- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER: 1-12997
------------------------
MAXIMUS, INC.
(Exact name of Registrant as specified in its Charter)
VIRGINIA 54-1000588
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
1356 BEVERLY ROAD, MCLEAN, VIRGINIA 22101
(Address of principal executive offices including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 734-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
NEW YORK STOCK EXCHANGE
(Name of each Exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The approximate aggregate market value of voting stock held by
non-affiliates of the Registrant as of December 8, 1999 was $411,114,876 based
on the last reported sale price of the Registrant's Common Stock on the New York
Stock Exchange as of the close of business on that day. (On the same basis, the
aggregate value of the voting stock, including shares held by affiliates was
$680,153,651). There were 21,008,607 shares of the Registrant's Common Stock
outstanding as of December 8, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders to be held on February 23, 2000, which Definitive Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the Registrant's fiscal year-end of September 30, 1999, are
incorporated by reference into Part III of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
OVERVIEW
MAXIMUS, Inc. ("MAXIMUS" or the "COMPANY") is a leading provider of program
management and consulting services to government agencies throughout the United
States. Since its inception in 1975, the Company has been at the forefront of
innovation in meeting its mission of "Helping Government Serve the People-TM-."
MAXIMUS's services are designed to make government operations more efficient and
cost effective while improving the quality of the services provided to program
beneficiaries. The Company applies an entrepreneurial, private sector approach,
utilizing advanced technology in projects in almost every state in the nation
and in markets in several foreign countries.
MAXIMUS conducts its operations through two groups: the Government
Operations Group and the Consulting Group. The Government Operations Group
administers and manages government health and human services programs, including
welfare-to-work and job readiness, child support enforcement, managed care
enrollment, children's health insurance and disability services. The Consulting
Group provides planning and management, information technology consulting,
electronic government products and services, strategic program evaluation,
program improvement, financial management, revenue maximization, fleet
management and other public sector-related consulting services to government
agencies. In fiscal 1999, the Company continued its strategy of expanding its
Consulting Group by combining with four additional consulting firms, and it
estimates that it continues to be the largest provider of general consulting
management services to state and local government agencies in the United States.
MARKET OPPORTUNITIES
The Company believes that providing program management and consulting
services to government agencies represents a significant market opportunity.
Federal, state and local government agencies in the United States spend more
than $250 billion annually on the health and human services programs to which
the Company markets its services, including Medicaid, Food Stamps, Temporary
Assistance to Needy Families, Child Support Enforcement, Supplemental Security
Income, General Assistance, Child Care and Child Welfare. The state-operated
programs alone cost an estimated $23.9 billion annually to administer. This
figure does not include administrative costs for Medicare and Title II
Disability Insurance, which are administered without state assistance. The
following chart sets forth currently available data from U.S. government
publications for programs served by the Company:
ESTIMATED ESTIMATED
NUMBER OF ANNUAL
BENEFICIARIES ADMINISTRATIVE
STATE-OPERATED PROGRAM SERVED EXPENDITURES
- ---------------------- ------------- --------------
Medicaid.................................................... 36.1 million $ 6.7 billion
Children's Health Insurance................................. 10.6 million 4.8 billion
Food Stamps................................................. 22.9 million 2.8 billion
Temporary Assistance to Needy Families...................... 9.4 million 2.1 billion
Child Support Enforcement................................... 19.6 million 3.4 billion
Supplemental Security Income................................ 6.6 million 2.0 billion
General Assistance/Social Services/Other.................... 10.1 million 2.1 billion
------------- -------------
115.3 million $23.9 billion
In the last several years, there has been a surge in legislation and
initiatives to reform federal, state and local welfare and health and human
services programs. One of the most significant of these legislative reforms was
the Welfare Reform Act, which restructured the benefits available to welfare
recipients, eliminated unconditional welfare entitlement and, most importantly,
restructured the funding relationships
1
between federal and state governments. Under the Welfare Reform Act, states
receive block grant funding from the federal government and are no longer able
to 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 service programs and by outsourcing management
of such programs completely. As a result, MAXIMUS, for example, has been awarded
performance-based contracts to manage health care enrollment services contracts
for government agencies in Michigan, Texas, New York, New Jersey, California,
Colorado, Vermont and Massachusetts. MAXIMUS has also been retained by numerous
states and municipalities to provide welfare-reform related consulting services.
A more recent initiative at the federal level is the Balanced Budget Act of
1997 (the "BALANCED BUDGET ACT"), which established, among other programs, the
State Children's Health Insurance Program (the "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. The federal government is making $20.3 billion available to states with
federally-approved plans to expand state Medicaid programs, initiate new
insurance programs or combine approaches. In June 1998, the Clinton
administration also mandated sweeping protections to Medicare beneficiaries,
including increased access to health plans by persons with pre-existing
illnesses, added protections for women and non-English speaking beneficiaries
and increased availability of specialists. Given the breadth and depth of the
Company's expertise, it believes it is well positioned to capitalize upon these
new opportunities to assist states in planning, implementing and maintaining the
increased enrollment and outreach that will be required by these new federal
initiatives.
As national concern continues regarding the rights of enrollees in managed
care plans, MAXIMUS has added an important element to its services through the
acquisition of Network Design Group, Inc. dba the Center for Health Dispute
Resolution ("CHDR"). CHDR operates the nation's largest system for the
resolution of managed care medical service appeals through independent external
review. CHDR offers an efficient and cost-effective external review system that
impartially resolves disputes among health plans, subscribers and providers.
CHDR is the sole national contractor to the Federal Health Care Financing
Administration for external appeals in the Medicare Managed Care Program.
The Company believes that these legislative changes, 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. The Company believes that government agencies will continue
to turn to companies such as MAXIMUS to achieve these solutions. The Company
believes that it more effectively administers government programs due to its
ability to: (i) accept contracts where compensation is based on performance;
(ii) attract and compensate experienced, high-level management personnel;
(iii) rapidly procure and utilize advanced technology; (iv) vary the number of
personnel on a project to match fluctuating work loads; (v) increase
productivity by providing employees with financial incentives and performance
awards and more readily terminating non-productive employees; (vi) provide
employees with ongoing training and career development assistance; and
(vii) maintain a professional work environment that is more conducive to
employee productivity.
The Company believes that state and local governments will continue to seek
its 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 (such as the Children's Health Insurance Program) have
been initiated to assist even more sectors of society, increasing the population
of beneficiaries of the Company's services. In more austere times, the
population enrolled
2
in existing government health and welfare programs expands, requiring
governments to spend more to administer these programs, but facing increased
pressure to do so cost-effectively. As a result, even in depressed economic
cycles, the Company's business has continued to expand.
The Company is recognized as a principal partner of state and local
governments for program management and consulting. With more than 110 offices
located throughout the nation, the Company has the local presence and
decentralized organization to promote relationships with the executive and
legislative branches of state and local governments. With more than 3,400
employees nationwide, the Company has more specialized resources than most
state, city or county government agencies.
STRENGTHS AND DIFFERENTIATIONS
The Company believes that it has been a pioneer in offering state and local
government agencies a private sector alternative to internal administration of
government health and human services programs. The Company has also successfully
increased the breadth of its service offerings to meet such demand from
government agencies. The following business strengths and differentiating
characteristics position MAXIMUS to capitalize on the significant market
opportunities presented by the changing environment of health and human services
program regulation:
SINGLE MARKET FOCUS. The Company believes that it is the largest company
dedicated exclusively to providing program management and consulting services to
government health and human services agencies, as well as the largest provider
of general management consulting services to state and local government
agencies. The Company has accumulated a detailed knowledge base and
understanding of the regulation and operation of health and human services
programs that allows it to apply proven methodologies, skills and solutions to
new projects in a cost-effective and timely fashion. The Company believes that
the size, depth and breadth of its health and human services program expertise
and related areas of government program management differentiate it 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.
EXPANDED CONSULTING GROUP. During fiscal 1999, the Company continued to
expand its Consulting Group by merging three additional consulting companies
with DMG-MAXIMUS: Control Software, Inc. ("CSI-MAXIMUS"), Norman Roberts and
Associates and Unison Consulting Group, Inc. These combinations increased the
number of the Company's professional consultants from over 600 to approximately
750, and the Company believes it has the largest management consulting practice
dedicated to serving state and local government in the United States. The
Company believes that the expansion of its consulting practice provides it with
significant competitive advantages including: (i) a more predictable source of
revenues with operating margins similar to the established Consulting Group
practice; (ii) a significant pool of experienced consultants with an established
knowledge base, re-useable methodologies and valuable relationships with members
of the executive and legislative branches of state and local governments;
(iii) a broader suite of consulting services that are increasingly demanded by
state and local government seeking a single-source provider of program
management and consulting services including cost accounting; human resources
consulting; executive recruiting; fleet management; software and systems
integration; strategic planning, evaluation and implementation for government;
electronic commerce and "smart card" technologies; and (iv) a broader client
base that facilitates cross-selling opportunities between the Consulting Group
and Government Operations Group.
PROVEN TRACK RECORD. Since 1975, MAXIMUS has successfully applied its
entrepreneurial private sector approach to assisting government health and human
services agencies. Over the last five years, the Company has successfully
completed approximately 600 large-scale program management and consulting
services projects for state and local health and human services agencies serving
millions of beneficiaries in nearly every state. DMG-MAXIMUS alone provides
consulting services to a client base of over 3,000 state and local agencies. The
Company believes that the successful execution of these projects has earned the
3
Company a reputation for providing efficient and cost-effective services to
government agencies while improving the quality of services provided to program
beneficiaries. The Company's reputation has contributed significantly to its
ability to compete successfully for new contracts. Additionally, the Company's
acquisitions provide it with expanded service capabilities and an additional
base of established clients that the Company believes will further enhance its
reputation as a leading provider of high-quality management and consulting
services to state and local government agencies.
WIDE RANGE OF SERVICES. Many of the Company's clients require their vendors
to provide a broad array of service offerings, which many of the Company's
competitors cannot provide. Engagements often require creative solutions that
must be drawn from diverse areas of expertise. The Company's experience in a
wide range of services enables it to better pursue new business opportunities
and to position itself as an e-Government provider, an application software
provider, as well as a single-source provider of program management, consulting
and information technology services to state and local government agencies.
PROPRIETARY CASE MANAGEMENT SOFTWARE PROGRAM. The Company has developed a
proprietary automated case management software program called the MAXSTAR Human
Services Application Builder ("MAXSTAR"). MAXSTAR is a software platform that
allows the Company to reduce project implementation time and cost. 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, the Company believes that MAXSTAR, together with the Company's
experienced information technology professionals, is a key element of its
success.
EXPERIENCED TEAM OF PROFESSIONALS. The Company has assembled an experienced
management team of former government executives, state agency officials,
information technology specialists and other professionals with backgrounds in
the public health and human services industry. The Company's employees
understand the problems and challenges faced in the marketing, assessment and
delivery of government agency services. Furthermore, since state and local
government administrators are subject to changing legislative and political
mandates, the Company has developed strong relationships with experienced
political consultants who inform and advise the Company with respect to
strategic marketing opportunities and legislative initiatives.
GROWTH STRATEGY
The Company's goal is to be the leading provider of program management and
consulting services to government health and human services programs. The
Company's strategy to achieve this goal includes the following:
CAPITALIZE ON TRENDS TOWARD OUTSOURCING GOVERNMENT FUNCTIONS. The Company
believes that it is well positioned to benefit from the continued increase in
demand for new program management and consulting services that has arisen in an
environment characterized by changing regulation and evolving technology. The
Company believes 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, the
Company believes that many government agencies will turn to outside experts,
such as the Company, for help.
AGGRESSIVELY PURSUE NEW BUSINESS OPPORTUNITIES. The Company believes that,
throughout its 24-year history, it has been a leader in developing innovative
solutions to meet the evolving needs of state and local health and human
services agencies. The Company plans to expand its revenue base by:
(i) marketing new and innovative program management solutions to the Company's
extensive client base; (ii) expanding the Company's client base by marketing the
Company's experience and established methodologies and systems; (iii) investing
in early identification of government bid opportunities; and (iv) submitting
competitive bids that leverage the Company's proven solutions for past projects.
4
CONTINUE TO ADD A RANGE OF COMPLEMENTARY CONSULTING SERVICES. The Company
intends to continue to broaden its range of consulting services in order to
respond to the evolving needs of its clients and provide cross-selling
opportunities. The Company intends to continue to acquire or internally develop
innovative technologies and methodologies that are required by government
entities in order to effectively deliver public services.
PURSUE STRATEGIC ACQUISITIONS. Given the highly fragmented structure of the
government services and consulting marketplace, the Company believes that it
will continue to successfully identify and pursue attractive acquisition
opportunities. Acquisitions can provide the Company with a rapid, cost-effective
method to broaden its services, increase the number of professional consultants,
broaden its client base, cross-sell additional services, establish or expand its
presence geographically, or obtain additional skill sets. The recent
acquisitions of CSI-MAXIMUS, Norman Roberts and Associates and Unison Consulting
Group, Inc. have increased the Company's client base and brought the number of
consultants to approximately 750.
RECRUIT HIGHLY SKILLED PROFESSIONALS. The Company continually strives to
recruit top government management and information technology professionals with
the experience, skills and innovation necessary to design and implement
solutions to complex problems presented by resource-constrained government
program agencies. The Company also seeks to attract middle-level consultants
with a proven track record in the health and human services field and a network
of political contacts to leverage the Company's existing management
infrastructure, client relationships and areas of expertise.
GOVERNMENT OPERATIONS GROUP
The Company's Government Operations Group is comprised of four divisions
specializing in the administration and management of government health and human
services programs.
CHILD SUPPORT DIVISION. The Company provides a full range of child support
enforcement ("CSE") services, including: (i) outreach to and interview of
parents of children entitled to child support; (ii) establishing paternity and
obtaining, enforcing, reviewing and modifying child support orders; and
(iii) payment processing. The Company operates statewide client service units,
updates case arrearage and demographic data for new CSE automated systems and
provides training to CSE workers. The Company believes that it has one of the
largest CSE staffs in the private sector with over 800 professionals. The
Company has been performing these services since 1976, which the Company
believes is longer than any other private sector firm in the United States. The
Company is currently engaged in the management of CSE programs in 11 states,
providing full child support services and specialized services for over 950,000
cases. For example, in September 1999, the Company was awarded a three-year,
$42 million, full-service CSE project for the city of Baltimore and Queen Anne's
County, Maryland.
