ITEM
1. Business.
Overview
We are a leading provider
of health and human services program management, consulting services and
systems solutions primarily to government agencies. Since our inception, we
have been at the forefront of innovation in meeting our mission of “Helping
Government Serve the People®.” We use our expertise, experience and
advanced information technology to make government operations more efficient
and cost-effective while improving the quality of services provided to program
beneficiaries. We operate primarily in the United States and have had contracts
with government agencies in all 50 states. We have been profitable every
year since we were founded in 1975. For the fiscal year ended
September 30, 2002, we had revenue of $518.7 million and net income
of $40.3 million.
We conduct our operations
through four business segments: our Consulting Group, our Health Services
Group, our Human Services Group and our Systems Group. Our Consulting Group
provides specialized consulting 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
Health Services Group administers and manages managed care enrollment programs
and also provides health literacy support and consulting services. Our Human
Services Group administers and manages state and local government human service
programs on a fully-outsourced basis. Examples of these programs include
welfare-to-work and job readiness, child-care, child support enforcement, and
disability services. Our Systems Group provides federal, 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®.
We believe that we are
well positioned to benefit from the continuing demand for program management,
consulting services and systems solutions in an environment characterized by
changing regulation and evolving technology. We believe that budgeting
pressures, particularly at the state level, will compel state and local
governments to continue to review program operations and seek cost savings.
Although the current economic environment results in fewer new, large outsourcing
opportunities, we expect the demand for our existing outsourcing programs to
generally remain stable, because of the fundamental need for governments to
provide these services to their constituents. Also, some programs are federally
mandated and/or partially funded. In addition, we expect state and local
governments will upgrade technology to operate more cost-efficient and
productive programs. To achieve these results, we believe that many government
agencies will turn to outside experts, including us, for help.
Legislative
Initiatives
There have been a significant number of legislative initiatives which
have reformed 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 manage health care
enrollment for government agencies in California, New York, Texas,
Massachusetts, Michigan, New Jersey, 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. Also, 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.
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
Our primary clients are state and local government agencies, but a
small portion of our business comes from a variety of federal agencies and
commercial clients as well. In fiscal 2002, approximately 59% of our total
revenue was derived from state government agencies; 30% from local government
agencies; 6% from federal government agencies; and 5% from other sources,
primarily foreign and commercial clients.
The state government market has been challenging over the last fiscal
year and we believe it will remain challenging into the first half of fiscal
year 2003. We attribute this to a highly unusual political environment
associated with an unprecedented number of gubernatorial elections nationwide,
and the overall weakness in many states’ budgets. There were 36 gubernatorial
elections on November 5, 2002,
which resulted in
24 new governors taking office. Based on our prior experience with significant
turnovers in administrations, we believe that while there may be delays in
state spending in some areas, there may also be an acceleration of certain
initiatives in other areas. Moreover, there is generally a lag in state
spending as new administrations evaluate needs and put key staff into place.
While we have generally seen no material increase or decrease in overall
revenue, we may experience shifts in our overall revenue mix associated with
the aforementioned accelerations or delays. Additionally, many states faced
budget deficits in fiscal year 2002 and budgetary pressures are expected to
continue into fiscal year 2003. We have found that during difficult economic
times the population enrolling in existing state government health and human
service programs tends to expand, requiring governments to spend more to
administer these types of core services to constituents. Consequently, our
business has remained relatively stable. Nevertheless, program reductions may
be experienced as states seek to balance their budgets.
A large portion of our revenue is derived from federally-mandated
programs as well as state and local government programs. Therefore, we believe
our revenue base, including revenue from states, is insulated to a meaningful extent
from state budget shortfalls. As a result, our revenue base has remained stable
over the last year despite the economic downturn. 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. Therefore, we
continue to believe that as government strives to generate efficiencies to
reduce costs and improve effectiveness, they will continue to seek assistance
from private sector companies including MAXIMUS to achieve their goals.
We believe that we deliver valued-added services to government agencies
by providing health and human services program management, consulting services
and systems services that help government operate more efficiently and effectively.
We believe we offer solutions and services that may be unobtainable by
government agencies through internal resources, and we do this by:
• Attracting
and compensating experienced, high-level management personnel;
• Rapidly
procuring and using advanced technology;
• Varying
the resources on a project to match fluctuating work loads;
• Increasing
productivity by providing employees with financial incentives and performance
awards and by terminating non-productive employees;
• Providing
employees with ongoing training and career development assistance;
• Maintaining
a modern and efficient work environment that is conducive to employee
productivity;
• Providing
an objective opinion and implementation plan based on an overall assessment of
clients needs; and
• Assisting
agencies with valid solutions to deal with retiring workforces and older
systems.
Competitive
Advantages
We are a pioneer in offering government, primarily state and local
agencies, compelling solutions with consulting services and systems services,
as well as being a private sector alternative to internal administration of
government. Early entry into the government market gives us the experience and
name
recognition that
provides us with a significant competitive advantage. The following is a
detailed discussion of the competitive advantages that allow us to capitalize
on the market opportunities presented by changes in the ways governments
provide services.
Single
market focus. We are
one of the largest publicly traded companies to focus primarily on government
clients. This single-market concentration allows us to fully dedicate time and
resources in providing health and human services program management, consulting
services and systems solutions to government clients. Over the past 27 years,
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 efficiently manage the complexities
of serving government agencies.
Wide
range of services across vertical business segments. Many of our clients require their vendors to
provide a broad array of service offerings across various vertical markets,
which many of our competitors cannot provide. Engagements often require
creative solutions that must be drawn from diverse areas of expertise across
our organization. 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
government agencies. Our broad client base affords us the opportunity to
cross-sell different products and services across our various operating
divisions. We have also completed numerous acquisitions over the last several
years that have added products and solutions that provide us with enhanced
service capabilities and an expanded base of clients.
Proven
track record. Since
1975, we have successfully and profitably applied our private sector approach
to assisting government, primarily state and local 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 every state. 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 track record and reputation have
contributed significantly to our ability to compete successfully for new
contracts.
Ability
to respond to RFPs.
Government agencies typically award contracts to third party providers
through onerous, lengthy and complicated bidding and proposal processes. With
over 27 years of experience responding to RFPs, we have gained significant
experience and expertise to navigate complex procurement processes. The complex
nature of this process creates significant barriers to entry for potential new
competitors not familiar with the onerous nature of government procurement. We
have the necessary knowledge and experience to estimate project costs and
productivity levels and to perform according to contractual terms. As a result,
our proposals allow us to clearly demonstrate our ability to meet all client
requirements at a price that is both attractive to the client and profitable to
the company. 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 and will continue to be a
key factor in our future success rates.
In an effort to increase our competitive advantage, we launched a
centralized proposal operations center in fiscal year 2002, located in McLean,
Virginia. We have made investments in systems, processes and people in an
effort to elevate our proposal practices. We have significant experience and
expertise in
assembling the
large amounts of information required to submit detailed proposals in response
to RFPs in a timely manner. We believe the addition of the proposal operations
infrastructure should result in a keener focus on the entire marketing cycle,
from pre-marketing through proposal preparation and contract negotiation, which
will ultimately provide a more cohesive effort throughout the entire RFP
process. Consequently, we believe that overall improvements in the RFP process
should generate favorable results in our ability to secure and expand key RFP
wins.
Proprietary program management
solution. We have
developed the MAXSTAR® Human Services Application Builder, automated
case management software that interfaces with government databases, tracks
program participant records and cases, and supports extraction and analysis of
program data. As technology continues to evolve, we are seeking to leverage the
current proprietary MAXSTAR® system by migrating it to an open
architecture system utilizing a Java 2 Enterprise Edition (“J2EE”) framework
and components.
