Maximus Inc (MMS) 2005 Q4 法說會逐字稿

Good morning and thank you for joining us. For today's call, we have posted a presentation for you to follow along with. The presentation can be found on the MAXIMUS website at www.maximus.com. Click on "Investor Information" and this will take you to the appropriate page where you will find the presentation language is located directly underneath the webcast link.

Before we begin, I would like to remind everyone that a number of statements being made today will be forward-looking in nature. Please remember that such statements are only predications and actual events or results may differ materially as a result of risks we face, including those discussed in Exhibit 99.1 of our SEC filings. We encourage you to review the summary of these risks in our most recent 10-Q filed with the SEC on August 8, 2005. The Company does not assume any obligation to revise or update these forward-looking statements to reflect subsequent events or circumstances.

On the call today is Lynn Davenport, Chief Executive Officer, and Rich Montoni, Chief Financial Officer. And with that, I will turn the call over to Rich for a discussion of our financial results.

Thank you, Lisa. Good morning to our audience and thanks for joining us. Before I get into the detailed results, I first want to provide some perspective. We have a lot of moving components in our numbers for the quarter and the year. It can be confusing, and it is also important to have a clear understanding first when gauging how we did versus expectations and second to set a baseline for next year.

So let's take a minute upfront to set these perspectives, and oh, by the way, we did include a supplemental exhibit in the press release that addresses this point, as well as slides that accompanies my presentation.

The two topics we need to discuss are, one, the legal settlement expense, and two, the impact of FAS 123R regarding the expensing of options.

As to the legal settlement expense, we've previously reported that the Company planned to take a $5.5 million charge in the fourth quarter. We have recorded this as a separate line item in the fourth quarter. In addition, as required by GAAP, the legal expenses related to this matter of 1.5 million for the first three quarters of fiscal 2005, which were previously expensed through SG&A, these are now reclassified and reported on the legal settlement line for those quarters. There is no bottom-line impact from the prior quarter's reclassification. Accordingly, when we add it in total, settlement-related legal expenses totaled $7 million for the full fiscal year.

Let's stop here for the moment. You may want to refer to the slide. Excluding the legal charge, fourth-quarter diluted earnings per share is $0.49, which compares to consensus of $0.47. While full-year diluted earnings per share, excluding the legal charge, is $1.86, remember that the charge for Q1 through Q3 of 1.5 million or $0.04 per share is only a REIT class and was factored in prior quarters' results, as well as in the setting of the consensus.

So when we pull it altogether for the fourth quarter and for the year, results were $0.02 above consensus.

Now let's tackle the option expensing piece. I will discuss this further when we talk about guidance, but let's set the baseline. If we had expensed options in fiscal 2005, the impact would have been approximately $0.16 per diluted share. Therefore, the $1.86, excluding charges, less the $0.16 gives us $1.70 fiscal 2005 baseline.

Now with all of that clear, let's move onto fourth quarter and fiscal 2005 financial results. Our key highlights include the following. Revenue for fiscal 2005 increased 7% to $647.5 million versus the prior year, and fourth-quarter revenue grew 9% to 167.3 million compared to Q4 of last year. All this growth is organic.

Net income for fiscal 2005 totaled $36.1 million or $1.67 per diluted share. Net income for the fourth quarter was 7.4 million or $0.34 per diluted share, and this includes the impact of the 5.5 million of previously disclosed legal settlement expenses. Excluding the fourth-quarter charge of 5.5 million, net income for the fourth quarter would have been 10.7 million or diluted earnings per share of $0.49.

Net cash provided by operating activities totaled 74.1 million for the fiscal year, of which 25 million was generated in the fourth quarter. Cash, cash equivalents and marketable securities remained healthy at $178.4 million as of September 30, 2005. And lastly, we achieved a record sales year in 2005 with signed awards totaling 1.4 billion and record backlog of 1.7 billion.

Moving into the results by business segment, consulting. Its revenue in the fourth quarter was $27.4 million and $107.3 million for the full year. The year-over-year revenue increases on a quarterly and annual basis were driven principally from robust growth within the education practice areas. The segment's fourth-quarter operating income totaled $4.2 million with a solid margin of 15%. Operating income for fiscal 2005 was 10.7 million with an operating margin of 10%. The Consulting segment made considerable progress on margin improvement in the second half of fiscal 2005 compared to the first half.

We initiated certain midyear corrections in underperforming areas, which boosted the segment's operating margin. These midyear initiatives included staff reductions and better aligning resources with booked backlog. We are encouraged by the improving trends, as well as the level of backlog in pipeline in this segment.

Systems Segment. Revenue totaled $34.3 million in the fourth quarter and $137.1 million for the full fiscal year. The Systems Segment contributed operating income of $1.7 million in the fourth quarter and 11.4 million for fiscal 2005. Revenue and operating income performance in the Systems Segment for both the quarter and the full year were driven by solid growth in Asset Solutions and ERP, which offset softness in other areas primarily attributable to project timing.

For example, a couple of divisions have some large jobs in fiscal 2004 that were significant contributors in 2004 but concluded in fiscal 2005. This is primarily in the areas of Justice and Enterprise Solutions. In the case of Enterprise Solutions, the division was impacted by HSPD-12, which was President Bush's directive that put several smartcard procurements essentially on hold for most of fiscal 2005.

Moving into '06, we are already starting to see some activity resurface in this market.

Moving into the Operations segment, and this segment includes our Health and Human Services work where we have provided top-level financial results for each group over the past year. Beginning in the first quarter of '06, we will no longer be breaking out this detail. Going forward, we will only provide segment level financial information.

Revenue for the Operations segment totaled $105.6 million for the fourth quarter and $403.1 million for the full fiscal year. Compared to the same period last year, revenue grew predominately from new and expanding contracts in our health practice.

Fourth-quarter operating income for the Operations segment totaled 10.1 million with a margin of 10% for the fiscal year. Operating income was 38.5 million with a 10% margin. In the area of Health Services, fourth-quarter revenue grew 13% to $65.3 million and for the full year grew 21% to $251.6 million versus the same periods in fiscal 2004. This was a result of the BC contract and new federal health work. The group also benefited from a full year of California Healthy Families contract versus a three quarter contribution in fiscal 2004.

Health Services operating income totaled $7.4 million in the fourth quarter and $29.2 million for fiscal 2005. The Health Services group absorbed the expected $3.5 million loss on the BC health benefits contract and still exited the year with a 12% operating margin.

There has been press coverage in British Columbia that the Company has incurred penalties related to the service level agreements of the health benefits project. The Company does acknowledge that we have incurred penalties; however, we are bound by nondisclosures in the contract, so we are not able to disclose the specific amounts. As Lynn will discuss, we have been working to move this early stage project into full compliance.