MANAGED CARE ENROLLMENT DIVISION. The Company provides a variety of project
management services for Medicaid programs with a particular emphasis on
large-scale managed care enrollment projects. In these projects, the Company
provides recipient outreach, education and enrollment services; an automated
information system customized for the particular state; data collection and
reporting; collaborative efforts with community-based organizations and advocacy
groups in conducting outreach and education activities; design and development
of program materials; health plan encounter data analysis and reporting; and
care coordination for Early and Periodic Screening, Diagnosis and Treatment
services. The Company currently provides 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, Colorado, Vermont, Massachusetts, New Jersey and Montana.
The Company also administers programs for uninsured and underinsured children as
part of the Children's Health Insurance Program in various states, including
Michigan, Massachusetts, Vermont, New Jersey and Kansas.
5
WELFARE REFORM DIVISION. The Company manages welfare-to-work programs by
providing a wide range of services, including eligibility determination,
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. The Company's typical welfare-to-work contract involves the engagement
of the Company for a period of three to five years. The Company has served over
290,000 welfare recipients in numerous states, and has achieved an average
employment placement rate in excess of 80%. During the 1999 fiscal year, the
Company placed nearly 19,000 welfare recipients into jobs. For example, the
Company has managed a three-year welfare reform contract in Milwaukee County,
Wisconsin, and was recently awarded a $30 million two-year extension. In 1999,
the Company was awarded a $17 million contract to provide eligibility and
employment services as a pilot program for the State of Arizona with the
potential for program expansion to a rural area and statewide. The Company was
also awarded a contract extension in Orange County, California totaling
$16 million. Additionally, this past year, the Company's welfare-to-work
programs in Delaware, Lake County, California, Montgomery County, Maryland, and
Prince Georges County, Maryland have been re-awarded to the Company as a result
of its bids. The contract in Illinois for Supplemental Security Income for
children was also renewed for another year. The Company continues to provide
statewide child care services in Connecticut and Hawaii. As a result of the
Company's efforts in Hawaii, the Company was recently awarded a one-year
welfare-to-work contract there.
FEDERAL SERVICES DIVISION. The Company provides a host of large-scale,
nationwide management services geared toward case management, innovative
return-to-work strategies, program management and staffing support services.
Areas of specialization include disability services, vocational rehabilitation,
substance abuse/mental health services and justice administration. In 1995,
MAXIMUS became the first company to operate a national case management and
monitoring program for disability beneficiaries when it contracted with the
Social Security Administration to provide referral and monitoring services to
beneficiaries with drug or alcohol disabilities. Under the program, the Company
successfully referred approximately 140,000 disabled beneficiaries into
treatment as a first step to re-entering the work force. The Company intends to
continue to leverage this experience by pursuing other large-scale program
management contracts with other agencies of the federal government, including
the Department of Justice and the Department of Veterans Affairs.
CONSULTING GROUP
The Company's Consulting Group is comprised of the following nine divisions:
the Information Technology Solutions Division, the Systems Planning and
Integration Division, the International Division, the Human Services Division,
Phoenix-MAXIMUS, Spectrum-MAXIMUS, Carrera-MAXIMUS, DMG-MAXIMUS and CSI-MAXIMUS.
INFORMATION TECHNOLOGY DIVISION. The Company provides computer systems
management and business process reengineering services to state, county and
other local governments. The Company provides services associated with project
management, including assessing current and future business needs, defining user
requirements, designing automated systems, developing requests for proposals and
providing evaluation assistance, contract negotiations and quality assurance
monitoring services. Since 1991, the Company has provided information technology
systems and design services for projects in more than 40 states in the nation.
The Company also specializes in providing management consulting and information
technology services such as systems planning, quality assurance and monitoring,
systems requirements and design, change management, conversion, training and
systems implementation to agencies administering criminal justice programs. In
November 1997, the Company was selected by the State of Connecticut to provide
project management and system integration services for the criminal justice
information system Offender Based Tracking System for the Connecticut Office of
Policy and Management. This $5.5 million contract will run through
September 2001 plus a $1 million follow-on contract. The Company also provides
systems planning, quality assurance and monitoring, systems
6
requirements and design, change management, and management consulting services
to tax and revenue government authorities.
SYSTEMS PLANNING AND INTEGRATION DIVISION. The Company believes that its
Systems Planning and Integration Division is a leading provider of strategic
information management, procurement and contracting, systems quality assurance
and systems implementation services to the rapidly expanding state health, human
services and child support enforcement agency market. Using an experienced team
of skilled project managers and information technology professionals, the
Company has, in multiple projects across numerous states, assisted clients in
the planning, design, procurement and implementation of information systems
totaling nearly $1 billion. These complex, high-profile systems--which have
ranged from $5 million to over $100 million and from 200 to 2,000 users--serve
as the mission critical infrastructure for over $30 billion in annual health and
human services expenditures. The potential market for the division's services
has continued to expand in recent years. Welfare reform is forcing dramatic
changes in eligibility systems for welfare programs. The number of work force
development programs sponsored by the Department of Labor is also increasing.
Significant changes to the systems supporting Medicaid, often the single largest
budget item of state government budgets, will be required by the shifts from
fee-for-service programs coupled with federally mandated competition for
Medicaid Management Information Systems operations support. Given the Company's
successful track record, core competencies and national market presence, the
Company believes that it is well positioned to take advantage of the increased
nationwide emphasis in state government on eligibility systems, managed care,
child services and child support enforcement. Additionally, the Company believes
that synergies between the Company's Consulting and Government Operations Groups
and other strategic hires will uniquely position the Company to take advantage
of the new market opportunities created by the enacted changes to managed care
and the Children's Health Insurance Program.
INTERNATIONAL DIVISION. The Company provides health care consulting and
systems services to assist foreign government agencies and public sector health
care organizations responsible for the delivery of treatment services to the
public. The Company automates and restructures clinical information systems for
large outpatient providers, hospital information systems, managed care
information systems, beneficiary management systems and treatment network
management systems for managing large networks of health treatment facilities.
In addition, the Company consults with foreign government agencies in developing
health care policy reforms, treatment quality improvements and productivity
enhancements. Currently, the division is engaged in two major automation
projects in Egypt: installing a health care information system in four major
hospitals in Cairo; and implementing a national health care system database in
hospitals and clinics throughout the country to allow the Egyptian Health
Insurance Organization to better manage its facilities. Additionally, in
Argentina, the Company is providing organizational and management services to
the health plan of an employee union with almost 500,000 members. In Brazil, the
Company is administering two managed care systems. The Company has formed
strategic alliances with partners in Argentina and Brazil in order to offer a
broader array of services, including fleet management systems, criminal justice
information systems and financial management systems.
HUMAN SERVICES DIVISION. The Company's Human Services Division provides
program planning and implementation, revenue maximization and evaluation
consulting assistance to human services, health and education agencies in state,
local and federal government. The Company has completed comprehensive welfare
reform planning and implementation projects for the District of Columbia and the
State of Nevada, and has been engaged by the District of Columbia to provide
planning and implementation assistance for a new Child Health Insurance Program.
In addition to significant contracts with the federal Social Security
Administration, the Company has completed over 15 projects, worth $10 million,
in the past three years to help the District of Columbia improve its efforts in
welfare, child welfare and systems. Revenue maximization projects, which involve
increasing federal financial participation in state health and human services
programs and which are generally carried out on a contingency fee basis, are
ongoing or have been completed in 23 states. These states have received more
than $603 million in additional federal
7
revenue as a result of the Company's efforts and expect current projects to
yield another $540 million in new federal revenue. The Company also is
frequently engaged to conduct evaluations of government programs and
demonstrations. Program evaluation contracts, such as in Minnesota and North
Carolina, are often multi-year research projects involving the collection of
extensive data using automated data merges as well as surveys and case record
reviews. In 1999, the Company was awarded significant program evaluation
contracts in New Mexico and South Carolina. Since 1994, the Company has
completed scores of welfare reform, revenue maximization and program evaluation
projects for numerous states and localities.
PHOENIX-MAXIMUS. The Company's Phoenix-MAXIMUS Division provides health,
transportation, education, banking and human service clients with expert
assistance in planning, implementing and evaluating Electronic Funds Transfer,
Electronic Benefits Transfer ("EBT"), Electronic Payment Systems, smart card,
biometric recognition system, e-Commerce and e-Government consulting services
and applications and related technologies. Responding to pressures to provide
more time- and cost-efficient services, public-sector entities are increasingly
following the general trend of moving from paper-based to electronics-based
systems. The Company has developed an e-MAX suite of web-based solutions for
electronic commerce ("EC") services designed to enable citizens access to
government information, services, and transactions over the Internet. The
Company is providing e-Government services for a range of citizen, business and
internal government transactions, such as license/permit applications and
renewals; program eligibility determination, verification, and recertification;
procurement and purchasing; fee payments; and document submission and record
retrieval. In addition to its cost efficiencies, EC technologies can provide
more accurate record keeping, minimize paper transactions and offer greater
security against fraud and theft. For instance, recognizing the advantages of
EBT systems, which permit a recipient to transfer his or her public-assistance
benefits directly from a government account to the product or service vendor,
the federal government has mandated that all states must convert to EBT issuance
under the Food Stamp Program by October 2002. In over thirty states,
Phoenix-MAXIMUS has assisted clients in making the conversion to electronic
commerce. Currently, it is helping the state of New Jersey implement a program
to facilitate 24-hour electronic access to a suite of government services using
smart card technology. In other states, including Texas and California,
Phoenix-MAXIMUS is providing expert assistance to implement EBT for Women,
Infant and Children benefits. The Company has become a recognized expert in its
field, having delivered lectures at influential card-technology conferences such
as CardTech/SecurTech NACHA, having conducted training seminars for entities
such as the U.S. Office of Management and Budget, the U.S. Joint Financial
Management Improvement Program, American Banking Association and Food Marketing
Institute, and having been a primary consultant to Vice President Gore's Federal
EBT Task Force.
SPECTRUM-MAXIMUS. The Company's Spectrum-MAXIMUS Division provides
management consulting services that focus on assisting large public sector
organizations in solving complex business problems related to automation.
Spectrum-MAXIMUS has engagements in all areas of government, including the
legislative, executive and judicial branches, and has extensive knowledge of the
fiscal structure of states through its experience with state auditors,
comptrollers and treasurers as well as a significant understanding of the
programmatic areas of state government through close contact with many types of
state agencies. The Company provides a variety of information technology
services including project planning and management; quality assurance monitoring
and assessment for child welfare, and healthcare and financial management
systems; strategic planning; and advanced technologies.
CARRERA-MAXIMUS. As a certified PeopleSoft and application software
provider ("ASP"), the Carrera-MAXIMUS mission is to deliver cost-efficient,
technology-based business solutions to state and local government. Services
include information technology strategic planning, custom system development for
health and human services systems and enterprise resource planning ("ERP")
systems implementation. As a PeopleSoft Global Alliance Partner, Carrera-MAXIMUS
is the leading implementor of PeopleSoft for the public sector, providing custom
development, imaging and workflow for human resource and financial systems.
Carrera-MAXIMUS has successfully implemented over 70 ERP solutions as well as
8
providing implementation management, conversion and development projects to a
client base of state and local government, education, transportation and public
utilities clients. Carrera-MAXIMUS offers its clients a highly skilled
consulting staff with focused expertise in helping public sector entities
implement large-scale information systems. In 1999, the Company focused on
expanding its ASP business services, including new solutions for state and local
education, property tax and case management.
DMG-MAXIMUS. DMG-MAXIMUS provides a broad array of consulting services to
state and local governments. These include financial services (government cost
accounting, activity-based costing, user fee, revenue maximization and
associated software products), human resources services (executive recruitment
and classification and compensation studies), and performance improvement
services in the areas of fleet, public rights-of-way, public housing and
utilities management. DMG-MAXIMUS provides consulting services to over 3,000
clients each year. Many of them have been DMG-MAXIMUS clients for 20 years or
more. This client base includes 27 of the 30 largest counties, 49 of the 50
largest cities, all of the 50 states, 100 colleges and universities, 50 airports
and many smaller governmental agencies. Joint marketing and service delivery to
this client base with other divisions of MAXIMUS were highly successful during
1999, providing a solid foundation for business growth in the future. A major
emphasis for the Company in the coming years is to expand the existing client
relationships within DMG-MAXIMUS to other divisions, thereby enabling them to
sell their services to this existing client base. In 1999, DMG-MAXIMUS expanded
through the Company's acquisitions of the executive recruiting firm of Norman
Roberts and Associates and Unison Consulting, which provides financial advisory,
retail development and facility design services to international airports.
CSI-MAXIMUS. With its acquisition of Control Software, Inc. in March 1999,
the Company became a leading supplier of fleet management software and
consulting services. In combination with the DMG-MAXIMUS fleet management
consulting practice, CSI-MAXIMUS has expanded its large public sector client
base in the United States, Canada, England and Saudi Arabia to include 250
government agencies, public utilities and mass transit agencies. All CSI-MAXIMUS
fleet management systems integrate comprehensive functionality specifically
designed to control the components of fleet expenses such as maintenance costs
(parts and labor), operating costs (fuel, oil and tires) and fixed cost
(insurance, depreciation and licenses). In fiscal 2000, the Company plans to
expand its share of fleet management services as a leading provider of
Internet-based fleet management enterprise applications to the public and
private sectors.
BACKLOG
The Company's 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. Using the best available information, the
Company estimates backlog on a quarterly basis with respect to all executed
contracts. The 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 from quarter to quarter result from:
(i) additions for future revenues from the execution of new contracts or
extension or renewal of existing contracts; (ii) reductions from fulfilling
contracts during the most recent quarter; (iii) reductions from the early
termination of contracts; and (iv) adjustments to estimates of previously
included contracts.
At September 30, 1999 and 1998, the Company's backlog for services was
approximately $311 million and $276 million, respectively.
MARKETING AND SALES
The Company's Government Operations Group obtains program management
contracts from state and local authorities by responding to Requests For
Proposals ("RFPS"). Whenever possible, prior to the
9
issuance of an RFP, senior executives in the Government Operations Group work
with senior government representatives, such as a state's governor, members of
the governor's staff and the heads of health and human services agencies to
encourage them to outsource certain health and human services functions. To
identify opportunities to work with government officials at early stages and to
optimize the government's receptivity to the Company's proposal to provide
program management services, the Company establishes and maintains relationships
with elected officials, political appointees and government employees. The
Company engages marketing consultants and lobbyists to establish and maintain
relationships with these client representatives. The Company's consultants and
lobbyists provide introductions to government personnel and provide information
to the Company regarding the status of legislative and executive
decision-making.