Current and future e-Government initiatives are
mandating open architecture systems that will provide greater interoperability
among agencies, systems and programs, as well as enhanced flexibility and
scalability. Our J2EE framework will provide us with a competitive advantage by
aligning our systems and services with these critical government standards.
Experienced
management 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 considerable experience in the public
services industry. Because of our depth and breadth of experience, we
understand the problems and challenges faced in the marketing, assessment and
delivery of government services. Further, as 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 grow by remaining a leading provider of health and human
services program management, consulting services and systems solutions to
government agencies. In fiscal 2002, we made significant investments in system
and process infrastructure including the development and implementation of a
new proposal center. We believe these investments will facilitate our marketing
and pre-marketing capabilities in an effort to better identify opportunities
for new and existing clients to subsequently grow and expand our business.
Overall, we plan to grow our revenue by:
• Maintaining
our existing client base in outsourcing by providing superior solutions that
are cost-effective to our clients
• Marketing
new and innovative solutions to our existing client base;
• Expanding
our client base by providing value-added solutions based on our experience,
established methodologies and systems, and market prowess, to meet existing and
future needs of clients;
• Developing
and implementing new services that complement our existing product portfolio;
• Providing
cost reduction services and revenue maximization opportunities to governmental
entities;
• Investing
in the early identification of government bid opportunities, including
retaining outside marketing consultants, hiring dedicated in-house personnel
and using our newly upgraded RFP tracking systems, processes and people; and
• Submitting
competitive bids that leverage proven solutions from past projects across
business units and market segments, including deploying key personnel who made
significant contributions on similar projects in an effort to tap their
expertise and skill set.
Aggressively
pursue new business opportunities. We believe that, throughout our 27-year history, we have been a
leader in developing innovative solutions to meet the evolving needs of
government agencies. We believe our proven brand recognition continues to be a
critical asset as we continue to identify and respond to new business
opportunities in an effort to gain additional expertise and deliver added value
to new and existing clients.
Continue
to develop complementary services. We intend to continue broadening our ranges of services in order
to better respond to the evolving needs of our clients and to provide
additional cross-selling opportunities. We will continue to develop innovative
consulting practices, technologies, and methodologies that are required by
government entities in order to effectively deliver public services.
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. In addition, we
have been a company of choice for senior government personnel who may be retiring
or otherwise seeking employment in the private sector. 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.
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.
Consulting
Group
Our Consulting Group, which generated approximately 27% of our total
revenue in our 2002 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.
School
Based Claiming Division.
Our School Based Claiming Division undertakes school related revenue
maximization for large school districts. These projects are generally carried
out on a contingency basis determined as a percentage of funds recovered from
the federal government.
Child Welfare Division. Our Child Welfare Division conducts program
compliance consulting and
related revenue
maximization projects. The program compliance services are provided to six
states on a fee for service basis. The revenue maximization projects are
carried out on a contingency fee basis determined as a percentage of funds
recovered from the federal government.
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. 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.
Cost Services Division. Our Cost Services Division performs services
to assist local and state governments in their efforts to recover available funding
from state and federal agencies, enhance revenue and operate efficiently.
Service areas include local cost planning services, user fee efforts and
California SB-90 engagements.
Technology Support Division.
Our Technology Support Division provides strategic information
management and consulting services to state health, human services, budget and
finance, and public employee retirement agencies to assist in solving complex
problems related to the automation of government services. Our experienced team
of skilled project managers and information technology professionals has
assisted clients in planning, procuring, and implementing information systems
in multiple projects across numerous states. These services include the
application of standards-based quality assurance and verification and
validation services to assist our clients in managing the work performed by
contractors who sell these systems.
Management Studies Division. Our Management Studies Division provides a
variety of consulting services to state and local government agencies, schools
and universities, and the federal government, with particular emphasis on
management studies, activity-based management and costing, human resources
consulting, organizational development assessments, executive recruitment, and
airport operations. The management studies practice is broad in scope, covering
a wide range of state and local agencies, including police and fire
departments. The human resources and organizational development practice
focuses on organizational effectiveness, classification and compensation,
performance appraisal systems, and policy and procedures. Executive recruitment
conducts search and placement activities for key leadership positions in
government organizations. The airport consulting services include airport
finance and business management, airport retail concessions planning,
facilities planning and systems development.
Asset
Management Division.
Our Asset Management Division provides support services to local, state,
and federal governments, as well as hundreds of school districts and
universities, assisting with the control, inventory, and management of assets.
Engagements include physical inventory control, regulatory compliance and
reporting, and asset valuation services. This Division also supports the
GASB-34 requirements for asset evaluation and management.
Education Division. Our Education
Division provides consulting services, technical support, and software tools to
school districts, colleges and universities, hospitals, and not-for profit
organizations. The division licenses SchoolMAX™ a world-class student
information system to K-12 school districts that captures, retrieves, and
aggregates all relevant student, family, and school information. The Higher
Education practice licenses specialized systems to top research institutions
across the country for purposes
of managing their
research grants efficiently and effectively.
Health
Services Group
Our Health Services Group, which generated
approximately 30% of our total revenue in our 2002 fiscal year, is comprised of
three regional divisions that provide a range of administrative support for
publicly funded health services and health insurance programs, with a
particular emphasis on state Medicaid managed care enrollment programs and
State Children’s Health Insurance Programs (“CHIPs”). For such programs, we
provide:
• Beneficiary/recipient
outreach, education, and enrollment counseling;
• Customized
automated information systems;
• Design
and development of program educational materials;
• Comprehensive
client service via on-site call centers;
• Program
data collection and reporting;
• Program
eligibility determination;
• Health
plan encounter data analysis and reporting; and
• Client
satisfaction surveys and needs assessments.
We provide managed
care enrollment services to more Medicaid recipients than any other public or
private sector entity in the nation by operating programs for the states of
California, New York, Texas, Michigan, Massachusetts, New Jersey, Vermont, Colorado,
and Montana. We administer CHIP projects for Michigan, Kansas, Iowa, and New
Jersey. We also monitor the provision of Medicaid’s early screening, diagnosis
and treatment services in Texas and Connecticut. The MAXIMUS Center for Health
Dispute Resolution operates an extensive system for the independent medical
review of disputed health insurance claims, and is a primary national
contractor for external appeals in the Federal Medicare managed care program
and the independent review contractor for numerous states. We also operate a
physician profiling program for New York, and a Center for Health Literacy and
Communication Technologies that concentrate on producing reader friendly
information for low-literacy populations.
Human
Services Group
Our Human Services Group, which generated approximately 28% of our
total revenue in our 2002 fiscal year, specializes in the administration and
management of government health and human services programs.
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. 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 many states, providing full child support services and
specialized services for over one million cases.
Workforce
Services Division.
The Workforce Services Division manages government workforce-centered
service programs in the United States and Australia. We help disadvantaged
individuals transition from government assistance programs to employment and
independence. This is accomplished by providing comprehensive services,
including eligibility determination, case management, job readiness preparation
and search, job
development and employer outreach, job retention and career advancement, and
selected educational and training services. We also provide employment case
management services to the ex-offender population. During the 2002 fiscal year,
we placed numerous program participants into jobs, thereby improving the lives
of many individuals. Additionally, we offer advocacy services for youth and
disabled persons in the United States and rehabilitation services in Australia,
assistance to employers in accessing tax credit benefits, and research and
survey solutions to government agencies through our Center for Public Studies
and Surveys.
Children
Services Division.
The Children Services Division positions us to become effectively
competitive in the children services systems and outsourcing market areas. The
Division combines our children services business process outsourcing delivery
with our children’s systems development expertise using the new MAXIMUS Human
Services Application Framework and associated Child Care application. The
Division is anchored with our very successful Child Care practice and focuses
on child care, child welfare, and generic case management systems and on
outsourcing services for childcare, child welfare, and not-for-profit community
based agencies. The Division’s program areas and offerings within the program
areas include: Child Care, Child Welfare, Not-for-Profit Community -Based
Agency Outsourcing, Systems, Products and Application Service Provider
services.