We did increase resources to get through the backlog, and this has helped to improve the overall performance metrics. As we ramp down those added costs, we expect the project's financial performance to improve throughout the year.

As a result, we now expect it to get to breakeven during the second half of our next fiscal year, which is later than our original plan. This is factored into our guidance. One last point, we still believe this project of 240 million over 10 years will operate profitably in the long run and provide a reasonable return for our efforts.

Moving over to the Human Services group, revenue for the fourth quarter was $40.3 million and 151.6 million for the full fiscal year. During fiscal 2005, we benefited from new and expanding projects in the Workforce Services area, which offset attrition in the Child Support Enforcement division. Operating income for Human Services increased to 2.6 million in the fourth quarter and 9.3 million for the fiscal year.

Human Services operating margin improved to 7% compared to 5% in the same quarter last year. Both Corrections and Child Support benefited from initiatives taken to improve operational efficiencies, and we expect to see continued improvements in fiscal 2006.

Moving on to expenses, I want to provide some specifics on SG&A before I jump into operating margin. As I mentioned earlier, we reclassified the prior quarter's legal expenses from SG&A expense into a separate legal settlement line item on the P&L for comparison purposes. As a result, the income statement reflects 5.5 million of legal expense in the fourth quarter and 7 million for the full fiscal year. Excluding the legal settlement charge, operating margin would have been 10% for the fourth quarter and 10% for the full fiscal year.

Interest and other income. As expected, other income remained consistent at $1.3 million for the fourth quarter. Ongoing active cash management and having more cash on hand at these higher rates has contributed to this higher level of other income.

A comment on this legal settlement. We chose to settle the Pennsylvania claim so as to avoid the ongoing legal cost and the uncertainty and risk of substantial additional costs that might have resulted from a jury trial. The fourth-quarter charge of 5.5 million includes the cost of the settlement, related legal bills in the quarter, as well as an estimate for remaining legal cost to litigate the ongoing Georgia claim.

We are not able to break out the individual components of the $5.5 million as the settlement amount is confidential. As a result, we did eliminate approximately 45 to 50% of the total $31 million amount originally claimed in this matter. This leaves us with approximately $17 million on remaining claim, the outcome of which is not currently determinable.

Moving into balance sheet metrics, total Accounts Receivable for the quarter were $168.3 million, of which $124.5 million was billed and 43.7 million was unbilled. DSOs remained steady at 94 days, and this was calculated including $5.3 million in long-term Accounts Receivable, and these long-term Accounts Receivable are classified within other assets on our balance sheet.

We had very strong cash flow in the quarter. This was driven by several factors including strong A/R collections, income tax timing, deferred compensation and contract advanced payments. Cash from operations totaled $25 million for the fourth quarter. Cash from operations totaled $74.1 million for the full fiscal year. As a result, we ended the quarter with $178.4 million in cash, cash equivalents and marketable securities. We do expect that first-quarter cash flow will be tempered as we pay annual bonuses in the first quarter.

During the quarter, we purchased approximately 110,500 shares of MAXIMUS common stock. This is part of our ongoing repurchase program. Essentially these purchases offset the effect on shares from employee stock purchases. It is not with the purpose to improve comparative earnings per share. As of September 30, we had $29.5 million available under the program for future stock repurchases. We view our healthy cash balance as a way to ensure the funding of ongoing operations of the business, our share repurchase program and the continuation of the quarterly cash dividend.

We also remain opportunistic on the acquisition front. While you have not seen any substantial M&A activity from the Company over the last year, the pipeline has been active. We continue to seek out candidates that provide a strategic fit with our current operations, are accretive to earnings and operate in an area where we see future growth at respectable margins.

Now let's move onto guidance. For fiscal 2006, the Company expects revenue and earnings growth in the range of 10 to 13%. We expect revenue, excluding acquisitions, to be in the range of 710 million to $725 million. In fiscal 2006, we will begin expensing options. The expected impact is approximately $0.04 to $0.05 per share per quarter, and we intend to implement 123R prospectively.

As I discussed earlier, if we expensed options in fiscal 2005, the annualized impact would have been $0.16 per diluted share. As noted earlier, earnings per share for fiscal 2005 also included legal settlement expense of $7 million, which reduced diluted earnings per share by $0.19. Adjusting for those two items, fiscal 2005 diluted earnings per share of $1.67 would have been $1.70. So for comparative purposes, we suggest using a baseline EPS for fiscal 2005 of $1.70.

For fiscal 2006, the Company expects GAAP diluted earnings per share, which include the expensing of options, to be in the range of $1.87 to $1.92 or growth of 10% to 13%.

As many of you know, our fiscal first quarter has traditionally been seasonally the weakest, largely due to the impacts of the holidays. The first-quarter results will also be tempered by the additional resources we have assigned to the British Columbia project. We're confident that the situation in British Columbia will improve in Q2 and beyond as we continue to improve on meeting our project goals.

As a result, we expect the first quarter will be in the range of $0.39 to $0.41 diluted EPS versus fiscal '05 comparable quarter of $0.38. Our third and fourth quarters tend to be our stronger quarters, which include favorable impacts from our Workforce Services business.

Guidance by segment. On a percentage basis, we expect revenue from the Consulting segment in the mid-single digits. We're aiming to achieve a full-year operating margin for the Consulting segment of at least 10%.

Moving on to the Systems segment, we anticipate 2006 revenue will be similar to revenue contributions in fiscal 2005. We do expect improved margin contribution from this group for the full year, and we are targeting getting the segment back in the 10% plus range in fiscal 2006. We anticipate the majority of revenue growth in fiscal 2006 will come from the Operations segment. For fiscal 2006, we anticipate that revenue growth from the Operations segment will be in the range of 10 to 15% with operating margin approximating high single digits.

A quick note on Sarbanes-Oxley. The September year-end marks the first time MAXIMUS is required to report pursuant to Sarbanes-Oxley. While there can be no absolute assurance until we complete the reporting process of filing our 10-K, we believe the situation is akin to waiting for the clock to run out. We have a very high comfort level that our results will be satisfactory, meaning an unqualified Sarbanes-Oxley opinion from our outside auditors. This has been a significant endeavor with third-party cost approximating $1 million and as important is the result of the significant efforts by the many within MAXIMUS at all levels. Thanks to all those involved for their efforts, and congratulations on this soon to be confirmed success.

And with that, I will turn the call over to Lynn.

