MAXIMUS INC - 10-K Annual Report

PART I

ITEM 1. Business.

Overview

We are a leading provider of program management, consulting services and systems solutions primarily to state and local government agencies throughout the United States. Since our inception in 1975, we have been at the forefront of innovation in meeting our mission of "Helping Government Serve the People^®." We use our expertise, experience and advanced information technology to make government operations more efficient and cost-effective while improving the quality of services provided to program beneficiaries. We have had contracts with government agencies in all 50 states, 49 of the 50 largest cities and 27 of the 30 largest counties. We have been profitable every year since we were founded. For the fiscal year ended September 30, 2001, we had revenues of $487.3 million and income, before the cumulative effect of an accounting change, of $40.1 million.

We conduct our operations through three groups: our Government Operations Group, our Consulting Group and our Systems Group. Our Government Operations Group administers and manages state and local government programs on a fully–outsourced basis. Examples of these programs include welfare-to-work and job readiness, child care, child support enforcement, managed care enrollment and disability services. Our Consulting Group provides specialized services such as assisting state and local agencies in maximizing federal funding for their programs, program planning and quality assurance services to state and local government agencies, cost allocation services, and other general management consulting services. Our Systems Group provides state and local agencies with systems design and implementation to improve the efficiency and cost-effectiveness of their program administration. We offer our own suite of proprietary software products in addition to customized versions of popular applications such as PeopleSoft^®. See the notes to our consolidated financial statements for financial information on our business segments.

We believe that we are well-positioned to benefit from the continued increase in demand for new program management, consulting services and systems solutions that has arisen in an environment characterized by changing regulation and evolving technology. We believe that fiscal pressures will compel state and local governments to continue to rationalize program operations and upgrade existing technology to operate more cost-efficient and productive programs. To achieve these efficiencies, we believe that many government agencies will turn to outside experts, including us, for help.

Market Opportunities

We believe that providing program management, consulting services and systems solutions to government agencies continues to represent significant market opportunities. The federal, state and local government agencies in the United States to which we market our services spend more than $250 billion annually on health and human services programs including Medicaid, Children's Health Insurance, Food Stamps, Child Support Enforcement, Supplemental Security Income, Temporary Assistance to Needy Families, and various other programs. Based on currently available data published by the federal government, we estimate that states spend over $28 billion annually to administer these programs, of which we estimate only a small portion was outsourced to private service providers, including us. We believe that state and local government agencies will increasingly rely on private service providers to administer their programs and will also increasingly engage consultants as they seek to reduce costs and improve the delivery of services. The following table describes the market for our services:

State–Operated Program	Estimated Number of Beneficiaries Served	Estimated Annual Administrative Expenditures
Medicaid	41.4 million	$	10.8 billion
Food Stamps	17.2 million	3.7 billion
Child Support Enforcement	16.4 million	4.0 billion
Supplemental Social Security Income	6.3 million	2.5 billion
Temporary Assistance to Needy Families	7.2 million	2.3 billion
Children's Health Insurance	3.3 million	0.6 billion
Certain Other Social Services	16.3 million	4.6 billion
Total	108.1 million	$	28.5 billion

Legislative Initiatives

During the last several years, there has been a significant increase in legislation and initiatives to reform federal, state and local health and human services programs, including the Welfare Reform Act of 1996, the Balanced Budget Act of 1997, Government Accounting Standards Board Statement No. 34 and the Health Insurance Portability and Accountability Act of 1996.

Welfare Reform Act of 1996. The Welfare Reform Act was one of the most significant of the legislative reforms and restructured the benefits available to welfare recipients, eliminated unconditional welfare entitlement and, most importantly, restructured the funding relationships between federal and state governments. Under the Welfare Reform Act, states receive block grant funding from the federal government and may no longer seek reimbursement in the form of matching federal government funds for expenditures in excess of block grants. Accordingly, states bear the financial risk for the operation of their welfare programs.

All states and many local governments are taking action to respond to welfare reform. Some of these actions include enlisting the advice of specialized management consultants on ways to more efficiently and effectively administer their health and human services programs and in many cases outsource the management of such programs completely. As a result, we have been awarded performance–based contracts to manage health care enrollment services contracts for government agencies in states which include California, New York, Texas, Massachusetts, Michigan, New Jersey, Iowa, Kansas, Colorado and Vermont. We have also been retained by numerous states and municipalities to provide welfare reform related consulting services.