Systems
Group
Our Systems Group, which generated approximately 15% of our total
revenue in our 2002 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.
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 for state
governments around the country. We are also involved in the deployment of new
systems to support other divisions involved in the delivery of health program
operations services.
Federal
and Intelligent Technologies Division. Our Federal and Intelligent Technologies
Division provides expert assistance in developing, planning and implementing
smart card technology, biometric recognition systems, and e-government
consulting services and related technologies. The division has also 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 fiscal 2001, we 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.
ERP
Solutions Division.
The Enterprise Resource Planning (“ERP”) Solutions Division consultants
work almost exclusively with government and educational entities to implement
PeopleSoft® and provide IT consulting services. Our goal is to
deliver cost-efficient technology-based business solutions, including client
information systems/utility billing, financial systems, human resources
management systems, procurement systems, and student administration systems.
Our ERP Solutions Division is a PeopleSoft consulting alliance partner and a
certified PeopleSoft Application Systems Provider.
Asset
Solutions Division.
The Asset Solutions Division offers a suite of client/server and
internet-based
asset management
software solutions that manage and maintain physical assets, including fleet,
fuel, facility, space and fixed assets. Asset Solutions provides software
solutions to over 500 clients including government agencies, public utilities,
mass transits, universities and commercial clients. 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, Waste Management
and the Massachusetts Bay Transportation Authority.
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. In
fiscal 2002, we introduced our new software application, JailView®
which is designed to assist law enforcement officials in the management of
jails and the tracking of inmate records. The Justice Solutions Division also
develops and implements integrated 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.
Backlog
Backlog represents an estimate of the remaining future revenue from
existing signed contracts and revenue from contracts that have been awarded but
not yet signed. Our backlog estimate includes revenue expected under the
current terms of executed contracts, revenue 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 backlog result from additions for future revenue 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. Our
contracts typically contain provisions permitting government clients to
terminate the contract on short notice, with or without cause.
Estimates of future revenue from awarded or signed contracts are
necessarily inexact and the receipt and timing of this revenue 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 revenue 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, contracts may be subject to funding, or initial
estimates regarding a contract’s revenue could be inaccurate.
Marketing
and Sales
Our Consulting Group, Health Services Group, Human Services Group, and
Systems Group all obtain program management, consulting services and systems
solutions contracts with government agencies by responding to RFPs. We have
developed and implemented a sophisticated RFP tracking system that provides us
with real-time information about the status of existing RFPs, our actions to
date, and deliverables with respect to those RFPs.
While our processes are sophisticated, we
frequently seek new ways to gain efficiencies. As such, we launched a
centralized proposal operations center located in McLean, Virginia in March
2002 and have made considerable investments in systems, processes and people in
an effort to dramatically overhaul our proposal response practices. Although we
have significant experience and expertise in assembling the large amounts of
information required to submit detailed proposals in response to RFPs in a
timely manner, we expect the addition of the proposal operations infrastructure
to result in a more keenly focused pre-marketing and marketing effort on the
front end of the proposal process which will ultimately provide a more cohesive
effort throughout the entire RFP process. Consequently, we believe that overall
improvements in the RFP process will generate favorable results in our ability
to secure and expand key RFP wins.
In conjunction with our RFP processes, we engage our Government Affairs
unit, which is comprised of full time employees and marketing consultants
located in regional offices nationwide, to develop and maintain 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. Our marketing consultants provide introductions
to government personnel and provide information to us regarding the status of
legislative initiatives and executive decision-making.
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
subscribe to government RFP databases that track government bid activity and we
also make every effort to ensure that we are on bidder’s lists as well as
approved vendor lists for government procurement offices. 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 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 health and human services program management,
consulting and systems services to government agencies generally is competitive
and subject to rapid change. Our Consulting Group competes with specialized
consulting firms. Our Health Services Group and Human Services Group compete
for program management contracts with the government services divisions of
large organizations such as Affiliated Computer Systems, Electronic Data
Systems, Inc., Accenture, and Tier Technologies, more specialized service
providers such as Policy Studies Incorporated, and local non-profit
organizations such as the United Way, Goodwill Industries and Catholic
Charities. Our Systems Group competes with a large number of competitors
including Unisys, SAP, Oracle, BearingPoint, Accenture, Litton PRC (a Northrop
Grumman Company), and Electronic Data Systems, Inc.
It is possible we may face increased competition in the future but our
experience, reputation, industry focus, and broad range of services provide
significant competitive advantages that we expect will enable us to compete
effectively in our markets. There is also the possibility that new companies
will try to enter the space. However, we believe that our extensive experience
will continue to provide us with a competitive advantage.
Employees
As of September 30, 2002, we had 5,188 employees, consisting of 656
employees in the Consulting Group, 1,568 employees in the Health Services
Group, 2,241 employees in the Human Services Group, 519 employees in the
Systems Group and 204 corporate administrative employees. Our success depends
in large part on attracting, retaining and motivating talented, innovative and
experienced professionals at all levels. As of September 30, 2002, 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 2000, 2001, and
2002 were $1.6 million, $2.9 million and $9.3 million, respectively. At
September 30, 2002, we had $10.5 million long-lived assets located in foreign
countries, principally Australia. An insignificant amount of long-lived assets
were located in foreign countries at September 30, 2001.
Website
Information
Our Internet address is www.maximus.com. We make available free of
charge through our website access to our Annual Reports on Form 10-K, our
Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments
to these reports, as filed with or furnished to the Securities and Exchange
Commission (the “SEC”) pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the SEC.
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. We lease 216 offices
totaling approximately 1.1 million 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.
ITEM
3.
ITEM
3. Legal
Proceedings.
On December 5, 2000, the Village of Maywood, Illinois
(the “Village”) sued Unison MAXIMUS, Inc. (“Unison”), a wholly-owned subsidiary
of MAXIMUS, in the Circuit Court of Cook County, Illinois. (We acquired Unison
Consulting Group, Inc. in May 1999 and subsequently renamed it “Unison MAXIMUS,
Inc.” Unison remains a wholly-owned subsidiary of MAXIMUS). The Village had
contracted with Unison to provide a variety of financial and consulting
services from 1996 through 1999. The Village has alleged inter alia breach of contract, breach of
fiduciary duty, and fraud. The action is in the discovery and motion phase and
no trial date has been set. The complaint does not specify the Village’s
damages. In September 2002, the Village filed a purported expert report with
the court that estimated the Village’s damages to be approximately $47 million.
We and Unison believe that report is deeply flawed and the Village’s claims are
without merit. Unison intends to defend the action vigorously. Unison
tendered the claim to our insurance carrier. Although
there is no assurance of a favorable outcome, we do not believe that this
action will have a material adverse effect on our financial condition or
results of operations, and we have not accrued for any loss related to this
action.
We are involved in various legal proceedings in the ordinary course of
our business. In our opinion, we do not expect the ultimate outcome of the
legal proceedings to have a material adverse effect on our financial condition
or our results of operations.
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.
Lynn P.
Davenport has served as the General Manager of our Health and
Consulting Services Strategic Business Unit since October 2001. Before that he
was President of our Consulting Group from October 2000 to September 2001.
Previously he had been 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 the General Manager of our Human
Services and Systems Strategic Business Unit since October 2001. Before that he
was Chief Operating Officer from October 2000 to September 2001.
Previously he had been 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 a 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 M. Johnson has served as our
Chief Operating Officer since October 2002. Previously he was a Partner and
Managing Director with Deloitte Consulting for 19 years serving in numerous
capacities including office, regional, practice and industry management
responsibilities. His primary focus was in serving government clients in the
U.S. federal, state and local market with an emphasis on information technology
and operations improvement. Prior to Deloitte, he was with Nolan, Norton &
Company and Automatic Data Processing in management consulting roles. Mr.
