services business acquired on May 1, 2003, which was approximately $9.6 million compared to $2.3 million of revenue related to this acquisition for the nine months ended June 30, 2003. Also included in the third quarter of fiscal 2004 was a charge of approximately $1.1 million for certain accounts receivables that may be at risk stemming from an investigation of fraudulent activities by two terminated employees with whom we are now in litigation. Gross margin decreased to 28.9% for the three months ended June 30, 2004 from 29.6% for the same period in fiscal 2003 due primarily to the above mentioned $1.1 million charge. Gross margin increased to 29.4% for the nine months ended June 30, 2004 from 27.3% for the same period in fiscal 2003 as a result of improved profitability on certain projects in the segment.

 

12



 

Technical Services

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

40,455

 

$

40,922

 

$

109,520

 

$

117,425

 

Cost of revenue

 

24,418

 

25,434

 

61,754

 

72,384

 

Gross profit

 

$

16,037

 

$

15,488

 

$

47,766

 

$

45,041

 

 

 

 

 

 

 

 

 

 

 

Gross margin percentage

 

39.6

%

37.8

%

43.6

%

38.4

%

 

Revenue of our Technical Services segment increased 1.2% for the three months ended June 30, 2004 compared to the same period in fiscal 2003, and increased 7.2% for the nine months ended June 30, 2004 compared to the same period in fiscal 2003. These increases were primarily due to revenue from new contracts. Gross margin decreased to 37.8% for the three months ended June 30, 2004 from 39.6% for the same period in fiscal 2003, and to 38.4% for the nine months ended June 30, 2004 from 43.6% for the same period in fiscal 2003. These decreases in gross margin were primarily due to less software license revenue, which carries higher gross margins.

 

Other Income

 

 

 

Three Months
Ended June 30,

 

Nine Months
Ended June 30,

 

 

 

2003

 

2004

 

2003

 

2004

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

$

331

 

$

291

 

$

1,268

 

$

819

 

Percentage of revenue

 

0.2

%

0.2

%

0.3

%

0.2

%

 

Interest and other income decreased during the three months and nine months ended June 30, 2004 when compared to the same periods in the previous fiscal year due primarily to lower interest rates on our invested cash and cash equivalents and our incurring of interest expense on our capital lease obligations beginning in January 2004.

 

Liquidity and Capital Resources

 

 

 

Nine Months
Ended June,

 

 

 

2003

 

2004

 

 

 

(dollars in thousands)

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

34,028

 

$

26,204

 

Investing activities

 

(22,671

)

(17,375

)

Financing activities

 

(16,821

)

5,410

 

Net (decrease) increase in cash and cash equivalents

 

$

(5,464

)

$

14,239

 

 

For the nine months ended June 30, 2004, cash provided by our operations was $26.2 million, compared to $34.0 million for the nine months ended June 30, 2003. Cash provided by operating activities for the nine months ended June 30, 2004 primarily consisted of net income of $28.6 million plus non-cash items aggregating $25.1 million offset by net uses of working capital of $27.5 million. Non-cash items included $9.6 million of depreciation and amortization, $3.6 million from the income tax benefit of option exercises and $11.1 million from deferred income taxes. The net uses of working capital reflect increases in accounts receivable-billed of $7.7 million and accounts receivable-unbilled of $11.4 million, increases in deferred contract costs of $5.8 million, and increases in other assets, primarily longer term accounts receivable, of $4.4 million, net of increases in accounts payable of $4.2

 

13



 

million. The increase in accounts receivable-billed and unbilled during the nine months ended June 30, 2004 was primarily due to certain milestone based billings in our Technical Services segment and billings related to our California Healthy Families contract in our Health Services segment. During the nine months ended June 30, 2003, cash provided by operating activities consisted primarily of net income of $25.9 million plus non-cash items of $8.4 million and net decreases in working capital of $0.3 million. Non-cash items included $7.6 million of depreciation and amortization. The net increases in working capital were primarily due to increases in accounts receivable-billed and unbilled totaling $15.0 million offset by increases in deferred revenue of $8.8 million and accounts payable of $8.8 million.