Following the issuance of an RFP, the Government Operations Group
participates 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,
the Company's representatives then negotiate the contract with representatives
of the government authority until an agreement is reached.
The Consulting Group generates leads for consulting contracts by tracking
bid notices, employing lobbyists, maintaining relationships with government
personnel, communicating directly with current and prospective clients, and
increasingly, through referrals and cross-selling initiatives from other
divisions of the Consulting Group. The Consulting Group participates in
professional associations of government administrators and industry seminars
featuring presentations by the Company personnel. Senior executives from the
Consulting Group develop leads through on-site presentations to decision-makers.
In many cases, consulting contracts, like program management contracts, are
obtained after responding to a formal RFP. The Consulting Group's efforts in
generating a lead prior to the RFP can facilitate the Company's insight in
responding to a particular RFP. A portion of the Consulting Group's new business
arises from prior client engagements, in which case the Company may be the sole
source of services. The Company also expects to leverage the client
relationships of firms it acquires by cross-selling its existing services.
Furthermore, clients frequently expand the scope of engagements during delivery
to include follow-on complementary activities.
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. The Company's
Government Operations Group competes for program management contracts with local
non-profit organizations such as the United Way and Goodwill Industries,
government services divisions of large companies such as Lockheed Martin
Corporation and Electronic Data Systems, Inc., managed care enrollment companies
such as Benova, and specialized service providers such as Andersen Consulting,
America Works, Inc. and Policy Studies Incorporated. The Company's Consulting
Group competes with the consulting divisions of the "Big 5" accounting firms as
well as Electronic Data Systems, Inc. and many smaller consulting firms. The
Company anticipates that it will face increased competition in the future as new
companies enter the market, but that its experience, reputation, industry focus
and broad range of services provide significant competitive advantages which the
Company expects will enable it to compete effectively in its markets.
GOVERNMENT REGULATION
The market for the Company's services exists under a United States federal
regulatory framework of social programs that are largely implemented at the
state or local level. The following summarizes this framework:
FINANCIAL ASSISTANCE PROGRAMS. Under Welfare Reform legislation, the
federal government combined its major welfare and employment initiatives into a
single program known as "Temporary Assistance to
10
Needy Families" or "TANF." Under TANF, the federal government makes "block
grants" of funds to the states, to be administered at the state level in
programs that include certain mandatory work, education and job-related
activities, including job training and job search for the purposes of:
(i) providing needy families with time-limited assistance in order to end their
dependency on government benefits and achieve self-sufficiency; (ii) preventing
and reducing out-of-wedlock pregnancies, especially teenage pregnancies; and
(iii) encouraging the formation and maintenance of two-parent families. While
the federal act provides general requirements, states must determine how these
requirements will be met.
The Workforce Investment Act of 1998 represents a major reform of the
country's job training system. When implemented by all states by July 2000, it
will replace the current workforce programs, including the Joint Training
Partnerships Act programs. The purpose of this act is to build a workforce
delivery system that enables individuals interested in upgrading their skills
and advancing their career goals. The Act is designed to create a revitalized
workforce system that integrates currently fragmented services and reduces the
duplication of efforts by a variety of workforce agencies.
GENERAL ASSISTANCE/GENERAL RELIEF PROGRAMS. There are also General
Assistance or General Relief programs that are administered by the states. These
welfare programs are not federally reimbursed and generally serve persons not
eligible for other federal programs. By their nature, they are very restrictive
in terms of eligibility requirements since states must pay 100% of both the
benefit and administrative costs. The eligibility requirements for these
programs vary by state and sometimes by county within the state. Forty-two
states currently have General Assistance programs in operations. Thirty-three of
these states operate the program in only a portion of the state.
FOOD STAMP PROGRAM. The Food Stamp Program is a federally funded program
that is administered by the states. The purpose of the program is to increase
the food purchasing power of eligible low-income households to a point that they
can buy a nutritionally adequate, low-cost diet. The program subsidizes food
purchases through the issuance of food stamps or through issuance of electronic
cards. Food stamp program benefits are entirely paid for by the federal
government and food stamp program administrative costs are shared 50/50 with the
states, except that states with low error rates may have up to 60% of their
administrative costs reimbursed. Eligibility for TANF or SSI also ensures
eligibility for food stamps.
SUPPLEMENTAL SOCIAL SECURITY INCOME. Title XVI of the federal Social
Security Act provides for the administration and distribution of financial
assistance to disabled individuals whose impairments make them unemployable.
There has been political pressure on the Social Security Administration (the
"SSA") and the states to review the caseload of Title XVI beneficiaries to
ensure that each individual's disability still exists and that the extent of
such disability remains sufficient to preclude employment. In addition, the SSA
has been under pressure to increase and improve vocational rehabilitation
efforts focused on returning disabled beneficiaries to work and
self-sufficiency.
CHILD SUPPORT ENFORCEMENT. The federal Child Support Enforcement ("CSE")
program, authorized under Title IV-D of the Social Security Act, was established
in 1975 in response to the increasing failure of many parents to provide
financial support to their children. The purpose of the CSE program is to help
strengthen families and reduce welfare dependency by placing the responsibility
for supporting children on the parents rather than on the government. State
governments are generally required to locate absent parents, establish paternity
if necessary, obtain judicial support orders and collect the support payments
required by those orders. Child Support Enforcement has been the subject of
close scrutiny in recent years and is an area of health and human services where
government has sought significant private sector involvement including
full-service program management efforts.
The Child Support Enforcement Amendments of 1984 mandated that state CSE
information systems, in order to receive matching federal funding, must meet
certain federal functional requirements covering case initiation, case
management, database linkage, financial management, enforcement, security,
privacy and reporting. The Family Support Act of 1988, effective October 1992,
mandated enhanced functional requirements for state CSE systems, including the
implementation of automated systems able to interface
11
electronically with other state systems such as Welfare, driver and vehicle
registration and Medicaid systems. The Welfare Reform Act in 1996 changed the
federal incentive system, required centralized payment processing centers and
modified the distribution rules to provide more funds to families.
MEDICAID, MEDICARE AND THE CHILDREN'S HEALTH INSURANCE PROGRAM. Medicaid
and Medicare were implemented under Titles XIX and XVIII of the Social Security
Act. Medicaid is a federal-state matching entitlement program that provides
reimbursement for the cost of medical care to low-income individuals who are
aged, blind, disabled or TANF beneficiaries and to certain pregnant women and
children. Within broad federal guidelines, each state designs and administers
its own program. Eligibility and claims processing systems are automated by each
state to handle this program, which is typically the largest line item in a
state budget. Federal assistance is also available on a waiver basis for managed
care enrollment for Medicaid recipients and similar populations. Medicare is a
federal entitlement program providing reimbursement of a portion of the cost of
medical care provided to the elderly. The Children's Health Insurance Program is
a recently-enacted $20 billion program to provide health care for children whose
family income is near the poverty level.
HUMAN RESOURCES
As of November 30, 1999, the Company had 3,485 employees, consisting of
2,570 employees in the Government Operations Group, 782 employees in the
Consulting Group and 133 corporate administrative employees. The Company's
success depends in large part on attracting, retaining and motivating talented,
innovative and experienced professionals at all levels. In connection with its
hiring efforts, the Company employs a full-time human resources coordinator,
retains several executive search firms and relies on personal and business
contacts to recruit senior level employees for senior management positions in
the Government Operations Group and Consulting Group and for senior
administrative positions. When the Company's Government Operations Group is
awarded a contract by a state or local government, the Company is often under a
tight timetable to hire project leaders and case management personnel to meet
the needs of the new project. To meet such needs, the Company engages in
intensive short-term hiring efforts at the project's location.
The Company's hiring focus is to identify candidates who are well-suited by
background and temperament to serve the Company's government clients. The
Company's Government Operations employees are largely drawn from government
employment positions, while the Consulting Group employees are largely selected
from other consulting organizations and government agencies.
The Company offers employees an internal training program designed to
enhance professional skills and knowledge. Offered twice a year, the three-day
program includes human resources topics such as cultural sensitivity, sexual
harassment and wrongful termination; business ethics and public company
orientation, marketing, proposal writing and public relations; project
administration topics such as contract negotiations, project management,
deliverable preparation and client management; and technology updates. In
addition, the Company offers partial tuition reimbursement for employees
pursuing relevant degree programs and fully reimburses employees for relevant
training seminars and short courses.
The Company promotes loyalty and continuity of its employees by offering
packages of base and incentive compensation and benefits that it believes are
significantly more attractive than those offered by governments or other
government consulting firms in general. In addition, to attract and retain
employees, the Company has established several employee benefit plans, including
401(k) savings and retirement plans, its 1997 Equity Incentive Plan and its 1997
Employee Stock Purchase Plan.
ITEM 2. PROPERTIES
The Company is currently headquartered in McLean, Virginia, in a 21,000
square foot office building which it owns. Due to continued growth, in January,
1999, the Company purchased a 60,000 square foot office building in Reston,
Virginia to serve as corporate headquarters, which the Company expects to begin
12
occupying in early 2000. The Company leases office space for other management
and administrative functions in connection with the performance of its contracts
in various states and foreign countries. On October 1, 1999, the Company
conducted operations from 114 leased office facilities totaling approximately
576,000 square feet. The lease terms vary from month-to-month to five-year
leases and are generally at market rates.
ITEM 3. LEGAL PROCEEDINGS
In 1997, the Company was named as a third-party defendant by Network
Six, Inc. ("Network Six") in a legal action brought by the State of Hawaii
against Network Six. Network Six alleged that the Company was liable to Network
Six on various grounds. In October 1999, the Company paid Network Six $50,000 in
full settlement of all claims. The settlement was made without admission of
fault or liability on the part of the Company.
On November 28, 1997, an individual who is 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 further
alleges 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 and claims damages in excess of $10 million. The
Company does not believe that this action has merit and intends to vigorously
defend this action. The Company does not believe that this action will have a
material adverse effect on its financial condition or results of operation.
However, no assurance may be given that the Company will be successful in its
defense.
On May 12, 1998, the Company acquired David M. Griffith & Associates, Ltd.
("DMG"), which was subsequently merged into DMG-MAXIMUS, a wholly-owned
subsidiary of the Company. DMG-MAXIMUS is currently defending against a lawsuit
arising out of consultation services provided to underwriters of revenue bonds
issued by Superstition Mountains Community Facilities District No. 1
(the "DISTRICT") in 1994. The bonds were issued to finance construction of a
water waste treatment plant in Arizona. However, the District was unable to
service the bonds and eventually declared bankruptcy. The District voluntarily
came out of bankruptcy and is currently operating under a forbearance agreement
with the sole purchaser of the bonds, Allstate Insurance Company ("ALLSTATE"). A
consolidated action arising out of these events is pending in the U.S. District
Court for the District of Arizona against DMG-MAXIMUS and thirteen other named
defendants. The parties making claims against DMG-MAXIMUS in the lawsuit,
Allstate and District, allege that DMG made false and misleading representations
in the reports DMG prepared included among the exhibits to the bond offering
memoranda. DMG's reports concerned certain financial projections made by the
District regarding its ability to service the bonds. Allstate seeks as damages
$32.1 million, the principal amount of bonds it purchased together with accrued
and unpaid interest; the District seeks actual and special damages, prejudgment
interest and costs. DMG-MAXIMUS believes these claims are without merit and
intends to defend against these actions vigorously. The Company does not believe
these actions will have a material adverse effect on its financial condition or
results of operations. However, no assurance may be given that DMG-MAXIMUS will
be successful in its defense.
The Company is not a party to any material legal proceedings, except as set
forth above.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES OF THE REGISTRANT
The current executive officers of the Company are as follows:
NAME AGE POSITION
- ---- -------- --------
David V. Mastran....................... 57 President, Chief Executive Officer and Director
Raymond B. Ruddy....................... 56 Chairman of the Board of Directors, Vice President of
the Company, and President of Consulting Group
Ilene R. Baylinson..................... 43 President of Federal Services Division
Russell A. Beliveau.................... 52 President of Government Affairs and Investor
Relations and Director
John F. Boyer.......................... 52 President of Managed Care Enrollment Division
Margaret Carrera....................... 46 President of Carrera-MAXIMUS and Vice-Chairwoman of
the Board
David M. Casey......................... 41 President of Information Technology Division
George C. Casey........................ 55 President of Spectrum-MAXIMUS and Director
Louis E. Chappuie...................... 61 President of DMG-MAXIMUS and Director
Lynn P. Davenport...................... 52 President of Human Services Division and Director
David R. Francis....................... 38 General Counsel and Secretary
Gary L. Glickman....................... 46 President of Phoenix-MAXIMUS
Thomas A. Grissen...................... 40 President of Government Operations Group and Director
David A. Hogan......................... 51 President of Child Support Division
John P. Lau, Sr........................ 56 President of International Division
Robert J. Muzzio....................... 65 Executive Vice President and Director
F. Arthur Nerret....................... 52 Vice President, Finance, Chief Financial Officer and
Treasurer
James M. Paulits*...................... 48 President of CSI-MAXIMUS
Holly A. Payne......................... 46 President of Welfare Reform Division
Susan D. Pepin......................... 45 President of Systems Planning Division
Robert E. Taggart, Jr.................. 53 Vice President and Chief Operating Officer of DMG-
MAXIMUS
- ------------------------
* Indicates a key employee who has not been designated by the Company as an
officer under Section 16 of Exchange Act.
DAVID V. MASTRAN has served as President, Chief Executive Officer and a
director of the Company since he founded the Company 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 the Chairman of the Board of Directors since
1985 and President of the Company's Consulting Group since 1986. From 1969 until
he joined the Company, 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.
ILENE R. BAYLINSON has served as the President of the Company's Federal
Services Division (formerly, the Disability Services Division) since 1995 and as
Chief Operating Officer from 1991 to 1995. She has
14
more than 17 years of experience in health and human services program
administration. After obtaining her B.A. from John Hopkins University in 1978,
Ms. Baylinson worked in a variety of positions for Koba Associates, Inc. of
Washington, D.C., including Senior Vice President for Corporate Management,
Marketing and Operations from 1989 until her departure and Corporate Vice
President/Director, Law and Justice Division from 1985 through 1991.