Good morning, everyone, and thank you, Rich. We finished fiscal year 2005 on a solid footing, and I'm confident that we start fiscal year 2006 in a position to grow significantly. I would like to talk about both of these points today.

I will start by providing a brief recap of this past quarter and this past year. I then want to present my objectives for fiscal year 2006, along with my assessment of our outlook for this year and our prospects for growth. Finally, I will discuss our status on rebids and options in our pipeline.

With that, let me turn to the quarter that has just ended. All in all, we had a good quarter. First and most important, as Rich has already discussed, we beat consensus by about $0.02 for the quarter and for the year, excluding the onetime legal expenses that we had to incur.

This is very significant for us at MAXIMUS. I'm proud to say that we've met our projected financial estimates for each quarter this year and for the year overall. We wanted to become more predictable this year, and I am pleased to say that we met this goal.

We also had a very good sales quarter, adding to the sale successes that we had this year. As you know from my previous announcements, we had over $1.4 billion in sales this year, which is by far the best sales year that we have ever had. This past quarter we won major welfare-to-work projects in San Diego, Los Angeles, Wisconsin and with the Social Security Administration. These wins are worth over $200 million, including the revenues that we will receive from both fiscal year 2006 and beyond. Overall we had over 300 million in new wins in the fourth quarter, continuing the strong sales performance that we had all year.

We also made good progress this quarter on our large projects in Texas and in British Columbia, which I know are of interest to everyone. I will talk more about this progress later in my presentation.

Finally, we added four new senior management managers this past quarter, essentially finishing the effort that I started at the beginning of the year to strengthen our management team. I will also talk about each of these new people later in my remarks.

With that, I would like to turn to a brief recap of our entire year in fiscal year 2005. As you know, I took over the position of CEO at the beginning of this past year. When I took over, we had a strong history of successes and accomplishments. We also had been a little flat over the past several years. As I stated last year, my goal was to build on our successes and to get us back on track to grow.

As you probably recall, I set six objectives at the beginning of the year to meet these goals. I would like to summarize our results against each of these objectives one last time to provide sort of a scorecard for the year so to speak.

First, I said at the beginning of the year that I wanted to stabilize our organization by putting back in place our traditional organizational structure focused on Consulting, Systems and Operations. This change is done, and all of our key positions are now filled.

Second, I said that I wanted to strengthen our management team. I have essentially completed this objective as well. Namely as I already indicated, we hired four new senior people this past quarter. We also added three more key people from within to put our team in place for the future.

Third, I said that we wanted to strengthen our overall quality control practices and results. I believe that we have made significant progress in this area as well, although there are challenges that remain. Namely we did not loss any major rebids this year. We also met our numbers each quarter. This is a distinct improvement over our performance in recent years.

Fourth, I stated at the beginning of this past year that we wanted to improve our overall profitability. I believe that we also made significant progress against this objective.

As an example, we completed, as you know, a series of major cost reduction efforts this past year, resulting in annual savings of at least 10 to $12 million per year. Some of these savings hit the bottom line. Others have been reinvested in new jobs such as Texas and British Columbia. These savings are important for both the obvious financial reasons and as an indication that we are prepared to do what we have to do to make sure we remain profitable. This was an important historical step for MAXIMUS. We will continue to focus hard on this objective this next year.

Fifth, we made a significant effort this past year to improve the performance of our underperforming practices with a number of important successes. We also have one or two remaining challenges. Namely we were very successful in improving the results in our education practice. This lost money last year and was quite profitable this year. And in our Human Services practice, which almost doubled its profitability, we also close several smaller practices.

Our Revenue Services practice, which has responsibility for our revenue maximization practice, also had a profitable fourth quarter after a series of disappointing quarters. This practice also starts this next year with an improved outlook.

On the other hand, we still face a challenge in our Court Systems practice and in our overall Consulting practice. To this end, we have recently completed a new series of cost reduction efforts and management changes in these areas. This will continue to be a major area for priority attention this year.

Finally, I said at the beginning of this year that we wanted to win some big jobs. As I said before, we had our best sales year ever, presenting a strong starting foundation for this year and the years to come. In short, we believe that we substantially accomplished what we set out to do in fiscal year 2005. We are a stronger firm. We have the foundation in place to grow. It is now time to start building on this foundation.

This takes me to our objectives for fiscal year 2006. If our objective in fiscal year 2005 was to get our house in order, our objective in fiscal year 2006 is to now start growing significantly. Namely, as Rich has already indicated, we believe that we can return to double-digit growth in fiscal year 2006. It is our priority for this year.

Unlike last year, I only have three goals for this year. First, I want to work closely with our new management team to integrate this team into our organization. Second, I want to continue our efforts to improve our profitability and successfully deliver on all jobs, especially our big new jobs such as the Texas and British Columbia jobs.

Third, I want to make a major growth drive, looking at both organic and acquisition options. Our new team is the key to our future. Accordingly, my first priority will be to work closely with this team to build the strongest possible organization for the future.

The team that we have hired put a dramatically different look and face on MAXIMUS. We've hired a team of first-class people from first-class firms. Each of the persons that we have hired has significant years of experience and extensive prior success record, which is precisely the type of team that we need to take on the types of challenges and opportunities that we have before us.

We plan to schedule another investor day over the next several months so that you can meet our new team. I have also shown each of the members of our team on the organization chart that we've made available to the Company this presentation. I would like to tell you a little bit about each of these individuals.

We have brought in Bob Sullivan to take over our Consulting practice. Bob has over 25 years experience as a highly successful consultant and as a partner with BearingPoint, providing him with the strongest possible credentials to lead our Consulting turnaround efforts.

In addition to Bob, we've hired two very senior individuals to take the lead for our systems practice, to provide a significant step up in our technical delivery and sales efforts.

First, we have created a new Enterprise Systems segment to take over responsibility for all of our existing systems, divisions and practices. We have hired Drew Cramer to lead this business unit. Drew comes to MAXIMUS from Unisys where he built a $350 million a year systems development and outsourcing practice focused primarily at the federal level. Prior to joining Unisys, Drew also had a long career with AT&T and Xerox. Overall he has over 30 years experience in winning, running and managing very large-scale systems development efforts, providing us with a depth of technical leadership that we have never had before. In addition to the new function that Drew will lead, we have established a second large systems segment to focus exclusively on the technical components of our large Health and Human Services outsourcing jobs, such as our new jobs in Texas and British Columbia.

Previously we handled these technical challenges as part of our overall Operations practice efforts. However, we're finding that these challenges are too big and too complicated to be handled at just one aspect of a larger project.

