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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-21755
MASTECH CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1802235
------------ ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1004 McKee Road
Oakdale, Pennsylvania 15071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 787-2100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding
12 months, and (2) has been subject such filing requirements for the past 90
days.
Yes [X] No [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1997 (based on the closing price of such stock as
reported by NASDAQ on such date) was $78,600,000.
The number of shares of the registrant's Common Stock, par value $.01 per share,
outstanding as of March 20, 1997 was 21,654,600 shares.
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 the registrant's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this form 10-K [_]
Documents Incorporated By Reference
-----------------------------------
Portions of the Corporation's Proxy Statement, prepared for the Annual Meeting
of Shareholders scheduled for June 9, 1997, to be filed with the Commission are
incorporated by reference into Part III of this report.
1
MASTECH CORPORATION
1996 FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS................................ 3
ITEM 2. DESCRIPTION OF PROPERTIES............... 9
ITEM 3. LEGAL PROCEEDINGS....................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS........................ 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS......... 10
ITEM 6. SELECTED FINANCIAL DATA................. 11
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............... 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA.................................... 17
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................... 34
PART III
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.... 35
ITEM 11. EXECUTIVE COMPENSATION.................. 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT........ 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................ 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K................. 36
AUDITOR'S REPORTS.................................... 19
SIGNATURE PAGES...................................... 41
FINANCIAL SCHEDULES.................................. 42
2
PART I
ITEM 1: BUSINESS
Overview
Mastech Corporation ("Mastech" or the "Company") was incorporated in
Pennsylvania on November 12, 1996. Mastech Systems Corporation, a Pennsylvania
corporation through which the business of the Company has been conducted since
its inception in July 1986; ("Mastech Systems"), is an indirect wholly-owned
subsidiary of the Company. On December 20, 1996, Mastech completed the initial
public offering of its common stock, resulting in net proceeds to the Company of
approximately, $45,606,000 ("the IPO"). Contemporaneously with the IPO, Mascot
Systems Pvt., Ltd. ("Mascot Systems"), and Scott Systems Pvt., Ltd. ("Scott
Systems"), both corporations organized under the laws of India, became wholly-
owned subsidiaries of Mastech Systems. Unless the context otherwise requires,
references in this Annual Report on Form 10-K to "Mastech" or the "Company"
include the Company and its subsidiaries.
Mastech is a worldwide provider of information technology ("IT") services to
large organizations. Mastech provides its clients with a single source for a
broad range of applications solutions and services, including client/server
design and development, conversion/ migration services, Year 2000 services,
Enterprise Resource Planning ("ERP") package implementation services and
maintenance outsourcing. These services are provided in a variety of computing
environments and use leading technologies, including client/server
architectures, object-oriented programming, distributed databases and the latest
networking and communications technologies. To enhance its services, Mastech has
formed business alliances with leading software companies such as Baan, Oracle
and Viasoft. In addition, the Company has developed its own proprietary
methodologies and tools, known as SmartAPPS, that provide a complete solution
set for each of its services.
During 1996, Mastech provided IT services to over 350 clients worldwide in a
diverse range of industries. These clients include AT&T, Citibank, EDS, IBM,
Intel, Oracle and Wal-Mart. Historically, the Company has primarily provided IT
professional services on a time-and-materials basis to support client-managed
projects. The Company plans to generate an increasing portion of its revenues
from Mastech-managed projects, international markets, offshore software
development projects and fixed-price engagements.
As of December 31, 1996, the Company employed 1,387 IT professionals, over
1,175 of whom were in the United States, with the remainder in the Far East,
Canada, the United Kingdom ("U.K.") and India. To support the Company's growth
and to meet the increased demand for IT professionals, the Company has embarked
on an aggressive recruiting and training strategy, designed to more than double
the number of IT professionals hired. The Company recruits and trains IT
professionals in India through its Scott Systems subsidiary.
The Company is now replicating its business model in key international markets
to meet the large and growing demand for IT services overseas and to serve its
client base of large multinational corporations that need support on a global
basis. In addition to offices in Pittsburgh, Washington D.C. and San Francisco,
the Company maintains international offices in Toronto and Singapore, and has
recently opened offices in London, Sydney and Tokyo. The Company also plans to
open offices in South Africa, the Middle East and Continental Europe.
In light of the large and growing backlog of applications development
projects, the shortage of qualified IT professionals in developed countries and
the rising costs of applications development and support, an increasing number
of organizations are turning to offshore software development. Through its
Mascot Systems subsidiary, Mastech is investing in an extensive offshore
software development infrastructure in India, including four state-of-the-art
software development centers. The centers in Bangalore, India are currently
operational and is conducting over 20 engagements for Mastech clients in the
U.S. and Canada. Two additional centers are under development. This offshore
infrastructure, will be able to accommodate 1,500 IT professionals when
complete.
Financial information about the domestic and foreign operations of the
Company can be found on page 33 in this Form 10-K. Services rendered by
Mastech's foreign offices are considered foreign operations. The Company has no
export revenues.
3
Services
Mastech provides its clients with a single source for a broad range of IT
applications solutions and services including: (i) client/server design and
development; (ii) conversion/migration services; (iii) Year 2000 services; (iv)
ERP package implementation services; and (v) applications maintenance
outsourcing. These services are provided in a wide variety of computing
environments utilizing leading technologies including client/server
architectures, object-oriented programming languages and tools, distributed
database management systems, Computer-Aided Software Engineering ("CASE")
Tools, ERP packages, groupware and the latest networking and communications
technologies. In addition, the Company has developed proprietary SmartAPPS
methodologies and tools to enhance productivity.
Historically, the substantial majority of the Company's projects have been
client-managed. On client-managed projects, Mastech provides professional
services as a member of the project team on a time-and-materials basis. On
Mastech-managed projects, Mastech takes complete responsibility for project
management and bills the client on a time-and-materials or fixed-price basis.
The Company is seeking to shift a larger portion of its business to Mastech-
managed projects, which generally carry higher profit margins.
The Project Control Office ("PCO"), located in the Company's headquarters,
provides project management oversight for all North American client engagements.
For offshore projects, the PCO is the point of contact during client business
hours, establishing a clear line of communication with the project teams in
India and the U.S. Mastech uses a proprietary Lotus Notes-based Global Project
Tracking System to facilitate project management and control. The Company also
utilizes PC conferencing tools to conduct "virtual" meetings.
The Company offers many of its services through existing offshore software
development centers in Bangalore, India which are connected via secure, high-
speed satellite links to the Company's headquarters and client sites. Mastech is
increasing its offshore capacity by developing, through its Mascot Systems
subsidiary, additional offshore software development centers in Madras and Pune,
India.
The Company's services are described below:
SERVICES METHODS/TOOLS
Client/Server Design and Development
> Project management . SmartAPPS Client/Server
> Requirements analysis and definition . Languages: C/C++, VisualBasic,
> Evaluation and selection of Delphi SmallTalk, Java
applications packages . Tools: Powerbuilder, Gupta,
> Prototyping and re-use Developer/2000, Lotus Notes
> Data modeling, data warehousing . DBMS/4GLs: Oracle, Informix,
> Applications systems design and Sybase, Unify, SQLServer
development . GUI: Windows, Motif, X-Windows,
> Database design and administration OpenLook
> Systems development and . CASE Tools: Oracle*CASE, IEF,
implementation Bachman
> Technology education and training
Conversion/Migration
> Project management .SmartAPPS Migrate
> Automated tools development Methodology and Automated
> User interface conversion Conversion Tools
> Code conversion and testing
> Control language conversion
> Data migration
> Cutover and implementation
4
SERVICES METHODS/TOOLS
Year 2000
> Impact analysis .SmartAPPS 2000
> Project planning Impact Assessment and
> Year 2000 conversion Automated Conversion Tools
> Compliance testing and validation .Viasoft
> Cutover and implementation .Microfocus Revolve
Specialty Package Implementation
> Project management .Oracle Applications
> Customization .Baan Triton
> Integration .PeopleSoft
> Migration .SAP R/3
> Database design and administration
> Systems support
> Training
Applications Maintenance Outsourcing
> Baseline assessment and service .SmartAPPS Maintain
level definition Methodology and Tools
> Process enhancements
> Modifications/enhancements to
functionality
> Interfaces and integration with new
systems
> Configuration management
> Documentation and standardization
> Application productivity improvement
> Trouble-shooting and problem
resolution
> 24- hours-per-day, 7- days-per-week
emergency support
Additional Services
Mastech is in the process of developing additional services for clients,
including:
Education and Training. Mastech's Education and Training Department provides
employees with basic and advanced courses in key technologies such as Oracle,
PowerBuilder, VisualBasic, Java and ERP packages including Oracle Applications
and Baan. Mastech is planning to expand its training programs and courseware to
offer them to its clients as a distinct value-added service. The Company has
piloted this service with selected clients and has received positive feedback.
