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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
COMMISSION FILE NUMBER: 1-12997
MAXIMUS, INC.
(Exact name of Registrant as specified in its Charter)
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VIRGINIA
(State or other jurisdiction of incorporation or organization)
54-1000588
(I.R.S. Employer Identification Number)
1356 BEVERLY ROAD, MCLEAN, VIRGINIA 22101
(Address of principal executive offices including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 734-4200
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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 November 19, 1998 was $205,437,792 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
$542,207,673). There were 18,225,468 shares of the Registrant's Common Stock
outstanding as of November 19, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders to be held on February 23, 1999, 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, 1998, are
incorporated by reference into Part III of this Form 10-K.
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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 believes it 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 and disability services. The Consulting Group provides planning and
management, information technology consulting, strategic program evaluation,
program improvement, financial management, revenue maximization, fleet
management and other public sector-related consulting services to all government
agencies. In fiscal 1998, the Company significantly expanded its Consulting
Group by combining with four consulting firms, and it now estimates that it is
the largest provider of general consulting 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 $21.0 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:
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
NUMBER OF ANNUAL
BENEFICIARIES ADMINISTRATIVE
STATE OPERATED PROGRAM SERVED EXPENDITURES
<S> <C> <C>
Medicaid................................................... 36.1 million $ 6.7 billion
Food Stamps................................................ 26.9 million 3.8 billion
Temporary Assistance to Needy Families..................... 12.6 million 3.3 billion
Child Support Enforcement.................................. 11.5 million 3.1 billion
Supplemental Security Income............................... 6.6 million 2.0 billion
General Assistance/Social Services/Other................... 10.0 million 2.1 billion
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103.7 million $ 21.0 billion
</TABLE>
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 mechanisms that exist 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.
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A number of state governments are taking action to respond to changes being
initiated as a result of 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, and California. MAXIMUS has also been retained by numerous
states and municipalities to provide 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 the next
five years, $20.3 billion will be made 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.
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 reduce costs and improve the
effectiveness of health and human services programs. 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 its
citizens. In recent years, as governments at all levels have experienced budget
surpluses, new programs have been initiated to assist even more sectors of
society (such as the Children's Health Insurance Program), increasing the
population of beneficiaries of the Company's 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, 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 100 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 2,800
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 MAX-
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IMUS 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 broad range 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 1998, the Company significantly
expanded its Consulting group by acquiring four consulting companies: Spectrum
Consulting Group, Inc. and Spectrum Consulting Services, Inc. (collectively,
"SPECTRUM"), David M. Griffith & Associates, Ltd. ("DMG"), Carrera Consulting
Group ("CARRERA") and Phoenix Planning & Evaluation, Ltd. ("PHOENIX"). These
combinations increased the number of the Company's professional consultants from
approximately 125 to over 600 and the Company believes it has the largest
management consulting practice dedicated to serving state and local government
in the U.S. 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 Consulting
Group; (ii) a significant source 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; Year 2000 planing and 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 500 program management and consulting services projects
for state and local health and human services agencies serving millions of
beneficiaries in nearly every state. The Company believes that the successful
execution of these projects has earned the 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 combinations with Spectrum, DMG, Carrera
and Phoenix provide it with extended 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
expertise in a wide range of services enables it to better pursue new business
opportunities and to offer itself 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
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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 have 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 23-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.
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
combinations with Spectrum, DMG, Carrera and Phoenix have increased the
Company's client base by over 2,000 and added 500 new consultants.
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.
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SERVICES
The Company's services are designed to make the operations of government
health and human services programs more efficient and cost effective while
improving the quality of the services that such government agencies provide to
program beneficiaries. The Company organizes its operations into two groups: (i)
the Government Operations Group, specializing in the management of government
health and human services operations; and (ii) the Consulting Group, which
offers consulting services to every state, county and local government agency,
including health and human services, law enforcement, parks and recreation,
taxation, housing, motor vehicles, labor, education and legislatures.
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 500 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 several states providing full child
support services and specialized services for over 600,000 cases. For example,
in June 1998, the Company was awarded a five-year, $29 million, full-service CSE
program management follow-on contract in Nashville, Tennessee.
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 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 Georgia. In recent
months, the Company has begun to administer 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.
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
250,000 welfare recipients in numerous states, and has achieved an average
employment placement rate in excess of 80%. For example, the Company currently
manages a welfare reform program in Milwaukee County, Wisconsin under a
three-year, $24 million contract. In 1998, the Company was awarded a contract to
provide employment services in San Diego, California serving 13,000 participants
and valued at more than $6 million annually. Additionally, the Company has
recently been awarded performance-based, welfare-to-work contracts in Texas,
Illinois, Delaware, Virginia, Maryland and Pennsylvania totaling over $10
million. The Company provides statewide child care services in Connecticut and
was also recently awarded a contract to provide child care services statewide in
Hawaii. As an outgrowth of the Company's welfare reform services, the Company
has developed MAXSTAFF, an independent employment agency that leverages the
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Company's referral and placement infrastructures by helping employers find
qualified employees or temporary staff from the large pool of human resources
the Company manages.
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, the
Company 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
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 eight
divisions: the Information Technology Solutions Division, the Systems Planning
and Integration Division, the International Division, the Human Services
Division, Phoenix Consulting Group, the Spectrum Consulting Division, the
Carrera Consulting Group and DMG-MAXIMUS.
Information Technology Division. The Company provides computer systems
management and business process re-engineering 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 services to agencies
administering criminal justice programs. In November 1997, 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. The Company also provides
re-engineering services to government authorities such as the County of Los
Angeles. The Company is assisting the County (Board of Supervisors, Auditor-
Controller, Office of the Assessor, Registrar-Recorder/County Clerk, and the
Treasurer and Tax Collector) in the development of the County's Property Tax
System Business Process Re-engineering Project. In addition, the Company
provides assistance in assessing, evaluating, testing and certifying government
systems for Year 2000 compliance. The Company is currently providing Year 2000
project management and quality services to the Department of Information
Technology for the State of Connecticut.
Systems Planning Division. The Company believes that its Systems Planning
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 division also supports the card technologies practice of the
Company's Phoenix Consulting Division focusing on its application to electronic
benefits transfer and driver's license applications. 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
are 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
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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, family court 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 recently enacted changes to managed care and
the Child Health Insurance Program.
International Division. The Company provides health care consulting and
systems services to assist foreign government agencies and health care
organizations responsible for the delivery of treatment services to large
populations. 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. The Company's health care systems software, developed in
ORACLE(R), is a platform-independent and multi-language software package. The
Company has developed an Arabic language version of this software for use in the
Middle East. Currently, the division is engaged in two major automation projects
in Egypt, installing a health care information system in three hospitals in
Cairo and 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, and conducted a demonstration
project in support of Health District autonomy for the Ugandan Ministry of
Health to improve the effectiveness of its contracting process in selected pilot
Health Districts.
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.
Revenue maximization projects, which involve increasing federal financial
participation in state health and human services programs and are generally
carried out on a contingency fee basis, have been completed or are on-going in
more than twenty states. The states have received more than $350 million in
additional federal revenue as a result of the Company's efforts and expect
current projects to yield another $300 million in new federal revenue. The
Company also is frequently engaged to conduct evaluations of government programs
and demonstrations. Program evaluation contracts are often multi-year research
projects involving the collection of extensive data using automated data merges
as well as surveys and case record reviews. Since 1994, the Company has
completed scores of welfare reform, revenue maximization and program evaluation
projects for numerous states and localities.
Electronic Commerce and Card Technologies Consulting Services (Phoenix
Consulting Division). The Company's Phoenix Consulting Division provides
health, transportation, education, banking and human service clients with expert
assistance in planning, implementing and evaluating Electronic Funds Transfer
("EFT"), Electronic Benefits Transfer ("EBT"), Electronic Payment Systems
("EPS"), smart card, biometric recognition system 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. In addition to its cost
efficiencies, electronic commerce ("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 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 is providing expert
assistance to implement EBT for WIC benefits. Phoenix has
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become a recognized expert in its field, having delivered lectures at
influential card-technology conferences such as CardTech/SecurTech NACHA,
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.
Automation Consulting Services (Spectrum Consulting Division). The
Company's Spectrum Consulting Division provides management consulting services
that focus on assisting large public sector organizations in solving complex
business problems related to automation. Spectrum 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 Year 2000 quality assurance and
project planning and management; quality assurance monitoring and assessment for
child welfare, and healthcare and financial management systems; strategic
planning; and advanced technologies. The Company also plans to provide clients
with a comprehensive set of quality assurance and Year 2000 consulting services
that are jointly developed by the Spectrum and Systems Planning and Integration
divisions.
Carrera Consulting Group (a Division of MAXIMUS). The Carrera Consulting
Group's mission is to deliver technology-based business solutions to government.
Services include information technology strategic planning, year 2000 impact
assessment and remediation, custom system development for health and human
services systems and enterprise resource planning ("ERP") systems
implementation. As a PeopleSoft Global Alliance Partner, the Carrera Consulting
Group is one of the leading implementators of human resource and financial
systems for state and local government. Prior to its combination with the
Company, Carrera had implemented over thirty such systems for various government
clients including the cities of Escondido, Los Angeles, Santa Monica, Des
Moines, Akron, Eugene, Seattle and Denver; the counties of Solano, Tuolumne and
King County Washington; and various organizations within the States of
California, Georgia and New York. The Carrera Consulting Group has also provided
implementation management, conversion, development projects. The Carrera
Consulting Group offers clients a highly skilled consulting staff with focused
expertise in helping public sector entities implement large-scale information
systems.
DMG-MAXIMUS. The Company's DMG-MAXIMUS division provides a broad array of
consulting services such as cost accounting, wage and compensation evaluation,
executive recruitment and fleet management. A particular expertise of this
division is assisting government entities with controlling their overhead and
program specific costs. DMG-MAXIMUS conducts comprehensive reviews and audits of
client operations at the department- or division-level to identify unusually
costly units of service or departments not meeting community needs. The division
also helps clients prepare rationalized cost accounting of their services,
through preparing either (i) cost allocation plans, which allocates overhead
costs of centrally-provided services among the departments by the level of use
of such services; (ii) indirect cost rate proposals, which allocate
inter-departmental administrative costs among the specific department programs
and activities; (iii) or other such cost plans. DMG-MAXIMUS further assists
local and state governments in determining the appropriate fee charges for
government services by calculating the total costs of such fee-based services.
DMG-MAXIMUS does not typically engage in the large scale projects undertaken by
other of the Consulting Group's divisions. Its focus has been on discrete,
specialized consulting engagements, which it currently has with over 2,000
clients throughout the United States. The Company views this expansive network
of contacts as an opportunity to cross-sell its broad array of services by
leveraging customer satisfaction in smaller engagements into potentially larger
scale consulting projects.
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
8
<PAGE> 10
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)
addition for future revenues from the execution of new contracts or extension or
renewal of existing contracts; (ii) reduction from fulfilling contracts during
the most recent quarter; (iii) reduction from the early termination of
contracts; and (iv) adjustments to estimates of previously included contracts.
At September 30, 1998 and 1997, the Company's backlog for services was
approximately $276 million and $217 million, respectively.
MARKETING AND SALES
The Company's Government Operations Group obtains program management
contracts from state and local authorities by responding to RFPs. Whenever
possible, prior to the 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, including
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
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<PAGE> 11
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:
Welfare Program. Under Title IV-A of the federal Social Security Act, the
federal government provides financial assistance to underprivileged families
under several programs commonly known as "Welfare," which have included the Aid
to Families with Dependent Children Program ("AFDC") and the Job Opportunities
and Basic Skills Training Program ("JOBS"). Under the AFDC program, cash welfare
payments were provided to needy children deprived of parental support and to
certain others in the household of the child. State governments are required to
define "need," set their own benefit levels, establish (within federal
limitations) income and resource limits and administer the program or supervise
its administration. Beginning in October 1990, the federal government required
each state to implement a JOBS program, which is designed to help needy families
with children to avoid long-term Welfare dependency by providing education,
training, job placement and other supportive services, including child care.
Under the Welfare Reform Act, AFDC and JOBS have been combined into a
single program, known as "Temporary Assistance to 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.
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
the 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. Titles XVI of the federal Social
Security Act provide 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,
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<PAGE> 12
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 electronically with other
state systems such as Welfare, driver and vehicle registration and Medicaid
systems.
Medicaid, Medicare and the Children's Health Insurance Program. Medicaid
and Medicare were implemented under Title 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 Child 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 19, 1998, the Company had more than 2,800 employees,
consisting of 2,067 employees in the Government Operations Group, 685 employees
in the Consulting Group and 126 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 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; 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.
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ITEM 2. PROPERTIES
The Company is headquartered in McLean, Virginia, in a 21,000 square foot
office building which it owns. 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, 1998, 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. The Company is currently
seeking additional space to house its new headquarters and to support its
expanding operations and believes that it will be able to secure such space, as
needed, in the future.
ITEM 3. LEGAL PROCEEDINGS
On March 12, 1997, Network Six, Inc. ("NETWORK SIX") served MAXIMUS with a
First Amended Third-Party Complaint filed in the State of Hawaii Circuit Court
of the First Circuit. In this complaint, Network Six named the Company and other
parties as third party defendants in an action by the State of Hawaii against
Network Six. In 1991, the Company's Consulting Group was engaged by the State of
Hawaii to provide assistance in planning for and monitoring the development and
implementation by Hawaii of a statewide automated child support system. In 1993,
Hawaii contracted with Network Six to provide systems development and
implementation services for this project. In 1996, the state terminated the
Network Six contract for cause and filed an action against Network Six. Network
Six counter-claimed against Hawaii that the state breached its obligations under
the contract with Network Six. In the Third Party Complaint, Network Six alleges
that the Company is liable to Network Six on grounds that: (i) Network Six was
an intended third party beneficiary under the contract between the Company and
Hawaii; (ii) the Company engaged in bad faith conduct and tortiously interfered
with the contract and relationship between Network Six and Hawaii; (iii) the
Company negligently breached duties to Network Six; and (iv) the Company aided
and abetted Hawaii in Hawaii's breach of contract. Network Six's complaint seeks
damages, including punitive damages, from the third party defendants in an
amount to be proven at trial. The Company believes that Network Six was not an
intended third party beneficiary under its contract with Hawaii and that Network
Six's claims are without factual or legal merit. The Company does not believe
this action will have a material adverse effect on the Company's business, and
it intends to vigorously defend this action. However, given the early stage of
this litigation, no assurance may be given that the Company will be successful
in defending this action. A decision by the court in Network Six's favor or any
other conclusion of this litigation in a manner adverse to the Company could
have a material adverse effect on the Company's business, financial condition
and results of operations.
On November 28, 1997, an individual who was a former officer, director and
shareholder of the Company, filed a complaint in the United States District
Court for the District of Massachusetts, alleging that at the time he resigned
from the Company in 1996, thereby triggering the repurchase of his shares, the
Company and certain of its officers and directors had failed to disclose
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
million. The Company does not believe that this action has merit or that it will
have a material adverse effect on the Company's business, and it intends to
vigorously defend this action. However, given the early stage of this
litigation, no assurance may be given that the Company will be successful in its
defense.
On May 12, 1998, the Company acquired DMG. DMG 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 waste water treatment plant in Arizona. However, the District was unable to
service the bonds and eventually declared bankruptcy. Two actions arising out of
those events were filed against DMG in the U.S. District Court for the District
of Arizona, one filed on January 31, 1997 by Allstate Insurance Company
("ALLSTATE") against DMG and thirteen other named defendants, and another filed
on December 2, 1996 by the District against DMG. The action brought by the
District against DMG was dismissed by the U.S. District Court on August 19,
1998. Nevertheless, the District was subsequently joined as a party in the
Allstate litigation and has reasserted its claims against DMG in a third party
complaint. The parties making claims
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against DMG allege that DMG made false and misleading representations in the
reports included among the exhibits to the bond offering memoranda. DMG's
reports concerned the accuracy of 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. MAXIMUS intends to defend against these claims vigorously.
However, given the preliminary stage of this litigation, no assurance can be
given that the Company will be successful in defending this lawsuit.
The Company is not a party to any material legal proceedings, except as set
forth above.
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 OF THE REGISTRANT
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
David V. Mastran..................... 55 President, Chief Executive Officer and Director
Raymond B. Ruddy..................... 55 Chairman of the Board of Directors, Vice President
of the Company, President of Consulting Group,
Treasurer and Director
Russell A. Beliveau.................. 51 President of Business Development and Director
Margaret Carrera..................... 44 President of Carrera Consulting Group,
Vice-Chairwoman of the Board and Director
Ilene R. Baylinson................... 42 President of Federal Services Division
John F. Boyer........................ 51 President of Managed Care Enrollment Division
David M. Casey....................... 40 President of Information Technology Division
George C. Casey...................... 54 President of Spectrum Consulting Division
Louis E. Chappuie.................... 60 President of DMG-MAXIMUS and Director
Lynn P. Davenport.................... 51 President of Human Services Division and Director
Gary L. Glickman..................... 45 President of Phoenix Consulting Division
David A. Hogan....................... 50 President of Child Support Division
John P. Lau, Sr...................... 55 President of International Division
Holly A. Payne....................... 45 President of Welfare Reform Division
Susan D. Pepin....................... 44 President of Systems Planning Division and Director
Robert J. Muzzio..................... 64 Executive Vice President and Director
F. Arthur Nerret..................... 51 Vice President, Finance and Chief Financial Officer
Robert E. Taggart, Jr................ 52 Vice President and Chief Operating Officer of DMG-
MAXIMUS
</TABLE>
David V. Mastran has served as President and Chief Executive Officer 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
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various capacities with Touche Ross & Co., including, Associate National
Director of Consulting from 1982 until 1984 and Director of Management
Consulting (Boston, Massachusetts office) from 1978 until 1983. Mr. Ruddy
received his M.B.A. from the Wharton School of Business of the University of
Pennsylvania and his B.S. in Economics from Holy Cross College.
Russell A. Beliveau has served as the President of the Company's Business
Development Division since September 1998. Prior to that, he served as President
of the Government Operations Group since 1995. Mr. Beliveau has more than 20
years' 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.
Margaret Carrera has served as President of the Company's Carrera
Consulting Group division, Vice-Chairwoman of the board and a director since the
acquisition of 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
twenty 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.
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 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.
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 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' 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.
David M. Casey has served as the President of the Information Technology
Division of the Company since 1997 and has been with the Company since 1994. Mr.
Casey has 17 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 Consulting Division
since the Company's acquisition of the Spectrum in March 1998. Prior to that, he
had served as President of the 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
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<PAGE> 16
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 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 thirteen
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.
Gary L. Glickman has served as President of the Phoenix Consulting Division
since the acquisition of 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 & Howarth. 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.
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.
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 17 years' 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
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<PAGE> 17
Welfare from 1984 until 1987 and 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 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
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 has over 24 years of
accounting experience as a C.P.A. 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.
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 November 19, 1998, there were
167 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.
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.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Year Ended September 30, 1997:
Third Quarter (from June 13, 1997)........................ $18 3/8 $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 1/8
Fourth Quarter............................................ 31 20 7/16
</TABLE>
16
<PAGE> 18
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 year
1998 were related solely to S corporation distributions by companies MAXIMUS
combined with during the year. The distributions were 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, contractual restrictions and such other factors as the Board of
Directors may deem relevant.
A Registration Statement on Form S-1 (File No. 333-29115) registering
6,037,500 shares of the Company's Common Stock, filed in connection with the
Company's IPO, was declared effective by the Securities and Exchange Commission
on June 12, 1997. The IPO closed on June 18, 1997 and the offering has
terminated. The Company's net proceeds from the IPO were $53,804,000. The
Company used $10.7 million of the net proceeds from the IPO during fiscal year
1998 to fund the cash needs of DMG including the liquidation of deferred
compensation liabilities of approximately $5,670,000, the discharge of a note
payable to a bank in the amount of $3,640,000, payment of current accounts
payable totalling approximately $1,390,000 and general operating capital.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below as of September 30, 1997 and
1998 and for each of the three years in the period ended September 30, 1998 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 presented below as of September 30, 1994, 1995 and 1996
and for each of the two years ended September 30, 1995 are derived from the
Company's financial statements, not included in this Form 10-K, which have been
audited by Ernst & Young LLP or the Company's predecessor accountants, and DMG's
independent auditors. The selected financial data give retroactive effect to the
combination with DMG, which was 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.
17
<PAGE> 19
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:................................. $57,442 $82,540 $135,673 $167,324 $233,473
Cost of revenues.......................... 41,700 57,198 101,539 121,968 172,900
------- ------- -------- -------- --------
Gross profit.............................. 15,742 25,342 34,134 45,356 60,573
Selling, general and administrative
expenses................................ 11,983 15,781 20,238 25,323 33,783
Stock option compensation, merger,
deferred compensation and ESOP
expense(a).............................. 436 1,400 1,556 7,372 3,671
------- ------- -------- -------- --------
Income from operations.................... 3,323 8,161 12,340 12,661 23,119
Interest and other income
(expense)............................... (131) (72) (17) 777 1,775
------- ------- -------- -------- --------
Income before income taxes................ 3,192 8,089 12,323 13,438 24,894
Provision for income taxes(b)............. 1,089 736 530 4,104 10,440
------- ------- -------- -------- --------
Net income................................ $ 2,103 $ 7,353 $ 11,793 $ 9,334 $ 14,454
======= ======= ======== ======== ========
Earnings per share:
Basic................................... $ 0.16 $ 0.59 $ 0.94 $ 0.69 $ 0.84
======= ======= ======== ======== ========
Diluted................................. $ 0.16 $ 0.59 $ 0.94 $ 0.67 $ 0.82
======= ======= ======== ======== ========
Shares used in computing earnings per
share:
Basic................................... 12,938 12,507 12,573 13,508 17,237
======= ======= ======== ======== ========
Diluted................................. 12,938 12,507 12,573 13,893 17,596
======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
--------------------------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term
investments............................. $ 990 $ 2,640 $ 3,394 $ 51,869 $ 32,977
Working capital........................... 9,012 15,677 25,101 65,389 77,022
Total assets.............................. 28,404 36,392 48,720 111,497 120,543
Long-term debt............................ 4,835 4,224 -- -- 454
Redeemable common stock................... 15,390 21,362 31,683 -- --
Total shareholders' equity (deficit)...... (5,309) (4,201) (4,679) 67,913 84,699
</TABLE>
- ------------------------------
(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.
18
<PAGE> 20
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As an important part of the Company's growth strategy, it has recently
completed combinations with four consulting firms, Spectrum Consulting Group,
Inc. and Spectrum Consulting Services, Inc. (collectively, "SPECTRUM") in March
1998, David M. Griffith & Associates, Ltd. ("DMG") in May 1998, and Carrera
Consulting Group ("CARRERA") and Phoenix Planning & Evaluation, Ltd. ("PHOENIX")
in August 1998, all of which were accounted for as poolings of interests
combinations. See "-- Business Combinations." Prior year amounts have been
restated to reflect the combination with DMG. 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.
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 every state, county and local government
agency, including health and human services, law enforcement, parks and
recreation, taxation, housing, motor vehicles, labor, education and
legislatures.
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, 1998, revenues from these contract types were approximately
24%, 46%, 18% and 12%, 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 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
$56.5 million, $31.6 million and $0 to the Company's revenues in fiscal years
1996, 1997 and 1998, respectively.
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, 1998, the
Company's average Government Operations contract duration was 3 1/2 years. The
Company's Consulting Group is typically engaged for periods in excess of two
years. Indicative of the long-term nature of the Company's engagements,
approximately 61% of the Company's fiscal 1998 revenues were in backlog as of
September 30, 1997.
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
19
<PAGE> 21
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 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 furtherance of this growth strategy, the Company combined with four
consulting firms during 1998 in transactions accounted for as poolings of
interests.
As of 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.
As of 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.
As of 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.
As of 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 electronic card technologies. At the time of the
combination, Phoenix had 11 consultants and three other employees.