Balanced Budget Act of 1997. The Balanced Budget Act established, among other programs, the State Children's Health Insurance Program. This program provides federal matching funds to enable states to expand health care to targeted uninsured, low-income children over a five-year period. Under the Balanced Budget Act, the federal government made $39.7 billion available over ten years to states with federally–approved plans to expand state Medicaid programs, initiate new insurance programs or combine programs. In June 1998, the federal government also mandated sweeping protections to Medicare beneficiaries, including increased access to health plans by persons with pre-existing illnesses, added protections for women and non-English speaking beneficiaries and increased availability of specialists. We have capitalized upon these new opportunities by assisting states in planning, implementing and maintaining the increased enrollment and outreach required by these federal initiatives.

Governmental Accounting Compliance. Another emerging market created by changes in legislation or government policy is helping states and municipal governments comply with Governmental Accounting Standards Board Statement No. 34, adopted in 1999. GASB 34 requires government entities to properly value and account for their capital assets and infrastructure. Compliance with these new rules is being phased in over a five-year period beginning in 2001. Our Consulting Group is well-positioned to assist states and municipal governments in complying with GASB 34 as it has the requisite experience to perform all the services necessary to ensure compliance. To date, we have entered into 120 contracts to perform these services valued at approximately $4.5 million.

Health Insurance Portability and Accountability Act of 1996. The Health Insurance Portability and Accountability Act requires health care programs, including Medicaid, Medicare and most government–funded health care programs, to comply with new regulations governing billing and payment policies, exchange of eligibility and enrollment information, referral and authorization processes for medical services and ensuring patient privacy. Accordingly, each state will need to evaluate and update its Medicaid Management Information Systems, a process with which we are well-positioned to provide assistance.

Market Outlook

We believe that the legislative changes described above, when combined with political pressures and the financial constraints that inevitably result, will accelerate the rate at which state and local government agencies seek new solutions to reduce costs and improve the effectiveness of health and human services programs. We believe that government agencies will continue to turn to companies like ours to achieve these ends. We believe that we administer government programs more effectively than government agencies themselves due to our ability to:

• attract and compensate experienced, high-level management personnel;

• rapidly procure and use advanced technology;

• vary the number of personnel on a project to match fluctuating work loads;

• increase productivity by providing employees with financial incentives and performance awards and by terminating non-productive employees;

• provide employees with ongoing training and career development assistance; and

• maintain a modern and efficient work environment that is more conducive to employee productivity.

We believe that state and local governments will continue to seek our services despite the effect of economic cycles on government budgets. Historically, in times of both budget surpluses and deficits, state and local governments have relied on the private sector to deliver services to their citizens. In recent years, as governments at all levels have experienced budget surpluses, new programs, including the Children's Health Insurance Program, have been initiated to assist even more sectors of society, increasing the population of beneficiaries of our services. In more austere times, the population enrolled in existing government health and welfare programs expands, requiring governments to spend more to administer these programs, while facing increased pressure to do so cost-effectively. Because our contracts are typically volume based, our business has continued to expand, even in depressed economic cycles.

Competitive Advantages

We believe that we have been a pioneer in offering state and local government agencies a compelling private sector alternative to internal administration of government programs. The following competitive advantages position us to capitalize on the significant market opportunities presented by changes in the ways government provides services.

Single Market Focus. We believe that we are the largest company dedicated to providing program management, consulting services and systems solutions primarily to state and local government agencies. We have accumulated a detailed knowledge base and understanding of the regulation and operation of government programs that allows us to apply proven methodologies, skills and solutions to new projects in a cost-effective and timely fashion. We believe that the depth and breadth of our government program expertise and related areas of government program management differentiate us from both small firms and non-profit organizations with limited resources and skill sets as well as from large consulting firms that serve multiple industries but lack the focus necessary to understand the complex nature of serving government agencies.

