PROSPECTUS FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-61264
3,700,000 SHARES
MAXIMUS-REGISTERED TRADEMARK-
HELPING GOVERNMENT SERVE THE PEOPLE-REGISTERED TRADEMARK-
COMMON STOCK
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We are offering 1,000,000 shares of our common stock and our existing
shareholders are offering 2,700,000 shares of our common stock.
Our common stock trades on the New York Stock Exchange under the symbol
"MMS." On June 19, 2001, the last sale price of our common stock as reported on
the New York Stock Exchange was $33.95 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS, INCLUDING THOSE THAT ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
----------------
PER SHARE TOTAL
--------- -----
Public offering price....................................... $33.95 $125,615,000
Underwriting discount....................................... $1.66 $6,142,000
Proceeds, before expenses, to MAXIMUS....................... $32.29 $32,290,000
Proceeds to the selling shareholders........................ $32.29 $87,183,000
The underwriters have an option to purchase up to an additional 555,000
shares from two of the selling shareholders, at the public offering price, less
the underwriting discount, within 30 days from the date of this prospectus to
cover overallotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about June 25, 2001.
------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
LEGG MASON WOOD WALKER
INCORPORATED
------------------
The date of this prospectus is June 19, 2001.
DESCRIPTION OF ARTWORK FOR INSIDE FRONT COVER OF PROSPECTUS.
[Map of the United States, Puerto Rico, and the U.S. Virgin Islands, with
flags indicating the locations of MAXIMUS offices. Names of the cities in which
offices are located are spelled out adjacent to their respective flag. The map
is colored in green and the flags are in gold with a red "M".]
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Special Note Regarding Forward-Looking Statements........... 14
Use of Proceeds............................................. 15
Market Price of Common Stock and Dividend Policy............ 16
Capitalization.............................................. 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 29
Management.................................................. 40
Selling Shareholders........................................ 43
Underwriting................................................ 44
Legal Matters............................................... 47
Experts..................................................... 47
Available Information....................................... 47
Incorporation of Certain Documents by Reference............. 47
Index to Consolidated Financial Statements.................. F-1
The MAXIMUS logo, "Helping Government Serve the People" and MAXSTAR are our
registered trademarks. All other registered trademarks and trademarks used in
this prospectus are the property of their respective owners.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
(This page has been left blank intentionally.)
PROSPECTUS SUMMARY
THE FOLLOWING IS ONLY A SUMMARY. IT MAY NOT CONTAIN ALL OF THE INFORMATION
THAT IS IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THE MORE DETAILED
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE FINANCIAL
STATEMENTS AND THE NOTES TO SUCH STATEMENTS. UNLESS OTHERWISE INDICATED, THE
INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVERALLOTMENT OPTION IS NOT
EXERCISED. AN INVESTMENT IN OUR COMMON STOCK INVOLVES RISK. THEREFORE, YOU
SHOULD CAREFULLY CONSIDER THE INFORMATION PROVIDED UNDER THE CAPTION "RISK
FACTORS." WE URGE YOU TO READ THIS PROSPECTUS IN ITS ENTIRETY.
MAXIMUS, INC.
OUR COMPANY
We are a leading provider of program management, consulting services and
systems solutions primarily to state and local government agencies throughout
the United States. Since our inception in 1975, we have been at the forefront of
innovation in meeting our mission of "Helping Government Serve the
People-Registered Trademark-." 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 currently have contracts with government agencies in all 50
states, 49 of the 50 largest cities and 27 of the 30 largest counties. We have
been profitable every year since we were founded. For the fiscal year ended
September 30, 2000, we had revenues of $399.2 million and net income of
$30.5 million, and for the six months ended March 31, 2001, we had revenues of
$233.5 million and net income of $18.5 million.
We conduct our operations through three groups: our Government Operations
Group, our Consulting Group and our Systems Group. Our Government Operations
Group administers and manages state and local government programs on a
fully-outsourced basis. Examples of these programs include welfare-to-work and
job readiness, child care, child support enforcement, managed care enrollment
and disability services. Our Consulting Group provides 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. Our Systems Group provides state and local agencies with systems
design and implementation to improve the efficiency and cost-effectiveness of
their program administration. We offer our own suite of proprietary software
products in addition to customized versions of popular applications such as
PeopleSoft-Registered Trademark-.
MARKET OPPORTUNITIES
We believe that providing program management, consulting services and
systems solutions to government agencies continues to represent significant
market opportunities. The federal, state and local government agencies in the
United States to which we market our services spend more than $250 billion
annually on health and human services programs. Based on currently available
data published by the federal government, we estimate that states spend over
$23 billion annually to administer these programs, of which we estimate only a
small portion was outsourced to private service providers, including us. We
believe that state and local government agencies will increasingly rely on
private service providers to administer their programs and will also
increasingly engage consultants as they seek to reduce costs and improve the
delivery of services.
1
OUR COMPETITIVE ADVANTAGES
The following competitive advantages position us to capitalize on the
significant market opportunities presented by the changes in the ways government
provides services.
- SINGLE MARKET FOCUS. We believe that we are the largest company dedicated
to providing program management, consulting services and systems solutions
primarily to state and local government agencies.
- PROVEN TRACK RECORD. Since 1975, we have successfully completed hundreds
of large-scale program management and consulting projects for state and
local government agencies serving millions of beneficiaries in nearly
every state.
- ABILITY TO RESPOND TO REQUESTS FOR PROPOSALS. We have significant
expertise and experience in complying with the lengthy and complicated
bidding and proposal process in response to RFPs of government agencies.
- PROPRIETARY PROGRAM MANAGEMENT SOLUTION. We have developed a proprietary
software program, MAXSTAR-Registered Trademark-, that interfaces with
government databases and monitors and tracks cases of program
participants. We use MAXSTAR's scalable and customizable features to
reduce our project implementation time and cost.
- WIDE RANGE OF SERVICES. We leverage our experience in a wide range of
services to pursue new business opportunities and position ourselves to be
a leading e-government consulting and implementation force, as well as a
single-source provider of program management, consulting services and
systems solutions to state and local government agencies.
- MARKET LEADING CONSULTING CAPABILITIES. We believe we have the largest
management consulting practice dedicated to serving state and local
governments, led by experienced consultants with an established knowledge
base and valuable government relationships.
- EXPERIENCED TEAM OF PROFESSIONALS. We have assembled a management team of
former government executives, state agency officials, information
technology specialists and other professionals, most of whom have more
than seven years of experience in the public services industry.
OUR GROWTH STRATEGY
Our goal is to be the leading provider of program management, consulting
services and systems solutions to state and local government agencies. Our
strategy to achieve this goal includes the following:
- AGGRESSIVELY PURSUE NEW BUSINESS OPPORTUNITIES. We intend to market new
and innovative solutions based on our experience, established
methodologies and systems. We also intend to invest in the early
identification of government bid opportunities and to submit competitive
bids that leverage our proven solutions from past projects.
- CONTINUE TO DEVELOP COMPLEMENTARY SERVICES. We intend to continue
broadening our range of services in order to respond to the evolving needs
of our clients and to provide additional cross-selling opportunities.
- RECRUIT HIGHLY SKILLED PROFESSIONALS. We intend to attract and retain
experienced government personnel by leveraging our reputation as a premier
government services consultant with a single market focus.
2
- PURSUE STRATEGIC ACQUISITIONS. While most of our revenue growth has been
internally generated, we intend to continue to selectively identify and
pursue attractive acquisition opportunities to broaden our services,
enhance our technical capabilities and expand our client base.
We believe that we are well-positioned to benefit from the continued
increase in demand for new program management, consulting services and systems
solutions that has arisen in an environment characterized by changing regulation
and evolving technology. We believe that fiscal pressures will compel state
governments to continue to rationalize program operations and upgrade existing
technology to operate more cost-efficient and productive programs. To achieve
these efficiencies, we believe that many government agencies will turn to
outside experts, including us, for help.
------------------------
We were incorporated in Virginia in September 1975 and our principal
executive offices are located at 11419 Sunset Hills Road, Reston, Virginia
20190. Our website address is http://www.maximus.com. The contents of our
website are not part of this prospectus. Our telephone number is
(703) 251-8500.
3
THE OFFERING
Common stock offered:
By MAXIMUS................................. 1,000,000 shares
By the selling shareholders................ 2,700,000 shares
-----------------
Total.................................... 3,700,000 shares
Shares outstanding after the offering........ 22,620,954 shares
Use of proceeds.............................. We intend to use the net proceeds of this offering for
general corporate purposes, including:
- working capital;
- expansion of existing operations;
- strategic acquisitions of complementary businesses;
and
- investment in systems infrastructures and new
technologies.
We will not receive any proceeds from the sale of
shares by the selling shareholders.
Risk factors................................. See "Risk Factors" beginning on page 6 for a discussion
of factors you should carefully consider before
deciding to buy shares of our common stock.
NYSE symbol.................................. "MMS"
- ------------------------
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 19, 2001 and
(1) includes 45,840 shares of common stock issued upon exercise of vested stock
options by the selling shareholders and (2) excludes 3,822,945 shares issuable
upon exercise of options outstanding as of June 19, 2001 and an additional
756,629 shares reserved for issuance under our 1997 Equity Incentive Plan and
our 1997 Director Stock Option Plan.
4
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
We have presented below information derived from our consolidated statements
of income and balance sheet. Our consolidated financial statements for the three
years ended September 30, 2000 have been audited by Ernst & Young LLP,
independent auditors. The summary consolidated financial data for the six months
ended March 31, 2000 and as of and for the six months ended March 31, 2001 have
been derived from unaudited financial statements which, in the opinion of our
management, reflect all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of this data. You should read the following
information in conjunction with our consolidated financial statements and
related notes, as well as "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
----------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenues:
Government Operations Group......... $ 77,211 $ 97,369 $139,263 $177,428 $221,177 $105,210 $127,069
Consulting Group.................... 53,620 64,327 83,017 99,979 119,917 54,396 72,302
Systems Group....................... 9,661 11,659 21,834 42,133 58,070 23,578 34,150
-------- -------- -------- -------- -------- -------- --------
Total revenues.................... 140,492 173,355 244,114 319,540 399,164 183,184 233,521
Cost of revenues...................... 106,258 127,170 181,403 224,912 272,620 126,334 159,300
-------- -------- -------- -------- -------- -------- --------
Gross profit.......................... 34,234 46,185 62,711 94,628 126,544 56,850 74,221
Amortization of goodwill and other
acquisition related intangibles..... -- -- -- 260 3,212 645 2,751
Income from operations................ 12,094 12,713 24,131 43,262 51,510 25,498 31,210
Net income(1)......................... $ 11,517 $ 9,530 $ 15,514 $ 27,626 $ 30,468 $ 16,226 $ 18,523
======== ======== ======== ======== ======== ======== ========
Earnings per share:
Basic............................... $ 0.87 $ 0.67 $ 0.86 $ 1.35 $ 1.45 $ 0.77 $ 0.87
======== ======== ======== ======== ======== ======== ========
Diluted............................. $ 0.87 $ 0.65 $ 0.85 $ 1.32 $ 1.42 $ 0.76 $ 0.85
======== ======== ======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic............................... 13,273 14,208 17,937 20,537 21,055 21,019 21,179
======== ======== ======== ======== ======== ======== ========
Diluted............................. 13,273 14,593 18,296 20,891 21,424 21,427 21,804
======== ======== ======== ======== ======== ======== ========
AS OF MARCH 31, 2001
-------------------------
ACTUAL AS ADJUSTED(2)
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(UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments........ $ 48,344 $ 79,722
Working capital............................................. 146,723 178,101
Total assets................................................ 270,274 301,652
Total debt.................................................. 355 355
Total shareholders' equity.................................. 230,067 261,445
- ------------------------------
(1) For the year ended September 30, 1996, and during fiscal year 1997 up to and
including June 12, 1997, we elected to be treated as an S corporation and
our income was taxed for federal and most state purposes directly to our
shareholders. As a result, the earnings per share figures are not directly
comparable. In connection with our initial public offering, our
S corporation status terminated and we recorded a deferred tax charge
against income of $2.6 million for the cumulative differences between the
financial reporting and income tax basis of certain assets and liabilities
at June 12, 1997. Subsequent to June 12, 1997, we have recorded state and
federal income taxes based on earnings for those periods.
(2) As adjusted to give effect to the sale of 1,000,000 shares of our common
stock and the receipt of the estimated net proceeds from this offering. See
"Use of Proceeds."
5
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO
BUY OUR COMMON STOCK. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION IN THIS
PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND RELATED NOTES. ADDITIONAL
RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US, OR RISKS THAT WE CURRENTLY
CONSIDER IMMATERIAL, MAY ALSO IMPAIR OUR OPERATIONS. IF ANY OF THE FOLLOWING
EVENTS ACTUALLY OCCURS, OUR BUSINESS COULD BE HARMED WHICH COULD CAUSE THE
TRADING PRICE OF OUR COMMON STOCK TO DECLINE AND YOU COULD LOSE ALL OR PART OF
YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
IF WE FAIL TO SATISFY OUR CONTRACTUAL OBLIGATIONS, OUR ABILITY TO COMPETE FOR
FUTURE CONTRACTS AND OUR FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.
Our failure to comply with contract requirements or to meet our client's
performance expectations when performing a contract could materially and
adversely affect our financial performance and our reputation, which, in turn,
would impact our ability to compete for new contracts. Our failure to meet
contractual obligations could also result in substantial actual and
consequential damages. In addition, our contracts often require us to indemnify
clients for our failure to meet performance standards. Some of our contracts
contain liquidated damages provisions and financial penalties related to
performance failures. Although we have liability insurance, the policy limits
may not be adequate to provide protection against all potential liabilities.
IF WE FAIL TO ESTIMATE ACCURATELY THE FACTORS UPON WHICH WE BASE OUR CONTRACT
PRICING, WE MAY HAVE TO REPORT A DECREASE IN REVENUES OR INCUR LOSSES ON THOSE
CONTRACTS.
We derived approximately 47% of our fiscal 2000 revenues from fixed-price
contracts and approximately 18% of our fiscal 2000 revenues from
performance-based contracts. For fixed-price contracts, we receive our fee if we
meet specified objectives or achieve certain units of work. Those objectives
might include placing a certain number of welfare recipients into jobs,
collecting target amounts of child support payments, completing a particular
number of managed care enrollments, or delivering a planning document under a
consulting arrangement. For performance-based contracts, we receive our fee on a
per-transaction basis. These contracts include, for example, child support
enforcement contracts, in which we often receive a fee based on the amount of
child support collected. To earn a profit on these contracts, we must accurately
estimate costs involved and assess the probability of meeting the specified
objectives, realizing the expected units of work or completing individual
transactions, within the contracted time period. We recognize revenues on these
contracts, including a portion of estimated profit, as costs are incurred. Under
this method, anticipated revenues for the full contract are recorded as the
costs are incurred, not when the bills are sent or when the payment is made.
Therefore, if a contract is cancelled or re-negotiated after work has been
performed, previously recognized revenue would be reversed and charged to
earnings at that time. The reversal of previously recognized revenue could
adversely affect our financial results. In addition, we review these contracts
quarterly and adjust revenues to reflect our current expectations as to the
total anticipated costs of each contract. These adjustments affect the timing
and amount of revenue recognized and could adversely affect our financial
results.
IF WE ARE UNABLE TO MANAGE OUR GROWTH, OUR PROFITABILITY WILL BE ADVERSELY
AFFECTED.
Sustaining our growth has placed significant demands on our management as
well as on our administrative, operational and financial resources. For us to
continue to manage our growth, we must continue to improve our operational,
financial and management information systems and expand, motivate and manage our
workforce. If our growth comes at the expense of providing quality service
6
and generating reasonable profits, our ability to successfully bid for contracts
and our profitability will be adversely affected.
GOVERNMENT ENTITIES HAVE IN THE PAST AND MAY IN THE FUTURE TERMINATE THEIR
CONTRACTS WITH US EARLIER THAN WE EXPECT, WHICH MAY RESULT IN REVENUE
SHORTFALLS.
Many of our government contracts contain base periods of one or more years,
as well as option periods covering more than half of the contract's potential
duration. Government agencies do not have to exercise these option periods. The
profitability of some of our contracts could be adversely impacted if the option
periods are not exercised. Our contracts also typically contain provisions
permitting a government client to terminate the contract on short notice, with
or without cause. The unexpected termination of significant contracts could
result in significant revenue shortfalls. If revenue shortfalls occur and are
not offset by corresponding reductions in expenses, our business could be
adversely affected. We cannot anticipate if, when or to what extent a client
might terminate its contracts with us.
GOVERNMENT UNIONS MAY OPPOSE OUTSOURCING OF GOVERNMENT PROGRAMS TO OUTSIDE
VENDORS SUCH AS US, WHICH COULD LIMIT OUR MARKET OPPORTUNITIES.
Our success depends in part on our ability to win profitable contracts to
administer and manage health and human services programs traditionally
administered by government employees. Many government employees, however, belong
to labor unions with considerable financial resources and lobbying networks.
Unions have in the past and are likely to continue to apply political pressure
on legislators and other officials seeking to outsource government programs. For
example, union lobbying was instrumental in influencing the Department of Health
and Human Services to deny a petition to allow private corporations to make Food
Stamp and Medicaid eligibility determinations in Texas. Union opposition may
result in fewer opportunities for us to service government agencies.
WE MAY LOSE EXECUTIVE OFFICERS AND SENIOR MANAGERS ON WHOM WE RELY TO GENERATE
BUSINESS AND EXECUTE PROJECTS SUCCESSFULLY.
The abilities of our executive officers and our senior managers to generate
business and execute projects successfully is important to our success. While we
have employment agreements with some of our executive officers, these agreements
do not prevent them from terminating their employment with us. The loss of an
executive officer or senior manager could impair our ability to secure and
manage engagements.
GOVERNMENT AGENCIES MAY INVESTIGATE AND AUDIT OUR CONTRACTS AND, IF ANY
IMPROPRIETIES ARE FOUND, WE MAY BE REQUIRED TO REFUND REVENUES WE HAVE RECEIVED,
TO FOREGO ANTICIPATED REVENUES AND MAY BE SUBJECT TO PENALTIES AND SANCTIONS,
INCLUDING PROHIBITIONS ON OUR BIDDING FOR RFPS.
The government agencies we contract with have the authority to audit and
investigate our contracts with them. As part of that process, the government
agency reviews our performance on the contract, our pricing practices, our cost
structure and our compliance with applicable laws, regulations and standards. If
the agency determines that we have improperly allocated costs to a specific
contract, we will not be reimbursed for those costs and we will be required to
refund the amount of any such costs which have been reimbursed. If a government
audit uncovers improper or illegal activities by us or we otherwise determine
that these activities have occurred, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeitures of profits, suspension of payments, fines and suspension or
disqualification from doing business with the government. Any adverse
determination could adversely impact our ability to bid for RFPs in one or more
jurisdictions.
7
WE MAY INCUR SIGNIFICANT COSTS BEFORE RECEIVING RELATED REVENUES WHICH COULD
RESULT IN CASH SHORTFALLS.
When we are awarded a contract to manage a government program, we may incur
significant expenses before we receive contract payments, if any. These expenses
include leasing office space, purchasing office equipment and hiring personnel.
As a result, in certain large contracts where the government does not fund
program start-up costs, we are required to invest significant sums of money
before receiving related contract payments. In addition, payments due to us from
government agencies may be delayed due to billing cycles or as a result of
failures to approve governmental budgets in a timely manner. Moreover, any
resulting cash shortfall could be exacerbated if we fail to either invoice the
government agency or to collect our fee in a timely manner.
INACCURATE, MISLEADING OR NEGATIVE MEDIA COVERAGE COULD ADVERSELY AFFECT OUR
REPUTATION AND OUR ABILITY TO BID FOR GOVERNMENT CONTRACTS.