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of income data as a percentage of revenues:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
<S> <C> <C> <C>
Revenues:
Government Operations Group............................... 15.2% 39.3% 59.6%
Consulting Group.......................................... 43.1 41.8 40.4
SSA Contract.............................................. 41.7 18.9 --
----- ----- -----
Total revenues......................................... 100.0 100.0 100.0
Gross profit:
Government Operations Group............................... 20.3 22.3 18.0
Consulting Group.......................................... 36.9 37.6 37.7
SSA Contract.............................................. 14.7 13.9 --
Total gross profit as percentage of total revenues..... 25.2 27.1 25.9
Selling, general and administrative expenses................ 14.9 15.1 14.5
Stock option compensation, merger, deferred compensation and
ESOP expense.............................................. 1.2 4.4 1.5
----- ----- -----
Income from operations...................................... 9.1 7.6 9.9
Interest and other income (expense)......................... -- 0.4 0.8
----- ----- -----
Income before income taxes.................................. 9.1 8.0 10.7
Provision for income taxes.................................. 0.4 2.4 4.5
----- ----- -----
Net income.................................................. 8.7% 5.6% 6.2%
===== ===== =====
</TABLE>
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Revenues. Total revenues increased 39.5% to $233.5 million in fiscal 1998
from $167.3 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 contracts totalling $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
34.7% to $94.2 million in fiscal 1998 from $70.0 million in fiscal 1997 due to
an increase in the number of contracts and revenues from companies which merged
with the Company in fiscal 1998 in transactions accounted for as pooling of
interests. Revenues from the merged companies accounted for as immaterial
poolings totalled $16.9 million in fiscal 1998.
Gross Profit. Total gross profit increased 33.5% to $60.6 million in
fiscal 1998 from $45.4 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 revenues, Government Operations Group gross
profit decreased to 18.0% in fiscal 1998 from 19.6% in fiscal 1997 primarily due
to anticipated lower gross margins on the three purchased Managed Care
Enrollment contracts. Consulting Group gross profit increased 34.7% to $35.4
million in fiscal 1998 from $26.3 million in fiscal 1997 due principally to the
increased revenues. As a percentage of revenues, Consulting Group gross profit
was 37.7% in fiscal 1998 and 37.6% in fiscal 1997.
21
<PAGE> 23
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses increased 33.6% to $33.8 million in fiscal 1998 from
$25.3 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 18% from 125
to 147 and the Company grew from 1,800 total employees at September 30, 1997 to
more than 2,800 total employees at September 30, 1998. As a percent of revenues,
selling, general and administrative expenses decreased slightly to 14.5% 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 totalling $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 initial
public offering. 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 for fiscal year 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 for fiscal 1998 is 41.9% compared to 30.5%
for fiscal 1997. The fiscal 1998 tax expense was adversely impacted by $0.5
million due to the nondeductibility of certain merger related expenses.
Additional information regarding income tax expense is in Note 9 to the
consolidated financial statements contained in this document.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Revenues. Total revenues increased 23.3% to $167.3 million in fiscal 1997
from $135.7 million in fiscal 1996. Government Operations Group revenues
increased 26.1% to $97.4 million in fiscal 1997 from $77.2 million in fiscal
1996 due to an increase in the number of projects offset by a decrease in
revenue from the SSA Contract, which was terminated in February 1997. The SSA
Contract contributed $31.6 million to fiscal 1997 revenues as compared to $56.5
million to fiscal 1996 revenues. Excluding the SSA Contract, Government
Operations Group revenues increased 218.0% to $65.8 million in fiscal 1997 from
$20.7 million in fiscal 1996 due to increases in the numbers of contracts in the
Welfare Reform, Managed Care Enrollment Services, and Child Support Enforcement
divisions of the group. Consulting Group revenues increased 19.7% to $70.0
million in fiscal 1997 from $58.5 million in fiscal 1996 due to an increase in
the number of contracts and increased revenues from management studies, fleet
consulting, franchise fee consulting, revenue maximization contracts and
international business.
Gross Profit. Total gross profit increased 32.8% to $45.4 million in
fiscal 1997 from $34.1 million in fiscal 1996. Government Operations Group gross
profit increased 52.1% to $19.1 million in fiscal 1997 from $12.5 million in
fiscal 1996. As a percentage of revenues, Government Operations Group gross
profit increased to 19.6% in fiscal 1997 from 16.2% in fiscal 1996 primarily due
to the decreased revenue volume of the SSA Contract in fiscal 1997, which had a
lower gross profit margin than other contracts in the group, and to favorable
profit recognition adjustments on two large projects. Excluding the SSA
Contract, Government Operations Group gross profit as a percentage of revenues
increased to 22.3% in fiscal 1997 from 20.3% in fiscal 1996. Consulting Group
gross profit increased 21.7% to $26.3 million in fiscal 1997 from $21.6 million
in fiscal 1996 due to principally to the increased revenues. As a percentage of
revenues, Consulting Group gross
22
<PAGE> 24
profit increased to 37.6% in fiscal 1997 from 36.9% in fiscal 1996 which
represents normal variability of gross profit from period to period.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses increased 25.1% to $25.3 million in fiscal 1997 from
$20.2 million in fiscal 1996. This increase in costs was due to increases in
both professional and administrative personnel and professional fees necessary
to support the Company's growth and marketing and proposal preparation
expenditures incurred to pursue further growth. As a percent of revenues,
selling, general and administrative expenses increased to 15.1% for fiscal 1997
from 14.9% for fiscal 1996.
Stock Option Compensation, Merger, Deferred Compensation and ESOP
Expenses. 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. The Company incurred $1.5 million in fiscal 1997
and $1.6 million in fiscal 1996 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 initial
public offering. Upon completion of the IPO, the Company's S corporation status
was terminated and the Company became subject to federal and state income taxes.
As a percentage of income before income taxes, the income tax expense for
fiscal 1997 is 30.5% compared to 4.3% for fiscal 1996. Additional information
regarding income tax expense is in Note 9 to the consolidated financial
statements contained in this document.
23
<PAGE> 25
QUARTERLY RESULTS
Set forth below are selected income statement data for the eight quarters
ended September 30, 1998. 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.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1997 1997 1997 1997 1998 1998 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Government Operations Group.... $ 8,029 $15,551 $19,158 $23,019 $27,772 $32,189 $36,844 $42,458
Consulting Group............... 15,811 17,096 16,906 20,142 19,875 21,042 24,394 28,899
SSA Contract................... 22,511 9,082 19 -- -- -- -- --
-------- ------- ------- ------- ------- ------- ------- -------
Total revenues................... 46,351 41,729 36,083 43,161 47,647 53,231 61,238 71,357
Cost of revenues................. 35,826 29,882 25,272 30,988 35,452 38,937 46,217 52,294
-------- ------- ------- ------- ------- ------- ------- -------
Gross profit..................... 10,525 11,847 10,811 12,173 12,195 14,294 15,021 19,063
Selling, general and
administrative expenses........ 5,715 6,065 6,171 7,372 8,172 8,377 7,105 10,129
Stock option compensation,
merger, deferred compensation
and ESOP expense............... 392 509 6,077 394 467 907 1,972 325
-------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.... 4,418 5,273 (1,437) 4,407 3,556 5,010 5,944 8,609
Interest and other income........ 64 23 143 547 527 526 384 338
Income (loss) before income
taxes.......................... 4,482 5,296 (1,294) 4,954 4,083 5,536 6,328 8,947
Provision for income taxes....... 416 666 907 2,115 1,592 2,237 2,549 4,062
-------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................ $ 4,066 $ 4,630 $(2,201) $ 2,839 $ 2,491 $ 3,299 $ 3,779 $ 4,885
======== ======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic.......................... $ 0.32 $ 0.37 $ (0.17) $ 0.18 $ 0.16 $ 0.20 $ 0.23 $ 0.27
Diluted........................ $ 0.32 $ 0.36 $ (0.17) $ 0.17 $ 0.15 $ 0.19 $ 0.22 $ 0.26
</TABLE>
The results of operations for the quarter ended June 30, 1997 include two
significant nonrecurring charges, a $5.7 million charge ($3.7 million after tax)
for the difference between the IPO price and the formula price for stock options
outstanding and a $2.6 million charge to record deferred income taxes upon
termination of the Company's S corporation status.
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. In addition, the termination of the SSA
Contract and the absence of revenues thereunder after March 31, 1997
significantly reduced the Company's revenue base as compared to previous
quarters. 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.
24
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity is cash flow from operations. The
Company's cash flow from operations was ($7.5) million, $18.5 million and $4.0
million for the years ended September 30, 1998, 1997 and 1996, respectively. The
decrease in cash flow from operations in fiscal 1998 as compared to fiscal 1997
is due primarily to increased accounts receivable related to revenue growth.
Certain marketable securities were sold during the year ended September 30,
1998 generating $27.8 million in proceeds. These investments were sold to
provide general working capital, including necessary income tax payments, and to
pay the final S corporation distribution discussed below. The Company has no
material commitments for capital expenditures and, as a services company, does
not anticipate making any significant capital expenditures during fiscal year
1999.
During the three months ended December 31, 1997, the Company made final S
corporation distributions totaling $5.7 million. The distributions to
shareholders were based upon the fiscal 1997 income taxable to the S corporation
shareholders. The amount of the fiscal 1997 taxable income was determined during
the finalization of the Company's income for the full fiscal year ended
September 30, 1997, and the liability for the $5.7 million distribution was
recognized on the September 30, 1997 balance sheet. The Company also made S
corporation distributions totaling $1.7 million to former shareholders of
Spectrum and Phoenix during fiscal 1998. Cash flow from financing activities was
$31.2 million in fiscal 1997. In June 1997, the Company received net proceeds of
$53.8 million from the sale of stock in its IPO. The Company made S corporation
distributions of $21.7 million, representing a portion of the estimated income
taxed or taxable to the S corporation shareholders through the date of its IPO.
The Company has a $10.0 million revolving credit facility (the "CREDIT
FACILITY") with Crestar Bank in Virginia, which may be used for borrowing and
the issuance of letters of credit. Outstanding letters of credit totaled $0.4
million at September 30, 1998. The Credit Facility bears interest at a rate
equal to LIBOR plus an amount which ranges from 0.65% to 1.25% depending on the
Company's debt to equity ratio. The Credit Facility contains certain restrictive
covenants and financial ratio requirements, including a minimum net worth
requirement of $60 million. The Company has not used the Credit Facility to
finance its working capital needs and, at September 30, 1998, the Company had
$9.6 million available under the Credit Facility.
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 systems will face as
the millennium ("YEAR 2000") approaches. The Company is auditing its internal
software and hardware and is implementing corrective actions where necessary to
address Year 2000 problems. The Company is also currently reviewing the software
and hardware, and implementing corrective actions where necessary, of DMG,
Carrera, Spectrum and Phoenix, all of which the Company combined with during
1998. The Company will continue to assess the need for Year 2000 contingency
plans as its remediation efforts progress. The Company estimates that its
remediation efforts will be completed by March 31, 1999. The Company does not
believe that the cost of its remediation efforts will be material or that these
efforts will have a material impact on its operations or financial results.
However, there can be no assurance that those costs will not be greater than
anticipated, or that corrective actions undertaken will be completed before any
Year 2000 problems could occur.
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
27
<PAGE> 27
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.
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 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, 1997 and 1998
Consolidated Statements of Income for the years ended
September 30, 1996, 1997
and 1998
Consolidated Statements of Changes in Redeemable Common Stock
and
Shareholders' Equity for the years ended September 30, 1996,
1997 and 1998
Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1997
and 1998
Notes to Consolidated Financial Statements
26
<PAGE> 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, 1997 and 1998, 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, 1998. 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 assets of $15.5 million
as of December 31, 1997 and total revenues of $32.6 million and $39.4 million,
for the two years then ended. 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 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, 1997 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1998, in conformity with generally accepted accounting principles.
/s/ERNST & YOUNG LLP
Washington, D.C.
November 13, 1998
27
<PAGE> 29
REPORT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS
Board of Directors
David M. Griffith & Associates, Ltd.
We have audited the balance sheet of David M. Griffith & Associates, Ltd.
(an Illinois corporation) as of December 31, 1997, and the related statements of
earnings, stockholders' equity, and cash flows for the years ended December 31,
1996 and 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 audits.
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, the financial statements referred to above present fairly,
in all material respects, the financial position of David M. Griffith &
Associates, Ltd. as of December 31, 1997, and the results of its operations and
its cash flows for the years ended December 31, 1996 and 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
28
<PAGE> 30
MAXIMUS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
--------------------
1997 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 11,000 $ 19,400
Marketable securities..................................... 40,869 13,577
Accounts receivable, net.................................. 46,531 72,345
Costs and estimated earnings in excess of billings (Note
5)..................................................... 5,605 5,924
Prepaid expenses and other current assets................. 1,435 1,166
-------- --------
Total current assets................................... 105,440 112,412
Property and equipment at cost:
Land...................................................... 662 662
Building and improvements................................. 1,721 1,721
Office furniture and equipment............................ 4,902 6,421
Leasehold improvements.................................... 188 214
-------- --------
7,473 9,018
Less: Accumulated depreciation and amortization........... (3,578) (4,504)
-------- --------
Total property and equipment, net...................... 3,895 4,514
Deferred income taxes (Note 9)............................ 1,241 1,434
Other assets.............................................. 921 2,183
-------- --------
Total assets........................................... $111,497 $120,543
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 3,914 $ 9,724
Accrued compensation and benefits......................... 10,132 14,446
Billings in excess of costs and estimated earnings (Note
5)..................................................... 12,277 10,316
Notes payable............................................. 1,596 --
Income taxes payable...................................... 3,932 3
Deferred income taxes..................................... 2,452 901
S corporation distribution payable (Note 10).............. 5,748 --
-------- --------
Total current liabilities.............................. 40,051 35,390
Long-term debt.............................................. -- 454
Deferred compensation, less current portion................. 3,533 --
-------- --------
Total liabilities...................................... 43,584 35,844
Commitments and contingencies (Notes 7 and 11)
Shareholders' equity (Note 10):
Common stock, no par value; 30,000,000 shares authorized;
15,991,680 and 18,225,390 shares issued and outstanding
at September 30, 1997 and 1998, at stated amount....... 66,708 66,535
Retained earnings......................................... 1,205 18,164
-------- --------
Total shareholders' equity............................. 67,913 84,699
-------- --------
Total liabilities and shareholders' equity............. $111,497 $120,543
======== ========
</TABLE>
See notes to financial statements.
29
<PAGE> 31
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------
1996 1997 1998
<S> <C> <C> <C>
Revenues.................................................. $135,673 $167,324 $233,473
Cost of revenues.......................................... 101,539 121,968 172,900
-------- -------- --------
Gross profit.............................................. 34,134 45,356 60,573
Selling, general and administrative expenses.............. 20,238 25,323 33,783
Stock option compensation, merger, deferred compensation
and ESOP expense........................................ 1,556 7,372 3,671
-------- -------- --------
Income from operations.................................... 12,340 12,661 23,119
Interest and other income (expense)....................... (17) 777 1,775
-------- -------- --------
Income before income taxes................................ 12,323 13,438 24,894
Provision for income taxes................................ 530 4,104 10,440
-------- -------- --------
Net income................................................ $ 11,793 $ 9,334 $ 14,454
======== ======== ========
Earnings per share:
Basic................................................... $ 0.94 $ 0.69 $ 0.84
======== ======== ========
Diluted................................................. $ 0.94 $ 0.67 $ 0.82
======== ======== ========
Weighted average shares outstanding:
Basic................................................... 12,573 13,508 17,237
======== ======== ========
Diluted................................................. 12,573 13,893 17,596
======== ======== ========
</TABLE>
See notes to financial statements.
30
<PAGE> 32
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE COMMON STOCK
AND SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
REDEEMABLE --------------------
COMMON COMMON RETAINED
STOCK STOCK EARNINGS
<S> <C> <C> <C>
Balance at September 30, 1995............................... $ 21,359 $ -- $(4,201)
Issuance of redeemable common stock to employees.......... 229 -- --
Net income................................................ -- -- 11,793
Adjustment to redemption value of redeemable common
stock.................................................. 10,095 -- (10,095)
S Corporation distributions............................... -- -- (2,175)
-------- ------- -------
Balance at September 30, 1996............................... 31,683 -- (4,678)
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................................................ -- -- 9,334
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............................................... (30,286) 15,335 14,951
Net proceeds from sale of common stock in initial public
offering............................................... -- 53,804 --
S Corporation distributions............................... -- -- (27,460)
-------- ------- -------
Balance at September 30, 1997............................... -- 66,708 1,205
Purchase of common stock from employee.................... -- (454) --
Net income................................................ -- -- 14,454
Tax benefit due to option exercise........................ -- -- 173
Adjustment for Griffith results previously reported....... -- -- 156
Increase resulting from immaterial poolings............... -- 137 3,843
Issuance of common stock to employees..................... -- 144 --
S Corporation distributions............................... -- -- (1,667)
-------- ------- -------
Balance at September 30, 1998............................... $ -- $66,535 $18,164
======== ======= =======
</TABLE>
See notes to financial statements.
33
<PAGE> 33
MAXIMUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $11,793 $ 9,334 $14,454
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation........................................... 801 1,027 995
Amortization........................................... -- -- 1,401
Stock option compensation expense...................... -- 5,874 --
Other.................................................. 4 (157) 173
Changes in assets and liabilities:
Accounts receivable, net............................... (9,470) (10,592) (19,931)
Costs and estimated earnings in excess of billings..... (2,173) (2,656) (319)
Prepaid expenses and other current assets.............. (203) (794) 380
Other assets........................................... (101) (231) (44)
Accounts payable....................................... 282 2,791 4,593
Accrued compensation and benefits...................... 884 3,497 (1,093)
Billings in excess of costs and estimated earnings..... 1,995 6,770 (1,811)
Income taxes payable................................... (81) 3,914 (3,877)
Deferred income taxes.................................. 280 (319) (2,475)
------- -------- -------
Net cash provided by (used in) operating activities......... 4,011 18,458 (7,554)
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of contracts..................................... -- -- (2,436)
Increase in cash resulting from immaterial poolings....... -- -- 1,002
Purchase of property and equipment........................ (783) (1,207) (1,006)
(Purchase) sale of marketable securities.................. (1,000) (39,862) 27,819
------- -------- -------
Net cash (used in) provided by investing activities......... (1,783) (41,069) 25,379
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net of expenses.... -- 53,804 --
S Corporation distributions............................... (2,175) (21,712) (7,415)
Redeemable common stock purchased......................... (899) (1,234) --
Common stock issued....................................... 229 4 144
Net proceeds from (payments on) borrowings................ 364 362 (2,621)
------- -------- -------
Net cash (used in) provided by financing activities......... (2,481) 31,224 (9,892)
------- -------- -------
Cash flow adjustment for change in accounting period of
Griffith.................................................. -- -- 467
------- -------- -------
Net (decrease) increase in cash and cash equivalents........ (253) 8,613 8,400
Cash and cash equivalents, beginning of year................ 2,640 2,387 11,000
------- -------- -------
Cash and cash equivalents, end of year...................... $ 2,387 $ 11,000 $19,400
======= ======== =======
</TABLE>
See notes to financial statements.
32
<PAGE> 34
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT 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
Services 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, 1996, 1997 and 1998.
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 1996 and 1997 financial statements have been restated to
reflect the combination with David M. Griffith, Ltd. ("Griffith") in May 1998 in
a transaction 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.
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
33
<PAGE> 35
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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, if material. 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. There are no material unrealized gains or losses on marketable
securities at September 30, 1997 and 1998. Marketable securities consist
primarily of short-term municipal and commercial bonds.
Property and Equipment
Property and equipment is stated at cost and depreciated using both the
straight-line and accelerated methods based on estimated useful lives of 32
years for the Company's building 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 assets and liabilities 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 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 for cumulative differences between the financial statement and tax basis
of assets and liabilities.
Accounting Standards Not Adopted
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" which established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. This statement is effective for fiscal
years beginning after December 15, 1997.
34
<PAGE> 36
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments
of an Enterprise and Related Information" which established standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments. The financial information is required to
be reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. This statement is effective for financial statements for periods
beginning after December 15, 1997.
The Company does not expect the impact of adopting these new accounting
standards to be significant.
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, 1997 and 1998.
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 David M. Griffith and
Associates, Ltd. ("Griffith"). 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 Griffith. Griffith's operations
for the years ended December 31, 1996 and 1997 were combined with the Company's
operations for the fiscal years ended September 30, 1996 and 1997. This resulted
in inclusion of Griffith operating results for the three months ended December
31, 1997 in the Company's operating results for both fiscal 1997 and 1998.
Griffith'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.
All of the companies involved in the mergers described above are involved
primarily in consulting services for state and local governments. The merged
companies accounted for as immaterial poolings contributed $16,854 to the
Company's revenues for the year ended September 30, 1998.
35
<PAGE> 37
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
A reconciliation of the Company's revenues and net income, as previously
reported, to the restated results that give effect to the Griffith combination
for the fiscal years ended September 30, 1996 and 1997 follow:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------------
1996 1997
<S> <C> <C>
Revenues as previously reported.......................... $103,113 $127,947
Griffith revenues........................................ 32,560 39,377
-------- --------
Combined revenues........................................ $135,673 $167,324
======== ========
Net income as previously reported........................ $ 11,619 $ 8,589
Griffith net income...................................... 174 745
-------- --------
Combined net income...................................... $ 11,793 $ 9,334
======== ========
</TABLE>
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1996 1997 1998
<S> <C> <C> <C>
Numerator:
Net income..................................... $11,793 $9,334 $14,454
Denominator:
Weighted average shares outstanding............ 12,573 13,508 17,237
Effect of dilutive securities:
Employee stock options.............................. -- 385 359
------- ------ -------
Denominator for dilutive earnings per share......... 12,573 13,893 17,596
======= ====== =======
</TABLE>
36
<PAGE> 38
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Uncompleted contracts consist of the following components:
<TABLE>
<CAPTION>
BALANCE SHEET CAPTION
----------------------------------------------
COSTS AND ESTIMATED BILLINGS IN EXCESS OF
EARNINGS IN EXCESS OF COSTS AND ESTIMATED
BILLINGS EARNINGS
<S> <C> <C>
September 30, 1997:
Costs and estimated earnings.............. $136,008 $119,765
Billings.................................. 130,403 132,042
-------- --------
$ 5,605 $ 12,277
======== ========
September 30, 1998:
Costs and estimated earnings.............. $193,022 $192,219
Billings.................................. 187,098 202,535
-------- --------
$ 5,924 $ 10,316
======== ========
</TABLE>
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 has a $10 million revolving line of credit with a bank.
Borrowings under this line bear interest at LIBOR plus an amount which ranges
from 0.65% to 1.25% depending on the Company's debt to equity ratio. The Company
had no borrowings under the Credit Facility at September 30, 1998. Under the
terms of the line, the Company is required to maintain at all times: (i) an
excess of current assets to current liabilities of not less than 1.5 to 1, (ii)
net worth of $60 million, and (iii) a ratio of total liabilities to net worth of
not more than 1.5 to 1. There were no outstanding borrowings under the line of
credit facility at September 30, 1997 and 1998. The line of credit expires on
March 31, 1999. At September 30, 1997 and 1998, the Company had letters of
credit outstanding amounting to $508 and $401, respectively.
Certain companies that merged into the Company during 1998 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 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, 1996, 1997 and 1998 was $3,321, $5,296 and $6,947, respectively.
37
<PAGE> 39
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Minimum future payments under these leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
<S> <C>
1999................................................... $ 8,863
2000................................................... 5,517
2001................................................... 3,969
2002................................................... 2,872
2003................................................... 1,938
Thereafter............................................. 997
-------
$24,156
=======
</TABLE>
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, 1996, 1997 and 1998,
the Company contributed $650, $774 and $1,342 to the plans, respectively.
Prior to its merger with the Company, Griffith had an employee stock
ownership plan covering substantially all of its employees. During 1996, 1997
and 1998, amounts charged to operations for the plan were $643, $897, and $394,
respectively.
Prior to its merger with the Company, Griffith 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 1996, 1997 and 1998, amounts charged to
operations under these arrangements were $461, $216 and $972, including a
non-recurring charge of $942 in 1998 as a result of the merger.