Johnson received an Accounting Degree from Bentley College in 1979.
Richard A. Montoni has served as
our Chief Financial Officer and Treasurer since March 2002. Previously he
served as Chief Financial Officer and Executive Vice President for Managed
Storage International, Inc. in Broomfield, Colorado from December 2000 to
August 2001. From October 1996 to December 2000, he was Chief Financial Officer
and Executive Vice President for CIBER, Inc., a NYSE-listed company in
Englewood, Colorado where he also served as a director until March 2002. Before
joining CIBER, he was an audit partner with KPMG, LLP, where he worked for
nearly 20 years. Mr. Montoni holds a Masters Degree in Accounting from
Northeastern University and a Bachelor of Science degree in Economics from
Boston University.
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.
Russell
A. Beliveau has
served as a director since 1995. He served as our President of Investor
Relations from October 2000 to September 2002 and served as President of
Business Development from September 1998 until October 2000. 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 2005 Annual Meeting of Shareholders.
John J. Haley has served as one of
our directors since June 2002. Mr. Haley is currently President and Chief
Executive Officer of Watson Wyatt & Company Holdings, a human resources and
employee benefits consulting firm. Mr. Haley joined Watson Wyatt in 1977. Mr.
Haley is also a director of Watson Wyatt & Company Holdings and serves on
the Watson Wyatt LLP Partnership Board. Mr. Haley is a Fellow of the Society of
Actuaries and is a co-author of Fundamentals
of Private Pensions (University of Pennsylvania Press). He has an
A.B. in Mathematics from Rutgers College and studied under a Fellowship at the
Graduate School of Mathematics at Yale University. Mr. Haley’s current term as
a director expires at the 2005 Annual Meeting of Shareholders.
Marilyn A. Seymann has served as
one of our directors since April 2002. Dr. Seymann is currently President and
Chief Executive Officer of M One, Inc., a management risk and information systems
consulting firm specializing in the financial services industry. She has been
with M One since 1991. Dr. Seymann holds a B.A. from Brandeis University, an
M.A. from Columbia University, and a Ph.D. from California Western University.
She is a director of Beverly Enterprises, Inc., Community First Bankshares,
Inc., and NorthWestern Corporation. Dr. Seymann’s current term as a director
expires at the 2005 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
international 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 Navigant Consulting, Inc., Prime
Retail, Inc., The Japan Society (New York), 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
and the Lyric Opera. 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 16, 2002 were $27.63 and $27.38, respectively. As of
December 16, 2002, there were 112 holders of record of our outstanding
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.
Equity Compensation Plan Information
(1) Represents options
assumed in connection with our acquisition of Carrera Consulting Group
(“Carrera”) in August 1998. The exercise price of these options is $12.31 per
share. All of these options are fully vested and expire in May 2008.
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
revenue 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 health and human services program
management, consulting services and systems solutions primarily to government
agencies. Since our inception, we have been at the forefront of innovation in
meeting our mission of “Helping Government Serve the People®.” We
use our expertise, experience and advanced information technology to make
government operations more efficient and cost-effective while improving the
quality of services provided to program beneficiaries. We operate primarily in
the United States and have had contracts with government agencies in all
50 states. We have been profitable every year since we were founded in
1975. For the fiscal year ended September 30, 2002, we had revenue of
$518.7 million and net income of $40.3 million.
Prior to fiscal 2002, we conducted our operations through three
business segments: the Consulting Group, the Government Operations Group and
the Systems Group. Beginning in fiscal 2002, we reorganized our business into
four segments in order to better focus and manage our healthcare outsourcing
work, which had been part of the Government Operations Group. Accordingly,
prior period financial information has been reclassified to reflect current
period presentation of segment information.
Business
Combinations and Acquisitions
As part of our ongoing growth strategy, we intend to continue to
selectively identify and pursue the acquisition of complementary businesses to
expand our geographic reach and the breadth and depth of our services and to
enhance our client base. Since the beginning of fiscal 2001, we have completed
the following acquisitions:
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”). We adopted these new rules on
accounting for goodwill and other intangible assets beginning the first quarter
of fiscal year 2002. Under these new rules, goodwill is no longer 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.
Results
of Operations
The following table sets forth, for the fiscal year
ends indicated, selected statements of income data.
Our consolidated revenue increased 6.5% for the fiscal
year ended September 30, 2002 compared to fiscal 2001. Excluding revenue
related to acquisitions, we had an overall increase in organic revenue of 4.1%
for fiscal 2002 compared to fiscal 2001. Our consolidated revenue increased
22.1% for the fiscal year ended September 30, 2001 compared to fiscal 2000.
Excluding revenue related to acquisitions, our overall growth in revenue was
17.1% for fiscal 2001 compared to fiscal 2000.
Our gross margin
was 31.2% in fiscal 2002 compared to 31.1% in fiscal 2001. Gross margin
increased 10 basis points for fiscal 2002 compared fiscal 2001 and declined 60
basis points for fiscal 2001 compared to fiscal 2000.
For fiscal 2002, our selling, general and
administrative expense (“SG&A”) was $96.0 million, up 21.8% compared to fiscal
2001, and represented 18.5% of our fiscal 2002 revenue. For fiscal 2001, our
SG&A was $78.8 million, up 16.0% compared to fiscal 2000, and represented
16.2% of our fiscal 2001 revenue. SG&A consists of management, marketing
and administration costs (including salaries, benefits, bid and proposal
efforts, travel, recruiting, continuing education and training), facilities
costs, printing, reproduction, communications and equipment depreciation. SG&A increased in fiscal 2002
compared to fiscal 2001, and also in fiscal 2001 compared to fiscal 2000, due
to the increase in expenses necessary to support higher revenue and to
strengthen our infrastructure to market and grow, including our proposal
facilities and systems, and new finance and compliance personnel. The fiscal
2002 increase was also due to SG&A related to businesses acquired in fiscal
2002.
Our provision for
income tax for fiscal 2002 was 40.2% of income before income taxes as compared
to 41.5% for fiscal 2001 and 44.2% for fiscal 2000. These decreases were due to
differences in the amounts of certain expense items and tax reduction
strategies implemented in fiscal 2001, as well as the non-deductibility of a
legal settlement expense in fiscal 2000.
Net income for
fiscal 2002 was $40.3 million, or $1.73 per diluted share, compared with net
income of $36.2 million, or $1.61 per diluted share, for fiscal 2001 and net
income of $30.5 million, or $1.42 per diluted share, for fiscal 2000. Fiscal
2001 net income and earnings per share included the cumulative effect of an
accounting change of $3.9 million. Also, in fiscal 2002, we adopted FAS 142,
which eliminated goodwill amortization, which amounted to $4.3 million and $2.4
million for fiscal 2001 and 2000, respectively.
Consulting Group
Revenue of our
Consulting Group decreased 6.1% in fiscal 2002 compared to fiscal 2001. This
decline was primarily due to delays in the revenue cycle of our Revenue
Services practice area and a reduction in our IT consulting practice as
government procurement of large system projects has weakened. For 2001 compared
to fiscal 2000, revenue of our Consulting Group increased 22.4%. This increase
was due primarily to revenue related to an increase in the number of contracts
in the Group plus revenue from entities acquired after the beginning of fiscal
2000. Gross margin increased to 47.0% for fiscal 2002 from 45.9% for fiscal
2001. This increase was primarily due to greater revenue of the higher margin
Revenue Services practice area. Gross margin increased to 45.9% for fiscal 2001
from 41.7% for fiscal 2000. This increase was primarily due to improved margins
on certain contracts within the Revenue Services and Education practice areas.
Health Services Group
Revenue of our
Health Services Group increased 16.7% for fiscal 2002 compared to fiscal 2001.