To this end, we have hired Mike Plymack to lead our large Health and Human Services technology efforts. Mike has over 30 years experience with IBM in managing large-scale systems development and implementation efforts.

In addition to Drew and Mike, we have also made a major recent change in our Operations practice. Namely we have recently promoted Bruce Caswell to lead our overall Operations practice, combining our Human Services Operations practice and our Health Services practice. Bruce joined us almost a year ago from IBM where we had a lead responsibility for IBM's consulting, marketing and sales efforts. Prior to joining IBM, he had a long career with the PricewaterhouseCoopers Consulting practice. For the past year, Bruce has lead our Human Services/Operations practice, which had its best sales year ever.

In addition to Bruce, we have asked John Boyer, who has led our Health Services practice for the past 10 years, to take on a new responsibility to expand our federal practice efforts. John developed our Health Services practice into our largest and most successful practice. We believe that he will have the same success in expanding our federal efforts.

John has a PhD with over 30 years experience in health care and with MAXIMUS in the federal government. Prior to joining MAXIMUS, John had a long career with the Department of Defense where he had lead policy and management responsibility with the Office of the Assistant Secretary of Defense at the Pentagon.

In addition to the other new members of our team, Mark Andrekovich has recently joined our team to serve as our new Chief of Human Capital. Mark comes from Banister International, a private human capital and executive search firm, where he has served as a partner since 2003. Mark has over 20 years of executive human resources experience with multinational companies, including General Electric and Cytech, providing us with a level of professional human capital management skills and experience that we have never had before.

Finally, I have asked Sue Pepin, who has a long and successful track record as a Division President at MAXIMUS, to lead our overall quality control efforts. Sue has recently returned to MAXIMUS on a full-time basis. Prior to her departure, she established yourself as one of our strongest Division Presidents with a reputation for the highest performance results.

In addition to getting our new team in place, we will also continue to work hard this year to achieve the highest level of quality in our efforts and to avoid job problems. We have already started our quality control efforts for this year by moving aggressively to make our new projects in Texas and in British Columbia successful. We have added additional staff for each project and put in place comprehensive corrective action plans. We are confident that we're on track in Texas, but we fully appreciate the size and complexity of this project.

As you know, this project involves a virtual total change of the existing welfare program in Texas. The overall operational transition and system build-out task in Texas has been going quite well, although the effort has been very intense for everyone involved. We remain on track for the transition of the CHIP program, which is expected to be completed at the beginning of December. In January we begin a phased regional rollout of the fully integrated eligibility program.

We also believe that we are making significant progress in British Columbia after a difficult beginning. This is another very large and complex project. We're working in another country and in a complicated union environment. As you know, we have received several performance sanctions, and we have found ourselves in the British Columbia press. Some of the attention that we have received is political, some of it is warranted.

We have made a considerable effort over the past several months to turn our performance in British Columbia around. I have personally made a number of trips to British Columbia, along with Mike Plymack and others. I'm pleased to report that we have achieved considerable success over the past two months in improving our performance against all of the key performance metrics set for our efforts.

We are confident that we will be in full compliance with all performance requirements by the end of December, and at that time we can begin to reduce the additional resources that we had to assign over the last couple of months to make sure we perform as required. As Rich indicated, we're also confident that our internal financial position on the project will be substantially improved by the second half of the year.

In addition to our work in Texas and British Columbia, we also have initiated a major effort to improve the performance of our Systems and Consulting practices. We started this effort by putting our new Consulting and Systems teams in place. We have also taken steps to strengthen our marketing efforts in these areas. We are also prepared to eliminate additional businesses if we cannot make them sufficiently profitable. Overall I'm well aware that a lot of people are watching to see how we will do in implementing our big new projects and taking on additional challenges.

Some of this concern is well-intentioned; some of it is the types of things that competitors say when they see someone else that is succeeding. I am confident that we have the team in place that will make us successful and that we moved aggressively to take the right actions with our team.

As a final element in our strategy for fiscal year 2005, we're committed to continuing with the sales and growth efforts that we started this past fiscal year. We have started a major national marketing effort to take our success story in Texas and in our Health Services practice to all states to take advantage of the major opportunities that exist in Eligibility Services and health care cost containment and management.

We also are planning a major effort over the next year to expand our Consulting business, which is another one of the reasons what we hired Bob Sullivan. We see a wide range of new opportunities in such areas as child welfare, education and in fraud and abuse control.

Further, we have started a major new marketing push in the federal area under the leadership of John Boyer and Drew Cramer, drawing on each of their long experience with the federal government. We won almost $100 million in projects this past year at the federal level without a strong single federal marketing focus. We believe that we can substantially expand on this effort the new organizational changes that we've recently put into place.

Finally, let me say something about our acquisition plans for fiscal year 2006 and beyond. We know that we have a strong cash position to support a more aggressive acquisition effort. However, we're just not going to spend money because we had it or try to buy our future growth. We do not believe that either of these strategies has any chance to be successful in the long run.

Instead we have taken time to get our house in order and to select our acquisition priorities. We are now ready to move more aggressively on to the acquisition front and can expect a more assertive acquisition and investment effort from MAXIMUS. At the same time, we will continue to be careful in how we spend our money and balancing our strategies between organic growth and acquisition growth. I'm not sure that we will acquire any firm in this process, but we are going to accelerate our search efforts.

I have been talking personally for both myself and our Board. You can be sure that we will define our sweet spot so to speak for acquisitions and that we are only going to go after firms in this sweet spot. We're not going to just go after opportunities that come before us, no matter how attractive they may appear. This is both my own philosophy and the philosophy of our Board.

I would now like to turn to our outlook and growth prospects. We're confident that we can begin double-digit growth this year. We also believe that we're in a position to continue to improve on this performance over the next several years.

There are two major regions for our confidence besides the new team that we have put in place and the new processes that we have implemented. First, we have the opportunity to substantially improve our profitability and our growth in earnings if we can just complete all of our projects as planned. Namely even though we achieved a 10% operating margin in fiscal year 2005, we spent over $12 million fixing underperforming jobs and the onetime legal fees and added reserves for Accounts Receivable.

If we can just avoid half of these types of expenses this year, we have double-digit earnings growth, even if we do not sell any more work than the work that we have already sold. This is another of the reasons why we have added so many new and more experienced faces to our organization this year. The type of improvement that is possible is shown on the exhibit that is included as part of the presentation that we have provided for this analyst call for those of you who may be reading along.

And a second reason why we are positive about our growth prospects, we are also encouraged by the many new wins that we had this past year and by the additional prospects that exist in the markets where we have been successful such as Eligibility Services, Health Care and Human Services. We also believe that we have major new opportunities in some of the areas where we have not been as successful in recent years such as in our Consulting and Systems practices.