9. INCOME TAXES
The Company's provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
<S> <C> <C> <C>
Current provision: 1996 1997 1998
Federal......................................... --.... 3,722 10,676
State.......................................... $ 250 $ 701 $ 1,894
Deferred tax expense (benefit)...................... 280 (319) (2,130)
------ ------- -------
$ 530 $ 4,104 $10,440
====== ======= =======
</TABLE>
38
<PAGE> 40
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The provision for income taxes resulted in effective tax rates that varied from
the federal statutory income tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1996 1997 1998
<S> <C> <C> <C>
Expected federal income tax provision............... $4,195 $ 4,569 $ 8,713
Effect of income taxed directly to S Corporation
shareholders...................................... (4,027) (3,893) (297)
State income taxes.................................. 250 607 1,245
Effect of termination of S Corporation status....... -- 2,566 325
Effect of nondeductible merger costs................ -- -- 531
Other............................................... 112 255 (77)
------ ------- -------
$ 530 $ 4,104 $10,440
====== ======= =======
</TABLE>
The significant items comprising the Company's deferred tax assets and
liabilities as of September 30, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1997 1998
<S> <C> <C>
Deferred tax assets -- current:
Liabilities for costs deductible in future periods........ $ 425 $ 810
Billings in excess of costs and estimated earnings........ 4,699 4,126
------- ------
Total deferred tax assets -- current........................ 5,124 4,936
Deferred tax liabilities -- current:
Cash versus accrual accounting............................ 5,334 2,915
Costs and estimated earnings and excess of billings....... 2,242 2,512
Other..................................................... -- 410
------- ------
Total deferred tax liabilities -- current................... 7,576 5,837
------- ------
Net deferred tax (liability) -- current..................... $(2,452) $ (901)
======= ======
Deferred tax assets (liabilities) -- non-current:
Stock option compensation................................. 2,055 1,874
Deferred compensation..................................... 1,388 --
Cash versus accrual accounting............................ (2,202) (795)
Other..................................................... -- 355
------- ------
Net deferred tax asset -- non-current....................... $ 1,241 $1,434
======= ======
</TABLE>
Cash paid for income taxes during the years ended September 30, 1996, 1997 and
1998 was $313, $274 and $16,507, respectively.
39
<PAGE> 41
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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
MAXIMUS, Inc. generating $53,804 in proceeds to the Company, net of offering
expenses.
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 and Phoenix paid S
Corporation dividends totaling $1,667 during 1998, 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. Griffith 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 Griffith,
were reclassified into shareholders' 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 subsequent to September 30, 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 Director 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, 1998, 2.0 million shares were 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
40
<PAGE> 42
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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 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 with the
following assumptions -- volatility 42% for 1998, risk free interest rate 6.5%
for 1997 and 5.5% for 1998, 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 and
$9.61 for 1998.
For purposes of the pro forma disclosure, the estimated fair value of the
options is amortized to reflect such expense over the options' vesting period.
For the years ended September 30, 1997 and 1998, pro forma net income and pro
forma net income per share resulting from the adjustment for stock option
compensation was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1998
<S> <C> <C>
Net income........................................... $9,334 $14,454
FAS 123 compensation expense......................... (972) (780)
------ -------
Net income, as adjusted.............................. $8,362 $13,674
====== =======
Net income per share, as adjusted:
Basic........................................... $ 0.62 $ 0.79
Diluted......................................... $ 0.60 $ 0.78
</TABLE>
A summary of the Company's stock option activity for the years ended September
30, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
ACTIVITY DURING 1997: OPTIONS PRICE
<S> <C> <C>
Granted............................................ 531,975 $ 5.05
Exercised.......................................... (3,025) 1.46
---------
Outstanding at September 30, 1997.................. 528,950 5.07
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
=========
</TABLE>
41
<PAGE> 43
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The ranges of exercise prices for outstanding options were as follows at
September 30, 1998:
<TABLE>
<S> <C>
$ 0.01 - $ 1.46............................................. 369,150
$12.31 - $16.00............................................. 251,338
$23.38 - $31.56............................................. 473,264
---------
1,093,752
=========
</TABLE>
The Company had 468,995 options exercisable at September 30, 1998 at a weighted
average exercise price of $5.54 per share. Outstanding options have a weighted
average remaining exercise period of 9.2 years at September 30, 1998.
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 alleges that the Company is liable to
Network Six on various grounds. The Company believes Network Six's claims are
without merit and intends to vigorously defend this action. The Company believes
this action will not have a material adverse effect on its financial condition
or results of operations and has not accrued for any loss related to this claim.
On November 28, 1997, an individual who was a former officer, director and
shareholder of the Company, filed a complaint in the United States District
Court for the District of Massachusetts, alleging that at the time he resigned
from the Company in 1996, thereby triggering the repurchase of his shares, the
Company and certain of its officers and directors had failed to disclose
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 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 will have a material
adverse effect on the Company's financial condition or results of operations,
and it intends to vigorously defend this action.
In January 1997, a lawsuit was filed against a number of defendants,
including Griffith, by a purchaser of municipal bonds. Griffith 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 the 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 Griffith, for damages of $32.1 million which is
the face value of the revenue bonds, plus interest. The District has also filed
a lawsuit against Griffith seeking damages. Griffith intends to vigorously
defend both of these actions. However, given the early stage of litigation,
legal counsel is unable to express an opinion concerning the ultimate resolution
of either case or Griffith's liability, if any, in connection therewith.
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
42
<PAGE> 44
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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 14 of its executives that
provide for base salaries of approximately $3.5 million per year. The term of
the employment obligations are through 2000.
12. CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable and costs
and estimated earnings in excess of billings on uncompleted contracts. To date,
these financial instruments have been derived from contract revenues earned
primarily from federal, state and local government agencies located in the
United States.
At September 30, 1997 and 1998, $1,436 and $1,004, respectively, 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 $61,317, $35,802 and $3,738 for the years ended September 30, 1996, 1997
and 1998, respectively. Of these amounts, $56,530, $31,611 and $0 for the years
ended September 30, 1996, 1997 and 1998, respectively, were revenues of the
government operations segment. 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 group for 1996 and 1997 was terminated by the United
States Government. This contract concluded during the second quarter of 1997.
At September 30, 1997 and 1998, $10,482 and $9,706 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
and $30,934 for the years ended September 30, 1997 and 1998.
43
<PAGE> 45
MAXIMUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
13. BUSINESS SEGMENTS
The following table provides certain financial information for each
business segment:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Revenues:
Government Operations................ $ 77,211 $ 97,369 $139,263
Consulting........................... 58,462 69,955 94,210
-------- -------- --------
$135,673 $167,324 $233,473
======== ======== ========
Income from operations:
Government Operations................ $ 4,936 $ 6,164 $ 10,642
Consulting........................... 7,404 6,497 12,544
-------- -------- --------
$ 12,340 $ 12,661 $ 23,186
======== ======== ========
Identifiable assets:
Government Operations................ $ 19,369 $ 26,610 $ 42,429
Consulting........................... 23,137 28,886 40,701
Corporate............................ 6,214 56,001 37,413
-------- -------- --------
$ 48,720 $111,497 $120,543
======== ======== ========
Capital expenditures:
Government Operations................ $ 4 $ 2 $ --
Consulting........................... 508 790 545
Corporate............................ 271 415 461
-------- -------- --------
$ 783 $ 1,207 $ 1,006
======== ======== ========
Depreciation and amortization:
Government Operations................ $ 99 $ 204 $ 1,518
Consulting........................... 521 643 792
Corporate............................ 181 180 86
-------- -------- --------
$ 801 $ 1,027 $ 2,396
======== ======== ========
</TABLE>
44
<PAGE> 46
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
"Election of Directors" in the Company's Proxy Statement relating to its Annual
Meeting of Shareholders scheduled for February 23, 1999 (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 Certain
Beneficial Owners and Management" 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
<TABLE>
<C> <S>
(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
The Company filed a Current Report on Form 8-K dated August
31, 1998 reporting on the completion of the Company's
business combination with Carrera.
(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.
</TABLE>
47
<PAGE> 47
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 20th day of November, 1998.
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, 1998, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming al 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID V. MASTRAN President, Chief Executive November 20, 1998
- --------------------------------------------- Officer and Director
DAVID V. MASTRAN (Principal Executive Officer)
/s/ RAYMOND B. RUDDY Chairman of the Board of November 20, 1998
- --------------------------------------------- Directors
RAYMOND B. RUDDY
/s/ F. ARTHUR NERRET Chief Financial Officer November 20, 1998
- --------------------------------------------- (Principal Financial and
F. ARTHUR NERRET Accounting Officer)
/s/ RUSSELL A. BELIVEAU Director November 20, 1998
- ---------------------------------------------
RUSSELL A. BELIVEAU
/s/ JESSE BROWN Director November 20, 1998
- ---------------------------------------------
JESSE BROWN
/s/ MARGARET CARRERA Vice-Chairwoman of the Board November 20, 1998
- --------------------------------------------- and Director
MARGARET CARRERA
/s/ LOUIS E. CHAPPUIE Director November 20, 1998
- ---------------------------------------------
LOUIS E. CHAPPUIE
</TABLE>
48
<PAGE> 48
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LYNN P. DAVENPORT Director November 20, 1998
- ---------------------------------------------
LYNN P. DAVENPORT
/s/ ROBERT J. MUZZIO Director November 20, 1998
- ---------------------------------------------
ROBERT J. MUZZIO
/s/ SUSAN D. PEPIN Director November 20, 1998
- ---------------------------------------------
SUSAN D. PEPIN
/s/ PETER POND Director November 20, 1998
- ---------------------------------------------
PETER POND
</TABLE>
49
<PAGE> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
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.(2)(3)
10.2 1997 Director Stock Option Plan, as amended.(3)(4)
10.3 1997 Employee Stock Purchase Plan.(2)(3)
10.4 Amendment No. 1 to 1997 Employee Stock Purchase Plan.(3)(5)
10.5 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and David
V. Mastran.(2)
10.6 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and Raymond
B. Ruddy.(2)
10.7 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and Russell
A. Beliveau.(2)
10.8 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and Susan
D. Pepin.(2)
10.9 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and Ilene
R. Baylinson.(2)
10.10 Executive Employment, Non-Compete, Confidentiality and Stock
Restriction Agreement by and between the Company and Lynn P.
Davenport.(2)
10.11 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and Margaret Carrera.
Filed herewith.
10.12 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and George C. Casey.
Filed herewith.
10.13 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and Louis E. Chappuie.
Filed herewith.
10.14 Executive Employment, Non-Compete and Confidentiality
Agreement by and between the Company and Gary L. Glickman.
Filed herewith.
10.15 Form of Indemnification Agreement by and between the Company
and each of the directors of the Company.(2)
10.16 Letter Agreement dated September 30, 1997 between the
Company and Crestar Bank with respect to a $10 million line
of credit.(3)
10.17 Commercial Note, dated September 30, 1997 in the amount of
$10 million, issued by the Company to Crestar Bank.(3)
10.18 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)
10.19 Agreement and Plan of Merger by and between the Company and
David M. Griffith and Associates, Ltd.(6)
23.1 Consent of Ernst & Young LLP, independent auditors. Filed
herewith.
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
23.2 Consent of Grant Thornton LLP, independent auditors. Filed
herewith.
24.1 Power of Attorney, contained on signature page hereto.
27 Financial Data Schedule. Filed herewith. EDGAR only.
99.1 Important Factors Regarding Forward Looking Statements.
Filed herewith.
</TABLE>
- ---------------
(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 Registration Statement on Form S-1
(File No. 333-21611) declared effective on June 12, 1997 and incorporated
herein by reference.
(3) Management contracts and compensatory plan or arrangements required to be
filed as an Exhibit pursuant to Item 14(c) of Form 10-K.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended September 30, 1997 (File No. 1-12997) on December 22, 1997 and
incorporated herein by reference.
(5) Filed as an exhibit to the Company's 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.
(6) 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.
<PAGE> 1
EXHIBIT 10.11
EXECUTIVE EMPLOYMENT, NON-COMPETE
AND CONFIDENTIALITY AGREEMENT
THIS EXECUTIVE EMPLOYMENT, NON-COMPETE AND CONFIDENTIALITY AGREEMENT
entered into this 31st day of August, 1998 by and between Margaret Carrera (the
"Executive") and MAXIMUS, Inc., a Virginia corporation with a usual place of
business in McLean, Virginia (the "Corporation"). Capitalized terms not defined
herein shall have the meanings set forth in the Agreement and Plan of Merger by
and among the Corporation, Carrera Consulting Group ("Carrera"), Carrera
Acquisition Corp. and the Executive dated August 31, 1998.
WHEREAS, as of the Effective Time the Executive shall be a key employee
of the Corporation and a holder of a substantial number of shares of the issued
and outstanding capital stock of the Corporation.
NOW, THEREFORE, in consideration of these premises and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Employment.
1.1 Duties. The Corporation hereby agrees to employ the Executive, and
the Executive hereby agrees to accept such employment, to serve as President of
Carrera Consulting Group, a division of the Corporation reporting directly to
the Chief Executive Officer, David V. Mastran for the term set forth below. The
Corporation shall take all actions necessary to cause the Executive to be
elected to the Board of Directors of the Corporation and shall further take all
actions necessary for the Executive to be elected as Vice Chairman of the Board
of Directors of the Corporation promptly following her election to the Board of
Directors of the Corporation. The Executive hereby represents and warrants that
she is in good health and capable of performing the services required hereunder.
The Executive shall perform such services and duties as are appropriate to such
office or delegated to the Executive by the Chief Executive Officer or the Board
of Directors of the Corporation, including without limitation the duties and
responsibilities set forth in an authority and responsibility matrix to be
agreed upon by the Chief Executive Officer and the Executive. During the term of
this Agreement, the Executive shall be a full time employee of the Corporation
and shall devote such time and attention to the discharge of her duties as may
be necessary and appropriate to accomplish and complete such duties, including
without limitation attendance at monthly management meetings held at the
Corporation's offices in McLean, Virginia.
1.2 Compensation.
(a) Salary and Regular Year-End Bonus. As compensation for
performance of her obligations hereunder, the Corporation shall pay the
Executive an annual salary of not less
<PAGE> 2
than $240,000, such annual salary to be reviewed for adjustment on or about
October 1, 1999 and is eligible for a regular year-end bonus consistent with
Carrera's past practices. Such amounts shall be payable in accordance with the
Corporation's normal payroll practices.
(b) Vacation, Insurance, Expenses. The Executive shall be
entitled to such vacation benefits, health, disability and life insurance
benefits and expense reimbursements in a manner consistent with the
Corporation's past practices and as are provided by the Corporation to its other
Division Presidents.
(c) Other Benefits. The Executive shall be entitled to the
continued use of the automobile currently owned and provided for the use of the
Executive by Carrera at the expense of the Corporation, such expense to include
insurance, maintenance and all other reasonable expenses related to the use of
said automobile. The Corporation and the Executive will negotiate the terms and
conditions of any arrangement to be entered into in lieu of the provisions of
this Section 1.2(c).
1.3 Term; Termination. The term of the employment agreement set forth
in this Section 1 shall be for a period commencing at the Effective Time and
continuing for three (3) years thereafter provided that this Agreement shall
terminate:
(a) by mutual written consent of the parties;
(b) upon Executive's death or inability, by reason of physical
or mental impairment, to perform substantially all of Executive's duties as
contemplated herein for a continuous period of 120 days or more; or
(c) by the Corporation for cause, which shall mean in the
event of Executive's breach of any material duty or obligation hereunder, or
intentional or grossly negligent misconduct that is materially injurious to the
Corporation, as reasonably determined by the Corporation's Board of Directors,
or willful failure to follow the reasonable directions of the Corporation's
Board of Directors.
In addition, the Executive agrees to continue her employment with the
Corporation beyond the three year term described above, at her annual salary in
effect at such time, for the period of time that is required for her to locate
and train a suitable replacement for her position with the Corporation.
Upon any termination of employment under this Section 1.3, neither
party shall have any obligation to the other pursuant to this Section 1, but
such termination shall have no effect on the obligations of the parties under
other provisions of this Agreement.
2. Non-Competition.
2.1 Undertaking. The Executive agrees that while the Executive is
employed by the Corporation and thereafter, for a period of two (2) years after
termination or cessation of such employment for any reason, the Executive shall
not, without the Corporation's prior written consent, directly or indirectly, as
a principal, employee, consultant, partner, or stockholder of, or in any other
capacity with, any business enterprise (other than in the Executive's capacity
as a
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holder of not more than 1% of the combined voting power of the outstanding stock
of a publicly held company) (a) engage in direct or indirect competition with
the Corporation, (b) conduct a business of the type or character engaged in by
the Corporation at the time of termination or cessation of the Executive's
employment or (c) develop products or services competitive with those of the
Corporation.
2.2 Prohibited Activities.
(a) The Executive agrees that, during her employment with the
Corporation, and thereafter for a period of two (2) years after the termination
of such employment, the Executive will not engage in any unethical behavior
which may adversely affect the Corporation. For the purpose of this Section 2.2,
"Unethical Behavior" is defined as:
(i) any attempt, successful or unsuccessful, by the Executive
to divert any existing contracts or subcontracts from the Corporation to any
other firm, whether or not affiliated with the Executive;
(ii) any attempt, successful or unsuccessful, by the
Executive, to adversely influence clients of the Corporation or organizations
with which the Corporation has a contract or a proposal pending as of the date
of the Executive's termination from the Corporation;
(iii) any attempt, successful or unsuccessful, by the
Executive to divert any contracts or subcontracts which are pending as of the
date of Executive's termination from the Corporation to any other firm, whether
or not affiliated with the Executive;
(iv) any attempt, successful or unsuccessful, by the Executive
to offer her services, or to influence any other employee of the Corporation to
offer their services, to any firm to compete against the Corporation in the
performance of services provided under existing contracts or follow-ons to
existing contracts or pending proposals with the Corporation's clients as of the
date of the Executive's termination; or
(v) any attempt, successful or unsuccessful, by the Executive
to employ or offer employment to, or cause any other person to employ or offer
employment to any other employee of the Corporation.
(b) The provisions of this Section 2 shall continue for a period
of two (2) years after termination of the Executive's employment with the
Corporation, whether voluntary or involuntary, with or without cause. The
Executive shall notify any new employer, partner, association or any other firm
or corporation actually or potentially in competition with the Corporation with
whom the Executive shall become associated in any capacity whatsoever of the
provisions of this Section 2 and the Executive agrees that the Corporation may
give such notice to such firm, corporation or other person.
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2.3 Business Opportunities; Conflicts of Interest; Other Employment and
Activities of the Executive.
(a) The Executive, while an employee of the Corporation, agrees
promptly to advise the Corporation of, and provide the Corporation with an
opportunity to pursue, all business opportunities that the Executive becomes
aware of that reasonably relate to the present business conducted by the
Corporation.
(b) The Executive, in her capacity as an employee of the
Corporation, shall not engage in any business with any member of the Executive's
immediate family or with any person or business entity in which the Executive or
any member of the Executive's immediate family has any material ownership
interest or financial interest, unless and until the Executive has first fully
disclosed such interest to the Board of Directors and received written consent
from the Board of Directors, signed by the Chairman of such board. As used
herein, the term "immediate family" means the Executive's spouse, natural or
adopted children, parents or siblings and the term "financial interest" means
any relationship with such person or business entity that may monetarily benefit
the Executive or member of the Executive's immediate family, including any
lending relationship or the guarantying of any obligations of such person or
business entity by the Executive or member of her immediate family.
(c) The parties hereto acknowledge and agree that the Executive
may engage in outside civic, political, social, educational and professional
activities and may serve on the boards of directors of other corporations;
provided, however, that such activities shall not have priority over or
adversely affect or conflict with the business of the Corporation or its
clients, or interfere with the mobility of the Executive to fulfill the
Executive's duties to the Corporation as a full-time employee and/or officer or
director, as the case may be, of the Corporation, as conclusively determined by
the Board of Directors of the Corporation.
(d) The parties hereto agree that the Executive may, consistent
with this Section 2.3, receive and retain speaking fees, referral fees from
business opportunities not accepted by the Corporation, and fees from outside
business activities and opportunities of the Executive consented to by the Board
of Directors of the Corporation.
3. Confidentiality.
3.1 Non-Disclosure. The parties hereto agree that the Corporation's
books, records, files and all other information relating to the Corporation
(that is not otherwise available in the Public Domain), its business and its
clients are proprietary in nature and contain trade secrets and shall be held in
strict confidence by the parties hereto, and shall not, either during the term
of this Agreement or after the termination hereof, be intentionally disclosed,
directly or indirectly, to any third party, person, firm, corporation or other
entity, irrespective of whether such person or entity is a competitor of the
Corporation or is engaged in a business similar to that of the Corporation;
except in furtherance of the Corporation's business. The trade secrets or other
proprietary or confidential information referred to in the prior sentence
includes, without limitation, all proposals to clients or potential clients,
contracts, client or potential client lists, fee policies, financial
information, administration or marketing practices or procedures and all other
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information regarding the business of the Corporation and its clients not
generally known to the public.
3.2 Trade Secrets. The parties hereto hereby acknowledge and agree that
all proprietary information referred to in this Section 3 shall be deemed trade
secrets of the Corporation and that each party hereto shall take such steps,
undertake such actions and refrain from taking such other actions, as mandated
by the provisions hereof and by the provisions of the laws of the Commonwealth
of Virginia.
4. Stock Restrictions.
4.1 Transfers. The Executive may not offer, sell, assign, grant a
participation in, pledge or otherwise transfer ("Transfer") any of the
Executive's shares of Common Stock of the Corporation (including shares acquired
after the date hereof) (the "Shares") except in compliance with the Securities
Act of 1933, as amended (the "Act"), and any applicable state securities laws.
After one year from the date of acquiring the Shares the Executive shall be
permitted to sell the Shares pursuant to Rule 144 under the Act (as currently in
effect), subject to the applicable manner of sale, volume and current public
information restrictions of Rule 144.
4.2 Improper Transfer.
(a) Any attempt to Transfer any Shares not in compliance with this
Agreement shall be null and void and neither the Corporation nor any transfer
agent of the Corporation shall register, or otherwise recognize in the
Corporation's records, any such improper Transfer.
(b) The Executive shall not enter into any transaction or series
of transactions for the purpose or with the effect of, directly or indirectly,
denying or impairing the rights or obligations of the Corporation under this
Agreement, and any such transaction shall be null and void and, to the extent
that such transaction requires any action by the Corporation, it shall not be
registered or otherwise recognized in the Corporation's records or otherwise.
5. Registration Rights.
5.1 Secondary Registration.
(a) Registration for Resale. The Corporation intends to seek to
create liquidity for the Shares held by the Executive. In the sole discretion of
the Corporation, the Corporation may file with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-8 or Form S-3
(or similar form) sufficient to permit the public offering and sale of the
Registrable Shares (as defined below) through all securities exchanges and
over-the-counter markets on which the Corporation's Common Stock is then traded.
For the purposes of this Agreement, "Registrable Shares" shall mean outstanding
Shares held by the Executive and any other person holding registration rights
substantially the same as the rights set forth in this Section 5, which Shares
are not at that time the subject of an effective registration statement filed
with the Commission. For the purposes of this Agreement, "Holders" shall mean
the Executive and any person to whom the Executive has transferred Registrable
Shares.
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(b) Notice of Filing of Registration Statement. In the event the
Corporation determines to file a registration pursuant to Section 5.1(a), the
Corporation shall notify each Holder of the proposed filing and request that
each Holder notify the Corporation within 15 days thereafter of the number of
Registrable Shares such Holder wishes the Corporation to register on such
Holder's behalf. Each Holder shall, prior to the end of such 15 day period,
request in writing that the Corporation register the sale of all or part of such
Holder's Registrable Shares.
5.2 Piggyback Registration Rights.
(a) Offer to Include Registrable Shares in Corporation Offering.