In fiscal 2001, revenue of our Health Services Group increased 33.7% compared
to fiscal 2000. These increases were due to add-on work and volume expansions
within existing contracts and additional new
contracts. Gross margin
decreased to 17.6% for fiscal 2002 from 17.9% for fiscal 2001. This decrease
was due primarily to unanticipated costs and a revenue and profit shortfall on
a certain project during the March 2002 quarter. Management believes the
factors leading to the poor performance have been alleviated and does not
expect future losses from this project. Gross margin decreased to 17.9% for
fiscal 2001 from 23.3% for fiscal 2000. This decrease was due primarily to a
decline in gross margins on a few projects within that Group.
Human Services Group
Revenue of our
Human Services Group increased 6.0% for fiscal 2002 compared to fiscal 2001.
This increase was principally due to $7.9 million of revenue from entities
acquired in 2002. Revenue of our Human Services Group increased 14.7% for
fiscal 2001 compared to fiscal 2000. This increase was due primarily to revenue
from new contracts won by the Group. Gross margins decreased to 22.0% for
fiscal 2002 from 22.6% for fiscal 2001 and from 22.8% in fiscal 2000. These
decreases were due primarily to declines in gross margins on a few projects
within that Group.
Systems Group
Revenue of our
Systems Group increased 14.2% for fiscal 2002 compared to fiscal 2001. Revenue
increased 16.5% for fiscal 2001 compared to fiscal 2000. These increases were
due to increased contract revenue from new contracts won by certain divisions
within the Group, plus revenue of $2.7 million from entities acquired in 2002.
Gross margin increased to 47.9% for fiscal 2002 from 42.4% for fiscal 2001.
This increase was primarily due to increased software license revenue, which
carries higher gross margins. Gross margin decreased to 42.4% in fiscal 2001
from 44.0% for fiscal 2000. This decrease was primarily due to a decline in
software sales.
Other
(income) expenses
We recognized $342,000 of non-cash equity based
compensation expense for fiscal 2002 related to the issuance of restricted
stock units in May 2002. In future periods, the quarterly amortization expense
related to these restricted stock units is estimated to be approximately
$250,000 and may increase if certain earnings targets are achieved.
Amortization of goodwill
and other acquisition-related intangibles decreased in fiscal 2002
compared to fiscal 2001 due to the non-amortization of goodwill under FAS 142
effective October 1, 2001.
The increase in interest and other income in fiscal
2002 compared to fiscal 2001 was due to an increase in the average balance of
funds we invested, which were increased as a result of the completion in June
2001 of an equity offering resulting in $31.7 million of proceeds to the
Company, net of offering expenses.
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,
2002. 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 revenue and operating results are subject to
significant variation from quarter to quarter depending on a number of factors,
including:
• the
progress of contracts;
• the
revenue earned on contracts;
• the
timing of revenue 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
revenue. Our quarterly results may fluctuate, causing a material adverse effect
on our operating results and financial condition.
Liquidity
and Capital Resources
For fiscal 2002, cash provided by our operations was
$58.4 million as compared to $38.4 million for fiscal 2001. Cash provided by
operating activities for fiscal 2002 primarily consisted of net income of $40.3
million plus non-cash items aggregating $12.1 million and plus net cash related
to working capital changes of $6.0 million. Non-cash items primarily consisted
of $2.7 million from deferred income taxes in addition to $7.3 million of
depreciation and amortization. The net cash related to working capital changes
reflect a decline in accounts receivable-billed of $12.8 million offset by an
increase in accounts receivable-unbilled of $4.7 million. During fiscal 2001,
cash provided by operating activities consisted primarily of net income of
$36.2 million plus non-cash items of $18.1 million offset by net use of cash
related to working capital changes of $16.0 million. Non-cash items included
$10.0 million of depreciation and amortization and $3.9 million from a
cumulative effect of accounting change. The net use of cash related to working
capital changes were primarily due to an increase in billed accounts receivable
of $16.2 million and a decrease in deferred revenue of $4.9 million.
For fiscal 2002, cash used in investing activities was
$35.4 million as compared to $13.1 million for fiscal 2001. Cash used in
investing activities for fiscal 2002 primarily consisted of $23.7 million for
five business acquisitions, expenditures for capitalized software costs
totaling $5.1 million and purchases of property and equipment of $7.8 million.
During fiscal 2001, we used cash in investing activities primarily for
expenditures related to capitalized software costs totaling $6.1 million and
purchases of property and equipment of $5.1 million.
For fiscal 2002, cash used in financing activities was
$42.1 million as compared to cash provided by financing activities of $51.8
million for fiscal 2001. Cash used in financing activities for fiscal 2002
primarily consisted of $50.8 million of common stock repurchases offset by $9.0
million of sales of stock to employees through our Employee Stock Purchase Plan
and Equity Incentive Plan. Cash provided by financing activities for fiscal
2001 primarily consisted of $20.9 million of proceeds from sales of stock to
employees through our Employee Stock Purchase Plan and Equity Incentive Plan
and $31.7 million of net proceeds from our secondary stock offering in June
2001.
In May 2000, our Board of
Directors authorized the repurchase, at management’s discretion, of up to $30.0
million of our common stock. In June 2002, the Board of Directors authorized
the use of
option exercise proceeds for the repurchase
of our common stock. In July 2002, the Board of Directors authorized the
repurchase, at management’s discretion, of up to an additional $30.0 million of
our common stock. During fiscal 2002, we repurchased 1.9 million shares. At
September 30, 2002, $15.9 million remained available for future stock
repurchases under the program.
Our working capital at September 30, 2001 and 2002 was
$214.5 and $186.0 million, respectively. At September 30, 2002, we had cash,
cash equivalents, and marketable securities of $95.1 million and no debt.
Management believes this strong liquidity and financial position will allow the
Company to continue its stock repurchase program, depending on the price of the
Company’s common stock, and to pursue selective acquisitions.
Our management believes that we will have sufficient
resources to meet our currently anticipated capital expenditure and working
capital requirements for at least the next twelve months.
Critical Accounting
Policies and Estimates
Our discussion and analysis of financial condition and
results of operations is based on our consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent liabilities and the
reported amounts of revenue and expenses. On an on going basis, we evaluate our
estimates including those related to revenue recognition and cost estimation on
certain contracts, the realizability of goodwill, and amounts related to income
taxes, certain accrued liabilities and contingencies and litigation. We base
our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities. Actual results could differ from those estimates.
Our management believes that we do not have
significant off-balance sheet risk or exposure to liabilities that are not
recorded or disclosed in our financial statements. While we have significant
operating lease commitments for office space, those commitments are generally
tied to the period of performance under related contracts. Additionally,
although on certain contracts we are bound by performance bond commitments, we
have not had any defaults resulting in draws on performance bonds. Also, we do
not speculate in derivative transactions.
We believe the following critical accounting policies
affect the significant judgments and estimates used in the preparation of our
condensed consolidated financial statements.
Revenue
recognition. Our revenue is generated from contracts with
various payment arrangements, including:
(1) fixed-price; (2) costs incurred plus a negotiated fee (“cost-plus”);
(3) performance-based criteria; and (4) time and materials (used primarily by
the Consulting Group). Also, some contracts contain “not-to-exceed” provisions.
For fiscal year 2002, revenue from fixed-price contracts was approximately 35%
of total revenue; revenue from cost-plus contracts was approximately 22% of
total revenue; revenue from performance-based contracts was approximately 28%
of total revenue; and revenue from time and materials contracts was
approximately 15% of total revenue. A majority of our contracts with state and
local government agencies have been fixed-price and performance-based and our
contracts with the federal government have been cost-plus. Fixed-price and
performance-based contracts generally offer higher margins but typically
involve more risk than cost-plus or time and materials reimbursement contracts.