The media frequently focuses its attention on our contracts with government
agencies. If the media coverage is negative, it could influence government
officials to slow the pace of outsourcing government services, which could
reduce the number of RFPs. The media also focuses its attention on the
activities of political consultants engaged by us, even when their activities
are unrelated to our business, and we may be tainted by adverse media coverage
about their activities. Moreover, inaccurate, misleading or negative media
coverage about us could harm our reputation and, accordingly, our ability to bid
for and win government contracts. For example, on June 13, 2001, it was reported
in the press that the Attorney General of the State of South Carolina intends to
investigate a contract between the state and MAXIMUS. To date, we have not been
contacted by the Attorney General's office.
WE OBTAIN MOST OF OUR BUSINESS THROUGH RESPONSES TO GOVERNMENT RFPS. WE MAY NOT
BE AWARDED CONTRACTS THROUGH THIS PROCESS IN THE FUTURE AND CONTRACTS WE ARE
AWARDED MAY NOT BE PROFITABLE.
Substantially all of our clients are state or local government authorities.
To market our services to government clients, we are often required to respond
to RFPs. To do so effectively, we must estimate accurately our cost structure
for servicing a proposed contract, the time required to establish operations and
likely terms of the proposals submitted by competitors. We must also assemble
and submit a large volume of information within an RFP's rigid timetable. Our
ability to respond successfully to RFPs will greatly impact our business. We may
not be awarded contracts through the RFP process and our proposals may not
result in profitable contracts.
WE MAY BE UNABLE TO ATTRACT AND RETAIN SUFFICIENT QUALIFIED PERSONNEL NECESSARY
TO SUSTAIN OUR BUSINESS.
Our delivery of services is labor-intensive. When we are awarded a
government contract, we must quickly hire project leaders and case management
personnel. The additional staff also creates a concurrent demand for increased
administrative personnel. The success of our Government Operations Group,
Consulting Group and Systems Group requires that we attract, develop, motivate
and retain:
- experienced and innovative executive officers;
- senior managers who have successfully managed or designed government
services programs in the public sector; and
- information technology professionals who have designed or implemented
complex information technology projects.
Innovative, experienced and technically proficient individuals are in great
demand and are likely to remain a limited resource. We may be unable to continue
to attract and retain desirable executive
8
officers and senior managers. Our inability to hire sufficient personnel on a
timely basis or the loss of significant numbers of executive officers and senior
managers could adversely affect our business.
IF WE FAIL TO ESTABLISH AND MAINTAIN IMPORTANT RELATIONSHIPS WITH GOVERNMENT
ENTITIES AND AGENCIES, OUR ABILITY TO SUCCESSFULLY BID FOR RFPS MAY BE ADVERSELY
AFFECTED.
To facilitate our ability to prepare bids in response to RFPs, we rely in
part on establishing and maintaining relationships with officials of various
government entities and agencies. These relationships enable us to provide
informal input and advice to the government entities and agencies prior to the
development of an RFP. We also engage marketing consultants, including
lobbyists, to establish and maintain relationships with elected officials and
appointed members of government agencies. The effectiveness of these consultants
may be reduced or eliminated if a significant political change occurs. We may be
unable to successfully manage our relationships with government entities and
agencies and with elected officials and appointees and any failure to do so may
adversely affect our ability to bid successfully for RFPs.
THE FEDERAL GOVERNMENT MAY REFUSE TO GRANT CONSENTS AND/OR WAIVERS NECESSARY TO
PERMIT PRIVATE ENTITIES, SUCH AS US, TO PERFORM CERTAIN ELEMENTS OF GOVERNMENT
PROGRAMS.
Under current law, in order to privatize certain functions of government
programs, the federal government must grant a consent and/or waiver to the
petitioning state or local agency. If the federal government does not grant a
necessary consent or waiver, the state or local agency will be unable to
outsource that function to a private entity, such as us, which could eliminate
or reduce the value of the contract.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY FUTURE LEGISLATIVE CHANGES THAT WE
DO NOT ANTICIPATE OR TO WHICH WE DO NOT RESPOND EFFECTIVELY.
The market for our services depends largely on federal and state legislative
programs. These programs can be modified or amended at any time by acts of
federal and state governments. For example, in 1996, Congress amended the Social
Security Act to eliminate social security and supplemental income benefit
payments based solely on drug and alcohol disabilities. That amendment resulted
in the termination of our substantial contract with the Social Security
Administration which related to the referral and monitoring of the treatment of
recipients of these benefits.
Moreover, part of our growth strategy includes aggressively pursuing
opportunities created by the Welfare Reform Act and other federal and state
initiatives, which we believe will be implemented to encourage long-term changes
in the nation's welfare system by seeking new contracts to administer and new
health and welfare programs to manage. However, there are many opponents of
welfare reform and, as a result, future progress in the area of welfare reform
is uncertain. The repeal of the Welfare Reform Act, in whole or in part, could
adversely affect our business. Further, if additional reforms are not proposed
or enacted, or if previously enacted reforms are challenged, repealed or
invalidated, our growth strategy could be adversely impacted.
IF WE DO NOT SUCCESSFULLY INTEGRATE THE BUSINESSES THAT WE ACQUIRE, OUR RESULTS
OF OPERATIONS COULD BE ADVERSELY AFFECTED.
We may be unable to manage businesses that we have acquired or that we may
acquire profitably or integrate them successfully without incurring substantial
expenses, delays or other problems that could negatively impact our results of
operations. To date, we have combined with twelve firms and have acquired
substantially all of the assets of two firms and a division of another firm. We
are still in the process of integrating the operations of several of these
firms.
9
Moreover, business combinations involve additional risks, including:
- diversion of management's attention;
- loss of key personnel;
- assumption of unanticipated legal or financial liabilities;
- our becoming significantly leveraged as a result of the incurrence of debt
to finance an acquisition;
- unanticipated operating, accounting or management difficulties in
connection with the acquired entities;
- amortization of acquired intangible assets, including goodwill; and
- dilution to our earnings per share.
Also, client dissatisfaction or performance problems with an acquired firm
could materially and adversely affect our reputation as a whole. Further, the
acquired businesses may not achieve the revenues and earnings we anticipated.
FEDERAL GOVERNMENT OFFICIALS MAY DISCOURAGE STATE AND LOCAL GOVERNMENTAL
ENTITIES FROM ENGAGING US, WHICH MAY RESULT IN A DECLINE IN REVENUES.
To avoid higher than anticipated demands for federal funds, federal
government officials occasionally discourage state and local authorities from
engaging private consultants to advise them on maximizing federal funding. If
state and local officials are dissuaded from engaging us for revenue
maximization services, we will not receive contracts for, or revenues from,
those services.
WE FACE COMPETITION FROM A VARIETY OF ORGANIZATIONS, MANY OF WHICH HAVE
SUBSTANTIALLY GREATER FINANCIAL RESOURCES THAN WE DO, AND WE MAY BE UNABLE TO
COMPETE SUCCESSFULLY WITH THESE ORGANIZATIONS.
Our Government Operations Group competes for program management contracts
with the following:
- government services divisions of large organizations such as Lockheed
Martin Corporation, Electronic Data Systems, Inc. and Accenture;
- specialized service providers such as Benova, Inc., Policy Studies
Incorporated, Affiliated Computer Services, Inc. and America Works, Inc.;
and
- local non-profit organizations such as the United Way, Goodwill Industries
and Catholic Charities.
Our Consulting Group competes with:
- the consulting divisions of the "Big 5" accounting firms; and
- small, specialized consulting firms.
Our Systems Group competes with a large number of competitors, including
Unisys, KPMG, Accenture, Litton PRC (a Northrop Grumman Company), Peregrine
Systems, Inc. and Electronic Data Systems, Inc.
Many of these companies are national and international in scope and have
greater resources than we have. Substantial resources could enable certain
competitors to initiate severe price cuts or take other measures in an effort to
gain market share. In addition, we may be unable to compete for the limited
number of large contracts because we may not be able to meet an RFP's
requirement to obtain and post a large cash performance bond. Also, in some
geographic areas, we face competition from
10
smaller consulting firms with established reputations and political
relationships. We may be unable to compete successfully against our existing or
any new competitors.
WE MAY NOT RECEIVE SUFFICIENT PAYMENTS IN A QUARTER TO COVER ALL OF OUR COSTS
INCURRED IN THAT QUARTER.
A number of factors cause our payments and operating results to vary from
quarter to quarter, including:
- the progression of contracts;
- the levels of revenues earned on fixed-price and performance-based
contracts (including any adjustments in expectations for revenue
recognition on fixed-price contracts);
- the commencement, completion or termination of contracts during any
particular quarter;
- the schedules of government agencies for awarding contracts;
- the term of awarded contracts; and
- potential acquisitions.
Changes in the volume of activity and the number of contracts commenced,
completed or terminated during any quarter may cause significant variations in
our cash flow from operations because a relatively large amount of our expenses
are fixed. Moreover, we incur significant operating expenses during the start-up
and early stages of large contracts and typically do not receive corresponding
payments in that same quarter.
WE ARE CURRENTLY SUBJECT TO INVESTIGATIONS BY THE DISTRICT ATTORNEY'S OFFICE OF
NEW YORK COUNTY AND THE UNITED STATES ATTORNEY'S OFFICE FOR THE SOUTHERN
DISTRICT OF NEW YORK REGARDING TWO CONTRACTS AWARDED TO US BY THE NEW YORK CITY
HUMAN RESOURCES ADMINISTRATION. IF DETERMINED ADVERSELY, WE COULD BE REQUIRED TO
PAY PENALTIES AND BE SUBJECT TO ADMINISTRATIVE SANCTIONS.
In January 2000, the New York City Human Resources Administration submitted
two contracts that it had awarded to us for the performance of welfare-to-work
services to the Comptroller of New York City to be registered. Under New York
law, the contracts must be registered in order for us to receive payment.
However, the Comptroller refused to register the contracts alleging
improprieties in the procurement process and in our conduct. The New York
Supreme Court, Appellate Division--First Department ordered the Comptroller to
register the contracts in October 2000 after finding no wrongdoing in our
conduct. Nevertheless, this matter continues to be the subject of investigations
being conducted by certain government agencies. The District Attorney's Office
of New York County and the United States Attorney's Office for the Southern
District of New York, in response to requests made by the Comptroller, are
investigating the facts underlying this matter. These offices reviewed some of
our documents and interviewed some of our employees in 2000 and 2001. We believe
that our actions were lawful and appropriate and, although there can be no
assurance of a favorable outcome, we do not believe that this matter will have a
material adverse effect on our financial condition or results of operations.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE IS VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR
ABOVE THE PRICE YOU PAID FOR THEM.
We first publicly issued common stock on June 13, 1997 at $16.00 per share
in our initial public offering. Between June 13, 1997 and June 19, 2001, the
closing sale price has ranged from a high of
11
$39.50 per share to a low of $17.38 per share. The market price of our common
stock could continue to fluctuate substantially due to a variety of factors,
including:
- quarterly fluctuations in results of operations;
- the failure to be awarded a significant contract on which we have bid;
- the termination by a government client of a material contract;
- the announcement of new services by competitors;
- political and legislative developments adverse to the privatization of
government services;
- changes in or failure to meet earnings estimates by securities analysts;
- sales of our common stock by existing shareholders or the perception that
these sales may occur;
- adverse judgments or settlements obligating us to pay damages;
- negative publicity; and
- loss of key personnel.
In addition, overall volatility has often significantly affected the market
prices of securities for reasons unrelated to a company's operating performance.
In the past, securities class action litigation has often been commenced against
companies that have experienced periods of volatility in the price of their
stock. Securities litigation initiated against us could cause us to incur
substantial costs and could lead to the diversion of management's attention and
resources.
OUR ARTICLES OF INCORPORATION AND BYLAWS INCLUDE PROVISIONS THAT MAY HAVE
ANTI-TAKEOVER EFFECTS.
Our Articles of Incorporation and bylaws include provisions that may delay,
deter or prevent a takeover attempt that shareholders might consider desirable.
For example, our Articles of Incorporation provide that our directors are to be
divided into three classes and elected to serve staggered three-year terms. This
structure could impede or discourage an attempt to obtain control of us by
preventing shareholders from replacing our entire board in a single proxy
contest, making it more difficult for a third party to take control of us
without the consent of our board of directors. Our Articles of Incorporation
further provide that our shareholders may not take any action in writing without
a meeting. This prohibition could impede or discourage an attempt to obtain
control of us by requiring that any actions required to be taken by shareholders
be taken at properly called shareholder meetings.
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK AFTER THIS
OFFERING COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
Our executive officers, directors and the selling shareholders, who
collectively beneficially own approximately 33.1% of our outstanding common
stock (approximately 20.9% of our outstanding common stock after completion of
this offering), have agreed to hold their shares until 90 days after this
offering, subject to certain exceptions. At that time, approximately 4,851,643
shares of common stock held by them will be eligible for immediate resale, of
which 4,755,354 will be subject to volume and manner of sale restrictions.
Sales, or the availability for sale, of shares of our common stock by these or
other shareholders could cause the market price of our common stock to decline.
In addition, 812,420 shares held by one shareholder became freely tradable on
June 5, 2001, and approximately 1,164,713 additional shares of common stock
issuable upon exercise of vested stock options are currently available for
immediate resale.
12
OUR EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP OWN SUFFICIENT SHARES OF OUR
COMMON STOCK TO SIGNIFICANTLY AFFECT THE RESULTS OF ANY SHAREHOLDER VOTE.
Our executive officers and directors beneficially own approximately 32.5% of
our common stock (approximately 20.6% of the outstanding common stock after
completion of this offering). Two of those individuals, Dr. Mastran and
Mr. Ruddy, together beneficially own approximately 30.3% of our common stock
(approximately 19.2% of the outstanding common stock after completion of this
offering). Mr. Ruddy has agreed to vote his shares of common stock in a manner
instructed by Dr. Mastran until September 30, 2001. As a result, these executive
officers and directors have the ability to significantly influence the outcome
of matters requiring a shareholder vote, including the election of our board of
directors, amendments to our organizational documents, or approval of any
merger, sale of assets or other major corporate transaction. The interests of
these executive officers and directors may differ from yours and these executive
officers and directors may be able to delay or prevent us from entering into
transactions that would result in a change in control, including transactions in
which our shareholders might otherwise receive a premium over the then current
market price for their shares.
WE HAVE BROAD DISCRETION IN THE USE OF PROCEEDS OF THIS OFFERING.
We have not designated the anticipated net proceeds of this offering for
specific uses. Accordingly, our management will have considerable discretion in
the application of the net proceeds of this offering and you will not have the
opportunity, as part of your investment decision, to assess whether the proceeds
are being used appropriately. See "Use of Proceeds."
13
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements appear principally in the sections entitled "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
Forward-looking statements may appear in other sections of this prospectus as
well. Generally, the forward-looking statements in this prospectus use words
like "anticipate," "believe," "could," "estimate," "expect," "future," "intend,"
"may," "opportunity," "plan," "potential," "project," "will," and similar terms.
These forward-looking statements include statements about:
- our strategic plans;
- the future of our industry;
- the activities of competitors;
- anticipated expenses;
- anticipated sources of future revenues; and
- our need for additional funds.
Forward-looking statements involve risks and uncertainties. Our actual
results could differ significantly from the results discussed in the
forward-looking statements in this prospectus. Many factors could cause or
contribute to these differences, including the factors discussed in the section
of this prospectus entitled "Risk Factors." You should carefully read this
entire prospectus, particularly the section entitled "Risk Factors," before you
make an investment decision.
The forward-looking events discussed in this prospectus might not occur.
Therefore, you should not place undue reliance on our forward-looking
statements.
14
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 1,000,000 shares of our
common stock in this offering at an offering price of $33.95 per share will be
$31,378,000, after deducting the underwriting discount and estimated offering
expenses that are payable by us. We will not receive any proceeds from the sale
of our common stock by the selling shareholders. Additionally, we will not
receive any proceeds if the underwriters exercise the overallotment option
granted to them by two of the selling shareholders. However, we will receive
approximately $66,926 representing the aggregate exercise price of the stock
options through the exercise of which some of the selling shareholders will
acquire their shares.
We plan to use the net proceeds from this offering for general corporate
purposes, including for working capital, expansion of existing operations,
strategic acquisitions of complementary businesses or entities, including
acquisitions that may be larger than those we have made in the past, and
investment in systems infrastructures and new technologies. We have no present
plans, commitments, understandings or agreements to acquire any business. We
cannot estimate precisely the allocation of the proceeds among these uses, and
we may use some of the proceeds from this offering for other purposes. Our
management will have broad discretion to allocate proceeds from this offering to
uses that it believes are appropriate. We plan to invest the net proceeds of
this offering in short-term, investment grade, interest-bearing securities or
guaranteed obligations of the United States or its agencies.
15
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock began trading on June 13, 1997 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 closing prices for our common stock
on the New York Stock Exchange.
HIGH LOW
-------- --------
YEAR ENDED SEPTEMBER 30, 1999:
First Quarter............................................. $37.00 $26.50
Second Quarter............................................ 39.50 22.00
Third Quarter............................................. 31.56 23.13
Fourth Quarter............................................ 36.00 27.38
YEAR ENDED SEPTEMBER 30, 2000:
First Quarter............................................. $35.38 $21.25
Second Quarter............................................ 38.19 30.25
Third Quarter............................................. 32.06 20.44
Fourth Quarter............................................ 24.44 19.50
YEAR ENDING SEPTEMBER 30, 2001:
First Quarter............................................. $34.94 $18.44
Second Quarter............................................ 36.91 29.20
Third Quarter (through June 19, 2001)..................... 38.26 26.90
The closing price of our common stock on June 19, 2001, as reported on the
New York Stock Exchange was $33.95 per share. As of June 19, 2001, there were
129 holders of record of our common stock.
As an S corporation prior to our initial public offering, we made a series
of cash distributions to shareholders representing our earnings taxed or taxable
to those shareholders. We made the last of those distributions at the end of
fiscal year 1997. Since that time, we have retained, and currently anticipate
that we will continue to retain, all of our earnings for use in developing our
business. Distributions reported during fiscal year 1998 were related solely to
S corporation distributions by companies with which we combined during the year.
The distributions were to those companies' former shareholders and related to
earnings prior to combining with us. Future cash dividends, if any, will be paid
at the discretion of our board of directors and will depend, among other things,
upon our future operations and earnings, capital requirements and surplus,
general financial condition, contractual restrictions and such other factors as
our board of directors may deem relevant. We do not anticipate paying any cash
dividends in the foreseeable future.
16
CAPITALIZATION
The following table sets forth, as of March 31, 2001, our actual
capitalization and capitalization as adjusted for the sale of the 1,000,000
shares of our common stock offered by us in this prospectus after deducting
underwriting discounts and commissions and estimated offering expenses. You
should read the following table in conjunction with the consolidated financial
statements and related notes included elsewhere in this prospectus.
AS OF MARCH 31, 2001
-------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
Cash and cash equivalents and short-term investments........ $ 48,344 $ 79,722
======== ========
Total debt.................................................. $ 355 $ 355
Shareholders' equity:
Common stock, no par value; 60,000,000 shares authorized;
21,233,805 shares issued and outstanding; 22,233,805
shares issued and outstanding as adjusted(2)............ 135,680 167,058
Accumulated other comprehensive income.................... (13) (13)
Retained earnings......................................... $ 94,400 $ 94,400
-------- --------
Total shareholders' equity.............................. $230,067 $261,445
-------- --------
Total capitalization.................................... $230,422 $261,800
======== ========
- ------------------------
(1) Assumes net proceeds from the sale of 1,000,000 shares of our common stock
in this offering of $31,378,000, after deducting the underwriting discount
and estimated offering expenses of $912,000 payable by us.