If, at any time prior to the Registration Termination Date (as defined in
Section 5.4), the Corporation shall file a registration statement to register
shares of Common Stock for its own account in an underwritten offering with the
Commission (other than a Registration Statement on Form S-4, Form S-8 or other
special purpose form) while any Registrable Shares are outstanding, the
Corporation shall give all the Holders at least thirty (30) days prior written
notice of the filing of such registration statement. Subject to 5.2(b) below, if
requested by any Holder in writing within fifteen (15) days after receipt of any
such notice, the Corporation shall register or qualify up to 20% of the number
of Registrable Shares received by the Executive on the Effective Date or, at
each Holder's option, any portion of the Registrable Shares of any Holders who
shall have made such request up to an aggregate amount equal to 20% of the
number of Registrable Shares received by the Executive on the Effective Date,
concurrently with the registration of such other securities, all to the extent
requisite to permit the public offering and sale of the Registrable Shares
through the facilities of all appropriate securities exchanges and the
over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable.
(b) Cutback of Participation in Corporation Offering.
Notwithstanding Section 5.2(a), if the managing underwriter of any such offering
shall advise the Corporation that, in its opinion, the distribution of all or a
portion of the Registrable Shares requested to be included in the registration
concurrently with the securities being registered by the Corporation would
materially adversely affect the distribution of such securities by the
Corporation for its own account, then the number of Registrable Shares held by
such Holder to be included in such registration statement shall be reduced to
the extent advised by such managing underwriter, provided that any such
reduction shall be made pro rata among the Holders electing to participate in
such registration based on the aggregate number of Registrable Shares held by
each Holder electing to so participate, and provided further that the total
number of Registrable Shares included in any such registration shall not be less
than 25% of the total number of shares of Common Stock included in the
registration for the Corporation's account, the Holders account and the account
of any other person.
5.3 Underwriting.
(a) Underwriting in Secondary Registration. If the Corporation
undertakes a registration under Section 5.1, any Holder wishing to distribute
the Registrable Shares which such Holder has requested to be registered in such
registration by means of an underwriting, shall so advise the Corporation in
such Holder's request to participate in such registration under Section 5.1(b).
The Holders of a majority of the Registrable Shares being offered may select one
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or more underwriters for the registration under Section 5.1, which selection
shall be approved by the Corporation, which approval shall not be unreasonably
withheld provided such underwriter(s) are experienced and reputable. The
Corporation shall, together with the Holders engaged in the registration
hereunder, enter into an underwriting agreement with the representative of the
underwriter or underwriters selected for such underwriting in accordance with
this Section 5.3(a).
(b) Underwriting in Piggyback Registration. In the event of an
underwritten registration pursuant to the provisions of Section 5.2, any Holder
who requests to have Registrable Shares included in such registration shall
enter into such custody agreements and powers of attorney as are reasonably
requested by the Corporation and any such underwriter, and, if requested, enter
into an underwriting agreement containing customary terms.
(c) Right of Withdrawal from Underwriting. In the event of an
underwritten offering under Section 5.3(a) or (b), the right of a Holder to
participate in a registration hereunder shall be conditioned upon the inclusion
of all or any portion of such Holder's Registrable Shares in such underwriting.
If a Holder disapproves of the terms of the underwriting, such Holder may elect
to withdraw therefrom by written notice to the Corporation and the underwriter
delivered at least seven (7) days prior to the effective date of the
registration statement. The securities so withdrawn shall also be withdrawn from
the registration statement.
5.4 Effectiveness and Expenses. The Corporation will use its best
efforts through its officers, directors, auditors and counsel to cause any
registration statement filed pursuant to this Section 5 to become effective as
promptly as practicable. The Corporation shall be obligated to use its best
efforts to maintain the effectiveness of such registration statement only until
the earlier of (i) the date on which the Registrable Shares may be sold (without
regard to volume limitations) under Rule 144 promulgated under the Act, and (ii)
the date on which no Registrable Shares remain outstanding (the "Registration
Termination Date"). The Corporation shall be obligated to pay all expenses
(other than the fees and disbursements of counsel for the Holders and
underwriting discounts, if any, payable in respect of the Registrable Shares
sold by the Holders) in connection with any such registration statement.
5.5 Blue Sky Registrations. In the event of a registration pursuant to
the provisions of this Section 5, the Corporation shall use its best efforts to
cause the Registrable Shares so registered to be registered or qualified for
sale under the securities or blue sky laws of such jurisdictions as the Holders
may reasonably request; provided, however, that the Corporation shall not be
required to qualify to do business in any state by reason of this Section 5.5 in
which it is not otherwise required to qualify to do business.
5.6 Continuing Effectiveness. Until the Registration Termination Date,
the Corporation shall use its best efforts to keep effective any registration or
qualification contemplated by this Section 5 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document and communication for such period of
time as shall be required to permit the Holders to complete the offer and sale
of the Registrable Shares covered thereby.
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<PAGE> 8
5.7 Copies of Registration Statement and Related Documents. In the
event of a registration pursuant to the provisions of this Section 5, the
Corporation shall furnish to each Holder a copy of the registration statement
and of each amendment and supplement thereto (in each case, including all
exhibits), and a reasonable number of copies of each prospectus contained in
such registration statement and each supplement or amendment thereto (including
each preliminary prospectus), all of which shall conform to the requirements of
the Act, and the rules and regulations thereunder, and such other documents, as
any Holder may reasonably request to facilitate the disposition of the
Registrable Shares included in such registration.
5.8 Rule 144 Eligibility. The Corporation agrees that until all the
Registrable Shares have been sold under a registration statement or pursuant to
Rule 144 under the Act, the Corporation shall use its best efforts to keep
current in filing all reports, statements and other materials required to be
filed with the Commission to permit holders of the Registrable Shares to sell
such securities under Rule 144.
6. Indemnity.
6.1 Corporation Indemnification of the Holders. Subject to the
conditions set forth below, the Corporation agrees to indemnify and hold
harmless each Holder, its officers, directors, partners, employees, agents and
counsel, if any, and each person, if any, who controls any such person within
the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), if any, from and against any and
all loss, liability, charge, claim, damage and expense whatsoever (which shall
include, for all purposes of this Section 6, without limitation, attorneys' fees
and any and all expenses whatsoever incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), as and when incurred, arising out of, based upon, or in connection
with any untrue statement or alleged untrue statement of a material fact
contained in any registration statement, preliminary prospectus or final
prospectus (as from time to time amended and supplemented), or any amendment or
supplement thereto, relating to the sale of any of the Registrable Shares, filed
with the Commission or any securities exchange; or any omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, unless such statement or omission
was made in reliance upon and in conformity with written information furnished
to the Corporation with respect to such Holder by or on behalf of such person
expressly for inclusion in any registration statement, preliminary prospectus,
or final prospectus, or any amendment or supplement thereto, as the case may be.
The foregoing agreement to indemnify shall be in addition to any liability the
Corporation may otherwise have, including liabilities arising under this
Agreement.
If any action is brought against any Holder or any of its officers,
directors, partners, employees, agents or counsel, or any controlling persons of
such person (an "Indemnified Party") in respect of which indemnity may be sought
against the Corporation pursuant to the foregoing paragraph, such Indemnified
Party or Parties shall promptly notify the Corporation in writing of the
institution of such action (but the failure so to notify shall not relieve the
Corporation from any liability other than pursuant to this Section 6.1) and the
Corporation shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such Indemnified Party or
Parties) and payment of expenses. Such Indemnified
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Party or Parties shall have the right to employ its or their own counsel in any
such case, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party or Parties unless the employment of such counsel shall
have been authorized in writing by the Corporation in connection with the
defense of such action or the Corporation shall not have promptly employed
counsel reasonably satisfactory to such Indemnified Party or Parties to have
charge of the defense of such action or such Indemnified Party or Parties shall
have reasonably concluded that there may be one or more legal defenses available
to it or them or to other Indemnified Parties which are different from or
additional to those available to the Corporation, in any of which events such
fees and expenses shall be borne by the Corporation, and the Corporation shall
not have the right to direct the defense of such action on behalf of the
Indemnified Party or Parties. Anything in this Section 6 to the contrary
notwithstanding, the Corporation shall not be liable for any settlement of any
such claim or action effected without its written consent, which shall not be
unreasonably withheld. The Corporation shall not, without the prior written
consent of each Indemnified Party that is not released as described in this
sentence, settle or compromise any action, or permit a default or consent to the
entry of judgment in or otherwise seek to terminate any pending or threatened
action, in respect of which indemnity may be sought hereunder (whether or not
any Indemnified Party is a party thereto), unless such settlement, compromise,
consent or termination includes an unconditional release of each Indemnified
Party from all liability in respect of such action. The Corporation agrees
promptly to notify the Holders of the commencement of any litigation or
proceedings against the Corporation or any of its officers or directors in
connection with the sale of any Registrable Shares or any preliminary
prospectus, prospectus, registration statement or amendment or supplement
thereto, or any application relating to any sale of any Registrable Shares.
6.2 Holder Indemnification of the Corporation. Each Holder
participating in any such registration shall indemnify and hold harmless the
Corporation, each director of the Corporation, each officer of the Corporation
who shall have signed the registration statement covering Registrable Shares
held by the Holder, each other person, if any, who controls the Corporation
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, and its or their respective counsel, to the same extent as the foregoing
indemnity from the Corporation to the Holders in Section 6.1, but only with
respect to statements or omissions, if any, made in any registration statement,
preliminary prospectus or final prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, in reliance upon and in
conformity with information furnished to the Corporation with respect to such
Holder by or on behalf of such Holder expressly for inclusion in any such
registration statement, preliminary prospectus or final prospectus, or any
amendment or supplement thereto, as the case may be. If any action shall be
brought against the Corporation or any other person so indemnified based on any
such registration statement, preliminary prospectus or final prospectus, or any
amendment or supplement thereto, or in any application, and in respect of which
indemnity may be sought against such Holder pursuant to this Section 6.2, such
Holder shall have the rights and duties given to the Corporation and the
Corporation and each other person so indemnified shall have the rights and
duties given to the Indemnified Parties, by the provisions of Section 6.1.
6.3 Contribution. To provide for just and equitable contribution, if
(i) an Indemnified Party makes a claim for indemnification pursuant to Section
6.1 or 6.2 but it is found in a final judicial determination, not subject to
further appeal, that such indemnification may not be enforced in such case, even
though this Agreement expressly provides for indemnification in
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such case, or (ii) any Indemnified Party or indemnifying party seeks
contribution under the Act, the Exchange Act or otherwise, then the Corporation
(including for this purpose any contribution made by or on behalf of any
director of the Corporation, any officer of the Corporation who signed any such
registration statement, any controlling person of the Corporation, and its or
their respective counsel), as one entity, and the Holders of the Registrable
Shares included in such registration in the aggregate (including for this
purpose any contribution by or on behalf of an Indemnified Party), as a second
entity, shall contribute to the losses, liabilities, claims, damages and
expenses whatsoever to which any of them may be subject, on the basis of
relevant equitable considerations such as the relative fault of the Corporation
and such Holders in connection with the facts which resulted in such losses,
liabilities, claims, damages and expenses. The relative fault, in the case of an
untrue statement, alleged untrue statement, omission or alleged omission, shall
be determined by, among other things, whether such statement, alleged statement,
omission or alleged omission relates to information supplied by the Corporation
or by such Holders, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement, alleged
statement, omission or alleged omission. The Corporation and the Holder agree
that it would be unjust and inequitable if the respective obligations of the
Corporation and the Holders for the contribution were determined by pro rata or
per capita allocation of the aggregate losses, liabilities, claims, damages and
expenses (even if the Holder and the other Indemnified Parties were treated as
one entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations, referred to in this Section 6.3. In no
case shall any Holder be responsible for a portion of the contribution
obligation imposed on all Holders in excess of its pro rata share based on the
number of Registrable Shares owned by it and included in such registration as
compared to the number of Registrable Shares owned by all Holders and included
in such registration. No person guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation. For purposes
of this Section 6.3, each person, if any, who controls any Holder within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each
officer, director, partner, employee, agent and counsel of each such Holder or
control person shall have the same rights to contribution as such Holder or
control person and each person, if any, who controls the Corporation within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Corporation who shall have signed any such registration
statement, each director of the Corporation and its or their respective counsel
shall have the same right to contribution as the Corporation, subject in each
case to the provisions of this Section 6.3. Anything in this Section 6.3 to the
contrary notwithstanding, no party shall be liable for contribution with respect
to the settlement of any claim or action effected without its written consent.
This Section 6.3 is intended to supersede any right to contribution under the
Act, the Exchange Act or otherwise.
7. Miscellaneous.
7.1 Notices. All notices, requests, demands or other communications
provided for in this Agreement shall be in writing and shall be delivered by
hand, sent prepaid by Federal Express (or a comparable overnight delivery
service) or sent by the United States mail, certified, postage prepaid, return
receipt request, to the following:
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If to the Corporation:
MAXIMUS, Inc.
1356 Beverly Road
McLean, Virginia 22201
Attention: David V. Mastran
If to the Executive:
Ms. Margaret Carrera
Carrera Consulting Group
2110 21st Street, Suite 400
Sacramento, CA 95818
Any notice, request, demand or other communication delivered or sent in the
foregoing manner shall be deemed given or made (as the case may be) upon the
earliest of (i) the date it is actually received, (ii) the business-day after
the day on which it is delivered by hand, (iii) the business day after the day
on which it is properly delivered to Federal Express (or a comparable overnight
delivery service), or (iv) the third business day after the date on which it is
deposited in the United States mail. Either party may change its address by
notifying the other party of the new address in any manner permitted by this
paragraph. Rejection or other refusal to accept or the inability to deliver
because of a changed address of which no notice was given shall not affect the
date of such notice, election or demand sent in accordance with the foregoing
provisions.
7.2 Remedies. The parties hereto further agree and acknowledge that any
violation by the Executive of the terms hereof may result in irreparable injury
and damage to the Corporation or its clients, which will not adequately be
compensable in monetary damages, that the Corporation will have no adequate
remedy at law therefor, and that the Corporation may obtain such preliminary,
temporary or permanent mandatory or restraining injunctions, orders or decrees
as may be necessary to protect it against, or on account of, any breach of the
provisions contained in this Agreement.
7.3 No Obligation of Continued Employment After Termination of Section
1. Except as set forth in Section 1 hereof, the Executive understands that this
Agreement does not constitute a contract of employment or create an obligation
on the part of the Corporation to continue the Executive's employment with the
Corporation.
7.4 Benefit; Assignment. This Agreement shall bind and inure to the
benefit of the parties and their respective personal representatives, heirs,
successors and assigns, provided this Agreement may not be assigned by either
party without the consent of the other, except that the Corporation may assign
this Agreement in connection with the merger, consolidation or sale of all or
substantially all of its business or assets. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and other legal representatives and, to the extent that any
assignment hereof is permitted hereunder, their assignees.
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7.5 Entire Agreement. This Agreement supersedes all prior agreements,
written or oral, with respect to the subject matter of this Agreement.
7.6 Severability. In the event that any one or more of the provisions
contained herein shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, and all other
provisions shall remain in full force and effect. If any of the provisions of
this Agreement is held to be excessively broad, it shall be reformed and
construed by limiting and reducing it so as to be enforceable to the maximum
extent permitted by law.
7.7 Waivers. No delay or omission by the Corporation in exercising any
right under this Agreement will operate as a waiver of that or any other right.
A waiver or consent given by the Corporation on any occasion if effective only
in that instance and will not be construed as a bar to or waiver of any right on
any other occasion.
7.8 Captions. The captions of the various sections and paragraphs of
this Agreement have been inserted only for the purpose of convenience; such
captions are not a part of this Agreement and shall not be deemed in any manner
to modify, explain, enlarge or restrict any of the provisions of this Agreement.
7.9 Governing Law. This Agreement shall be construed as a sealed
instrument and shall in all events and for all purposes be governed by, and
construed in accordance with, the laws of the Commonwealth of Virginia without
regard to any choice of law principle that would dictate the application of the
laws of another jurisdiction. Any action, suit or other legal proceeding which
the Executive may commence to resolve any matter arising under or relating to
any provision of this Agreement shall be commenced only in a court of the
Commonwealth of Virginia (or, if appropriate, a federal court located within
Virginia). Any action, suit or other legal proceeding which the Corporation may
commence to resolve any matter arising under or relating to any provision of
this Agreement shall be commenced only in a court of the State of California
(or, if appropriate, a federal court located within California). The Section
headings are included solely for convenience and shall in no event affect or be
used in connection with, the interpretation of this Agreement.
THE EXECUTIVE HAS READ ALL OF THE PROVISIONS OF THIS AGREEMENT AND THE
EXECUTIVE UNDERSTANDS, AND AGREES TO, EACH OF SUCH PROVISIONS. THE EXECUTIVE
UNDERSTANDS THAT THIS AGREEMENT MAY AFFECT THE EXECUTIVE'S RIGHT TO ACCEPT
EMPLOYMENT WITH OTHER COMPANIES SUBSEQUENT TO THE EXECUTIVE'S EMPLOYMENT WITH
THE CORPORATION.
7.10 Amendments. No alterations or additions to this Agreement shall be
binding unless in writing and signed by both the parties.
7.11 Genders. Whenever reasonably necessary, pronouns of any gender
shall be deemed synonymous, as shall singular and plural pronouns.
7.12 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, and all such
counterparts shall constitute one instrument.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
/s/ MARGARET CARRERA
----------------------------------------
Margaret Carrera
MAXIMUS, INC.
By: /s/ DAVID V. MASTRAN
----------------------------------------
David V. Mastran
President
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EXHIBIT 10.12
EXECUTIVE EMPLOYMENT, NON-COMPETE AND CONFIDENTIALITY
EMPLOYMENT AGREEMENT entered into this 16th day of March, 1998 by and
between George C. Casey (the "Executive") and MAXIMUS, Inc., a Virginia
corporation with a usual place of business in McLean, Virginia (the
"Corporation").
WHEREAS, Executive is a key employee of the Corporation and a holder of
a substantial number of shares of the issued and outstanding capital stock of
the Corporation.
NOW, THEREFORE, in consideration of these premises and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Employment.
1.1. Duties. The Corporation hereby employs the Executive, and the
Executive hereby accepts such employment, to serve during the term of this
Agreement as Division President of the Spectrum Consulting Group Division of the
Corporation reporting directly to the President of the Consulting Group of the
Corporation. The Executive hereby represents and warrants that he is in good
health and capable of performing the services required hereunder. The Executive
shall perform such services and duties as are appropriate to such office or
delegated to the Executive by the President of the Consulting Group or the Board
of Directors of the Corporation. During the term of this Agreement, the
Executive shall be a full time employee of the Corporation and shall devote such
time and attention to the discharge of his duties as may be necessary and
appropriate to accomplish and complete such duties. The Executive may not be
transferred from the Spectrum Consulting Group Division during the term of this
Agreement without his prior written consent. The Executive shall be entitled to
live in any U.S. city of his choice convenient to major transportation
facilities, and the Corporation shall reimburse the Executive's travel and
living expenses for travel to and from work locations. The Executive understands
that his job requires extensive travel and is willing to travel extensively.
1.2. Compensation.
(a) Salary and Regular Year-End Bonus. As compensation for
performance of his obligations hereunder, the Corporation shall pay the
Executive a salary of not less than $300,000 and regular year-end bonus
consistent with the Corporation's past practices.
(b) Option Agreement. As a signing bonus for joining the
Corporation and not in lieu of bonus or incentive compensation, Executive shall
also receive a stock option to purchase 100,000 shares of the Corporation's
common stock, no par value at an exercise price equal to fair market value on
the date of hire, which will become exercisable as to 25,000 shares on each of
the first four anniversaries of the date of hire. Such option shall have the
standard
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terms for the Corporation's non-qualified stock options except that such option
shall become fully exercisable to the extent not then exercisable upon the
occurrence of a change of control as defined in Section 12(g) of the
Corporation's Equity Incentive Plan.
(c) Vacation, Insurance, Expenses. The Executive shall be
entitled to such vacation benefits, health, disability and life insurance
benefits and expense reimbursements in a manner consistent with the
Corporation's past practices and as are provided by the Corporation to its Chief
Executive Officer and based on the Executive's years of service with Spectrum
Consulting Group, Inc. being treated as years of service with the Corporation
for the purposes of qualification, seniority, vesting, meeting any required
waiting periods and otherwise. Any waiting periods for pre-existing conditions
under the Corporation's insurance benefits are hereby waived for the executive.
1.3. Term; Termination. The term of the employment agreement set forth
in this Section 1 shall be for a period commencing on the date hereof and
continuing until March 15, 2002 provided that this Agreement shall terminate:
(a) by mutual written consent of the parties; or
(b) upon Executive's death or inability, by reason of physical
or mental impairment, to perform substantially all of Executive's duties as
contemplated herein for a continuous period of 120 days or more; or
(c) by the Corporation for cause, which shall mean the
Executive's intentional or grossly negligent misconduct that is materially
injurious to the Corporation, or willful failure to follow the reasonable
written directions of the Corporation's Board of Directors despite being given
written notice of and a reasonable opportunity to cure such failure.
The Corporation shall not have the right to terminate this Agreement as to the
Executive's employment prior to the end of the term except as provided in
clauses (a), (b) and (c) of this Section 1.3.
Upon any termination of employment under this Section 1.3, neither
party shall have any obligation to the other pursuant to this Section 1, but
such termination shall have no effect on the obligations of the parties under
other provisions of this Agreement.
2. NON-COMPETITION.
2.1. Undertaking. The Executive agrees that while the Executive is
employed by the Corporation and for a period of two (2) years after the
termination or cessation of such employment for any reason, the Executive shall
not, without the Corporation's prior written consent, directly or indirectly, as
a principal, employee, consultant, partner, or stockholder of, or in any other
capacity with, any business enterprise (other than in the Executive's capacity
as a holder of not more than 1% of the combined voting power of the outstanding
stock of a publicly held company) (a) engage in direct or indirect competition
with the Corporation, (b) conduct a business of the type or character engaged in
by the Corporation at the time of termination or cessation of the Executive's
employment or (c) develop products or services competitive with those of the
Corporation.
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2.2. Prohibited Activities.
(a) The Executive agrees that, during his employment with the
Corporation, and thereafter for a period of two years after the termination of
such employment, the Executive will not engage in any unethical behavior which
may adversely affect the Corporation. For the purpose of this Section 2.2,
"Unethical Behavior" is defined as:
(1) any attempt, successful or unsuccessful, by the
Executive to divert any existing contracts or subcontracts from the Corporation
to any other firm, whether or not affiliated with the Executive;
(2) any attempt, successful or unsuccessful by the
Executive, to adversely influence clients of the Corporation or organizations
with which the Corporation has a contract or a proposal pending as of the date
of the Executive's termination from the Corporation;
(3) any attempt, successful or unsuccessful, by the
Executive to divert any contracts or subcontracts which are pending as of the
date of Executive's termination from the Corporation to any other firm, whether
or not affiliated with the Executive;
(4) any attempt, successful or unsuccessful, by the
Executive to offer his services, or to influence any other employee of the
Corporation to offer their services, to any firm to compete against the
Corporation in the performance of services provided under existing contracts or
follow-ons to existing contracts or pending proposals with the Corporation's
clients as of the date of the Executive's termination; or
(5) any attempt, successful or unsuccessful, by the
Executive to employ or offer employment to, or cause any other person to employ
or offer employment to any other employee of the Corporation.
(b) The Executive agrees that, in addition to any other remedy
available to the Corporation, in the event of a breach by the Executive of the
terms of this Section 2 the Corporation may set off against any amounts due the
Executive, an amount equal to the gross revenues which such Executive, or any
entity with which the Executive is employed, affiliated or associated, receives
or is entitled to receive, from any existing clients (or potential clients with
whom a proposal is pending) of the Corporation during the two-year period
provided in this Section 2.
(c) The provisions of this Section 2 shall continue for a
period of two years after termination of the Executive's employment with the
Corporation, whether voluntary or involuntary, with or without cause. The
Executive shall notify any new employer, partner, association or any other firm
or corporation actually or potentially in competition with the Corporation with
whom the Executive shall become associated in any capacity whatsoever of the
provisions of this Section 2 and the Executive agrees that the Corporation may
give such notice to such firm, corporation or other person.