Internet/Intranet Solutions. Mastech manages its worldwide operations using
Lotus Notes, Web-based technologies and an extensive communications
infrastructure. Mastech plans to create a service line focused on helping its
clients use Internet and World Wide Web technology to develop Intranets and
utilize the World Wide Web for electronic commerce.
5
SmartAPPS Methodologies and Tools
Mastech's proprietary SmartAPPS methodologies and tools provide a complete
solution set for each of its services. These methodologies and tools are
premised on a rapid delivery paradigm and provide a consistent framework to
address each service line, with the flexibility to address alternative delivery
mechanisms. These delivery mechanisms include a variety of on-site solutions and
offshore delivery techniques. The methodologies include project management
practices that extend across all service lines and a work breakdown structure to
address each component of the solution.
Proprietary Tools. The Company's proprietary tools provide productivity
gains by automating certain software delivery processes while reducing the risk
of human error. The SmartAPPS set of tools incorporates natural language-based
analysis and transformations using compiler technology. These tools are built
around object-oriented technology that enables them to be easily extended as
greater automation opportunities are uncovered. SmartAPPS tools are particularly
useful in automated conversions for the Year 2000 and Conversion/Migration
service lines.
Proprietary Frameworks. The Company has developed automated frameworks for
each service line. "SmartAPPS Client/Server" incorporates the Rapid
Architected Application Development technique to deliver this service to
clients. "SmartAPPS Migrate" provides for database mapping and re-engineering,
followed by source conversion using automated tools. "SmartAPPS 2000" provides
impact analysis, project planning and conversion solutions to the Year 2000
problem. "SmartAPPS Maintain" uses the waterfall development model and
reusable templates and provides detailed steps for guaranteed service level
maintenance of applications at the offshore center.
Sales and Marketing
Mastech sells its services to large organizations through a direct sales force
of over 45 professionals. The Company's U.S. sales force is organized to meet
the needs of the marketplace through three primary divisions: (i) the General
Business Division; (ii) the System Integrator Division; and (iii) the Enterprise
Package Division.
The General Business Division includes three geographic regions, each of which
is directed by a Regional Director. Each region includes multiple new business
development managers. These individuals use a proprietary database of several
thousand prospects to telemarket Mastech's services nationally. The Company
subsequently sends interested prospective clients a written proposal providing
information about the Company, its approach and methodology, schedules, team
members, pricing and terms. Mastech leverages the mobility of its software
professionals and its cost-effective telephone selling model to service all
areas of the U.S. Each geographic region also includes Corporate Account
Managers who are responsible for selling Mastech's services to existing
clients. These managers, with the support of a specialized applications
solutions sales team, Regional Directors and senior management, meet frequently
on a direct, face-to-face basis with clients. Through an organized consultative
sales approach, Mastech cross-sells its different services in order to develop
stronger and expanded client relationships.
The System Integrator Division focuses on developing national and global
relationships with major systems integrators such as EDS, IBM, KPMG Peat
Marwick, Ernst & Young and Oracle. Mastech assists these integrators to meet
their customers' needs by providing specialized technical expertise and
complementary capabilities such as offshore development.
The Enterprise Package Division includes personnel trained and dedicated to
addressing the needs of clients and prospects that are involved in ERP package
implementations. This division works directly with companies providing complete
implementation services, as well as partnering with both the ERP software
vendors and systems integrators on teamed implementation efforts.
Mastech's international sales organization has offices located in five
different countries. Each office is supervised by a Country Manager and
supported by dedicated sales personnel that sell directly to new clients using
an approach similar to the Company's domestic sales approach. Additionally,
these offices focus on leveraging Mastech's existing relationships with its
U.S.-based multinational clients. These relationships are particularly strong
with global systems integrators and often provide a foundation on which each of
Mastech's international offices can build.
6
Mastech's marketing organization works closely with the sales organization to
constantly improve results. The marketing organization's responsibilities
include development of company marketing literature, market research to assist
in strategic planning and tactical decision-making, trade show selection and
exhibit planning, advertising and public relations support. The marketing
organization develops messages and positioning for such activities by analyzing
market trends and competitors' activities.
Clients
Substantially all of the Company's clients are large companies, major systems
integrators or governmental agencies. During 1996, the Company provided services
to over 350 clients in the U.S., Canada, Europe and the Far East. The Company's
strategy is to maximize its client retention rate and secure follow-on
engagements by providing high quality services and client responsiveness.
The Company is a preferred vendor for several large organizations, including
Associates Bancorp, Bank of America, EDS, KPMG Peat Marwick and Oracle. As a
preferred vendor, the Company is one of a limited number of service providers to
these organizations, enabling it to sell its services more effectively. The
Company is aggressively pursuing additional preferred vendor arrangements in
order to obtain new or additional business from large organizations. These
contracts generally result in lower margins due to negotiated discounts, but are
expected to generate higher revenues.
Organizations to which the Company has provided, or is providing, services
include:
Consumer Products Manufacturing Telecommunications Transportation
- ------------------- ---------------- ---------------------- ---------------------
J.C. Penney Ford Motor AirTouch Carnival Cruise Lines
Nike General Electric AT&T Royal Caribbean
Philip Morris General Motors Ameritech Ryder Systems
Sears Hitachi MCI Union Pacific
Wal-Mart Intel U.S. Cellular USAir
Integrators &
Health Care Financial Services Vendors
------------------- ------------------------ ----------------
Blue Cross/Blue Shield Bank of America Deloitte & Touche
Foxmeyer Citibank EDS
Health America Deutsche Bank IBM/ISSC
Kaiser Foundation Health Hartford Insurance/ITT KPMG Peat Marwick
Merck NationsBank Oracle
In 1995 and 1996, approximately 29% of the Company's revenues were derived from
its top five clients (EDS, IBM, the U.S. Department of Defense, Oracle and
Unisys). EDS accounted for almost 10% and 9 % of the Company's revenues in
1995 and 1996, respectively. Most of the Company's projects are terminable by
the client without penalty. The loss of any significant client or project could
have a material adverse effect on the Company's business, operating results and
financial condition.
7
Competition
The IT services industry is highly competitive and served by numerous
national, regional and local firms, all of which are either existing or
potential competitors of the Company. Primary competitors include participants
from a variety of market segments, including "Big Six" accounting firms,
systems consulting and implementation firms, applications software firms,
service groups of computer equipment companies, general management consulting
firms, programming companies and temporary staffing firms. Many of these
competitors have substantially greater financial, technical and marketing
resources and greater name recognition than the Company. In addition, there is a
risk that clients may elect to increase their internal IT resources to satisfy
their applications solutions needs. The Company believes that the principal
competitive factors in the IT services industry include the range of services
offered, technical expertise, responsiveness to client needs, speed in
delivering IT solutions, quality of service and perceived value. The Company
believes that it competes favorably with respect to these factors.
Intellectual Property Rights
The Company relies upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright and trademark laws to protect its
proprietary rights and the proprietary rights of third parties from whom the
Company licenses intellectual property. The Company enters into confidentiality
agreements with its employees and limits distribution of proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights.
Although the Company obtained U.S. trademark registration covering the service
mark "Mastech," a company named Mastek Limited of India, which purports to
have operations in the U.K., has asked the Company to withdraw its service mark
application for the mark "Mastech" in the U.K. claiming that the names are
confusingly similar. The Company is currently investigating the merits of this
claim. There can be no assurance that such claim will not result in legal action
being brought against the Company asserting superior rights to the designation
"Mastech" or "Mastek" in the U.K. or elsewhere and, if such an action is
bought, there can be no assurance that it will be successfully defended by the
Company.