Our most significant expense is cost of revenue, which
consists primarily of project-related costs such as employee salaries and
benefits, subcontractors, computer equipment and travel expenses. Management
uses its judgment and experience to estimate cost of revenue. Our ability to
accurately predict personnel requirements, salaries and other costs as well as
to effectively manage a project or achieve certain levels of performance can
have a significant impact on the gross margins related to our fixed-price,
performance-based and time and materials contracts. If actual costs are higher
than our estimates, profitability may be adversely affected. Service cost
variability has little impact on cost-plus arrangements because allowable costs
are reimbursed by the client.
We recognize revenue on fixed-priced contracts using
the percentage of completion method, which relies on estimates of total
expected contract revenue and costs. The cumulative impact of any revisions in
estimated revenue and costs are recognized in the period in which the facts
that give rise to the revision become known. Also, with fixed-price contracts,
we are subject to the risk of potential cost overruns. We recognize revenue on
our performance-based contracts as such revenue becomes fixed or determinable,
which generally occurs when amounts are billable to clients, rather than as
costs are incurred. For certain contracts, this may result in revenue being
recognized in large, irregular increments. Additionally, costs related to
certain contracts are incurred in periods prior to recognizing revenue. These
factors may result in irregular revenue and profit margins for
performance-based contracts, which exist in our Consulting Group, Health
Services Group and Human Services Group. As a result, with performance-based
contracts we have more uncertainty regarding expected future revenue.
The Human Services Group and Health Services Group
contracts generally contain base periods of one or more years as well as one or
more option periods that may cover more than half of the potential contract
duration. As of September 30, 2002, our average Human Services Group and Health
Services Group contract duration was approximately 2.5 years. Our Consulting
Group contracts had performance periods ranging from one month to approximately
two years. Our average Systems Group contract duration was one year.
Impairment
of goodwill. In June 2001, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 141, Business
Combinations (“FAS 141”), and No. 142, Goodwill and Other Intangible Assets (“FAS
142”). Under the new rules, goodwill is no longer amortized but is subject to
annual impairment tests in accordance with FAS 141 and FAS 142. We elected to
adopt FAS 141 and 142 effective October 1, 2001, and as a result, amortization
of goodwill was discontinued as of the beginning of the fiscal year ended
September 30, 2002. Upon adoption, the required impairment tests were
performed. Results of these impairment tests did not generate any impairment
loss. Goodwill will be tested on an annual basis, or more frequently as
impairment indicators arise. Annual impairment tests involve the use of
estimates related to the fair market values of the business operations with
which goodwill is associated. Losses, if any, resulting from annual impairment
tests will be reflected in operating income in our income statement.
Forward
Looking Statements
This Annual Report on Form 10-K contains
forward-looking statements, including statements about our confidence and
strategies and our expectations about revenue, results of operations,
profitability, current and future contracts, market opportunities, market
demand and acceptance of our products and services. Any statements contained in
this Annual Report on Form 10-K which are not statements of historical fact may
be forward-looking statements. The words “could,” “estimate,” “future,”
“intend,” “may,” “opportunity,” “potential,” “project,” “will,” “believes,”
“anticipates,” “plans,” “expect” and similar expressions are intended to
identify forward-looking statements. Our actual results may differ materially
from those indicated by such forward-looking statements because of a number of
risks, uncertainties and other factors. Examples of these risks,
uncertainties and other factors include reliance on government clients, risks
associated with government contracting, risks involved in managing government
projects, political developments and legal, economic, and other risks detailed
in Exhibit 99.1 to this Annual Report on Form 10-K.
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, 2001 and 2002
Consolidated
Statements of Income for the years ended September 30, 2000, 2001
and 2002
Consolidated
Statements of Changes in Shareholders’ Equity for the years ended
September 30, 2000, 2001 and 2002
Consolidated
Statements of Cash Flows for the years ended September 30, 2000, 2001 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, 2001 and 2002, 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,
2002. 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, 2001 and 2002, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 2002, 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 and
in 2002 the Company changed its accounting for goodwill and intangible assets.
/s/ Ernst & Young LLP
McLean, Virginia
November 20, 2002
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 30,
2000, 2001 and 2002
(Dollars in thousands, except per
share amounts)
1. Description of Business
MAXIMUS, Inc. (the “Company”) provides consulting
services, health and human services program management and information
technology solutions primarily to government agencies. The Company conducts its
operations through four business segments: the Consulting Group, the Health
Services Group, the Human Services Group and the Systems Group. The Consulting
Group provides specialized consulting 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. The
Health Services Group administers and manages managed care enrollment programs
and also provides health literacy support and consulting services. The Human
Services Group administers and manages state and local government human
services programs on a fully-outsourced basis. Examples of these programs
include welfare-to-work and job readiness, child-care, child support
enforcement, and disability services. The Systems Group provides federal, state
and local agencies with systems design and implementation 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. Revenue from foreign-based projects and offices were less than 2%
of total revenue for the years ended September 30, 2000, 2001 and 2002.
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 MAXIMUS, Inc. and its wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to prior
period amounts to conform to the current year presentation.
Use
of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States 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.
Revenue
Recognition
The Company generates revenue under various
arrangements, including contracts under which revenue is based on costs
incurred plus a negotiated fee (“cost-plus”), as well as fixed price,
time and materials reimbursement, and performance-based criteria. Revenue for
cost-plus contracts, including a pro rata amount of the negotiated fee, is
recorded as costs are incurred. Revenue from fixed price and time and materials
reimbursement contracts, including a portion of estimated profit, is recognized
as costs are incurred. During fiscal 2000, revenue from performance-based
contracts, including a portion of estimated profit, was 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 accounts
receivable-unbilled and deferred revenue.
Management reviews the costs incurred, the revenue
recognized and billings from government contracts periodically and adjusts
recognized revenue 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, revenue from performance-based
contracts, including a portion of estimated profit, was 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 clients, 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 revenue is recognized when a
non-cancelable license agreement is in force, the product has been shipped, the
license fee is fixed or determinable, and collection is probable. If the fee is
not fixed or determinable, revenue is recognized as payments become due from
the client. In addition, when software license contracts contain post-contract
customer support as part of a multiple element arrangement, revenue is
recognized based upon the vendor-specific objective evidence of the fair value
of each element. Maintenance and post-contract customer support revenue are
recognized ratably over the term of the related agreements, which in most cases
is one year. Revenue from software-related consulting services under time and
material contracts and for training is recognized as services are performed.
Revenue from other software-related contract services is generally recognized
under the percentage-of-completion method.
Cash
Equivalents
The Company considers all highly liquid investments
with an original maturity of three months or less when purchased to be cash
equivalents.
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, 2000,
unrealized losses on marketable securities were $8 and reclassification
adjustments for losses included in net income were $262. For the years ended
September 30, 2001 and 2002, unrealized gains on marketable securities
were $8 and $21, respectively. 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. Direct costs of time and material incurred for the development of
software for internal use are capitalized as property and equipment. These
costs are depreciated using the straight-line method over the estimated useful
life of the software, ranging from three to seven years.
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. Capitalized
software development costs are reported at the lower of unamortized cost or
estimated net realizable value. Upon the general release of the software to
clients, capitalized software development costs for the products are amortized
based on current and estimated future revenue for each product, with annual
minimum amortization equal to the straight-line amortization over the remaining
estimated economic life of the product, which ranges from three to five years.
Goodwill
In June 2001, the Financial Accounting Standards Board
issued Statements of Financial Accounting Standards No. 141, Business Combinations (“FAS
141”), and No. 142, Goodwill and Other Intangible Assets (“FAS
142”). Under the new rules, goodwill is no longer amortized but is subject to
annual impairment tests in accordance with FAS 141 and FAS 142. The Company
elected to adopt FAS 141 and 142 effective October 1, 2001, and as a result,
amortization of goodwill was discontinued as of the beginning of the fiscal
year ended September 30, 2002.