 

For the nine months ended June 30, 2004, cash used in investing activities was $17.4 million, compared to $22.7 million for the nine months ended June 30, 2003. Cash used in investing activities for the nine months ended June 30, 2004 primarily consisted of acquisitions of businesses of $6.4 million, expenditures for capitalized software costs of $6.2 million (which includes approximately $2.7 million of purchased software during the three month period ended June 30, 2004) and purchases of property and equipment of $5.0 million. During the nine months ended June 30, 2003, we used $13.5 million related to the acquisition of businesses, $3.0 million for expenditures related to capitalized software costs, and $4.6 million for purchases of property and equipment.

 

For the nine months ended June 30, 2004, cash provided by financing activities was $5.4 million, compared to cash used of $16.8 million for the nine months ended June 30, 2003. Cash provided by financing activities for the nine months ended June 30, 2004 primarily consisted of $21.3 million of employee stock transactions offset by $15.1 million of common stock repurchases. Cash used in financing activities for the nine months ended June 30, 2003 primarily consisted of $3.7 million of employee stock transactions offset by $20.4 million of common stock repurchases.

 

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 $90.0 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 nine months ended June 30, 2004, the Company repurchased approximately 439,000 shares. At June 30, 2004, $42.2 million remained authorized for future stock repurchases under the program.

 

Our working capital at June 30, 2004 was $227.9 million and we had cash and cash equivalents of $131.6 million and no debt, except for capital lease obligations. Management believes this strong liquidity and financial position will allow us to continue our stock repurchase program, depending on the price of the Company’s common stock, and to pursue selective acquisitions. Restricted cash represents amounts collected on behalf of certain customers and its use is restricted for liabilities specified under our contracts with these customers.

 

Under the provisions of a recently awarded long-term contract, we incurred certain reimbursable transition period costs. During this transition period, these expenditures resulted in the use of our cash and in our entering into lease financing arrangements for a portion of the costs. Reimbursement of these costs will occur over the 60 months of the contract operating period, which commenced in January 2004. As of June 30, 2004, approximately $16.4 million in costs, net of amortization of approximately $1.8 million, had been incurred and reported as deferred contract costs on our June 30, 2004 condensed consolidated balance sheet. Also under the provisions of this contract, we issued a standby letter of credit in an initial amount of up to $20.0 million, which amount shall be reduced to $10.0 million on April 1, 2005. The letter of credit, which expires on March 31, 2009, may be called by the customer in the event we default under the terms of the contract. The facility contains financial covenants that establish minimum levels of tangible net worth and earnings before interest, tax, depreciation and amortization (EBITDA) and require the maintenance of certain cash balances. We were in compliance with the covenants at June 30, 2004.

 

In July 2003, we entered into a capital lease financing arrangement with a financial institution, whereby we may acquire assets pursuant to an equipment lease agreement. Rental payments for assets leased will be payable over a 60-month period at a rate of 4.05% commencing in January 2004. In March 2004, we entered into a supplemental

 

14



 

capital lease financing arrangement with the same financial institution whereby we may acquire additional assets pursuant to an equipment lease agreement. Rental payments for assets leased under the supplemental arrangement are payable over a 57-month period at a rate of 3.61% commencing in April 2004. At June 30, 2004, capital lease obligations of approximately $7.6 million were outstanding related to these lease arrangements for new equipment. Capital leases entered into during the nine months ended June 30, 2004 were approximately $3.3 million.

 

At June 30, 2004, we classified accounts receivable of approximately $4.4 million, net of a $1.1 million discount, as long-term receivables and reported them within the other assets category on our June 30, 2004 condensed consolidated balance sheet. These receivables have extended payment terms and collection is expected to exceed one-year.

 

We believe 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 consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us 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.

 

We believe that we do not have material 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 and standby letters of credit, we have not had any defaults resulting in draws on performance bonds or letters of credit. Also, we do not enter into derivative transactions. 