Proven Track Record. Since 1975, we have successfully and profitably applied our private sector approach to assisting state and local government agencies. We have successfully completed hundreds of large–scale program management and consulting projects for state and local government agencies serving millions of beneficiaries in nearly every state and we currently have more than 4,000 state and local government agency clients. We believe that the successful execution of these projects has enhanced our reputation for providing efficient and cost-effective services to government agencies while improving the quality of services provided to program beneficiaries. Our reputation has contributed significantly to our ability to compete successfully for new contracts.

Ability to Respond to RFPs. State and local government agencies award contracts to third party providers through a lengthy and complicated bidding and proposal process. We have significant experience in assembling the large amounts of information required to submit detailed proposals in response to RFPs in a timely manner. In addition, the expertise and experience of our managers and employees enables us to accurately estimate project costs and productivity levels. As a result, our proposals allow us to meet RFP requirements and to earn a profit. Coupled with reluctance on the part of government agencies to award contracts to unproven companies, we believe that our ability to respond to RFPs has contributed significantly to our success.

Proprietary Program Management Solution. We have developed a proprietary automated case management software program called the MAXSTAR^® Human Services Application Builder. The MAXSTAR program tracks program participants, interfaces with government databases and monitors cases of program participants. MAXSTAR reduces our project implementation time and cost because it is easily scalable and customizable and facilitates our project management capability by enabling us to organize and manage large amounts of information necessary to operate programs effectively. Because government agencies are often required to manage vast amounts of data and large numbers of cases without access to advanced technology and experienced professionals, we believe that MAXSTAR, together with our experienced information technology professionals, is a key element of our success.

Wide Range of Services. Many of our clients require their vendors to provide a broad array of service offerings, which many of our competitors cannot provide. Engagements often require creative solutions that must be drawn from diverse areas of expertise. Our experience in a wide range of services enables us to better pursue new business opportunities and positions us to be a leading e-government consulting and implementation force, as well as a single–source provider of program management, consulting services and systems solutions to state and local government agencies. Our broad client base facilitates cross–selling opportunities among our Government Operations, Consulting and Systems Groups. Additionally, our acquisitions have provided us with expanded service capabilities and an additional base of established clients.

Market Leading Consulting Capabilities. We believe we have the largest management consulting practice dedicated to serving state and local governments in the United States. We believe that our Consulting Group provides us with significant competitive advantages including:

• a significant pool of experienced consultants with an established knowledge base and valuable relationships with members of the executive and legislative branches of state and local governments;

• methodologies that can be easily replicated and customized; and

• a more predictable source of revenues due to recurring revenue streams from our renewable contracts.

In addition, we offer a broad suite of services that are increasingly sought by state and local governments seeking a single–source provider of program management and consulting services including cost accounting, human resources consulting, executive recruiting, and planning, evaluation and implementation for large government systems.

Experienced Team of Professionals. We have assembled a management team of former government executives, state agency officials, information technology specialists and other professionals, many of whom have more than seven years of experience in the public services industry. Our employees understand the problems and challenges faced in the marketing, assessment and delivery of government services. Further, as state and local government administrators are subject to changing legislative and political mandates, we have developed strong relationships with experienced political consultants who inform and advise us with respect to strategic marketing opportunities and legislative initiatives.

Growth Strategy

Our goal is to be the leading provider of program management, consulting services and systems solutions to state and local government agencies. Our strategy to achieve this goal includes the following:

Aggressively Pursue New Business Opportunities. We believe that, throughout our 26-year history, we have been a leader in developing innovative solutions to meet the evolving needs of state and local health and human services agencies. We plan to expand our revenue base by:

• providing cost reduction efficiencies and revenue maximization opportunities to financially stressed governmental entities;

• marketing new and innovative solutions to our extensive client base;

• expanding our client base by marketing our experience, established methodologies and systems;

• investing in the early identification of government bid opportunities, including retaining outside marketing consultants, hiring dedicated in-house personnel and using available RFP tracking databases;

• maintaining our existing client base in outsourcing while allowing new work to provide incremental growth; and

• submitting competitive bids that leverage our proven solutions from past projects.