(2) Excludes: (a) an aggregate of 4,187,856 shares issuable upon exercise of
stock options outstanding at March 31, 2001, plus an additional 731,769
shares reserved for issuance in connection with future stock options and
other awards under our 1997 Director Stock Option Plan and 1997 Equity
Incentive Plan; and (b) 360,854 shares reserved for issuance under our 1997
Employee Stock Purchase Plan. See note 10 to the consolidated financial
statements.
17
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
We have derived the selected consolidated financial data presented below as
of September 30, 1999 and 2000 and for each of the three years in the period
ended September 30, 2000 from our consolidated financial statements and the
related notes which have been audited by Ernst & Young LLP, independent
auditors. We have derived the selected consolidated financial data presented
below as of September 30, 1997 and 1998 and for each of the two years in the
period ended September 30, 1997 from our financial statements, not included in
this prospectus, which have been audited by Ernst & Young LLP. The selected
consolidated financial data for the six months ended March 31, 2000 and as of
and for the six months ended March 31, 2001, have been derived from unaudited
financial statements which, in the opinion of our management, reflect all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of this data. Results for the six months ended March 31, 2001 are
not necessarily indicative of results that may be expected for the fiscal year
ending September 30, 2001. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes thereto and other financial information appearing elsewhere in this
prospectus.
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
---------------------------------------------------- ---------------------
1996 1997 1998 1999 2000 2000 2001
-------- -------- -------- -------- -------- -------- ----------
(UNAUDITED)
STATEMENT OF INCOME DATA:
Revenues:
Government Operations Group.......... $ 77,211 $ 97,369 $139,263 $177,428 $221,177 $105,210 $127,069
Consulting Group..................... 53,620 64,327 83,017 99,979 119,917 54,396 72,302
Systems Group........................ 9,661 11,659 21,834 42,133 58,070 23,578 34,150
-------- -------- -------- -------- -------- -------- --------
Total revenues................... 140,492 173,355 244,114 319,540 399,164 183,184 233,521
Cost of revenues....................... 106,258 127,170 181,403 224,912 272,620 126,334 159,300
-------- -------- -------- -------- -------- -------- --------
Gross profit........................... 34,234 46,185 62,711 94,628 126,544 56,850 74,221
Selling, general and administrative
expenses............................. 20,584 26,100 34,909 50,626 67,947 30,707 40,260
Stock option compensation, merger,
deferred compensation and ESOP
expense(1)........................... 1,556 7,372 3,671 480 225 -- --
Amortization of goodwill and other
acquisition-related intangibles...... -- -- -- 260 3,212 645 2,751
Legal settlement expense............... -- -- -- -- 3,650 -- --
-------- -------- -------- -------- -------- -------- --------
Income from operations................. 12,094 12,713 24,131 43,262 51,510 25,498 31,210
Interest and other (expense) income.... (47) 921 1,823 3,604 3,045 2,149 454
-------- -------- -------- -------- -------- -------- --------
Income before income taxes............. 12,047 13,634 25,954 46,866 54,555 27,647 31,664
Provision for income taxes(2).......... 530 4,104 10,440 19,240 24,087 11,421 13,141
-------- -------- -------- -------- -------- -------- --------
Net income............................. $ 11,517 $ 9,530 $ 15,514 $ 27,626 $ 30,468 $ 16,226 $ 18,523
======== ======== ======== ======== ======== ======== ========
Earnings per share:
Basic................................ $ 0.87 $ 0.67 $ 0.86 $ 1.35 $ 1.45 $ 0.77 $ 0.87
======== ======== ======== ======== ======== ======== ========
Diluted.............................. $ 0.87 $ 0.65 $ 0.85 $ 1.32 $ 1.42 $ 0.76 $ 0.85
======== ======== ======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic................................ 13,273 14,208 17,937 20,537 21,055 21,019 21,179
======== ======== ======== ======== ======== ======== ========
Diluted.............................. 13,273 14,593 18,296 20,891 21,424 21,427 21,804
======== ======== ======== ======== ======== ======== ========
FOOTNOTES ON FOLLOWING PAGE
18
AS OF SEPTEMBER 30,
------------------------------------------------------- AS OF
1996 1997 1998 1999 2000 MARCH 31, 2001
----------- -------- -------- -------- -------- ---------------
(UNAUDITED) (UNAUDITED)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term
investments.............................. $ 3,397 $ 51,875 $ 32,980 $ 98,882 $ 38,334 $ 48,344
Working capital............................ 25,467 66,108 78,478 150,472 127,812 146,723
Total assets............................... 50,993 113,884 126,002 223,036 256,903 270,274
Total debt................................. 331 1,596 820 578 764 355
Redeemable common stock.................... 31,758 -- -- -- -- --
Total shareholders' (deficit) equity....... (3,651) 69,041 86,787 175,479 208,933 230,067
- ------------------------
(1) In January 1997, we issued options to various employees to purchase 403,975
shares of our common stock at a formula price based on book value. During
1997, we recorded a non-recurring charge against income of $5,874,000 for
the difference between the initial public offering price and the formula
price for all options outstanding. We recorded a deferred tax benefit
relating to the charge in the amount of $2,055,000. The option exercise
price is a formula price based on the book value of our common stock at
September 30, 1996, and was established pursuant to a pre-existing
shareholder agreement.
(2) For the year ended September 30, 1996, and during fiscal year 1997 up to and
including June 12, 1997, we elected to be treated as an S corporation and
our income was taxed for federal and most state purposes directly to our
shareholders. In connection with our initial public offering, our
S corporation status terminated and we recorded a deferred tax charge
against income of $2,566,000 for the cumulative differences between the
financial reporting and income tax basis of certain assets and liabilities
at June 12, 1997. Subsequent to June 12, 1997, we have recorded state and
federal income taxes based on earnings for those periods. Income taxes
provided for periods prior to our initial public offering related primarily
to operations of David M. Griffith & Associates, Ltd., a company we merged
with during 1998 in a transaction accounted for as a pooling of interests.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER SUBSTANTIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY
FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a leading provider of program management, consulting services and
systems solutions primarily to state and local government agencies throughout
the United States. Since our inception in 1975, we have been at the forefront of
innovation in meeting our mission of "Helping Government Serve the People." We
use our expertise, experience and advanced information technology to make
government operations more efficient and cost-effective while improving the
quality of services provided to program beneficiaries. We currently have
contracts with government agencies in all 50 states, 49 of the 50 largest cities
and 27 of the 30 largest counties. We have been profitable every year since we
were founded. For the fiscal year ended September 30, 2000, we had revenues of
$399.2 million and net income of $30.5 million, and for the six months ended
March 31, 2001, we had revenues of $233.5 million and net income of
$18.5 million.
Prior to October 2000, we conducted our operations through two groups: the
Government Operations Group and the Consulting Group. In October 2000, we
reorganized our groups to better focus and manage our existing and future
technology assets. Our core technology assets were moved from our Consulting
Group to our newly created Systems Group. Accordingly, prior period financial
information has been reclassified to reflect current period presentation of
segment information.
Our revenues are generated from contracts with various payment arrangements,
including: (1) fixed-price; (2) costs incurred plus a negotiated fee
("cost-plus"); (3) performance-based criteria; and (4) time and materials
reimbursement (used primarily by the Consulting Group). For the fiscal year
ended September 30, 2000, the most recent period for which this information is
available, revenues from fixed-price contracts were approximately 47% of total
revenues; revenues from cost-plus contracts were approximately 19% of total
revenues; revenues from performance-based contracts were approximately 18% of
total revenues; and revenues from time and materials reimbursement contracts
were approximately 16% of total revenues. Traditionally, a majority of our
contracts with state and local government agencies have been fixed-price and
performance-based and federal government contracts have been cost-plus.
Fixed-price and performance-based contracts generally offer higher margins but
typically involve more risk than cost-plus or time and materials reimbursement
contracts because we are subject to the risk of potential cost overruns or
inaccurate revenue estimates.
We recognize revenues from cost-plus contracts, including a pro rata amount
of the negotiated fee, as costs are incurred. We recognize revenues from
fixed-price, performance-based and time and materials reimbursement contracts,
including a portion of our estimated profit, as costs are incurred. Each
quarter, management reviews the costs incurred, the revenues recognized and
billings from government contracts to adjust recognized revenue amounts.
The Government Operations Group's contracts generally contain base periods
of one or more years as well as one or more option periods that may cover more
than half of the potential contract duration. As of September 30, 2000, our
average Government Operations contract duration was approximately 2.3 years. Our
Consulting Group contracts had performance periods ranging from one month to
approximately two years. Our average Systems Group contract duration was
1.5 years.
20
Our most significant expense is cost of revenues, which consists primarily
of project-related employee salaries and benefits, subcontractors, computer
equipment and travel expenses. Our ability to accurately predict personnel
requirements, salaries and other costs as well as to effectively manage a
project or to achieve certain levels of performance can have a significant
impact on the service costs related to our fixed-price, performance-based and
time and materials reimbursement contracts. Service cost variability has little
impact on cost-plus arrangements because allowable costs are reimbursed by the
client.
Selling, general and administrative expenses consist of management,
marketing and administration costs including salaries, benefits, travel,
recruiting, continuing education and training, facilities costs, printing,
reproduction, communications and equipment depreciation.
BUSINESS COMBINATIONS AND ACQUISITIONS
As part of our growth strategy, we intend to continue to selectively
identify and pursue complementary businesses to expand our geographic reach and
the breadth and depth of our services and to enhance our customer base,
including pursuing acquisitions that may be larger than those we have made in
the past. Since the beginning of fiscal 2000, we have completed the following
transactions:
INTANGIBLE ASSETS
ACQUIRED COMPANY DESCRIPTION OF BUSINESS DATE PURCHASE PRICE RECORDED
- --------------------- ----------------------- ---------------- ------------------ ------------------
Opportunity America Employment training and May 11, 2001 $825,000 $753,000
LLC placement
Strategic Partners Activity-based costing July 19, 2000 $1,800,000 $1,609,000
International LLC systems
Technology Management Child support April 29, 2000 $9,674,000 $10,036,000
Resources collection services
Valuation Resource Asset inventorying and April 14, 2000 $4,500,000 $3,585,000
Management, Inc. valuation services
Asset Works, Inc. Infrastructure April 12, 2000 $8,613,000 $8,674,000
management systems
3-G International, Smart-card systems March 31, 2000 $7,000,000 plus $7,054,000
Inc. an earn-out of (excludes May
$1,126,000 paid earn-out payment)
May 2001
Crawford Consulting, Web-enabled information March 20, 2000 $16,750,000 $11,887,000
Inc. systems
Public Systems, Inc. Client-server October 20, 1999 $5,000,000 $4,540,000
management systems
21
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
------------------------------------ SIX MONTHS ENDED
1998 1999 2000 MARCH 31, 2001
-------- -------- -------- ----------------
Revenues:
Government Operations Group......................... 57.0% 55.5% 55.4% 54.4%
Consulting Group.................................... 34.0 31.3 30.0 31.0
Systems Group....................................... 9.0 13.2 14.6 14.6
----- ----- ----- -----
Total revenues.................................... 100.0 100.0 100.0 100.0
Cost of revenues...................................... 74.3 70.4 68.3 68.2
----- ----- ----- -----
Gross profit:
Government Operations Group......................... 18.0 19.7 23.1 21.5
Consulting Group.................................... 37.4 41.6 41.7 43.9
Systems Group....................................... 30.4 42.8 44.0 44.4
----- ----- ----- -----
Total gross profit as percentage of total
revenues........................................ 25.7 29.6 31.7 31.8
Selling general and administrative expenses........... 14.3 15.8 17.0 17.2
Merger, deferred compensation and ESOP expense........ 1.5 0.2 0.1 --
Amortization of goodwill and other acquisition-related
intangibles......................................... -- 0.1 0.8 1.2
Legal settlement expense.............................. -- -- 0.9 --
----- ----- ----- -----
Income from operations................................ 9.9 13.5 12.9 13.4
Interest and other income............................. 0.7 1.1 0.7 0.1
----- ----- ----- -----
Income before income taxes............................ 10.6 14.6 13.6 13.5
Provision for income taxes............................ 4.2 6.0 6.0 5.6
----- ----- ----- -----
Net income............................................ 6.4% 8.6% 7.6% 7.9%
===== ===== ===== =====
SIX MONTHS ENDED MARCH 31, 2001 COMPARED TO SIX MONTHS ENDED MARCH 31, 2000
REVENUES. Our total contract revenues increased 27.5% to $233.5 million for
the six months ended March 31, 2001 from $183.2 million for the same period in
2000. Revenues of our Government Operations Group increased 20.8% to
$127.1 million for the six months ended March 31, 2001 from $105.2 million for
the same period in 2000. This increase was due to an increase in the number of
contracts plus revenue totaling $2.8 million received during the six month
period ended March 31, 2001 from entities acquired after the start of the six
month period ended March 31, 2000. Revenues of our Consulting Group increased
32.9% to $72.3 million for the six months ended March 31, 2001 from
$54.4 million for the same period in 2000. This increase was due to an increase
in the number of contracts plus revenue totaling $4.2 million received during
the six month period ended March 31, 2001 from entities acquired after the start
of the six month period ended March 31, 2000. Revenues of our Systems Group
increased 44.8% to $34.1 million for the six months ended March 31, 2001 from
$23.6 million for the same period in 2000. This increase was primarily due to
revenue totaling $10.1 million received during the six month period ended
March 31, 2001 from entities acquired after the start of the six month period
ended March 31, 2000. For the six months ended March 31, 2001 compared to the
six months ended March 31, 2000, our overall growth in revenue was 18.1%
excluding the revenue from entities we acquired after the period ended
March 31, 2000.
GROSS PROFIT. Our total gross profit increased 30.6% to $74.2 million for
the six months ended March 31, 2001 from $56.9 million for the same period in
2000. Gross profit of our Government Operations Group increased 16.3% to
$27.3 million for the six months ended March 31, 2001 from $23.5 million for the
six months ended March 31, 2000. As a percentage of Government Operations
22
Group revenues, Government Operations Group gross profit decreased to 21.5% for
the six months ended March 31, 2001 from 22.3% for the same period in 2000. The
decrease was due to additional revenue being recognized in the six months ended
March 31, 2000 upon the completion of one contract. Gross profit of our
Consulting Group increased 43.0% to $31.7 million for the six months ended
March 31, 2001 from $22.2 million for the same period in 2000. As a percentage
of Consulting Group revenues, Consulting Group gross profit increased to 43.9%
for the six months ended March 31, 2001 from 40.8% for the same period in 2000,
primarily due to improved margins. Gross profit of our Systems Group increased
35.8% to $15.2 million for the six months ended March 31, 2001 from
$11.2 million for the same period in 2000 due to increased revenues. As a
percentage of Systems Group revenues, Systems Group gross profit decreased to
44.4% for the six months ended March 31, 2001 from 47.3% for the same period in
2000, due primarily to a decline in software license sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our SG&A expenses increased
31.1% to $40.3 million for the six months ended March 31, 2001 from
$30.7 million for the same period in 2000. The primary reasons for the increase
in SG&A costs were the increase in marketing and proposal preparation
expenditures incurred to pursue further growth and, to a lesser extent, the
increase in corporate and administrative staff to 192 at March 31, 2001 from 183
at March 31, 2000. As a percentage of our revenues, our SG&A expenses increased
to 17.2% for the six months ended March 31, 2001 from 16.8% for the same period
in 2000.
AMORTIZATION OF GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLES. In the
quarter ended March 31, 2001, we incurred $2.8 million of amortization expense,
as compared to $0.6 million for the same period in 2000. The increase is due to
amortization of $56.0 million of goodwill and other acquisition-related
intangible assets we recorded in connection with acquisitions we completed
through fiscal year 2000.
INTEREST AND OTHER INCOME. The decrease in interest and other income to
$0.5 million for the six months ended March 31, 2001 as compared to
$2.1 million for the same period in 2000 was due to a decrease in the average
balance of funds we invested.
PROVISION FOR INCOME TAXES. Our provision for income tax for the six months
ended March 31, 2001 was 41.5% of income before income taxes as compared to
41.3% for the six months ended March 31, 2000. This increase was due to
differences in the amounts of certain expense items, primarily amortization of
intangible assets, some of which is not deductible for tax purposes.
YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO YEAR ENDED SEPTEMBER 30, 1999
REVENUES. Our total revenues increased 24.9% to $399.2 million in fiscal
2000 from $319.5 million in fiscal 1999. Revenues of our Government Operations
Group increased 24.7% to $221.2 million in fiscal 2000 from $177.4 million in
fiscal 1999. This increase was due to an increase in the number of contracts in
the group plus revenue totaling $8.0 million received from entities acquired
after the start of the period ended September 30, 1999. Revenues of our
Consulting Group increased 19.9% to $119.9 million in fiscal 2000 from
$100.0 million in fiscal 1999. This increase was due to an increase in the
number of contracts, revenues totaling $3.9 million from companies purchased in
fiscal 2000 and revenue growth from companies that we purchased during fiscal
1999. Revenues of our Systems Group increased 37.8% to $58.1 million in fiscal
2000 from $42.1 million in fiscal 1999. This increase was due primarily to
revenues totaling $14.6 million from companies purchased in fiscal 2000.
GROSS PROFIT. Our total gross profit increased 33.7% to $126.5 million in
fiscal 2000 from $94.6 million in fiscal 1999. Gross profit of our Government
Operations Group increased 45.7% to $51.0 million in fiscal 2000 from
$35.0 million in fiscal 1999. As a percentage of Government Operations Group
revenues, Government Operations Group gross profit increased to 23.1% in fiscal
2000 from 19.7% in fiscal 1999. This increase was primarily due to improved
gross margins on a few
23
projects within the Group. Gross profit of our Consulting Group increased 20.1%
to $50.0 million in fiscal 2000 from $41.6 million in fiscal 1999. As a
percentage of Consulting Group revenues, Consulting Group gross profit remained
relatively unchanged. Gross profit of our Systems Group increased 41.8% to
$25.6 million in fiscal 2000 from $18.0 million in fiscal 1999. As a percentage
of Systems Group revenues, Systems Group gross profit increased to 44.0% in
fiscal 2000 from 42.8% in fiscal 1999. The improvement in gross margin for the
Systems Group was due primarily to the impact of a 50.6% margin realized by one
division in the Group.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our SG&A expenses increased
34.2% to $67.9 million in fiscal 2000 from $50.6 million in fiscal 1999. As a
percentage of revenues, SG&A expenses increased to 17.0% for fiscal 2000 from
15.8% for fiscal 1999. This increase in costs was due to increases in the number
of non-project professional and administrative personnel and the amount of
professional fees necessary to support our growth and marketing and proposal
preparation expenditures incurred to pursue further growth. During fiscal 2000,
the total number of support staff employees increased and we further expanded
the Government Affairs and Investor Relations unit and the Information Systems
unit. In fiscal 2000, the number of administrative and systems personnel
increased 33.6% to 342 from 256 in fiscal 1999 and the number of employees
increased from 3,285 total employees at September 30, 1999 to 4,205 total
employees at September 30, 2000.
MERGER, DEFERRED COMPENSATION AND ESOP EXPENSES. During fiscal year 2000,
we incurred $0.2 million of non-recurring expenses in connection with
acquisitions we completed during the year. These expenses consisted of legal,
audit and due diligence expenses. During fiscal year 1999, we incurred
$0.5 million of non-recurring expenses in connection with acquisitions. These
expenses consisted of legal, audit and due diligence expenses.
AMORTIZATION OF GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLES. During
fiscal year 2000, we incurred $3.2 million of amortization expense related to
the $56.1 million of goodwill and other acquisition-related intangible assets we
recorded in connection with acquisitions we completed during fiscal 1999 and
fiscal 2000. During fiscal year 1999, we incurred $0.3 million of amortization
expense related to the $7.6 million of goodwill and other acquisition-related
intangible assets we recorded in connection with the acquisitions we completed
during the year.