Software developed by the Company in connection with a client engagement is
typically assigned to the client. In limited situations, the Company may retain
ownership, or obtain a license from its client, which permits Mastech or a third
party to market the software for the joint benefit of the client and Mastech or
for the sole benefit of Mastech.
Human Resources
The Company's success depends in large part on its ability to attract,
develop, motivate and retain highly skilled IT professionals. The Company has
over 70 full-time employees dedicated to recruiting IT professionals and
managing its human resources. The Company recruits in a number of countries,
including India, the U.S., Canada, the U.K., Singapore, Australia and the
Philippines. The Company advertises in leading newspapers and trade magazines.
In addition, the Company's employees are a valuable recruiting tool and are
actively involved in referring new employees and screening candidates for new
positions. Mastech uses a standardized global selection process which includes
interviews, tests and reference checks.
The Company's Resource Managers use a proprietary system to manage, on a real-
time basis, the employees and candidates in the Company's talent pool. This
system enables the Company to quickly identify appropriate IT professionals for
various client engagements. This database, which currently holds profiles on
several thousand IT professionals, catalogs individual technical profiles and
stores information pertaining to each individual's location, availability,
mobility and other factors.
8
The Company has a focused retention strategy that includes career planning,
training, benefits and an incentive plan. The Company's comprehensive benefits
package includes Company-paid health insurance, group life insurance, a long-
term disability plan, Company-subsidized health club memberships and tuition
reimbursement. The Company uses stock options as part of its recruitment and
retention strategy. The Company also has an extensive training infrastructure.
The Company's Education and Training Department trains employees on a variety of
platforms and helps them transition from legacy to client/server skills by
providing cross-platform training in new technologies. The Company is
implementing an Intranet to allow its employees to access its courseware and
computer-based training modules via the Internet so that the training is
available to all employees worldwide at their individual convenience and pace.
Mastech's IT professionals typically have Master's or Bachelor's degrees in
Computer Science or another technical discipline and three to ten years of IT
experience. As of December 31, 1996, the Company had 1,615 employees comprised
of 1,387 IT professionals, 57 sales and marketing personnel and 171 general and
administrative personnel. In addition, the Company uses independent contractors
to staff client engagements. As of December 31, 1996, the Company had 142
independent contractors working on client engagements.
Government Regulation of Immigration
The Company recruits its IT professionals on a global basis to create a mobile
workforce that it can deploy wherever required and, therefore, must comply with
the immigration laws in the countries in which it operates, particularly the
U.S. Over 90% of Mastech's IT professionals are citizens of other countries,
with most of those in the U.S. working under H-1B temporary work permits. There
is a limit on the number of new H-1B permits that may be approved by the U.S. in
any government fiscal year. In years in which this limit is reached, the Company
may be unable to obtain enough H-1B permits to bring foreign employees to the
U.S. If the Company were unable to obtain H1-B permits for its employees in
sufficient quantities or at a sufficient rate, the Company's business, operating
results and financial condition could be adversely affected. Furthermore,
Congress and administrative agencies with jurisdiction over immigration matters
have periodically expressed concerns over the levels of legal and illegal
immigration into the U.S. These concerns have often resulted in proposed
legislation, rules and regulations aimed at reducing the number of work permits
that may be issued. Any changes in such laws making it more difficult to hire
foreign nationals or limiting the ability of the Company to retain foreign
employees, could require the Company to incur additional unexpected labor costs
and expenses. Any such restrictions or limitations on the Company's hiring
practices could have a material adverse effect on the Company's business,
operating results and financial condition.
ITEM 2: PROPERTIES
The Company leases 35,900 square feet of office space in the Pittsburgh suburb
of Oakdale, Pennsylvania which serves as its headquarters. The Company's senior
management, administrative personnel, human resources and sales and marketing
functions are housed in this facility. This lease expires on May 31, 2000 and
contains two additional options to extend the lease for five years each.
The Company also leases space in Washington D.C., San Francisco, London,
Singapore, Sydney, Toronto and Tokyo. These locations allow the Company to
respond to the needs of its clients and to recruit qualified IT professionals
in these markets.
Mascot Systems leases two offshore software development facilities with
approximately 34,200 square feet in Bangalore, India. These facilities were
established by Mastech's controlling shareholders to deliver the Company's
offshore software development services to the Company's clients worldwide.
Mascot Systems intends to lease from Mastech's controlling shareholders two
additional offshore software development centers. These facilities, totaling
100,000 square feet, are located in Pune and Madras, India, and are currently
under construction.
The Company believes that its present facilities provide sufficient space for
its current and anticipated near-term needs.
9
ITEM 3: LEGAL PROCEEDINGS
The Company is not a party to any litigation that is expected to have a
material adverse effect on the Company or its business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the Company's IPO, certain matters were submitted to a vote
of shareholders, including: (i) the amendment and restatement of the Company's
Articles of Incorporation on November 18, 1996; and (ii) the adoption of the
Company's 1996 Incentive Stock Plan on December 16, 1996.
Each of the proposals was approved by a unanimous written consent of the
shareholders holding all of the 250,000 shares of common stock then outstanding.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on THE NASDAQ NATIONAL MARKET tier
of THE NASDAQ STOCK MARKET under the symbol: "MAST" since December 17, 1996 when
the Company commenced trading in connection with the Company's initial public
offering of its Common Stock at $15.00 per share. The following table sets forth
the range of high and low bid prices per share of Mastech Common Stock for the
periods indicated as reported on the NASDAQ composite tape.
High Low
----- ---
Fiscal 1996
Fourth Quarter 1996 (December 17, 1996- December 31, 1996)............ 19-1/4 15-1/4
As of March 20, 1997, the Company's Common Stock was held by 5,000 holders of
record.
The Company intends to retain all of its future earnings for use in its
business, and therefore does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Future cash dividends, if any, will be
at the discretion of the Company's Board of Directors and will depend upon,
among other things, 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.
In October 1996, the Company entered into an agreement with an executive
pursuant to which the Company agreed to pay this executive ,as compensation for
past services, a cash amount equal to the value of 109,200 shares of Common
Stock or that number of actual shares of Common Stock. At the executive's
election, one-half of this amount was paid in cash immediately after the IPO,
and the remaining amount was paid in the form of 54,600 shares of restricted
Common Stock issued to the executive pursuant to an exemption from registration
under Section 4(2) of the Securities Act of 1933 and which will vest on June 30,
1998. If the executive voluntarily leaves the employ of the Company or is
terminated by the Company for cause before that date, the shares of restricted
stock will be forfeited. If the executive is terminated without cause, or upon
the sale of the Company or upon the executive's death, the shares of restricted
stock will vest on a pro rata basis.
10
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
------------------------
1992 1993 1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Statement Data:
Revenues.................... $20,161 $38,709 $70,050 $103,676 $123,400
Gross profit................ 7,314 12,573 20,135 31,262 33,947
Income from operations(1)... 2,707 2,744 11,349 18,259 12,874
Income before income taxes.. 2,732 2,724 11,444 18,396 12,828
Provision for income
taxes(2)................... -- -- -- -- 4,136
------- ------- ------- -------- --------
Net income.................. $ 2,732 $ 2,724 $11,444 $ 18,396 $ 8,692
------- ------- ------- -------- --------
Pro forma income taxes (2).. 1,093 1,090 4,578 7,358 4,915
------- ------- ------- -------- --------
Pro forma net income (2).... $ 1,639 $ 1,634 $ 6,866 $ 11,038 $ 3,777
======= ======= ======= ======== ========
Pro forma net income per
share (2).................. $0.09 $0.09 $0.38 $0.60 $0.20
======= ======= ======= ======== ========
Weighted average number of
common shares outstanding.. 18,255 18,255 18,255 18,255 18,790
AS OF DECEMBER 31,
----------------------------------------------------
1992 1993 1994 1995 1996
Balance Sheet Data:
Cash and Cash Equivalents... $ 499 $ 2,897 $ 4,124 $ 3,026 $ 45,997
Working capital............. 4,238 5,678 13,745 14,594 49,692
Total assets................ 5,695 12,461 22,847 25,754 77,509
Total shareholders' equity.. 4,626 5,972 14,262 15,671 50,759
(1) Income from operations for the year ended December 31, 1996, includes a
non-recurring charge incurred pursuant to an agreement with an executive
to pay, as compensation for past services, an amount equal to the value
of 54,600 shares of Common Stock at the IPO price of $15 per share. The
Company has reflected this payment along with the applicable tax
withholdings as a non-recurring charge.