Continue to Develop Complementary Services. We intend to continue broadening our range of services in order to respond to the evolving needs of our clients and to provide additional cross–selling opportunities. We intend to continue to internally develop innovative consulting practices, technologies, and methodologies that are required by government entities in order to effectively deliver public services. For example, we have developed a system that interfaces with insurance company databases to intercept payments to claimants who are delinquent on child support obligations. We have also developed a consulting practice focused on the requirements of the Health Insurance Portability and Accountability Act. This practice provides high-level information systems services designed to bring state Medicaid programs into compliance under the Act.

Recruit Highly Skilled Professionals. We continually strive to recruit top management and information technology professionals with the experience, skills and innovation necessary to design and implement solutions to the complex problems faced by resource–constrained government program agencies. We also seek to attract middle–level consultants with a proven track record in the government services field and a network of political contacts to leverage our existing management infrastructure, client relationships and areas of expertise. We believe we can continue to attract and retain experienced government personnel by leveraging our reputation as a premier government services consultant and our single market focus.

Pursue Strategic Acquisitions. While most of our revenue growth has been internally generated, we intend to continue to selectively identify and pursue attractive acquisition opportunities, including pursuing acquisitions that may be larger than those we have made in the past. Acquisitions can provide us with a rapid, cost-effective method to broaden our services, increase the number of our professional consultants, expand our client base, cross-sell additional services, enhance our technical capabilities, establish or expand our presence geographically and obtain additional skill sets.

Government Operations Group

Our Government Operations Group, which generated approximately 56% of our total revenues in our 2001 fiscal year, specializes in the administration and management of government health and human services programs.

Health Management Services Division. We provide a variety of project management services for Medicaid programs with a particular emphasis on large–scale managed care enrollment projects. In these projects, we provide:

• recipient outreach, education and enrollment services;

• an automated information system customized for the particular state;

• data collection and reporting;

• design and development services for program materials; and

• health plan encounter data analysis and reporting.

We currently provide managed care enrollment contract services to more Medicaid recipients than any other public or private sector entity in the country, operating projects for the states of California, New York, Texas, Michigan, Montana, Massachusetts, New Jersey, Colorado and Vermont. We also administer programs for uninsured and underinsured children as part of the Children's Health Insurance Program in various states, including Michigan, Massachusetts, New Jersey, Kansas, and Iowa. We operate the nation's largest system for the resolution of disputes among health plans, subscribers and providers through independent external review. We are the sole national contractor to the Federal Centers for Medicare and Medicaid Services (formerly known as the Health Care Financing Administration) for external appeals in the Medicare Managed Care Program and have rapidly expanded our offerings into state government, currently providing external review services to 20 states. We also operate a Center for Health Literacy and Communication Technologies that concentrates on producing reader-friendly information for low literate populations.

Child Support Division. The Division is organized vertically into three lines of business in support of local and state Child Support Programs: operating offices that provide full and specialized Child Support services; consulting on various programmatic, operational and fiscal issues; and providing systems consultation and operating services. We believe that we have one of the largest Child Support Enforcement staffs in the private sector with over 1,000 professionals. We have been performing some of these services since 1976, which we believe is longer than any other private sector firm in the United States. We are currently engaged in the management of Child Support Enforcement programs in ten states, providing full child support services and specialized services for over one million cases.

Workforce Services Division. We manage welfare-to-work and Workforce Investment Act One-Stop programs by providing a wide range of services, including emergency assistance, job referral and placement, transition services such as child care and transportation, community work training services, job readiness preparation, case management services, retention services, supportive services and selected educational and training services. Our typical welfare-to-work contract involves an engagement period of three to five years. During the 2001 fiscal year, we placed 19,200 program participants into jobs, thereby improving the lives of over 60,000 individuals. We have issued over $200 million in subsidized child care payments to child care providers in fiscal 2001. Additionally, we have two contracts that represent the significant privatization of government functions under which we both administer the program and make applicant eligibility determinations.