LEGAL SETTLEMENT EXPENSE. In the fourth quarter of fiscal 2000, we incurred
an expense of $3.7 million to settle, without admission of fault or liability by
us, litigation brought against us by a former officer, director and shareholder
in connection with our repurchase of his shares following his resignation in
1996.
PROVISION FOR INCOME TAXES. Income tax expense increased 25.2% to
$24.1 million in fiscal 2000 from $19.2 million in fiscal 1999. As a percentage
of income before income taxes, the income tax expense increased to 44.2% for
fiscal 2000 from 41.0% for fiscal 1999. This increase was due primarily to the
non-deductibility of the legal settlement expense discussed above.
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
REVENUES. Our total revenues increased 30.9% to $319.5 million in fiscal
1999 from $244.1 million in fiscal 1998. Revenues of our Government Operations
Group increased 27.4% to $177.4 million in fiscal 1999 from $139.3 million in
fiscal 1998. This increase was due to an increase in the number of contracts in
the group. Revenues of our Consulting Group increased 20.4% to $100.0 million in
fiscal 1999 from $83.0 million in fiscal 1998. This increase was due to an
increase in the number of contracts, revenues totaling $5.1 million from
companies we purchased in fiscal 1999 and revenue growth from companies that
merged with us in fiscal 1998 in transactions accounted for as immaterial
poolings of interests. These companies had $2.2 million of pre-merger revenues
in fiscal 1998 that were not included in our reported fiscal 1998 revenue.
Revenues of our Systems Group increased 93.0% to
24
$42.1 million in fiscal 1999 from $21.8 million in fiscal 1998. This increase
was primarily due to revenue growth of $18.1 million from companies that merged
with us in fiscal 1998 in transactions accounted for as immaterial poolings of
interests. These companies had $11.5 million of pre-merger revenues in fiscal
1998 that were not included in our reported fiscal 1998 revenue.
GROSS PROFIT. Our total gross profit increased 50.9% to $94.6 million in
fiscal 1999 from $62.7 million in fiscal 1998. Gross profit of our Government
Operations Group increased 39.6% to $35.0 million in fiscal 1999 from
$25.0 million in fiscal 1998. As a percentage of Government Operations Group
revenues, Government Operations Group gross profit increased to 19.7% in fiscal
1999 from 18.0% in fiscal 1998. This increase was primarily due to improved
gross margins on two of the three Health Management Services contracts we
purchased in fiscal 1998. Gross profit of our Consulting Group increased 34.1%
to $41.6 million in fiscal 1999 from $31.0 million in fiscal 1998. As a
percentage of Consulting Group revenues, Consulting Group gross profit increased
to 41.6% in fiscal 1999 from 37.4% in fiscal 1998. The improvement in gross
margin for the Consulting Group was due to improved operating efficiencies
within the group. Systems Group gross profit increased 171.6% to $18.0 million
in fiscal 1999 from $6.6 million in fiscal 1998. As a percentage of Systems
Group revenues, Systems Group gross profit increased to 42.8% in fiscal 1999
from 30.4% in fiscal 1998. The improvement in gross margin for the Systems Group
was due primarily to the impact of a 50.0% margin realized by one division in
the Group, which constituted 45.1% of fiscal 1999 Systems Group revenues,
compared to only 20.3% of fiscal 1998 Systems Group revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our total SG&A expenses
increased 45.0% to $50.6 million in fiscal 1999 from $34.9 million in fiscal
1998. As a percentage of revenues, SG&A increased to 15.9% for fiscal 1999 from
14.3% for fiscal 1998. This increase in costs was due to increases in the number
of non-project professional and administrative personnel and the amount of
professional fees necessary to support our growth and marketing and proposal
preparation expenditures incurred to pursue further growth. We established a
Government Affairs and Investor Relations unit at the end of fiscal 1998 and
significantly increased the size of our Information Systems unit during fiscal
1999. From September 30, 1998 to September 30, 1999 the number of administrative
and systems personnel increased 23.1% from 208 to 256 and the total number of
employees increased from 2,870 total employees at September 30, 1998 to 3,285
total employees at September 30, 1999.
MERGER, DEFERRED COMPENSATION AND ESOP EXPENSES. During fiscal year 1999,
we incurred $0.5 million of non-recurring expenses in connection with
acquisitions we completed during the year. These expenses consisted of legal,
audit and due diligence expenses. During fiscal year 1998, we incurred
$3.7 million of non-recurring expenses in connection with acquisitions we
completed during the year. These expenses consisted of legal, audit, broker,
trustee, deferred compensation and other expenses and the acceleration of
expenses related to stock appreciation rights for employees of one of our
acquired companies totaling $0.9 million.
AMORTIZATION OF GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLES. We
incurred $0.3 million of amortization expense related to the $7.6 million of
goodwill and other acquisition-related intangible assets we recorded in
connection with acquisitions during fiscal 1999. We did not incur any
amortization expenses in fiscal 1998 because we accounted for all acquisitions
we completed during that fiscal year as poolings of interests.
PROVISION FOR INCOME TAXES. Our income tax expense increased 84.3% to
$19.2 million in fiscal 1999 from $10.4 million in fiscal 1998. As a percentage
of income before income taxes, our income tax expense increased to 41.0% for
fiscal 1999 from 40.2% for fiscal 1998. This increase was due primarily to the
effect of the termination of the S corporation status of Control Software, Inc.
upon its merger with us.
25
QUARTERLY RESULTS
Set forth below are selected income statement data for the eight quarters
ended March 31, 2001. We derived this information from unaudited quarterly
financial statements that include, in the opinion of our management, all
adjustments necessary for a fair presentation of the information for such
periods. You should read this information in conjunction with the consolidated
financial statements and related notes thereto included in this prospectus.
Results of operations for any fiscal quarter are not necessarily indicative of
results for any future period.
QUARTER ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1999 1999 1999 2000 2000 2000 2000 2001
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Government Operations Group........... $ 47,427 $ 48,640 $ 51,180 $ 54,030 $ 55,629 $ 60,338 $ 60,483 $ 66,586
Consulting Group...................... 24,796 27,641 27,141 27,255 31,150 34,371 35,539 36,763
Systems Group......................... 11,945 10,455 11,362 12,216 18,798 15,694 16,894 17,256
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues.................... 84,168 86,736 89,683 93,501 105,577 110,403 112,916 120,605
Cost of revenues........................ 58,467 61,318 62,085 64,249 71,832 74,454 77,254 82,046
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit:
Government Operations Group........... 9,494 10,078 11,167 12,347 12,733 14,736 12,786 14,554
Consulting Group...................... 10,452 11,032 11,327 10,855 12,352 15,448 15,076 16,655
Systems Group......................... 5,755 4,308 5,104 6,050 8,660 5,765 7,800 7,350
-------- -------- -------- -------- -------- -------- -------- --------
Total gross profit................ 25,701 25,418 27,598 29,252 33,745 35,949 35,662 38,559
Selling, general and administrative
expenses.............................. 13,844 12,737 15,426 15,281 18,036 19,204 19,751 20,509
Merger, deferred compensation and ESOP
expense............................... 152 210 -- -- 210 15 -- --
Amortization of goodwill and other
acquisition-related intangibles....... 88 172 274 371 1,079 1,488 1,392 1,359
Legal settlement expense................ -- -- -- -- -- 3,650 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations.................. 11,617 12,299 11,898 13,600 14,420 11,592 14,519 16,691
Interest and other income............... 965 1,364 1,050 1,099 366 530 288 166
-------- -------- -------- -------- -------- -------- -------- --------
Income before income taxes.............. 12,582 13,663 12,948 14,699 14,786 12,122 14,807 16,857
Provision for income taxes.............. 5,131 5,756 5,288 6,133 6,188 6,478 6,145 6,996
-------- -------- -------- -------- -------- -------- -------- --------
Net income.............................. $ 7,451 $ 7,907 $ 7,660 $ 8,566 $ 8,598 $ 5,644 $ 8,662 $ 9,861
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share:
Basic................................. $ 0.36 $ 0.38 $ 0.36 $ 0.41 $ 0.41 $ 0.27 $ 0.41 $ 0.46
======== ======== ======== ======== ======== ======== ======== ========
Diluted............................... $ 0.35 $ 0.37 $ 0.36 $ 0.40 $ 0.40 $ 0.26 $ 0.40 $ 0.45
======== ======== ======== ======== ======== ======== ======== ========
Our revenues and operating results are subject to significant variation from
quarter to quarter depending on a number of factors, including:
- the progress of contracts;
- revenues earned on 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
26
incur greater operating expenses during the start-up and early stages of
significant contracts prior to receiving related revenues. Our quarterly results
may fluctuate, causing a material adverse effect on our operating results and
financial condition.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended March 31, 2001, cash provided by operations was
$13.3 million as compared to cash used in operations of $3.9 million for the six
months ended March 31, 2000. Improvements in realizations on accounts receivable
collections, from an increase in accounts receivable of $6,884 in the six months
ended March 31, 2000 to a decrease in accounts receivable of $8,129 in the six
months ended March 31, 2001, have had a significant positive effect in the first
six months of fiscal 2001, partially offset by an increase in costs and
estimated earnings in excess of billings (i.e., unbilled receivables) and a
decrease in billings in excess of costs and estimated earnings (i.e., deferred
revenue). The increase in unbilled accounts receivable and the decrease in
deferred revenues during the six months ended March 31, 2001 were due to a
number of new contract startups and the impact of a number of contracts for
which billings do not match costs incurred in connection with such contracts. We
believe that the unbilled receivables will decrease during the remainder of
fiscal 2001, resulting in a positive effect on cash flow. Higher income after
adjustment for depreciation and amortization and changes in working capital
accounts has also favorably impacted our operating cash flow.
For the six months ended March 31, 2001, cash used in investing activities
was $5.3 million as compared to $12.7 million for the six months ended
March 31, 2000. Cash used in investing activities for the six months ended
March 31, 2001 primarily consisted of expenditures for capitalized software
costs totaling $3.8 million and purchases of property and equipment of
$2.3 million. During the six months ended March 31, 2000, we generated cash from
sales of marketable securities, substantially all of which consisted of
short-term municipal bonds totaling $10.7 million, and used $21.5 million in
cash for two acquisitions.
Cash provided by financing activities during the six months ended March 31,
2001 was $2.0 million and during the six months ended March 31, 2000 was
$1.5 million, which consisted primarily of sales of stock to employees through
our employee stock purchase plan and stock option plan during both periods.
Cash used in investing activities totaled $25.0 million during the year
ended September 30, 2000 as compared to $45.1 million of cash used in investing
activities for the year ended September 30, 1999. The $25.0 million of cash used
in investing activities for the year ended September 30, 2000 consisted of
$53.3 million for acquisitions, net of cash acquired, $5.0 million for the
purchase of property and equipment (of which $1.6 million was for improvements
to the corporate headquarters building), and $2.8 million for capitalized
software development costs, offset by the sale of marketable securities totaling
$36.1 million. The $45.1 million of cash used in investing activities for the
year ended September 30, 1999 consisted of purchases of marketable securities
totaling $23.2 million, $8.0 million for the purchase of our corporate
headquarters in Reston, Virginia, $11.2 million for acquisitions, net of cash
acquired, and $2.6 million for the purchase of property and equipment.
Cash used in financing activities totaled $4.5 million during the year ended
September 30, 2000 and consisted of $6.8 million of payments on borrowings of
companies which were acquired during the year, offset by the receipt of proceeds
of $2.3 million from the issuance of common stock through option exercises and
through purchases under our employee stock purchase plan. Cash provided by
financing activities totaled $59.3 million during the year ended September 30,
1999 and consisted primarily of $61.0 million of proceeds, net of offering
expenses, from our secondary offering of common stock that we completed in
December 1998.
We had a $10.0 million revolving credit facility with a bank, which was
available for borrowing and the issuance of letters of credit. We had not used
the credit facility to finance our working capital
27
needs, and our management decided to allow the credit facility to expire at
March 31, 1999. We may in the future incur indebtedness to finance acquisitions.
We believe that we will have sufficient resources to meet our currently
anticipated capital expenditure and working capital cash needs over the next
twelve months.
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.
NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.
SAB 101 summarizes some of the staff's interpretations of application of
generally accepted accounting principles to revenue recognition, including
presentation in the consolidated financial statements. The staff provided
guidance due, in part, to the large number of revenue recognition issues that it
has encountered in registrant filings.
Under SAB 101, we will recognize revenue on many of our performance-based
contracts as billings are rendered to customers, rather than as costs are
incurred. Upon adopting SAB 101, we will adjust our financial statements for the
six months ended March 31, 2001 to reflect the change in revenues and profit
resulting from the application of the new accounting principle. We are currently
evaluating the impact that SAB 101 will have on our financial statements and we
intend to adopt SAB 101 in the fourth quarter of fiscal 2001.
28
BUSINESS
OVERVIEW
We are a leading provider of program management, consulting services and
systems solutions primarily to state and local government agencies throughout
the United States. Since our inception in 1975, we have been at the forefront of
innovation in meeting our mission of "Helping Government Serve the
People-Registered Trademark-." 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 currently have contracts with government agencies in all
50 states, 49 of the 50 largest cities and 27 of the 30 largest counties. For
the year ended September 30, 2000, our five largest contracts were with
government agencies in Texas, California, New York, Maryland and New Jersey and
accounted for approximately 20.6% of our fiscal 2000 revenues. We have been
profitable every year since we were founded. For the fiscal year ended
September 30, 2000, we had revenues of $399.2 million and net income of
$30.5 million, and for the six months ended March 31, 2001, we had revenues of
$233.5 million and net income of $18.5 million.
We conduct our operations through three groups: our Government Operations
Group, our Consulting Group and our Systems Group. Our Government Operations
Group administers and manages state and local government programs on a
fully-outsourced basis. Examples of these programs include welfare-to-work and
job readiness, child care, child support enforcement, managed care enrollment
and disability services. Our Consulting Group provides 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. Our Systems Group provides state and local agencies with systems
design and implementation to improve the efficiency and cost-effectiveness of
their program administration. We offer our own suite of proprietary software
products in addition to customized versions of popular applications such as
PeopleSoft.
We believe that we are well-positioned to benefit from the continued
increase in demand for new program management, consulting services and systems
solutions that has arisen in an environment characterized by changing regulation
and evolving technology. We believe that fiscal pressures will compel state
governments to continue to rationalize program operations and upgrade existing
technology to operate more cost-efficient and productive programs. To achieve
these efficiencies, we believe that many government agencies will turn to
outside experts, including us, for help.
MARKET OPPORTUNITIES
OVERVIEW
We believe that providing program management, consulting services and
systems solutions to government agencies continues to represent significant
market opportunities. The federal, state and local government agencies in the
United States to which we market our services spend more than $250 billion
annually on health and human services programs including Medicaid, Children's
Health Insurance, Food Stamps, Child Support Enforcement, Supplemental Security
Income, Temporary Assistance to Needy Families, and various other programs.
Based on currently available data published by the federal government, we
estimate that states spend over $23 billion annually to administer these
programs, of which we estimate only a small portion was outsourced to private
service providers, including us. We believe that state and local government
agencies will increasingly rely on private service providers to administer their
programs and will also increasingly engage consultants as they seek
29
to reduce costs and improve the delivery of services. The following table
describes the market for our services:
ESTIMATED NUMBER ESTIMATED ANNUAL
OF ADMINISTRATIVE
STATE-OPERATED PROGRAM BENEFICIARIES SERVED EXPENDITURES
- ---------------------- -------------------- ----------------
Medicaid.................................................... 40.6 million $ 6.9 billion
Food Stamps................................................. 19.8 million 4.0 billion
Child Support Enforcement................................... 11.9 million 3.6 billion
Supplemental Social Security Income......................... 6.6 million 2.5 billion
Temporary Assistance to Needy Families...................... 7.2 million 2.3 billion
Children's Health Insurance................................. 3.3 million 0.4 billion
Certain Other Social Services............................... 6.8 million 3.5 billion
--------------- -------------
Total....................................................... 96.2 million $23.2 billion
LEGISLATIVE INITIATIVES
In the last several years, there has been a significant increase in
legislation and initiatives to reform federal, state and local health and human
services programs, including the Welfare Reform Act of 1996, the Balanced Budget
Act of 1997, Government Accounting Standards Board Statement No. 34 and the
Health Insurance Portability and Accountability Act of 1996.
WELFARE REFORM ACT OF 1996. The Welfare Reform Act was one of the most
significant of the legislative reforms and restructured the benefits available
to welfare recipients, eliminated unconditional welfare entitlement and, most
importantly, restructured the funding relationships between federal and state
governments. Under the Welfare Reform Act, states receive block grant funding
from the federal government and may no longer seek reimbursement in the form of
matching federal government funds for expenditures in excess of block grants.
Accordingly, states bear the financial risk for the operation of their welfare
programs.
All states and many local governments are taking action to respond to
welfare reform. Some of these actions include enlisting the advice of
specialized management consultants on ways to more efficiently and effectively
administer their health and human services programs and in many cases outsource
the management of such programs completely. As a result, we have been awarded
performance-based contracts to manage health care enrollment services contracts
for government agencies in California, New York, Texas, Massachusetts, Michigan,
New Jersey, Iowa, Kansas, Colorado and Vermont. We have also been retained by
numerous states and municipalities to provide welfare reform related consulting
services.
Further, as an increasing number of individuals are enrolled in managed care
plans, a need has arisen to provide a mechanism by which disputes between
patients and their managed healthcare plan can be resolved. We operate the
nation's largest system for the resolution of disputes among health plans,
subscribers and providers through independent external review. We are the sole
national contractor to the Federal Health Care Financing Administration for
external appeals in the Medicare Managed Care Program and have rapidly expanded
our services into 15 state governments.
BALANCED BUDGET ACT OF 1997. The Balanced Budget Act established, among
other programs, the State Children's Health Insurance Program. This program
provides federal matching funds to enable states to expand health care to
targeted uninsured, low-income children over a five-year period. Under the
Balanced Budget Act, the federal government made $39.7 billion available over
ten years to states with federally-approved plans to expand state Medicaid
programs, initiate new insurance programs or combine programs. In June 1998, the
federal government also mandated sweeping protections to Medicare beneficiaries,
including increased access to health plans by persons with pre-existing
illnesses, added protections for women and non-English speaking beneficiaries
and increased availability of
30
specialists. Given the breadth and depth of our expertise, 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. We have already entered into 120
contracts valued at approximately $4.5 million to perform these services.
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 requirements 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 have
to evaluate and update its Medicaid Management Information Systems, a process we
are well-positioned to perform.
MARKET OUTLOOK
We believe that the legislative changes described above, when combined with
political pressures and the financial constraints that inevitably result, will
accelerate the rate at which state and local government agencies seek new
solutions to reduce costs and improve the effectiveness of health and human
services programs. We believe that government agencies will continue to turn to
companies like ours to achieve these ends. We believe that we administer
government programs more effectively than government agencies themselves due to
our ability to:
- attract and compensate experienced, high-level management personnel;
- rapidly procure and use advanced technology;
- vary the number of personnel on a project to match fluctuating work loads;
- increase productivity by providing employees with financial incentives and
performance awards and by terminating non-productive employees;
- provide employees with ongoing training and career development assistance;
and
- maintain a modern and efficient work environment that is more conducive to
employee productivity.
We believe that state and local governments will continue to seek our
services despite the effect of economic cycles on government budgets.
Historically, in times of both budget surpluses and deficits, state and local
governments have relied on the private sector to deliver services to their
citizens. In recent years, as governments at all levels have experienced budget
surpluses, new programs, including the Children's Health Insurance Program, have
been initiated to assist even more sectors of society, increasing the population
of beneficiaries of our services. In more austere times, the population enrolled
in existing government health and welfare programs expands, requiring
governments to spend more to administer these programs, while facing increased
pressure to do so cost-effectively. Because our contracts are typically volume
based, our business has continued to expand, even in depressed economic cycles.