(2) Certain events, including the closing of the Company's public offering of
common stock, automatically terminated its S corporation status on December
16, 1996, thereby subjecting income to federal and state income taxes at
the corporate level. Pro forma net income and pro forma net income per
share reflect federal and state income taxes (assuming a 40% effective tax
rate) as if the Company had been taxed as a C corporation for all periods
presented.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
that involve substantial risks and uncertainties. When used in this section, the
words "anticipate," "believe," "estimate," "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from the results expressed
in, or implied by, these forward-looking statements.
Overview
Mastech, founded in 1986, has experienced revenue growth every year since
inception and has been profitable every year since 1987. Mastech completed the
initial public offering of its Common Stock on December 20, 1996, resulting in
net proceeds to the Company of approximately, $45,606,000 ("the IPO").
The Company's revenues are derived from fees paid by clients for professional
services. Historically, a substantial majority of the Company's projects have
been client-managed. On client-managed projects, Mastech provides professional
services as a member of the project team on a time-and-materials basis. The
Company recognizes revenues on time-and-materials projects as the services are
performed. On Mastech-managed projects, Mastech takes complete responsibility
for project management, and bills the client on a time-and-materials or fixed-
price basis. Fixed-price contracts are recognized on the percentage of
completion method.
Mastech's most significant cost is its personnel expense, which consists
primarily of salaries and benefits of the Company's billable personnel. The
number of IT professionals assigned to projects may vary depending on the size
and duration of each engagement. Moreover, project terminations and completion
and scheduling delays may result in periods when personnel are not assigned to
active projects. Mastech manages its personnel costs by closely monitoring
client needs and basing personnel increases on specific project engagements.
While the number of IT professionals may be adjusted to reflect active
projects, the Company must maintain a sufficient number of professionals to
respond to demand for the Company's services on both existing projects and new
engagements.
12
Since July 1995, the Company has incurred significant incremental expenses to
build the infrastructure necessary to sustain the Company's growth. These
expenditures were incurred in connection with: (i) the development of additional
service offerings, including Year 2000 conversion services and ERP package
software services; (ii) the significant expansion of its globel recruitment
division; (iii) the opening of foreign sales offices to provide better access to
the global market; (iv) the development of four offshore software development
centers in India; (v) the hiring of additional managers to support a larger
organization; (vi) the relocation of the Company's headquarters to larger, more
efficient office space; and (vii) the establishment of training centers to
improve the skill levels of new and current employees. While these expenses have
increased the Company's selling, general and administrative expenses, the
Company believes that the revenues expected to be derived as a result of these
expenditures have not yet been fully realized.
Results of Operations
The following table sets forth for the periods indicated, selected statements
of operations data as a percentage of revenues:
Years ended December 31,
1994 1995 1996
Revenues............................. 100.0% 100.0% 100.0%
Cost of revenues..................... 71.3 69.9 72.5
----- ----- -----
Gross profit......................... 28.7 30.1 27.5
Selling, general and administrative*. 12.5 12.5 17.1
Income from operations............... 16.2 17.6 10.4
Income before income taxes........... 16.3 17.7 10.4
Provision for income taxes........... -- -- 3.4
----- ----- -----
Net income........................... 16.3% 17.7% 7.0%
===== ===== =====
*Includes a non-recurring charge of 0.07% of revenues in 1996.
1996 Compared to 1995
Revenues. The Company's revenues increased 19.0% from $103.7 million in 1995
to $123.4 million in 1996. This growth in revenues was primarily attributable to
additional services provided to existing clients, engagements with new clients
and the Company's continued expansion into international markets. The Company
broadened its client base from 308 clients in 1995 to 369 clients in 1996.
Revenues from the Company's international operations increased from $1.4 million
in 1995 to $11.1 million in 1996. The Company's revenue growth was limited by
higher than normal employee attrition in the first eight months of 1996.
Gross Profit. Gross profit consists of revenues less cost of revenues. Cost
of revenues consists primarily of salaries and employee benefits for billable IT
professionals and the associated travel and relocation costs of these
professionals, as well as the cost of the independent contractors used by the
Company. The number of IT professionals utilized by the Company (including
independent contractors) increased from 1,248 as of December 31, 1995 to 1,529
as of December 31, 1996. Gross profit increased 8.6% from $31.3 million in 1995
to $33.9 million in 1996. Gross profit as a percentage of revenues declined from
30.1% in 1995 to 27.5% in 1996. This decrease is directly attributable to an
increase in costs for IT professionals, including higher salaries, employee
bonuses, relocation expenses and an increase in the use of independent
contractors, incurred during the period as a result of a higher than normal rate
of employee attrition, In the first eight months of 1996, the Company
experienced this higher than normal rate of employee attrition because the
Company was experiencing delays in securing the first-stage approval from the
Department of Labor ("DOL") for permanent residency status for some of its
professionals. This attrition resulted in increased costs for IT professionals
and reduced revenue growth. In response to this attrition problem, the Company
increased its U.S. recruiting efforts, enhanced its training programs and worked
with the DOL to revise its filing procedures to resolve the delays. As a result
of these initiatives, the Company's employee attrition rate returned to normal
historical levels in September 1996. Costs associated with the use of
independent contractors as a percentage of cost of revenues increased from 10.1%
in 1995 to 16.3% in 1996.
13
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of costs associated with the Company's sales and
marketing efforts, executive management, finance and human resource functions,
facilities and telecommunication costs and other general overhead expenses.
Selling, general and administrative expenses increased 62.1% from $13.0 million
in 1995 to $21.1 million in 1996. As a percentage of revenues, selling, general
and administrative expenses increased from 12.5% in 1995 to 17.1% in 1996. This
increase was primarily attributable to the expenses incurred to build the
infrastructure necessary to support the Company's revenue growth as discussed
under "Overview" above. In addition to the incremental costs previously
mentioned, the Company has initiated a sales force recruiting program which
resulted in a 50% increase from 1995 to 1996 in the number of sales related
personnel.
Income Before Income Taxes. As a result of all of the above, the Company's
income before income taxes decreased 30.3% from $18.4 million in 1995 to $12.8
million in 1996. In addition to the above factors, the Company recorded a non-
recurring charge to income of $0.9 million related to an executive compensation
agreement, which provided for, among other things, a cash payment equal to the
value of 54,600 shares of the Company's common stock at the IPO price.
Provision for Income Taxes. The Company's effective tax rate was 32.2% for
the year ended December 31, 1996, including a one-time charge of $3.9 million
for income taxes related to Mastech's termination of its S-corporation status in
connection with the IPO. The Company also recorded a provision of $0.3 million
for income taxes incurred as a C corporation during the two week period from the
closing of the IPO through December 31, 1996 . See Notes 2 and 3 of the Notes to
Consolidated Financial Statements on pages 24 and 26, respectively in this Form
10-K.
1995 Compared to 1994
Revenues. The Company's revenues increased 48.0% from $70.1 million in 1994
to $103.7 million in 1995. The growth in revenues was attributable to increased
revenue from systems integrators, additional services delivered to existing
clients, engagements with new clients and, for the first time, revenue from
international operations. The Company broadened its client base from 285 clients
in 1994 to 308 clients in 1995. The increase in revenues was partially offset by
a planned decrease in government projects.
Gross Profit. Gross profit increased 55.3% from $20.1 million in 1994 to
$31.3 million in 1995. Gross profit also increased as a percentage of revenues
from 28.7% to 30.1%. This increase in margins was attributable to billing rates
increasing at a slightly higher level than professional salaries. Also, the
shift of available resources away from government contracts to more profitable
projects enabled the Company to attain a higher gross profit margin in 1995. The
increase in gross profit was partially offset by higher personnel expenses
resulting from the hiring of additional professionals to support the increase in
client engagements. The number of IT professionals increased from 1,005 as of
December 31, 1994 to 1,248 as of December 31, 1995. Costs associated with the
use of independent contractors as a percentage of cost of revenues increased
from approximately 1.0% in 1994 to 10.1% in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 48.0% from $8.8 million in 1994 to $13.0
million in 1995, representing 12.5% of revenues in both 1994 and 1995. Expenses
incurred in 1995 include costs related to the start-up of two foreign offices,
the relocation of the Company's headquarters and a general expansion of the
sales, marketing and administrative functions to support the Company's continued
revenue growth.
