ITEM 1. Business.
Overview
We
are a leading provider of program management, consulting services and systems
solutions primarily to state and local government agencies throughout the
United States. Since our inception in 1975, 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 and cost-effective while improving the quality of
services provided to program beneficiaries. We have had contracts with
government agencies in all 50 states, 49 of the 50 largest cities and
27 of the 30 largest counties. We have been profitable every year since we were
founded. For the fiscal year ended September 30, 2001, we had revenues of
$487.3 million and income, before the cumulative effect of an accounting
change, of $40.1 million.
We
conduct our operations through three groups: our Government Operations Group,
our Consulting Group and our Systems Group. Our Government Operations Group
administers and manages state and local government programs on a fully-outsourced
basis. Examples of these programs include welfare-to-work and job readiness,
child care, child support enforcement, managed care enrollment and disability
services. Our Consulting Group provides specialized services such as assisting
state and local agencies in maximizing federal funding for their programs,
program planning and quality assurance services to state and local government
agencies, cost allocation services, and other general management consulting
services. Our Systems Group provides state and local agencies with systems
design and implementation to improve the efficiency and cost-effectiveness of
their program administration. We offer our own suite of proprietary software
products in addition to customized versions of popular applications such as
PeopleSoft®.
See the notes to our consolidated financial statements for financial
information on our business segments.
We
believe that we are well-positioned to benefit from the continued increase in
demand for new program management, consulting services and systems solutions
that has arisen in an environment characterized by changing regulation and
evolving technology. We believe that fiscal pressures will compel state and
local governments to continue to rationalize program operations and upgrade
existing technology to operate more cost-efficient and productive programs. To
achieve these efficiencies, we believe that many government agencies will turn
to outside experts, including us, for help.
Market Opportunities
We
believe that providing program management, consulting services and systems
solutions to government agencies continues to represent significant market
opportunities. The federal, state and local government agencies in the United
States to which we market our services spend more than $250 billion
annually on health and human services programs including Medicaid, Children's
Health Insurance, Food Stamps, Child Support Enforcement, Supplemental Security
Income, Temporary Assistance to Needy Families, and various other programs. Based
on currently available data published by the federal government, we estimate
that states spend over $28 billion annually to administer these programs,
of which we estimate only a small portion was outsourced to private service
providers, including us. We believe that state and local government agencies
will increasingly rely on private service providers to administer their
programs and will also increasingly engage consultants as they seek to reduce
costs and improve the delivery of services. The following table describes the
market for our services:
Legislative Initiatives
During
the last several years, there has been a significant increase in legislation
and initiatives to reform federal, state and local health and human services
programs, including the Welfare Reform Act of 1996, the Balanced Budget Act of
1997, Government Accounting Standards Board Statement No. 34 and the
Health Insurance Portability and Accountability Act of 1996.
Welfare
Reform Act of 1996. The Welfare Reform Act was one of the most
significant of the legislative reforms and restructured the benefits available
to welfare recipients, eliminated unconditional welfare entitlement and, most
importantly, restructured the funding relationships between federal and state
governments. Under the Welfare Reform Act, states receive block grant funding
from the federal government and may no longer seek reimbursement in the form of
matching federal government funds for expenditures in excess of block grants.
Accordingly, states bear the financial risk for the operation of their welfare
programs.
All
states and many local governments are taking action to respond to welfare
reform. Some of these actions include enlisting the advice of specialized
management consultants on ways to more efficiently and effectively administer
their health and human services programs and in many cases outsource the
management of such programs completely. As a result, we have been awarded
performance-based contracts to manage health care enrollment services
contracts for government agencies in states which include California, New York,
Texas, Massachusetts, Michigan, New Jersey, Iowa, Kansas, Colorado and Vermont.
We have also been retained by numerous states and municipalities to provide
welfare reform related consulting services.
Balanced
Budget Act of 1997. The Balanced Budget Act established, among
other programs, the State Children's Health Insurance Program. This program
provides federal matching funds to enable states to expand health care to
targeted uninsured, low-income children over a five-year period. Under the
Balanced Budget Act, the federal government made $39.7 billion available
over ten years to states with federally-approved plans to expand state
Medicaid programs, initiate new insurance programs or combine programs. In
June 1998, the federal government also mandated sweeping protections to
Medicare beneficiaries, including increased access to health plans by persons
with pre-existing illnesses, added protections for women and non-English
speaking beneficiaries and increased availability of specialists. We have
capitalized upon these new opportunities by assisting states in planning,
implementing and maintaining the increased enrollment and outreach required by these
federal initiatives.
Governmental Accounting Compliance. Another emerging
market created by changes in legislation or government policy is helping states
and municipal governments comply with Governmental Accounting Standards Board
Statement No. 34, adopted in 1999. GASB 34 requires government entities to
properly value and account for their capital assets and infrastructure.
Compliance with these new rules is being phased in over a five-year period
beginning in 2001. Our Consulting Group is well-positioned to assist states and
municipal governments in complying with GASB 34 as it has the requisite
experience to perform all the services necessary to ensure compliance. To date,
we have entered into 120 contracts to perform these services valued at approximately
$4.5 million.
Health
Insurance Portability and Accountability Act of 1996. The Health
Insurance Portability and Accountability Act requires health care programs,
including Medicaid, Medicare and most government-funded health care
programs, to comply with new regulations governing billing and payment
policies, exchange of eligibility and enrollment information, referral and
authorization processes for medical services and ensuring patient privacy.
Accordingly, each state will need to evaluate and update its Medicaid
Management Information Systems, a process with which we are well-positioned to
provide assistance.
Market Outlook
We
believe that the legislative changes described above, when combined with
political pressures and the financial constraints that inevitably result, will
accelerate the rate at which state and local government agencies seek new
solutions to reduce costs and improve the effectiveness of health and human
services programs. We believe that government agencies will continue to turn to
companies like ours to achieve these ends. We believe that we administer
government programs more effectively than government agencies themselves due to
our ability to:
• attract and compensate experienced,
high-level management personnel;
• rapidly procure and use advanced
technology;
• vary the number of personnel on a project
to match fluctuating work loads;
• increase productivity by providing
employees with financial incentives and performance awards and by terminating
non-productive employees;
• provide employees with ongoing training
and career development assistance; and
• maintain a modern and efficient work
environment that is more conducive to employee productivity.
We
believe that state and local governments will continue to seek our services
despite the effect of economic cycles on government budgets. Historically, in
times of both budget surpluses and deficits, state and local governments have
relied on the private sector to deliver services to their citizens. In recent
years, as governments at all levels have experienced budget surpluses, new
programs, including the Children's Health Insurance Program, have been
initiated to assist even more sectors of society, increasing the population of
beneficiaries of our services. In more austere times, the population enrolled
in existing government health and welfare programs expands, requiring
governments to spend more to administer these programs, while facing increased
pressure to do so cost-effectively. Because our contracts are typically volume
based, our business has continued to expand, even in depressed economic cycles.
Competitive Advantages
We
believe that we have been a pioneer in offering state and local government
agencies a compelling private sector alternative to internal administration of
government programs. The following competitive advantages position us to
capitalize on the significant market opportunities presented by changes in the
ways government provides services.
Single
Market Focus. We believe that we are the largest company
dedicated to providing program management, consulting services and systems
solutions primarily to state and local government agencies. We have accumulated
a detailed knowledge base and understanding of the regulation and operation of government
programs that allows us to apply proven methodologies, skills and solutions to
new projects in a cost-effective and timely fashion. We believe that the depth
and breadth of our government program expertise and related areas of government
program management differentiate us from both small firms and non-profit
organizations with limited resources and skill sets as well as from large
consulting firms that serve multiple industries but lack the focus necessary to
understand the complex nature of serving government agencies.
Proven
Track Record. Since 1975, we have successfully and
profitably applied our private sector approach to assisting state and local
government agencies. We have successfully completed hundreds of large-scale
program management and consulting projects for state and local government
agencies serving millions of beneficiaries in nearly every state and we
currently have more than 4,000 state and local government agency clients. We
believe that the successful execution of these projects has enhanced our
reputation for providing efficient and cost-effective services to government
agencies while improving the quality of services provided to program
beneficiaries. Our reputation has contributed significantly to our ability to
compete successfully for new contracts.
Ability
to Respond to RFPs. State and local government agencies award
contracts to third party providers through a lengthy and complicated bidding
and proposal process. We have significant experience in assembling the large
amounts of information required to submit detailed proposals in response to
RFPs in a timely manner. In addition, the expertise and experience of our
managers and employees enables us to accurately estimate project costs and
productivity levels. As a result, our proposals allow us to meet RFP
requirements and to earn a profit. Coupled with reluctance on the part of
government agencies to award contracts to unproven companies, we believe that
our ability to respond to RFPs has contributed significantly to our success.
Proprietary
Program Management Solution. We have
developed a proprietary automated case management software program called the
MAXSTAR®
Human Services Application Builder. The MAXSTAR program tracks program
participants, interfaces with government databases and monitors cases of
program participants. MAXSTAR reduces our project implementation time and cost
because it is easily scalable and customizable and facilitates our project
management capability by enabling us to organize and manage large amounts of
information necessary to operate programs effectively. Because government
agencies are often required to manage vast amounts of data and large numbers of
cases without access to advanced technology and experienced professionals, we
believe that MAXSTAR, together with our experienced information technology
professionals, is a key element of our success.
Wide
Range of Services. Many of our clients require their vendors to
provide a broad array of service offerings, which many of our competitors
cannot provide. Engagements often require creative solutions that must be drawn
from diverse areas of expertise. Our experience in a wide range of services
enables us to better pursue new business opportunities and positions us to be a
leading e-government consulting and implementation force, as well as a single-source
provider of program management, consulting services and systems solutions to
state and local government agencies. Our broad client base facilitates cross-selling
opportunities among our Government Operations, Consulting and Systems Groups.
Additionally, our acquisitions have provided us with expanded service
capabilities and an additional base of established clients.
Market
Leading Consulting Capabilities.
We believe we have the largest management consulting practice dedicated
to serving state and local governments in the United States. We believe that
our Consulting Group provides us with significant competitive advantages
including:
• a significant pool of experienced
consultants with an established knowledge base and valuable relationships with
members of the executive and legislative branches of state and local
governments;
• methodologies that can be easily
replicated and customized; and
• a more predictable source of revenues due
to recurring revenue streams from our renewable contracts.
In
addition, we offer a broad suite of services that are increasingly sought by
state and local governments seeking a single-source provider of program
management and consulting services including cost accounting, human resources
consulting, executive recruiting, and planning, evaluation and implementation
for large government systems.