 

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

 

Revenue recognition. In fiscal 2003, approximately 82% of our total revenue was derived from state and local government agencies; 6% from federal government agencies; and 12% from other sources, such as foreign and commercial customers. 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. Also, some contracts contain “not-to-exceed” provisions. For fiscal 2003, revenue from fixed-price contracts was approximately 36% of total revenue; revenue from cost-plus contracts was approximately 17% of total revenue; revenue from performance-based contracts was approximately 33% of total revenue; and revenue from time and materials contracts was approximately 14% 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 when earned, as services are provided. For certain fixed price contracts, we recognize revenue based on costs incurred using estimates of total expected contract revenue and costs to be incurred. 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

 

15



 

subject to the risk of potential cost overruns. Provisions for estimated losses on incomplete contracts are provided in full in the period in which such losses become known. We recognize revenue on our performance-based contracts as such revenue becomes fixed or determinable, which generally occurs when amounts are billable to customers. 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 and are generally expensed. Certain of these direct 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 mainly for performance-based contracts which exist in our Health Services segment and Human Services segment. 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. Our management uses its judgment and experience to estimate cost of revenue expected on projects. Our management’s 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 management’s estimates, profitability may be adversely affected. Service cost variability has little impact on cost-plus arrangements because allowable costs are reimbursed by the customer.

 

We also license 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 customer. 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 of software is recognized under the percentage-of-completion method.

 

Beginning July 1, 2003, EITF 00-21, Revenue Arrangements with Multiple Deliverables, requires contracts with multiple deliverables to be divided into separate units of accounting if certain criteria are met. While EITF 00-21 has not had a material impact on our financial statements, we apply the guidance therein and recognize revenue on multiple deliverables as separate units of accounting if the criteria are met.

 

Health Services segment and Human Services segment 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 our most recently ended fiscal year, our average Human Services segment and Health Services segment contract duration was approximately two years. Our average Technical Services segment 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 October 1, 2001. Upon adoption, the required impairment tests were performed. These impairment tests did not result in any impairment loss. Goodwill is tested on an annual basis in our fourth quarter, or more frequently as impairment indicators arise. Annual impairment tests involve the use of estimates related to the fair market values of our reporting units with which goodwill is associated. Losses, if any, resulting from annual impairment tests will be reflected in operating income in our income statement.

 

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Capitalized Software Development Costs. Capitalized software development costs are capitalized in accordance with FAS No. 86, Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise Marketed. We capitalize both purchased software that is ready for resale and costs incurred internally for software development projects from the time technological feasibility is established. Capitalized software development costs are reported at the lower of unamortized cost or estimated net realizable value. Upon the general release of the software to customers, capitalized software development costs for the products are amortized over the greater of the ratio of gross revenues to expected total revenues of the product or the straight-line method of amortization over the estimated economic life of the product, which ranges from three to five years. The establishment of technological feasibility and the ongoing assessment for recoverability of capitalized development costs require considerable judgment by management including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life, and changes in software and hardware technologies. Any changes to these estimates could impact the amount of amortization expense and the amount recognized as capitalized software development costs in the consolidated balance sheet.

 

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.

 

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 management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that these disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods.

 

(b)  Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

On January 3, 2003, the City of San Diego served us with a complaint naming DMG-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 $0.7 million 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 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 alleged damages against all defendants of at least $10.0 million. All parties have tentatively agreed to settle this matter.  Our share of the settlement is not material and will be covered by insurance.

 

On December 8, 2003, David M. Johnson, a former officer of MAXIMUS, sued us, David V. Mastran, and Lynn P. Davenport in the federal District Court for the Northern District of Ohio in connection with the termination of his employment in August 2003. The matter has since been transferred to the federal District Court for the Eastern District of Virginia. In October 2002, Mr. Johnson signed a four-year employment agreement with us. His complaint asserts that his employment was wrongfully terminated by the defendants, and alleges breach of contract, promissory estoppel, fraud, interference with contract, and intentional infliction of emotional distress. Mr. Johnson claims damages of at least $11.0 million. We believe that Mr. Johnson’s claims are without merit and we intend to defend the action vigorously. Although there can be no assurance of a favorable outcome, we do not believe that this action will have a material adverse effect on our financial condition or results of operations, and we have not accrued for any loss related to this action.