14
Liquidity and Capital Resources
The net proceeds generated from the IPO were approximately $45.6 million,
after deducting underwriting discounts and commissions and estimated offering
expenses paid by the Company. These monies have been temporarily invested in
short-term investment grade interest bearing securities. The Company expects to
use the net proceeds from the offering for: (i) expansion of existing
operations, including the Company's international and offshore software
development operations, development of new service lines and possible
acquisitions of related businesses; (ii) payment of undistributed S corporation
earnings estimated to be $6.5 million; (iii) payment of approximately $3.9
million in income taxes related to the termination of the Company's S
corporation status and (iv) general corporate purposes including working
capital.
Historically, the Company generally financed its working capital requirements
and distributions to shareholders through internally generated funds. The
Company's cash provided by operations was $4.7, $16.7 and $11.0 million for the
years ended December 31, 1994 and 1995 and 1996, respectively. The Company's
cash provided by operations prior to the IPO does not reflect any income tax
expense due to the Company's status as an S corporation.
Capital expenditures for the years ended December 31, 1995 and 1996 were
$0.8 and $3.0 million, respectively. Additionally, the Company entered into an
agreement to purchase a new management information system. The Company expects
to finance the entire $2.0 million cost of this project using its fiscal year
1997 operating funds.
The Company currently has a $15.0 million revolving credit facility (the
"Facility") with PNC Bank, Pittsburgh, Pennsylvania. The Facility bears
interest at a rate equal to LIBOR (approximately 7.07% at December 31, 1996)
plus 1.5% or prime (8.25% at December 31, 1996) at the Company's option and
borrowings are unsecured. The Facility contains certain restrictive covenants
and financial ratio requirements which would limit distributions to shareholders
and additional borrowings. Historically, the Company has not used the Facility
to finance its working capital needs. During 1996, the Company borrowed funds
for the purpose of making distributions to shareholders, which the shareholders
used to help finance construction of the three offshore software development
centers in India that will be leased by the Company. As of December 31, 1996,
$15.0 million remained available for borrowing under the Facility. The Company
is currently in negotiations to increase this credit facility to $25.0 million.
The Company currently anticipates that the proceeds from its IPO together
with existing sources of liquidity and cash generated from operations will be
sufficient to satisfy its cash needs at least through the next twelve months.
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented. On an ongoing basis,
the Company attempts to minimize any effects of inflation on its operating
results by controlling operating costs and, whenever possible, seeking to insure
that billing rates reflect increases in costs due to inflation.
The Company invoices its clients in the local currency of the country in which
the client is located. Gains and losses as a result of fluctuations in foreign
currency exchange rates have not had a significant impact on results of
operations.
15
Recently Issued Accounting Standards
In October 1995, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"). SFAS No. 123 recommends, but does not require,
that companies change their method of accounting for stock-based compensation
plans to one that attributes compensation costs equal to the fair value of a
stock-based compensation arrangement over the periods in which service is
rendered. Companies not electing to change their method of accounting are
required, among other things, to provide additional disclosure which in effect
restates the company's results for comparative periods as if the new method of
accounting had been adopted. The Company elected not to adopt the recognition
provision of SFAS No. 123, but instead, has complied with the disclosure
requirements. Effective December 16, 1996, the Company adopted the 1996 Stock
Incentive Plan (the "Plan") for directors, executive management and key
personnel. The Plan provides for the issuance of up to 2,160,000 shares of
Common Stock pursuant to incentive awards. In 1996, the Company issued options
to purchase 845,550 shares of Common Stock to its directors, executive
management and key personnel. Each of these options has an exercise price of
100% of the fair market value of the Common Stock on the date of award. The
right to purchase these options expires 10 years from the date of grant or
earlier if an option holder ceases to be employed by the Company for any reason.
Financial Accounting Standards Board Statement No. 128, "Earnings Per
Share" (SFAS No. 128) was issued in February 1997 and is effective for fiscal
years beginning after December 15, 1997. This statement, upon adoption, will
require all prior-period earnings per share (EPS) data to be restated, to
conform to the provisions of the statement. This statement's objective is to
simplify the computation of EPS and to make the U.S. standard for EPS
computations more compatible with that of the International Accounting Standards
Committee. The Company will adopt SFAS No. 128 in fiscal 1998 and does not
anticipate that the statement will have a significant impact on its reported
EPS.
Financial Accounting Standards Board Statement No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) was issued in February 1997
and is effective for periods ending after December 15, 1997. This statement,
upon adoption, will require all companies to provide specific disclosure
regarding the entities capital structure. SFAS No. 129 will specify the
disclosures, for all companies, including descriptions of the securities
comprising the capital structure and the contractual rights of the holders of
such securities. The Company will adopt SFAS No. 129 in fiscal 1997 and does not
anticipate that the statement will have a significant impact on its disclosure.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data required by this item are
filed as part of this Form 10-K. See Index to Consolidated Financial Statements
on page 18 of this Form 10-K.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Mastech Corporation
have been prepared by management, who are responsible for their integrity and
objectivity. The statements have been prepared in conformity with generally
accepted accounting principles and necessarily include amounts based on
management's best estimates and judgments.
Management has established and maintains a system of internal controls
designed to provide reasonable assurance that assets are safeguarded and that
the Company's financial records reflect authorized transactions of the Company.
The system of internal controls includes widely communicated statements of
policies and business practices that are designed to require all employees to
maintain high ethical standards in the conduct of Company affairs. The internal
controls are augmented by organizational arrangements that provide for
appropriate delegation of authority and division of responsibility.
The Company's consolidated financial statements have been audited by Arthur
Andersen LLP, independent public accountants, whose report thereon appears on
page 19 of this Form 10-K. As part of its audit of the Company's 1996 financial
statements, Arthur Andersen LLP considered the Company's system of internal
controls to the extent it deemed necessary to determine the nature, timing and
extent of its audit tests. Management has made available to Arthur Andersen LLP
the Company's financial records and related data.
The Board of Directors will pursue its responsibility for the Company's
financial reporting and accounting practices through its Audit Committee, a
majority of the members of which are nonemployee directors . The Committee was
established at the first meeting of the Board of Directors on March 9, 1997.
The independent public accountants will have direct access to the Audit
Committee with and without the presence of management representatives, to
discuss the results of their audit work and their comments on the adequacy of
internal accounting controls, and the quality of financial reporting .