Overall, as I will discuss in more detail shortly, we have a strong pipeline and a solid starting backlog, putting us in an excellent starting position for this next year.

Moving on to rebids and options, we came off 2004 with a couple of rebid losses that forced us to evaluate how we were doing. We pushed our staff to new heights of customer satisfaction. With no major rebid losses, we turned around our overall success rate in 2005.

We have also started off 2006 on the right foot. Of the 17 rebids that we expect in 2006, which had a total contract value of $188 million, we have won our first rebid. This is for a small $2 million rebid in our Airport Consulting practice, leaving 16 rebids remaining with total value of $186 million.

Since our last call, we also exercised our options for year two and year three of our California Health Care Options project, which is one of the largest Medicaid enrollment broker projects in the country. These options were for $80 million. These options were included in our 1.4 billion of signed contracts for fiscal year 2005.

Overall we started fiscal year 2006 with 14 options. These options have a total contract value of $77 million and a fiscal year 2006 revenue value of about $20 million.

Moving into our sales pipeline and backlog, as I said earlier, fiscal year 2005 was a record sales year for MAXIMUS with over 1.4 billion in signed sales. We also have an additional $177 million in awarded but unsigned contracts. Our sales pipeline remains robust with many new opportunities at all levels of the pipeline.

As of November 17, our pipeline totaled $1.1 billion and consisted of proposals pending of $233 million, proposals in preparation of $160 million and RFPs tracking at $671 million. This only includes opportunities where we expect RFPs in the next six months such as it does not include some of the biggest opportunities that we are pursuing in the areas of Health Care and Eligibility Services.

Finally, with respect to our backlog, our contract sales in fiscal year 2005 drove our backlog to record levels, totaling $1.7 billion. As noted in our press release, of our forecasted revenue of 710 to $725 million, approximately 82% is in the form of backlog. This gives us added confidence that our fiscal year 2006 guidance is achievable.

To close, we had our annual firm off-site meeting in California two weeks ago. At this meeting, we committed to move MAXIMUS from a good firm to a great firm, borrowing the theme from the recent book by Jim Collins. Our entire team and our Company are committed to this objective. We met our goals this past year. We have set even higher goals for this year, starting with our objective to return to double-digit growth. We're confident that we can achieve this objective.

And with that, I will open it up for questions.

(OPERATOR INSTRUCTIONS). Anu Ragrana (ph).

Great quarter, guys. Could you please give us an idea about the general environment for state and local business? Also, we have been hearing that some other companies who were not doing so well in the commercial space is now targeting state and local market more aggressively. What are your thoughts on that? And lastly, could you please give us some idea of what your expectations for cash flow and CapEx are for next year?

Okay. It is Lynn Davenport, first. We're pretty strong about the state and local space. As you know, we had a really strong sales year. We had about over $1 billion in things we are looking at. We see strength in a couple of areas. We see states looking very hard to restructure their whole welfare programs, and that is leading to all this work in eligibility systems that we see in Texas, and we now are pursuing opportunities in about 10 or 12 other states that are looking at Texas type projects.

Health care is a major concern in this country. As you know, health care cost containment. We have about 14 major states, plus British Columbia, where we have major health care projects right now, and we see more opportunities in that area. We see opportunities to go beyond the kinds of services we're in right now to get to more specialized parts of the health care practice, the aid to blind and disabled for example.

We see increasing opportunities at the federal levels to take some of our state's high bids. We see also other parts of the state level -- state and local are pretty strong. We see strength in education. We see a lot of concern with areas of fraud abuse and recovery that a lot of states believe that there is a lot of money out there that has been erroneously paid out for all kinds of various programs, and so we recently won a major project with the federal CMS and the state of New York to help those two states put in place fraud abuse control programs, and we think there is a big opportunity.

So net net we see good opportunities. I think there's a couple of things about it. One is it is much more competitive than it was five or 10 years ago. We are bigger firms all pushing the same opportunities, and second, the leadtimes tend to be longer. The Texas project, as you may know, was almost a year and a half in terms of sales process.

So we see I guess some good opportunities, particularly in the outsourcing with outsourcing technology flavor, a little bit longer leadtime, more competition. Overall we are pretty positive about the state and local practice area.

Your second question, Rich, why don't you take that was on --?

I would be glad to do that. I think you asked about expectations for cash flow and CapEx in fiscal '06, is that right?

Yes.

Let me give you some of the touch points as it relates to cash flow items. On capitalized software, we capitalized about $11 million in fiscal '05. We expect that that will be about the same level in fiscal '06. It could be a little bit higher depending on activity levels. The amortization of that I expect will increase from the $7 million we had in fiscal '05 perhaps a couple million dollars as we bring on line a couple of these larger capital software initiatives that we have been working on.

You should also be aware that from a fixed asset perspective, a CapEx activity perspective, we ended the year with about $30 million -- $31 million on our balance sheet for fixed assets. We expect that FY '06 CapEx activity will be comparable to the FY '05, which was about $13 million in gross adds. Behind this is we had activity for BC in '05, as well as other startups. We also had some -- we do have some infrastructure improvements that we are working on in FY '06. This would include most notably we are expanding our datacenter capability as you would expect as we have these additional projects.

And I would also say asset expenditures may increase. We are taking a hard look at an ERP system in FY '06 depending upon that project. That would require CapEx.

From a depreciation perspective, it is going to increase somewhat over '05. Again, the ERP is a little bit of a swing factor. It could increase a couple million dollars over '05. Does that help?

Thank you so much.

John Mahoney, BB&T.

Good morning. Can you give me some feel for how the legal expenses are going to be on an ongoing basis? Is there anything left? (multiple speakers). On a quarterly basis, how are they going to run through '06?

My commentary on the legal expenses are that we have separately broken out the legal expenses related to this one extraordinary legal matter, the STI matter. We do have ongoing legal expense ordinary routine that will continue to incur.

Then I would tell you, John, it would not be anything that stands out from a trend perspective in SG&A. We did provide for -- in the $5.5 million, we did provide for an estimated additional legal costs to take us to what we think is the completion of the second phase of the matter. And again, that is an estimate. So for the next two to three quarters, I would not expect anything related to that. If it protracts beyond that point in time, we may start to incur additional expenses beyond that point. (multiple speakers)

Included in the 5.5 is expenses you included when you (inaudible) Georgia, you kind of took it all upfront?

That is correct, John.

For the options expense, did you model something in the -- I think I'm trying to back into it, but something in the 1.5 a quarter range?

I'm sorry, you broke up. For which expense?