Experienced
Team of Professionals. We have assembled a management team of
former government executives, state agency officials, information technology
specialists and other professionals, many of whom have more than seven years of
experience in the public services industry. Our employees understand the
problems and challenges faced in the marketing, assessment and delivery of
government services. Further, as state and local government administrators are
subject to changing legislative and political mandates, we have developed
strong relationships with experienced political consultants who inform and
advise us with respect to strategic marketing opportunities and legislative
initiatives.
Growth Strategy
Our
goal is to be the leading provider of program management, consulting services
and systems solutions to state and local government agencies. Our strategy to achieve
this goal includes the following:
Aggressively
Pursue New Business Opportunities.
We believe that, throughout our 26-year history, we have been a leader
in developing innovative solutions to meet the evolving needs of state and
local health and human services agencies. We plan to expand our revenue base
by:
• providing cost reduction efficiencies and
revenue maximization opportunities to financially stressed governmental
entities;
• marketing new and innovative solutions to
our extensive client base;
• expanding our client base by marketing our
experience, established methodologies and systems;
• investing in the early identification of
government bid opportunities, including retaining outside marketing
consultants, hiring dedicated in-house personnel and using available RFP
tracking databases;
• maintaining our existing client base in
outsourcing while allowing new work to provide incremental growth; and
• submitting competitive bids that leverage
our proven solutions from past projects.
Continue
to Develop Complementary Services. We intend to
continue broadening our range of services in order to respond to the evolving
needs of our clients and to provide additional cross-selling
opportunities. We intend to continue to internally develop innovative
consulting practices, technologies, and methodologies that are required by
government entities in order to effectively deliver public services. For
example, we have developed a system that interfaces with insurance company
databases to intercept payments to claimants who are delinquent on child
support obligations. We have also developed a consulting practice focused on
the requirements of the Health Insurance Portability and Accountability Act.
This practice provides high-level information systems services designed to
bring state Medicaid programs into compliance under the Act.
Recruit
Highly Skilled Professionals. We continually
strive to recruit top management and information technology professionals with
the experience, skills and innovation necessary to design and implement
solutions to the complex problems faced by resource-constrained
government program agencies. We also seek to attract middle-level
consultants with a proven track record in the government services field and a
network of political contacts to leverage our existing management
infrastructure, client relationships and areas of expertise. We believe we can
continue to attract and retain experienced government personnel by leveraging
our reputation as a premier government services consultant and our single
market focus.
Pursue
Strategic Acquisitions. While most of our revenue growth has been
internally generated, we intend to continue to selectively identify and pursue
attractive acquisition opportunities, including pursuing acquisitions that may
be larger than those we have made in the past. Acquisitions can provide us with
a rapid, cost-effective method to broaden our services, increase the number of
our professional consultants, expand our client base, cross-sell additional services,
enhance our technical capabilities, establish or expand our presence
geographically and obtain additional skill sets.
Government Operations Group
Our
Government Operations Group, which generated approximately 56% of our total
revenues in our 2001 fiscal year, specializes in the administration and
management of government health and human services programs.
Health
Management Services Division. We provide a
variety of project management services for Medicaid programs with a particular
emphasis on large-scale managed care enrollment projects. In these
projects, we provide:
• recipient outreach, education and
enrollment services;
• an automated information system customized
for the particular state;
• data collection and reporting;
• design and development services for
program materials; and
• health plan encounter data analysis and
reporting.
We currently provide managed care enrollment contract
services to more Medicaid recipients than any other public or private sector
entity in the country, operating projects for the states of California, New
York, Texas, Michigan, Montana, Massachusetts, New Jersey, Colorado and
Vermont. We also administer programs for uninsured and underinsured children as
part of the Children's Health Insurance Program in various states, including
Michigan, Massachusetts, New Jersey, Kansas, and Iowa. We operate the nation's
largest system for the resolution of disputes among health plans, subscribers
and providers through independent external review. We are the sole national
contractor to the Federal Centers for Medicare and Medicaid Services (formerly
known as the Health Care Financing Administration) for external appeals in the
Medicare Managed Care Program and have rapidly expanded our offerings into
state government, currently providing external review services to 20 states. We
also operate a Center for Health Literacy and Communication Technologies that
concentrates on producing reader-friendly information for low literate
populations.
Child
Support Division. The Division is organized vertically into
three lines of business in support of local and state Child Support Programs:
operating offices that provide full and specialized Child Support services;
consulting on various programmatic, operational and fiscal issues; and
providing systems consultation and operating services. We believe that we have
one of the largest Child Support Enforcement staffs in the private sector with
over 1,000 professionals. We have been performing some of these services since
1976, which we believe is longer than any other private sector firm in the
United States. We are currently engaged in the management of Child Support
Enforcement programs in ten states, providing full child support services and
specialized services for over one million cases.
Workforce
Services Division. We manage welfare-to-work and Workforce
Investment Act One-Stop programs by providing a wide range of services,
including emergency assistance, job referral and placement, transition services
such as child care and transportation, community work training services, job
readiness preparation, case management services, retention services, supportive
services and selected educational and training services. Our typical
welfare-to-work contract involves an engagement period of three to five years.
During the 2001 fiscal year, we placed 19,200 program participants into jobs,
thereby improving the lives of over 60,000 individuals. We have issued over
$200 million in subsidized child care payments to child care providers in fiscal
2001. Additionally, we have two contracts that represent the significant
privatization of government functions under which we both administer the
program and make applicant eligibility determinations.
Federal Services Division. We provide a
host of large-scale, nationwide management services geared toward
emerging market areas including disability services, vocational rehabilitation,
youth and elderly services, substance abuse/mental health services and justice
administration support services. In 1995, we became the first company to
operate a national case management and monitoring program for disability
beneficiaries when we contracted with the Social Security Administration (SSA)
to provide services to beneficiaries with drug or alcohol disabilities. In
1999, we were awarded the first SSA contract to provide employability planning
and support services to disabled youth in order to assist them in entering the
workforce. In September 2000, SSA awarded us a five-year nationwide contract to
assist disabled adult Social Security Income (SSI) and Social Security
Disability Insurance (SSDI) beneficiaries leave the disability rolls and become
self-sufficient. Under this contract, we serve as the Program Manager for the
Ticket to Work Program, providing vocational rehabilitation and employment
services to individuals with disabilities. Also in fiscal year 2000, the
Commonwealth of Massachusetts awarded us a contract to enroll in managed care
services senior citizens who receive Medicare and Medicaid benefits. Under this
first of its kind federal/state partnership between the Federal Centers for
Medicare and Medicaid Services and the Commonwealth of Massachusetts, we are
responsible for the development of the program protocol and the operation of
the pilot program.
Consulting Group
Our
Consulting Group, which generated approximately 30% of our total revenues in
our 2001 fiscal year, provides program planning and quality assurance services
to state and local government agencies, in addition to general management
consulting services and specialized services such as assisting state and local
agencies in maximizing federal funding for their programs.
Management
Services Division. Our Management Services Division provides a
broad array of consulting services to state and local governments. These
services include accounting, activity-based costing, cost of service and
user fee studies, executive recruitment, airport expansion financial
feasibility studies and retail planning and management, capital asset management,
public works, fleet management, and utilities management. Through this
division, we provided consulting services to over 4,000 clients in fiscal year
2001, many of which have been clients for 20 years or more. We believe
that this extensive client base creates opportunities for us to successfully
cross-market our services.
Revenue
Services Division. Our Revenue Services Division seeks out
additional federal funding and provides benefits program planning and
implementation services for state and local government agencies. Our revenue
maximization projects are generally carried out on a contingency fee basis
determined as a percentage of funds recovered from the federal government. Our
revenue maximization projects have resulted in the recovery of more than
$1.1 billion of federal funds on behalf of agencies in 24 states. We have
also provided welfare planning and implementation projects and have been
engaged by the Commonwealth of Pennsylvania to provide detailed analysis and
assistance to ensure that the state child welfare and juvenile justice claims
programs comply with applicable federal requirements. We also assist several
states in facilitating claims for additional services through the Temporary
Assistance to Needy Families program.
Human
Services Technology Division. Our Human
Services Technology Division provides strategic information management,
procurement and contracting, systems quality assurance and systems
implementation services to the state health and human service agencies. Our
experienced team of skilled project managers and information technology
professionals has assisted clients in the planning, design, procurement and
implementation of information systems in multiple projects across numerous
states. We also supervise the work performed by contractors who sell these
systems. The potential market for the division's services has continued to
expand in recent years. Given our successful track record, core competencies
and national market presence, we believe that we are well positioned to take
advantage of the increased nationwide emphasis by state governments on welfare
eligibility systems, Medicaid Management Information Systems, child welfare
services and child support enforcement services. Additionally, we believe that
synergies between our Government Operations Group, Consulting Group and Systems
Group uniquely position us to take advantage of new market opportunities in
health and human services program areas.
Infrastructure
Technologies Division. Our
Infrastructure Technologies Division provides management consulting services
that focus on assisting large public sector organizations in solving complex
problems related to automation of financial services. This division has
engagements in the legislative, executive and judicial branches. We also have
extensive knowledge of the fiscal structure of states through our experience
with state auditors, comptrollers and treasurers as well as a significant
understanding of state government through close contact with many state
agencies. As part of our consulting engagement, we provide a variety of
information technology services, including project planning and management,
quality assurance monitoring and assessment for child welfare, healthcare and
financial management systems, strategic planning, and advanced technologies.
Systems Group
Our
Systems Group, which generated approximately 14% of our total revenues in our
2001 fiscal year provides state and local agencies with software solutions and
systems design and implementation to improve the efficiency and
cost-effectiveness of their program administration.
ERP
Solutions Division. The ERP Solutions Division consultants work
almost exclusively with government and educational entities to implement
PeopleSoft®
and other ERP Software Solutions. Our goal is to deliver cost-efficient
technology-based business solutions, including customer information
systems/utility billing, financial systems, human resources management systems,
procurement systems, and student administration systems. ERP Solutions is a
PeopleSoft consulting alliance partner and one of the only certified PeopleSoft
Application Systems Providers.
Asset
Solutions Division. The Asset Solutions Division offers a suite
of internet-based asset management solutions that manage and maintain physical
assets, including fleet, fuel, facility, space and fixed assets. Asset
Solutions provides software solutions to over 300 customers including
government agencies, public utilities, mass transits, K-12 education systems
and universities. All Asset Solutions systems integrate with major ERP
solutions and promote accountability and cost management. Recent achievements
include new contracts with the State of New Jersey, the State of Michigan, the
Immigration and Naturalization Service and the University of Massachusetts.