Sunil Wadhwani
Co-Chairman, Chief Executive Officer and Director
Michael Zugay
Vice President-Finance
March 17, 1997
17
MASTECH CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
Report of Independent Public Accountants.................. 19
Consolidated Balance Sheets as of
December 31, 1995 and 1996............................... 20
Consolidated Income Statements for the
years ended December 31, 1994, 1995
and 1996................................................. 21
Consolidated Statements of
Shareholders' Equity for the years
ended December 31, 1994, 1995 and 1996.................... 22
Consolidated Statements of Cash Flows
for the years ended December 31, 1994,
1995 and 1996............................................. 23
Notes to Consolidated Financial
Statements................................................ 24-34
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Mastech Corporation:
We have audited the accompanying consolidated balance sheets of Mastech
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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 audits 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 Mastech Corporation and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
February 13, 1997
19
MASTECH CORPORATION
Consolidated Balance Sheets
(Dollars in thousands)
December 31
-------------------
1995 1996
ASSETS
Current assets:
Cash and cash equivalents (cost
approximates market value).......... $ 3,026 $45,997
Accounts receivable, net of allowance
for uncollectible
accounts............................ 19,146 23,160
Unbilled receivables.................. 1,504 1,410
Employee and related party advances... 526 2,591
Prepaid and other assets.............. 421 601
------- -------
Total current assets............ 24,623 73,759
------- -------
Equipment and leasehold improvements,
at cost:
Equipment............................. 1,548 3,932
Leasehold improvements................ 147 736
------- -------
1,695 4,668
Less--Accumulated depreciation........ (564) (918)
------- -------
Net equipment and leasehold
improvements...................... 1,131 3,750
------- -------
Total assets............................ $25,754 $77,509
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 4).... $ -- $ 2,077
Accounts payable...................... 1,412 3,934
Accrued payroll and related costs..... 7,822 8,898
Other accrued liabilities............. 795 1,342
S corporation dividend payable (Note
12).................................. -- 6,500
Deferred revenue...................... -- 116
Deferred income taxes................. -- 1,200
------- -------
Total current liabilities....... 10,029 24,067
------- -------
Minority interest....................... 54 --
Deferred income taxes................... -- 2,683
Commitments (Note 6)
Shareholders' equity:
Preferred stock, without par value:
20,000,000 shares
authorized, no shares outstanding... -- --
Common stock, par value $0.01 per
share:
100,000,000 shares authorized,
18,200,000 and 21,654,600
shares issued and outstanding,
respectively (Note 9).............. 182 217
Additional paid-in capital............ 106 51,168
Retained earnings..................... 15,384 197
Deferred compensation (Note 9)........ -- (776)
Currency translation adjustment....... (1) (47)
------- -------
Total shareholders' equity...... 15,671 50,759
------- -------
Total liabilities and shareholders'
equity................................. $25,754 $77,509
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
20
MASTECH CORPORATION
Consolidated Income Statements
(Dollars in thousands, except per share data)
Years Ended December 31
-------------------------------------
1994 1995 1996
Revenues................................ $70,050 $103,676 $123,400
Cost of revenues........................ 49,915 72,414 89,453
------- -------- --------
Gross profit............................ 20,135 31,262 33,947
Selling, general and administrative..... 8,786 13,003 20,198
Non-recurring charge (Note 8)........... -- -- 875
------- -------- --------
Income from operations.................. 11,349 18,259 12,874
Interest (income) expense, net.......... (69) (164) 43
Minority interest in net (loss) income
of subsidiaries........................ (26) 27 3
------- -------- --------
Net income before income taxes.......... 11,444 18,396 12,828
Provision (credit) for income taxes.....
Current................................ -- -- 253
Deferred............................... -- -- (17)
Termination of S corporation status.... -- -- 3,900
------- -------- --------
Provision for income taxes........... -- -- 4,136
------- -------- --------
Net income.............................. $11,444 $ 18,396 $ 8,692
======= ======== ========
Pro forma Information-(Unaudited)
---------------------------------
Net income.............................. $11,444 $ 18,396 $ 8,692
Pro forma income taxes.................. 4,578 7,358 4,915
------- -------- --------
Pro forma net income.................... $ 6,866 $ 11,038 $ 3,777
======= ======== ========
Pro forma net income per common share... $0.38 $0.60 $0.20
======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
21
MASTECH CORPORATION
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
Common Stock
---------------------
Additional Currency Total
Paid-in Retained Deferred Translation Shareholders'
Shares Par Value Capital Earnings Compensation Adjustment Equity
---------- --------- ---------- --------- ------------- ------------ --------------
Balance, December 31, 1993......... 18,200,000 $182 $ 106 $ 5,723 $ -- $(39) $ 5,972
Net income........................ -- -- -- 11,444 -- -- 11,444
Dividends......................... -- -- -- (3,192) -- -- (3,192)
Currency translation adjustment... -- -- -- -- -- 38 38
-----------------------------------------------------------------------------------------
Balance, December 31, 1994......... 18,200,000 182 106 13,975 -- (1) 14,262
Net income........................ -- -- -- 18,396 -- -- 18,396
Dividends......................... -- -- -- (16,987) -- -- (16,987)
Currency translation adjustment... -- -- -- -- -- -- --
-----------------------------------------------------------------------------------------
Balance, December 31, 1995......... 18,200,000 182 106 15,384 -- (1) 15,671
Net income........................ -- -- -- 8,692 -- -- 8,692
Dividends......................... -- -- -- (19,045) -- -- (19,045)
Issuance of common stock.......... 3,400,000 34 50,216 (4,644) -- -- 45,606
Disproportionate
dividend (Note 11)............... -- -- -- (190) -- -- (190)
Acquisition of minority interest
in Scott Systems................. -- -- 28 -- -- -- 28
Restricted stock award............ 54,600 1 818 -- (819) -- --
Amortization of deferred
compensation..................... -- -- -- -- 43 -- 43
Currency translation adjustment... -- -- -- -- -- (46) (46)
-----------------------------------------------------------------------------------------
Balance, December 31, 1996........ 21,654,600 $217 $51,168 $ 197 $(776) $(47) $ 50,759
========================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
22
MASTECH CORPORATION
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31
-----------------------------
1994 1995 1996
CASH FLOW FROM OPERATIONS
OPERATIONS:
Net income............................. $11,444 $ 18,396 $ 8,692
Adjustments to reconcile net income
to cash provided by operations:
Depreciation......................... 137 206 354
Allowance for uncollectible accounts. 150 200 175
Minority interest.................... (27) 28 (54)
Deferred income taxes, net........... -- -- 3,883
Amortization of deferred
compensation........................ -- -- 43
Working capital items:
Accounts receivable and unbilled
receivables......................... (8,402) (3,743) (4,095)
Advances............................. (715) 479 (2,065)
Prepaid and other assets............. 4 (353) (180)
Accounts payable..................... 775 (713) 2,522
Accrued and other current
liabilities......................... 1,348 2,183 1,739
------- -------- --------
Net cash flow from operations..... 4,714 16,683 11,014
------- -------- --------
INVESTING ACTIVITIES:
Additions to equipment and leasehold
improvements........................ (333) (794) (2,973)
Acquisition of minority interest in
Scott Systems....................... -- -- 28
------- -------- --------
Net cash flow from investing
activities....................... (333) (794) (2,945)
------- -------- --------
FINANCING ACTIVITIES:
Borrowings under revolving credit
facility.............................. -- -- 2,077
Net proceeds from issuance of common
stock................................. -- -- 45,606
Disproportionate dividend.............. -- -- (190)
Dividends paid......................... (3,192) (16,987) (12,545)
------- -------- --------
Net cash flow from financing
activities....................... (3,192) (16,987) 34,948
------- -------- --------
Effect of currency translation on cash... 38 -- (46)
Net change in cash and cash equivalents.. 1,227 (1,098) 42,971
Cash and cash equivalents, beginning of
period.................................. 2,897 4,124 3,026
------- -------- --------
Cash and cash equivalents, end of period. $ 4,124 $ 3,026 $ 45,997
======= ======== ========
Supplemental disclosure:
Non cash financing activities
Dividends declared- S corporation.... $ -- $ -- $ 6,500
Cash payments for interest............. $ 10 $ 3 $ 223
The accompanying notes are an integral part of these consolidated financial
statements.
23
MASTECH CORPORATION
Notes to Consolidated Financial Statements
1. Operations:
In conjunction with the closing of its initial public offering on December
16, 1996 (the "IPO"), Mastech Systems Corporation, the entity through which the
business of the Company had been conducted since its inception in July 1986,
became an indirect, wholly-owned subsidiary of Mastech Corporation ("Mastech" or
the "Company"), which is a newly-formed Pennsylvania corporation.
Mastech is a worldwide provider of IT services to large organizations.
Mastech provides its clients with a single source for a broad range of
applications solutions and services, including client/server design and
development, conversion/migration services, Year 2000 services, ERP package
implementation services and maintenance outsourcing. These services are provided
in a variety of computing environments and use leading technologies, including
client/server architectures, object-oriented programming, distributed databases
and the latest networking and communications technologies.
Mascot Systems Pvt, Ltd. ("Mascot"), a wholly-owned foreign subsidiary, was
acquired upon the closing of the IPO. Mascot is currently operating two and
developing two other offshore software development centers in the cities of
Bangalore, Pune and Madras, India. Mascot's current operations serve as
Mastech's single source for offshore software development. Also, effective
December 16, 1996, SWAT Systems Corporation, a Pennsylvania corporation ("SWAT")
was merged into the Company resulting in its wholly-owned subsidiary, Scott
Systems Pvt. Ltd ("Scott"), an India-based corporation, becoming a wholly-owned
subsidiary of Mastech. Both subsidiaries provide IT professional recruiting and
training services. As of December 31, 1996, all of Mascot, SWAT and Scott's
revenues were derived from services provided to Mastech. These transactions are
described in Note 11.