31
COMPETITIVE ADVANTAGES
We believe that we have been a pioneer in offering state and local
government agencies a compelling private sector alternative to internal
administration of government programs. The following competitive advantages
position us to capitalize on the significant market opportunities presented by
changes in the ways government provides services.
SINGLE MARKET FOCUS. We believe that we are the largest company dedicated
to providing program management, consulting services and systems solutions
primarily to state and local government agencies. We have accumulated a detailed
knowledge base and understanding of the regulation and operation of government
programs that allows us to apply proven methodologies, skills and solutions to
new projects in a cost-effective and timely fashion. We believe that the depth
and breadth of our government program expertise and related areas of government
program management differentiate us from both small firms and non-profit
organizations with limited resources and skill sets as well as from large
consulting firms that serve multiple industries but lack the focus necessary to
understand the complex nature of serving government agencies.
PROVEN TRACK RECORD. Since 1975, we have successfully and profitably
applied our private sector approach to assisting state and local government
agencies. We have successfully completed hundreds of large-scale program
management and consulting projects for state and local government agencies
serving millions of beneficiaries in nearly every state and we currently have
more than 3,000 clients. We believe that the successful execution of these
projects has enhanced our reputation for providing efficient and cost-effective
services to government agencies while improving the quality of services provided
to program beneficiaries. Our reputation has contributed significantly to our
ability to compete successfully for new contracts.
ABILITY TO RESPOND TO RFPS. State and local government agencies award
contracts to third party providers through a lengthy and complicated bidding and
proposal process. We have significant experience in assembling the large amounts
of information required to submit detailed proposals in response to RFPs in a
timely manner. In addition, the expertise and experience of our managers and
employees enables us to accurately estimate project costs and productivity
levels. As a result, our proposals allow us to meet RFP requirements and to earn
a profit. Coupled with a reluctance on the part of government agencies to award
contracts to unproven companies, we believe that our ability to respond to RFPs
has contributed significantly to our success.
PROPRIETARY PROGRAM MANAGEMENT SOLUTION. We have developed a proprietary
automated case management software program called the MAXSTAR Human Services
Application Builder. The MAXSTAR program tracks program participants, interfaces
with government databases and monitors cases of program participants. MAXSTAR
reduces our project implementation time and cost because it is easily scalable
and customizable and facilitates our project management capability by enabling
us to organize and manage large amounts of information necessary to operate
programs effectively. Because government agencies are often required to manage
vast amounts of data and large numbers of cases without access to advanced
technology and experienced professionals, we believe that MAXSTAR, together with
our experienced information technology professionals, is a key element of our
success.
WIDE RANGE OF SERVICES. Many of our clients require their vendors to
provide a broad array of service offerings, which many of our competitors cannot
provide. Engagements often require creative solutions that must be drawn from
diverse areas of expertise. Our experience in a wide range of services enables
us to better pursue new business opportunities and positions us to be a leading
e-government consulting and implementation force, as well as a single-source
provider of program management, consulting services and systems solutions to
state and local government agencies. Our broad client base facilitates
cross-selling opportunities among our Government Operations, Consulting
32
and Systems Groups. Additionally, our acquisitions have provided us with
expanded service capabilities and an additional base of established clients.
MARKET LEADING CONSULTING CAPABILITIES. We believe we have the largest
management consulting practice dedicated to serving state and local governments
in the United States. We believe that our Consulting Group provides us with
significant competitive advantages including:
- a significant pool of experienced consultants with an established
knowledge base and valuable relationships with members of the executive
and legislative branches of state and local governments;
- methodologies that can be easily replicated and customized; and
- a more predictable source of revenues due to recurring revenue streams
from our renewable contracts.
In addition, we offer a broad suite of services that are increasingly sought
by state and local governments seeking a single-source provider of program
management and consulting services including cost accounting; human resources
consulting; executive recruiting; and planning, evaluation and implementation
for large government systems.
EXPERIENCED TEAM OF PROFESSIONALS. We have assembled a management team of
former government executives, state agency officials, information technology
specialists and other professionals, most of whom have more than seven years of
experience in the public services industry. Our employees understand the
problems and challenges faced in the marketing, assessment and delivery of
government agency services. Further, as state and local government
administrators are subject to changing legislative and political mandates, we
have developed strong relationships with experienced political consultants who
inform and advise us with respect to strategic marketing opportunities and
legislative initiatives.
GROWTH STRATEGY
Our goal is to be the leading provider of program management, consulting
services and systems solutions to state and local government agencies. Our
strategy to achieve this goal includes the following:
AGGRESSIVELY PURSUE NEW BUSINESS OPPORTUNITIES. We believe that, throughout
our 25-year history, we have been a leader in developing innovative solutions to
meet the evolving needs of state and local health and human services agencies.
We plan to expand our revenue base by:
- marketing new and innovative solutions to our extensive client base;
- expanding our client base by marketing our experience, established
methodologies and systems;
- investing in the early identification of government bid opportunities,
including retaining outside marketing consultants, hiring dedicated
in-house personnel and using available RFP tracking databases; and
- submitting competitive bids that leverage our proven solutions from past
projects.
CONTINUE TO DEVELOP COMPLEMENTARY SERVICES. We intend to continue
broadening our range of services in order to respond to the evolving needs of
our clients and to provide additional cross-selling opportunities. We intend to
continue to internally develop innovative consulting practices, technologies,
and methodologies that are required by government entities in order to
effectively deliver public services. For example, we have developed a system
that interfaces with insurance company databases to intercept payments to
claimants who are delinquent on child support obligations. We have also
developed a consulting practice focused on the requirements of the Health
Insurance Portability and
33
Accountability Act. This practice provides high level information systems
services designed to bring state Medicaid programs into compliance under the
Act.
RECRUIT HIGHLY SKILLED PROFESSIONALS. We continually strive to recruit top
management and information technology professionals with the experience, skills
and innovation necessary to design and implement solutions to the complex
problems faced by resource-constrained government program agencies. We also seek
to attract middle-level consultants with a proven track record in the government
services field and a network of political contacts to leverage our existing
management infrastructure, client relationships and areas of expertise. We
believe we can continue to attract and retain experienced government personnel
by leveraging our reputation as a premier government services consultant and our
single market focus.
PURSUE STRATEGIC ACQUISITIONS. While most of our revenue growth has been
internally generated, we intend to continue to selectively identify and pursue
attractive acquisition opportunities, including pursuing acquisitions that may
be larger than those we have made in the past. Acquisitions can provide us with
a rapid, cost-effective method to broaden our services, increase the number of
our professional consultants, expand our client base, cross-sell additional
services, enhance our technical capabilities, establish or expand our presence
geographically and obtain additional skill sets.
GOVERNMENT OPERATIONS GROUP
Our Government Operations Group, which generated approximately 55% of our
total revenues in our most recent fiscal year, specializes in the administration
and management of government health and human services programs.
HEALTH MANAGEMENT SERVICES DIVISION. We provide a variety of project
management services for Medicaid programs with a particular emphasis on
large-scale managed care enrollment projects. In these projects, we provide:
- recipient outreach, education and enrollment services;
- an automated information system customized for the particular state;
- data collection and reporting;
- design and development services for program materials; and
- health plan encounter data analysis and reporting.
We currently provide managed care enrollment contract services to more
Medicaid recipients than any other public or private sector entity in the
country, operating projects for the states of California, New York, Texas,
Michigan, Massachusetts, New Jersey, Colorado and Vermont. We also administer
programs for uninsured and underinsured children as part of the Children's
Health Insurance Program in various states, including Michigan, Massachusetts,
New Jersey, Kansas, and Iowa. We operate the nation's largest system for the
resolution of disputes among health plans, subscribers and providers through
independent external review. We are the sole national contractor to the Federal
Health Care Financing Administration for external appeals in the Medicare
Managed Care Program and have rapidly expanded our offerings into state
government, currently providing external review services to 15 states.
CHILD SUPPORT DIVISION. We operate full-service and specialized-service
child support projects on behalf of state and local governments. Projects span a
broad range of services, including outreach to participants, intake of cases,
establishing paternity, obtaining child support orders, collecting child
support, operating customer service call centers, locating services and
obtaining court order modifications. We believe that we have one of the largest
Child Support Enforcement staffs in the private sector with over 1,000
professionals. We have been performing some of these services since
34
1976, which we believe is longer than any other private sector firm in the
United States. We are currently engaged in the management of Child Support
Enforcement programs in ten states, providing full child support services and
specialized services for over one million cases. Our Customer Service
operations, including four stand-alone call centers, currently handle
approximately three million telephone calls from customers per year.
WORKFORCE SERVICES DIVISION. We manage welfare-to-work programs by
providing a wide range of services, including emergency assistance, job referral
and placement, transition services such as child care and transportation,
community work training services, job readiness preparation, case management
services and selected educational and training services. Our typical
welfare-to-work contract involves an engagement period of three to five years.
During the 2000 fiscal year, we placed nearly 17,500 welfare recipients into
jobs. On average, we have placed over 80% of the welfare recipients that are
referred to us for job placement. Additionally, we have two contracts that
represent the significant privatization of government functions under which we
both administer the program and make applicant eligibility determinations.
FEDERAL SERVICES DIVISION. We provide a host of large-scale, nationwide
management services geared toward emerging market areas including disability
services, vocational rehabilitation, youth and elderly services, substance
abuse/mental health services and justice administration support services. In
1995, we became the first company to operate a national case management and
monitoring program for disability beneficiaries when we contracted with the
Social Security Administration to provide services to beneficiaries with drug or
alcohol disabilities. In 1999, we were awarded the first Social Security
Administration contract to provide employability planning and support services
to disabled youth in order to assist them in entering the workforce. In 2000,
the Commonwealth of Massachusetts awarded us a contract to enroll senior
citizens who receive Medicare and Medicaid benefits in managed care services.
Under this first of its kind federal/state partnership between the Health Care
Financing Administration and the Commonwealth of Massachusetts, we are
responsible for the development of the program protocol and the operation of the
pilot program.
CONSULTING GROUP
Our Consulting Group, which generated approximately 30% of our total
revenues in our most recent fiscal year, provides program planning and quality
assurance services to state and local government agencies, in addition to
general management consulting services and specialized services such as
assisting state and local agencies in maximizing federal funding for their
programs.
MANAGEMENT SERVICES DIVISION. Our Management Services Division provides a
broad array of consulting services to state and local governments. These
services include accounting, activity-based costing, cost of service and user
fee studies; executive recruitment; airport expansion financial feasibility
studies and retail planning and management; capital asset management; public
works, fleet management; and utilities management. Through this division, we
provide consulting services to over 3,000 clients each year, many of which have
been clients for 20 years or more. We believe that this extensive client base
creates opportunities for us to successfully cross-market our services.
REVENUE SERVICES DIVISION. Our Revenue Services Division seeks out
additional federal funding and provides benefits program planning and
implementation services for state and local government agencies. Our federal
funding maximization projects are generally carried out on a contingency fee
basis determined as a percentage of funds recovered from the federal government.
Our revenue maximization projects have resulted in the recovery of more than
$1.1 billion of federal funds on behalf of 24 states. We have also provided
welfare planning and implementation projects and have been engaged by the
Commonwealth of Pennsylvania to provide detailed analysis and assistance to
ensure that the state child welfare and juvenile justice claims programs comply
with applicable federal
35
requirements. We also assist several states in facilitating claims for
additional services through the Temporary Assistance to Needy Families program.
HUMAN SERVICES TECHNOLOGY DIVISION. Our Human Services Technology Division
provides strategic information management, procurement and contracting, systems
quality assurance and systems implementation services to the state health and
human service agencies. Our experienced team of skilled project managers and
information technology professionals has assisted clients in the planning,
design, procurement and implementation of information systems in multiple
projects across numerous states. We also supervise the work performed by
contractors who sell these systems. The potential market for the division's
services has continued to expand in recent years. Given our successful track
record, core competencies and national market presence, we believe that we are
well-positioned to take advantage of the increased nationwide emphasis by state
governments on welfare eligibility systems, Medicaid Management Information
Systems, child welfare services and child support enforcement services.
Additionally, we believe that synergies between our Government Operations Group,
Consulting Group and Systems Group uniquely position us to take advantage of new
market opportunities in health and human services program areas.
INFRASTRUCTURE TECHNOLOGIES DIVISION. Our Infrastructure Technologies
Division provides management consulting services that focus on assisting large
public sector organizations in solving complex problems related to automation of
financial services. This division has engagements in the legislative, executive
and judicial branches. We also have extensive knowledge of the fiscal structure
of states through our experience with state auditors, comptrollers and
treasurers as well as a significant understanding of state government through
close contact with many state agencies. As part of our consulting engagement, we
provide a variety of information technology services, including project planning
and management; quality assurance monitoring and assessment for child welfare,
healthcare and financial management systems; strategic planning; and advanced
technologies.
SYSTEMS GROUP
Our newly-created Systems Group, which generated approximately 15% of our
total revenues in our most recent fiscal year, contains our technology solutions
and proprietary software programs formerly included in our Consulting Group. The
group provides state and local agencies with systems design and implementation
to improve the efficiency and cost-effectiveness of their program
administration.
ERP SOLUTIONS DIVISION. The ERP Solutions Division consultants work almost
exclusively with government and educational entities to implement
PeopleSoft-Registered Trademark- and Microsoft-Registered Trademark- Great
Plains Business Solutions Enterprise Resource Planning, or ERP, Software
Solutions. Our goal is to deliver cost-efficient technology-based business
solutions, including customer information systems/utility billing; financial
systems; human resources management systems; procurement systems; and student
administration systems. ERP Solutions is a PeopleSoft consulting alliance
partner and one of the only certified PeopleSoft Application Systems Providers.
ASSET SOLUTIONS DIVISION. The Asset Solutions Division offers a suite of
asset management solutions that manage and maintain physical assets, including
fleet, fuel, facility, space and fixed assets. Asset Solutions provides
web-enabled solutions to over 300 customers including government agencies,
public utilities, mass transits, K-12 education systems and universities. All
Asset Solutions systems integrate with major ERP solutions and promote
accountability and cost management. Recent achievements include new contracts
with The City of New York, the City of Chicago and the Southeastern Pennsylvania
Transit 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
36
management, docketing, scheduling and report generating software used in all
stages of the judicial process. We market and sell a jury management software
program that creates jury lists, generates notices and monitors attendance and
payments. We also offer a records management software solution to automate
record keeping functions and county recorders' offices. We currently support
over 5,000 users at over 150 sites in Ohio, Florida, Michigan, Arkansas,
Indiana, Massachusetts, California and New York.
The Justice Solutions Division also develops and implements information
technology systems solutions for state criminal justice systems. We work with
law enforcement agencies, courts and corrections agencies to develop systems
that integrate and facilitate access to criminal justice information and
records. We are currently responsible for the management of the Connecticut
offender-based tracking system that tracks offender location, classification and
status information.
PUBLIC SYSTEMS DIVISION. The Public Systems Division provides systems
development, integration and implementation services to public-sector health and
human services agencies. This division develops modern, web-based solutions for
government agencies providing public services that enable the use of the
Internet to lower the cost of maintaining and supporting large application
systems. We are also involved in the development of web portals designed to
facilitate access to program information on the Internet. The division is
currently offering these services through a series of projects in Utah for
Medicaid Managed Care and in Delaware to a variety of agencies providing social
services.
INTELLIGENT TECHNOLOGIES DIVISION. Our Intelligent Technologies Division
provides health, transportation, education, banking and human services clients
with expert assistance in developing, planning and implementing smart card
technology, biometric recognition systems, and e-government consulting services
and related technologies. Responding to pressures to provide services more
efficiently, public-sector entities are increasingly moving from paper-based to
electronics-based systems. In addition to cost efficiencies, e-government
technologies provide more accurate record keeping and offer greater security
against fraud and theft. Recognizing the potential efficiencies of smart card
technology, the United States General Services Administration awarded a ten-year
contract to five companies, including us, to implement this technology in
federal government agencies. This division also assists health, education and
banking clients in planning, implementing and evaluating electronic funds
transfer, electronic benefits transfer and electronic payment systems. These
systems allow recipients to transfer benefits from government accounts to
product or service vendors.
BACKLOG
Backlog represents an estimate of the remaining future revenues from
existing signed contracts and revenues from contracts that have been awarded but
not yet signed. Our backlog estimate includes revenues expected under the
current terms of executed contracts, revenues from contracts in which the scope
and duration of the services required are not definite but estimable and does
not assume any contract renewals or extensions.
Changes in the backlog calculation result from additions for future revenues
from the execution of new contracts or extension or renewal of existing
contracts, reductions from fulfilling contracts, reductions from the early
termination of contracts, and adjustments to estimates of previously included
contracts.
Estimates of future revenues from awarded or signed contracts are
necessarily inexact and the receipt and timing of these revenues are subject to
various contingencies, many of which are outside of our control. We believe that
period-to-period backlog comparisons are difficult and do not necessarily
accurately reflect future revenues we may receive. The actual timing of revenue
receipts, if any, on projects included in backlog could change because, among
other reasons, the scheduling of a project
37
could be postponed, a contract could be modified or canceled, or initial
estimates regarding a contract's revenues could prove to be wrong.
AS OF SEPTEMBER 30, 2000
------------------------------
SIGNED UNSIGNED TOTAL
-------- -------- --------
(IN MILLIONS)
Government Operations Group................ $268.3 $18.4 $286.7
Consulting Group........................... 135.2 14.1 149.3
Systems Group.............................. 31.8 -- 31.8
------ ----- ------
Total.................................. $435.3 $32.5 $467.8
====== ===== ======
MARKETING AND SALES
Our Government Operations Group, Consulting Group and Systems Group obtain
program management, consulting services and systems solutions contracts for
state and local agencies by responding to RFPs. Our Government Affairs unit,
consisting of eight employees and approximately 40 marketing consultants located
in regional offices, develops and maintains relationships with senior government
representatives, elected officials and political appointees, including a state's
governor, members of the governor's staff and the heads of state health and
human services agencies to encourage them to outsource government services. We
also developed and implemented a sophisticated RFP tracking system that provides
us with real-time information about the status of existing RFPs and our actions
to date with respect to those RFPs.
Our marketing consultants provide introductions to government personnel and
provide information to us regarding the status of legislative initiatives and
executive decision-making. Following the issuance of an RFP, we participate in
formal discussions, if any, between the contracting government agency and the
group of potential service providers seeking to modify the RFP and prepare the
proposal. Upon the award of a government operations contract, our
representatives may help us negotiate the contract with representatives of the
government authority until an agreement is reached.
We generate leads for contracts by tracking bid notices, employing marketing
consultants, maintaining relationships with government personnel, communicating
directly with current and prospective clients and, increasingly, through
referrals and cross-selling initiatives from our Consulting Group. We
participate in professional associations of government administrators and
industry seminars featuring presentations by our executives and employees.
Senior executives develop leads through on-site presentations to
decision-makers. A portion of our new consulting business has resulted from
prior client engagements in which we were the sole service provider. We also
intend to leverage client relationships of firms we acquire by cross-selling our
existing services.
COMPETITION
The market for providing program management and consulting services to state
and local health and human services agencies, as well as to public sector
clients generally, is competitive and subject to rapid change. Our Government
Operations Group competes for program management contracts with the government
services divisions of large organizations such as Lockheed Martin Corporation,
Electronic Data Systems, Inc. and Accenture; specialized service providers such
as Benova, Inc., Policy Studies Incorporated, Affiliated Computer
Services, Inc. and America Works, Inc.; and local non-profit organizations such
as the United Way, Goodwill Industries and Catholic Charities. Our Consulting
Group competes with the consulting divisions of the "Big 5" accounting firms;
and small, specialized consulting firms. Our Systems Group competes with a large
number of competitors including Unisys, KPMG, Accenture, Litton PRC (a Northrop
Grumman Company), Peregrine Systems, Inc. and Electronic Data Systems, Inc.