Justice
Solutions Division. The Justice Solutions Division implements
and supports software programs designed to increase the efficiency of state
court systems. Our products include case management, docketing, scheduling and
report generating software used in all stages of the judicial process. We
market and sell a jury management software program that creates jury lists,
generates notices and monitors attendance and payments. We also offer a records
management software solution to automate record keeping functions and county
recorders' offices. We currently support over 5,000 users at over 150
sites in Ohio, Florida, Michigan, Arkansas, Indiana, Massachusetts, California
and New York.
The
Justice Solutions Division also develops and implements information technology
systems solutions for state criminal justice systems. We work with law
enforcement agencies, courts and corrections agencies to develop systems that
integrate and facilitate access to criminal justice information and records. We
are currently responsible for the management of the Connecticut offender-based
tracking system that tracks offender location, classification and status
information.
Public
Systems Division. The Public Systems Division provides systems
development, integration and implementation services to public-sector
health and human services agencies. This division develops modern, web-based
solutions for government agencies providing public services that enable the use
of the Internet to lower the cost of maintaining and supporting large
application systems. The Division is currently offering these services through
a series of projects in Utah for Medicaid Managed Care and in Delaware to a
variety of agencies providing social services. We are also involved in the
development of systems to support other divisions involved in the delivery of
program operations services.
Intelligent
Technologies Division. Our Intelligent Technologies Division
provides health, transportation, education, banking and human services clients
with expert assistance in developing, planning and implementing smart card
technology, biometric recognition systems, and e-government consulting services
and related technologies. Responding to pressures to provide services more efficiently,
public-sector entities are increasingly moving from paper-based to
electronics-based systems. In addition to cost efficiencies, e-government
technologies provide more accurate record keeping and offer greater security
against fraud and theft. Recognizing the potential efficiencies of smart card
technology, in fiscal 2000, the United States General Services Administration
awarded a ten-year contract to five companies, including us, to implement this
technology in federal government agencies.
The division has taken a leadership position in the
development of technology solutions to assist federal, state and local
governments enhance their physical and logistical security systems in response
to recent events. We recently announced a new technology product in this area,
FlySecure®,
which uses biometric technologies to improve airport security by ensuring that
passengers and airport employees are accounted for and tracked through every
part of an airport. This division also assists health, education and banking
clients in planning, implementing and evaluating electronic funds transfer,
electronic benefits transfer and electronic payment systems. These systems
allow recipients to transfer benefits from government accounts to product or
service vendors.
Backlog
Backlog
represents an estimate of the remaining future revenues from existing signed
contracts and revenues from contracts that have been awarded but not yet
signed. Our backlog estimate includes revenues expected under the current terms
of executed contracts, revenues from contracts in which the scope and duration
of the services required are not definite but estimable and does not assume any
contract renewals or extensions.
Changes
in the backlog calculation result from additions for future revenues from the
execution of new contracts or extension or renewal of existing contracts,
reductions from fulfilling contracts, reductions from the early termination of
contracts, and adjustments to estimates of previously included contracts.
Estimates
of future revenues from awarded or signed contracts are necessarily inexact and
the receipt and timing of these revenues are subject to various contingencies,
many of which are outside of our control. We believe that period-to-period
backlog comparisons are difficult and do not necessarily accurately reflect
future revenues we may receive. The actual timing of revenue receipts, if any,
on projects included in backlog could change because, among other reasons, the
scheduling of a project could be postponed, an awarded but unsigned contract
could be retracted and not executed, a signed contract could be modified or
canceled, or initial estimates regarding a contract's revenues could prove to
be wrong.
Marketing and Sales
Our
Government Operations Group, Consulting Group and Systems Group obtain program
management, consulting services and systems solutions contracts for state and
local agencies by responding to RFPs. Our Government Affairs unit, consisting
of eight employees and approximately 40 marketing consultants located in
regional offices, develops and maintains relationships with senior government
representatives, elected officials and political appointees, including a
state's governor, members of the governor's staff and the heads of state health
and human services agencies to encourage them to outsource government services.
We also developed and implemented a sophisticated RFP tracking system that
provides us with real-time information about the status of existing RFPs and
our actions to date with respect to those RFPs.
Our
marketing consultants provide introductions to government personnel and provide
information to us regarding the status of legislative initiatives and executive
decision-making. Following the issuance of an RFP, we participate in
formal discussions, if any, between the contracting government agency and the
group of potential service providers seeking to modify the RFP and prepare the
proposal. Upon the award of a government operations contract, our representatives
may help us negotiate the contract with representatives of the government
authority until an agreement is reached.
We
generate leads for contracts by tracking bid notices, employing marketing
consultants, maintaining relationships with government personnel, communicating
directly with current and prospective clients and, increasingly, through
referrals and cross-selling initiatives from our Consulting Group. We
participate in professional associations of government administrators and
industry seminars featuring presentations by our executives and employees.
Senior executives develop leads through on-site presentations to decision-makers.
A portion of our new consulting business has resulted from prior client
engagements in which we were the sole service provider. We also intend to
leverage client relationships of firms we acquire by cross-selling our
existing services.
Competition
The
market for providing program management and consulting services to state and
local health and human services agencies, as well as to public sector clients
generally, is competitive and subject to rapid change. Our Government
Operations Group competes for program management contracts with the government
services divisions of large organizations such as Electronic Data
Systems, Inc. and Accenture; specialized service providers such as
Benova, Inc., Policy Studies Incorporated, Affiliated Computer
Services, Inc. and America Works, Inc.; and local non-profit
organizations such as the United Way, Goodwill Industries and Catholic
Charities. Our Consulting Group competes with the consulting divisions of the
"Big 5" accounting firms; and small, specialized consulting firms.
Our Systems Group competes with a large number of competitors including Unisys,
KPMG, Accenture, Litton PRC (a Northrop Grumman Company), Peregrine
Systems, Inc. and Electronic Data Systems, Inc.
We
anticipate that we may face increased competition in the future as new
companies enter the market, but that our experience, reputation, industry focus
and broad range of services provide significant competitive advantages which we
expect will enable us to compete effectively in our markets.
Employees
As
of September 30, 2001, we had 4,825 employees, consisting of 3,520 employees in
the Government Operations Group, 699 employees in the Consulting Group, 406
employees in the Systems Group and 200 corporate administrative employees. Our
success depends in large part on attracting, retaining and motivating talented,
innovative and experienced professionals at all levels. None of our employees
is covered by a collective bargaining agreement. We consider our relations with
our employees to be good.
Foreign Operations
We
currently operate predominately in the United States. Our revenues derived from
operations in foreign countries for fiscal years 1999, 2000, and 2001 were $4.6
million, $1.6 million and $2.9 million, respectively. At September 30, 2000 and
2001, we had an insignificant amount of long-lived assets located in foreign
countries.
ITEM 2.
ITEM 2. Properties.
We
own a 60,000 square foot office building in Reston, Virginia and a 21,000
square foot office building in McLean, Virginia. Our Government Operations
Group, our Consulting Group and our Systems Group use both of these buildings.
We lease 160 offices totaling approximately 990,000 square feet for other
management and administrative functions in connection with the performance of
our contracts. The lease terms vary from month-to-month to five-year leases and
are generally at market rates. Depending on the contract involved, our leased
properties are used by one or more of our Government Operations Group,
Consulting Group or Systems Group.
ITEM 3.
ITEM 3. Legal Proceedings.
In
January 2000, the New York City Human Resources Administration submitted
two contracts that it had awarded to us for the performance of welfare-to-work
services to the Comptroller of New York City to be registered. Under New York
law, the contracts must be registered in order for us to receive payment.
However, the Comptroller refused to register the contracts alleging
improprieties in the procurement process and in our conduct. The New York
Supreme Court, Appellate Division-First
Department ordered the Comptroller to register the contracts in
October 2000 after finding no wrongdoing in our conduct. This matter has
also been investigated by certain government agencies. The District Attorney's
Office of New York County and the United States Attorney's Office for the
Southern District of New York, in response to requests made by the Comptroller,
announced that they were investigating the facts underlying this matter. Those
offices reviewed some of our documents and interviewed some of our employees in
2000 and 2001. In October 2001, the United States Attorney’s Office informed us
that it had closed its file on the matter without taking any actions against
us. In December 2001, the District
Attorney’s Office informed us that it had closed its investigation and
determined not to take any action against us.
We
are involved in various legal proceedings in the ordinary course of our
business. In our opinion, these proceedings involve amounts that would not have
a material effect on our financial position or results of operations if such
proceedings were resolved unfavorably.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year covered by this report.
Executive Officers and Directors and Other Significant
Employees of the Registrant
Our
executive officers and directors and their respective ages and positions are as
follows:
David V.
Mastran has served
as our President, Chief Executive Officer and a director since he founded
MAXIMUS in 1975. Dr. Mastran received his Sc.D. in Operations Research
from George Washington University in 1973, his M.S. in Industrial Engineering
from Stanford University in 1966 and his B.S. from the United States Military
Academy at West Point in 1965. Dr. Mastran’s current term as a director expires
at the 2003 Annual Meeting of Shareholders.
Russell A.
Beliveau has served as our President of Investor Relations since
October 2000 and served as President of Business Development from
September 1998 until October 2000. He has served as a director since
1995. Prior to that, he served as President of the Government Operations Group
from 1995 to 1998. Mr. Beliveau has more than 20 years of experience
in the health and human services industry during which he has worked in both
government and private sector positions at the senior executive level.
Mr. Beliveau's past positions include Vice President of Operations at
Foundation Health Corporation of Sacramento, California from 1988 through 1994
and Deputy Associate Commissioner (Medicaid) for the Massachusetts Department
of Public Welfare from 1983 until 1988. Mr. Beliveau received his Masters
in Business Administration and Management Information Systems from Boston
College in 1980 and his B.A. in Psychology from Bridgewater State College in
1974. Mr. Beliveau’s current term as a director expires at the 2002 Annual
Meeting of Shareholders.
Richard L.
Bradley has served as President of our Systems Group since
October 2000. Prior to joining us, Mr. Bradley was a Vice President
and General Manager for TRW (and BDM International prior to its acquisition by
TRW) and was responsible for public sector operations. Before that, he served
in various management roles at Unisys in the health and human services and
other public sector areas. Mr. Bradley has over 25 years of
professional information technology experience. Over that time, Mr. Bradley
has managed multiple large public and commercial information technology
organizations. Mr. Bradley received B.A. degrees in Political Science and
Education from Western Washington State University and completed the coursework
for the State of Washington Fellowship M.P.A. Program at Western Washington
University.
Lynn P.