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2.3. Business Opportunities: Conflicts of Interest: Other Employment
and Activities of the Executive.
(a) The Executive agrees promptly to advise the Corporation
of, and provide the Corporation with an opportunity to pursue, all business
opportunities that reasonably relate to the present business conducted by the
Corporation.
(b) The Executive, in his capacity as an employee of the
Corporation, shall not engage in any business with any member of the Executive's
immediate family or with any person or business entity in which the Executive or
any member of the Executive's immediate family has any ownership interest or
financial interest, unless and until the Executive has first fully disclosed
such interest to the Board of Directors and received written consent from the
Board of Directors, signed by the Chairman of such board. As used herein, the
term "immediate family" means the Executive's spouse, natural or adopted
children, parents or siblings and the term "financial interest" means any
relationship with such person or business entity that may monetarily benefit the
Executive or member of the Executive's immediate family, including any lending
relationship or the guarantying of any obligations of such person or business
entity by the Executive or member of his immediate family.
(c) The parties hereto acknowledge and agree that the
Executive may engage in outside civic, political, social, educational and
professional activities and may serve on the boards of directors of other
corporations; provided, however, that such activities shall not have priority
over or adversely affect or conflict with the business of the Corporation or its
clients, or interfere with the mobility of the Executive to fulfill the
Executive's duties to the Corporation as a full-time employee and officer and
director of the Corporation, as conclusively determined by the Board of
Directors of the Corporation.
(d) The parties hereto agree that the Executive may,
consistent with this Section 1.3, receive and retain speaking fees, referral
fees from business opportunities not accepted by the Corporation, and fees from
outside business activities and opportunities of the Executive consented to by
the Board of Directors of the Corporation.
3. Confidentiality.
3.1. Non-Disclosure. The parties hereto agree that the Corporation's
books, records, files and all other information relating to the Corporation
(that is not otherwise available in the Public Domain), its business and its
clients are proprietary in nature and contain trade secrets and shall be held in
strict confidence by the parties hereto, and shall not, either during the term
of this Agreement or after the termination hereof, be intentionally disclosed,
directly or indirectly, to any third party, person, firm, corporation or other
entity, irrespective of whether such person or entity is a competitor of the
Corporation or is engaged in a business similar to that of the Corporation;
except in furtherance of the Corporation's business. The trade secrets or other
proprietary or confidential information referred to in the prior sentence
includes, without limitation, all proposals to clients or potential clients,
contracts, client or potential client lists, fee policies, financial
information. administration or marketing practices or procedures and all other
information regarding the business of the Corporation and its clients not
generally known to the public, but does not include (1) information that the
Executive knew or had in his possession,
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prior to disclosure by the Corporation, without obligation of confidentiality;
(2) information that is received rightfully by the Executive from a third party
and without obligation of confidentiality; or (3) ideas, concepts, techniques,
know-how and methodologies known by the Executive prior to his employment with
the Corporation.
3.2. Trade Secrets. The parties hereto hereby acknowledge and agree
that all proprietary information referred to in this Section 2 shall be deemed
trade secrets of the Corporation and that each party hereto shall take such
steps, undertake such actions and refrain from taking such other actions, as
mandated by the provisions hereof and by the provisions of the laws of the
Commonwealth of Virginia.
4. Stock Restrictions.
4.1. Transfers. The Executive may not offer, sell, assign, grant a
participation in, pledge or otherwise transfer ("Transfer") any of the
Executive's shares of Common Stock of the Corporation (including shares acquired
after the date hereof) (the "Shares") except in compliance with the Securities
Act of 1933, as amended (the "Act"), and any applicable state securities laws.
4.2. Improper Transfer.
(a) Any attempt to Transfer any Shares not in compliance with
this Agreement shall be null and void and neither the Corporation nor any
transfer agent of the Corporation shall register, or otherwise recognize in the
Corporation's records, any such improper Transfer.
(b) The Executive shall not enter into any transaction or
series of transactions for the purpose or with the effect of, directly or
indirectly, denying or impairing the rights or obligations of the Corporation
under this Agreement, and any such transaction shall be null and void and, to
the extent that such transaction requires any action by the Corporation, it
shall not be registered or otherwise recognized in the Corporation's records or
otherwise.
4.3. Access to Records and Documents. At any time during which the
Executive is a stockholder and/or a member of the Board of Directors of the
Corporation, the Executive shall be entitled to inspect and copy such records
and documents to the extent provided by the Stock Corporation Act of the
Commonwealth of Virginia and any other applicable law.
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5. Registration Rights.
5.1. Secondary Registration.
(a) Registration for Resale. The Corporation intends to seek
to create liquidity for the Shares held by the Executive. In the sole discretion
of the Corporation, the Corporation may file with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-8 or Form S-3
(or similar form) sufficient to permit the public offering and sale of the
Registrable Shares (as defined below) through all securities exchanges and
over-the-counter markets on which the Corporation's Common Stock is then traded.
For the purposes of this Agreement, "Registrable Shares" shall mean outstanding
Shares held by the Executive and any other person holding registration rights
substantially the same as the rights set forth in this Section 5, which Shares
are not at that time the subject of an effective registration statement filed
with the Commission. For the purposes of this Agreement, "Holders" shall mean
the Executive and any person to whom the Executive has transferred Registrable
Shares.
(b) Notice of Filing of Registration Statement. In the event
the Corporation determines to file a registration pursuant to Section 5.1(a),
the Corporation shall notify each Holder of the proposed filing and request that
each Holder notify the Corporation within 15 days thereafter of the number of
Registrable Shares such Holder wishes the Corporation to register on such
Holder's behalf. Each Holder shall, prior to the end of such 15 day period,
request in writing that the Corporation register the sale of all or part of such
Holder's Registrable Shares.
5.2. Piggyback Registration Rights.
(a) Offer to Include Registrable Shares in Corporation
Offering. If, at any time prior to the Registration Termination Date (as defined
in Section 5.4), the Corporation proposes to file a registration statement to
register shares of Common Stock for its own account in an underwritten offering
with the Commission (other than a registration on Form S-4, Form S-8 or other
special purpose form) while any Registrable Shares are outstanding, the
Corporation shall give all the Holders at least 45 days prior written notice of
the filing of such registration statement. Subject to 5.2(b) below, if requested
by any Holder in writing within 30 days after receipt of any such notice, the
Corporation shall register or qualify all or, at each Holder's option, any
portion of the Registrable Shares of any Holders who shall have made such
request, concurrently with the registration of such other securities, all to the
extent requisite to permit the public offering and sale of the Registrable
Shares through the facilities of all appropriate securities exchanges and the
over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable.
(b) Cutback of Participation in Corporation Offering.
Notwithstanding Section 5.2(a), if the managing underwriter of any such offering
shall advise the Corporation in writing that, in its opinion, the distribution
of all or a portion of the Registrable Shares requested to be included in the
registration concurrently with the securities being registered by the
Corporation would materially adversely affect the distribution of such
securities by the Corporation for its own account, then the number of
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Registrable Shares held by such Holder to be included in such registration
statement shall be reduced to the extent advised by such managing underwriter,
provided that any such reduction shall be made pro rata among the Holders
electing to participate in such registration based on the aggregate number of
Registrable Shares held by each Holder electing to so participate, and provided
further that the total number of Registrable Shares included in any such
registration shall not be less than 25% of the total number of shares of Common
Stock included in the registration for the Corporation's account, the Holders'
account and the account of any other person.
5.3. Underwriting.
(a) Underwriting in Secondary Registration. If the Corporation
undertakes a registration under Section 5.1, any Holder wishing to distribute
the Registrable Shares which such Holder has requested to be registered in such
registration by means of an underwriting, such Holder shall so advise the
Corporation in such Holder's request to participate in such registration under
Section 5.1(b). The Holders of a majority of the Registrable Shares being
offered may select one or more underwriters for the registration under Section
5.1, which selection shall be approved by the Corporation, which approval shall
not be unreasonably withheld provided such underwriter(s) are experienced and
reputable. The Corporation shall, together with the Holders engaged in the
registration hereunder, enter into an underwriting agreement with the
representative of the underwriter or underwriters selected for such underwriting
in accordance with this Section 5.3(a).
(b) Underwriting in Piggyback Registration. In the event of an
underwritten registration pursuant to the provisions of Section 5.2, any Holder
who requests to have Registrable Shares included in such registration shall
enter into such custody agreements and powers of attorney as are reasonably
requested by the Corporation and any such underwriter, and, if requested, enter
into an underwriting agreement containing customary terms.
(c) Right of Withdrawal from Underwriting. In the event of an
underwritten offering under Section 5.3(a) or (b), the right of a Holder to
participate in a registration hereunder shall be conditioned upon the inclusion
of such Holder's Registrable Shares in such underwriting. If a Holder
disapproves of the terms of the underwriting, such Holder may elect to withdraw
therefrom by written notice to the Corporation and the underwriter delivered at
least seven days prior to the effective date of the Registration Statement. The
securities so withdrawn shall also be withdrawn from the Registration Statement.
5.4. Effectiveness and Expenses. The Corporation will use its best
efforts through its officers, directors, auditors and counsel to cause any
Registration Statement filed pursuant to this Section 5 to become effective as
promptly as practicable. The Corporation shall be obligated to use its best
efforts to maintain the effectiveness of such Registration Statement only until
the earlier of (i) the date on which the Registrable Shares may be sold (without
regard to volume limitations) under Rule 144 promulgated under the Act, and (ii)
the date on which no Registrable Shares remain outstanding (the "Registration
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Termination Date"). The Corporation shall be obligated to pay all expenses
(other than the fees and disbursements of counsel for the Holders and
underwriting discounts, if any, payable in respect of the Registrable Shares
sold by the Holders) in connection with any such Registration Statement,
including any expenses incurred in connection with a registration or
qualification pursuant to Section 5.5 below.
5.5. Blue Sky Registrations. In the event of a registration pursuant to
the provisions of this Section 5, the Corporation shall use its best efforts to
cause the Registrable Shares so registered to be registered or qualified for
sale under the securities or blue sky laws of such jurisdictions as the Holders
may reasonably request; provided, however, that the Corporation shall not be
required to qualify to do business in any state by reason of this Section 5.5 in
which it is not otherwise required to qualify to do business.
5.6. Continuing Effectiveness. Until the Registration Termination Date,
the Corporation shall use its best efforts to keep effective any registration or
qualification contemplated by this Section 5 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document and communication for such period of
time as shall be required to permit the Holders to complete the offer and sale
of the Registrable Shares covered thereby.
5.7. Copies of Registration Statement and Related Documents and
Information. In the event of a registration pursuant to the provisions of this
Section 5, the Corporation shall furnish to each Holder a copy of the
Registration Statement and of each amendment and supplement thereto (in each
case, including all exhibits), and a reasonable number of copies of each
prospectus contained in such registration statement and each supplement or
amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act, and the rules and regulations
thereunder, and such other documents and information, as any Holder may
reasonably request to facilitate the disposition of the Registrable Shares
included in such registration.
5.8. Rule 144 Eligibility. The Corporation agrees that until all the
Registrable Shares have been sold under a registration statement or pursuant to
Rule 144 under the Act, the Corporation shall use its best efforts to keep
current in filing all reports, statements and other materials required to be
filed with the Commission to permit holders of the Registrable Shares to sell
such securities under Rule 144.
5.9. No Inconsistency. The Corporation shall not enter into any
agreement with any holder or prospective holder of any securities of the
Corporation providing for the grant of registration rights which is inconsistent
with the rights granted to the Holders of Registrable Shares in this Agreement.
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6. Indemnity.
6.1. Corporation Indemnification of the Holders. Subject to the
conditions set forth below, the Corporation agrees to indemnify and hold
harmless each Holder, its officers, directors, partners, employees, agents and
counsel, if any, and each person, if any, who controls any such person within
the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), if any, from and against any and
all loss, liability, charge, claim, damage and expense whatsoever (which shall
include, for all purposes of this Section 6, without limitation, attorneys' fees
and any and all expenses whatsoever incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), as and when incurred, arising out of, based upon, or in connection
with any untrue statement or alleged untrue statement of a material fact
contained in any registration statement, preliminary prospectus or final
prospectus (as from time to time amended and supplemented), or any amendment or
supplement thereto, relating to the sale of any of the Registrable Shares, filed
with the Commission, any state regulatory authority or any securities exchange;
or any omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
arising out of, based upon, or in connection with any violation by the
Corporation of any rule or regulation promulgated under the Act applicable to
the Corporation and relating to any action or inaction required of the
Corporation in connection with any registration pursuant to Section 5, unless
and to the extent such statement or omission was made in reliance upon and in
conformity with written information furnished to the Corporation with respect to
such Holder by or on behalf of such person expressly for inclusion in any
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, as the case may be. The foregoing agreement to
indemnify shall be in addition to any liability the Corporation may otherwise
have, including liabilities arising under this Agreement.
If any action is brought against any Holder or any of its officers,
directors, partners, employees, agents or counsel, or any controlling persons of
such person (an "Indemnified Party") in respect of which indemnity may be sought
against the Corporation pursuant to the foregoing paragraph, such Indemnified
Party or Parties shall promptly notify the Corporation in writing of the
institution of such action (but the failure so to notify shall not relieve the
Corporation from any liability other than pursuant to this Section 6.1) and the
Corporation shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such Indemnified Party or
Parties) and payment of expenses. Such Indemnified Party or parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless the employment of such counsel shall have been authorized in
writing by the Corporation in connection with the defense of such action or the
Corporation shall not have promptly employed counsel reasonably satisfactory to
such Indemnified Party or Parties to have charge of the defense of such action
or such Indemnified Party or parties shall have reasonably concluded that there
may be one or more legal defenses available to it or them or to other
Indemnified Parties which are different from or additional to those available to
the Corporation, in any of which events such fees and expenses shall be borne by
the Corporation, and the Corporation shall
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not have the right to direct the defense of such action on behalf of the
Indemnified Party or Parties. Anything in this Section 6 to the contrary
notwithstanding, the Corporation shall not be liable for any settlement of any
such claim or action effected without its written consent, which shall not be
unreasonably withheld or delayed. The Corporation shall not, without the prior
written consent of each Indemnified Party that is not released as described in
this sentence, settle or compromise any action, or permit a default or consent
to the entry of judgment in or otherwise seek to terminate any pending or
threatened action, in respect of which indemnity may be sought hereunder
(whether or not any Indemnified Party is a party thereto), unless such
settlement, compromise, consent or termination includes an unconditional release
of each Indemnified Party from all liability in respect of such action. The
Corporation agrees promptly to notify the Holders of the commencement of any
litigation or proceedings against the Corporation or any of its officers or
directors in connection with the sale of any Registrable Shares or any
preliminary prospectus, prospectus, registration statement or amendment or
supplement thereto, or any application relating to any sale of any Registrable
Shares.
6.2. Holder Indemnification of the Corporation. Each Holder
participating in any such registration shall severally and not jointly,
indemnify and hold harmless the Corporation, each director of the Corporation,
each officer of the Corporation who shall have signed the registration statement
covering Registrable Shares held by the Holder, each other person, if any, who
controls the Corporation within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, and its or their respective counsel, to the same
extent as the foregoing indemnity from the Corporation to the Holders in Section
6.1, but only with respect to statements or omissions, if any, made in any
registration statement, preliminary prospectus or final prospectus (as from time
to time amended and supplemented), or any amendment or supplement thereto, in
reliance upon and in conformity with written information furnished to the
Corporation with respect to such Holder by or on behalf of such Holder expressly
for inclusion in any such registration statement, preliminary prospectus or
final prospectus, or any amendment or supplement thereto, as the case may be. If
any action shall be brought against the Corporation or any other person so
indemnified based on any such registration statement, preliminary prospectus or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against such Holder pursuant to
this Section 6.2, such Holder shall have the rights and duties given to the
Corporation and the Corporation and each other person so indemnified shall have
the rights and duties given to the Indemnified Parties, by the provisions of
Section 6.1. However, in no event shall the liability of any Holder of
Registrable Shares participating in such registration hereunder be greater than
the dollar amount for the proceeds received by such Holder upon the sale of the
Registrable Shares giving rise to such indemnification obligation.
6.3. Contribution. To provide for just and equitable contribution, if
(i) an Indemnified Party makes a claim for indemnification pursuant to Section
6.1 or 6.2 but it is found in a final judicial determination, not subject to
further appeal, that such indemnification may not be enforced in such case, even
though this Agreement expressly provides for indemnification in such case, or
(ii) any indemnified or indemnifying party seeks contribution under the Act, the
Exchange Act or otherwise, then the Corporation (including for this purpose any
contribution made by or on behalf of any director of the
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Corporation, any officer of the Corporation who signed any such registration
statement, any controlling person of the Corporation, and its or their
respective counsel), as one entity, and the Holders of the Registrable Shares
included in such registration in the aggregate (including for this purpose any
contribution by or on behalf of an Indemnified Party), as a second entity, shall
contribute to the losses, liabilities, claims, damages and expenses whatsoever
to which any of them may be subject, on the basis of relevant equitable
considerations such as the relative fault of the Corporation and such Holders in
connection with the facts which resulted in such losses, liabilities, claims,
damages and expenses. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission or alleged omission, shall be determined by,
among other things, whether such statement, alleged statement, omission or
alleged omission relates to information supplied by the Corporation or by such
Holders, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement, alleged statement, omission or
alleged omission. The Corporation and the Holder agree that it would be unjust
and inequitable if the respective obligations of the Corporation and the Holders
for the contribution were determined by pro rata or per capita allocation of the
aggregate losses, liabilities, claims, damages and expenses (even if the Holder
and the other Indemnified Parties were treated as one entity for such purpose)
or by any other method of allocation that does not reflect the equitable
considerations, referred to in this Section 6.3. In no case shall any Holder be
responsible for a portion of the contribution obligation imposed on all Holders
in excess of its pro rata share based on the number of Registrable Shares held
by it and included in such registration as compared to the number of Registrable
Shares owned by all Holders and included in such registration. No person guilty
of a fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 6.3, each person, if
any, who controls any Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent and counsel of each such Holder or control person shall have the same
rights to contribution as such Holder or control person and each person, if any,
who controls the Corporation within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, each officer of the Corporation who shall
have signed any such registration statement, each director of the Corporation
and its or their respective counsel shall have the same right to contribution as
the Corporation, subject in each case to the provisions of this Section 6.3.
Anything in this Section 6.3 to the contrary notwithstanding, no party shall be
liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This Section 6.3 is intended to supersede
any right to contribution under the Act, the Exchange Act or otherwise.
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7. Miscellaneous.
7.1. Notices. All notices, requests, demands or other communications
provided for in this Agreement shall be in writing and shall be delivered by
hand, sent prepaid by Federal Express (or a comparable overnight delivery
service) or sent by the United States mail, certified, postage prepaid, return
receipt request, to the following
If to the Corporation,
MAXIMUS, Inc.
1356 Beverly Road
McLean, Virginia 22201
Attention: David V. Mastran
If to the Executive,
George C. Casey
15503 Legend Springs
San Antonio, TX 78247
Any notice, request, demand or other communication delivered or sent in the
foregoing manner shall be deemed given or made (as the case may be) upon the
earliest of (i) the date it is actually received, (ii) the business-day after
the day on which it is delivered by hand, (iii) the business day after the day
on which it is properly delivered to Federal Express (or a comparable overnight
delivery service), or (iv) the third business day after the date on which it is
deposited in the United States mail. Either party may change its address by
notifying the other party of the new address in any manner permitted by this
paragraph. Rejection or other refusal to accept or the inability to deliver
because of a changed address of which no notice was given shall not affect the
date of such notice, election or demand sent in accordance with the foregoing
provisions.
7.2. Remedies. The parties hereto further agree and acknowledge that
any violation by either party of the terms hereof may result in irreparable
injury and damage to the other party, which will not adequately be compensable
in monetary damages, that the injured party will have no adequate remedy at law
therefor, and that the injured party may obtain such preliminary, temporary or
permanent mandatory or restraining injunctions, orders or decrees as may be
necessary to protect it against, or on account of, any breach of the provisions
contained in this Agreement.
7.3. No Obligation of Continued Employment After Termination of Section
1. Except as set forth in Section 1 hereof, the Executive understands that this
Agreement does not constitute a contract of employment or create an obligation
on the part of the Corporation to continue the Executive's employment with the
Corporation.
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7.4. Benefit; Assignment. This Agreement shall bind and inure to the
benefit of the parties and their respective personal representatives, heirs,
successors and assigns, provided this Agreement may not be assigned by either
party without the consent of the other except that the Corporation may assign
this Agreement in connection with the merger, consolidation or sale of all or
substantially all of its business or assets to a successor that assumes in
writing the Corporation's obligations hereunder. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and other legal representatives and, to the extent that any
assignment hereof is permitted hereunder, their assignees.
7.5. Entire Agreement. This Agreement supersedes all prior agreements,
written or oral, with respect to the subject matter of this Agreement.
7.6. Severability. In the event that any one or more of the provisions
contained herein shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, and all other
provisions shall remain in full force and effect. If any of the provisions of
this Agreement is held to be excessively broad, it shall be reformed and
construed by limiting and reducing it so as to be enforceable to the maximum
extent permitted by law.
7.7. Waivers. No delay or omission by a party in exercising any right
under this Agreement will operate as a waiver of that or any other right. A
waiver or consent given by a party on any occasion if effective only in that
instance and will not be construed as a bar to or waiver of any right on any
other occasion.
7.8. Captions. The captions of the various sections and paragraphs of
this Agreement have been inserted only for the purpose of convenience; such
captions are not a part of this Agreement and shall not be deemed in any manner
to modify, explain, enlarge or restrict any of the provisions of this Agreement.
7.9. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the Commonwealth of Virginia exclusive of its choice
of law rules.
THE EXECUTIVE HAS READ ALL OF THE PROVISIONS OF THIS AGREEMENT AND THE
EXECUTIVE UNDERSTANDS, AND AGREES TO, EACH OF SUCH PROVISIONS. THE EXECUTIVE
UNDERSTANDS THAT THIS AGREEMENT MAY AFFECT THE EXECUTIVE'S RIGHT TO ACCEPT
EMPLOYMENT WITH OTHER COMPANIES SUBSEQUENT TO THE EXECUTIVE'S EMPLOYMENT WITH
THE CORPORATION.
7.10. Amendments. No alterations or additions to this Agreement shall
be binding unless in writing and signed by both the parties.
7.11. Genders. Whenever reasonably necessary, pronouns of any gender
shall be deemed synonymous, as shall singular and plural pronouns.
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7.12. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, and all such
counterparts shall constitute one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
\s\GEORGE C. CASEY
--------------------------------------------
George C. Casey
MAXIMUS, INC.
By: \s\DAVID V. MASTRAN
--------------------------------------------
David V. Mastran
President and Chief Executive Officer
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EXHIBIT 10.13
EXECUTIVE EMPLOYMENT, NONCOMPETE AND CONFIDENTIALITY
AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") entered into this 12th day of
May 1998 by and between Louis E. Chappuie (the "Executive") and Maximus
Acquisition Corp., a Delaware corporation with a usual place of business in
McLean, Virginia, (such corporation, or its successors and assigns, including
but not limited to David M. Griffith & Associates, Ltd., the "Corporation").
WHEREAS, the Corporation desires to employ Executive as its President of
David M. Griffith & Associates, Ltd. ("Griffith"); and
WHEREAS, Executive desires to be so employed by the Corporation at the
salary and benefits provided for herein; and
WHEREAS, Executive acknowledges and understands that during the course of
his employment, Executive will become familiar with certain confidential
information of the Corporation and Griffith which is exceptionally valuable to
the Corporation and Griffith and vital to the success of the business of the
Corporation and Griffith; and
WHEREAS, the Corporation and Executive desire to protect such confidential
information from disclosure to third parties or its use to the detriment of the
Corporation or Griffith; and
WHEREAS, Executive acknowledges that the likelihood of disclosure of such
confidential information would be substantially reduced, and that legitimate
business interests of the Corporation and Griffith would be protected, if
Executive refrains from competing with the Corporation or Griffith and from
soliciting customers and employees during and following the term of this
Agreement, and Executive is willing to covenant that he is willing to refrain
from such actions.