38
We anticipate that we may face increased competition in the future as new
companies enter the market, but that our experience, reputation, industry focus
and broad range of services provide significant competitive advantages which we
expect will enable us to compete effectively in our markets.
EMPLOYEES
As of May 31, 2001, we had 4,737 employees, consisting of 3,383 employees in
the Government Operations Group, 708 employees in the Consulting Group, 441
employees in the Systems Group and 205 corporate administrative employees. Our
success depends in large part on attracting, retaining and motivating talented,
innovative and experienced professionals at all levels. None of our employees is
covered by a collective bargaining agreement. We consider our relations with our
employees to be good.
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 170 offices totaling
approximately 988,000 square feet for other management and administrative
functions in connection with the performance of our contracts. The lease terms
vary from month-to-month to five-year leases and are generally at market rates.
LEGAL PROCEEDINGS
In January 2000, the New York City Human Resources Administration submitted
two contracts that it had awarded to us for the performance of welfare-to-work
services to the Comptroller of New York City to be registered. Under New York
law, the contracts must be registered in order for us to receive payment.
However, the Comptroller refused to register the contracts alleging
improprieties in the procurement process and in our conduct. The New York
Supreme Court, Appellate Division--First Department ordered the Comptroller to
register the contracts in October 2000 after finding no wrongdoing in our
conduct. Nevertheless, this matter continues to be the subject of investigations
being conducted by certain government agencies. The District Attorney's Office
of New York County and the United States Attorney's Office for the Southern
District of New York, in response to requests made by the Comptroller, are
investigating the facts underlying this matter. These offices reviewed some of
our documents and interviewed some of our employees in 2000 and 2001. We believe
that our actions were lawful and appropriate and, although there can be no
assurance of a favorable outcome, we do not believe that this matter will have a
material adverse effect on our financial condition or results of operations.
We are also involved in various other legal proceedings in the ordinary
course of our business. In our opinion, these proceedings involve amounts that
would not have a material effect on our financial position or results of
operations if such proceedings were resolved unfavorably.
39
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their respective ages and positions
are as follows:
NAME AGE POSITION
- ---- -------- ------------------------------------------
David V. Mastran.......................... 58 President, Chief Executive Officer and
Director
Raymond B. Ruddy.......................... 57 Chairman of the Board of Directors, Vice
President of the Company
Russell A. Beliveau....................... 53 President of Investor Relations and
Director
Richard L. Bradley........................ 52 President of Systems Group
Lynn P. Davenport......................... 53 President of Consulting Group and Director
David R. Francis.......................... 39 General Counsel and Secretary
Thomas A. Grissen......................... 42 Chief Operating Officer and Director
David A. Hogan............................ 52 President of Government Operations Group
F. Arthur Nerret.......................... 54 Vice President, Finance, Chief Financial
Officer and Treasurer
Jesse Brown............................... 57 Director
Peter B. Pond............................. 56 Director
James R. Thompson, Jr..................... 65 Director
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.
RAYMOND B. RUDDY has served as our Chairman of our Board of Directors from
1985 to the present and was President of the Consulting Group from 1986 to 2000.
From 1969 until he joined us, Mr. Ruddy served in various capacities with Touche
Ross & Co., including Associate National Director of Consulting from 1982 until
1984 and Director of Management Consulting (Boston, Massachusetts office) from
1978 until 1983. Mr. Ruddy received his M.B.A. from the Wharton School of
Business of the University of Pennsylvania and his B.S. in Economics from Holy
Cross College.
RUSSELL A. BELIVEAU has served as our President of Investor Relations since
September 1998 and served as President of Government Affairs 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
M.B.A. in Business Administration and Management Information Systems from Boston
College in 1980 and his B.A. in Psychology from Bridgewater State College in
1974.
RICHARD L. BRADLEY has served as President of our newly formed Systems Group
since October 2000. Prior to joining us, Mr. Bradley was a Vice President and
General Manager for TRW
40
(and BDM International prior to its acquisition by TRW) and was responsible for
public sector operations. Before that, he served in various management roles at
Unisys in the health and human services and other public sector areas.
Mr. Bradley has over 25 years of professional information technology experience.
Over that time, Mr. Bradley has managed multiple large public and commercial
information technology organizations. Mr. Bradley received B.A. degrees in
Political Science and Education from Western Washington State University and
completed the coursework for the State of Washington Fellowship M.P.A. Program
at Western Washington University.
LYNN P. DAVENPORT has served as the President of the MAXIMUS Consulting
Group since October 2000. Before that he was President of the Human Services
Division since he joined us in 1991. 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.
DAVID R. FRANCIS has served as our General Counsel and Secretary since
August 1998. He has over 14 years experience as a practicing attorney. Before
joining us, he was Of Counsel at the law firm Howrey & Simon and, prior to that,
Senior Counsel at Teledyne, Inc. Mr. Francis received his J.D. from Harvard Law
School in 1986 and his B.A. in Philosophy from Johns Hopkins University in 1983.
THOMAS A. GRISSEN has served as our Chief Operating Officer since
October 2000. Before that, he served as President of the Government Operations
Group since he joined us in March 1999. Prior to that, he served as the General
Manager and Vice President of TRW from January 1998. Mr. Grissen was President
of BDM International from April 1997 until joining TRW. Before starting at BDM
International, Mr. Grissen was a principal and managing director of Unisys for
16 years. Mr. Grissen received his Executive M.B.A. from Michigan State
University and his B.A. in Business from Central Michigan University.
DAVID A. HOGAN has served as the President of the Government Operations
Group since October 2000. Before that he was the President of the Child Support
Enforcement Division since 1994 and served as a Vice President of the division
from 1993 until 1994. Prior to joining us, Mr. Hogan spent 23 years working in
numerous positions for the Washington State Department of Social and Health
Services, including five years as the State's Child Support Director. Mr. Hogan
also served one year as the President of the National Child Support Directors
Association. Mr. Hogan received his J.D. from the University of Puget Sound in
1976 and his B.A. from Western Washington University in 1970.
F. ARTHUR NERRET has served as our Chief Financial Officer since 1994 and
serves as Trustee of our 401(k) Plan. He is a CPA and has over 25 years of
financial management experience. From 1981 until he joined us, Mr. Nerret held a
variety of positions at Frank E. Basil, Inc. in Washington, D.C., including Vice
President, Finance from 1991 to 1994 and Director of Finance from 1989 until
1991. Mr. Nerret received his B.S. in Accounting from the University of Maryland
in 1970.
JESSE BROWN has served as one of our directors since his election in
September 1997. Mr. Brown is currently President of Brown & Associates, Inc., an
international consulting company, and served as Secretary of Veteran Affairs
under the Clinton Administration from 1993 until 1997, and as Executive Director
of the Washington office of Disabled American Veterans from 1989 to 1993.
Mr. Brown also serves as a director of PEC Solutions, Inc. and of Roy F. Weston,
Inc. Mr. Brown is an honors graduate of Chicago City College and also attended
Roosevelt University Chicago and Catholic University in Washington, D.C.
41
PETER B. POND has served as one of our directors since his election in
December 1997. Mr. Pond is a founder of ALTA Equity Partners LLC, a venture
capital firm, and has been a General Partner of the 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.
JAMES R. THOMPSON, JR. has served as one of our directors since his election
in 2001. Governor Thompson currently serves as Chairman of the Chicago office of
the law firm of Winston & Strawn since January 1993. He joined the firm in
January 1991 as Chairman of the Executive Committee after serving four terms as
Governor of the State of Illinois from 1977 until January 1991. Prior to his
terms as Governor, he served as U.S. Attorney for the Northern District of
Illinois from 1971 to 1975. Governor Thompson has served as the Chief of the
Department of Law Enforcement and Public Protection in the Office of the
Attorney General of Illinois, as an Associate Professor at Northwestern
University School of Law, and as an Assistant State's Attorney of Cook County.
He is a former Chairman of the President's Intelligence Oversight Board.
Governor Thompson is currently a member of the boards of directors of Jefferson
Smurfit Group, Navigant Consulting, Inc., Prime Retail, Inc., The Japan Society
(New York), Metal Management, Inc., Prime Group Realty Trust, FMC Corporation,
the Chicago Board of Trade and Hollinger International. He serves on the Board
of the Museum of Contemporary Art, the Lyric Opera and the Illinois Math and
Science Academy Foundation. Governor Thompson attended the University of
Illinois and Washington University, and he received his J.D. from Northwestern
University in 1959.
42
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of June 19, 2001, and as adjusted to reflect
the sale of the shares offered hereby, by each selling shareholder. We believe
that each person named below has sole voting and investment power with respect
to all shares of common stock shown as beneficially owned by such holder,
subject to community property laws where applicable, except as noted in the
footnotes relating to such holder. The address of each of the selling
shareholders is care of MAXIMUS at our principal executive office.
SHARES OWNED PRIOR SHARES OWNED AFTER
TO THE OFFERING(A) THE OFFERING(A)
------------------------ SHARES ------------------------
NUMBER PERCENT OFFERED(B) NUMBER PERCENT
--------- -------- ---------- --------- --------
SELLING SHAREHOLDERS:
David V. Mastran.............................. 6,554,013(c) 30.3% 1,454,167 5,099,846(c) 22.5%
Raymond B. Ruddy.............................. 2,465,787(d) 11.4 681,445 1,712,342(i) 7.6
Lynn P. Davenport............................. 217,875(e) 1.0 108,937 108,938(j) *
Susan D. Pepin................................ 178,594(f) * 89,297 89,297(k) *
Russell A. Beliveau........................... 156,308(g) * 78,154 78,154(g) *
Raymond B. Ruddy Charitable Remainder
Unitrust No. 2.............................. 72,000(h) * 72,000 -- *
Raymond and Marilyn Ruddy Charitable Trust.... 216,000 * 216,000 -- *
- ------------------------------
* Percentage is less than 1% of all outstanding shares of our common stock.
(a) Applicable percentage of ownership prior to this offering is based upon
21,620,954 shares of common stock outstanding, which includes 45,840 shares
of common stock issued upon exercise of vested stock options by
Mr. Davenport (16,303) and Ms. Pepin (29,537). For ownership after
completion of this offering, applicable percentage ownership is based on
22,620,954 shares of common stock outstanding, which includes 45,840 shares
of common stock issued upon exercise of vested stock options by
Mr. Davenport (16,303) and Ms. Pepin (29,537), and assumes no exercise of
the underwriters' overallotment option. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission, and
includes shares with respect to which the person has voting and investment
power. The number of shares of common stock deemed beneficially owned by any
person includes outstanding shares of common stock held by such person and
any shares of common stock issuable upon exercise of stock options held by
such person exercisable within 60 days following June 19, 2001.
(b) If the overallotment option is exercised in full, Dr. Mastran and Mr. Ruddy
will sell an aggregate of 555,000 additional shares of common stock.
Dr. Mastran will sell 333,000 additional shares and Mr. Ruddy will sell
222,000 additional shares.
(c) Includes the holdings of (1) Dr. Mastran's spouse, consisting of
62,129 shares and 7,694 shares issuable upon exercise of stock options
exercisable within 60 days following June 19, 2001, (2) Dr. Mastran's
father, consisting of 1,800 shares, and (3) Mr. Ruddy, consisting of
2,465,787 shares prior to the offering and 1,712,342 shares after the
offering, and who is obligated by written agreement to vote such shares in a
manner consistent with instructions received from Dr. Mastran until
September 30, 2001. Dr. Mastran does not have dispositive power over
Mr. Ruddy's shares.
(d) Includes 112,000 shares held by trusts for the benefit of Mr. Ruddy's family
members. See footnote (h).
(e) Includes (1) 123,991 shares issuable upon exercise of stock options
exercisable within 60 days following June 19, 2001 and (2) 1,250 shares held
by Mr. Davenport's son.
(f) Includes 118,834 shares issuable upon exercise of stock options exercisable
within 60 days following June 19, 2001. Ms. Pepin is the Deputy Consulting
Group President.
(g) Includes (1) 18,006 shares issuable upon exercise of stock options
exercisable within 60 days following June 19, 2001 and (2) the holdings of a
trust of which Mr. Beliveau and his spouse are the primary beneficiaries,
consisting of 137,146 shares prior to the offering and 59,570 shares after
the offering.
(h) Consists entirely of shares held by a trust of which Mr. Ruddy is trustee
and beneficary. See footnote (d).
(i) Includes 40,000 shares held by a trust for the benefit of Mr. Ruddy's family
members.
(j) Includes (1) 107,688 shares issuable upon exercise of stock options
exercisable within 60 days following June 19, 2001 and (2) 1,250 shares held
by Mr. Davenport's son.
(k) Reflects 89,297 shares issuable upon exercise of stock options exercisable
within 60 days following June 19, 2001.
43
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns &
Co. Inc., Legg Mason Wood Walker, Incorporated, Adams, Harkness & Hill, Inc. and
BB&T Capital Markets, A division of Scott & Stringfellow, Inc. are acting as
representatives of the underwriters named below. Subject to the terms and
conditions described in a purchase agreement among us, the selling shareholders
and the underwriters, we and the selling shareholders have agreed to sell to the
underwriters, and the underwriters severally and not jointly have agreed to
purchase from us and the selling shareholders, the number of shares listed
opposite their names below.
NUMBER OF
UNDERWRITER SHARES
---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................... 1,632,000
Bear, Stearns & Co. Inc..................................... 814,000
Legg Mason Wood Walker, Incorporated........................ 814,000
Adams, Harkness & Hill, Inc................................. 185,000
BB&T Capital Markets, A division of Scott & Stringfellow,
Inc....................................................... 185,000
CJS Securities, Inc......................................... 70,000
---------
Total............................................ 3,700,000
=========
Subject to the terms and conditions in the purchase agreement, the
underwriters have agreed to purchase all the shares of our common stock being
sold pursuant to the purchase agreement if any of these shares of our common
stock are purchased. If an underwriter defaults, the purchase agreement provides
that the purchase commitments of the nondefaulting underwriters may be increased
or the purchase agreement may be terminated.
We and the selling shareholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to make in respect of
those liabilities.
The underwriters are offering the shares of our common stock, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of legal matters by their counsel, including the validity of the shares, and
other conditions contained in the purchase agreement, such as the receipt by the
underwriters of officers' certificates and legal opinions. The underwriters
reserve the right to withdraw, cancel or modify offers to the public and to
reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us and the selling shareholders that the
underwriters propose initially to offer the shares of our common stock to the
public at the public offering price on the cover page of this prospectus and to
dealers at that price less a concession not in excess of $.98 per share. The
underwriters may allow, and the dealers may reallow, a discount not in excess of
$.10 per share to other dealers. After the offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting discount
to be paid by us and the selling shareholders to the underwriters and the
proceeds, before expenses, to us and the selling
44
shareholders. This information assumes either no exercise or full exercise by
the underwriters of their overallotment options.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price................... $33.95 $125,615,000 $144,457,250
Underwriting discount................... $1.66 $6,142,000 $7,063,300
Proceeds, before expenses, to MAXIMUS... $32.29 $32,290,000 $32,290,000
Proceeds to the selling shareholders.... $32.29 $87,183,000 $105,103,950
The expenses of this offering, not including the underwriting discount, are
estimated at $912,000 and are payable by us. The underwriters have agreed to pay
a portion of our expenses in connection with this offering.
OVERALLOTMENT OPTION
Two selling shareholders, David V. Mastran and Raymond B. Ruddy, have
granted an option to the underwriters to purchase up to an aggregate of 555,000
additional shares of our common stock at the public offering price less the
underwriting discount. The underwriters may exercise this option for 30 days
from the date of this prospectus solely to cover any overallotments. If the
underwriters exercise this option, each underwriter will be obligated, subject
to conditions contained in the purchase agreement, to purchase a number of
additional shares of our common stock proportionate to that underwriter's
initial amount reflected in the above table.
NO SALES OF SIMILAR SECURITIES
We, the selling shareholders and our executive officers and directors have
agreed, subject to some limited exceptions, not to sell or transfer any shares
of our common stock for 90 days after the date of this prospectus without first
obtaining the written consent of Merrill Lynch. Specifically, we, the selling
shareholders and these other individuals have agreed not to directly or
indirectly:
- offer, pledge, sell or contract to sell any shares of our common stock;
- sell any option or contract to purchase any shares of our common stock;
- purchase any option or contract to sell any shares of our common stock;
- grant any option, right or warrant for the sale of any shares of our
common stock;
- lend or otherwise dispose of or transfer any shares of our common stock;
or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequences of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lock-up provision applies to shares of our common stock and to
securities convertible into, or exchangeable or exercisable for, or repayable
with, shares of our common stock. It also applies to shares of our common stock
owned now or acquired later by the person executing the agreement or for which
the person executing the agreement later acquires the power of disposition.
ELECTRONIC DISTRIBUTION
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the Internet website maintained by
Merrill Lynch. Other than the prospectus in electronic format, the information
on the Merrill Lynch website is not a part of this prospectus.
45
LISTING ON THE NEW YORK STOCK EXCHANGE
The shares of our common stock are listed on the New York Stock Exchange
under the symbol "MMS."
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares of our common stock is completed, rules
of the Securities and Exchange Commission may limit underwriters and selling
group members from bidding for and purchasing our common stock. However, the
representatives may engage in transactions that stabilize the price of the
common stock, such as bids or purchases to peg, fix or maintain that price.
In connection with the offering, the underwriters may make short sales of
our common stock. Short sales involve the sale by the underwriters at the time
of the offering of a greater number of shares than they are required to purchase
in the offering. Covered short sales are sales made in an amount not greater
than the overallotment option. The underwriters may close out any covered short
position by either exercising their overallotment option or purchasing shares in
the open market. In determining the source of shares to close out the covered
short position, the underwriters will consider, among other things, the price of
shares available for purchase in the open market as compared to the public
offering price at which they may purchase the shares through the overallotment
option.
Naked short sales are sales in excess of the overallotment option. The
underwriters must close out any naked short position by purchasing shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
Similar to other purchase transactions, the purchases by the underwriters to
cover syndicate short positions may have the effect of raising or maintaining
the market price of the common stock or preventing or retarding a decline in the
market price of the common stock. As a result, the price of our common stock may
be higher than it would otherwise be in the absence of these transactions.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
our common stock in the open market to reduce an underwriter's short position or
to stabilize the purchase of such shares, they may reclaim the amount of the
selling commission from the underwriters and selling group members who sold
those shares. The imposition of a penalty bid may also affect the price of the
shares of our common stock in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor any
of the underwriters make any representation that the representatives will engage
in these transactions or that these transactions, once commenced, will not be
discontinued without notice.
46
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Palmer & Dodge LLP, Boston, Massachusetts. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Sidley Austin Brown & Wood LLP, New York, New York. Mr. Kerry Tomasevich, a
partner of Palmer & Dodge LLP, is an Assistant Secretary of MAXIMUS.
EXPERTS
Our consolidated financial statements at September 30, 2000 and 1999 and for
each of the three years in the period ended September 30, 2000 appearing in this
prospectus and the registration statement on Form S-3 have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein. The financial statements referred to above are
included in reliance on such reports given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, and, in accordance therewith, file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
Reports, proxy and information statements filed pursuant to Sections 14(a) and
14(c) of the Exchange Act and other information filed with the Commission can be
inspected and copied at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. Information regarding the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-800-SEC-0330. In addition, we are required to file electronic versions of
such material with the Commission through the Commission's Electronic Data
Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a
website at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. Copies of certain information we file with the Commission
are also available on our website at http://www.maximus.com. The contents of our
website are not part of this prospectus. Our common stock is listed on the New
York Stock Exchange. You can inspect reports and other information concerning us
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission (File No. 1-12997),
pursuant to the Exchange Act, are incorporated herein by reference:
(a) Our Annual Report on Form 10-K for the fiscal year ended September 30,
2000, filed with the Commission on December 27, 2000.