Davenport has served as the President of our Consulting Group since
October 2000. Before that he was President of the Human Services Division
since he joined us in 1991. Mr. Davenport has served as a director since 1994.
He has over 25 years of health and human services experience in the areas
of administration, productivity improvement, management consulting, revenue
maximization and management information systems. Prior to joining us,
Mr. Davenport was employed by Deloitte & Touche, and its
predecessor, Touche Ross & Co., in Boston, Massachusetts, where he
became a partner in 1987. Mr. Davenport received his M.P.A. in Public
Administration from New York University in 1971 and his B.A. in Political Science
and Economics from Hartwick College in 1969. Mr. Davenport’s current term as a
director expires at the 2003 Annual Meeting of Shareholders.
David R.
Francis
has served as our General Counsel and Secretary since August 1998. He has
over 15 years experience as a practicing attorney. Before joining us, he
was Of Counsel at the law firm Howrey & Simon and, prior to that,
Senior Counsel at Teledyne, Inc. Mr. Francis received his J.D. from
Harvard Law School in 1986 and his B.A. in Philosophy from Johns Hopkins
University in 1983.
Thomas A.
Grissen has served as our Chief Operating Officer since
October 2000. Before that, he served as President of the Government
Operations Group since he joined us in March 1999. Mr. Grissen has served
as a director since 1999. Prior to that, he served as the General Manager and
Vice President of TRW from January 1998. Mr. Grissen was President of
BDM International from April 1997 until joining TRW. Before starting at
BDM International, Mr. Grissen was a principal and managing director of
Unisys for 16 years. Mr. Grissen received his Executive M.B.A. from
Michigan State University and his B.A. in Business from Central Michigan
University. Mr. Grissen’s current term as a director expires at the 2003 Annual
Meeting of Shareholders.
David A.
Hogan has served as the President of our Government Operations Group
since October 2000. Before that he was the President of the Child Support
Enforcement Division since 1994 and served as a Vice President of the division
from 1993 until 1994. Prior to joining us, Mr. Hogan spent 23 years
working in numerous positions for the Washington State Department of Social and
Health Services, including five years as the State's Child Support Director.
Mr. Hogan also served one year as the President of the National Child
Support Directors Association. Mr. Hogan received his J.D. from the
University of Puget Sound in 1976 and his B.A. from Western Washington
University in 1970.
F. Arthur
Nerret has served as our Chief Financial Officer since 1994 and serves
as Trustee of our 401(k) plan. He is a CPA and has over 25 years of
financial management experience. From 1981 until he joined us, Mr. Nerret
held a variety of positions at Frank E. Basil, Inc. in Washington, D.C.,
including Vice President, Finance from 1991 to 1994 and Director of Finance
from 1989 until 1991. Mr. Nerret received his B.S. in Accounting from the
University of Maryland in 1970.
Jesse Brown
has served as one of our directors since his election in September 1997.
Mr. Brown was President of Brown & Associates, Inc., an
international consulting company, until October 30, 2001 and served as
Secretary of Veteran Affairs in the Clinton Administration from 1993 until
1997, and as Executive Director of the Washington office of Disabled American
Veterans from 1989 to 1993. Mr. Brown also serves as a director of PEC
Solutions, Inc. and of Roy F. Weston, Inc. Mr. Brown is an honors
graduate of Chicago City College and also attended Roosevelt University in
Chicago and Catholic University in Washington, D.C. Mr. Brown’s current term as
a director expires at the 2002 Annual Meeting of Shareholders.
Peter B.
Pond has served as one of our directors since his election in
December 1997 and as Chairman of the Board since September 2001.
Mr. Pond is a founder of ALTA Equity Partners LLC, a venture capital firm,
and has been a General Partner of that firm since June 2000. Prior to
that, Mr. Pond was a Principal and Managing Director in the Investment
Banking Department at Donaldson, Lufkin & Jenrette Securities
Corporation in Chicago and was head of that company's Midwest Investment
Banking Group. Mr. Pond holds a B.S. in Economics from Williams College
and an M.B.A. in Finance from the University of Chicago. He is also a director
of Navigant Consulting, Inc. Mr. Pond’s current term as a director expires
at the 2004 Annual Meeting of Shareholders.
James R.
Thompson, Jr.
has served as one of our directors since his election in March 2001. Governor
Thompson currently serves as Chairman of the Chicago office of the law firm of
Winston & Strawn, a position he has held since January 1993. He
joined that firm in January 1991 as Chairman of the Executive Committee
after serving four terms as Governor of the State of Illinois from 1977 until January 1991.
Prior to his terms as Governor, he served as U.S. Attorney for the Northern
District of Illinois from 1971 to 1975. Governor Thompson has served as the
Chief of the Department of Law Enforcement and Public Protection in the Office
of the Attorney General of Illinois, as an Associate Professor at Northwestern
University School of Law, and as an Assistant State's Attorney of Cook County.
He is a former Chairman of the President's Intelligence Oversight Board.
Governor Thompson is currently a member of the boards of directors of Jefferson
Smurfit Group, Navigant Consulting, Inc., Prime Retail, Inc., The
Japan Society (New York), Metal Management, Inc., Prime Group Realty
Trust, FMC Corporation, FMC Technologies, Inc., the Chicago Board of Trade and
Hollinger International. He also serves on the Boards of the Museum of
Contemporary Art, the Lyric Opera and the Illinois Math and Science Academy
Foundation. Governor Thompson attended the University of Illinois and
Washington University, and he received his J.D. from Northwestern University in
1959. Governor Thompson’s current term as a director expires at the 2004 Annual
Meeting of Shareholders.
PART II
ITEM 5.
ITEM 5. Market For Registrant’s
Common Equity and Related Stockholder Matters.
Our
common stock trades on the New York Stock Exchange under the symbol
"MMS." The following table sets forth, for the fiscal periods
indicated, the range of high and low sales prices for our common stock on the
New York Stock Exchange.
The
high and low sales prices for our common stock on the New York Stock Exchange
on December 17, 2001 were $43.10 and $40.90, respectively. As of December 17,
2001, there were 119 holders of record of our common stock.
We
have not paid or declared any cash dividends on our common stock. We have
retained, and currently anticipate that we will continue to retain, all of our
earnings for use in developing our business. Future cash dividends, if any,
will be paid at the discretion of our board of directors and will depend, among
other things, upon our future operations and earnings, capital requirements and
surplus, general financial condition, contractual restrictions and such other
factors as our board of directors may deem relevant. We do not anticipate
paying any cash dividends in the foreseeable future.
ITEM 6.
ITEM 6. Selected Consolidated
Financial Data.
We
have derived the selected consolidated financial data presented below from our
consolidated financial statements and the related notes. The revenues and
operating results related to the acquisition of companies using the purchase
accounting method are included from the respective acquisition dates. The
selected financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included as Item 7
ITEM 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Overview
We
are a leading provider of program management, consulting services and systems
solutions primarily to state and local government agencies throughout the
United States. Since our inception in 1975, 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 and cost-effective
while improving the quality of services provided to program beneficiaries. We have
had contracts with government agencies in all 50 states, 49 of the 50
largest cities and 27 of the 30 largest counties. We have been profitable every
year since we were founded. For the fiscal year ended September 30, 2001,
we had revenues of $487.3 million and income, before the cumulative effect
of an accounting change, of $40.1 million.
Prior
to October 2000, we conducted our operations through two groups: the
Government Operations Group and the Consulting Group. In October 2000, we
reorganized our groups to better focus and manage our existing and future
technology assets. Our core technology assets were moved from our Consulting
Group to our newly created Systems Group. Accordingly, prior period financial
information has been reclassified to reflect current period presentation of
segment information.
Our
revenues are 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 reimbursement (used primarily by the
Consulting Group). For the fiscal year ended September 30, 2001, revenues
from fixed-price contracts were approximately 36% of total revenues;
revenues from cost-plus contracts were approximately 22% of total revenues;
revenues from performance-based contracts were approximately 28% of total
revenues; and revenues from time and materials reimbursement contracts were
approximately 14% of total revenues. Traditionally, a majority of our contracts
with state and local government agencies have been fixed-price and
performance-based and federal government contracts 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 because we are subject to the risk of potential cost
overruns or inaccurate revenue estimates.
We
recognize revenues from cost-plus contracts, including a pro rata amount of the
negotiated fee, as costs are incurred. We recognize revenues from fixed-price
and time and materials reimbursement contracts, including a portion of our
estimated profit, as costs are incurred. During fiscal 1999 and fiscal 2000,
revenues from performance-based contracts, including a portion of estimated
profit, were recognized as costs were incurred. In fiscal 2001, we changed our
method of revenue recognition for performance-based contracts to recognize
revenues as such revenues become fixed or determinable, which generally occurs
when amounts are billable to customers rather than as costs are incurred. See
Note 2 of Notes to Consolidated Financial Statements. Each quarter, management
reviews the costs incurred, the revenues recognized and billings from
government contracts to adjust recognized revenue amounts.
The
Government Operations Group's contracts generally contain base periods of one
or more years as well as one or more option periods that may cover more than
half of the potential contract duration. As of September 30, 2001, our
average Government Operations Group contract duration was approximately
2.5 years. Our Consulting Group contracts had performance periods ranging
from one month to approximately two years. Our average Systems Group contract
duration was approximately 1.2 years. Our most significant expense is cost
of revenues, which consists primarily of project-related employee
salaries and benefits, subcontractors, computer equipment and travel expenses.
Our ability to accurately predict personnel requirements, salaries and other
costs as well as to effectively manage a project or to achieve certain levels
of performance can have a significant impact on the service costs related to
our fixed-price, performance-based and time and materials
reimbursement contracts. Service cost variability has little impact on
cost-plus arrangements because allowable costs are reimbursed by the client.
Selling, general and administrative expenses consist of
management, marketing and administration costs (including salaries, benefits,
travel, recruiting, continuing education and training), facilities costs,
printing, reproduction, communications and equipment depreciation.
Business Combinations and Acquisitions
We
combined with four firms during 1998, all of which were transactions accounted
for as pooling of interests; four firms during 1999, three of which were
accounted for as purchases and one of which was accounted for as a pooling of
interests; and four firms during fiscal 2000 and one firm in fiscal 2001, each
of which was accounted for as a purchase. Additionally, we acquired
substantially all of the assets of two firms and a division of another during
fiscal 2000. In fiscal 2001, our focus was on the consolidation and integration
of our previous acquisitions. As part of our growth strategy, we intend to
continue to selectively identify and pursue complementary businesses to expand
our geographic reach and the breadth and depth of our services and to enhance
our customer base. Since the beginning of fiscal 2000, we have completed the
following acquisition transactions:
We recognize the excess of the cost over the fair value
of net assets of purchased businesses as intangible assets. At September 30, 2000 and 2001,
intangible assets, net of related amortization, represented approximately 21%
and 14% of our total assets, respectively. The carrying values of intangible
assets, as well as other long-lived assets, are reviewed for impairment if
changes in the facts and circumstances indicate potential impairment of their
carrying value. The principle factor we use in identifying potential impairment
is profitability of the acquired business. Any impairment would be recognized
when the expected future operating cash flows from such intangible assets is
less than their carrying value.