RUSSELL A. BELIVEAU has served as the President of the Company's Office of
Government Affairs and Investor Relations since September 1998. 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.
JOHN F. BOYER has served as President of the Company's Managed Care
Enrollment Division since October 1998, after serving in various capacities for
that division since the fall of 1997. Prior to that, he served as Vice President
for Strategic Planning and Contract Administration of the Company since 1995.
Dr. Boyer has more than 20 years of experience in health care delivery in both
clinical and administrative settings. Prior to joining the Company, Dr. Boyer
served as Director of Health Services Financing Policy in The Office of The
Assistant Secretary of Defense (Health Affairs) at the Pentagon from 1989 until
1995. Dr. Boyer received his Ph.D. in Public Administration and Public Policy
Analysis from The American University in 1989, his M.S. in Management from The
Naval Postgraduate School in 1981, his M.S. in Nursing from New York Medical
College in 1973 and his B.S. from Illinois State University in 1969.
MARGARET CARRERA has served as President of Carrera-MAXIMUS and
Vice-Chairwoman of the Board of Directors since the acquisition of the Carrera
Group ("Carrera") by the Company in August 1998. Prior to that time she had
served as President of Carrera since its founding in 1991. Ms. Carrera has 20
years of experience in management information systems. Prior to the founding of
Carrera, she served as West Region Director of Information Systems consulting
for the Public Sector with Ernst & Young LLP and Vice President of Bank Card
Processing for Bank of America. She has also held positions at Cambridge Systems
Group and Pacific Telephone. Ms. Carrera received her M.B.A. in Finance from San
Francisco State University in 1980 and her B.A. in Mathematics and Chemistry
from United States International University in 1975.
DAVID M. CASEY has served as the President of the Information Technology
Division of the Company since 1997 and has been employed by the Company since
1994. Mr. Casey has 19 years of professional experience in management
information systems. Prior to joining the Company, Mr. Casey served as a
Government and Education Account Executive for Wang Laboratories, Inc. from 1987
until 1994 and served as a Sales Consultant at Wang Laboratories, Inc. from 1986
to 1987. Mr. Casey has also held positions at Motorola, Inc. and Polaroid
Corporation. Mr. Casey holds a B.S. in General Engineering and Computer Science
from Northeastern University.
GEORGE C. CASEY has served as President of the Spectrum-MAXIMUS Division
since the Company's acquisition of the Spectrum Consulting Group, Inc.
("SPECTRUM") in March 1998. Prior to that, he had served as President of
Spectrum since October 1986. Before joining Spectrum in 1986, Mr. Casey worked
as a partner for KMG Main Hurdman, an international public accounting firm that
subsequently merged with KPMG Peat Marwick. Mr. Casey has extensive experience
in project planning and management, procurement and contract negotiations, and
quality assurance reviews and realignment. Mr. Casey earned a B.S./B.A. degree
from Northwestern University in 1966.
LOUIS E. CHAPPUIE has served as President of DMG-MAXIMUS and a director of
the Company since the acquisition of DMG by the Company in May 1998. Prior to
that time he served as President and
15
Chairman of the Board of DMG from 1992 and 1997, respectively. Prior to assuming
the presidency of DMG, he was Executive Vice President of DMG's Western Practice
Area in Sacramento, California for 12 years. His additional experience includes
Arthur Young & Company and Foreign Service Officer, U.S. State Department.
Mr. Chappuie received his B.A. and M.A. from the University of Minnesota in 1960
and 1961, respectively, and has completed course work for a Ph.D. in Economics.
LYNN P. DAVENPORT has served as the President of the Company's Human
Services Division since he joined the Company 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 the Company, 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 General Counsel and Secretary of the Company
since August 1998. He has over 13 years experience as a practicing attorney.
Before joining the Company he was Of Counsel at the law firm Howrey & Simon and,
before 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.
GARY L. GLICKMAN has served as President of the Phoenix-MAXIMUS Division
since the acquisition of Phoenix Planning & Evaluation, Ltd. ("PHOENIX") by the
Company in August 1998. Prior to that time he had served as President of Phoenix
since its founding in 1990. Mr. Glickman entered consulting in 1980 and has
served in a variety of positions advising public and private clients on
electronic banking and related technologies. During this time, he was employed
with several firms, including Deloitte & Touche and Laventhal & Horwath. Prior
to entering consulting, Mr. Glickman held positions in the Office of the
Secretary in the U.S. Department of the Treasury and Controller's Office of New
York City. Mr. Glickman received his M.B.A. in Economics from New York
University in 1978 and his B.A. in American Studies from Brandeis University in
1975.
THOMAS A GRISSEN has served as President of the Government Operations Group
since 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 form Central Michigan University.
DAVID A. HOGAN has served as the President of the Child Support Division
since 1994 and served as a Vice President of the division from 1993 until 1994.
Prior to joining the Company, 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.
JOHN P. LAU, SR. has served as the President of the Company's International
Division since 1993 and served as President of the Company's Advanced Systems
Division from 1989 until 1993. From 1961 until 1988, Mr. Lau worked in a variety
of government and private health care systems organizations in technical,
managerial and executive positions. Most recently, Mr. Lau was a Vice President
of Modern Psychiatric Systems in Rockville, Maryland in 1988 and 1989 and served
from 1968 through 1988 as Consultant to the President of Creative SocioMedics
Corporation. Mr. Lau received his M.S. in Physics from Fairleigh Dickinson
University in 1968 and his B.S. in Physics from St. Peter's College, Jersey
City, New Jersey in 1965.
ROBERT J. MUZZIO has served in various positions with the Company since
1979, including Executive Vice President since 1987, and has more than 30 years
of experience as a health care administrator, health systems researcher, and
personnel and manpower analyst. Prior to joining the Company, Mr. Muzzio held
16
many public and private sector positions in the health care industry, including
Life Support Coordinator for the Morrison Knudsen Saudi Arabia Consortium in
1978 and 1979 and Director of the Personnel Policies Division of the Office of
the Surgeon General, Department of the Army, from 1976 until 1978. Mr. Muzzio
received his M.A. in Health Care Administration from Baylor University in 1967
and his B.A. in Public Health from San Jose State College in 1956.
F. ARTHUR NERRET has served as Chief Financial Officer of the Company since
1994 and serves as Trustee of the Company's 401(k) Plan. He is a CPA and has
over 25 years of financial management experience. From 1981 until he joined the
Company, 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.
JAMES M. PAULITS has served as president of CSI-MAXIMUS since the
acquisition of Control Software in February 1999. Mr Paulits has over 15 years
experience in the area of software development for fleet management. Prior to
founding Control Software, Mr. Paulits was involved in product development for
AT&T and Sungard Data Systems. Mr. Paulits received his B.A. in Industrial
Management from LaSalle University.
HOLLY A. PAYNE has served in various executive capacities at the Company
since 1987 and as President of the Welfare Reform Division of the Company since
1995. Ms. Payne has over 21 years of human services programs experience. From
1983 until she joined the Company, Ms. Payne was a Program Manager at Electronic
Data Systems Corporation in Bethesda, Maryland and from 1978 until 1983 she
worked in several capacities for the Departments of Social Services in Prince
William and Fairfax Counties in Virginia. Ms. Payne received her M.S.W. from
West Virginia University in 1978 and her B.S. in Family Services from Northern
Illinois University in 1975.
SUSAN D. PEPIN has served as the President of the Company's Systems Planning
Division since 1994 and has been with the Company since 1988. She has over
18 years of experience in technical management and consulting with a focus on
health and human services management information systems. Before joining the
Company, Ms. Pepin served as Director of eligibility systems for the
Massachusetts Department of Public Welfare from 1984 until 1987 and was a
Project Leader for Wang Laboratories, Inc. from 1979 until 1984. Ms. Pepin
received her B.S. in Home Economics with a concentration in Consumer Studies and
a minor in Business from the University of New Hampshire in 1976.
ROBERT E. TAGGART, JR. has served as Vice-President and Chief Operating
Officer of DMG-MAXIMUS since the acquisition of DMG by the Company in May 1998.
Prior to that time, he served as the National Director of Fleet Management
Consulting for six years and Vice President of DMG for four years. Additionally,
he was the director of Fleet Consulting for Ernst & Young LLP. Mr. Taggart has
more than 18 years of consulting and fleet management experience. Mr. Taggart
received his M.C.R.P. in Urban and Regional Planning from the University of
California at Berkeley in 1974 and his B.A. in Economics from Lawrence
University in 1968.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock commenced trading on June 13, 1997 on the New
York Stock Exchange under the symbol "MMS." As of December 17, 1999, there were
172 holders of record of the Company's Common Stock. Prior to June 13, 1997,
there was no public market for the Common Stock or any other securities of the
Company.
17
The following table sets forth, for the fiscal periods indicated, the range
of high and low closing prices for the Company's Common Stock on the New York
Stock Exchange.
HIGH LOW
------------ ------------
Year Ended September 30, 1997:
Third Quarter (from June 13, 1997)........................ $18 6/16 $17
Fourth Quarter............................................ 32 14/16 17 14/16
Year Ended September 30, 1998:
First Quarter............................................. $31 9/16 $22 9/16
Second Quarter............................................ 30 14/16 23
Third Quarter............................................. 32 9/16 25 2/16
Fourth Quarter............................................ 31 20 7/16
Year Ended September 30, 1999:
First Quarter............................................. $37 $26 8/16
Second Quarter............................................ 39 8/16 22
Third Quarter............................................. 31 9/16 23
Fourth Quarter............................................ 36 23 6/16
As an S corporation prior to the IPO, the Company made a series of cash
distributions to shareholders representing earnings of the Company taxed or
taxable to such shareholders. The Company made the final such distribution at
the end of fiscal year 1997. Since that time, the Company has retained, and
currently anticipates that it will continue to retain, all of its earnings for
development of the Company's business and does not anticipate paying any cash
dividends in the foreseeable future. Distributions reported during fiscal years
1998 and 1999 were related solely to S corporation distributions by companies
MAXIMUS combined with during those years. The distributions were paid to these
companies' former shareholders and related to earnings prior to combining with
MAXIMUS. Future cash dividends, if any, will be paid at the discretion of the
Company's Board of Directors and will depend, among other things, upon the
Company's future operations and earnings, capital requirements and surplus,
general financial condition, legal and contractual restrictions and such other
factors as the Board of Directors may deem relevant.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below as of September 30, 1998 and
1999 and for each of the three years in the period ended September 30, 1999 are
derived from the Company's Consolidated Financial Statements and related Notes
thereto which have been audited by Ernst & Young LLP, independent auditors,
except for the financial statements of DMG, a consolidated subsidiary, which
through December 31, 1997 were audited by other independent auditors. The
selected financial data give retroactive effect to the combination with DMG and
Control Software, Inc. ("CSI"), which were accounted for using the pooling of
interests method. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included as Item 7 and the Consolidated Financial Statements and
related Notes included as Item 8 in this Form 10-K. The historical results are
not necessarily indicative of the results of operations to be expected in the
future.
18
YEARS ENDED SEPTEMBER 30,
----------------------------------------------------
STATEMENT OF INCOME DATA: 1995 1996 1997 1998 1999
- ------------------------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenues:.................................. $88,386 $140,492 $173,355 $244,114 $319,540
Cost of revenues........................... 62,128 106,258 127,170 181,403 224,912
------- -------- -------- -------- --------
Gross profit............................... 26,258 34,234 46,185 62,711 94,628
Selling, general and administrative
Expenses................................. 16,201 20,584 26,100 34,909 50,626
Stock option compensation, merger, deferred
compensation and ESOP expense(a)......... 1,400 1,556 7,372 3,671 480
Amortization of goodwill and other
acquisition related intangibles.......... -- -- -- -- 260
------- -------- -------- -------- --------
Income from operations..................... 8,657 12,094 12,713 24,131 43,262
Interest and other income (expense)........ (64) (47) 921 1,823 3,604
------- -------- -------- -------- --------
Income before income taxes................. 8,593 12,047 13,634 25,954 46,866
Provision for income taxes(b).............. 736 530 4,104 10,440 19,240
------- -------- -------- -------- --------
Net income................................. $ 7,857 $ 11,517 $ 9,530 $ 15,514 $ 27,626
======= ======== ======== ======== ========
Earnings per share:
Basic.................................... $ 0.59 $ 0.87 $ 0.67 $ 0.86 $ 1.35
======= ======== ======== ======== ========
Diluted.................................. $ 0.59 $ 0.87 $ 0.65 $ 0.85 $ 1.32
======= ======== ======== ======== ========
Shares used in computing earnings per
share:
Basic.................................... 13,207 13,273 14,208 17,937 20,537
======= ======== ======== ======== ========
Diluted.................................. 13,207 13,273 14,593 18,296 20,891
======= ======== ======== ======== ========
AS OF SEPTEMBER 30,
----------------------------------------------------
BALANCE SHEET DATA: 1995 1996 1997 1998 1999
- ------------------- -------- -------- -------- -------- --------
Cash and cash equivalents and short-term
investments............................... $ 2,656 $ 3,397 $ 51,875 $ 32,980 $ 98,882
Working capital............................. 16,680 25,467 66,108 78,478 150,472
Total assets................................ 39,147 50,993 113,884 126,002 223,036
Long-term debt.............................. 4,558 331 321 620 578
Redeemable common stock..................... 21,434 31,758 -- -- --
Total shareholders' equity (deficit)........ (2,819) (3,651) 69,041 86,787 175,479
- ------------------------
(a) In January 1997, the Company issued options to various employees to purchase
403,975 shares of common stock at a formula price based on book value.
During 1997, the Company recorded a non-recurring charge against income of
$5,874,000 for the difference between the IPO price and the formula price
for all options outstanding. The Company 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 the common stock at
September 30, 1996, and was established pursuant to a pre-existing
shareholder agreement.
(b) For the three years ended September 30, 1996, and during fiscal year 1997 up
to and including June 12, 1997, the Company elected to be treated as an S
corporation and the income of the Company was taxed for federal and most
state purposes directly to the Company's shareholders. In connection with
its IPO, the Company's S corporation status terminated and the Company
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, the Company has recorded state and federal income taxes based on
earnings for those periods. Income taxes provided for periods prior to the
IPO related primarily to operations of DMG.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company provides program management and consulting services primarily to
government agencies in the United States. Founded in 1975, the Company has been
profitable every year since inception. The Company conducts its operations
through two groups, the Government Operations Group and the Consulting Group.