2. Summary of Significant Accounting Policies:
The accompanying Consolidated Financial Statements reflect the application of
the following significant accounting policies:
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Accounts Receivable
The Company extends credit to clients based upon management's
assessment of their creditworthiness. Substantially all of the Company's
revenues (and the resulting accounts receivable) are from large companies, major
systems integrators and governmental agencies. The allowance for uncollectible
accounts was approximately $500,000 and $675,000 as of December 31, 1995 and
1996, respectively.
Revenue Recognition
The Company recognizes revenue on time-and-materials contracts as the services
are performed for clients. Revenues on fixed-price contracts are recognized
using the percentage of completion method. Percentage of completion is
determined by relating the actual cost of work performed to date to the
estimated total cost for each contract. If the estimate indicates a loss on a
particular contract, a provision is made for the entire estimated loss without
reference to the percentage of completion.
24
MASTECH CORPORATION
Notes to Consolidated Financial Statements
Depreciation
The Company provides for depreciation using the straight-line method in
amounts which allocate the costs of equipment over their estimated useful lives
of five to seven years, and leasehold improvements over the shorter of the life
of the improvement or of the underlying lease term.
Currency Translation Adjustment
The financial statements of foreign subsidiaries are translated using the
exchange rate in effect at year-end for balance sheet accounts and the average
exchange rate in effect during the year for revenue and expense accounts.
Translation gains and losses are excluded from the consolidated income
statements and are instead reported as the currency translation adjustment
component of shareholders' equity.
The functional currency of international offices and foreign subsidiaries is
the currency of the country in which the office or subsidiary is located.
Revenues of the Company are billed in the currency of the country in which the
customer is located. Translation gains and losses arising from differences
between the functional and billing currencies are recognized in the consolidated
income statements.
Income Taxes
Prior to its initial public offering, the Company elected to be taxed under
Subchapter S of the Internal Revenue Code of 1986, as amended ("S
corporation") for income tax purposes. Accordingly, the income of the Company
was reported on the individual income tax returns of its shareholders.
Therefore, the financial statements do not include a provision for income taxes
related to income prior to the closing of the public offering.
The Company's S corporation status terminated in connection with the Company's
initial public offering, thereby subjecting the Company's income to federal and
state income taxes at the corporate level. Due to temporary differences in
recognition of revenue and expenses, income for financial reporting purposes has
exceeded income for income tax purposes. Accordingly, the application of the
provisions of SFAS No. 109, "Accounting for Income Taxes" resulted in the
recognition of deferred tax liabilities (and a corresponding one-time charge to
expense) of $3.9 million as of the date the S corporation was terminated. The
majority of this tax provision will be paid over the next four years.
In the recent past, the government of India has provided incentives, in the
form of tax holidays, to encourage foreign investment. No tax holidays have been
granted to the Company as of December 31, 1996.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
25
MASTECH CORPORATION
Notes to Consolidated Financial Statements--(Continued)
Through April 30, 1996, the Company provided for group medical costs through
self-insurance programs. The amounts charged to expense for group medical claims
were approximately $1,195,000, $2,005,000, $669,000 for the years ended December
31, 1994, 1995 and 1996, respectively. Estimated claims incurred but not
reported were $500,000 and $370,000 as of December 31, 1995 and 1996,
respectively, and are included in other accrued liabilities in the accompanying
consolidated balance sheets. As of April 30, 1996, the Company had stop/loss
insurance coverage related to these programs. Effective May 1, 1996, the Company
maintains coverage through a fully insured premium based plan.
Financial Instruments
The fair values and carrying amounts of the Company's financial instruments,
primarily accounts receivable and payable, are approximately equivalent. The
financial instruments are classified as current and will be liquidated within
the next operating cycle.
Pro Forma Information (Unaudited):
The pro forma adjustments for income taxes included in the accompanying
consolidated income statements are based upon the statutory rates in effect for
C corporations during the periods presented.
Reclassifications
Certain prior-year balances have been reclassified to conform to the current
period presentation.
3. Income Taxes
The Company's S corporation status terminated in connection with the Company's
initial public offering, thereby subjecting the Company's income to federal and
state income taxes at the corporate level. The Company accounts for income taxes
in accordance with the provisions of SFAS No. 109. Except for the effect of the
reversal of net deductible temporary differences, the Company is not aware of
any significant differences between book and taxable income in future years.
Prior to the initial public offering, the Company elected Subchapter S
corporation status for income tax purposes. Accordingly, the income of the
Company was reported on the individual income tax returns of its shareholders.
The financial statements, therefore, do not include a provision for income taxes
prior to the closing of the public offering.
26
MASTECH CORPORATION
Notes to Consolidated Financial Statements--(Continued)
The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes follows:
1996
------
C corporation income before taxes for
the 15 day period ended December $ 413
31, 1996...............................
Net taxable temporary differences....... 4
Current portion of S corporation
deferred revenue....................... 123
------
Book taxable income as a C corporation.. 540
Income taxes at the statutory rate...... 216
Provision for change in tax status to C
corporation............................ 3,900
Other, net.............................. 20
------
Provision for income taxes.............. 4,136
======
The provision for income taxes as shown in the accompanying consolidated
statements of income, include the following components:
(Dollars in Thousands) 1996
-----
Current provision-
Federal............................. $ 216
State............................... --
Foreign............................. 37
------
Total current provision........... 253
Deferred credit..................... (17)
Termination of S corporation status. 3,900
------
Total provision for income taxes..... $4,136
======
27
MASTECH CORPORATION
Notes to Consolidated Financial Statements--(Continued)
The components of the deferred tax assets and liabilities are as follows:
December 31
-----------
(Dollars in Thousands) 1996
Deferred tax assets............... $ (17)
Deferred tax liabilities.......... 3,900
------
Total deferred tax liability...... $3,883
======
Consisting of-
Current liability
S corporation deferred revenue.. $1,200
Deferred liability
S corporation deferred revenue.. $2,395
Other........................... 288
------
$3,883
======
4. Revolving Credit Facility:
The Company has available borrowings under a revolving credit facility with a
bank. Borrowings under this arrangement are unsecured, are limited to $15.0
million bear interest at LIBOR, as defined, (7.07 % and 7.50% at December 31,
1996 and 1995, respectively), plus 1.5% or the prime rate (8.25% and 8.50% at
December 31, 1996 and 1995, respectively) and are payable upon demand. There
were no borrowings outstanding under this arrangement as of December 31, 1996
and 1995. Average outstanding borrowings under this arrangement were $1.4
million for the year ended December 31, 1996 and there were no borrowings under
this arrangement during the year ended December 31, 1995.
As of December 31, 1996, Mascot Systems had borrowings outstanding under
revolving credit agreements with ICICI Banking Corporation Limited and IndusInd
Bank Limited, both of India. Borrowings under these facilities are secured by
deposits of the controlling shareholders of the Company. Of the $2.1 million
borrowed and outstanding under these agreements at December 31, 1996, the
following interest rates apply:
Amount Annual
Borrowed Interest Rate
- ------------- --------------
$995,000 18.75%
1,082,000 19.25%
- ----------
$2,077,000
==========
These borrowings will be repaid by the Company as soon as the Company receives
Reserve Bank of India approval for the repatriation of such loan to Mascot
Systems.
28
MASTECH CORPORATION
Notes to Consolidated Financial Statements--(Continued)
5. Related Party Transactions:
The controlling shareholders leased residential properties to the Company
under lease agreements which were terminated during 1996. Payments in
accordance with these arrangements were approximately $36,000, $36,000 and
$9,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
The Company has loans outstanding from the Company's controlling shareholders
of $16,000 as of December 31, 1996 and 1995. These loans are included in
accounts payable in the consolidated balance sheets.
As an S corporation, the net income of the Company was attributed, for federal
(and some state) income tax purposes, directly to the Company's shareholders
rather than to the Company. During 1995 and 1996, the Company had from time to
time paid the corresponding income taxes due on these amounts on behalf of the
controlling shareholders in the form of interest-free advances which were later
repaid. The highest aggregate amounts of advances outstanding to one of the
controlling shareholders and his Qualified Subchapter S Trust during 1995 and
1996 were approximately $117,000 and $1,682,000, respectively. The highest
aggregate amounts of advances outstanding to the other controlling shareholder
during 1995 and 1996 were approximately $117,000 and $1,682,000, respectively.