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”), effective for fiscal years
beginning after December 15, 2001, with earlier adoption permitted. Under the
new rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with FAS 141 and FAS 142. Other intangible
assets will continue to be amortized over their useful lives. We intend to
apply the new rules on accounting for goodwill and other intangible assets
beginning the first quarter of fiscal year 2002.
Results of Operations
Set forth in the table below are the percentages of
revenue for selected income statement data for each of the three fiscal years
in the period ended September 30, 2001.
Year Ended September 30, 2001 Compared to Year Ended
September 30, 2000
Revenues. Our total revenues increased 22.1% to
$487.3 million in fiscal 2001 from $399.2 million in fiscal 2000.
Revenues of our Government Operations Group increased 23.3% to
$272.8 million in fiscal 2001 from $221.2 million in fiscal 2000.
This increase was due to revenues related to an increase in the number of
contracts in the Group, particularly Health Management Services contracts,
which increased revenues by $27.0 million, and Workforce Services, which
increased revenues by $14.4 million, plus revenues totaling $3.2 million
received from entities acquired after the start of the period ended September 30,
2000. Revenues of our Consulting Group increased 22.4% to $146.8 million
in fiscal 2001 from $119.9 million in fiscal 2000. This increase was due
to revenues related to an increase in the number of contracts in the Group,
particularly in the Revenue Services division, which increased by $17.1
million, plus revenues totaling $6.7 million from entities acquired after
the start of the period ended September 30, 2000. Revenues of our Systems
Group increased 16.5% to $67.6 million in fiscal 2001 from $58.1 million
in fiscal 2000. This increase was primarily due to revenues totaling
$10.1 million from entities acquired after the start of the period ended
September 30, 2000. For fiscal 2001 compared to fiscal 2000, our overall growth
in revenue was 17.1% excluding the revenue from entities we acquired after the
start of the period ended September 30, 2000.
Gross
Profit. Our total gross profit increased 19.7% to
$151.4 million in fiscal 2001 from $126.5 million in fiscal 2000.
Gross profit of our Government Operations Group increased 8.5% to
$55.3 million in fiscal 2001 from $51.0 million in fiscal 2000. As a
percentage of Government Operations Group revenues, Government Operations Group
gross profit decreased to 20.3% in fiscal 2001 from 23.1% in fiscal 2000. This
decrease in gross margins for the Government Operations Group was primarily due
to a decline in gross margins an a few projects within the Group. Gross profit
of our Consulting Group increased 34.9% to $67.4 million in fiscal 2001
from $50.0 million in fiscal 2000. As a percentage of Consulting Group
revenues, Consulting Group gross profit increased to 45.9% in fiscal 2001 from
41.7% in fiscal 2000. The increase in gross margin for the Consulting Group was
primarily due to improved margins on performance-based contracts within our
Revenue Services Group. Gross profit of
our Systems Group increased 12.1% to $28.7 million in fiscal 2001 from
$25.6 million in fiscal 2000. As a percentage of Systems Group revenues,
Systems Group gross profit decreased to 42.4% in fiscal 2001 from 44.0% in
fiscal 2000. The decline in gross margin for the Systems Group was primarily
due to a decline in software sales.
Selling,
General and Administrative Expenses. Our SG&A
expenses increased 16.0% to $78.8 million in fiscal 2001 from
$67.9 million in fiscal 2000. The primary reasons for the increase in
SG&A costs were the increase in marketing and proposal preparation
expenditures incurred to pursue further growth and, to a lesser extent, the
increase in the number of non-project professional and administrative
personnel. As a percentage of revenues, SG&A expenses decreased to 16.2%
for fiscal 2001 from 17.0% for fiscal 2000.
Amortization
of Goodwill and Other Acquisition-Related Intangibles. During fiscal
year 2001, we incurred $5.6 million of amortization expense related to the
$58.9 million of goodwill and other acquisition-related intangible
assets we recorded in connection with acquisitions we completed through fiscal
2001. During fiscal year 2000, we incurred $3.2 million of amortization
expense related to the $58.2 million of goodwill and other acquisition-related
intangible assets we recorded in connection with the acquisitions we completed
during fiscal 1999 and 2000. The $2.4 million increase in amortization expense
is primarily attributed to a full year of amortization expense in fiscal 2001
related to the seven acquisitions consummated throughout fiscal 2000.
Provision
for Income Taxes. Income tax expense increased 18.1% to
$28.4 million in fiscal 2001 from $24.1 million in fiscal 2000. As a
percentage of income before income taxes, the income tax expense decreased to
41.5% for fiscal 2001 from 44.2% for fiscal 2000. This decrease was primarily
due to the non-deductibility of the legal settlement expense in fiscal 2000.
Year Ended September 30, 2000 Compared to Year Ended
September 30, 1999
Revenues. Our total revenues increased 24.9% to
$399.2 million in fiscal 2000 from $319.5 million in fiscal 1999.
Revenues of our Government Operations Group increased 24.7% to
$221.2 million in fiscal 2000 from $177.4 million in fiscal 1999.
This increase was due to an increase in the number of contracts in the Group
plus revenues totaling $8.0 million received from entities acquired after
the start of the period ended September 30, 1999. Revenues of our
Consulting Group increased 19.9% to $119.9 million in fiscal 2000 from
$100.0 million in fiscal 1999. This increase was due to an increase in the
number of contracts, revenues totaling $3.9 million from companies purchased
in fiscal 2000 and revenue growth from companies that we purchased during
fiscal 1999. Revenues of our Systems Group increased 37.8% to
$58.1 million in fiscal 2000 from $42.1 million in fiscal 1999. This
increase was primarily due to revenues totaling $14.6 million from
companies purchased in fiscal 2000.
Gross
Profit. Our total gross profit increased 33.7% to
$126.5 million in fiscal 2000 from $94.6 million in fiscal 1999.
Gross profit of our Government Operations Group increased 45.7% to $51.0 million
in fiscal 2000 from $35.0 million in fiscal 1999. As a percentage of
Government Operations Group revenues, Government Operations Group gross profit
increased to 23.1% in fiscal 2000 from 19.7% in fiscal 1999. This increase was
primarily due to improved gross margins on a few projects within the Group.
Gross profit of our Consulting Group increased 20.1% to $50.0 million in
fiscal 2000 from $41.6 million in fiscal 1999. As a percentage of
Consulting Group revenues, Consulting Group gross profit remained relatively
unchanged. Gross profit of our Systems Group increased 41.8% to
$25.6 million in fiscal 2000 from $18.0 million in fiscal 1999. As a
percentage of Systems Group revenues, Systems Group gross profit increased to
44.0% in fiscal 2000 from 42.8% in fiscal 1999. The improvement in gross margin
for the Systems Group was primarily due to the impact of a 50.6% margin
realized by one division in the Group.
Selling,
General and Administrative Expenses. Our SG&A
expenses increased 34.2% to $67.9 million in fiscal 2000 from
$50.6 million in fiscal 1999. As a percentage of revenues, SG&A
expenses increased to 17.0% for fiscal 2000 from 15.8% for fiscal 1999. This
increase in costs was due to increases in the number of non-project
professional and administrative personnel and the amount of professional fees
necessary to support our growth and marketing and proposal preparation
expenditures incurred to pursue further growth. During fiscal 2000, the total
number of support staff employees increased and we further expanded the
Government Affairs and Investor Relations unit and the Information Systems
unit. In fiscal 2000, the number of administrative and systems personnel
increased 33.6% to 342 from 256 in fiscal 1999 and the number of employees
increased from 3,285 total employees at September 30, 1999 to 4,205 total
employees at September 30, 2000.
Merger,
Deferred Compensation and ESOP Expenses. During fiscal
year 2000, we incurred $0.2 million of non-recurring expenses in
connection with acquisitions we completed during the year. These expenses
consisted of legal, audit and due diligence expenses. During fiscal year 1999,
we incurred $0.5 million of non-recurring expenses in connection with
acquisitions. These expenses consisted of legal, audit and due diligence
expenses.
Amortization
of Goodwill and Other Acquisition-Related Intangibles. During fiscal
year 2000, we incurred $3.2 million of amortization expense related to the
$58.2 million of goodwill and other acquisition-related intangible
assets we recorded in connection with acquisitions we completed during fiscal
1999 and fiscal 2000. During fiscal year 1999, we incurred $0.3 million of
amortization expense related to the $9.5 million of goodwill and other
acquisition-related intangible assets we recorded in connection with the
acquisitions we completed during the year.
Legal
Settlement Expense. In the
fourth quarter of fiscal 2000, we incurred an expense of $3.7 million to
settle, without admission of fault or liability by us, litigation brought
against us by a former officer, director and shareholder in connection with our
repurchase of his shares following his resignation in 1996.
Provision
for Income Taxes. Income tax expense increased 25.2% to
$24.1 million in fiscal 2000 from $19.2 million in fiscal 1999. As a
percentage of income before income taxes, the income tax expense increased to
44.2% for fiscal 2000 from 41.0% for fiscal 1999. This increase was primarily
due to the non-deductibility of the legal settlement expense discussed above.
Quarterly Results
Set
forth in Item 8 of this Annual Report on Form 10-K are selected income
statement data for the eight quarters ended September 30, 2001. We derived this
information from unaudited quarterly financial statements that include, in the
opinion of our management, all adjustments necessary for a fair presentation of
the information for such periods. You should read this information in
conjunction with the audited consolidated financial statements and notes
thereto. Results of operations for any fiscal quarter are not necessarily
indicative of results for any future period.
Our
revenues and operating results are subject to significant variation from
quarter to quarter depending on a number of factors, including:
• the progress of contracts;
• the revenues earned on contracts;
• the timing of revenues on
performance-based contracts;
• the commencement and completion of
contracts during any particular quarter;
• the schedule of government agencies for
awarding contracts; and
• the term of each contract that we have
been awarded.
Because
a significant portion of our expenses are relatively fixed, successful contract
performance and variation in the volume of activity as well as in the number of
contracts commenced or completed during any quarter may cause significant
variations in operating results from quarter to quarter. Further, we have
occasionally experienced a pattern in our results of operations pursuant to
which we incur greater operating expenses during the start-up and early stages
of significant contracts prior to receiving related revenues. Our quarterly
results may fluctuate, causing a material adverse effect on our operating
results and financial condition.