The options expense, 123R?

For option expense, that is right. In this year it would be the impact would have been about $0.16 in fiscal '05, and on ongoing basis, we think it's going to be in the range of $0.16 to $0.17 a share -- $0.16 to $0.20 a share.

So that is like 1.5 million pre-tax?

I think that is right.

John, it is Lisa Miles. I just wanted to make one point clear on the 5.5 million in the legal expense. Those estimated legal expenditures either included in that 5.5 million are only for legal expenses and not potential settlement-related expenses.

Okay. I have got you. And another question. The 10 to 13%, is that going to be -- you gave us some guidance of the 39 to 41 for the first quarter, but not on the revenue line. Is the 10 to 13, is that going to be more driven towards the back half? And can you comment on how the quarters are going to roll out in terms of your expectations for revenue growth?

Yes, I would tell you that I would expect that it is going to be more towards the back half. That is when we tend to experience our growth. Our first quarter tends to be a relatively flat sequential quarter.

But on a year-over-year basis, can we expect something in the high single digits still? Or should we start to expect to see that 10% on a year-over-year basis in the first quarter?

On a year-over-year basis, you should see improvement in the first quarter, and I think if my data is correct, the first quarter of fiscal '05 was $152 million.

(OPERATOR INSTRUCTIONS). George Price, Legg Mason.

Good morning, everyone. Nice quarter. I wanted to -- you answered the stock comp expense question. But, Rich, is the interest income -- first of all, I guess is the 1.3 in interest income, was that all interest income, or was that most of it? Was there anything in (multiple speakers)

That is most of it, George, and I think you saw it increase meaningfully kind of in the second half of the year. We expected that that is going to continue until such time as we do something with our cash.

All right. So that kind of level should be pretty consistent?

I think that is reasonable.

Okay. Then what is that -- I guess I will obviously be doing the math, but what does that translate based on the guidance into operating margin expectations from your perspective?

So that I understand your question, what does the total or the --

Just based on the revenue and the EPS guidance, what is your operating margin outlook look like for '06? (multiple speakers) And if you can distinguish if it includes or excludes the stock comp?

Let me talk about that. First off, just to kind of set the base on -- let's talk a little bit about FY '05 margin, which the operating margin -- and I believe this is before the other income expense -- was 9.8%. And year-over-year that is down from FY '04 of 10.4%, and it is slightly improved sequentially and pretty much where we expected it to come in at 9.8%. That is pre-123. And when we talk about 123, 123 impacted us I would say about $0.16 in the year. When you run the numbers, I think you'll find that that costs us about 90 basis points in margin. That is right -- .9% or 90 basis points in margin. So if we took FY '05 and adjusted it downward, it would be 90 basis points -- roughly 1%. So we would be -- we would have been had we adopted 123 in '05 at 9%.

So, as we look forward to FY '06, I will talk a little bit about the dynamics in the margins here. We still think 10% is attainable in FY '06 even after 123. An interesting way to view this also is that would mean if we did not expense options in FY '06, we would be in the 10 to 11% range, which would be improvement over FY '05, again pre-123.

The key factors you need to think about when you think about margin from MAXIMUS, obviously make sure you have this 123 clear before and after. It is a confusing factor in '05 versus '06, again it is about a 1% impact year-to-year. Two, British Columbia, and we do have some seasonal work in our Workforce Services business that really does have a pretty significant impact on us. Particularly it is strong in the third and fourth quarters, and as a result, the first quarter, the December quarter, tends to be weaker. So this December quarter will be tempered because of that seasonal Workforce Services business and because we continue to have the startup costs associated with British Columbia.

The other important factor that you need to consider is mix. We are moving towards larger outsourcing jobs, and as we have always talked, the larger outsourcing jobs tend to have less margins than some of our traditional lines of businesses, Consulting and Systems. And also federal work, and we are doing more federal work, has lower margin associated with it.

And I want to put a side note in here, and that is that while it does the outsourcing and federal work does carry lower margins, it does offer accretion to us in the form of substantial revenue growth, and it is reoccurring nature. I think that is very important.

So when you put all of this together, when we looked at FY '06 operating margin behind our estimates of 10 to 13% growth top-line and bottom-line, we've got an underlying 9 to 10%, I will say, post-123 after expensing options operating margin, which I think is on the conservative side. We do have additional upside in that margin that I think is real. Lynn touched upon some of these things, but that would come from tight project management, getting more profit out of our existing book of business, A/R management to make sure that we don't have to have reserves, you know, our normal amounts and just general prudent SG&A cost management.

One last point on margins is I do think that -- and this will be subject to a major mix shift. I do think the underlying demand and pricing dynamics in our business still support margins increasing above 10% towards 12%, and that is after expensing options.

Okay. What -- just to follow-up on that because you draw the target upwards of 12% that you talked about before, what do you think -- you know, what is your guess on the timeframe? What are you guys thinking about that internally?

You know, my thoughts is from a timeframe perspective, and I know Lynn is anxious to maybe add something here, but my thinking is let's solidify the 10, get it moving north of 10. The real swinger is going to be the mix of the new work that we win. So I think it's going to be a horserace between the larger outsourcing jobs -- do they win proportionally more than the Consulting and the Systems work?

We are pushing. We have a 10% range that we saw in the numbers, but we think internally we can do better. We have really challenged our team to do better. There was that one chart you may have seen in the presentation that talks about good year notwithstanding. That was as many as $12 million that we spent to fix problems, legal expenses, etc.

We have our offset -- our annual meeting a week ago, and I put that chart up there. I took a chance and put it before you folks. I really wanted to challenge our people to show internally how much better it could be with just a little bit better habits and practices internally. One of the reasons we brought in new people from bigger firms who have seen bigger problems with a different kind of very aggressive attitudes, people like Sue Pepin in terms of control process, and we are trying to build a whole focus on control and delivery to really help us drive our internal performance and profitability.

So we have told our folks internally the goal is 12%, and we are pushing towards that. So we have a whole process focused on that now.

Are we going to achieve it and when? Time will tell. But we're certainly putting our pressure on our processes to push towards that.

Charles Strauzer, CJS Securities.

I've got a question for Rich and a question for Lynn. Rich, just some general help on the assumptions in your guidance if you can on share account, tax rate, cash tax expectations? And then, Lynn, your question basically on the M&A front. You talk about the sweet spot that you focus on. Can you help us better define the sweet spot? Things like the ACS business that was just recently sold. Is that something you had looked at? Is that something you would consider to be in that sweet spot?