The Government Operations Group administers and manages government health and
human services programs, including disability services, managed care enrollment,
welfare-to-work and job readiness and child support enforcement. The Consulting
Group provides consulting services to state, county and local government
agencies, including health and human services, law enforcement, parks and
recreation, taxation, housing, motor vehicles, labor, education and
legislatures.
As an important part of the Company's growth strategy, it has completed
combinations with the following firms: Spectrum Consulting Group, Inc. and
Spectrum Consulting Services, Inc. (collectively, "Spectrum") in March 1998,
David M. Griffith & Associates, Ltd. ("DMG") in May 1998, Carrera Consulting
Group ("CARRERA") and Phoenix Planning & Evaluation, Ltd. ("PHOENIX") in
August 1998, CSI in February 1999, Norman Roberts & Associates, Inc. ("ROBERTS")
in March 1999, Unison Consulting Group, Inc. ("UNISON") in June 1999, and
Network Design Group, Inc. dba The Center for Health Dispute Resolution ("CHDR")
in September 1999. Spectrum, DMG, Carrera, Phoenix, and CSI were accounted for
as poolings of interests combinations. Roberts, Unison and CHDR were accounted
for as purchases. See "--Business Combinations." Prior year amounts have been
restated to reflect the combination with DMG and CSI. The Spectrum, Carrera and
Phoenix combinations were accounted for as immaterial poolings of interests,
and, accordingly, the Company's previously issued financial statements were not
restated to reflect these combinations.
The Company's revenues are generated from contracts with various payment
arrangements, including: (i) costs incurred plus a fixed fee ("COST-PLUS");
(ii) fixed-price; (iii) performance-based criteria; and (iv) time and materials
reimbursement (utilized primarily by the Consulting Group). For the fiscal year
ended September 30, 1999, revenues from these contract types were approximately
25%, 37%, 19% and 19%, respectively, of total revenues. Traditionally, federal
government contracts have been cost-plus and a majority of the contracts with
state and local government agencies have been fixed-price and performance-
based. 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 the Company is subject to the risk of potential
cost overruns or inaccurate revenue estimates.
Effective January 1, 1997, the Social Security Act of 1935 was amended to
eliminate Social Security Income and Supplemental Security Disability Insurance
benefits based solely on drug and alcohol disabilities. As a result, the Social
Security Administration terminated the Company's $350 million contract with the
Administration (the "SSA CONTRACT") effective at the end of February 1997. All
services provided to the Social Security Administration were completed in the
quarter ended March 31, 1997. The SSA Contract contributed $31.6 million to the
Company's revenues in fiscal year 1997 and $0 to the Company's revenues in
fiscal years 1998 and 1999.
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, 1999, the
Company's average Government Operations contract duration was 2 3/4 years. The
Company's Consulting Group contracts have performance periods of one month to in
excess of two years.
The Company's most significant expense is cost of revenues, which consists
primarily of project related employee salaries and benefits, subcontractors,
computer equipment and travel expenses. The Company's ability to accurately
predict personnel requirements, salaries and other costs as well as to
effectively manage a project or achieve certain levels of performance can have a
significant impact on the service costs
20
related to the Company's fixed price and performance-based contracts. Service
cost variability has little impact on cost-plus arrangements because allowable
costs are reimbursed by the client. The profitability of the Consulting Group's
contracts is largely dependent upon the utilization rates of its consultants and
the success of its performance-based contracts.
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.
During 1997, the Company recognized two significant charges against income.
The completion of its initial public offering ("IPO") resulted in the
termination of the Company's S corporation status. As a result, the Company
recorded a non-recurring deferred tax charge 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, the day prior to the IPO. In connection
with the IPO, on January 31, 1997, certain key employees of the Company
surrendered rights to purchase shares of Common Stock of the Company in exchange
for options to purchase shares of Common Stock at an exercise price of $1.46 per
share. The Company recognized a non-cash compensation charge against income of
$5.9 million, the difference between the initial public offering price and the
option exercise price for all outstanding options. The option exercise price was
based on the adjusted book value of the Common Stock at September 30, 1996, and
was established pursuant to pre-existing compensation arrangements with these
employees.
BUSINESS COMBINATIONS
As part of its growth strategy, the Company expects to continue to pursue
complementary business combinations to expand its geographic reach, expand the
breadth and depth of its service offerings and enhance the Company's consultant
base. In pursuit of this strategy, the Company combined with four consulting
firms during 1998 and one firm during 1999 in transactions accounted for as
poolings of interests, and three firms during 1999 accounted for as purchases.
On March 16, 1998, the Company acquired all of the outstanding shares of
capital stock of Spectrum in exchange for 840,000 shares of Common Stock.
Spectrum, based in Austin, Texas, provides management consulting services that
focus on assisting public sector organizations in solving complex business
problems related to automation. Spectrum's operations complement and expand the
Company's existing information technology and systems planning and integration
consulting service offerings. At the time of the combination, Spectrum had
approximately 37 consultants and three other employees.
On May 12, 1998, the Company acquired all of the outstanding capital stock
of DMG in exchange for 1,166,179 shares of Common Stock. DMG, based in
Northbrook, Illinois, provides consulting services to state and local government
and other public sector clients throughout the United States. DMG's operations
complement the Company's existing management consulting and information
technology services and expand the Company's service offerings to include a
broad range of financial planning, cost management and various other consulting
services aimed at the public sector. At the time of the combination, DMG had
approximately 375 consultants and 40 other employees.
On August 31, 1998, the Company acquired all of the outstanding shares of
capital stock of Carrera in exchange for 1,137,420 shares of Common Stock.
Carrera, based in Sacramento, California, provides consulting services that
focus on assisting public sector entities implement large-scale, software-based
human resource and financial systems. At the time of the combination, Carrera
had 78 consultants and eight other employees.
On August 31, 1998, the Company acquired all of the outstanding shares of
capital stock of Phoenix in exchange for 254,545 shares of Common Stock.
Phoenix, based in Rockville, Maryland, provides consulting services to public
sector entities in planning, implementing and evaluating the utilization of
various electronic commerce technologies, such as electronic benefits transfer,
electronic funds transfer and
21
electronic card technologies. At the time of the combination, Phoenix had 11
consultants and three other employees.
On February 26, 1999, the Company acquired all of the outstanding shares of
capital stock of CSI in exchange for 700,210 shares of Common Stock. CSI, based
in Wayne, Pennsylvania, provides fleet management software and related services
to public service entities. At the time of the combination, CSI had 46
employees.
On March 31, 1999, the Company acquired all of the outstanding shares of
capital stock of Roberts for $1,930,000. Roberts, based in Los Angeles,
California, provides executive search services for the public sector. In
connection with the purchase, the Company recorded intangible assets of
$1,880,000. At the time of the combination, Roberts had 18 employees.
On June 1, 1999, the Company acquired all of the outstanding shares of
capital stock of Unison for $7,074,000. Unison, based in Chicago, Illinois,
provides financial consulting services for government owned airports. In
connection with the purchase, the Company recorded intangible assets of
$4,979,000. At the time of the combination, Unison had 39 employees.
On September 30, 1999, the Company acquired all of the outstanding shares of
capital stock of CHDR for $2,070,000. CHDR, based in Pittsford, New York, is the
sole national provider of external reviews for Medicare beneficiaries enrolled
in HMOs. In connection with the purchase, the Company recorded intangible assets
of $771,000. At the time of the combination, CHDR had 35 employees.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of income data as a percentage of revenues:
YEARS ENDED SEPTEMBER 30,
------------------------------------
1997 1998 1999
-------- -------- --------
Revenues:
Government Operations Group............................... 38.0% 57.0% 55.5%
Consulting Group.......................................... 43.8 43.0 44.5
SSA Contract.............................................. 18.2 -- --
----- ----- -----
Total revenues.......................................... 100.0 100.0 100.0
Gross profit:
Government Operations Group............................... 22.3 18.0 19.7
Consulting Group.......................................... 35.7 35.9 42.0
SSA Contract.............................................. 13.9 -- --
Total gross profit as percentage of total revenues...... 26.6 25.7 29.6
Selling general and administrative expenses................. 15.0 14.3 15.8
Stock option compensation, merger, deferred compensation and
ESOP expense.............................................. 4.2 1.5 0.2
Amortization of goodwill and other acquisition-related
intangibles............................................... -- -- 0.0
----- ----- -----
Income from operations...................................... 7.4 9.9 13.6
Interest and other income................................... 0.5 0.7 1.1
----- ----- -----
Income before income taxes.................................. 7.9 10.6 14.7
Provision for income taxes.................................. 2.4 4.2 6.0
----- ----- -----
Net income.................................................. 5.5% 6.4% 8.7%
===== ===== =====
22
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
REVENUES. Total revenues increased 30.9% to $319.5 million in fiscal 1999
from $244.1 million in fiscal 1998. Government Operations Group revenues
increased 27.4% to $177.4 million in fiscal 1999 from $139.3 million in fiscal
1998 due to an increase in the number of contracts in the Child Support
Enforcement, Managed Care Enrollment and Welfare Reform divisions of the group.
Consulting Group revenues increased 35.5% to $142.1 million in fiscal 1999 from
$104.9 million in fiscal 1998 due to an increase in the number of contracts,
revenues totaling $5.1 million from companies purchased in fiscal 1999 and
revenue growth from companies which merged with the Company in fiscal 1998 in
transactions accounted for as immaterial poolings of interests. These companies
had $13.7 million of pre-merger revenues in fiscal 1998 which were not included
in the fiscal 1998 revenue amount reported for the Company.
GROSS PROFIT. Total gross profit increased 50.9% to $94.6 million in fiscal
1999 from $62.7 million in fiscal 1998. Government Operations Group gross profit
increased 37.2% to $35.0 million in fiscal 1999 from $25.5 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 primarily due to improved gross margins on two of the three Managed
Care Enrollment contracts which were purchased in fiscal 1998. See "Year Ended
September 30, 1998 Compared to Year Ended September 30, 1997," below. Consulting
Group gross profit increased 60.2% to $59.6 million in fiscal 1999 from
$37.7 million in fiscal 1998. As a percentage of Consulting Group revenues,
Consulting Group gross profit increased to 42.0% in fiscal 1999 from 35.9% in
fiscal 1998. The improvement in gross margin for the Consulting Group was due to
improved operating efficiencies within most Consulting Group divisions, notably
the CSI division, and the impact of a 50% margin realized by Carrera, which
constituted 13.4% of fiscal 1999 Consulting Group revenues, compared to only
4.2% of fiscal 1998 Consulting Group revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and
administrative expenses ("SG&A") 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 15.8% for fiscal 1999 from 14.3% for fiscal 1998. This increase in costs was
due to increases in the number of both professional and administrative personnel
and the amount of professional fees necessary to support the Company's growth,
marketing and proposal preparation expenditures incurred to pursue further
growth. The Company established a Government Affairs and Investor Relations unit
at the end of fiscal 1998 and significantly increased the size of its
Information Systems unit during fiscal 1999. From September 30, 1998 to
September 30, 1999 administrative and systems personnel increased 23.1% from 208
to 256 and the Company grew from 2,870 total employees at September 30, 1998 to
3,285 total employees at September 30, 1999.
STOCK OPTION COMPENSATION, MERGER, DEFERRED COMPENSATION AND ESOP
EXPENSES. During fiscal year 1999, the Company incurred $0.5 million of
non-recurring expenses in connection with the mergers with CSI, Roberts, Unison
and CHDR. These expenses consisted of legal and audit and due diligence
expenses. During fiscal year 1998, the Company incurred $3.7 million of
non-recurring expenses in connection with the mergers with Spectrum, DMG,
Carrera and Phoenix. These expenses consisted of legal, audit, broker, trustee,
deferred compensation and other expenses and the acceleration of expenses
related to stock appreciation rights for DMG employees totaling $0.9 million.
AMORTIZATION OF GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLES. The
Company incurred $0.3 million of amortization expense related to the $7.6
million of goodwill and other acquisition-related intangible assets it recorded
in connection with the acquisitions during fiscal 1999 of Roberts, Unison and
CHDR.
PROVISION FOR INCOME TAXES. 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, the income tax expense increased to 41.0% for
fiscal 1999 from 40.2% for fiscal 1998. This increase was due primarily to the
effect
23
of the termination of the S Corporation status of CSI upon the merger with the
Company. Additional information regarding income tax expense is in Note 9 to the
consolidated financial statements contained in this document.
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
REVENUES. Total revenues increased 40.8% to $244.1 million in fiscal 1998
from $173.4 million in fiscal 1997. Government Operations Group revenues
increased 43.0% to $139.3 million in fiscal 1998 from $97.4 million in fiscal
1997 due to an increase in the number of contracts in the Child Support
Enforcement, Managed Care Enrollment and Welfare Reform divisions of the group
and revenues from three Managed Care Enrollment contracts totaling
$18.1 million purchased from another company in February 1998. Excluding the SSA
Contract, which had $31.6 million of revenues in fiscal 1997, Government
Operations Group revenues increased 111.8% as compared to fiscal 1997.
Consulting Group revenues increased 38.0% to $104.9 million in fiscal 1998 from
$76.0 million in fiscal 1997 due to an increase in the number of contracts and
revenues totaling $16.9 million from companies which merged with the Company in
fiscal 1998 in transactions accounted for as immaterial poolings of interests.
GROSS PROFIT. Total gross profit increased 35.8% to $62.7 million in fiscal
1998 from $46.2 million in fiscal 1997. Government Operations Group gross profit
increased 31.4% to $25.1 million in fiscal 1998 from $19.1 million in fiscal
1997. As a percentage of Government Operations Group revenues, Government
Operations Group gross profit decreased to 18.0% in fiscal 1998 from 22.3% in
fiscal 1997 primarily due to anticipated lower gross margins on the three
Managed Care Enrollment contracts which were purchased in fiscal 1998.
Consulting Group gross profit increased 38.9% to $37.7 million in fiscal 1998
from $27.1 million in fiscal 1997. As a percentage of Consulting Group revenues,
Consulting Group gross profit increased slightly to 35.9% in fiscal 1998 from
35.7% in fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and
administrative expenses increased 33.8% to $34.9 million in fiscal 1998 from
$26.1 million in fiscal 1997. This increase in costs was due to increases in
both professional and administrative personnel and professional fees necessary
to support the Company's growth, marketing and proposal preparation expenditures
incurred to pursue further growth and the impact of business combinations
accounted for as immaterial poolings of interests. From September 30, 1997 to
September 30, 1998 administrative and systems personnel increased 34.2% from 155
to 208 and the Company grew from 1,822 total employees to 2,870 total employees.