During the quarterly
periods in fiscal years 2000 and 2001, we recorded goodwill amortization
expense as follows:
Beginning October 1,
2001, goodwill will no longer be expensed under FAS 142. The pro-forma impact of not recognizing
goodwill amortization expense in fiscal 2000 and 2001 would have resulted in an
increase to net income and diluted earnings per share as follows:
Liquidity and Capital Resources
For
the year ended September 30, 2001, cash provided by operations was $38.4
million as compared to $4.8 million for the year ended September 30, 2000.
Higher income after adjustment for depreciation and amortization, the
cumulative effect of an accounting change and the tax benefit due to option
exercises has favorably impacted our operating cash flow. Improvements in the billing and realization of
accounts receivable collections, from an increase in costs and estimated
earnings in excess of billings (i.e., unbilled receivables) of $9.1 million in
fiscal 2000 to a decrease in unbilled receivables of $3.0 million in fiscal
2001, had a significant positive effect in fiscal 2001.
For
the year ended September 30, 2001, cash used in investing activities was
$13.1 million as compared to $24.4 million for the year ended
September 30, 2000. Cash used in investing activities for the year ended
September 30, 2001 primarily consisted of expenditures for capitalized software
costs totaling $6.1 million and purchases of property and equipment of
$5.1 million. During the year ended September 30, 2000, we generated cash
from sales of marketable securities, substantially all of which consisted of
short-term municipal bonds totaling $36.1 million, and used
$53.3 million in cash for acquisitions as well as expenditures for
capitalized software costs totaling $2.8 million and purchases of property and
equipment of $5.0 million. The $45.1 million of cash used in investing
activities for the year ended September 30, 1999 consisted of purchases of
marketable securities totaling $23.2 million; $8.0 million for the
purchase of our corporate headquarters in Reston, Virginia; $11.2 million
for acquisitions, net of cash acquired; and $2.6 million for the purchase
of property and equipment.
Cash provided by financing activities during the year
ended September 30, 2001 was $51.8 million, which consisted primarily of
$31.7 million of proceeds, net of offering expenses, from the secondary stock
offering completed in June 2001 and sales of stock to employees through our
Employee Stock Purchase Plan and Stock Option Plan of $20.9 million. Cash used
in financing activities during the year ended September 30, 2000 totaled
$5.1 million and consisted of $7.4 million of payments on borrowings of
companies acquired, offset by the receipt of proceeds of $2.3 million from
sales of stock to employees through our Employee Stock Purchase Plan and Stock
Option Plan. Cash provided by financing activities totaled $59.3 million
during the year ended September 30, 1999 and consisted primarily of
$61.0 million of proceeds, net of offering expenses, from our secondary
offering of common stock that we completed in December 1998.
As a consequence of the
terrorist attacks on September 11, 2001, we believe that the unanticipated
expenses of heightened security measures implemented by federal, state and
local governmental agencies may exceed budgeted amounts. In the near-term, we
believe that these government agencies will have sufficient resources to
continue to fund increased security measures without significant budget
adjustments. Therefore, we currently expect that the market for our services
will remain relatively unchanged. However, our expectation assumes that the
terrorist attacks on September 11 were a one-time event and that there will be
no additional events of this magnitude. If additional events should occur that
result in significantly greater expenditures for tighter security measures, or
such additional security measures are required to be sustained for extended
periods of time, then the amounts budgeted for our services by governmental
agencies may be reduced or reallocated, in some cases significantly, which
would adversely affect our business and results of operations.
We
believe that we will have sufficient resources to meet our currently
anticipated capital expenditure and working capital cash needs over the next
twelve months.
Forward Looking Statements
This Annual Report on
Form 10-K contains forward-looking statements. These forward-looking statements
appear principally in the sections entitled “Management’s Discussion and
Analysis of Financial Conditions and Results of Operations” and “Business.”
Forward-looking statements may appear in other sections of this report as well.
Generally, the forward-looking statements in this report use words like
“anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “intend,”
“may,” “opportunity,” “plan,” “potential,” “project,” “will,” and similar
terms.
The forward-looking
statements include statements about:
• our strategic plans;
• the future of our industry;
• the activities of competitors;
• anticipated expenses;
• anticipated sources of future revenues;
and
• our need for additional funds.
Forward-looking
statements involve risks and uncertainties. Our actual results could differ
significantly from the results discussed in the forward-looking statements in
this report. Many factors could cause or contribute to these differences,
including the factors discussed in Exhibit 99.1 to this Annual Report on Form
10-K. The forward-looking events discussed in this report might not occur.
Therefore, you should not place undue reliance on our forward-looking
statements.
ITEM 7A.
ITEM 7A. 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 8.
ITEM 8. Consolidated Financial Statements and Supplementary
Data.
The
following financial statements and supplementary data are included as part of
this Annual Report on Form 10-K:
Report
of Ernst & Young LLP, Independent Auditors
Consolidated
Balance Sheets as of September 30, 2000 and 2001
Consolidated
Statements of Income for the years ended September 30, 1999, 2000 and
Consolidated
Statements of Changes in Shareholders’ Equity for the years ended
September 30, 1999, 2000 and 2001
Consolidated
Statements of Cash Flows for the years ended September 30, 1999, 2000 and
Notes
to Consolidated Financial Statements
REPORT
OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors
MAXIMUS, Inc.
We
have audited the accompanying consolidated balance sheets of MAXIMUS, Inc.
as of September 30, 2000 and 2001, and the related consolidated statements
of income, changes in shareholders' equity, and cash flows for each of the
three years in the period ended September 30, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
MAXIMUS, Inc. at September 30, 2000 and 2001, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended September 30, 2001, in conformity with accounting principles
generally accepted in the United States.
As
discussed in Note 2 to the consolidated financial statements, in 2001 the
Company changed its method of revenue recognition.
/s/
ERNST & YOUNG LLP
McLean, Virginia
November 12, 2001
MAXIMUS, Inc.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
See notes to consolidated financial
statements.
MAXIMUS, Inc.
CONSOLIDATED
STATEMENTS OF INCOME
(In thousands, except per share data)
See notes to consolidated financial
statements.
MAXIMUS, Inc.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in
thousands)
See notes to consolidated financial
statements.
MAXIMUS, Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars in
thousands)
See notes to consolidated financial
statements.
MAXIMUS, Inc.
Notes
to Consolidated Financial Statements For the years ended September 1999, 2000
and 2001
(Dollars in thousands, except per share
amounts)
1. Description of
Business
MAXIMUS, Inc.
(the "Company") provides program management, consulting services and
systems solutions primarily to state and local government agencies throughout
the United States. The Company conducts its operations through three
groups: the Government Operations Group, the Consulting Group and the
Systems Group. The Government Operations Group administers and manages state
and local government programs on a fully out-sourced basis. Examples of these
programs include welfare-to-work and job readiness, child support enforcement,
child care, managed care enrollment and disability services. The Consulting
Group provides program planning and quality assurance services to state and
local government agencies in addition to general management consulting services
and specialized services such as assisting state and local agencies in
maximizing federal funding for their programs. The Systems Group provides state
and local agencies with systems design and implementation services to improve
the efficiency and cost-effectiveness of their program administration.
The Systems Group also offers a suite of proprietary software products in
addition to customized versions of applications such as PeopleSoft.
The
Company operates predominantly in the United States. Revenues from foreign-based
projects were less than 1% of total revenues for the years ended
September 30, 1999, 2000 and 2001.
2. Summary of
Significant Accounting Policies
The
following is a description of the Company's more significant accounting
policies.
Principles
of Consolidation
The
consolidated financial statements include the accounts of wholly-owned
subsidiaries. All material intercompany items have been eliminated in consolidation.
Reclassifications
Certain
reclassifications have been made to prior period amounts to conform to current
year presentation.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes, in particular, estimates used in the earnings recognition process.
Actual results could differ from those estimates.
Cash
Equivalents
The Company considers all highly
liquid investments with an original maturity of three months or less when
purchased to be cash equivalents.
Revenue Recognition
The
Company generates revenue under various arrangements, including contracts under
which revenues are based on costs incurred plus a negotiated fee ("cost-plus"),
as well as fixed price, time and materials reimbursement, and performance-based
criteria. Revenues for cost-plus contracts, including a pro rata amount of the
negotiated fee, are recorded as costs are incurred. Revenues from fixed price
and time and materials reimbursement contracts, including a portion of
estimated profit, are recognized as costs are incurred. During fiscal 1999 and
fiscal 2000, revenues from performance-based contracts, including a portion of
estimated profit, were recognized as costs were incurred. During fiscal 2001,
the Company changed its method of revenue recognition for performance-based
contracts, as discussed below. The timing of billing to clients varies based on
individual contracts and often differs from the period of revenue recognition.
These differences are included in costs and estimated earnings in excess of
billings and billings in excess of costs and estimated earnings.
Management
reviews the costs incurred, the revenues recognized and billings from
government contracts quarterly and adjusts recognized revenues to reflect
current expectations on realization of costs and estimated earnings in excess
of billings. Provisions for estimated losses on incomplete contracts are
provided in full in the period in which such losses become known. The Company
has various fixed price contracts that may generate profit in excess of the
Company's expectations. The Company recognizes additional revenue and profit in
these situations after management concludes that substantially all of the
contractual risks have been eliminated, which generally is at task or contract
completion.
During
the year ended September 30, 2001, the Company changed its method of revenue
recognition for its performance-based contracts in accordance with the
Securities and Exchange Commission’s Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements.
Previously, revenues from performance-based contracts, including a portion of
estimated profit, were recognized as costs were incurred. Under the new
accounting method, adopted retroactively as of October 1, 2000, the Company now
recognizes revenue on its performance-based contracts as such revenue becomes
fixed or determinable which generally occurs when amounts are billable to
customers, rather than as costs are incurred. The cumulative effect of the
accounting changed resulted in a charge to income of $3,856 (net of an income
tax benefit of $2,735), or $0.17 per diluted share, which is included in
operating results for the year ended September 30, 2001. During the year ended
September 30, 2001, the Company recognized $5,696 of the $6,591 of revenue that
was included in the cumulative effect adjustment as of October 1, 2000. The
pro-forma amounts presented in the consolidated statements of income were
calculated assuming the accounting change was made retroactively in prior
periods.
The
Company also licenses software under non-cancelable license agreements. License
fee revenues are 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 revenues are recognized ratably over the term of
the related agreements, which in most cases is one year. Revenues from
software-related consulting services under time and material contracts and for
training are recognized as services are performed. Revenues from other
software-related contract services are generally recognized under the
percentage-of-completion method.