Federal Services Division. We provide a host of large–scale, nationwide management services geared toward emerging market areas including disability services, vocational rehabilitation, youth and elderly services, substance abuse/mental health services and justice administration support services. In 1995, we became the first company to operate a national case management and monitoring program for disability beneficiaries when we contracted with the Social Security Administration (SSA) to provide services to beneficiaries with drug or alcohol disabilities. In 1999, we were awarded the first SSA contract to provide employability planning and support services to disabled youth in order to assist them in entering the workforce. In September 2000, SSA awarded us a five-year nationwide contract to assist disabled adult Social Security Income (SSI) and Social Security Disability Insurance (SSDI) beneficiaries leave the disability rolls and become self-sufficient. Under this contract, we serve as the Program Manager for the Ticket to Work Program, providing vocational rehabilitation and employment services to individuals with disabilities. Also in fiscal year 2000, the Commonwealth of Massachusetts awarded us a contract to enroll in managed care services senior citizens who receive Medicare and Medicaid benefits. Under this first of its kind federal/state partnership between the Federal Centers for Medicare and Medicaid Services and the Commonwealth of Massachusetts, we are responsible for the development of the program protocol and the operation of the pilot program.

Consulting Group

Our Consulting Group, which generated approximately 30% of our total revenues in our 2001 fiscal year, provides program planning and quality assurance services to state and local government agencies, in addition to general management consulting services and specialized services such as assisting state and local agencies in maximizing federal funding for their programs.

Management Services Division. Our Management Services Division provides a broad array of consulting services to state and local governments. These services include accounting, activity–based costing, cost of service and user fee studies, executive recruitment, airport expansion financial feasibility studies and retail planning and management, capital asset management, public works, fleet management, and utilities management. Through this division, we provided consulting services to over 4,000 clients in fiscal year 2001, many of which have been clients for 20 years or more. We believe that this extensive client base creates opportunities for us to successfully cross–market our services.

Revenue Services Division. Our Revenue Services Division seeks out additional federal funding and provides benefits program planning and implementation services for state and local government agencies. Our revenue maximization projects are generally carried out on a contingency fee basis determined as a percentage of funds recovered from the federal government. Our revenue maximization projects have resulted in the recovery of more than $1.1 billion of federal funds on behalf of agencies in 24 states. We have also provided welfare planning and implementation projects and have been engaged by the Commonwealth of Pennsylvania to provide detailed analysis and assistance to ensure that the state child welfare and juvenile justice claims programs comply with applicable federal requirements. We also assist several states in facilitating claims for additional services through the Temporary Assistance to Needy Families program.

Human Services Technology Division. Our Human Services Technology Division provides strategic information management, procurement and contracting, systems quality assurance and systems implementation services to the state health and human service agencies. Our experienced team of skilled project managers and information technology professionals has assisted clients in the planning, design, procurement and implementation of information systems in multiple projects across numerous states. We also supervise the work performed by contractors who sell these systems. The potential market for the division's services has continued to expand in recent years. Given our successful track record, core competencies and national market presence, we believe that we are well positioned to take advantage of the increased nationwide emphasis by state governments on welfare eligibility systems, Medicaid Management Information Systems, child welfare services and child support enforcement services. Additionally, we believe that synergies between our Government Operations Group, Consulting Group and Systems Group uniquely position us to take advantage of new market opportunities in health and human services program areas.

Infrastructure Technologies Division. Our Infrastructure Technologies Division provides management consulting services that focus on assisting large public sector organizations in solving complex problems related to automation of financial services. This division has engagements in the legislative, executive and judicial branches. We also have extensive knowledge of the fiscal structure of states through our experience with state auditors, comptrollers and treasurers as well as a significant understanding of state government through close contact with many state agencies. As part of our consulting engagement, we provide a variety of information technology services, including project planning and management, quality assurance monitoring and assessment for child welfare, healthcare and financial management systems, strategic planning, and advanced technologies.

Systems Group

Our Systems Group, which generated approximately 14% of our total revenues in our 2001 fiscal year provides state and local agencies with software solutions and systems design and implementation to improve the efficiency and cost-effectiveness of their program administration.

ERP Solutions Division. The ERP Solutions Division consultants work almost exclusively with government and educational entities to implement PeopleSoft^® and other ERP Software Solutions. Our goal is to deliver cost-efficient technology–based business solutions, including customer information systems/utility billing, financial systems, human resources management systems, procurement systems, and student administration systems. ERP Solutions is a PeopleSoft consulting alliance partner and one of the only certified PeopleSoft Application Systems Providers.