NOW, THEREFORE, in consideration of these premises and of the mutual
covenants and agreements set forth hereinafter, the parties hereto hereby agree
as follows:
1. SUPERSEDED AGREEMENT. This Agreement supersedes the Employment and Share
Purchase Agreement between Griffith and Executive dated April 26, 1997 and any
amendments thereto (collectively, the "1997 Agreements"), subject, however, to
the provisions of Section 2.2 (iii) hereof.
2. EMPLOYMENT.
2.1. DUTIES. The Corporation hereby employs Executive, and Executive hereby
accepts such employment, to serve as the President and Director of Griffith.
Executive will
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perform such services and duties as are appropriate to such office or delegated
to Executive by Raymond Ruddy as President of the Consulting Group of MAXIMUS,
Inc., the parent company of the Corporation or by the Board of Directors of
MAXIMUS, Inc. During the term of this Agreement, Executive will be a full time
employee of the Corporation and will devote such time and attention to the
diligent and satisfactory performance of his duties as may be necessary and
appropriate to accomplish and complete such duties. Executive will not engage in
any activities which would have an adverse effect on the Corporation's
reputation, goodwill or business relationships or which would result in economic
harm to the Corporation.
2.2. COMPENSATION.
(i) SALARY. During the term of Executive's employment hereunder, the
Corporation will pay to Executive an annual base salary ("Base Salary") of Three
Hundred Thousand Dollars ($300,000.00), payable in equal bimonthly installments
as are customary under the Corporation's payroll practices from time to time.
Base Salary expressly includes an allowance for automobile lease expenses and
for the fringe benefit adjustment that other Griffith employees received to
their base salaries as a result of the merger of the Corporation and Griffith on
May 7, 1998, which fringe benefit adjustment Executive hereby expressly waives.
(ii) BONUS. During the term of Executive's employment, the Corporation
will pay to Executive a bonus in the amount of One Hundred Twenty Five Thousand
Dollars ($125,000.00) payable in equal installments on March 31 and on September
30 of each year; provided, however, that Executive's bonus will be pro rated for
the period commencing on the date hereof and ending on September 30, 1998.
(iii) ADDITIONAL BONUS. It is contemplated by the parties hereto that
Performance Compensation provided for in the 1997 Agreement shall be paid by
Griffith prior to the date hereof, evidenced by a receipt therefor signed by
both parties. In the event that such Performance Compensation is not so paid,
the Corporation will pay to Executive an additional bonus in the amount of Two
Hundred Thousand Dollars ($200,000.00) on the date that is one year from the
date hereof.
(iv) ADDITIONAL BENEFITS. The Corporation will provide Executive such
benefits as are generally provided by the Corporation to its other employees,
including but not limited to, health and dental insurance, disability and life
insurance, sick days and other employee benefits (collectively, "Other
Benefits"), all in accordance with the terms and conditions of the Other
Benefits plans, as the same will be amended from time to time.
(v) WITHHOLDING. All salary, bonus, and other payments described in
this Agreement will be subject to withholding for federal, state or local taxes,
amounts withheld under applicable benefit policies or programs, and any other
amounts that may be required to be withheld by law, judicial order or otherwise.
2.3. TERM; TERMINATION. Executive's employment pursuant to this Agreement
shall commence on the date hereof and shall continue for two (2) years
thereafter, provided that this Agreement will terminate:
(a) by mutual written consent of the parties; or
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(b) upon Executive's death or inability, by reason of physical or
mental impairment, to perform substantially all of Executive's duties as
contemplated herein for a continuous period of four (4) months or more; or
(c) by the Corporation for cause, which will mean in the event of
Executive's breach of any material duty or obligation hereunder, or intentional
or grossly negligent conduct that is materially injurious to the Corporation, as
reasonably determined by the Corporation's Board of Directors, or willful
failure to follow the reasonable directions of the Corporation's President of
the Consulting Group or Board of Directors.
Upon any termination of employment under this Section 2.3, neither party
will have any obligation to the other pursuant to this Section 2, except as set
forth in Section 2.2 (iii), but such termination will have no effect on the
obligations of the parties under other provisions of this Agreement.
2.4. EARLY TERMINATION OF EXECUTIVE'S EMPLOYMENT BY THE CORPORATION. If the
Corporation terminates this Agreement for any reason other than an event
described under Section 2.3, the Corporation shall have post-termination
obligations to executive. The post termination obligations shall commence with
the date the Corporation terminates Executive's employment and shall run to the
date this Agreement would have otherwise terminated by lapse of time or an
earlier event described in Section 2.3. The Corporation's post-termination
obligations are as follows:
(i) to pay $425,000.00 per year and a pro rata portion thereof for
any partial year;
(ii) where permitted by the terms of the Other Benefits plans, statute
and other pertinent authority, to continue the Executive as a participant in any
existing Other Benefit plan on the date of termination and, if such continuation
is not permitted, to pay the dollar equivalent benefit under the Other Benefit
plan, provided that such payment does not violate pertinent statute or other
authority; and
(iii) to pay to Executive the additional bonus if not earlier paid.
3. NON-COMPETITION.
3.1. DEFINITIONS FOR APPLICATION OF THE COVENANT NOT TO COMPETE.
(a) Restricted Services. The term "Restricted Services" means
services rendered by Griffith or the Corporation, including without limitation,
all of the following:
* "A-87" cost allocation plans (or such cost allocation plans as
may later replace or supplement such "A-87" cost allocation
plans),
* user fee and charge studies,
* full cost plans,
* child support enforcement services,
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* environmental consulting,
* fleet studies,
* state mandated cost claiming,
* disaster claiming,
* human resource consulting,
* productivity studies,
* privatization analyses,
* university A-21 studies,
* management studies,
* franchise fee studies,
* government studies,
* executive search,
* revenue maximization studies, and
* housing authority consulting.
(b) Properties. The term "Properties" means tangible and intangible
properties of Griffith and the Corporation, including but not limited to,
goodwill, trade secrets (including but not limited to each item listed and
defined as a trade secret under the Illinois Trade Secrets Act," 765 ILCS 1065/1
ET SEQ.), marketing strategies and confidential information such as client
lists, proposal letters, contract forms, and manuals. "Properties" also include,
without limitation, all computer software, input forms, source codes, and report
formats used, developed, sold or licensed in connection with the rendition of
Restricted Services or otherwise sold or used in the business of Griffith or the
Corporation.
(c) Client. The term "Client" means a client of Griffith or the
Corporation who within the twenty-one (21) month period ending with the date of
a commission of a competitive act under Paragraph 3.2.3 had been invoiced by
Griffith or the Corporation or for whom the Corporation or Griffith had
performed, or for whom Griffith or the Corporation had an executed contract to
perform, or had solicited to perform, any Restricted Services.
3.2. COVENANTS BY AND RESTRICTIONS ON THE EXECUTIVE.
3.2.1. BEST EFFORTS TO GUARD CONFIDENTIALITY OF PROPERTIES. Executive
covenants and agrees to use the Executive's best efforts and utmost diligence in
carrying out Executive's duties and in guarding (through such reasonable
precautions required by the Board of Directors or otherwise) the confidentiality
of the Properties.
3.2.2. FORBIDDEN USE OF THE PROPERTIES. Executive further covenants
and agrees that he will not, directly or indirectly (as officer, director,
proprietor, manager, consultant, employee, partner or shareholder, or in any
other capacity), use for himself or others any of the Properties during or at
any time after he has completed his duties under this Agreement.
3.2.3. COVENANT NOT TO COMMIT COMPETITIVE ACTS. The Executive further
covenants that, for a period of two (2) years after termination of the
Executive's employment for any reason, the Executive will not, directly or
indirectly (as officer, director, proprietor, manager,
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consultant, employee, partner or shareholder, or in any other capacity), commit
any of the following acts, wherever the Corporation or Griffith renders
Restricted Services:
(i) solicit or perform any Restricted Services for any client, or
interfere with any contractual arrangements of any client, of Griffith or the
Corporation,
(ii) solicit or hire any other employee, or any individual who has
been an employee, of Griffith or the Corporation within the preceding six
calendar months prior to the solicitation or hiring of the employee,
(iii) develop, sell license or otherwise market computer software
which is competitive with any of Griffith or the Corporation's computer
software, including without limitation computer software which is developed,
sold, licensed or otherwise marketed by Griffith or the Corporation as of the
termination of Executive's employment for any reason,
except in each such case Executive has received the express written permission
of the Corporation.
3.2.4. RIGHT OF INSPECTION. Executive shall upon demand from the
Corporation, make available for inspection at such reasonable times and places
as the Corporation may request any of the confidential or other information used
directly or indirectly by Executive, solely for the purpose of determining
Executive's compliance with the restrictions of this Agreement. The Corporation
will not use, adopt or exploit for its own purposes any of the disclosed
information.
3.3. REMEDIES IN THE EVENT OF BREACH. Executive agrees that the remedy at
law for any breach by Executive of any of the restrictions of this Section 3 may
be inadequate and that the Corporation shall be entitled to injunctive relief.
Executive further understands and agrees that in addition to any other remedy
available to the Corporation, the Corporation may set off against any amounts
due Executive, an amount equal to the gross revenues which Executive, or any
entity with which Executive is employed, affiliated or associated, receives or
is entitled to receive, from any existing clients (or potential clients with
whom a proposal is pending) of Griffith or the Corporation (as the case might
be) during the two-year period provided in this Section 3.
3.4. DUTY TO INFORM. Executive shall notify any new employer, partner,
association or any other firm or corporation actually or potentially in
competition with Griffith or the Corporation with whom Executive shall become
associated in any capacity whatsoever of the provisions of this Section 3 and
Executive agrees that the Corporation may give such notice to such firm,
corporation or other person.
3.5. BUSINESS OPPORTUNITIES: CONFLICTS OF INTEREST; OTHER EMPLOYMENT AND
ACTIVITIES OF EXECUTIVE.
3.5.1. Executive agrees promptly to advise the Corporation of, and
provide the Corporation with all opportunity to seek, all business opportunities
that reasonably relate to the present business conducted by the Corporation.
5
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3.5.2. Executive, in his capacity as an employee of the Corporation,
shall not engage in any business with any member of Executive's immediate family
or with any person or business entity in which Executive or any member of
Executive's immediate family has any ownership interest or financial interest,
unless and until Executive has first fully disclosed such interest to the Board
of Directors and received written consent from the Board of Directors, signed by
the Chairman of such board. As used herein, the term "immediate family" means
Executive's spouse, natural or adopted children, parents or siblings and the
term "financial interest" means any relationship with such person or business
entity that may monetarily benefit Executive or member of Executive's immediate
family, including any lending relationship or the guarantying of any obligations
of such person or business entity by Executive or member of his immediate
family.
3.5.3. The parties hereto acknowledge and agree that Executive may
engage in outside civic, political, social, educational and professional
activities and may serve on the boards of directors of other corporations;
provided, however, that such activities shall not have priority over or
adversely affect or conflict with the business of the Corporation or its
clients, or interfere with the mobility of Executive to fulfill Executive's
duties to the Corporation as a full-time employee and officer of the
Corporation, as conclusively determined by the Board of Directors of the
Corporation.
3.5.4. The parties hereto agree that Executive may, consistent with
this Section 3, receive and retain speaking fees, referral fees from business
opportunities not accepted by the Corporation, and fees from outside business
activities and opportunities of Executive consented to by the Board of Directors
of the Corporation.
4. STOCK RESTRICTIONS.
4.1. TRANSFERS. Executive may not offer, sell, assign, grant a
participation in, pledge or otherwise transfer ("Transfer") any of the
Executive's shares of Common Stock of the Corporation (including shares acquired
after ale date hereof) (the "Shares") except in compliance with the Securities
Act of 1933, as amended (the "Act"), and any applicable state securities laws.
4.2. IMPROPER TRANSFER.
4.2.1. Any attempt to Transfer any Shares not in compliance with this
Agreement shall be null and void and neither the Corporation nor any transfer
agent of the Corporation shall register, or otherwise recognize in the
Corporation's records, any such improper Transfer.
4.2.2. Executive shall not enter into any transaction or series of
transactions for the purpose or with the effect of, directly or indirectly,
denying or impairing the rights or obligations of the Corporation under this
Agreement, and any such transaction shall be null and void and, to the extent
that such transaction requires any action by the Corporation, it shall not be
registered or otherwise recognized in the Corporation's records or otherwise.
4.3. ACCESS TO RECORDS AND DOCUMENTS. At any time during which Executive is
a stockholder and/or a member of the Board of Directors of the Corporation,
Executive shall be
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entitled to inspect and copy such records and documents to the extent provided
by the Stock Corporation Act of the Commonwealth of Virginia and any other
applicable law.
5. MISCELLANEOUS.
5.1. NOTICES. All notices, requests, demands or other communications
provided for in this Agreement shall be in writing and shall be delivered by
hand, sent prepaid by Federal Express (or a comparable overnight delivery
service) or sent by the United States mail, certified, postage prepaid, return
receipt request, to the following
If to the Corporation,
MAXIMUS, Inc.
36 Washington Street, Suite 320
Wellesley Hills, MA 02181
Attention: Raymond Ruddy
If to Executive,
884 Gloucester Crossing
Lake Forest, IL 60045
Any notice, request, demand or other communication delivered or sent in the
foregoing manner shall be deemed given or made (as the case may be) upon the
earliest of (l) the date it is actually received, (ii) the business-day after
the day on which it is delivered by hand, (iii) the business day after the day
on which it is properly delivered to Federal Express (or a comparable overnight
delivery service) or (iv) the third business day after the date on which it is
deposited in the United States mail. Either party may change its address by
notifying the other party of the new address in any manner permitted by this
paragraph. Rejection or other refusal to accept or the inability to deliver
because of a changed address of which no notice was given shall not affect the
date of such notice, election or demand sent in accordance with the foregoing
provisions.
5.2. NO OBLIGATION OF CONTINUED EMPLOYMENT. Except as set forth in Section
2 hereof, Executive understands that this Agreement does not constitute a
contract of employment or create an obligation on the part of the Corporation to
continue Executive's employment with the Corporation.
5.3. BENEFIT; ASSIGNMENT. This Agreement shall bind and inure to the
benefit of the parties and their respective personal representatives, heirs,
successors and assigns, provided this Agreement may not be assigned by either
party without the consent of the other except that the Corporation may assign
this Agreement in connection with the merger, consolidation or sale of all or
substantially all of its business or assets.
5.4. ENTIRE AGREEMENT. This Agreement supersedes all prior agreements,
written or oral, with respect to the subject matter of this Agreement.
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5.5. SEVERABILITY. In the event that any one or more of the provisions
contained herein shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, and all other
provisions shall remain in full force and effect. If any of the provisions of
this Agreement is held to be excessively broad, it shall be reformed and
construed by limiting and reducing it so as to be enforceable to the maximum
extent permitted by law.
5.6. WAIVERS. No delay or omission by the Corporation in exercising any
right under this Agreement will operate as a waiver of that or any other right.
A waiver or consent given by the Corporation on any occasion is effective only
in that instance and will not be construed as a bar to or waiver of any right on
any other occasion.
5.7. CAPTIONS. The captions of the various sections and paragraphs of this
Agreement have been inserted only for the purpose of convenience; such captions
are not a part of this Agreement and shall not be deemed in any manner to
modify, explain, enlarge or restrict any of the provisions of this Agreement.
5.8. GOVERNING LAW. This Agreement shall be construed as a sealed
instrument and shall in all events and for all purposes be governed by, and
construed in accordance with, the laws of the State of Illinois without regard
to any choice of law principle that would dictate the application of the laws of
another jurisdiction. Any action, suit or other legal proceeding which either
party may commence or resolve any matter arising under or relating to any
provision of this Agreement shall be commenced only in a court of the State of
Illinois (or, if appropriate, a federal court located within Illinois), and
Executive hereby consent to the jurisdiction of such court with respect to any
action, suit or proceeding commenced in such court by the Corporation. The
Section headings are included solely for convenience and shall in no event
affect or be used in connection with, the interpretation of this Agreement.
EXECUTIVE HAS READ ALL OF THE PROVISIONS OF THIS AGREEMENT AND EXECUTIVE
UNDERSTANDS AND AGREES TO, EACH OF SUCH PROVISIONS. EXECUTIVE UNDERSTANDS THAT
THIS AGREEMENT MAY AFFECT EXECUTIVE'S RIGHT TO ACCEPT EMPLOYMENT WITH OTHER
COMPANIES SUBSEQUENT TO EXECUTIVE'S EMPLOYMENT WITH THE CORPORATION.
5.9. AMENDMENTS. No alterations or additions to this Agreement shall be
binding unless in writing and signed by both the parties.
5.10. GENDERS. Whenever reasonably necessary, pronouns of any gender shall
be deemed synonymous, as shall singular and plural pronouns.
5.11. COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, and all such counterparts shall
constitute one instrument.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
\s\ LOUIS E. CHAPPUIE
----------------------------------------
Louis E. Chappuie
MAXIMUS ACQUISITION CORP.
\s\ DAVID V. MASTRAN
----------------------------------------
David V. Mastran
President
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DAVID V. MASTRAN AND RAYMOND RUDDY EXECUTE THIS AGREEMENT FOR THE SOLE PURPOSE
OF AGREEING TO THE FOLLOWING PROVISION ONLY:
ELECTION OF THE EXECUTIVE AS DIRECTOR. David V. Mastran and Raymond Ruddy,
as shareholders of MAXIMUS, Inc., agree to vote their shares of the Common
Stock of MAXIMUS, Inc. (and any other shares of MAXIMUS, Inc. over which
they exercise control) and take whatever actions are necessary to elect the
Executive as a Director of MAXIMUS, Inc. and thereafter continue the
Executive in office as a Director for a period of two (2) years from the
date hereof.
ACKNOWLEDGED AND AGREED THIS 12th DAY OF MAY, 1998
\s\ DAVID V. MASTRAN \s\ RAYMOND RUDDY
- -------------------------------- ----------------------------------
David V. Mastran Raymond Ruddy
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EXHIBIT 10.14
EXECUTIVE EMPLOYMENT, NON-COMPETE
AND CONFIDENTIALITY AGREEMENT
THIS EXECUTIVE EMPLOYMENT, NON-COMPETE AND CONFIDENTIALITY AGREEMENT
entered into this 31st day of August, 1998 by and between Gary L. Glickman (the
"Executive") and MAXIMUS, Inc., a Virginia corporation with a usual place of
business in McLean, Virginia (the "Corporation"). Capitalized terms not defined
herein shall have the meanings set forth in the Agreement and Plan of Merger
(the "Merger Agreement") by and among the Corporation, Phoenix Acquisition
Corp., Phoenix Planning & Evaluation, Ltd. ("Phoenix") and the Stockholders of
Phoenix Planning & Evaluation, Ltd. dated August 31, 1998.
WHEREAS, as of the Effective Time, Executive shall be a key employee of
the Corporation and a holder of a substantial number of shares of the issued and
outstanding capital stock of the Corporation;
WHEREAS, the Corporation acknowledges that the Executive possesses the
experience and resource capabilities to operate Phoenix;
WHEREAS, the Corporation does not intend to manage Phoenix on an
operational basis;
WHEREAS, the Corporation does not intend to enter into the Merger
Agreement or to consummate the transactions contemplated thereby (or any
subsequent merger of Phoenix with and into the Corporation) unless the Executive
is and continues to be employed by Maximus as Division President;
NOW, THEREFORE, in consideration of these premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Employment.
1.1 Duties. The Corporation hereby employs the Executive, and the
Executive hereby accepts such employment, to serve as a Division President of
the Corporation, reporting directly to the President of the Corporation's
Consulting Division. As a Division President of the Corporation, the Executive
will be deemed a Section 16 officer under the Securities Exchange Act of 1934,
as amended. The Corporation and the Executive each intend that the Executive
will continue to manage Phoenix with the goal of increasing the revenues and
profits of Phoenix. The Executive hereby represents and warrants that he is in
good health and capable of performing the services required hereunder. The
Executive shall perform such services and duties as are appropriate to such
office or delegated to the Executive by the President of the Corporation's
Consulting Division or the Board of Directors of the Corporation. During the
term of this Agreement, the Executive shall be a full time employee of the
Corporation and shall
<PAGE> 2
devote such time and attention to the discharge of his duties as may be
necessary and appropriate to accomplish and complete such duties.
1.2 Compensation.
(a) Salary and Regular Year-End Bonus. As compensation for
performance of his obligations hereunder, the Corporation shall pay the
Executive (i) an annual salary of not less than $220,000, such annual salary to
be reviewed annually for adjustment beginning on or about September 30, 1999,
(ii) a one-time bonus of $105,000 to be paid to the Executive on or about
September 30, 1998 and (iii) a regular year-end bonus for the fiscal years 1999,
2000 and 2001 consistent with the Corporation's past practices.
(b) Vacation, Insurance, Expenses. The Executive shall be entitled
to such vacation benefits, health, disability and life insurance benefits and
expense reimbursements in a manner consistent with the Corporation's past
practices and as are provided by the Corporation to its other Division
Presidents.
(c) Other Benefits. The Executive shall be entitled to participate
in stock option and incentive plans and receive fringe benefits as may be
granted or established by the Corporation from time to time; provided however,
that the Executive hereby acknowledges that in the past, options have been
granted at the discretion of the Chief Executive Officer of the Corporation and
not pursuant to a regular schedule or program, and that the Corporation does not
anticipate a change in such practice. The Executive shall also be entitled to
the continued use of his currently leased automobile for the remaining duration
of the current lease at the expense of the Corporation, such expense to include
insurance, maintenance and all other reasonable expenses related to the use of
said automobile. At the termination of the normal term of the current automobile
lease, the Corporation and the Executive will negotiate whether a new automobile
lease, or any extension or modification to the current automobile lease, will be
entered into.
1.3 Term; Termination. The term of the employment agreement set forth in
this Section 1 shall be for a period commencing at the Effective Time and
continuing for four (4) years thereafter (the "Scheduled Termination Date")
provided that this Agreement shall terminate:
(a) by mutual written consent of the parties;
(b) upon Executive's death or inability, by reason of physical or
mental impairment, to perform substantially all of Executive's duties as
contemplated herein for a continuous period of 120 days or more; or
(c) by the Corporation for cause, which shall mean in the event of
Executive's breach of any material duty or obligation hereunder, or intentional
or grossly negligent misconduct that is materially injurious to the Corporation,
as reasonably determined by the Corporation's Board of Directors, or willful
failure to follow the reasonable directions of the Corporation's Board of
Directors, in each such case after continued failure to cure such breach or
misconduct within thirty (30) days after written demand for performance has been
given to the
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Executive by the Corporation, which demand shall describe specifically the
nature of such alleged failure to perform or observe such material terms and
provisions.
Upon any termination of employment under this Section 1.3, neither party
shall have any obligation to the other pursuant to this Section 1, but such
termination shall have no effect on the obligations of the parties under other
provisions of this Agreement.
2. Non-Competition.
2.1 Undertaking. The Executive agrees that while the Executive is employed
by the Corporation and thereafter, for a period of two (2) years after
termination or cessation of such employment, the Executive shall not, without
the Corporation's prior written consent, directly or indirectly, as a principal,
employee, consultant, partner, or stockholder of, or in any other capacity with,
any business enterprise (other than in the Executive's capacity as a holder of
not more than 1% of the combined voting power of the outstanding stock of a
publicly held company):
(a) if the Executive's employment is terminated pursuant to Section
1.3 prior to the Scheduled Termination Date:
(i) engage in direct or indirect competition with the
Corporation's Consulting Group;
(ii) conduct a business of the type or character engaged in by
the Corporation's Consulting Group at the time of termination or cessation of
the Executive's employment; or
(iii) develop products or services competitive with those of the
Corporation's Consulting Group.