(b) Our Quarterly Report on Form 10-Q for the quarter ended December 31,
2000, filed with the Commission on February 14, 2001.
(c) Our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001,
filed with the Commission on May 15, 2001.
(d) Our Current Report on Form 8-K, filed with the Commission on
February 7, 2001.
(e) The description of our common stock contained in our registration
statement on Form 8-A, filed on May 15, 1997, including any amendment or reports
filed for the purpose of updating that description.
All documents we file pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this prospectus and prior to the
termination of this offering shall be deemed
47
incorporated by reference into this prospectus and to be a part hereof from the
date we file those documents. Any statement contained in any document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded, for purposes of this prospectus, to the extent that a
statement contained in this prospectus (or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein)
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
We will provide, without charge, to each person to whom a copy of this
prospectus is delivered, upon written or oral request of any such person, a copy
of any or all of the documents which are incorporated into this prospectus by
reference, except for certain exhibits to such documents. Requests should be
directed to F. Arthur Nerret, Vice President, Finance and Chief Financial
Officer, 11419 Sunset Hills Road, Reston, Virginia 20190, telephone
(703) 251-8500.
48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of September 30, 1999 and
2000 and March 31, 2001 (unaudited)....................... F-3
Consolidated Statements of Income for the years ended
September 30, 1998, 1999 and 2000 and the six months ended
March 31, 2000 and 2001 (unaudited)....................... F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended September 30, 1998, 1999 and 2000 and
the six months ended March 31, 2001 (unaudited)........... F-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1999 and 2000 and the six months ended
March 31, 2000 and 2001 (unaudited)....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
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, 1999 and 2000, 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, 2000. 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, 1999 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
McLean, Virginia
November 16, 2000, except for
Note 13 as to which the
date is May 15, 2001
F-2
MAXIMUS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30,
------------------- MARCH 31,
1999 2000 2001
-------- -------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 61,647 $ 36,975 $ 46,994
Marketable securities..................................... 37,235 1,359 1,350
Accounts receivable, net.................................. 75,865 102,500 94,371
Costs and estimated earnings in excess of billings (Note
5)...................................................... 16,150 27,264 37,057
Prepaid expenses and other current assets................. 2,711 6,344 6,505
Deferred income taxes..................................... 2,997 -- --
-------- -------- --------
Total current assets........................................ 196,605 174,442 186,277
Property and equipment at cost:
Land...................................................... 2,643 2,462 2,462
Buildings and improvements................................ 7,921 9,484 10,608
Office furniture and equipment............................ 10,429 14,264 15,352
Leasehold improvements.................................... 253 848 897
-------- -------- --------
21,246 27,058 29,319
Less: Accumulated depreciation and amortization............. (6,524) (8,754) (10,020)
-------- -------- --------
Total property and equipment, net........................... 14,722 18,304 19,299
Software development costs.................................. -- 7,883 11,629
Less: Accumulated amortization.............................. -- (703) (963)
-------- -------- --------
Total software development costs, net....................... -- 7,180 10,666
Deferred income taxes (Note 9).............................. 363 1,402 1,384
Intangible assets, net...................................... 8,254 52,586 49,815
Other assets................................................ 3,092 2,989 2,833
-------- -------- --------
Total assets................................................ $223,036 $256,903 $270,274
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 10,265 $ 12,565 $ 11,976
Accrued compensation and benefits......................... 16,119 17,747 16,152
Billings in excess of costs and estimated earnings (Note
5)...................................................... 16,942 15,648 10,710
Notes payable............................................. -- 209 284
Income taxes payable...................................... 2,266 -- --
Other current liabilities................................. 541 461 432
-------- -------- --------
Total current liabilities................................... 46,133 46,630 39,554
Long-term debt.............................................. 578 555 71
Other liabilities........................................... 846 785 582
-------- -------- --------
Total liabilities........................................... 47,557 47,970 40,207
Commitments and contingencies (Notes 7 and 11)
Shareholders' equity (Note 10):
Common stock, no par value; 60,000,000 shares authorized;
20,986,322, 21,125,844 and 21,233,805 shares issued and
outstanding at September 30, 1999 and 2000 and March 31,
2001, at stated amount, respectively.................... 130,518 133,082 135,680
Accumulated other comprehensive income (loss)............. (280) (26) (13)
Retained earnings......................................... 45,241 75,877 94,400
-------- -------- --------
Total shareholders' equity.................................. 175,479 208,933 230,067
-------- -------- --------
Total liabilities and shareholders' equity.................. $223,036 $256,903 $270,274
======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------ -------------------------
1998 1999 2000 2000 2001
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues................................. $244,114 $319,540 $399,164 $183,184 $233,521
Cost of revenues......................... 181,403 224,912 272,620 126,334 159,300
-------- -------- -------- -------- --------
Gross profit............................. 62,711 94,628 126,544 56,850 74,221
Selling, general and administrative
expenses............................... 34,909 50,626 67,947 30,707 40,260
Merger, deferred compensation and ESOP
expense................................ 3,671 480 225 -- --
Amortization of goodwill and other
acquisition-related intangibles........ -- 260 3,212 645 2,751
Legal settlement expense................. -- -- 3,650 -- --
-------- -------- -------- -------- --------
Income from operations................... 24,131 43,262 51,510 25,498 31,210
Interest and other income................ 1,823 3,604 3,045 2,149 454
-------- -------- -------- -------- --------
Income before income taxes............... 25,954 46,866 54,555 27,647 31,664
Provision for income taxes............... 10,440 19,240 24,087 11,421 13,141
-------- -------- -------- -------- --------
Net income............................... $ 15,514 $ 27,626 $ 30,468 $ 16,226 $ 18,523
======== ======== ======== ======== ========
Earnings per share:
Basic.................................. $ 0.86 $ 1.35 $ 1.45 $ 0.77 $ 0.87
======== ======== ======== ======== ========
Diluted................................ $ 0.85 $ 1.32 $ 1.42 $ 0.76 $ 0.85
======== ======== ======== ======== ========
Weighted average shares outstanding:
Basic.................................. 17,937 20,537 21,055 21,019 21,179
======== ======== ======== ======== ========
Diluted................................ 18,296 20,891 21,424 21,427 21,804
======== ======== ======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ACCUMULATED
OTHER
COMMON COMPREHENSIVE RETAINED
STOCK INCOME (LOSS) EARNINGS
-------- ------------- --------
Balance at September 30, 1997............................... $ 66,783 $ -- $ 2,258
Purchase of common stock from employee.................... (454) -- --
Net income................................................ -- -- 15,514
Tax benefit due to option exercise........................ -- -- 173
Adjustment for DMG results previously reported............ -- -- 156
Increase resulting from immaterial poolings............... 137 -- 3,843
Issuance of common stock to employees..................... 144 -- --
Issuance of common stock in exchange for debt............. 150 -- --
Reclassification of CSI accumulated earnings.............. 1,863 -- (1,863)
S corporation distributions............................... -- -- (1,917)
-------- ----- -------
Balance at September 30, 1998............................... 68,623 -- 18,164
Issuance of common stock to employees..................... 871 -- --
Net income................................................ -- -- 27,626
Tax benefit due to option exercise........................ -- -- 321
Adjustment for CSI results previously reported............ -- -- (114)
Net proceeds from sale of common stock in follow-on
offering................................................ 61,024 -- --
Unrealized losses on marketable securities................ -- (280) --
S corporation distributions............................... -- -- (756)
-------- ----- -------
Balance at September 30, 1999............................... 130,518 (280) 45,241
Issuance of common stock to employees..................... 2,264 -- --
Net income................................................ -- -- 30,468
Tax benefit due to option exercise........................ -- -- 168
Issuance of common stock in acquisition................... 300 -- --
Unrealized losses on marketable securities, net of
reclassification adjustment for losses included in net
income (Note 2)......................................... -- 254 --
-------- ----- -------
Balance at September 30, 2000............................... 133,082 (26) 75,877
Issuance of common stock to employees (unaudited)......... 2,598 -- --
Net income (unaudited).................................... -- -- 18,523
Unrealized gains on marketable securities (unaudited)..... -- 13 --
-------- ----- -------
Balance at March 31, 2001(unaudited)........................ $135,680 $ (13) $94,400
======== ===== =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS
YEAR ENDED SEPTEMBER 30, ENDED MARCH 31,
------------------------------ -------------------------
1998 1999 2000 2000 2001
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 15,514 $ 27,626 $ 30,468 $ 16,226 $18,523
Adjustments to reconcile net income to net cash (used
in) provided by operating activities:
Depreciation......................................... 1,078 1,567 2,379 1,362 1,266
Amortization......................................... 1,401 1,117 3,914 645 3,011
Deferred income taxes................................ (2,475) (2,807) 1,917 18 (177)
Other................................................ 173 131 168 -- --
Changes in assets and liabilities:
Accounts receivable, net............................. (22,922) (2,065) (17,063) (6,884) 8,129
Costs and estimated earnings in excess of billings... (326) (5,504) (9,115) (2,520) (9,792)
Prepaid expenses and other current assets............ 373 (460) (1,141) 318 (83)
Other assets......................................... (43) 1,062 192 853 (441)
Accounts payable..................................... 4,845 (535) 1,466 (2,713) (589)
Accrued compensation and benefits.................... 338 528 (445) (3,338) (1,595)
Billings in excess of costs and estimated earnings... (1,309) 5,201 (3,599) (5,084) (4,939)
Income taxes payable................................. (3,877) 2,073 (4,413) (2,941) --
Other liabilities.................................... -- -- 68 139 (28)
-------- -------- -------- -------- -------
Net cash (used in) provided by operating activities...... (7,230) 27,934 4,796 (3,919) 13,285
-------- -------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate................................ -- (8,000) -- -- --
Acquisition of businesses, net of cash acquired........ -- (11,243) (53,322) (21,514) --
Purchase price adjustments, net........................ -- -- -- -- 20
Purchase of contracts.................................. (2,436) -- -- -- --
Increase in cash resulting from immaterial poolings.... 1,002 -- -- -- --
Purchase of property and equipment..................... (1,160) (2,589) (5,004) (1,564) (2,261)
Proceeds from collections on notes receivable.......... -- -- -- 81 714
Capitalization of software development costs........... -- -- (2,772) (387) (3,746)
Sale (purchase) of marketable securities............... 27,822 (23,229) 36,134 10,710 21
-------- -------- -------- -------- -------
Net cash provided by (used in) investing activities...... 25,228 (45,061) (24,964) (12,674) (5,252)
-------- -------- -------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock offering, net of expenses.......... -- 61,024 -- -- --
S corporation distributions............................ (7,665) (756) -- -- --
Common stock issued.................................... 144 871 2,264 1,495 2,598
Payments on borrowings................................. (2,547) (1,799) (6,768) (38) (612)
-------- -------- -------- -------- -------
Net cash (used in) provided by financing activities...... (10,068) 59,340 (4,504) 1,457 1,986
-------- -------- -------- -------- -------
Cash flow adjustment for change in accounting period of
DMG and CSI............................................ 467 31 -- -- --
-------- -------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents..... 8,397 42,244 (24,672) (15,136) 10,019
Cash and cash equivalents, beginning of period........... 11,006 19,403 61,647 61,647 36,975
-------- -------- -------- -------- -------
Cash and cash equivalents, end of period................. $ 19,403 $ 61,647 $ 36,975 $ 46,511 $46,994
======== ======== ======== ======== =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
MAXIMUS, Inc. (the "Company") provides program management, consulting
services and systems solutions primarily to state and local government agencies
throughout the United States. The Company conducts its operations through three
groups: the Government Operations Group, Consulting Group and Systems Group. The
Government Operations Group administers and manages state and local government
programs on a fully out-sourced basis. Examples of these programs include
welfare-to-work and job readiness, child support enforcement, child care,
managed care enrollment and disability services. The Consulting Group provides
program planning and quality assurance services to state and local government
agencies in addition to general management consulting services and specialized
services such as assisting state and local agencies in maximizing federal
funding for their programs. The Systems Group provides state and local agencies
with systems design and implementation to improve the efficiency and
cost-effectiveness of their program administration. The Systems Group also
offers a suite of proprietary software products in addition to customized
versions of applications such as PeopleSoft.
The Company operates predominantly in the United States. Revenues from
foreign-based projects were less than 10% of total revenues for the years ended
September 30, 1998, 1999 and 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the Company's more significant accounting
policies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of wholly-owned
subsidiaries. All material intercompany items have been eliminated in
consolidation.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to conform
to current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes, in particular, estimates used in the earnings recognition
process. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements as of March 31, 2001 and for the six months ended
March 31, 2000 and 2001 are unaudited and have been prepared on the same basis
as the audited financial statements included herein. In the opinion of
management, the unaudited financial statements include all adjustments,
consisting only of normally recurring accruals, necessary to present fairly the
periods indicated. Results of operations for the interim period ended March 31,
2001 are not necessarily indicative of the results for the full fiscal year.
F-7
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
REVENUE RECOGNITION
The Company generates revenue under various arrangements, including
contracts under which revenues are based on a fixed price, costs incurred plus a
negotiated fee ("cost-plus"), performance-based criteria and time and materials
reimbursement. Revenues for cost-plus contracts, including a pro rata amount of
the negotiated fee, are recorded as costs are incurred. Revenues from fixed
price, performance-based and time and materials reimbursement contracts,
including a portion of estimated profit, are recognized as costs are incurred.
The timing of billing to clients varies based on individual contracts and often
differs from the period of revenue recognition. These differences are included
in costs and estimated earnings in excess of billings and billings in excess of
costs and estimated earnings.
Management reviews the costs incurred, the revenues recognized and billings
from government contracts quarterly and adjusts recognized revenues to reflect
current expectations on realization of costs and estimated earnings in excess of
billings. Provisions for estimated losses on incomplete contracts are provided
in full in the period in which such losses become known. The Company has various
fixed price and performance-based 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.
The Company also licenses software under non-cancelable license agreements.
License fee revenues are recognized when a non-cancelable license agreement is
in force, the product has been shipped, the license fee is fixed or
determinable, and collection is probable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer. In
addition, when software license contracts contain post-contract customer support
as part of a multiple element arrangement, revenue is recognized based upon the
vendor-specific objective evidence of the fair value of each element.
Maintenance and support revenues are recognized ratably over the term of the
related agreements, which in most cases is one year. Revenues from software
related consulting services under time and material contracts and for training
are recognized as services are performed. Revenues from other software related
contract services are generally recognized under the percentage-of-completion
method.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale and are recorded
at fair market value with unrealized gains and losses, net of taxes, and
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 investment income. Interest and dividends are also included in
investment income. For the year ended September 30, 1999, unrealized losses on
marketable securities were $280. For the year ended September 30, 2000,
unrealized losses on marketable securities were $8 and reclassification
adjustments for losses included in net income were $262. For the six months
ended March 31, 2001, unrealized
F-8
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
gains on marketable securities were $13. There were no material unrealized gains
or losses on marketable securities at September 30, 1998. Marketable securities
consist primarily of short-term municipal and commercial bonds.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using both the
straight-line and accelerated methods based on estimated useful lives not to
exceed 39.5 years for the Company's buildings and between three and ten years
for office furniture and equipment. Leasehold improvements are amortized over
the lesser of their useful life or the remaining term of the lease.
INTANGIBLE ASSETS
The excess of the cost over the fair value of net assets of purchased
businesses is recorded as intangible assets and is amortized using the
straight-line method over periods ranging from two to fifteen years. The
carrying values of intangible assets, as well as other long-lived assets, are
reviewed for impairment if changes in the facts and circumstances indicate
potential impairment of their carrying value. The principle factor used by the
Company in identifying potential impairment is profitability of the acquired
business. Any impairment would be recognized when the expected future operating
cash flows from such intangible assets is less than their carrying value.
INCOME TAXES
Deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted rates expected to be in effect during the year in which the differences
reverse.
The Company merged with two companies during 1998 and one company during
1999 that had elected to be treated as S corporations. The mergers resulted in
the termination of the S corporation status for those companies and a deferred
tax charge against income of $325 in 1998 and $1,109 in 1999 for cumulative
differences between the financial statement and tax basis of assets and
liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers the recorded value of its financial assets and
liabilities, which consist primarily of cash and cash equivalents, marketable
securities, accounts receivable and accounts payable, to approximate the fair
value of the respective assets and liabilities at September 30, 1999 and 2000.
3. BUSINESS COMBINATIONS
On March 16, 1998, the Company issued 840,000 shares of its common stock in
exchange for all of the common stock of Spectrum Consulting Group, Inc. and an
affiliated company ("Spectrum"). This merger was accounted for as an immaterial
pooling of interests and accordingly, the Company's financial statements,
including earnings per share, were not restated for periods prior to January 1,
1998.
F-9
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. BUSINESS COMBINATIONS (CONTINUED)
On May 12, 1998, the Company issued 1,166,179 shares of its common stock in
exchange for all of the outstanding common stock of David M. Griffith, Ltd.
("DMG"). This merger was accounted for as a pooling of interests and
accordingly, the Company's financial statements, including earnings per share
include the results of operations of DMG from October 1, 1997.
On August 31, 1998, the Company issued 1,137,420 shares of its common stock
in exchange for all of the outstanding common stock of Carrera Consulting Group
("Carrera"). This merger was accounted for as an immaterial pooling of interests
and accordingly, the Company's financial statements, including earnings per
share, were not restated for periods prior to July 1, 1998.
On August 31, 1998, the Company issued 254,545 shares of its common stock in
exchange for all of the outstanding common stock of Phoenix Planning &
Evaluation, Ltd. ("Phoenix"). This merger was accounted for as an immaterial
pooling of interests and accordingly, the Company's financial statements,
including earnings per share, were not restated for periods prior to July 1,
1998.
On February 26, 1999, the Company issued 700,210 shares of its common stock
in exchange for all of the outstanding common stock of Control Software, Inc.
("Control Software"). This merger was accounted for as a pooling of interests
and accordingly, the Company's financial statements, including earnings per
share, include the results of operations of Control Software from October 1,
1997. Control Software's operations for the year ended December 31, 1998 were
combined with the Company's operations for the fiscal year ended September 30,
1998. This resulted in inclusion of Control Software's operating results for the
three months ended December 31, 1998 in the Company's operating results for both
fiscal 1998 and 1999. Control Software's revenues and net income for the three
months ended December 31, 1998 were $2,170 and $114, respectively.
On March 31, 1999, the Company acquired all of the outstanding shares of
capital stock of Norman Roberts & Associates, Inc. for $1,930. In conjunction
with the purchase, the Company recorded intangible assets of $1,930.
On June 1, 1999, the Company acquired all of the outstanding shares of
capital stock of Unison Consulting Group, Inc. for $7,589. In conjunction with
the purchase, the Company recorded intangible assets of $5,494.
On September 30, 1999, the Company acquired all of the outstanding shares of
capital stock of Network Design Group, Inc. d/b/a The Center for Health Dispute
Resolution ("CHDR") for $2,070. Pursuant to the Purchase Agreement, the purchase
price was subject to an upward adjustment for each month for which CHDR secured
the renewal or extension of a certain contract, up to a maximum of an additional
$1,200. In August 2000, and again in February 2001, the contract was extended by
six months, and an additional $200 was paid for each extension, increasing the
intangible assets by $400. In conjunction with the purchase, the Company
recorded intangible assets of $1,228.
On October 20, 1999, the Company acquired all of the outstanding shares of
capital stock of Public Systems, Inc. for $5,000. In conjunction with the
purchase, the Company recorded intangible assets of $4,540.