Intangible
Assets
Intangible assets from acquisitions, which consist
primarily of customer relationships, technology-based intangibles and
non-competition agreements, are amortized over two to ten years.
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. A tax benefit or expense is recognized for the
net change in the deferred tax asset or liability during the period. The effect
on deferred tax assets and liabilities due to a change in tax rates is
recognized in income tax expense in the period that includes the enactment
date.
Foreign
Currency Translation
The assets and liabilities of foreign operations are
translated into U.S. dollars at current exchange rates and revenue and expenses
are translated at average exchange rates for the period. The resulting
cumulative translation adjustment is included in accumulated other
comprehensive income (loss) on the consolidated balance sheet. Foreign currency
transaction gains and losses have not been significant and are included in the
results of operations as incurred.
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, 2001 and 2002.
3. Business Combinations
In fiscal 2001 and 2002, the Company acquired the
businesses described below in business combinations accounted for as purchases.
Accordingly, the accompanying consolidated financial statements include the
results of operations of each acquired business since the date of acquisition.
On May 11, 2001, the Company acquired Opportunity
America, LLC for $780 plus related transaction costs. In conjunction with the
purchase, the Company recorded goodwill of $593 and intangible assets of $115,
which has been assigned to the Human Services Group business segment.
Opportunity America, LLC provides program management and consulting services to
the private sector and to federal, state and local government and human
services agencies.
On February 1, 2002, the Company acquired Collins
Consulting Group, Inc. for $4,100 plus related transaction costs. In
conjunction with the purchase, the Company recorded goodwill of $4,100, which
has been assigned to the Systems Group business segment. Collins Consulting
Group, Inc. provides information security solutions, information technology,
and management consulting. The primary reason for acquiring Collins Consulting
Group, Inc. was to enhance the Company’s new business opportunities in the
security solutions technologies markets.
On May 1, 2002, the Company acquired Leonie Green
& Associates (“LGA”) for $10,000 plus related transaction costs. Per the
terms of the agreement, additional consideration may be paid based on LGA
achieving certain performance objectives in fiscal 2003 through 2005.
Additionally, the terms of the agreement provide for additional consideration
of up to $3,000 based on achieving certain revenue targets during the one-year
period ending April 30, 2004. In conjunction with the purchase, the Company
recorded goodwill of $7,163 and intangible assets, primarily non-competition
agreements and customer relationships, of $2,900, which have been assigned to the
Human Services Group business segment. LGA provides a wide range of workforce
services in the five states in Australia. The primary reason for acquiring LGA
was to expand the Company’s presence and services to international markets.
On July 30, 2002, the Company acquired the fleet and
rail software business formerly owned by Peregrine Systems, Inc. for
approximately $7,455 plus related transaction costs. In conjunction with the
purchase, the Company recorded goodwill of $6,684 and intangibles assets,
primarily technology-based intangibles and customer contracts, of $2,500, which
have been assigned to the Systems Group business segment. The primary reasons
for acquiring these assets were to increase the Company’s market share in the
fleet management area and to expand its product offerings to include rail
management.
On August 12, 2002, the Company acquired substantially
all of the assets of Jumpstart Strategies, LLC for $79 plus related transaction
costs. In conjunction with the purchase, the Company recorded goodwill of $219,
which has been assigned to the Systems Group business segment. The primary
reason for acquiring this business was to provide the Company with resources
specifically focused on selling and installing fleet and rail management
software.
On August 19, 2002, the Company acquired substantially
all of the assets of APG, Inc. and Research Services Corp. (together “APG”) for
$3,294 plus related transaction costs. Per the terms of the agreement,
additional consideration of up to $3,695 may be paid based on the Company’s
billing and collection of certain contingency-based amounts under contracts
with clients. In conjunction with the purchase, the Company recorded goodwill
of $1,686 and intangible assets, primarily non-competition agreements and
customer relationships, of $1,250, which have been assigned to the Human
Services Group business segment. APG provided payroll-consulting and tax credit
recovery services to commercial organizations. The primary reason for acquiring
APG was to strategically complement the Company’s current service offerings in
the workforce services area.
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:
4. Costs and Estimated Earnings on Uncompleted
Contracts
Uncompleted contracts consist of the following
components:
Unbilled accounts receivable and deferred revenue
relate primarily to fixed price contracts wherein the timing of billings to
clients varies based on individual contracts and often differs from the period
of revenue recognition.
At September 30, 2001 and 2002, there was $3,473 and
$3,956, respectively, billed but not paid by clients pursuant to contractual
retainage provisions. Such balances are included in billed accounts receivable
in the accompanying consolidated balance sheets.
5. Property and Equipment
Property and equipment, at cost, consist of the
following:
6. Software Development Costs
The cost for software development capitalized and
related amortization expense for the years ended September 30, 2000, 2001 and
2002 were as follows:
7. Goodwill
Had the Company been accounting for its goodwill under
FAS 142 for the fiscal years ended September 30, 2000 and 2001, the Company’s
net income and earnings per share would have been as follows:
8. Intangible Assets
The following table sets forth, for the periods
indicated, components of intangible assets:
Intangible assets are amortized using the
straight-line method over a period of two to ten years. The weighted-average
amortization period for intangible assets is approximately seven years. The
estimated amortization expense for the years ending September 30, 2003, 2004,
2005 and 2006 is $1,012, $950, $895 and $880 respectively.
9. Earnings Per Share
The following table sets forth the components of basic
and diluted earnings per share:
10. Credit Facilities
Certain companies that were acquired by the Company
during fiscal 2001 and 2002 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.
11. 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, 2000, 2001 and 2002 was $15,208, $17,947 and $21,132
respectively.
Minimum future payments under these leases are as
follows:
12. 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, 2000,
2001 and 2002, the Company contributed $3,287, $4,590 and $5,142 to the
plans, respectively.
13. Income Taxes
The Company’s provision for income taxes is as
follows:
The provision for income taxes differs from that which
would have resulted from the use of the federal statutory income tax rate as
follows:
The significant items comprising the Company’s
deferred tax assets and liabilities as of September 30, 2001 and 2002 are
as follows:
Cash paid for income taxes during the years ended
September 30, 2000, 2001 and 2002 was $23,748, $19,753 and $17,915,
respectively.
Approximately 87% of the Company's total goodwill is
expected to be deductible for income tax purposes.
14. 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 first day of the quarter or the last day of the
quarter, whichever is lower. During fiscal 2000, 2001 and 2002, respectively,
the Company issued approximately 66,900, 69,100 and 69,100 shares of common
stock pursuant to this plan at an average price of $24.53, $26.19 and $29.63
per share.
Stock
Repurchase Program
In May 2000, the Board of Directors authorized the
repurchase, at management’s discretion, of up to $30,000 of the Company’s
common stock. In June 2002, the Board of Directors authorized the use of option
exercise proceeds for the repurchase of the Company’s common stock. In July
2002, the Board of Directors authorized the repurchase, at management’s
discretion, of up to an additional $30,000 of the Company’s common stock.
During the year ended September 30, 2002, the Company repurchased 1,871,869
shares. At September 30, 2002, $15,916 remained available for future stock
repurchases under the program.
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 a period of four years and expire ten years after the date
of grant. As of September 30, 2002, the Company’s Board of Directors had
reserved 6.6 million shares of common stock for issuance under the
Company’s stock option plans. At September 30, 2002, 1.9 million
shares remained available for grants under the Company’s option plans.
In May 2002, the Company issued 170,000 Restricted
Stock Units (RSUs) to certain executive officers and employees under its 1997
Equity Incentive Plan. The grant-date fair value of each RSU was $30.14. The
RSUs will vest in full upon the sixth anniversary of the date of grant,
provided, however, that the vesting will accelerate if the Company meets
certain earnings targets determined by the Board of Directors as set forth in
the RSUs. The fair value of the RSUs at the date of grant is amortized to
expense over the vesting period. Compensation expense recognized related to
these RSUs for the fiscal year ended September 30, 2002 was $342.