Marketable
Securities
Marketable
securities are classified as available-for-sale and are recorded at fair market
value with unrealized gains and losses, net of taxes, reported as a separate
component of shareholders' equity. Realized gains and losses and declines in
market value judged to be other than temporary are included in other income.
Interest and dividends are also included in other income. For the year ended
September 30, 1999, unrealized losses on marketable securities were $280.
For the year ended September 30, 2000, unrealized losses on marketable securities
were $8 and reclassification adjustments for losses included in net income were
$262. For the year ended September 30, 2001, unrealized gains on
marketable securities were $8. Marketable securities consist primarily of
short-term municipal and commercial bonds.
Property
and Equipment
Property
and equipment is stated at cost and depreciated using the straight-line method
based on estimated useful lives not to exceed 39.5 years for the Company's
buildings and between three and seven years for office furniture and equipment.
Leasehold improvements are amortized over the lesser of their useful life or
the remaining term of the lease.
Intangible
Assets
The
excess of the cost over the fair value of net assets of purchased businesses is
recorded as intangible assets and is amortized using the straight-line method
over periods ranging from two to fifteen years. The carrying values of
intangible assets, as well as other long-lived assets, are reviewed for
impairment if changes in the facts and circumstances indicate potential
impairment of their carrying value. The principle factor used by the Company in
identifying potential impairment is profitability of the acquired business. Any
impairment would be recognized when the expected future operating cash flows from
such intangible assets is less than their carrying value.
Software Development Costs
The Company capitalizes
both purchased software that is ready for resale and costs incurred internally
for software development projects from the time technological feasibility is
established. Upon the general release of the software to customers, capitalized
software development costs for the products are amortized over a range of three
to five years, based on the estimated economic life of the product.
Amortization of software development costs was $703 and $1,542 for fiscal years
2000 and 2001, respectively.
Income
Taxes
Deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted rates
expected to be in effect during the year in which the differences reverse.
The
Company merged with one company during 1999 that had elected to be treated as
an S corporation. The merger resulted in the termination of the S corporation
status for that company and a deferred tax charge against income of $1,109 in
1999 for a cumulative difference between the financial statement and tax basis
of assets and liabilities.
Fair
Value of Financial Instruments
The
Company considers the recorded value of its financial assets and liabilities,
which consist primarily of cash and cash equivalents, marketable securities,
accounts receivable and accounts payable, to approximate the fair value of the
respective assets and liabilities at September 30, 2000 and 2001.
Impact
of New Accounting Pronouncements
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”), effective for fiscal years
beginning after December 15, 2001, with earlier adoption permitted. Under the
new rules, goodwill will no longer be amortized but will be subject to annual
impairment tests in accordance with FAS 141 and FAS 142. Other intangible assets will continue to be
amortized over their useful lives. The Company intends to apply the new rules
on accounting for goodwill and other intangible assets beginning the first
quarter of fiscal year 2002. Application of the non-amortization provisions of
FAS 142 is expected to result in an increase in net income of $2,961 ($.13 per
diluted share) for fiscal year 2002. During fiscal year 2002, the Company
intends to perform the first of the required annual impairment tests of goodwill
as of October 1, 2001 and has not yet determined what the effect of these tests
will be on the earnings and financial position of the Company.
In August 2001, the
Financial Accounting Standards Board issued Statement of FAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and
reporting for the impairment of disposal of long-lived assets. FAS 144 supersedes FAS 121, Accounting for the Impairment of Long-Lived assets
and for Long-Lived Assets to be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations for a disposal of a segment of a
business. FAS 144 is effective for
fiscal years beginning after December 15, 2001, with earlier application
encouraged. The Company expects to
adopt FAS 144 effective as of October 1, 2001 and it does not expect that the
adoption of the Statement will have a significant impact on the Company’s
financial position and results of operations.
3. Business Combinations
On
October 20, 1999, the Company acquired all of the outstanding shares of
capital stock of Public Systems, Inc. for $5,000. In conjunction with the
purchase, the Company recorded intangible assets of $4,540.
On
March 20, 2000, the Company acquired all of the outstanding shares of
capital stock of Crawford Consulting, Inc. for $16,750. In conjunction
with the purchase, the Company recorded intangible assets of $11,887.
On
March 31, 2000, the Company acquired substantially all of the government
services division of 3-G International, Inc. for $7,000, plus an earn-out
amount of $1,126 paid by the Company in May 2001 as a result of the
achievement of certain objectives. In conjunction with the purchase, the
Company recorded intangible assets of $7,054, excluding the May 2001 earn-out
payment.
On
April 12, 2000, CSI-MAXIMUS, Inc., a wholly owned subsidiary of the
Company, acquired substantially all of the assets of Asset Works, Inc. for
$8,613. In conjunction with the purchase, the Company recorded intangible
assets of $8,674.
On April 14, 2000, the Company acquired all of the
outstanding shares of capital stock of Valuation Resource Management, Inc.
for $4,500. In conjunction with the purchase, the Company recorded intangible
assets of $3,763.
On
April 29, 2000, the Company acquired substantially all of the assets of
Technology Management Resources, Inc. for $9,674. In conjunction with the
purchase, the Company recorded intangible assets of $10,036.
On
July 19, 2000, the Company acquired all of the outstanding membership
interests of Strategic Partners International, LLC for $1,800. In conjunction
with the purchase, the Company recorded intangible assets of $1,609.
On May 11, 2001, the Company acquired all of the
outstanding membership interests of Opportunity America, LLC for $825, less a
subsequent purchase accounting adjustment of $45. In conjunction with the purchase, the Company recorded intangible
assets of $708.
Intangible
assets are amortized using the straight-line method over periods ranging from
two to fifteen years. The accumulated amortization related to intangible assets
at September 30, 2000 and 2001 was $3,472 and $9,068, respectively.
Unaudited
pro forma results of operations information for the Company as if the companies
acquired by the purchase method were acquired at the beginning of the periods
being reported is as follows:
All
of the companies acquired in the business combinations described above, except
Opportunity America, are involved primarily in providing software and/or
consulting services for state and local governments. Opportunity America
provides program management and consulting services to private sector and to
federal, state and local government and human services agencies.
4. Earnings Per Share
The
following table sets forth the components of basic and diluted earnings per
share:
5. Costs and
Estimated Earnings on Uncompleted Contracts
Uncompleted
contracts consist of the following components:
Costs
and estimated earnings in excess of billings and billings in excess of costs
and estimated earnings relate primarily to fixed price contracts and, in fiscal
2000, performance-based contracts, wherein the timing of billings to clients
varies based on individual contracts and often differs from the period of
revenue recognition.
6. Credit Facilities
Certain
companies that were acquired by the Company during 1999, 2000, and 2001 had
various arrangements for short and long-term borrowings. These credit
arrangements generally were repaid following the related acquisitions and do
not significantly affect the Company's financial statements.
7. Leases
The
Company leases office space under various operating leases, the majority of
which contain clauses permitting cancellation upon certain conditions. The
terms of these leases provide for certain minimum payments as well as increases
in lease payments based upon the operating cost of the facility and the consumer
price index. Rent expense for the years ended September 30, 1999, 2000,
and 2001 was $11,084, $15,208 and $17,947 respectively.
Minimum
future payments under these leases are as follows:
8. Employee Benefit
Plans and Deferred Compensation
The
Company has 401(k) plans and other defined contribution plans for the benefit
of all employees who meet certain eligibility requirements. The plans provide
for Company match, specified Company contributions, and/or discretionary
Company contributions. During the years ended September 30, 1999, 2000 and
2001, the Company contributed $2,923, $3,287 and $4,590 to the plans,
respectively.
9. Income Taxes
The
Company's provision for income taxes is as follows:
The
provision for income taxes resulted in effective tax rates that varied from the
federal statutory income tax rate as follows:
The
significant items comprising the Company's deferred tax assets and liabilities
as of September 30, 2000 and 2001 are as follows:
Cash
paid for income taxes during the years ended September 30, 1999, 2000 and
2001 was $20,002, $23,748 and $19,753 respectively.
10. Shareholders'
Equity
Follow-on
Public Offering
The
Company completed a public offering (the "follow-on offering") of
common stock during June 2001. Of the 4,255,000 shares of common stock sold in
the follow-on offering, 3,255,000 shares were sold by selling shareholders and
1,000,000 shares were sold by the Company, generating $31,680 in proceeds to
the Company, net of offering expenses.
Employee
Stock Purchase Plan
The
Company’s Employee Stock Purchase Plan permits employees to purchase shares of
the Company's common stock each quarter at 85% of the market value on the last
day of the quarter. During fiscal 1999, 2000 and 2001, respectively, the
Company issued approximately 13,100, 66,900 and 69,100 shares of common stock
pursuant to this plan at an average price of $26.52, $24.53 and $26.19 per
share.
Stock
Option Plans
The
Company's Board of Directors established stock option plans during 1997
pursuant to which the Company may grant incentive and non-qualified stock
options to officers, employees and directors of the Company. Such plans also
provide for stock awards and direct purchases of the Company's common stock.
The
vesting period and share price for awards are determined by the Company's Board
of Directors at the date of grant. Options generally vest over periods from two
to four years. As of September 30, 2001, the Company's Board of Directors
had reserved 5.1 million shares of common stock for issuance under the
Company's stock option plans. At September 30, 2001, 0.8 million
shares remained available for grants under the Company's option plans.
Under
Statement of Financial Accounting Standard (SFAS) No. 123, Accounting
and Disclosure for Stock-Based Compensation, companies may
account for stock options under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and
related interpretations and provide pro forma disclosure of net income, as if
the fair value-based method of accounting defined in SFAS 123 had
been applied. The Company has elected to follow APB 25 and related
interpretations in accounting for its employee stock options and provide pro
forma fair value disclosure under SFAS 123. No compensation cost for
options was recorded during the years presented in the Company’s consolidated
statements of income.
Pro forma information regarding net income has been
determined as if the Company had accounted for its stock options under the fair
value method of SFAS 123. The fair value for these options was estimated
at the date of grant using the Black-Scholes method with the following
assumptions: volatility of 56% for 1999, 66% for 2000 and 62% for 2001; risk
free interest rate of 6.5% for 1999, 5.7% for 2000 and 4.2% for 2001; dividend
yield 0%; and an expected life of the option of 4 years in 1999,
4.4 years in 2000 and 6 years in 2001. The grant-date weighted average
fair value per option of options granted was $14.45 in 1999, $14.77 in 2000 and
$13.24 in 2001.