(b) if the Executive's employment is not terminated pursuant to
Section 1.3 prior to the Scheduled Termination Date, then only with respect to
products and services developed, marketed and sold within the scope of the
Executive's employment under this Agreement:
(i) engage in direct or indirect competition with the
Corporation's Consulting Group;
(ii) conduct a business of the type or character engaged in by
the Corporation's Consulting Group at the time of termination or cessation of
the Executive's employment; or
(iii) develop products or services competitive with those of the
Corporation's Consulting Group.
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2.2 Prohibited Activities.
(a) The Executive agrees that, during his employment with the
Corporation, and thereafter for a period of two years after the termination of
such employment, the Executive will not engage in any unethical behavior which
may adversely affect the Corporation. For the purpose of this Section 2.2,
"Unethical Behavior" is defined as:
(i) any attempt, successful or unsuccessful, by the Executive to
divert any existing contracts or subcontracts from the Corporation to any other
firm, whether or not affiliated with the Executive;
(ii) any attempt, successful or unsuccessful by the Executive,
to adversely influence clients of the Corporation or organizations with which
the Corporation has a contract or a proposal pending as of the date of the
Executive's termination from the Corporation;
(iii) any attempt, successful or unsuccessful, by the Executive
to divert any contracts or subcontracts which are pending as of the date of
Executive's termination from the Corporation to any other firm, whether or not
affiliated with the Executive;
(iv) any attempt, successful or unsuccessful, by the Executive
to offer his services, or to influence any other employee of the Corporation to
offer their services, to any firm to compete against the Corporation in the
performance of services provided under existing contracts or follow-ons to
existing contracts or pending proposals with the Corporation's clients as of the
date of the Executive's termination; or
(v) any attempt, successful or unsuccessful, by the Executive to
employ or offer employment to, or cause any other person to employ or offer
employment to any other employee of the Corporation.
(b) The Executive agrees that, in addition to any other remedy
available to the Corporation, in the event of a breach by the Executive of the
terms of this Section 2 the Corporation may set off against any amounts due the
Executive, an amount equal to the gross revenues which such Executive, or any
entity with which the Executive is employed, affiliated or associated, receives
or is entitled to receive, from any existing clients (or potential clients with
whom a proposal is pending) of the Corporation during the two-year period
provided in this Section 2.
(c) The provisions of this Section 2 shall continue for a period of
two years after termination of the Executive's employment with the Corporation,
whether voluntary or involuntary, with or without cause. The Executive shall
notify any new employer, partner, association or any other firm or corporation
actually or potentially in competition with the Corporation with whom the
Executive shall become associated in any capacity whatsoever of the provisions
of this Section 2 and the Executive agrees that the Corporation may give such
notice to such firm, corporation or other person.
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2.3 Business Opportunities; Conflicts of Interest; Other Employment and
Activities of the Executive.
(a) The Executive agrees promptly to advise the Corporation of, and
provide the Corporation with an opportunity to pursue, all business
opportunities that reasonably relate to the present business conducted by the
Corporation.
(b) The Executive, in his capacity as an employee of the
Corporation, shall not engage in any business with any member of the Executive's
immediate family or with any person or business entity in which the Executive or
any member of the Executive's immediate family has any ownership interest or
financial interest, unless and until the Executive has first fully disclosed
such interest to the Board of Directors and received written consent from the
Board of Directors, signed by the Chairman of such board. As used herein, the
term "immediate family" means the Executive's spouse, natural or adopted
children, parents or siblings and the term "financial interest" means any
relationship with such person or business entity that may monetarily benefit the
Executive or member of the Executive's immediate family, including any lending
relationship or the guarantying of any obligations of such person or business
entity by the Executive or member of his immediate family.
(c) The parties hereto acknowledge and agree that the Executive may
engage in outside civic, political, social, educational and professional
activities and may serve on the boards of directors of other corporations;
provided, however, that such activities shall not have priority over or
adversely affect or conflict with the business of the Corporation or its
clients, or interfere with the mobility of the Executive to fulfill the
Executive's duties to the Corporation as a full-time employee and officer of the
Corporation, as conclusively determined by the Board of Directors of the
Corporation.
(d) The parties hereto agree that the Executive may, consistent with
this Section 2.3, receive and retain speaking fees, referral fees from business
opportunities not accepted by the Corporation, and fees from outside business
activities and opportunities of the Executive consented to by the Board of
Directors of the Corporation.
3. Confidentiality.
3.1 Non-Disclosure. The parties hereto agree that the Corporation's
books, records, files and all other information relating to the Corporation
(that is not otherwise available on a nonconfidential basis prior to its
disclosure hereunder or becomes available on a nonconfidential basis other than
from the Executive), its business and its clients are proprietary in nature and
contain trade secrets and shall be held in strict confidence by the parties
hereto, and shall not, either during the term of this Agreement or after the
termination hereof, be intentionally disclosed, directly or indirectly, to any
third party, person, firm, corporation or other entity, irrespective of whether
such person or entity is a competitor of the Corporation or is engaged in a
business similar to that of the Corporation; except in furtherance of the
Corporation's business or as required by court order or other legal process. The
trade secrets or other proprietary or confidential information referred to in
the prior sentence includes, without limitation, all proposals to clients or
potential clients, contracts, client or potential client lists, fee policies,
financial information, administration or marketing practices or procedures and
all other
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information regarding the business of the Corporation and its clients not
generally known to the public.
3.2 Trade Secrets. Each party hereto shall take such steps, undertake such
actions and refrain from taking such other actions, as mandated by the
provisions hereof and by the provisions of the laws of the Commonwealth of
Virginia regarding the proprietary information referred to in this Section 3
which is also a trade secret of the Corporation pursuant to the laws of
Virginia.
4. Stock Restrictions.
4.1 Transfers. The Executive may not offer, sell, assign, grant a
participation in, pledge or otherwise transfer ("Transfer") any of the
Executive's shares of Common Stock of the Corporation (including shares
acquired after the date hereof) (the "Shares") except in compliance with the
Securities Act of 1933, as amended (the "Act"), and any applicable state
securities laws.
4.2 Improper Transfer.
(a) Any attempt to Transfer any Shares not in compliance with this
Agreement shall be null and void and neither the Corporation nor any transfer
agent of the Corporation shall register, or otherwise recognize in the
Corporation's records, any such improper Transfer.
(b) The Executive shall not enter into any transaction or series of
transactions for the purpose or with the effect of, directly or indirectly,
denying or impairing the rights or obligations of the Corporation under this
Agreement, and any such transaction shall be null and void and, to the extent
that such transaction requires any action by the Corporation, it shall not be
registered or otherwise recognized in the Corporation's records or otherwise.
5. Registration Rights.
5.1 Secondary Registration.
(a) Registration for Resale. The Corporation intends to seek to
create liquidity for the Shares held by the Executive. In the sole discretion of
the Corporation, the Corporation may file with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-8 or Form S-3
(or similar form) sufficient to permit the public offering and sale of the
Registrable Shares (as defined below) through all securities exchanges and
over-the-counter markets on which the Corporation's Common Stock is then traded.
For the purposes of this Agreement, "Registrable Shares" shall mean outstanding
Shares held by the Executive and any other person holding registration rights
substantially the same as the rights set forth in this Section 5, which Shares
are not at that time the subject of an effective registration statement filed
with the Commission. For the purposes of this Agreement, "Holders" shall mean
the Executive and any person to whom the Executive has transferred Registrable
Shares.
(b) Notice of Filing of Registration Statement. In the event the
Corporation determines to file a registration pursuant to Section 5.1(a), the
Corporation shall notify each Holder of the proposed filing and request that
each Holder notify the Corporation within 15 days
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<PAGE> 7
thereafter of the number of Registrable Shares such Holder wishes the
Corporation to register on such Holder's behalf. Each Holder shall, prior to the
end of such 15 day period, request in writing that the Corporation register the
sale of all or part of such Holder's Registrable Shares.
5.2 Piggyback Registration Rights.
(a) Offer to Include Registrable Shares in Corporation Offering. If,
at any time prior to the Registration Termination Date (as defined in Section
5.4), the Corporation shall file a registration statement to register shares of
Common Stock for its own account in an underwritten offering with the Commission
(other than a Registration Statement on Form S-4, Form S-8 or other special
purpose form) while any Registrable Shares are outstanding, the Corporation
shall give all the Holders at least thirty (30) days prior written notice of the
filing of such registration statement. Subject to 5.2(b) below, if requested by
any Holder in writing within fifteen (15) days after receipt of any such notice,
the Corporation shall register or qualify all or, at each Holder's option, any
portion of the Registrable Shares of any Holders who shall have made such
request, concurrently with the registration of such other securities, all to the
extent requisite to permit the public offering and sale of the Registrable
Shares through the facilities of all appropriate securities exchanges and the
over-the-counter market, and will use its best efforts through its officers,
directors, auditors, and counsel to cause such registration statement to become
effective as promptly as practicable.
(b) Cutback of Participation in Corporation Offering.
Notwithstanding Section 5.2(a), if the managing underwriter of any such offering
shall advise the Corporation in writing that, in its opinion, the distribution
of all or a portion of the Registrable Shares requested to be included in the
registration concurrently with the securities being registered by the
Corporation would materially adversely affect the distribution of such
securities by the Corporation for its own account, then the number of
Registrable Shares held by such Holder to be included in such registration
statement shall be reduced to the extent advised by such managing underwriter,
provided that any such reduction shall be made pro rata among the Holders
electing to participate in such registration based on the aggregate number of
Registrable Shares held by each Holder electing to so participate, and provided
further that the total number of Registrable Shares included in any such
registration shall not be less than 25% of the total number of shares of Common
Stock included in the registration for the Corporation's account, the Holders
account and the account of any other person.
5.3 Underwriting.
(a) Underwriting in Secondary Registration. If the Corporation
undertakes a registration under Section 5.1, any Holder wishing to distribute
the Registrable Shares which such Holder has requested to be registered in such
registration by means of an underwriting, such Holder shall so advise the
Corporation in such Holder's request to participate in such registration under
Section 5.1(b). The Holders of a majority of the Registrable Shares being
offered may select one or more underwriters for the registration under Section
5.1, which selection shall be approved by the Corporation, which approval shall
not be unreasonably withheld provided such underwriter(s) are experienced and
reputable. The Corporation shall, together with the Holders engaged in the
registration hereunder, enter into an underwriting agreement with the
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<PAGE> 8
representative of the underwriter or underwriters selected for such underwriting
in accordance with this Section 5.3(a).
(b) Underwriting in Piggyback Registration. In the event of an
underwritten registration pursuant to the provisions of Section 5.2, any Holder
who requests to have Registrable Shares included in such registration shall
enter into such custody agreements and powers of attorney as are reasonably
requested by the Corporation and any such underwriter, and, if requested, enter
into an underwriting agreement containing customary terms.
(c) Right of Withdrawal from Underwriting. In the event of an
underwritten offering under Section 5.3(a) or (b), the right of a Holder to
participate in a registration hereunder shall be conditioned upon the inclusion
of such Holder's Registrable Shares in such underwriting. If a Holder
disapproves of the terms of the underwriting, such Holder may elect to withdraw
therefrom by written notice to the Corporation and the underwriter delivered at
least seven (7) days prior to the effective date of the registration statement.
The securities so withdrawn shall also be withdrawn from the registration
statement.
5.4 Effectiveness and Expenses. The Corporation will use its best
efforts through its officers, directors, auditors and counsel to cause any
registration statement filed pursuant to this Section 5 to become effective as
promptly as practicable. The Corporation shall be obligated to use its best
efforts to maintain the effectiveness of such registration statement only until
the earlier of (i) the date on which the Registrable Shares may be sold (without
regard to volume limitations) under Rule 144 promulgated under the Act, and (ii)
the date on which no Registrable Shares remain outstanding (the "Registration
Termination Date"). The Corporation shall be obligated to pay all expenses
(other than the fees and disbursements of counsel for the Holders and
underwriting discounts, if any, payable in respect of the Registrable Shares
sold by the Holders) in connection with any such registration statement.
5.5 Blue Sky Registrations. In the event of a registration pursuant to
the provisions of this Section 5, the Corporation shall use its best efforts to
cause the Registrable Shares so registered to be registered or qualified for
sale under the securities or blue sky laws of such jurisdictions as the Holders
may reasonably request; provided, however, that the Corporation shall not be
required to qualify to do business in any state by reason of this Section 5.5 in
which it is not otherwise required to qualify to do business.
5.6 Continuing Effectiveness. Until the Registration Termination Date,
the Corporation shall use its best efforts to keep effective any registration or
qualification contemplated by this Section 5 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document and communication for such period of
time as shall be required to permit the Holders to complete the offer and sale
of the Registrable Shares covered thereby.
5.7 Copies of Registration Statement and Related Documents. In the event
of a registration pursuant to the provisions of this Section 5, the Corporation
shall furnish to each Holder a copy of the registration statement and of each
amendment and supplement thereto (in each case, including all exhibits), and a
reasonable number of copies of each prospectus contained in such registration
statement and each supplement or amendment thereto (including
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each preliminary prospectus), all of which shall conform to the requirements of
the Act, and the rules and regulations thereunder, and such other documents, as
any Holder may reasonably request to facilitate the disposition of the
Registrable Shares included in such registration.
5.8 Rule 144 Eligibility. The Corporation agrees that until all the
Registrable Shares have been sold under a registration statement or pursuant to
Rule 144 under the Act, the Corporation shall use its best efforts to keep
current in filing all reports, statements and other materials required to be
filed with the Commission to permit holders of the Registrable Shares to sell
such securities under Rule 144.
6. Indemnity.
6.1 Corporation Indemnification of the Holders. Subject to the
conditions set forth below, the Corporation agrees to indemnify and hold
harmless each Holder, its officers, directors, partners, employees, agents and
counsel, if any, and each person, if any, who controls any such person within
the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), if any, from and against any and
all loss, liability, charge, claim, damage and expense whatsoever (which shall
include, for all purposes of this Section 6, without limitation, attorneys' fees
and any and all expenses whatsoever incurred in investigating, preparing or
defending against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation), as and when incurred, arising out of, based upon, or in connection
with any untrue statement or alleged untrue statement of a material fact
contained in any registration statement, preliminary prospectus or final
prospectus (as from time to time amended and supplemented), or any amendment or
supplement thereto, relating to the sale of any of the Registrable Shares, filed
with the Commission or any securities exchange; or any omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, unless such statement or omission
was made in reliance upon and in conformity with written information furnished
to the Corporation with respect to such Holder by or on behalf of such person
expressly for inclusion in any registration statement, preliminary prospectus,
or final prospectus, or any amendment or supplement thereto, as the case may be.
The foregoing agreement to indemnify shall be in addition to any liability the
Corporation may otherwise have, including liabilities arising under this
Agreement.
If any action is brought against any Holder or any of its officers,
directors, partners, employees, agents or counsel, or any controlling persons of
such person (an "Indemnified Party") in respect of which indemnity may be sought
against the Corporation pursuant to the foregoing paragraph, such Indemnified
Party or Parties shall promptly notify the Corporation in writing of the
institution of such action (but the failure so to notify shall not relieve the
Corporation from any liability other than pursuant to this Section 6.1) and the
Corporation shall promptly assume the defense of such action, including the
employment of counsel (reasonably satisfactory to such Indemnified Party or
Parties) and payment of expenses. Such Indemnified Party or Parties shall have
the right to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Party or
Parties unless the employment of such counsel shall have been authorized in
writing by the Corporation in connection with the defense of such action or the
Corporation shall not have promptly employed counsel reasonably
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satisfactory to such Indemnified Party or Parties to have charge of the defense
of such action or such Indemnified Party or Parties shall have reasonably
concluded that there may be one or more legal defenses available to it or them
or to other Indemnified Parties which are different from or additional to those
available to the Corporation, in any of which events such fees and expenses
shall be borne by the Corporation, and the Corporation shall not have the right
to direct the defense of such action on behalf of the Indemnified Party or
Parties. Anything in this Section 6 to the contrary notwithstanding, the
Corporation shall not be liable for any settlement of any such claim or action
effected without its written consent, which shall not be unreasonably withheld.
The Corporation shall not, without the prior written consent of each Indemnified
Party that is not released as described in this sentence, settle or compromise
any action, or permit a default or consent to the entry of judgment in or
otherwise seek to terminate any pending or threatened action, in respect of
which indemnity may be sought hereunder (whether or not any Indemnified Party is
a party thereto), unless such settlement, compromise, consent or termination
includes an unconditional release of each Indemnified Party from all liability
in respect of such action. The Corporation agrees promptly to notify the Holders
of the commencement of any litigation or proceedings against the Corporation or
any of its officers or directors in connection with the sale of any Registrable
Shares or any preliminary prospectus, prospectus, registration statement or
amendment or supplement thereto, or any application relating to any sale of any
Registrable Shares.
6.2 Holder Indemnification of the Corporation. Each Holder participating
in any such registration shall indemnify and hold harmless the Corporation, each
director of the Corporation, each officer of the Corporation who shall have
signed the registration statement covering Registrable Shares held by the
Holder, each other person, if any, who controls the Corporation within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, and its
or their respective counsel, to the same extent as the foregoing indemnity from
the Corporation to the Holders in Section 6.1, but only with respect to
statements or omissions, if any, made in any registration statement, preliminary
prospectus or final prospectus (as from time to time amended and supplemented),
or any amendment or supplement thereto, in reliance upon and in conformity with
information furnished to the Corporation with respect to such Holder by or on
behalf of such Holder expressly for inclusion in any such registration
statement, preliminary prospectus or final prospectus, or any amendment or
supplement thereto, as the case may be. If any action shall be brought against
the Corporation or any other person so indemnified based on any such
registration statement, preliminary prospectus or final prospectus, or any
amendment or supplement thereto, or in any application, and in respect of which
indemnity may be sought against such Holder pursuant to this Section 6.2, such
Holder shall have the rights and duties given to the Corporation and the
Corporation and each other person so indemnified shall have the rights and
duties given to the Indemnified Parties, by the provisions of Section 6.1.
6.3 Contribution. To provide for just and equitable contribution, if (i)
an Indemnified Party makes a claim for indemnification pursuant to Section 6.1
or 6.2 but it is found in a final judicial determination, not subject to further
appeal, that such indemnification may not be enforced in such case, even though
this Agreement expressly provides for indemnification in such case, or (ii) any
Indemnified Party or indemnifying party seeks contribution under the Act, the
Exchange Act or otherwise, then the Corporation (including for this purpose any
contribution made by or on behalf of any director of the Corporation, any
officer of the Corporation who
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signed any such registration statement, any controlling person of the
Corporation, and its or their respective counsel), as one entity, and the
Holders of the Registrable Shares included in such registration in the aggregate
(including for this purpose any contribution by or on behalf of an Indemnified
Party), as a second entity, shall contribute to the losses, liabilities, claims,
damages and expenses whatsoever to which any of them may be subject, on the
basis of relevant equitable considerations such as the relative fault of the
Corporation and such Holders in connection with the facts which resulted in such
losses, liabilities, claims, damages and expenses. The relative fault, in the
case of an untrue statement, alleged untrue statement, omission or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement, omission or alleged omission relates to information supplied
by the Corporation or by such Holders, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement, alleged statement, omission or alleged omission. The Corporation and
the Holder agree that it would be unjust and inequitable if the respective
obligations of the Corporation and the Holders for the contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages and expenses (even if the Holder and the other
Indemnified Parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations,
referred to in this Section 6.3. In no case shall any Holder be responsible for
a portion of the contribution obligation imposed on all Holders in excess of its
pro rata share based on the number of Registrable Shares owned by it and
included in such registration as compared to the number of Registrable Shares
owned by all Holders and included in such registration. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. For purposes of this Section 6.3, each person, if
any, who controls any Holder within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act and each officer, director, partner, employee,
agent and counsel of each such Holder or control person shall have the same
rights to contribution as such Holder or control person and each person, if any,
who controls the Corporation within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, each officer of the Corporation who shall
have signed any such registration statement, each director of the Corporation
and its or their respective counsel shall have the same right to contribution as
the Corporation, subject in each case to the provisions of this Section 6.3.
Anything in this Section 6.3 to the contrary notwithstanding, no party shall be
liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This Section 6.3 is intended to supersede
any right to contribution under the Act, the Exchange Act or otherwise.
7. Miscellaneous.
7.1 Notices. All notices, requests, demands or other communications
provided for in this Agreement shall be in writing and shall be delivered by
hand, sent prepaid by Federal Express (or a comparable overnight delivery
service) or sent by the United States mail, certified, postage prepaid, return
receipt request, to the following:
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If to the Corporation:
MAXIMUS, Inc.
1356 Beverly Road
McLean, Virginia 22201
Attention: David V. Mastran
If to the Executive:
Gary L. Glickman
3418 Bradley Lane
Chevy Chase, Maryland 20815
Any notice, request, demand or other communication delivered or sent in the
foregoing manner shall be deemed given or made (as the case may be) upon the
earliest of (i) the date it is actually received, (ii) the business-day after
the day on which it is delivered by hand, (iii) the business day after the day
on which it is properly delivered to Federal Express (or a comparable overnight
delivery service), or (iv) the third business day after the date on which it is
deposited in the United States mail. Either party may change its address by
notifying the other party of the new address in any manner permitted by this
paragraph. Rejection or other refusal to accept or the inability to deliver
because of a changed address of which no notice was given shall not affect the
date of such notice, election or demand sent in accordance with the foregoing
provisions.
7.2 Remedies. The parties hereto further agree and acknowledge that any
violation by the Executive of the terms hereof may result in irreparable injury
and damage to the Corporation or its clients, which will not adequately be
compensable in monetary damages, that the Corporation will have no adequate
remedy at law therefor, and that the Corporation may obtain such preliminary,
temporary or permanent mandatory or restraining injunctions, orders or decrees
as may be necessary to protect it against, or on account of, any breach of the
provisions contained in this Agreement.
7.3 No Obligation of Continued Employment After Termination of Section
1. Except as set forth in Section 1 hereof, the Executive understands that this
Agreement does not constitute a contract of employment or create an obligation
on the part of the Corporation to continue the Executive's employment with the
Corporation.
7.4 Benefit; Assignment. This Agreement shall bind and inure to the
benefit of the parties and their respective personal representatives, heirs,
successors and assigns, provided this Agreement may not be assigned by either
party without the consent of the other, except that the Corporation may assign
this Agreement in connection with the merger, consolidation or sale of all or
substantially all of its business or assets. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and other legal representatives and, to the extent that any
assignment hereof is permitted hereunder, their assignees.
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7.5 Entire Agreement. This Agreement supersedes all prior agreements,
written or oral, with respect to the subject matter of this Agreement.
7.6 Severability. In the event that any one or more of the provisions
contained herein shall, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, and all other
provisions shall remain in full force and effect. If any of the provisions of
this Agreement is held to be excessively broad, it shall be reformed and
construed by limiting and reducing it so as to be enforceable to the maximum
extent permitted by law.
7.7 Waivers. No delay or omission by the Corporation in exercising any
right under this Agreement will operate as a waiver of that or any other right.
A waiver or consent given by the Corporation on any occasion if effective only
in that instance and will not be construed as a bar to or waiver of any right on
any other occasion.
7.8 Captions. The captions of the various sections and paragraphs of
this Agreement have been inserted only for the purpose of convenience; such
captions are not a part of this Agreement and shall not be deemed in any manner
to modify, explain, enlarge or restrict any of the provisions of this Agreement.
7.9 Governing Law. This Agreement shall be construed as a sealed
instrument and shall in all events and for all purposes be governed by, and
construed in accordance with, the laws of the Commonwealth of Virginia without
regard to any choice of law principle that would dictate the application of the
laws of another jurisdiction. Any action, suit or other legal proceeding which
the Executive may commence to resolve any matter arising under or relating to
any provision of this Agreement shall be commenced only in a court of the
Commonwealth of Virginia (or, if appropriate, a federal court located within
Virginia), and the Executive hereby consent to the jurisdiction of such court
with respect to any action, suit or proceeding commenced in such court by the
Corporation. The Section headings are included solely for convenience and shall
in no event affect or be used in connection with, the interpretation of this
Agreement.