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 66% for 2000, 62% for 2001 and 59% for 2002; risk
free interest rate of 5.7% for 2000, 4.2% for 2001 and 3.0% for 2002; dividend
yield 0%; and an expected life of the option of 4.4 years in 2000, 6.0
years in 2001 and 5.7 years in 2002. The grant-date weighted average fair value
per option of options granted was $14.77 in 2000, $13.24 in 2001 and $16.56 in
2002.
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, 2000, 2001
and 2002, 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, 2000, 2001 and 2002 is as follows:
The following table provides
certain information with respect to stock options outstanding at September 30,
2002:
The following table provides
certain information with respect to stock options exercisable at September 30,
2002:
15. Commitments and Contingencies
Litigation
On December 5, 2000, the Village of Maywood, Illinois
(the “Village”) sued Unison MAXIMUS, Inc. (“Unison”), a wholly-owned subsidiary
of the Company, in the Circuit Court of Cook County, Illinois. (The Company acquired
Unison Consulting Group, Inc. in May 1999 and subsequently renamed it “Unison
MAXIMUS, Inc.” Unison remains a wholly-owned subsidiary of the Company). The
Village had contracted with Unison to provide a variety of financial and
consulting services from 1996 through 1999. The Village has alleged inter alia breach of contract, breach of
fiduciary duty, and fraud. The action is in the discovery and motion phase and
no trial date has been set. The complaint does not specify the Village’s
damages. In September 2002, the Village filed a purported expert report with
the court that estimated the Village’s damages to be approximately $47 million.
The Company and Unison believe that report is deeply flawed and the Village’s
claims are without merit. Unison intends to defend the action vigorously.
Unison tendered the claim to the Company’s insurance carrier. Although there is
no assurance of a favorable outcome, the Company does not believe that this
action will have a material adverse effect on its financial condition or
results of operations, and the Company has not accrued for any loss related to
this action.
The Company is involved in various legal proceedings
in the ordinary course of its business. Management does not expect the ultimate
outcome of the legal proceedings to have a material adverse effect on the
Company’s financial condition or its results of operations. 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 42 of its
executives and other employees with terms of the employment obligations ending
between 2003 and 2006.
16. Concentrations of Credit Risk and Major
Clients
Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist primarily of
accounts receivable, billed and unbilled, on uncompleted contracts. To date,
these financial instruments have been derived from contract revenue earned
primarily from federal, state and local government agencies located in the
United States.
There was no revenue from transactions with a single
federal, state or local customer amounting to 10% or more of the Company’s
consolidated revenue for the years ended September 30, 2001 and 2002.
Revenue from contracts with one state, principally by the Health Services
Group, was 12% of the Company’s consolidated revenue for the year ended
September 30, 2000.
17. Business Segments
During fiscal 2002, the Company reorganized its
business into four reportable operating segments in order to better focus and
manage its healthcare outsourcing work, which had been part of the Government
Operations Group. Accordingly, 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:
Revenue from foreign operations was $2,871 and $9,262
for fiscal years 2001 and 2002 and was not significant during fiscal year 2000.
Total assets of foreign operations were $13,549 at September 30, 2002 and were
not significant at September 30, 2001.
18. Quarterly Information (Unaudited)
Set forth below are selected quarterly income
statement data for the fiscal years ended September 30, 2001 and 2002. 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.
(1) During
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.
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 18, 2003 (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 contained in part under
the caption “Equity Compensation Plan Information” in Part II hereof and the
remainder 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. Controls and
Procedures.
a) Evaluation of disclosure controls and procedures. Our
chief executive officer and our chief financial officer, after evaluating the
effectiveness of our “disclosure controls and procedures” (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date
(the “Evaluation Date”) within 90 days before the filing date of this annual
report, have concluded that, as of the Evaluation Date, our disclosure controls
and procedures were adequate and designed to ensure that the information
required to be disclosed in the reports filed or submitted by us under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the requisite time periods.
b) Changes in internal controls. There were
no significant changes in our internal controls or in other factors that could
significantly affect our internal controls subsequent to the Evaluation Date.
ITEM 15.
ITEM 15. 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 Annual Report on
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 2002.
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 20th day of December 2002.
Each undersigned person hereby constitutes and
appoints David V. Mastran, Richard A. Montoni 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, 2002,
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 20, 2002
David V. Mastran
/s/ RICHARD A. MONTONI
Chief Financial Officer
(Principal Financial and
Accounting Officer)
December 20, 2002
Richard A. Montoni
/s/ RUSSELL BELIVEAU
Director
December 20, 2002
Russell Beliveau
/s/ LYNN P. DAVENPORT
Director
December 20, 2002
Lynn P. Davenport
/s/ THOMAS A. GRISSEN
Director
December 20, 2002
Thomas A. Grissen
/s/ JOHN J. HALEY
Director
December 20, 2002
John J. Haley
/s/ PETER B. POND
Chairman of the Board of Directors
December 20, 2002
Peter B. Pond
/s/ MARILYN R. SEYMANN
Director
December 20, 2002
Marilyn R. Seymann
/s/ JAMES R. THOMPSON, JR.
Director
December 20, 2002
James R. Thompson, Jr.
CERTIFICATIONS
I, David V. Mastran, certify that:
1. I have reviewed
this annual report on Form 10-K of MAXIMUS, Inc.;
2. Based on my
knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstance under such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my
knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant’s
other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such
disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the
effectiveness of the registrant’s disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual report (the
“Evaluation Date”); and
c) presented in this annual
report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s
other certifying officer and I have disclosed, based on our most recent
evaluation, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent
functions):
a) all significant
deficiencies in the design or operation of internal controls which could
adversely affect the registrant’s ability to record, process, summarize and
report financial data and have identified for the registrant’s auditors any
material weaknesses in internal controls; and
b) any fraud, whether or
not material, that involves management or other employees who have a
significant role in the registrant’s internal controls; and
6. The registrant’s
other certifying officer and I have indicated in this annual report whether
there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 20, 2002
/s/ David
V. Mastran
David V. Mastran
President and Chief Executive Officer
CERTIFICATIONS
I, Richard A. Montoni, certify that:
1. I have reviewed
this annual report on Form 10-K of MAXIMUS, Inc.;
2. Based on my
knowledge, this annual report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstance under such statements were made, not
misleading with respect to the period covered by this annual report;
3. Based on my
knowledge, the financial statements, and other financial information included
in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report;
4. The registrant’s
other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such
disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the
effectiveness of the registrant’s disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual report (the
“Evaluation Date”); and
c) presented in this
annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s
other certifying officer and I have disclosed, based on our most recent evaluation,
to the registrant’s auditors and the audit committee of the registrant’s board
of directors (or persons performing the equivalent functions):
a) all significant
deficiencies in the design or operation of internal controls which could
adversely affect the registrant’s ability to record, process, summarize and
report financial data and have identified for the registrant’s auditors any
material weaknesses in internal controls; and
b) any fraud, whether or
not material, that involves management or other employees who have a
significant role in the registrant’s internal controls; and
6. The registrant’s
other certifying officer and I have indicated in this annual report whether
there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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 Richard A. Montoni.
(7)*
10.6
Executive Employment, Non-Compete and
Confidentiality Agreement by and between the Company and David M. Johnson.
Filed herewith.*
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.
99.2
Section 906 CEO Certification. Filed herewith
99.3
Section 906 CFO Certification. 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, 2002 (File No. 1-12997) on May 14, 2002 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-Q for the quarter
ended March 31, 2002 (File No. 1-12997) on May 14, 2002 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.