For
purposes of the pro forma disclosure, the estimated fair value of the options
is amortized to reflect such expense over the options' vesting period. For the
years ended September 30, 1999, 2000, and 2001, pro forma net income and
pro forma net income per share resulting from the adjustment for stock option
compensation was as follows:
A
summary of the Company's stock option activity for the years ended
September 30, 1999, 2000 and 2001 is as follows:
The following table provides
certain information with respect to stock options outstanding at September 30,
2001:
The following table provides
certain information with respect to stock options exercisable at September 30,
2001:
11. Commitments and
Contingencies
Litigation
In
January 2000, the New York City Human Resources Administration submitted
two contracts that it had awarded to the Company for the performance of
welfare-to-work services to the Comptroller of New York City to be registered.
Under New York law, the contracts must be registered in order for the Company
to receive payment. However, the Comptroller refused to register the contracts
alleging improprieties in the procurement process and in the Company’s conduct.
The New York Supreme Court, Appellate Division-First Department ordered the Comptroller to
register the contracts in October 2000 after finding no wrongdoing in the
Company’s conduct. This matter has also been investigated by certain government
agencies. The District Attorney's Office of New York County and the United
States Attorney's Office for the Southern District of New York, in response to
requests made by the Comptroller, announced that they were investigating the
facts underlying this matter. Those offices reviewed some of the Company’s
documents and interviewed some of its employees in 2000 and 2001. In October
2001, the United States Attorney’s Office informed the Company that it had closed
its file on the matter without taking any actions against the Company. In
December 2001, the District Attorney’s Office informed the Company that it had
closed its investigation and determined not to take any action against the
Company.
The
Company is involved in various legal proceedings in the ordinary course of its
business. In the opinion of management, these proceedings involve amounts that
would not have a material effect on the financial position or results of
operations of the Company if such proceedings were disposed of unfavorably. A
substantial portion of payments to the Company from United States government
agencies is subject to adjustments upon audit by the agency with which the
Company has contracted. Audits through 1993 have been completed with no
material adjustments. In the opinion of management, the audits of subsequent
years are not expected to have a material adverse effect on the Company's
financial position or results of operations.
Employment
Agreements
The
Company has employment agreements with 33 of its executives and other employees
that provide for aggregate base salaries of approximately $6,340 per year. The
terms of the employment obligations end between 2002 and 2004.
12. Concentrations of
Credit Risk and Major Customers
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts. To date, these
financial instruments have been derived from contract revenues earned primarily
from federal, state and local government agencies located in the United States.
At
September 30, 2000 and 2001, $3,040 and $4,271 of the Company's accounts
receivable were due from the United States Government, respectively. Revenues
under contracts with various agencies of the United States Government were
$8,670 and $19,568 for the years ended September 30, 2000 and 2001,
respectively. Of these amounts, $5,416 and $11,967 for the years ended
September 30, 2000 and 2001, respectively, were revenues of the Government
Operations segment. A minimal amount of revenue was derived from the United
States Government during the year ended September 30, 1999.
At
September 30, 2000 and 2001, $16,542 and $24,370 of the Company's accounts
receivable were due from one state government. Revenues from contracts with
this state, principally by the Government Operations segment, were $49,131,
$48,899 and $74,270 for the years ended September 30, 1999, 2000 and 2001,
respectively.
13. Business Segments
In
October 2000, the Company completed a reorganization of its divisions in order
to better focus and manage the Company's existing and future technology assets.
This reorganization involved the creation of the Systems Group. Prior period
segment data has been reclassified to reflect current period presentation of
segment information.
The
following table provides certain financial information for each business
segment:
14. Quarterly
Information (Unaudited)
Set
forth below are selected income statement data for the eight quarters ended
September 30, 2001. The Company derived this information from unaudited
quarterly financial statements that include, in the opinion of Company’s
management, all adjustments necessary for a fair presentation of the
information for such periods. Results of operations for any fiscal quarter are
not necessarily indicative of results for any future period.
(Table continued on next page)
(1) During
the fourth quarter of fiscal 2000, the Company incurred an expense of
approximately $3.7 million to settle litigation with a former officer, director
and shareholder of the Company. The matter was settled without admission of
fault or liability on the part of the Company.
(2) During
the fourth quarter of fiscal 2001, the Company changed its method of accounting
for revenue recognition in accordance with SEC Staff Accounting Bulletin No.
101, Revenue Recognition in Financial
Statements. Effective October 1, 2000, the Company recorded the cumulative
effect of the accounting change. Additionally, pursuant to Financial Accounting
Standards Board Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, the quarterly
information for the first three quarters of fiscal 2001, which had been
previously reported, has been restated. No restatement of fiscal 2000
information was necessary.
ITEM 9.
ITEM 9. Changes in
and Disagreements With Accountants on Accounting and Financial Disclosures. None.
PART III ITEM 10.
ITEM 10. Directors
and Executive Officers of the Registrant. The
response to this item is contained in part under the caption “Executive
Officers and Directors and Other Significant Employees of the Registrant” in
Part I hereof and the remainder is incorporated herein by reference from
the sections captioned “Section 16(a) Beneficial Ownership Reporting
Compliance” and “PROPOSAL 1: Election of Directors” in the Company’s Proxy
Statement relating to its Annual Meeting of Shareholders scheduled for
March 5, 2002 (the “Proxy Statement”).
ITEM 11.
ITEM 11. Executive
Compensation. The
response to this item is incorporated herein by reference from the section
captioned “Executive Compensation” in the Proxy Statement.
ITEM 12.
ITEM 12. Security
Ownership of Certain Beneficial Owners and Management. The
response to this item is incorporated herein by reference from the section
captioned “Security Ownership of Management and Five Percent Owners” in the
Proxy Statement.
ITEM 13.
ITEM 13. Certain
Relationships and Related Transactions. The response to this
item is incorporated herein by reference from the section captioned “Certain
Relationships and Related Transactions” in the Proxy Statement.
PART IV ITEM 14.
ITEM 14. Exhibits,
Financial Statement Schedules and Reports on Form 8-K.
(a)
1.
Financial Statements.
The consolidated
financial statements are listed under Item 8 of this report.
2.
Financial Statement
Schedules.
None.
3.
Exhibits.
The Exhibits filed as
part of this Form 10-K are listed on the Exhibit Index immediately
preceding such Exhibits, which Exhibit Index is incorporated herein by
reference.
(b)
Reports On Form 8-K.
No Current Reports on
Form 8-K were filed by the Company during the fourth quarter of fiscal
2001.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 21st day of
December 2001.
Each
undersigned person hereby constitutes and appoints David V. Mastran,
F. Arthur Nerret, and David R. Francis, and each of them singly, with
full power of substitution and full power to act without the other, as his or
her true and lawful attorney-in-fact and agent, with full power to sign for
use, in his or her name and in the capacity indicated below, any and all
amendments to this Annual Report on Form 10-K of MAXIMUS, Inc. for
the fiscal year ended September 30, 2001, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming that which
each said attorney-in-fact may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature
Title
Date
/s/ DAVID V. MASTRAN
President, Chief
Executive Officer and Director (Principal Executive Officer)
December 21, 2001
David V. Mastran
/s/ F. ARTHUR NERRET
Chief Financial
Officer (Principal Financial and Accounting Officer)
December 21, 2001
F. Arthur Nerret
/s/ RUSSELL A.
BELIVEAU
Director
December 21, 2001
Russell A. Beliveau
/s/ JESSE BROWN
Director
December 21, 2001
Jesse Brown
/s/ LYNN P. DAVENPORT
Director
December 21, 2001
Lynn P. Davenport
/s/ THOMAS A. GRISSEN
Director
December 21, 2001
Thomas A. Grissen
/s/ PETER B. POND
Chairman of the Board
of Directors
December 21, 2001
Peter B. Pond
/s/ JAMES R. THOMPSON,
JR.
Director
December 21, 2001
James R. Thompson, Jr.
EXHIBIT INDEX
Exhibit
Number
3.1
Amended and Restated
Articles of Incorporation of Company, as amended. (1)
3.2
Amended and Restated
By-laws of Company. (2)
4.1
Specimen Common Stock
Certificate. (2)
10.1
1997 Equity Incentive
Plan, as amended. (3)*
10.2
1997 Director Stock
Option Plan, as amended. (4)*
10.3
1997 Employee Stock
Purchase Plan. (5)*
10.4
Amendment No. 1 to
1997 Employee Stock Purchase Plan. (6)*
10.5
Executive Employment,
Non-Compete and Confidentiality Agreement by and between the Company
and George C. Casey. (7)*
10.6
Executive Employment,
Non-Compete and Confidentiality Agreement by and between the Company
and Gary L. Glickman. (7)*
10.7
Executive Employment,
Non-Compete and Confidentiality Agreement by and between the Company
and Thomas A. Grissen. (8)*
10.8
Executive Employment,
Non-Compete and Confidentiality Agreement by and between the Company
and James M. Paulits. (1)*
10.9
Form of
Indemnification Agreement by and between the Company and each of the
directors of the Company. (5)
10.10
California Options
Project Contract, dated October 1, 1996, by and between the Company
and the Department of Health Services of the State of California. (4)
21.1
Subsidiaries of the
Company. Filed herewith.
23.1
Consent of Ernst &
Young LLP, independent auditors. Filed herewith.
24.1
Power of Attorney,
contained on signature page hereto.
99.1
Important Factors
Regarding Forward Looking Statements. Filed herewith.
* Denotes management
contract or compensation plan.
(1) Filed as an exhibit to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000 (File No. 1-12997)
on August 14, 2000 and incorporated herein by reference.
(2) Filed as an exhibit to the Company’s
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (File No. 1-12997)
on August 14, 1997 and incorporated herein by reference.
(3) Filed
as an exhibit to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 (File No. 1-12997) on May 15, 2001 and
incorporated herein by reference.
(4) Filed
as an exhibit to the Company’s Annual Report on Form 10-K for the year
ended September 30, 1997 (File No. 1-12997)
on December 22, 1997 and incorporated herein by reference.
(5) Filed
as an exhibit to the Company’s Registration Statement on Form S-1 (File
No. 333-21611) on February
12, 1997 and incorporated herein by reference.
(6) Filed
as an exhibit to the Company’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (File No. 1-12997)
on August 13, 1998 and incorporated herein by reference.
(7) Filed
as an exhibit to the Company’s Annual Report on Form 10-K for the year
ended September 30, 1998 (File No. 1-12997)
on November 23, 1998 and incorporated herein by reference.
(8) Filed
as an exhibit to the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 (File
No. 1-12997) on May 17, 1999 and incorporated herein by
reference.