All right, Charlie, I will go first. You asked about tax rates assumed. We've been running at a 39.5% effective tax rate. We are proud to be one of the highest taxpayers, I think, in our industry. And we are continuing with that assumption and the fact is, we just do most of our business is domestic and we don't have a tremendous opportunity for international tax planning. We do a little bit but Canada has a pretty high rate as well, as you probably know.

From a weighted average share outstanding perspective, we have not assumed a whole lot of dynamics. We ended the quarter with $21.8 million in WASOs (ph) and for purposes of modeling FY '06, you may want to tweak it up a little bit, not extensively because the stock prices can be a driver in that so I would nudge it up a little bit.

And then just your expectations on cash taxes? For the next year.

I think it is going to be -- it is going to repeat. We do get some seasonal fluctuations from some of the tax aspects of our business. I expect that seasonality will repeat but year-over-year I don't see any major swings.

Let me turn to the M&A questions. We do have a strong cash position upwards of $200 million and in this past year, we chose purposely to not start spending that amount of money. We wanted to get our internal operation ready. We wanted to make sure we could integrate and bring in new firms. Clearly it is part of our strategy. We are ready now to start looking at acquisitions as a full component of our strategies.

My points were to suggest that rather than just -- we get a lot of the people coming before us constantly with companies to buy. And some firms have taken a strategy to basically build to acquisition. That is not our strategy. We want to be a real strong firm that has a strong organic growth, acquisition support our strategy. We use our cash carefully. And so when we start a process internally, we're trying to figure out where, exactly, is that sweet spot? Where should we focus? Where are the companies that would be strong companies that would fit within our strategy that will allow us to take our growth agendas and make them stronger? We don't want to fix problems by bringing in a company. We want to take areas of growth and make us our chance of growth even stronger in those areas.

So that is our strategy. In terms of some of the general areas we're focusing at, when you look at our priorities, right now we think our strongest opportunities are in the areas of eligibility systems and services, health care, federal government, technology. Maybe a little bit of education.

So those are clearly the areas we're going to be looking to make acquisition considerations; and that is kind of the focus and that is the process we're starting.

You asked about the ACS property. We did look at the ACS property. And we were -- we're not in a position to be able to disclose the decision but we just did not think that was the right property for us for various reasons.

Got it. And if I look at your EBITDA what you're trading versus EBITDA, you're trading a little bit under eight times right now on your estimated '06 EBITDA function. Is it going to be harder for you to find accretive acquisitions? Or are you prepared to find -- if you find the right property to take something on that you think with the proper integration into your Company and the prospects that could be accretive, maybe 12 months out, or are you prepared to make those kind of acquisitions?

Yes, we want to buy companies that are fundamentally we think strong companies or have a strong product that are going to make us a stronger firm. Now obviously you would like to buy the company that is not very expensive and highly accretive and life would be wonderful. It won't be quite that way. We are going to be looking at, let's say, a couple of factors -- price, accretive capability and just what value they bring to our Company long-term. Because if a company is somewhat less accretive, how do they fit our long-term strategy? Do they ultimately -- and can we see very clearly that we're going to have a position and there is going to be a situation where our Company will be substantially stronger by bringing in a less accretive company. So it is those factors.

It is accretiveness, it is fit with our company, strategic value and price. Those are the factors we kind of wrestle with in our little stew, if you will.

Matthew McKay, Jefferies & Co.

First of all, can you talk a little bit about Texas and just what the plans are for hiring over the next couple of quarters there?

Okay. Texas, as you know, we are fully engaged. We are teamed -- partnered with Accenture, and the two firms are really working I think well together as a firm and working well with the client. There is a series of the immediate deadlines coming up. The week after Thanksgiving, we begin the first phase implementation in our CHIP program. That is the Children's Health Insurance Program. And we are all geared up pretty hard for that.

In January the first of the rollout of the big integrate eligibility project starts, and so we have been working for the last really year to put our operations process in place and to build the computer systems support. And that process is an intense process, but I think it is going along. It is on schedule. We have put an intense amount of attention as has Accenture in the state, and I think it is going okay.

In terms of the buildup of people, we have been building people up. We have been hiring quite a few people at the management level. We're going through a process now to be recruiting. That process is underway to be recruiting and adding additional people to support the project. We're going to have in excess of I believe it is another 1000 people or more we are bringing on to the -- excuse me? (multiple speakers) By the end of the year, another 1000 people or so. So there is a pretty active recruiting process, and we have a whole team of development -- of training people and recruiting people, going through a very structured process to bring people on board and prepare them. A number of those people will be getting their official jobs in Midland, Texas the week after Thanksgiving.

Okay. Great. So it has been relatively smooth in terms of being able to attract employees and everything seems to be going according to plan on that side?

Very intense project. It is in a fishbowl. We kind of like it being in a fishbowl. Everybody from the federal government to the state is watching it. But I think it is going along okay. We have a strong team, and they have been working very hard on it.

Great. Then IF I just turn over to BC, you talk about allocating some increased resources there through the end of December. You know, can you just -- just accept the risk associated with that contract now just if it's potential finds, if you don't execute or if there is something greater there just so that we understand what the risks are associated with the contract?

Let's go back and talk about the whole British Columbia project. We won the job about a year and a half ago, a year ago. We went through a long buildup process. The job became operational April of this past year.

What we're really doing is taking over a major responsibility for the administration of the Canadian's universal -- British Columbia's Universal Health Care Program. The job has a major large call center and operations piece, and it also has -- they are building a new computer system to support the operation. And we're doing this project in another country and we're doing it in a union environment, so there are some things here a little bit different.

And we came out of the box doing some good things in April. For example, previously about 40% of the phone calls were never answered. They were just allowed to ring. So we are answering all phone calls. Everybody that calls now gets somebody to talk to. But there is two major kind of requirements in this job. One, answer the calls on time, and second is to register people's paperwork to get them onto the health care program. And the first thing that happened in May, there was really a huge increase. Average calls have been averaging around 80,000 a month. They almost doubled in the month of May.

So all of a sudden we found ourselves in a new situation with a lot more calls. And we had some problems. We fell off the performance standards for both registering calls and responding to calls, registering claims and responding to calls. So we did get a few penalties, and we cannot talk about the specifics of that.

We put a huge amount of energy to getting this job turned around. I myself have been up there a number of times with Mike Plymack and others. We added a whole number of additional people. We brought in management people. We modified the computer system. We changed processes, and at this point, we have seen some pretty substantial performance results from the last couple of months. In the month of October and November, we were handling all calls from both providers and beneficiaries within the time standards. And our backlog of cases to be processes, the paperwork, which is about 160,000 in June and July, is now down to about 40,000. And our commitment to the ministry and to British Columbia is by the end of November we will have the backlog under control, and by December we will be on target with all the various performance requirements. And I think we're doing that pretty well. I think we're going to make that performance. We have worked really hard with the union and our employees to build a really good process. I think that is starting to work pretty well.