 

In the third quarter of fiscal 2004, we learned that two former employees who were principals in a small business we acquired in 2000 had signed fraudulent guarantees on behalf of MAXIMUS for computer equipment leases apparently used in a competitive enterprise completely unrelated to our business. We never had any knowledge of the leases or guarantees. On July 14, 2004, we filed suit against those individuals. Solarcom LLC, the leasing company, has demanded $31.0 million from us under the guarantees, which amount represents the remaining payments under the leases. On August 6, 2004, De Lage Landen Financial Services, Inc. sued MAXIMUS and Solarcom in the federal District Court for the Eastern District of Pennsylvania in connection with this matter.  Solarcom had sold and assigned certain of the lease payments to De Lage Landen.  De Lage Landen has sued MAXIMUS to enforce the guarantees, and has claimed damages of at least $10.0 million.  We believe that amount is part of the $31.0 million demanded by Solarcom. Because the guarantees were fraudulently signed, and because the leasing company did not perform appropriate due diligence, we believe that we are not liable under the guarantees and will vigorously contest any claim for payment. We have also reported the matter to law enforcement authorities. Although there can be no assurance of a favorable outcome, we do not believe that this action will have a material adverse effect on our financial condition or results of operations, and we have not accrued for any loss related to this action.

 

We are involved in various other legal proceedings, including contract claims, in the ordinary course of its business. We do not expect the ultimate outcome of any of these legal proceedings to have a material adverse effect on our financial condition or our results of operations.

 

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Item 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

 

The following table sets forth the information required regarding repurchases of common stock that we made during the three months ended June 30, 2004:

 

Period

 

Total
Number of
Shares
Purchased

 

Average
Price Paid
per Share

 

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans (1)

 

Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plan

 

 

 

 

 

 

 

 

 

(in thousands)

 

April 1, 2004 – April 30, 2004

 

 

 

 

$

44,325

 

 

 

 

 

 

 

 

 

 

 

May 1, 2004 – May 30, 2004

 

57,300

 

$

34.79

 

57,300

 

$

42,446

 

 

 

 

 

 

 

 

 

 

 

June. 1, 2004 – June 30, 2004

 

45,100

 

$

34.91

 

45,100

 

$

42,244

 

 

 

 

 

 

 

 

 

 

 

Total

 

102,400

 

$

34.84

 

102,400

 

 

 

 


(1)   Under resolutions adopted and publicly announced on May 12, 2000, July 10, 2002, and April 2, 2003, our Board of Directors has authorized the repurchase, at management’s discretion, of up to an aggregate of $90.0 million of common stock under our 1997 Equity Incentive Plan. In addition, in June 2002, the Board of Directors authorized the use of option exercise proceeds for the repurchase of our common stock.

 

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. 

 

During the quarter ended June 30, 2004, we filed or furnished the following Current Reports on Form 8-K:

 

1)         Current Report on Form 8-K (Item 12) was furnished on May 6, 2004 to announce our financial results for the three months and six months ended March 31, 2004.

2)         Current Report on Form 8-K (Item 5) was filed on June 30, 2004 to disclose segment financial information reflecting recent organizational changes.

 

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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:

August 12, 2004

By:

 /s/ Richard A. Montoni

 

 

 

 

 Richard A. Montoni

 

 

 

 Chief Financial Officer

 

 

 

 (On behalf of the registrant and as Principal
 Financial and Accounting Officer)

 

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EXHIBIT INDEX

 

 

Exhibit No.

 

Description

 

 

 

31.1

 

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

31.2

 

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

32.1

 

 

Section 906 Principal Executive Officer Certification.

 

 

 

 

32.2

 

 

Section 906 Principal Financial Officer Certification.

 

 

 

 

99.1

 

 

Important Factors Regarding Forward Looking Statements.

 

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