7.10 Amendments. No alterations or additions to this Agreement shall be
binding unless in writing and signed by both the parties.
7.11 Genders. Whenever reasonably necessary, pronouns of any gender shall
be deemed synonymous, as shall singular and plural pronouns.
7.12 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, and all such
counterparts shall constitute one instrument.
THE EXECUTIVE HAS READ ALL OF THE PROVISIONS OF THIS AGREEMENT AND THE
EXECUTIVE UNDERSTANDS, AND AGREES TO, EACH OF SUCH PROVISIONS. THE EXECUTIVE
UNDERSTANDS THAT THIS AGREEMENT MAY AFFECT THE EXECUTIVE'S RIGHT TO ACCEPT
EMPLOYMENT WITH OTHER COMPANIES SUBSEQUENT TO THE EXECUTIVE'S EMPLOYMENT WITH
THE CORPORATION.
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
\s\ GARY L. GLICKMAN
-----------------------------
Gary L. Glickman
MAXIMUS, INC.
By: \s\ DAVID V. MASTRAN
---------------------------
David V. Mastran
President and Chief Executive Officer
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 333-41869) pertaining to the 1997 Director Stock Option Plan, the
Registration Statement (Form S-8, No. 333-41867) pertaining to the 1997 Employee
Stock Purchase Plan and the Registration Statement (Form S-8, No. 333-41871)
pertaining to the 1997 Equity Incentive Plan of MAXIMUS, Inc., of our report
dated November 13, 1998 with respect to the consolidated financial statements of
MAXIMUS, Inc. included in the Annual Report (Form 10-K) for the year ended
September 30, 1998.
/s/ Ernst & Young LLP
Washington, DC
November 23, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF GRANT THORNTON LLP, INDEPENDENT AUDITORS
We have issued our report dated March 18, 1998, except for Note L which is
as of March 23, 1998, on the financial statements of David M. Griffith &
Associates, Ltd. (not presented herein) as of December 31, 1997 and for each of
the two years in the period ended December 31, 1997, included in the Annual
Report on Form 10-K of MAXIMUS, Inc. for the year ended September 30, 1998. We
hereby consent to the incorporation by reference of said report in the
Registration Statements on Form S-8 of MAXIMUS, Inc.(File No. 333-41867
pertaining to the 1997 Employee Stock Purchase Plan of MAXIMUS, Inc., File No.
333-41869 pertaining to the 1997 Director Stock Option Plan of MAXIMUS, Inc.
and File No. 333-41871 pertaining to the 1997 Equity Incentive Plan of MAXIMUS,
Inc.).
Grant Thornton LLP
Chicago, Illinois
November 16, 1998
<PAGE> 1
EXHIBIT 99.1
Important Factors Regarding Forward Looking Statements
November 1998
From time to time, the Company, through its management, may make
forward-looking public statements, such as statements concerning then expected
future revenues or earnings or concerning projected plans, performance, contract
procurement as well as other estimates relating to future operations.
Forward-looking statements may be in reports filed under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), in press releases or in oral
statements made with the approval of an authorized executive officer. The words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are intended to
identify "forward-looking statements" within the meaning of Section 21E of the
Exchange Act and Section 27A of the Securities Act of 1933, as amended, as
enacted by the Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on these
forward-looking statements which speak only as of the date on which they are
made. In addition, the Company wishes to advise readers that the factors listed
below, as well as other factors not currently identified by management, could
affect the Company's financial or other performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods or events in any
current statement.
The Company will not undertake and specifically declines any obligation to
publicly release any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events which may
cause management to re-evaluate such forward-looking statements.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is hereby filing cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially form those projected in forward-looking statements
of the Company made by or on behalf of the Company.
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<PAGE> 2
RELIANCE ON GOVERNMENT CLIENTS
Substantially all of our clients are state or local government authorities.
To market our services to government clients, we are largely required to respond
to government requests for proposals ("RFPS"). To do so effectively, we must
estimate accurately our cost structure for servicing a proposed contract, the
time required to establish operations and likely terms of the proposals
submitted by competitors. We must also assemble and submit a large volume of
information within a RFP's rigid timetable. Our ability to respond successfully
to RFPs will greatly impact our business, and we cannot guarantee that we will
be awarded contracts through the RFP process or that our proposals will result
in profitable contracts.
RISKS ASSOCIATED WITH GOVERNMENT CONTRACTING
Early Termination of Contracts. Many of our government contracts contain
base periods of one or more years, as well as option periods covering more than
half of the contract's potential duration. Government agencies generally have
the right not to exercise these option periods. A decision not to exercise
option periods could impact the profitability of some of our contracts. Our
contracts typically also contain provisions permitting a government client to
terminate the contract on short notice, with or without cause. The unexpected
termination of one or more significant contracts could result in significant
revenue shortfalls. The natural expiration of especially large contracts can
also present management challenges. If revenue shortfalls occur and are not
offset by corresponding reductions in expenses, our business could be adversely
affected. We cannot be certain if, when or to what extent a client might
terminate any or all of its contracts with us.
Contracts Subject to Audit. The Defense Contract Audit Agency ("DCAA"),
and certain other government agencies, have the authority to audit and
investigate any government contracts. These agencies review a contractor's
performance on its contract, its pricing practices, its cost structure and its
compliance with applicable laws, regulations and standards. Any costs found to
be improperly allocated to a specific contract will not be reimbursed, while
costs already reimbursed must be refunded. Therefore, a DCAA audit could result
in a substantial adjustment to our revenue. No material adjustments resulted
from audits completed through 1993, and we believe that adjustments resulting
from subsequent audits will not adversely affect our business. If a government
audit uncovers improper or illegal activities, a contractor may be subject to
civil and criminal penalties and administrative sanctions, including termination
of contracts, forfeitures of profits, suspension of payments, fines and
suspension or disqualification from doing business with the government.
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<PAGE> 3
Discouragement of Revenue Consulting by Federal Officials. To avoid higher
than anticipated demands for federal funds, federal government officials
occasionally discourage state and local authorities from engaging private
consultants to advise them on maximizing federal revenues. We cannot be certain
that state and local officials will not be dissuaded from engaging us for
revenue maximization services.
Relationships with Political Consultants. We occasionally engage marketing
consultants, including lobbyists, to establish and maintain relationships with
elected officials and appointed members of government agencies. The
effectiveness of these consultants may be reduced or eliminated if a significant
political change occurs. Implementation of term limits for certain elected
officials, for instance, would require us to confront political change on a more
regular basis. Because we cannot be certain that we will successfully manage our
relationships with political consultants, our business may be adversely
affected.
RISKS INVOLVED IN MANAGING GOVERNMENT PROJECTS
Risk of Fixed-Price and Performance-Based Contracts. We derived
approximately 18% of our fiscal 1998 revenues from fixed-price contracts and
approximately 46% of our fiscal 1998 revenues from performance-based contracts.
For fixed-price contracts, we receive our fee if we meet specified objectives or
achieve certain units of work. Those objectives might include placing a certain
number of welfare recipients into jobs, collecting target amounts of child
support payments, or completing a particular number of managed care enrollments.
For performance-based contracts, we receive our fee on a per-transaction basis.
Such contracts include, for example, child support enforcement contracts, in
which we often receive a fee based on the amount of child support collected. To
earn a profit on these contracts, we rely upon accurately estimating costs
involved and assessing the probability of meeting the specified objectives,
realizing the expected units of work, or completing individual transactions,
within the contracted time period. We recognize revenues on these contracts on a
"costs incurred" method. Therefore, we review these contracts quarterly and
adjust revenues to reflect our current expectations. These adjustments affect
the timing and amount of revenue recognized and could adversely affect our
financial results. If we fail to estimate accurately the factors upon which we
base our contract pricing, then we may have to report a decrease in revenues or
incur losses on these contracts.
Failure to Meet Contract Performance Standards. Our inability to satisfy
adequately our contractual obligations could adversely affect our financial
condition. Our contracts often require us to indemnify clients for our failures
to meet certain performance standards. Some contracts contain liquidated damages
provisions and financial penalties related to performance failures. In addition,
in order for our Government Operations Group to bid on certain contracts, we are
required to secure our indemnification obligations by posting a cash performance
bond or obtaining a letter of credit. If a claim is made against a performance
bond or letter of credit, the issuer of the bond could demand higher premiums.
Increased bond premiums would adversely affect our earnings and could limit our
ability to bid for future contracts. In addition, a failure to meet our client's
expectations when performing on a contract could materially and adversely affect
our reputation, which, in turn, would impact our ability to compete for new
contracts.
Termination of Large Contracts. Upon termination or expiration of a
contract between our Government Operations Group and a state or local
government, we have to evaluate whether, and in what capacity, we can continue
employing persons that formerly serviced the contract. Unless we enter into a
new contract using those same employees or
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<PAGE> 4
otherwise re-assign them, their employment must be terminated. The reassignment
or termination of a large number of employees makes significant demands on our
management and administrative resources.
Relationships with Government Entities. To facilitate our ability to
prepare bids in response to RFPs, we rely in part on establishing and
maintaining relationships with officials of various government entities and
agencies. These relationships enable us to provide informal input and advice to
the government entities and agencies prior to the development of an RFP. Because
we cannot be certain that we will successfully manage our relationships with
government entities and agencies, our business may be adversely affected.
Significant Start Up Costs. When we are awarded a contract to manage a
government program, our Government Operations Group can incur significant
start-up expenses before we receive any contract payments. These expenses
include leasing office space, purchasing office equipment and hiring personnel.
As a result, in certain large contracts where the government does not fund
program start-up costs, we are required to invest significant sums of money
prior to receiving related contract payments.
LEGISLATIVE CHANGE AND POLITICAL DEVELOPMENTS
Dependence on Legislative Programs. The market for our services is
dependent largely on federal and state legislative programs. These programs can
be modified or amended at any time by acts of federal and state governments. For
example, in 1996 Congress amended the Social Security Act to eliminate social
security and supplemental income benefit payments based solely on drug and
alcohol disabilities. That amendment resulted in the termination of our
substantial contract with the federal Social Security Administration (the "SSA
CONTRACT"), which related to the referral and monitoring of the treatment of
recipients of these benefits. Future legislative changes that we do not
anticipate or respond to effectively could occur and adversely affect our
business.
Dependence on Welfare Reform Act. We expect that the Welfare Reform Act
and other federal and state initiatives will continue to encourage long-term
changes in the nation's welfare system. Part of our growth strategy includes
aggressively pursuing these opportunities by seeking new contracts to administer
and new health and welfare programs to manage. However, there are many opponents
of welfare reform. As a result, future progress in the area of welfare reform is
uncertain. The repeal of the Welfare Reform Act, in whole or in part, could
adversely affect our business. Also, we cannot be certain that additional
reforms will be proposed or enacted, or that previously enacted reforms will not
be challenged, repealed or invalidated.
Restrictions on Privatization. Under current law, in order to privatize
certain functions of government programs, the federal government must grant a
consent and/or waiver to the petitioning state or local agency. For example, in
May 1997 the Department of Health and Human Services refused to grant a waiver
to the State of Texas permitting private corporations, rather than public
employees, to decide eligibility of applicants for Food Stamps and Medicaid
benefits. Although MAXIMUS did not bid on the Texas projects, we may face
similar obstacles in pursuing future health and human services contracts.
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<PAGE> 5
RISKS OF ACQUISITION STRATEGY; RISKS OF COMPLETED ACQUISITIONS
Our business strategy includes expanding our operations, breadth of service
offerings and geographic scope by acquiring or combining with related
businesses. To date, we have combined with four consulting firms and are still
in the process of integrating their operations. We cannot be certain that we
will be able to continue to identify, acquire and manage additional businesses
profitably or integrate them successfully without incurring substantial
expenses, delays or other problems. Furthermore, business combinations may
involve special risks, including:
- - Diversion of management's attention
- - Loss of key personnel
- - Assumption of unanticipated legal liabilities
- - Amortization of acquired intangible assets
- - Dilution to our earnings per share
Also, client dissatisfaction or performance problems at an acquired firm could
materially and adversely affect our reputation as a whole. Furthermore, we
cannot be certain that acquired businesses will achieve anticipated revenues and
earnings.
CHALLENGES RESULTING FROM GROWTH
Sustaining growth has placed significant demands on management as well as
on our administrative, operational and financial resources. To manage our
growth, we must continue to improve our operational, financial and management
information systems and expand, motivate and manage our workforce. However, our
growth and management of large-scale health and human services programs must not
come at the expense of providing quality service and generating reasonable
profits. We cannot be certain that we will continue to experience growth or
successfully manage it.
OPPOSITION FROM GOVERNMENT UNIONS
Our success derives in part from our ability to win profitable contracts to
administer and manage health and human services programs traditionally
administered by government employees. Government employees, however, typically
belong to labor unions with considerable financial resources and lobbying
networks. Unions are likely to continue to apply political pressure on
legislators and other officials seeking to outsource government programs. For
example, union lobbying was instrumental in influencing the Department of Health
and Human Services to deny a petition to allow private corporations to make Food
Stamp and Medicaid eligibility determinations in Texas. Union opposition may
slow welfare reform and result in fewer opportunities for MAXIMUS to service
government agencies.
RELIANCE ON KEY EXECUTIVES
The abilities of our executive officers, including David V. Mastran and
Raymond B. Ruddy, and our senior managers to generate business and execute
projects successfully is important to our success. While we have employment
agreements with certain of our executive officers, these agreements are
terminable under certain conditions. The loss of a key executive could impair
our ability to secure and manage engagements. To limit some
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<PAGE> 6
of this risk, we have obtained key-man life insurance policies on Dr. Mastran
and Mr. Ruddy in the amounts of $6,100,000 and $3,950,000, respectively.
ATTRACTION AND RETENTION OF EMPLOYEES
Delivery of the services provided by MAXIMUS is labor-intensive. When we
are awarded a government contract, we must quickly hire project leaders and case
management personnel. The additional staff also creates a concurrent demand for
increased administrative personnel. The success of our Government Operations
Group and Consulting Group requires that we attract, develop, motivate and
retain:
- Experienced and innovative executive officers
- Senior managers who have successfully managed or designed health and
human services programs in the public sector
- Information technology professionals who have designed or implemented
complex information technology projects
Innovative, experienced and technically proficient individuals are in great
demand and are likely to remain a limited resource. We cannot be certain that we
can continue to attract and retain desirable executive officers and senior
managers. A failure to hire sufficient personnel on a timely basis could
adversely affect our business. The loss of significant numbers of executive
officers and senior managers could produce similar adverse consequences.
COMPETITORS; EFFECTS OF COMPETITION
Intensification of Competition. Competition to provide certain program
management and consulting services to state and local government agencies has
intensified. Our Government Operations Group competes for program management
contracts with the following:
- Local non-profit organizations such as the United Way and Goodwill
Industries
- Government services divisions of large organizations such as Andersen
Consulting, Lockheed Martin Corporation and Electronic Data Systems,
Inc.
- Specialized service providers such as America Works, Inc., Policy
Studies Incorporated, and Benova, Inc.
MAXIMUS's Consulting Group competes with:
- The consulting divisions of the "Big 5" accounting firms
- Electronic Data Systems, Inc.
Many of these companies are national and international in scope and have
greater resources than MAXIMUS. Substantial resources could enable certain
competitors to initiate severe price cuts or take other measures in an effort to
gain market share. In addition, we are unable to compete for a limited number of
large contracts because, we are sometimes unable to meet a RFP's requirement to
obtain and post large cash performance bonds. Also, in certain geographic areas,
we face competition from smaller consulting firms with established reputations
and political relationships. We cannot be certain that we will compete
successfully against our existing or any new competitors.
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<PAGE> 7
Competition from Former Employees. In addition to competition from
existing competitors, we may experience competition from former employees.
Although MAXIMUS has entered into non-competition agreements with some of its
senior level employees, we cannot be certain that a court would enforce these
contracts. Competition by former employees could adversely affect our business.
ADVERSE PUBLICITY
The nature of our contracts with state and local government authorities
frequently generates media attention. In particular, our management of health
and human services programs and revenue maximization services have occasionally
received negative media coverage. This negative coverage could influence
government officials and slow the pace of welfare reform. The media also focuses
its attention on the activities of political consultants engaged by us, even
when their activities are unrelated to our business. MAXIMUS may be subject to
adverse media attention relating to the activities of individuals who are not
under its control. In addition, we cannot assure that the media will accurately
cover our activities or that MAXIMUS will be able to anticipate and respond in a
timely manner to all media contacts. Inaccurate or misleading media coverage or
our failure to manage adverse coverage could adversely affect our reputation.
LITIGATION
DMG Litigation. On May 12, 1998, we acquired DMG. DMG 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 and
thirteen other named defendants. The parties making claims against DMG in the
lawsuit, Allstate and the 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 the accuracy of 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. MAXIMUS intends to defend
against these claims vigorously. However, given the preliminary stage of this
litigation, we cannot assure that we will be successful in defending this
lawsuit.
Suit by Former Officer. We are currently defending a lawsuit brought by a
former officer, director and shareholder of MAXIMUS alleging that, at the time
he resigned from the Company in 1996 and became obligated to sell his MAXIMUS
shares back to the Company, we failed to disclose to him material information
regarding the potential value of his MAXIMUS shares. The former officer seeks
damages in excess of $10 million. We do not believe that this claim has merit
and intend to oppose it vigorously. However, given the early stage of this
litigation, we cannot assure that we will be successful in our defense.
Suit by Network Six. We are currently defending a lawsuit that was
commenced against MAXIMUS and other parties by Network Six, Inc. ("NETWORK
SIX"). MAXIMUS had been engaged by the State of Hawaii to monitor the
implementation of a
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<PAGE> 8
statewide automated child support system being performed by Network Six. Network
Six alleges that we tortiously interfered with and abetted Hawaii in the alleged
breach of its contract with Hawaii. We believe that Network Six's claims are
without merit and intend to defend this action vigorously. We do not believe
that this action will have a material adverse effect on our financial condition
or results of operations. Because this action is in the early stages of
discovery, we cannot assure that we will be successful in defending this
lawsuit.
VARIABILITY OF QUARTERLY OPERATING RESULTS
A number of factors cause our revenues and operating results to vary from
quarter to quarter. These factors include:
- The progress of contracts
- The levels of revenues earned on contracts (including any adjustments
in expectations on revenue recognition on fixed-price contracts)
- The commencement, completion or termination of contracts during any
particular quarter
- The schedules of government agencies for awarding contracts
- The term of awarded contracts
- The reactions of the market to announcements of potential acquisitions
- General economic conditions
Changes in the volume of activity and the number of contracts commenced or
completed during any quarter may cause significant variations in our operating
results because a relatively large amount of our expenses are fixed.
Furthermore, on occasion we incur greater operating expenses during the start-up
and early stages of significant contracts.
CONTROL BY PRINCIPAL SHAREHOLDERS
Our executive officers own beneficially 53.9% of MAXIMUS's common stock.
Certain executive officers, who hold approximately 47.5% of the outstanding
shares, have agreed to hold their shares until June 2001, subject to certain
exceptions. In addition, each of Dr. Mastran and Mr. Ruddy, who hold together
approximately 44.1% of the common stock, has agreed to vote to elect the other
to the board of directors, as long as the other person owns or controls at least
20% of the outstanding common stock. Mr. Ruddy currently owns less than 20% of
the outstanding shares of common stock and, accordingly, Dr. Mastran is no
longer obligated to vote to elect Mr. Ruddy to the board of directors. Mr. Ruddy
has also agreed to vote his shares of common stock in a manner instructed by Dr.
Mastran until September 30, 2001. As a result, these officers can control the
outcome of matters requiring a shareholder vote, including the election of the
board of directors. This control could adversely affect the market price of our
common stock or delay or prevent a change in control of MAXIMUS.
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POSSIBLE VOLATILITY OF STOCK PRICE
MAXIMUS issued common stock on June 13, 1997 at $16.00 per share upon the
closing of its initial public offering (the "IPO"). Between June 13, 1997 and
November 19, 1998, the closing sale price has ranged from a high of $32.56 per
share to a low of $17.00 per share. The market price of our common stock could
continue to fluctuate substantially due to a variety of factors, including:
- Quarterly fluctuations in results of operations
- The failure to be awarded a significant contract on which we have bid
- The termination by a government client of a material contract
- The announcement of new services by competitors
- Acquisitions and mergers
- Political and legislative developments adverse to the privatization of
government services
- Changes in earnings estimates by securities analysts
- Changes in accounting principles
- Sales of common stock by existing shareholders
- Negative publicity
- Loss of key personnel
Our ability to meet securities analysts' quarterly expectations may also
influence the market price of our common stock. In addition, overall volatility
has often significantly affected the market prices of securities for reasons
unrelated to a company's operating performance. In the past, securities class
action litigation has often been commenced against companies that have
experienced periods of volatility in the price of their stock. Securities
litigation initiated against MAXIMUS could cause us to incur substantial costs
and could lead to the diversion of management's attention and resources.
CERTAIN ANTI-TAKEOVER EFFECTS
Virginia law and our Articles of Incorporation and By-Laws include
provisions that may be deemed to have anti-takeover effects. These provisions
may delay, deter or prevent a takeover attempt that shareholders might consider
desirable. Directors of MAXIMUS are divided into three classes and are elected
to serve staggered three-year terms. This structure could impede or discourage
an attempt to obtain control of the Company. As a shareholder of MAXIMUS, you do
not possess the power to take any action in writing without a meeting. In
addition, Virginia law imposes certain limitations and special voting
requirements on affiliated transactions. Furthermore, Virginia law denies voting
rights to shares acquired in control share acquisitions, unless granted by a
shareholder vote.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
Internal Year 2000 Compliance. MAXIMUS is auditing its internal software
and hardware and the systems of its acquired companies for Year 2000 compliance
and is implementing corrective actions, where necessary, to address computer
problems associated with the Year 2000. The MAXSTAR case management software
used in all our major
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projects has been upgraded to be Year 2000 compliant. All MAXSTAR-based
applications must also be reviewed and upgraded, where necessary, which is now
scheduled to be completed by March 31, 1999. Our telephone systems must also be
Year 2000 compliant, which is also scheduled for completion by March 31, 1999.
We will continue to implement whatever remedial actions are necessary to make us
Year 2000 compliant. We do not believe that remedial measures taken to correct
any Year 2000 problems will materially impact our operations or financial
results. However, if our remediation plans do not succeed, then we may
experience adverse effects on our business. Furthermore, we cannot assure that
the costs of remediation will not exceed our current estimates, or that our
corrective actions will be completed before any Year 2000 problems occur.
Services Provided by MAXIMUS Affecting Clients' Year 2000 Compliance.
MAXIMUS assists in assessing, evaluating, testing and certifying government
client systems affected by Year 2000 problems. In addition, we provide quality
assurance of Year 2000 compliance conversions performed by third parties for our
clients. Although MAXIMUS has attempted to minimize its liability for potential
clients' system failures, we cannot assure that we will not become subject to
legal action if a client sustains Year 2000 problems. If such legal action is
brought and resolved against us, we could suffer adverse effects on our
business.
Reliance on Vendors' and Clients' Year 2000 Compliance. In order to
perform our government contracts, we rely to varying extents on information
processing performed by vendors, governmental agencies and entities with which
we contract. We have inquired about these parties' potential Year 2000 problems
where necessary. Based on responses to these inquiries, our management believes
that we would be able to continue to perform contracts without
experiencing material negative financial impact. However, we cannot assure that
Year 2000 related failures in the information systems of vendors or clients will
not occur. Any system failures could interfere with our ability to properly
manage contracted projects and could adversely affect our business.
UNCERTAINTIES RELATED TO INTERNATIONAL OPERATIONS
Most of our international operations are currently paid for by the World
Bank and the U.S. Agency for International Development in U.S. dollars. However,
as we expand our operations into developing countries we may encounter a number
of additional risks. The risks to our potential expected international revenues
include:
- Adverse currency exchange rate fluctuations
- Inability to collect receivables
- Difficulty in enforcing contract terms through a foreign country's
legal system
Foreign countries could also impose tariffs, impose additional withholding
taxes or otherwise tax our foreign income.
11
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