Asset Solutions Division. The Asset Solutions Division offers a suite of internet-based asset management solutions that manage and maintain physical assets, including fleet, fuel, facility, space and fixed assets. Asset Solutions provides software solutions to over 300 customers including government agencies, public utilities, mass transits, K-12 education systems and universities. All Asset Solutions systems integrate with major ERP solutions and promote accountability and cost management. Recent achievements include new contracts with the State of New Jersey, the State of Michigan, the Immigration and Naturalization Service and the University of Massachusetts.

Justice Solutions Division. The Justice Solutions Division implements and supports software programs designed to increase the efficiency of state court systems. Our products include case management, docketing, scheduling and report generating software used in all stages of the judicial process. We market and sell a jury management software program that creates jury lists, generates notices and monitors attendance and payments. We also offer a records management software solution to automate record keeping functions and county recorders' offices. We currently support over 5,000 users at over 150 sites in Ohio, Florida, Michigan, Arkansas, Indiana, Massachusetts, California and New York.

The Justice Solutions Division also develops and implements information technology systems solutions for state criminal justice systems. We work with law enforcement agencies, courts and corrections agencies to develop systems that integrate and facilitate access to criminal justice information and records. We are currently responsible for the management of the Connecticut offender–based tracking system that tracks offender location, classification and status information.

Public Systems Division. The Public Systems Division provides systems development, integration and implementation services to public–sector health and human services agencies. This division develops modern, web-based solutions for government agencies providing public services that enable the use of the Internet to lower the cost of maintaining and supporting large application systems. The Division is currently offering these services through a series of projects in Utah for Medicaid Managed Care and in Delaware to a variety of agencies providing social services. We are also involved in the development of systems to support other divisions involved in the delivery of program operations services.

Intelligent Technologies Division. Our Intelligent Technologies Division provides health, transportation, education, banking and human services clients with expert assistance in developing, planning and implementing smart card technology, biometric recognition systems, and e-government consulting services and related technologies. Responding to pressures to provide services more efficiently, public–sector entities are increasingly moving from paper–based to electronics–based systems. In addition to cost efficiencies, e-government technologies provide more accurate record keeping and offer greater security against fraud and theft. Recognizing the potential efficiencies of smart card technology, in fiscal 2000, the United States General Services Administration awarded a ten-year contract to five companies, including us, to implement this technology in federal government agencies.

The division has taken a leadership position in the development of technology solutions to assist federal, state and local governments enhance their physical and logistical security systems in response to recent events. We recently announced a new technology product in this area, FlySecure^®, which uses biometric technologies to improve airport security by ensuring that passengers and airport employees are accounted for and tracked through every part of an airport. This division also assists health, education and banking clients in planning, implementing and evaluating electronic funds transfer, electronic benefits transfer and electronic payment systems. These systems allow recipients to transfer benefits from government accounts to product or service vendors.

Backlog

Backlog represents an estimate of the remaining future revenues from existing signed contracts and revenues from contracts that have been awarded but not yet signed. Our backlog estimate includes revenues expected under the current terms of executed contracts, revenues from contracts in which the scope and duration of the services required are not definite but estimable and does not assume any contract renewals or extensions.

Changes in the backlog calculation result from additions for future revenues from the execution of new contracts or extension or renewal of existing contracts, reductions from fulfilling contracts, reductions from the early termination of contracts, and adjustments to estimates of previously included contracts.

Estimates of future revenues from awarded or signed contracts are necessarily inexact and the receipt and timing of these revenues are subject to various contingencies, many of which are outside of our control. We believe that period-to-period backlog comparisons are difficult and do not necessarily accurately reflect future revenues we may receive. The actual timing of revenue receipts, if any, on projects included in backlog could change because, among other reasons, the scheduling of a project could be postponed, an awarded but unsigned contract could be retracted and not executed, a signed contract could be modified or canceled, or initial estimates regarding a contract's revenues could prove to be wrong.

	As of September 30, 2001
	Signed		Unsigned		Total
			(In millions)
Government Operations Group	$	195.2	$	158.3	$

11419 Sunset Hills Road, Reston, Virginia 20190

Common Stock, no par value

New York Stock Exchange