As a percentage of revenues, SG&A decreased to 14.3% for fiscal 1998 from 15.1%
for fiscal 1997.
STOCK OPTION COMPENSATION, MERGER, DEFERRED COMPENSATION AND ESOP
EXPENSES. During fiscal year 1998, the Company incurred $3.7 million of
non-recurring expenses in connection with the mergers with Spectrum, DMG,
Carrera and Phoenix. These expenses consisted of legal, audit, broker, trustee,
deferred compensation and other expenses and the acceleration of expenses
related to stock appreciation rights for DMG employees totaling $0.9 million.
During fiscal year 1997, in connection with its IPO, the Company recognized a
non-recurring compensation expense of $5.9 million for stock options granted to
employees. Also in fiscal 1997, the Company incurred $1.5 million of deferred
compensation expenses for DMG employees related to plans which were terminated
subsequent to the merger with the Company.
PROVISION FOR INCOME TAXES. Prior to the IPO, the Company and its
shareholders elected to be treated as an S corporation under the Internal
Revenue Code. Under the provisions of the tax code, the Company's shareholders
included their pro rata share of the Company's income in their personal tax
returns. Accordingly, the Company was not subject to federal and most state
income taxes until June 12, 1997, the day prior to the completion of the IPO.
Upon completion of the IPO, the Company's S corporation status was terminated
and the Company became subject to federal and state income taxes.
Income tax expense increased 154.4% to $10.4 million in fiscal 1998 from
$4.1 million in fiscal 1997. As a percentage of income before income taxes, the
income tax expense increased to 40.2% for fiscal 1998
24
from 30.1% for fiscal 1997. Additional information regarding income tax expense
is in Note 9 to the consolidated financial statements contained in this
document.
QUARTERLY RESULTS
Set forth below are selected income statement data for the eight quarters
ended September 30, 1999. This information is derived from unaudited quarterly
financial statements which include, in the opinion of management, all
adjustments necessary for a fair presentation of the information for such
periods. This information should be read in conjunction with the Consolidated
Financial Statements and related Notes thereto included in Item 8 in this
Form 10-K. Results of operations for any fiscal quarter are not necessarily
indicative of results for any future period.
QUARTERS ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Government Operations
Group..................... $27,772 $32,189 $36,844 $42,458 $38,817 $42,544 $47,427 $48,640
Consulting Group............ 22,622 23,770 27,390 31,069 33,529 33,746 36,741 38,096
------- ------- ------- ------- ------- ------- ------- -------
Total revenues................ 50,394 55,959 64,234 73,527 72,346 76,290 84,168 86,736
Cost of revenues.............. 37,647 41,117 48,611 54,028 52,233 52,894 58,467 61,318
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................. 12,747 14,842 15,623 19,499 20,113 23,396 25,701 25,418
Selling, general and
administrative expenses..... 8,426 8,641 7,381 10,461 11,261 12,784 13,844 12,737
Stock option compensation,
merger, deferred
compensation and ESOP
expense..................... 467 907 1,972 325 -- 118 152 210
Amortization of goodwill and
other acquisition-related
intangibles................. -- -- -- -- -- -- 88 172
------- ------- ------- ------- ------- ------- ------- -------
Income from operations........ 3,854 5,294 6,270 8,713 8,852 10,494 11,617 12,299
Interest and other income..... 537 548 391 347 394 881 965 1,364
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes.... 4,391 5,842 6,661 9,060 9,246 11,375 12,582 13,663
Provision for income taxes.... 1,592 2,237 2,549 4,062 3,653 4,700 5,131 5,756
------- ------- ------- ------- ------- ------- ------- -------
Net income.................... $ 2,799 $ 3,605 $ 4,112 $ 4,998 5,593 6,675 7,451 7,907
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic....................... $ 0.17 $ 0.21 $ 0.24 $ 0.26 $ 0.29 $ 0.32 $ 0.36 $ 0.38
Diluted..................... $ 0.16 $ 0.20 $ 0.23 $ 0.26 $ 0.28 $ 0.31 $ 0.35 $ 0.37
The Company's 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 the
government agencies for awarding contracts, the term of each contract that the
Company has been awarded and general economic conditions. Because a significant
portion of the Company's 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. Furthermore, the
Company has on occasion experienced a pattern in its results of operations
pursuant to which it incurs greater operating expenses during the start-up and
early stages of significant contracts. No assurances can be given that quarterly
results will not fluctuate, causing a material adverse effect on the Company's
operating results and financial condition.
25
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operations. The
Company's cash flow provided by (used in) operations was $27.9 million, $(7.2)
million and $18.6 million for the years ended September 30, 1999, 1998 and 1997,
respectively. The increase in cash flow from operations for the year ended
September 30, 1999 as compared to the year ended September 30, 1998 is due to
primarily to the increase in net income to $27.6 million for the year ended
September 30, 1999 from $15.5 million for the year ended September 30, 1998 and
a decrease in the amounts of accounts receivable outstanding, billed and
unbilled, to 97 days of sales at September 30, 1999 from 103 days of sales at
September 30, 1998. The decrease in cash flow from operations for the year ended
September 30, 1998 from the year ended September 30, 1997 is due primarily to an
increase in tax payments of $16.2 million and an increase in accounts
receivables of $12.2 million.
Cash used in investing activities totaled $45.1 million during the year
ended September 30, 1999 as compared to $25.2 million of cash provided by
investing activities for the year ended September 30, 1998. The $45.1 million
consisted of purchases of marketable securities totaling $23.2 million,
$8.0 million for the purchase of a 60,000 square foot office building in Reston,
Virginia to serve as corporate headquarters, the purchases of Norman Roberts for
$1.9 million, Unison for $7.1 million and CHDR for $2.1 million, and the
purchase of property and equipment. The $25.2 million of cash provided by
investing activities for the year ended September 30, 1998 consisted primarily
of proceeds from the sale of marketable securities totaling $27.8 million.
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 the secondary offering completed in
December 1998. For the year ended September 30, 1998, cash used in financing
activities was $10.1 million, consisting primarily of $5.7 million of
S-corporation cash distributions paid to the S-corporation shareholders, based
upon the undistributed earnings of the Company taxable to the shareholders
through the date of the IPO. Also, consistent with past practices, Spectrum,
Phoenix and CSI paid S-corporation cash distributions totaling $2.0 million to
former shareholders based upon pre-merger taxable income.
The Company had a $10.0 million revolving credit facility (the "CREDIT
FACILITY") with Crestar Bank in Virginia, which was available for borrowing and
the issuance of letters of credit. The Credit Facility bore interest at a rate
equal to LIBOR plus an amount which ranged from 0.65% to 1.25% depending on the
Company's debt to equity ratio. The Credit Facility contained certain
restrictive covenants and financial ratio requirements, including a minimum net
worth requirement of $60 million. The Company had not used the Credit Facility
to finance its working capital needs, and management decided to allow the Credit
Facility to expire at March 31, 1999. At September 30, 1999, there are
outstanding letters of credit totaling $0.4 million.
Management believes that the Company will have sufficient resources to meet
its cash needs over the next 12 months. Such cash needs may include start-up
costs associated with new contract awards, obtaining additional office space,
establishing new offices, investment in upgraded systems infrastructure and
acquisitions of other businesses and technologies. Cash requirements beyond the
next 12 months depend on the Company's profitability, its ability to manage
working capital requirements, its rate of growth, the amounts ultimately spent
on business acquisitions, if any, and the leasing of new office space, if any.
YEAR 2000
The Company is aware of the issues that many computer, telecommunication and
other infrastructure systems will face as the millennium ("YEAR 2000")
approaches. The Company has audited its internal software and hardware and
implemented corrective actions where necessary to address Year 2000 problems.
The Company has also reviewed the software and hardware of, and implemented
corrective actions where necessary, at its divisions and subsidiaries. Although
the assessment and remediation efforts
26
have been completed, the Company continues to evaluate Year 2000 contingency
plans in the event a service not in the control of the Company experiences
processing problems or failures. The cost of these efforts has not been
material, and the Company does not anticipate that future costs will be material
or will have a material impact on its operations or financial results. However,
there can be no assurance that the corrective actions or contingency plans will
eliminate all Year 2000 risk or that a Year 2000 problem will not have a
material adverse effect on the Company.
The Company also provides assistance in assessing, evaluating, testing and
certifying government client systems affected by Year 2000 problems, as well as
quality assurance monitoring of Year 2000 compliance conversions performed for
clients by third parties. Although the Company has attempted to contract to
provide such services in a manner that will minimize its liability for system
failures, there can be no assurance that the Company would not become subject to
legal proceedings which, if resolved in a manner adverse to the Company, could
have a material adverse effect on its financial condition.
The Company relies to varying extents on information processing performed by
the governmental agencies and entities with which it contracts. The Company has
inquired where necessary of such agencies and entities of potential Year 2000
problems, and, based on responses to such inquiries, management believes that
the Company would be able to continue to perform on such contracts without
material negative financial impact. However, the Company cannot be certain that
Year 2000 related systems failures in the information systems of clients will
not occur and, if such failures occur, that they will not interfere with the
Company's ability to properly manage a contracted project and result in a
material adverse effect on the Company's business, financial condition and
results of operations.
Although the Company believes that it has addressed all material Year 2000
problems, there are a number of risks associated with Year 2000, only some of
which are within the control of the Company. Those risks include unforeseen
difficulties in identifying and correcting Year 2000 problems, an incomplete
audit of internal hardware and software, and the failure of one or more
government clients to adequately address the Year 2000 problem. The Company's
Year 2000 efforts have been meant to help manage and mitigate these risks. The
Company continues to evaluate and intends to adopt contingency plans, if deemed
necessary, to address any issues that may be identified internally and as it
assesses the state of readiness of its key government clients. As no specific
instance of material Year 2000 non-compliance has been discovered to date, the
Company has not yet adopted any specific contingency plans to deal with Year
2000 problems.
FORWARD LOOKING STATEMENTS
Statements that are not historical facts, including statements about the
Company's confidence and strategies and the Company's expectations regarding its
ability to obtain future contracts, expand its market opportunities or attract
highly-skilled employees, are forward looking statements that involve risks and
uncertainties. These risks and uncertainties include legislative changes and
political developments adverse to the privatization of the provision of
government services; risks related to possible acquisitions; opposition from
government employee unions; reliance on key executives; impact of competition
from similar companies; and legal, economic and other risks detailed in
Exhibit 99.1 to this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risk related to the effect
of changes in interest rates, foreign currency exchange rates, commodity prices
and equity prices on instruments entered into for trading and other purposes is
immaterial.
27
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and supplementary data are included as
part of this Annual Report on Form 10-K:
Report of Ernst & Young LLP, Independent Auditors
Report of Grant Thornton LLP, Independent Auditors
Consolidated Balance Sheets as of September 30, 1998 and 1999
Consolidated Statements of Income for the years ended September 30, 1997,
1998 and 1999
Consolidated Statements of Changes in Redeemable Common Stock and
Shareholders' Equity for the years ended September 30, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1998 and 1999
Notes to Consolidated Financial Statements
28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors
MAXIMUS, Inc.
We have audited the accompanying balance sheets of MAXIMUS, Inc. as of
September 30, 1998 and 1999, and the related statements of income, changes in
redeemable common stock and shareholders' equity, and cash flows for each of the
three years in the period ended September 30, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the financial statements of David M. Griffith & Associates, Ltd., a
wholly-owned subsidiary, which statements reflect total revenues of
$39.4 million for the year ended December 31, 1997. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for David M. Griffith &
Associates, Ltd. is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 1997, the report of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
MAXIMUS, Inc. at September 30, 1998 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Washington, D.C.
November 13, 1999
29
REPORT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS
Board of Directors
David M. Griffith & Associates, Ltd.
We have audited the statements of earnings, stockholders' equity, and cash
flows of David M. Griffith & Associates, Ltd. for the year ended December 31,
1997 (not presented herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of David M.