The last piece of the project is to get the computer system in place. We have made some modifications in that strategy. We are working with the client to bring that along. We have a major implementation in January, which I think is going to be the start of the implementation. That is going to be positive. And I was up there last week and I was saying, well, are we deriving benefit? I think we really are. We are handling all calls. We are handling calls at higher performance levels than previously, and we are less expensed than what the program was previously, and we have put in place a Web-based solution in January and April and May as there is a series of rollouts. I think we're going to have a substantially better program for the recipients. So that is good.

Now, it has cost us some money to bring a lot of people to fix the problem, and that has had an impact on our financials. Beginning in January, those individuals will be rolling out. We're going to be reducing our staffing. And so that is going to have -- and also we put our computer system in place. It's going to have an additional automated improvement. So we think in the second, third and fourth quarter, the job is going to improve financially quite a bit.

Also, we think it's going to be a good job, a good job for the province and a good job for MAXIMUS. We have had to work hard to get back to where we want to be, and we think we made that effort, and we think we suffered a little bit financially, but we think we're going to be able to turn this into a positive.

In fact, if anything in our financials, we have been very conservative in how we have projected for this job, just in case. And what we told our people is that guys, we can substantially improve our conservative financial position on this job, but we have a bottom-line impact that you have seen our numbers looking ahead. So that's kind of how we see British Columbia. I talked a lot. Did I answer all your questions?

Yes, yes, absolutely. Thank you very much.

Jason Kupferberg, UBS.

Just to build on your comment there on the BC contract, can you help us understand in terms of dollars what the extra costs have been that you have incurred to hire these people in order to improve performance against the service level agreements?

We brought in about 90 to 100 people. I don't want to get into the costs. We really don't want to get into project financials, but suffice it to say, we made a major commitment of people to show our commitment to British Columbia and to the ministry and to the people up there. And I think that has said an impact.

And now what we're trying to do is kind of second phase, is make sure the efficiencies are in place so that we can on an ongoing basis provide better service with less people.

Okay. And, Rich, just to clarify something you said earlier about the breakeven point on the contract, I think you said that has been pushed out to the second half of I think you said next year, but I was not clear if you were referring to fiscal '06 or fiscal '07?

Fiscal '06, Jason.

Second-half of the current fiscal year, you are expected to be at breakeven?

That is correct.

Okay. How do you guys feel about the size and the composition of your salesforce relative to the pipeline of contract opportunities? It seems to be pretty robust out there. But spread across a range of markets, if you can talk about that a little.

Good question. Obviously we find ourselves now with bigger opportunities and bigger firms to compete against. We have made major increases in our sales force. We are going to be doing more. We have also, for example, in this most recent reorganization, we did not talk about that, but Bruce Caswell, who is a pretty strong marketing person, is taking over our Operations practice, but we also have Mike Plymack who is a very strong delivery person working hand and glove with Bruce to really make sure we can deliver. So that is the kind of thing we're starting to do to make sure we have the muscle for both delivery and sales at the same time.

Now their challenge is to build underneath them so that we really have even more depth. But clearly we're constantly looking at the cost of spending in advance of the wins versus the cost you need to make sure so that you win. So it is a trade-off. We just don't want to spend a (inaudible), but we clearly are building more marketing muscle. We are also challenging our people to be better marketers.

We have over 5000 people working for the firm. Each one of those persons should be an excellent marketer, and that is a very large salesforce. Not everybody right now sees themselves as a marketer, so we've got to get them out there, too. So we are making investments in the marketing area, definitely.

Okay and last question on the M&A opportunity. Can you give us a sense as to how large the opportunities you might consider? Obviously you have no debt on your balance sheet. Would you consider adding a bit if a large opportunity presented itself that met the criteria you described earlier?

And along with that, have you guys used up any areas of the management team in terms of corporate development type functions to kind of promote a more aggressive M&A approach?

Yes, let me take the first. I kind of have to talk about Rich. We I think are generally going to be targeting larger acquisitions. I don't think I want to define what large means. But you know looking at MAXIMUS we have historically gone for much smaller companies, almost in the 5 to $15 million range. We don't think that is going to be a critical mass for us going forward unless there's some small company with just a product of all-time. So we're going to be targeting larger companies, and I will probably leave it at that and let Rich make a comment in just a second.

You asked about, have we beefed up our team in terms of M&A? Yes, we have. We brought one individual on working with Rich who is strong, and we are also looking at some other external options to bring in people with very strong senior M&A capabilities, and that is kind of an ongoing discussion we're having right now with individuals.

Yes, I would complement what Lynn said, Jason, as it relates to the size of acquisitions. And obviously there's a practical limit that we would reach, but we do have a lot of cash. And that goes an awful long way, $178 million. We do know that if necessary we could leverage although long-term leveraging is not really -- is not something we would prefer in terms of capitalizing the firm. It would be an interim situation if we had to do it.

So if you add those two together, you could imagine MAXIMUS doing a much larger acquisition. But again the size of the acquisition is not really the driver. It is what Lynn spoke about earlier in terms of fit. Does it create value? Does it hit our sweet spot? I will tell you we're going to try to avoid smaller ones unless they are very easy and easy tuck-in type situations. Hopefully they gives you a little bit of a feel in terms of what we're looking at.

Sorry, if I can just squeeze in one more. On the 17 million, I think that was the number you said in terms of outstanding potential legal liabilities related to the fraudulent employee lawsuits, what are the next steps there in terms of that making its way through the courts or where are we in the process there?

Dave Francis is our General Counsel who is here to answer that question for you, Jason.

Hi. We previously disclosed three plaintiffs involved in the overall lawsuit -- De Lage Landen, Fleet and Solarcom. The Pennsylvania settlement took care of De Lage Landen. The Fleet and Solarcom claims are now pending down in Georgia. We don't have a trial date set for that yet. Our best guess is probably sometime late in the spring of '06.

Very helpful. Thank you, guys.

At this time, there are no further questions.

We would like to thank everybody for joining us today for our fiscal 2005 year-end conference call, and management will be around for any further follow-up questions. Thank you.

Ladies and gentlemen, a replay of this call will be available to you within the hour. You can access the replay by dialing 1-800-207-7077 and entering PIN number 4267. (Repeats numbers).

Ladies and gentlemen, this concludes today's presentation. Thank you for your participation. You may now disconnect.