On March 20, 2000, the Company acquired all of the outstanding shares of
capital stock of Crawford Consulting, Inc. for $16,750. In conjunction with the
purchase, the Company recorded intangible assets of $11,887.
F-10
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. BUSINESS COMBINATIONS (CONTINUED)
On March 31, 2000, the Company acquired substantially all of the government
services division of 3-G International, Inc. for $7,000, plus an earn-out amount
of $1,126 paid by the Company in May 2001 as a result of the achievement of
certain objectives. In conjunction with the purchase, the Company recorded
intangible assets of $7,054, excluding the May 2001 earn-out payment.
On April 12, 2000, CSI-MAXIMUS, Inc., a wholly owned subsidiary of the
Company, acquired substantially all of the assets of Asset Works, Inc. for
$8,613. In conjunction with the purchase, the Company recorded intangible assets
of $8,674.
On April 14, 2000, the Company acquired all of the outstanding shares of
capital stock of Valuation Resource Management, Inc. for $4,500. In conjunction
with the purchase, the Company recorded intangible assets of $3,585.
On April 29, 2000, the Company acquired substantially all of the assets of
Technology Management Resources, Inc. for $9,674. In conjunction with the
purchase, the Company recorded intangible assets of $10,036.
On July 19, 2000, the Company acquired all of the outstanding membership
interests of Strategic Partners International, LLC for $1,800. In conjunction
with the purchase, the Company recorded intangible assets of $1,609.
Intangible assets are amortized using the straight-line method over periods
ranging from two to fifteen years. The accumulated amortization related to
intangible assets at September 30, 1999 and 2000 and March 31, 2001 was $260,
$3,472 and $6,223, respectively.
Unaudited pro forma results of operations information for the Company as if
the companies acquired by the purchase method were acquired at the beginning of
the periods being reported are as follows:
YEAR ENDED SEPTEMBER 30,
------------------------
1999 2000
--------- ---------
Revenue................................................ $377,251 $422,676
Net income............................................. $ 26,672 $ 29,291
Earnings per share (diluted)........................... $ 1.28 $ 1.37
All of the companies acquired in the business combinations described above
are involved primarily in providing software and/or consulting services for
state and local governments. The merged companies accounted for as immaterial
poolings contributed $16,854 to the Company's revenues for the year ended
September 30, 1998.
F-11
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. EARNINGS PER SHARE
The following table sets forth the components of basic and diluted earnings
per share:
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
------------------------------ -------------------
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
Numerator:
Net income................................... $15,514 $27,626 $30,468 $16,226 $18,523
======= ======= ======= ======= =======
Denominator:
Weighted average shares outstanding.......... 17,937 20,537 21,055 21,019 21,179
Effect of dilutive securities:
Employee stock options....................... 359 354 369 408 625
------- ------- ------- ------- -------
Denominator for diluted earnings per share..... 18,296 20,891 21,424 21,427 21,804
======= ======= ======= ======= =======
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts consist of the following components:
COSTS AND BILLINGS IN
ESTIMATED EARNINGS EXCESS OF COSTS AND
IN EXCESS OF BILLINGS ESTIMATED EARNINGS
--------------------- -------------------
September 30, 1999:
Costs and estimated earnings.............................. $255,572 $326,729
Billings.................................................. 239,422 343,671
-------- --------
Total................................................. $ 16,150 $ 16,942
======== ========
September 30, 2000:
Costs and estimated earnings.............................. $518,291 $471,044
Billings.................................................. 491,027 486,692
-------- --------
Total................................................. $ 27,264 $ 15,648
======== ========
Costs and estimated earnings in excess of billings relate primarily to
performance-based contracts that provide for billings based on attainment of
results specified in the contract and differences between actual and provisional
billing rates on cost-based contracts.
6. CREDIT FACILITIES
The Company had a $10 million revolving line of credit with a bank. The
Company had never borrowed under the line and management allowed the line to
expire on March 31, 1999.
Certain companies that were acquired by the Company during 1998, 1999, and
2000 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.
F-12
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. LEASES
The Company leases office space under various operating leases, the majority
of which contain clauses permitting cancellation upon certain conditions. The
terms of these leases provide for certain minimum payments as well as increases
in lease payments based upon the operating cost of the facility and the consumer
price index. Rent expense for the years ended September 30, 1998, 1999, and 2000
was $7,074, $11,084, and $15,208 respectively.
Minimum future payments under these leases are as follows:
Year ended September 30,
2001........................................................ $12,497
2002........................................................ 8,946
2003........................................................ 5,325
2004........................................................ 2,953
2005........................................................ 717
Thereafter.................................................. --
-------
$30,438
=======
8. EMPLOYEE BENEFIT PLANS AND DEFERRED COMPENSATION
The Company has 401(k) plans and other defined contribution plans for the
benefit of all employees who meet certain eligibility requirements. The plans
provide for Company match, specified Company contributions, and/or discretionary
Company contributions. During the years ended September 30, 1998, 1999 and 2000,
the Company contributed $1,387, $2,923 and $3,287 to the plans, respectively.
Prior to its merger with the Company, DMG had an employee stock ownership
plan covering substantially all of its employees. During 1998, the amount
charged to operations for the plan was $394.
Prior to its merger with the Company, DMG had deferred compensation
arrangements with certain officers and employees and had granted stock
appreciation rights to certain current and retired officers and employees. The
stock appreciation rights provided for full vesting and current settlement at
the time of the merger. During 1998, the amount charged to operations under
these arrangements was $972, including a one-time income statement charge of
$942 as a result of the merger.
9. INCOME TAXES
The Company's provision for income taxes is as follows:
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
Current provision:
Federal........................................ $10,676 $18,740 $17,278
State.......................................... 1,894 3,307 4,174
Deferred tax (benefit) expense................... (2,130) (2,807) 2,635
------- ------- -------
$10,440 $19,240 $24,087
======= ======= =======
F-13
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. INCOME TAXES (CONTINUED)
The provision for income taxes resulted in effective tax rates that varied
from the federal statutory income tax rate as follows:
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
Expected federal income tax provision....................... $ 9,074 $16,043 $19,094
Effect of income taxed directly to S corporation
shareholders.............................................. (658) (480) --
State income taxes.......................................... 1,245 2,343 3,047
Effect of nondeductible legal settlement expense............ -- -- 1,278
Effect of termination of S corporation status............... 325 1,109 --
Effect of nondeductible merger costs........................ 531 82 79
Other....................................................... (77) 143 589
------- ------- -------
$10,440 $19,240 $24,087
======= ======= =======
The significant items comprising the Company's deferred tax assets and
liabilities as of September 30, 1999 and 2000 are as follows:
AS OF SEPTEMBER 30,
----------------------
1999 2000
-------- --------
Deferred tax assets-current:
Liabilities for costs deductible in future periods........ $ 1,779 $2,870
Billings in excess of costs and estimated earnings........ 5,844 5,273
------- ------
Total deferred tax assets-current........................... 7,623 8,143
Deferred tax liabilities-current:
Cash versus accrual accounting............................ 1,247 869
Costs and estimated earnings in excess of billings........ 3,076 6,813
Other..................................................... 303 461
------- ------
Total deferred tax liabilities-current...................... 4,626 8,143
------- ------
Net deferred tax asset-current.............................. $ 2,997 $ --
======= ======
Deferred tax assets (liabilities)-non-current:
Stock option compensation................................. $ 1,905 $1,958
Cash versus accrual accounting............................ (1,733) (436)
Other..................................................... 191 (120)
------- ------
Net deferred tax asset-non-current.......................... $ 363 $1,402
======= ======
Cash paid for income taxes during the years ended September 30, 1998, 1999
and 2000 was $16,507, $20,002 and $23,748 respectively.
10. SHAREHOLDERS' EQUITY
FOLLOW-ON PUBLIC OFFERING
The Company completed a second public offering (the "follow-on offering") of
common stock during December 1998. Of the 4,200,000 shares of common stock sold
in the follow-on offering,
F-14
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. SHAREHOLDERS' EQUITY (CONTINUED)
2,200,000 shares were sold by selling shareholders and 2,000,000 shares were
sold by the Company, generating $61,024 in proceeds to the Company, net of
offering expenses.
S CORPORATION DISTRIBUTIONS
Consistent with their past practices, Spectrum, Phoenix, and Control
Software paid S corporation distributions totaling $1,917 during 1998, and
Control Software paid S corporation distributions totaling $756 during 1999,
based upon pre-merger taxable income.
EMPLOYEE STOCK PURCHASE PLAN
During fiscal 1998, the Company implemented a plan that permits employees to
purchase shares of the Company's common stock each quarter at 85% of the market
value on the last day of the quarter. The initial sale of shares under the plan
occurred during fiscal 1998. During fiscal 1999 and 2000, respectively, the
Company issued approximately 13,100 and 66,900 shares of common stock pursuant
to this plan at an average price of $26.52 and $24.53 per share.
STOCK OPTION PLANS
The Company's Board of Directors established stock option plans during 1997
pursuant to which the Company may grant incentive and non-qualified stock
options to officers, employees and directors of the Company. Such plans also
provide for stock awards and direct purchases of the Company's common stock.
The vesting period and share price for awards are determined by the
Company's Board of Directors at the date of grant. Options generally vest over
periods from two to four years. As of September 30, 2000, the Company's Board of
Directors had reserved 4.6 million shares of common stock for issuance under the
Company's stock option plans. At September 30, 2000, 1.3 million shares remained
available for grants under the Company's option plans.
Under Statement of Financial Accounting Standard (SFAS) No. 123, ACCOUNTING
AND DISCLOSURE FOR STOCK-BASED COMPENSATION, companies may account for stock
options under Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES (APB 25) and related Interpretations and provide pro forma
disclosure of net income, as if the fair value-based method of accounting
defined in SFAS 123 had been applied. The Company has elected to follow APB 25
and related interpretations in accounting for its employee stock options and
provide pro forma fair value disclosure under SFAS 123.
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 42%
for 1998, 56% for 1999, and 66% for 2000; risk free interest rate of 5.5% for
1998, 6.5% for 1999, and 5.7% for 2000; dividend yield 0%; and an expected life
of the option of 4 years in 1998 and 1999, and 4.4 years in 2000. The grant-date
fair value of options granted was $9.61 in 1998, $14.45 in 1999, and $14.77 in
2000.
F-15
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. SHAREHOLDERS' EQUITY (CONTINUED)
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.
The effects of applying SFAS 123 for providing pro forma disclosures are not
likely to be representative of the effects on reported net income for future
years. For the years ended September 30, 1998, 1999 and 2000, pro forma net
income and pro forma net income per share resulting from the adjustment for
stock option compensation was as follows:
YEAR ENDED SEPTEMBER 30,
------------------------------
1998 1999 2000
-------- -------- --------
Net income....................................... $15,514 $27,626 $30,468
SFAS 123 compensation expense.................... (780) (1,958) (6,351)
------- ------- -------
Net income, as adjusted.......................... $14,734 $25,668 $24,117
======= ======= =======
Net income per share, as adjusted:
Basic.......................................... $ 0.82 $ 1.25 $ 1.15
Diluted........................................ $ 0.81 $ 1.23 $ 1.13
A summary of the Company's stock option activity for the years ended
September 30, 1998, 1999 and 2000 is as follows:
WEIGHTED-
AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
Outstanding at September 30, 1997.................... 528,950 $ 5.07
Activity during fiscal 1998:
Granted............................................ 626,989 24.06
Exercised.......................................... (36,300) 3.46
Canceled due to termination........................ (25,887) 25.05
--------- ------
Outstanding at September 30, 1998.................... 1,093,752 15.33
Activity during fiscal 1999:
Granted............................................ 879,423 29.05
Exercised.......................................... (44,127) 10.26
Canceled due to termination........................ (110,807) 23.22
--------- ------
Outstanding at September 30, 1999.................... 1,818,241 21.79
Activity during fiscal 2000:
Granted............................................ 1,642,143 26.10
Exercised.......................................... (60,092) 10.69
Canceled due to termination........................ (181,064) 25.72
--------- ------
Outstanding at September 30, 2000.................... 3,219,228 $23.98
========= ======
F-16
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. SHAREHOLDERS' EQUITY (CONTINUED)
The ranges of exercise prices for outstanding options were as follows at
September 30, 2000:
$ 0.01 - $ 1.46............................................. 326,350
$12.31 - $16.00............................................. 135,830
$20.43 - $36.63............................................. 2,757,048
----------
3,219,228
==========
The Company had approximately 1,080,000 options exercisable at
September 30, 2000 at a weighted average exercise price of $18.53 per share.
Outstanding options have a weighted average remaining exercise period of
8.5 years at September 30, 2000.
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
On November 28, 1997, an individual who was a former officer, director and
shareholder of the Company filed a complaint in the United States District Court
for the District of Massachusetts, alleging that, at the time he resigned from
the Company in 1996, thereby triggering the repurchase of his shares, the
Company and certain of its officers and directors had failed to disclose to him
material information relating to the potential value of the shares. He had
further alleged that the Company and its officers and directors violated
Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 and breached
various fiduciary duties owed to him. This matter was settled in September 2000
without admission of fault or liability on the part of the Company. The
Company's financial statements for fiscal year 2000 were appropriately adjusted
to reflect a one-time charge for this legal settlement.
In January 2000, the New York City Human Resources Administration submitted
two contracts that it had awarded to the Company for the performance of
welfare-to-work services to the Comptroller of New York City (the "Comptroller")
to be registered. Under New York law, the contracts must be registered in order
for the Company to receive payment. However, the Comptroller refused to register
the contracts, alleging improprieties in the procurement process and in the
Company's conduct. The New York Supreme Court, Appellate Division--First
Department ordered the Comptroller to register the contracts in October 2000
after finding no wrongdoing in the Company's conduct. Nevertheless, this matter
continues to be the subject of investigations being conducted by certain
government agencies. The District Attorney's Office of New York County and the
United States Attorney's Office for the Southern District of New York, in
response to requests made by the Comptroller, are investigating the facts
underlying this matter. These offices reviewed some of the Company's documents
and interviewed some of the Company's employees in 2000 and 2001. The Company
believes that its actions were lawful and appropriate and, although there can be
no assurance of a favorable outcome, the Company does not believe that this
matter will have a material adverse effect on the Company's financial condition
or results of operations.
The Company also is involved in various other legal proceedings in the
ordinary course of its business. In the opinion of management, these proceedings
involve amounts that would not have a material effect on the financial position
or results of operations of the Company if such proceedings were disposed of
unfavorably.
F-17
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 41 of its executives and other
employees that provide for aggregate base salaries of approximately $8,100 per
year. The terms of the employment obligations end between 2001 and 2004.
12. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable and costs
and estimated earnings in excess of billings on uncompleted contracts. To date,
these financial instruments have been derived from contract revenues earned
primarily from federal, state and local government agencies located in the
United States.
At September 30, 2000, $3,040 of the Company's accounts receivable were due
from the United States Government. Revenues under contracts with various
agencies of the United States Government were $3,738 and $8,670 for the years
ended September 30, 1998 and 2000, respectively. Of these amounts, $0 and $5,416
for the years ended September 30, 1998 and 2000, respectively, were revenues of
the Government Operations segment. A minimal amount of the Company's accounts
receivable were due from the United States Government at September 30, 1999 and
a minimal amount of revenue was derived from the United States Government during
the year ended September 30, 1999.
At September 30, 1999 and 2000, $12,640 and $16,542 of the Company's
accounts receivable were due from one state government. Revenues from contracts
with this state, principally by the Government Operations segment, were $30,934,
$49,131 and $48,899 for the years ended September 30, 1998, 1999 and 2000,
respectively.
13. BUSINESS SEGMENTS
In October 2000, the Company completed a reorganization of its divisions in
order to better focus and manage the Company's existing and future technology
assets. Accordingly, prior periods have been reclassified to reflect current
period presentation of segment information.
The following table provides certain financial information for each business
segment:
1998 1999 2000
-------- -------- --------
Revenues:
Government Operations......................... $139,263 $177,428 $221,177
Consulting.................................... 83,017 99,979 119,917
Systems....................................... 21,834 42,133 58,070
-------- -------- --------
Total..................................... $244,114 $319,540 $399,164
======== ======== ========
F-18
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. BUSINESS SEGMENTS (CONTINUED)
1998 1999 2000
-------- -------- --------
Gross profit:
Government Operations......................... $ 25,054 $ 34,983 $ 50,983
Consulting.................................... 31,014 41,604 49,982
Systems....................................... 6,643 18,041 25,579
-------- -------- --------
Total..................................... $ 62,711 $ 94,628 $126,544
======== ======== ========
Income from operations:
Government Operations......................... $ 10,642 $ 16,816 $ 23,299
Consulting.................................... 10,766 19,084 22,299
Systems....................................... 2,723 7,362 5,912
-------- -------- --------
Total..................................... $ 24,131 $ 43,262 $ 51,510
======== ======== ========
Identifiable assets:
Government Operations......................... $ 42,429 $ 42,152 $ 72,159
Consulting.................................... 31,489 51,258 60,981
Systems....................................... 5,958 14,076 65,458
Corporate..................................... 46,126 115,550 58,305
-------- -------- --------
Total..................................... $126,002 $223,036 $256,903
======== ======== ========
Capital expenditures:
Government Operations......................... $ -- $ -- $ 18
Consulting.................................... 699 1,108 1,444
Systems....................................... -- 1,307 3,640
Corporate..................................... 461 8,174 2,674
-------- -------- --------
Total..................................... $ 1,160 $ 10,589 $ 7,776
======== ======== ========
Depreciation and amortization:
Government Operations......................... $ 1,518 $ 779 $ 547
Consulting.................................... 863 1,179 1,998
Systems....................................... 12 259 3,100
Corporate..................................... 86 467 648
-------- -------- --------
Total..................................... $ 2,479 $ 2,684 $ 6,293
======== ======== ========
F-19
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. BUSINESS SEGMENTS (CONTINUED)
SIX MONTHS
ENDED MARCH 31,
-------------------
2000 2001
-------- --------
Revenues:
Government Operations................................... $105,210 $127,069
Consulting.............................................. 54,396 72,302
Systems................................................. 23,578 34,150
-------- --------
Total............................................... $183,184 $233,521
======== ========
Gross Profit:
Government Operations................................... $ 23,514 $ 27,340
Consulting.............................................. 22,182 31,731
Systems................................................. 11,154 15,150
-------- --------
Total............................................... $ 56,850 $ 74,221
======== ========
Income from operations:
Government Operations................................... $ 11,569 $ 12,234
Consulting.............................................. 9,905 16,069
Systems................................................. 4,024 2,907
-------- --------
Total............................................... $ 25,498 $ 31,210
======== ========
14. EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITOR'S
REPORT--IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In December 1999, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements ("SAB 101"). SAB 101 summarizes some of the staff's
interpretations of application of generally accepted accounting principles to
revenue recognition, including presentation in the consolidated financial
statements. The staff provided guidance due, in part, to the large number of
revenue recognition issues that it has encountered in registrant filings.
Under SAB 101, the Company will recognize revenue on many of its
performance-based contracts as billings are rendered to customers, rather than
as costs are incurred. Upon adopting SAB 101, the Company will adjust its
financial statements for the six months ended March 31, 2001 to reflect the
change in revenues and profit resulting from the application of the new
accounting principle. The Company is currently evaluating the impact that
SAB 101 will have on its financial statements and intends to adopt SAB 101 in
the fourth quarter of fiscal 2001.
F-20
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3,700,000 SHARES
MAXIMUS-REGISTERED TRADEMARK-
HELPING GOVERNMENT SERVE THE PEOPLE-REGISTERED TRADEMARK-
COMMON STOCK
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P R O S P E C T U S
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MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
LEGG MASON WOOD WALKER
INCORPORATED
JUNE 19, 2001
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