Griffith & Associates, Ltd. for the year ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Chicago, Illinois
March 18, 1998, except for Note L
which is as of March 23, 1998
30
MAXIMUS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
AS OF
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 19,403 $ 61,647
Marketable securities..................................... 13,577 37,235
Accounts receivable, net.................................. 76,981 75,865
Costs and estimated earnings in excess of billings (Note
5)...................................................... 5,924 16,150
Prepaid expenses and other current assets................. 1,188 2,711
Deferred income taxes..................................... -- 2,997
-------- --------
Total current assets........................................ 117,073 196,605
Property and equipment at cost:
Land...................................................... 662 2,643
Buildings and improvements................................ 1,721 7,921
Office furniture and equipment............................ 7,703 10,429
Leasehold improvements.................................... 214 253
-------- --------
10,300 21,246
Less: Accumulated depreciation and amortization........... (5,433) (6,524)
-------- --------
Total property and equipment, net........................... 4,867 14,722
Deferred income taxes (Note 9).............................. 1,434 363
Intangible assets........................................... -- 8,254
Other assets................................................ 2,628 3,092
-------- --------
Total assets................................................ $126,002 $223,036
======== ========
LIABILITIES AND SHAREHOLERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 10,006 $ 10,265
Accrued compensation and benefits......................... 15,877 16,119
Billings in excess of costs and estimated earnings (Note
5)...................................................... 11,608 16,942
Notes payable............................................. 200 --
Income taxes payable...................................... 3 2,266
Other current liabilities................................. -- 541
Deferred income taxes..................................... 901 --
-------- --------
Total current liabilities................................... 38,595 46,133
Long-term debt (less current portion)....................... 620 578
Other liabilities........................................... 846
-------- --------
Total liabilities........................................... 39,215 47,557
Commitments and contingencies (Notes 7 and 11)
Shareholders' equity (Note 10):
Common stock, no par value; 30,000,000 shares authorized;
18,925,602 and 20,986,322 shares issued and outstanding
at September 30, 1998 and 1999, at stated amount........ 68,623 130,518
Accumulated other comprehensive income.................... -- (280)
Retained earnings......................................... 18,164 45,241
-------- --------
Total shareholders' equity.................................. 86,787 175,479
-------- --------
Total liabilities and shareholders' equity.................. $126,002 $223,036
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
Revenues.................................................... $173,355 $244,114 $319,540
Cost of revenues............................................ 127,170 181,403 224,912
-------- -------- --------
Gross profit................................................ 46,185 62,711 94,628
Selling, general and administrative expenses................ 26,100 34,909 50,626
Stock option compensation, merger, deferred compensation and
ESOP expense.............................................. 7,372 3,671 480
Amortization of goodwill and other acquisition-related
intangibles............................................... -- -- 260
-------- -------- --------
Income from operations...................................... 12,713 24,131 43,262
Interest and other income................................... 921 1,823 3,604
-------- -------- --------
Income before income taxes.................................. 13,634 25,954 46,866
Provision for income taxes.................................. 4,104 10,440 19,240
-------- -------- --------
Net income.................................................. $ 9,530 $ 15,514 $ 27,626
======== ======== ========
Earnings per share:
Basic..................................................... $ 0.67 $ 0.86 $ 1.35
======== ======== ========
Diluted................................................... $ 0.65 $ 0.85 $ 1.32
======== ======== ========
Weighted average shares outstanding:
Basic..................................................... 14,208 17,937 20,537
======== ======== ========
Diluted................................................... 14,593 18,296 20,891
======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE
COMMON STOCK AND SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS)
SHAREHOLDERS' EQUITY
-----------------------------------
ACCUMULATED
REDEEMABLE OTHER
COMMON COMPREHENSIVE COMMON RETAINED
STOCK INCOME STOCK EARNINGS
---------- ------------- -------- --------
Balance at September 30, 1996................... $ 31,758 $ -- $ -- $ (3,651)
Purchase of redeemable common stock from
employee.................................... (1,422) -- -- --
Issuance of common stock to employees......... -- -- 778 --
Compensation charge for stock options......... -- -- 5,874 --
Net income.................................... -- -- -- 9,530
Adjustment to redemption value of redeemable
common stock................................ 25 -- -- (25)
Adjustment to retained earnings upon initial
public offering............................. -- -- (9,083) 9,083
Reclass of redeemable common stock upon
initial public offering..................... (30,361) -- 15,410 14,951
Net proceeds from sale of common stock in
initial public offering..................... -- -- 53,804 --
S Corporation distributions................... -- -- -- (27,630)
-------- ----- -------- --------
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
secondary offering.......................... -- -- 61,024 --
Unrealized losses on marketable securities.... -- (280) -- --
S Corporation distributions................... -- -- -- (756)
-------- ----- -------- --------
Balance at September 30, 1999................... $ -- $(280) $130,518 $ 45,241
======== ===== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 9,530 $ 15,514 $ 27,626
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation............................................ 1,124 1,078 1,567
Amortization............................................ -- 1,401 1,117
Stock option compensation expense....................... 5,874 -- --
Deferred income taxes................................... (319) (2,475) (2,807)
Other................................................... (157) 173 131
Changes in assets and liabilities:
Accounts receivable, net................................ (10,701) (22,922) (2,065)
Costs and estimated earnings in excess of billings...... (2,656) (326) (5,504)
Prepaid expenses and other current assets............... (794) 373 (460)
Other assets............................................ (241) (43) 1,062
Accounts payable........................................ 2,835 4,845 (535)
Accrued compensation and benefits....................... 3,497 338 528
Billings in excess of costs and estimated earnings...... 6,725 (1,309) 5,201
Income taxes payable.................................... 3,914 (3,877) 2,073
-------- -------- --------
Net cash provided by (used in) operating activities......... 18,631 (7,230) 27,934
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate................................... -- -- (8,000)
Acquisition of business assets............................ -- -- (11,243)
Purchase of contracts..................................... -- (2,436) --
Increase in cash resulting from immaterial poolings....... -- 1,002 --
Purchase of property and equipment........................ (1,301) (1,160) (2,589)
(Purchase) sale of marketable securities.................. (39,857) 27,822 (23,229)
-------- -------- --------
Net cash (used in) provided by investing activities......... (41,158) 25,228 (45,061)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock offering, net of expenses............. 53,804 -- 61,024
S Corporation distributions............................... (21,882) (7,665) (756)
Redeemable common stock purchased......................... (1,234) -- --
Common stock issued....................................... 4 144 871
Net proceeds from (payments on) borrowings................ 452 (2,547) (1,799)
-------- -------- --------
Net cash (used in) provided by financing activities......... 31,144 (10,068) 59,340
-------- -------- --------
Cash flow adjustment for change in accounting period of
DMG and CSI............................................... -- 467 31
-------- -------- --------
Net increase in cash and cash equivalents................... 8,617 8,397 42,244
Cash and cash equivalents, beginning of year................ 2,389 11,006 19,403
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 11,006 $ 19,403 $ 61,647
======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
34
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1998 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS
MAXIMUS, Inc. (the "Company") provides a wide range of program management
and consulting services to federal, state and local government health and human
services agencies. The Company conducts its operations through two groups. The
Government Operations Group administers and manages government health and human
services programs, including welfare-to-work and job readiness, child support
enforcement, managed care enrollment and disability services. The Consulting
Group provides health and human services planning, information technology
consulting, strategic program evaluation, program improvement, communications
planning, and assistance to state and local governments in identifying and
collecting previously unclaimed federal welfare revenues.
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, 1997, 1998 and 1999.
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.
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.
RESTATEMENT OF PRIOR YEARS' FINANCIAL STATEMENTS
The Company's financial statements have been restated to reflect the
combination with David M. Griffith, Ltd. ("DMG") in May 1998 and Control
Software, Inc. ("Control Software") in February 1999 in transactions accounted
for using the pooling of interests method of accounting. See Note 3.
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, generally
long-term contracts under which revenues are based on costs incurred plus a
negotiated fee, a fixed price or various performance-based criteria. Revenues
for cost-plus contracts are recorded as costs are incurred and include a pro
rata amount of the negotiated fee. Revenues on long-term fixed price and
performance-based contracts 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.
35
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Management reviews the financial status of its contracts quarterly and
adjusts 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.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale and are recorded
at fair market value with unrealized gains and losses, net of taxes, reported as
a separate component of shareholders' equity. Realized gains and losses and
declines in market value judged to be other than temporary are included in
investment income. Interest and dividends are included in investment income. For
the year ended September 30, 1999, unrealized losses on marketable securities
were $280. There were no material unrealized gains or losses on marketable
securities at September 30, 1998 and 1997. 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.
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.
Prior to its initial public offering, the Company and its shareholders
elected to be treated as an S corporation under the Internal Revenue Code. Under
the provisions of the tax code, the Company's shareholders included their pro
rata share of the Company's income in their personal income tax returns.
Accordingly, the Company was not subject to federal and most state income taxes
during the periods prior to the initial public offering. The completion of the
Company's initial public offering during June 1997 resulted in the termination
of the Company's S corporation status for income tax purposes. In connection
therewith, the Company recorded a deferred tax charge against income of $2,566
for the cumulative differences between the financial reporting and income tax
basis of certain assets and liabilities at June 12, 1997.
The Company merged with two companies during 1998 and one company during
1999 that had elected to be treated as S corporations. The merger 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.
36
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1998 and 1999.
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.
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 DMG. This merger was
accounted for as a pooling of interests and accordingly, the Company's financial
statements, including earnings per share, have been restated for all periods
presented to include the financial position and results of operations of DMG.
DMG's operations for the year ended December 31, 1997 were combined with the
Company's operations for the fiscal year ended September 30, 1997. This resulted
in inclusion of DMG operating results for the three months ended December 31,
1997 in the Company's operating results for both fiscal 1997 and 1998. DMG's
revenues and net income for the three months ended December 31, 1997 were
$11,450 and $(156), respectively.
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. This
merger was accounted for as a pooling of interests and accordingly, the
Company's financial statements, including earnings per share, have been restated
for all periods presented to include the financial position and results of
operations of Control Software. Control Software's operations for the years
ended December 31, 1997 and 1998 were combined with the Company's operations for
the fiscal years ended September 30, 1997 and 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.
37
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS COMBINATIONS (CONTINUED)
A reconciliation of the Company's revenues and net income, as previously
reported, to the restated results that give effect to the DMG and Control
Software combinations for the fiscal years ended September 30, 1997 and 1998
follow:
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1998
---------- ----------
Revenues as previously reported...................... $127,947 $233,473
DMG revenues......................................... 39,377 --
Control Software revenues............................ 6,031 10,641
-------- --------
Combined revenues.................................... $173,355 $244,114
======== ========
Net income as previously reported.................... $ 8,589 $ 14,454
DMG net income....................................... 745 --
Control Software net income.......................... 196 1,060
-------- --------
Combined net income.................................. $ 9,530 $ 15,514
======== ========
On March 31, 1999, the Company acquired Norman Roberts & Associates, Inc.
for $1,930. In conjunction with the purchase, the Company recorded intangible
assets of $1,880.
On June 1, 1999, the Company acquired Unison Consulting Group, Inc. for
$7,074. In conjunction with the purchase, the Company recorded intangible assets
of $4,979.
On September 30, 1999, the Company acquired Network Design Group, Inc. d/b/a
The Center for Health Dispute Resolution ("CHDR") for $2,070. In conjunction
with the purchase, the Company recorded intangible assets of $771. The purchase
price is subject to an upward adjustment of $1,200 if CHDR secures the renewal
of a certain contract.
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, 1998 and 1999 was $0 and $260.
Unaudited pro forma results of operations information treating the results
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,
------------------------
1998 1999
--------- ---------
Revenue.............................................. $256,005 $329,216
Net income........................................... 16,191 28,405
Earnings per share (diluted)......................... $ 0.88 $ 1.36
All of the companies involved in the business combinations described above
are involved primarily in consulting services for state and local governments.
Control Software also derives revenue from the licensing of software. The merged
companies accounted for as immaterial poolings contributed $16,854 to the
Company's revenues for the year ended September 30, 1998.
38
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EARNINGS PER SHARE
The following table sets forth the components of basic and diluted earnings
per share:
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
Numerator:
Net income..................................... $ 9,530 $15,514 $27,626
Denominator:
Weighted average shares outstanding............ 14,208 17,937 20,537
Effect of dilutive securities:
Employee stock options........................... 385 359 354
------- ------- -------
Denominator for dilutive earnings per share...... 14,593 18,296 20,891
======= ======= =======
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts consist of the following components:
BALANCE SHEET CAPTION
---------------------------------------------
COSTS AND ESTIMATED BILLINGS IN EXCESS OF
EARNINGS IN EXCESS OF COSTS AND ESTIMATED
BILLINGS EARNINGS
--------------------- ---------------------
September 30, 1998:
Costs and estimated earnings............ $193,022 $192,219
Billings................................ 187,098 203,827
-------- --------
$ 5,924 $ 11,608
======== ========
September 30, 1999:
Costs and estimated earnings............ $255,572 $326,729
Billings................................ 239,422 343,671
-------- --------
$ 16,150 $ 16,942
======== ========
Costs and estimated earnings in excess of billings relate primarily to
performance-based contracts which 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 merged into the Company during 1998 and 1999 had
various arrangements for short and long-term borrowings. These credit
arrangements generally were repaid following the related merger and do not
significantly affect the Company's financial statements.
7. LEASES
The Company leases office space under various operating leases, the majority
of which contain clauses permitting cancellation upon certain conditions. The
terms of these leases provide for certain minimum
39
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASES (CONTINUED)
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, 1997, 1998, and 1999 was $5,412, $7,074 and $11,084, respectively.
Minimum future payments under these leases are as follows:
Years ended September 30,
2000........................................................ $10,225
2001........................................................ 6,861
2002........................................................ 5,283
2003........................................................ 3,119
2004........................................................ 1,648
Thereafter.................................................. 66
-------
$27,202
=======
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, 1997, 1998 and 1999,
the Company contributed $806, $1,387 and $2,923 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 1997 and 1998, amounts
charged to operations for the plan were $897 and $394, respectively.
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 1997 and 1998, amounts charged to operations
under these arrangements were $216 and $972, including a one-time income
statement charge of $942 in 1998 as a result of the merger.
9. INCOME TAXES
The Company's provision for income taxes is as follows:
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
Current provision:
Federal......................................... $3,722 $10,676 $18,740
State........................................... 701 1,894 3,307
Deferred tax expense (benefit).................... (319) (2,130) (2,807)
------ ------- -------
$4,104 $10,440 $19,240
====== ======= =======
40
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
------------------------------
1997 1998 1999
-------- -------- --------
Expected federal income tax provision............ $ 4,640 $ 9,074 $16,043
Effect of income taxed directly to S Corporation
shareholders................................... (3,964) (658) (480)
State income taxes............................... 607 1,245 2,343
Effect of termination of S Corporation status.... 2,566 325 1,109
Effect of nondeductible merger costs............. -- 531 82
Other............................................ 255 (77) 143
------- ------- -------
$ 4,104 $10,440 $19,240
======= ======= =======
The significant items comprising the Company's deferred tax assets and
liabilities as of September 30, 1998 and 1999 are as follows:
AS OF
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
Deferred tax assets--current:
Liabilities for costs deductible in future periods....... $ 810 $ 1,779
Billings in excess of costs and estimated earnings....... 4,126 5,844
------ -------
Total deferred tax assets--current:........................ 4,936 7,623
Deferred tax liabilities--current:
Cash versus accrual accounting........................... 2,915 1,247
Costs and estimated earnings in excess of billings....... 2,512 3,076
Other.................................................... 410 303
------ -------
Total deferred tax liabilities--current.................... 5,837 4,626
------ -------
Net deferred tax (liability) asset--current................ $ (901) $ 2,997
====== =======
Deferred tax assets (liabilities)--non-current:
Stock option compensation................................ 1,874 1,905
Cash versus accrual accounting........................... (795) (1,733)
Other.................................................... 355 191
------ -------
Net deferred tax asset--non-current........................ $1,434 $ 363
====== =======
Cash paid for income taxes during the years ended September 30, 1997, 1998,
and 1999 was $274, $16,507 and $20,002, respectively.
41
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
The Company completed an initial public offering (the "IPO") of common stock
during June 1997. Of the 6,037,500 shares of common stock sold in the IPO,
2,360,000 shares were sold by selling shareholders and 3,677,500 were sold by
the Company, generating $53,804 in proceeds to the Company, net of offering
expenses.
SECONDARY PUBLIC OFFERING
The Company completed a second public offering (the "second offering") of
common stock during December 1998. Of the 4,200,000 shares of common stock sold
in the second offering, 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.
42
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
S CORPORATION DISTRIBUTIONS
During fiscal year 1997, the Company made cash distributions to its S
corporation shareholders prior to the IPO totaling $1,212. In connection with
the IPO, the Company made an additional distribution of $20,500 to its S
corporation shareholders and accrued an additional distribution at
September 30, 1997 in the amount of $5,748, such aggregate amount representing
the undistributed earnings of the Company taxed or taxable to shareholders
through the date of the IPO.
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.
REDEEMABLE COMMON STOCK
Prior to the IPO, a shareholders' agreement obligated the Company to
purchase all shares offered for sale by the Company's shareholders at a formula
price based on the book value of the Company. In addition, shareholders were
obligated to sell and the Company was obligated to purchase at the formula price
all of the shares owned by the shareholders upon the shareholder's death,
disability or termination of employment. DMG had agreements with certain of its
shareholders to repurchase its shares under certain circumstances at fair value.
The Company's obligation to purchase common shares from shareholders terminated
upon completion of the IPO. Accordingly, amounts classified previously as
redeemable common stock, including amounts related to DMG, were reclassified
into shareholder's equity.
EMPLOYEE STOCK PURCHASE PLAN
During fiscal 1998, the Company implemented a plan which 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.
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 granted during 1997
include those which were fully vested on issuance and others which vest over
periods from two to four years. The Company's Board of Directors has reserved
3.1 million shares of common stock for issuance under the Company's stock option
plans. At September 30, 1999, 1.3 million shares remained available for grants
under the Company's option plans.
In January 1997, the Company issued options to various employees to purchase
403,975 shares of the Company's common stock at a formula price based on book
value. During 1997, the Company recorded a non-recurring charge against income
of $5,874 for the difference between the IPO price and the formula price for all
options outstanding. The Company recorded a deferred tax benefit relating to the
charge in the amount of $2,055.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 123, "Accounting and Disclosure for
Stock-Based Compensation," which provides for
43
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
a fair value based methodology of accounting for all stock option plans.
Under SFAS 123, 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 a minimal valuation method in 1997 and the Black-Scholes method in 1998
and 1999 with the following assumptions: volatility 42% for 1998 and 56% for
1999; risk free interest rate of 6.5% for 1997, 5.5% for 1998 and 6.5% for 1999;
dividend yield 0%; and an expected life of the option of 4 years. The grant-date
fair value of options granted was $3.58 for 1997, $9.61 for 1998 and $14.45 for
1999.
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 FAS 123 for providing proforma disclosures are not
likely to be representative of the effects on reported net income for future
years. For the years ended September 30, 1997, 1998 and 1999 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,
------------------------------
1997 1998 1999
-------- -------- --------
Net income........................................ $9,530 $15,514 $27,626
FAS 123 compensation expense...................... (972) (780) (1,958)
------ ------- -------
Net income, as adjusted........................... $8,558 $14,734 $25,668
====== ======= =======
Net income per share, as adjusted:
Basic........................................... $ 0.60 $ 0.82 $ 1.25
Diluted......................................... $ 0.59 $ 0.81 $ 1.23
44
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the Company's stock option activity for the years ended
September 30, 1997, 1998 and 1999 is as follows:
WEIGHTED-
AVERAGE EXERCISE
OPTIONS PRICE
--------- ----------------
Activity during fiscal 1997:
Granted............................................ 531,975 $ 5.05
Exercised.......................................... (3,025) 1.46
--------- ------
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
========= ======
The ranges of exercise prices for outstanding options were as follows at
September 30, 1999:
$ 0.01--$ 1.46.............................................. 356,350
$12.31--$16.00.............................................. 175,723
$23.38--$35.19.............................................. 1,286,168
---------
1,818,241
=========
The Company had approximately 691,251 options exercisable at September 30,
1999 at a weighted average exercise price of $12.61 per share. Outstanding
options have a weighted average remaining exercise period of 8.6 years at
September 30, 1999.
11. COMMITMENTS AND CONTINGENCIES
LITIGATION
On February 3, 1997, the Company was named as a third-party defendant by
Network Six, Inc. ("Network Six") in a legal action brought by the State of
Hawaii against Network Six. Network Six alleged that the Company was liable to
Network Six on various grounds. In October 1999, the Company paid Network Six
$50 in full settlement of all claims. The settlement was made without admission
of fault or liability on the part of the Company.
On November 28, 1997, an individual who is 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
45
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Company and certain of its officers and directors had failed to disclose
material information to him relating to the potential value of the shares. He
further alleges 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 and claims damages in excess of $10,000.
The Company believes these claims are without merit and intends to defend the
matter vigorously. Although there is no assurance of a favorable outcome, the
Company does not believe that this action will have a material adverse effect on
the Company's financial condition or results of operations, and has not accrued
for any loss related to this action.
In January 1997, a lawsuit was filed against a number of defendants,
including DMG, by a purchaser of municipal bonds. DMG had prepared two reports
rendering an opinion on the anticipated debt service coverage of the revenue
bonds for the first five years of operation of a sewer project by Superstition
Mountain Community Facilities District No. 1 (the "District"). The District was
unable to meet its debt service obligations and filed bankruptcy. The purchaser
of the revenue bonds, Allstate Insurance Company, has sued a number of
defendants, including DMG, for damages of $32,100 which is the face value of the
revenue bonds, plus interest. The District has also filed a lawsuit against DMG
seeking damages, which suit has been consolidated with the purchaser's actions.
DMG-MAXIMUS believes these claims are without merit and intends to defend
against these claims vigorously. Although there is no assurance of a favorable
outcome, the Company does not believe that this action will have a material
adverse effect on the Company's financial condition or results of operations and
has not accrued for any loss related to these claims.
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.
DCAA AUDITS
A substantial portion of payments to the Company from United States
Government agencies is subject to adjustments upon audit by the Defense Contract
Audit Agency. 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 25 of its executives and other
employees that provide for aggregate base salaries of approximately
$5.8 million per year. The terms of the employment obligations end between 2000
and 2003.
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.
46
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS (CONTINUED)
At September 30, 1998, $1,004 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 $35,802 and $3,738 for the years
ended September 30, 1997 and 1998, respectively. Of these amounts, $31,611 and
$0 for the years ended September 30, 1997 and 1998, 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.
As a result of legislation that eliminated certain Social Security
Administration program benefits, a contract with the United States Government
that contributed substantially all of the revenues of the government operations
segment for 1997 was terminated by the United States Government. This contract
concluded during the second quarter of 1997.
At September 30, 1998 and 1999, $9,706 and $12,640 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 $26,189, $30,934
and $49,131 for the years ended September 30, 1997, 1998 and 1999, respectively.
13. BUSINESS SEGMENTS
The following table provides certain financial information for each business
segment:
1997 1998 1999
-------- -------- --------
Revenues:
Government Operations....................... $ 97,369 $139,263 $177,428
Consulting.................................. 75,986 104,851 142,112
-------- -------- --------
$173,355 $244,114 $319,540
======== ======== ========
Income from operations:
Government Operations....................... $ 6,164 $ 10,642 $ 16,816
Consulting.................................. 6,549 13,489 26,446
-------- -------- --------
$ 12,713 $ 24,131 $ 43,262
======== ======== ========
Identifiable assets:
Government Operations....................... 26,610 42,429 42,152
Consulting.................................. 31,273 46,160 71,243
Corporate................................... 56,001 37,413 109,641
-------- -------- --------
$113,884 $126,002 $223,036
======== ======== ========
Capital expenditures:
Government Operations....................... $ 2 $ -- $ --
Consulting.................................. 884 699 2,415
Corporate................................... 415 461 8,174
-------- -------- --------
$ 1,301 $ 1,160 $ 10,589
======== ======== ========
Depreciation and amortization:
Government Operations....................... $ 204 $ 1,518 $ 779
Consulting.................................. 740 875 1,438
Corporate................................... 180 86 467
-------- -------- --------
$ 1,124 $ 2,479 $ 2,684
======== ======== ========
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Registrant" in Part I hereof and the remainder is incorporated
herein by reference from the discussion responsive thereto under the caption
"PROPOSAL 1: Election of Directors" in the Company's Proxy Statement relating to
its Annual Meeting of Shareholders scheduled for February 23, 2000 (the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Security Ownership of
Management and Five Percent Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated herein by reference from the
discussion responsive thereto under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The consolidated financial statements are listed under Item 8 of this
report.
2. FINANCIAL STATEMENT SCHEDULES
None.
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the fourth
quarter of fiscal 1999.
(c) EXHIBITS
The Exhibits filed as part of this Form 10-K are listed on the Exhibit Index
immediately preceding such Exhibits, which Exhibit Index is incorporated
herein by reference.
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized in the
city of McLean, Commonwealth of Virginia, on the 21th day of December 1999.
MAXIMUS, INC.
By: /s/ DAVID V. MASTRAN
----------------------------------------------
David V. Mastran
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Each undersigned person hereby constitutes and appoints David V. Mastran,
Raymond B. Ruddy, F. Arthur Nerret, David Francis and Lynnette C. Fallon, and
each of them singly, with full power of substitution and full power to act
without the other, as his or her true and lawful attorney-in-fact and agent,
with full power to sign for use, in his or her name and in the capacity
indicated below, any and all amendments to this Annual Report on Form 10-K of
MAXIMUS, Inc. for the fiscal year ended September 30, 1999, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming that
each said attorney-in-fact may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID V. MASTRAN President, Chief Executive December 21, 1999
------------------------------------------- Officer and Director
David V. Mastran (Principal Executive
Officer)
/s/ RAYMOND B. RUDDY Chairman of the Board of December 21, 1999
------------------------------------------- Directors
Raymond B. Ruddy
/s/ F. ARTHUR NERRET Chief Financial Officer December 21, 1999
------------------------------------------- (Principal Financial and
F. Arthur Nerret Accounting Officer)
/s/ RUSSELL A. BELIVEAU Director December 21, 1999
-------------------------------------------
Russell A. Beliveau
/s/ JESSE BROWN Director December 21, 1999
-------------------------------------------
Jesse Brown
/s/ MARGARET CARRERA Vice-Chairwoman of the December 21, 1999
------------------------------------------- Board and Director
Margaret Carrera
/s/ GEORGE C. CASEY Director December 21, 1999
-------------------------------------------
George C. Casey
49
SIGNATURE TITLE DATE
--------- ----- ----
/s/ LOUIS E. CHAPPUIE Director December 21, 1999
-------------------------------------------
Louis E. Chappuie
/s/ LYNN P. DAVENPORT Director December 21, 1999
-------------------------------------------
Lynn P. Davenport
/s/ STEPHEN GOLDSMITH Director December 21, 1999
-------------------------------------------
Stephen Goldsmith
/s/ THOMAS A. GRISSEN Director December 21, 1999
-------------------------------------------
Thomas A. Grissen
/s/ ROBERT J. MUZZIO Director December 21, 1999
-------------------------------------------
Robert J. Muzzio
/s/ PETER POND Director December 21, 1999
-------------------------------------------
Peter Pond
50
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT
- --------------------- -------
3.1 Amended and Restated Articles of Incorporation of Company.
(1)
3.2 Amended and Restated By-laws of Company. (1)
4.1 Specimen Common Stock Certificate. (1)
10.1 1997 Equity Incentive Plan, as amended. Filed herewith.*
10.2 1997 Director Stock Option Plan, as amended. (2)*
10.3 1997 Employee Stock Purchase Plan. (3)*
10.4 Amendment No. 1 to 1997 Employee Stock Purchase Plan. (4)*
10.5 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and David
V. Mastran. (3)*
10.6 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and Raymond
B. Ruddy. (3)*
10.7 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and Russell
A. Beliveau. (3)*
10.8 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and Susan
D. Pepin. (3)*
10.9 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and Ilene
R. Baylinson. (3)*
10.10 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and Lynn P.
Davenport. (3)*
10.11 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and Margaret Carrera.
(5)*
10.12 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and George C. Casey.
(5)*
10.13 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and Louis E. Chappuie.
(5)*
10.14 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and Gary L. Glickman.
(5)*
10.15 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and Thomas A. Grissen.
(6)*
10.16 Form of Indemnification Agreement by and between the Company
and each of the directors of the Company. (3)
10.17 Letter Agreement dated September 30, 1997 between the
Company and Crestar Bank with respect to a $10 million line
of credit. (2)
10.18 Commercial Note, dated September 30, 1997 in the amount of
$10 million, issued by the Company to Crestar Bank. (2)
51
EXHIBIT
NUMBER EXHIBIT
- --------------------- -------
10.19 California Options Project Contract, dated October 1, 1996,
by and between the Company and the Department of Health
Services of the State of California. (2)
10.20 Agreement and Plan of Merger by and between the Company and
David M. Griffith and Associates, Ltd. (7)
10.21 Agreement and Plan of Merger by and between the Company,
Control Acquisition Corp., Control Software, Inc., James M.
Paulits, John H. Hines, III, R. David Sadoo and John M.
Ryan. (8)
21.1 Subsidiaries of the Company. Filed herewith.
23.1 Consent of Ernst & Young LLP, independent auditors. Filed
herewith.
23.2 Consent of Grant Thornton LLP, independent auditors. Filed
herewith.
24.1 Power of Attorney, contained on signature page hereto.
27.1 Financial Data Schedule. Filed herewith. EDGAR only.
99.1 Important Factors Regarding Forward Looking Statements.
Filed herewith.
- ------------------------
* Denote management contracts and compensation plans.
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (File No. 1-12997) on August 14, 1997 and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended September 30, 1997 (File No. 1-12997) on December 22, 1997 and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-1
(File No. 333-21611) declared effective on June 12, 1997 and incorporated
herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (File No. 1-12997) on August 13, 1998 and
incorporated herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended September 30, 1998 (File No. 1-12997) on November 23, 1998 and
incorporated herein by reference.
(6) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 (File No. 1-12997) on May 17, 1999 and
incorporated herein by reference.
(7) Filed as an exhibit to the Company's Registration Statement on Form S-4
(File No. 333-49305) filed with the Securities and Exchange Commission on
April 3, 1998 and incorporated herein by reference.
(8) Filed as an exhibit to the Company's Current Report on Form 8-K (File
No. 1-12997) filed with the Securities and Exchange Commission on March 4,
1999 and incorporated herein by reference.
52