This practice will be discontinued in early 1997.
Mascot Systems leases and intends to lease from the controlling shareholders
the office space for the offshore software development facilities in Bangalore,
Pune and Madras, India. The acquisition of the real estate and the construction
of these office buildings (but not the buildout of the office space) was
financed entirely by the controlling shareholders out of personal funds.
Specifically, Mascot Systems leases approximately 4,200 square feet of office
space on one floor of an office building located in Bangalore, India, which
floor is owned by the controlling shareholders. The lease has a one-year term
expiring in March 1997, and the rent is approximately $7,000 per year. Mascot
Systems also leases a 30,000-square-foot office building located in Bangalore,
India from the controlling shareholders. This lease has a one-year term expiring
in October 1997, and the annual rent is approximately $110,000 per year. The
offshore software development facilities located in Pune and Madras, India are
presently under construction with occupancy expected in May 1997, and July 1997,
respectively. Mascot Systems expects to enter into two additional leases with
the controlling shareholders for these facilities. The facility in Pune, India
is a 35,000-square-foot office building, and the facility in Madras, India is a
65,000-square-foot office building. See also Note 11.
Scott Systems leases, for its training facilities, approximately 2,100 square
feet of office space on one floor of an office building located in Bombay,
India. The leased space is divided into five separately owned suites owned
individually by the controlling shareholders. The leases have a one-year term
expiring in April 1997, and the aggregate rent is $20,000 per year. Scott
Systems also leases additional office space of approximately 900 square feet on
another floor in the same office building which is owned by the controlling
shareholders. The lease has a one-year term expiring in October 1997, and the
rent is approximately $6,000 per year. See also Note 11
The Company believes that the terms of the leases described above are or will,
when executed, be no less favorable to the Company than could be obtained from
unrelated third parties.
29
MASTECH CORPORATION
Notes to Consolidated Financial Statements--(Continued)
6. Commitments:
The Company rents certain office facilities and equipment under noncancelable
operating leases which provide for the following future minimum rental payments
as of December 31, 1996:
Period ending December 31 Amount
1997 735,000
1998 621,000
1999 582,000
2000 239,000
Thereafter --
----------
Total $2,177,000
==========
Rental expense was approximately $179,000, $500,000 and $778,000 for the years
ended December 31, 1994, 1995 and 1996, respectively.
The Company has employment agreements with ten of its officers which provide
for specified minimum salaries and bonuses based upon the Company's performance.
7. Employee Benefit Plans:
The Company adopted a 401(k) benefit plan effective January 1, 1995. Eligible
employees, as defined in the plan, may contribute up to 15% of eligible
compensation, as defined. The Company does not contribute to this plan.
8. Non-recurring Charge:
In October 1996, the Company entered into an agreement with an executive
pursuant to which the Company agreed to pay this individual, as compensation for
past services, an amount equal to the value of 109,200 shares of Common Stock at
the initial public offering price of $15 per share. One-half of this payment
was made in cash, at the election of the executive, on December 16, 1996. The
remaining half of this obligation was satisfied on December 16, 1996 via the
issuance of 54,600 shares of restricted Common Stock, as described in Note 9.
The Company has reflected the cash payment along with the applicable tax
withholdings as a non-recurring charge in the accompanying consolidated
statements of income.
30
MASTECH CORPORATION
Notes to Consolidated Financial Statements--(Continued)
9. Stock-Based Compensation and Restricted Stock Award:
Effective December 16, 1996, the Company adopted the 1996 Stock Incentive Plan
(the "Plan") for directors, executive management and key personnel. The Plan
provides for the issuance of up to 2,160,000 stock-based incentive awards at the
market value of the stock at the date of grant. The Company accounts for the
Plan under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". Had compensation costs for the Plan been determined
consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), the pro forma effect
on net income and earnings per share during fiscal year 1996 would have been
insignificant. Among other things, the SFAS No. 123 computation assumes the
recognition of compensation expense on a straight-line basis for the two-week
period ended December 31, 1996.
In 1996, options covering a total of 845,550 shares of Common Stock were
granted under the plan. The right to purchase these options expires 10 years
from the date of grant or earlier if an option holder ceases to be employed by
the Company for any reason. A summary of stock option activity follows:
Summary of Stock Options Stock Option Price Total
- ---------------------------------------- ------------------- --------
$ 15
Year Ended December 31, 1995 -- --
Options:
Granted............................... 845,550 845,550
Forfeitures........................... -- --
Exercised............................. -- --
Year Ended December 31, 1996............ 845,550 845,550
======== ========
Options exerciseable at December 31,
1996................................... -- --
Weighted average fair value of options
granted during the year*............... $ 5.86 $ 5.86
======== ========
There were 1,314,450 shares reserved for future grants under the 1996 Stock
Option Plan at December 31, 1996.
*The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions for grants in 1996.
Risk free interest rate............................. 6.2%
Expected dividend yield............................. 0.0%
Expected life of options............................ 6 YRS.
Expected volatility rate............................ 24.5%
Effective December 16, 1996, the Company entered into an employment agreement
with an executive that included the granting of 54,600 shares of restricted
common stock. During the restricted period (from December 16, 1996 to June 30,
1998), the restricted stock vests ratably and daily. The agreement provides for
partial awards and forfeitures under various circumstances. At December 31,
1996, the Company's consolidated balance sheet reflects deferred compensation of
$776,000, related to this award, as an offset to shareholders' equity.
Compensation expense of $43,000 related to the vesting of restricted shares
through December 31, 1996 has been recorded in the Company's consolidated income
statement.
31
MASTECH CORPORATION
Notes to Consolidated Financial Statements--(Continued)
10. Pro Forma Income per Common Share:
Pro forma net income per common share is calculated by dividing pro forma net
income by the weighted average number of common shares plus incremental common
stock equivalent shares (shares issuable upon exercise of stock options).
Incremental common stock equivalent shares are calculated for each measurement
period based on the treasury stock method which uses the monthly average market
price per share.
The weighted average common shares and common share equivalents were as
follows:
December 31
- ------------------------------------
1994 1995 1996
18,254,600 18,254,600 18,790,262
The 1996 weighted average shares outstanding as calculated above also includes
393,462 common shares, which represents the number of shares, when multiplied by
the initial public offering price, would have been sufficient to replace the
capital in excess of earnings withdrawn as dividends during the period.
11. Business Acquisitions:
Mascot Systems, prior to becoming a subsidiary of the Company, was owned by
Mastech's controlling shareholders. The Company has in the past engaged Mascot
Systems as a subcontractor to perform offshore software development projects. On
December 16, 1996, the Company purchased the shares of Mascot Systems held by
the controlling shareholders for $170,000. This price was based upon an
independent valuation of that interest, and paid from the Company's working
capital. The Company has also purchased the minority shares of Mascot Systems,
which were held by relatives of the controlling shareholders, for $20,000, based
upon an independent valuation. This transaction has been reflected as a
disproportionate dividend in the accompanying statements of shareholders'
equity.
Scott Systems, prior to becoming a subsidiary of the Company, was indirectly
controlled by Mastech's controlling shareholders through SWAT Systems
Corporation. The Company has in the past engaged Scott Systems to recruit and
train IT professionals in India. On December 16, 1996, SWAT was merged with and
into Mastech and Scott Systems thereby became a subsidiary of the Company. The
controlling shareholders received nominal consideration in this transaction. The
Company also purchased the minority shares of Scott Systems, some of which are
held by relatives of the controlling shareholders, for $26,000.
The accompanying Consolidated Financial Statements present the financial
position, results of operations and cash flows of the Company and the
aforementioned entities as if they had been combined from inception in a manner
similar to a pooling of interests.
32
MASTECH CORPORATION
Notes to Consolidated Financial Statements--(Continued)
12. S corporation Dividend:
Since it was founded in 1986, the Company had elected S corporation status
for income tax purposes. As a result, substantially all of the Company's net
income was attributed, for income tax purposes, directly to the Company's
shareholders rather than to the Company. The Company's S corporation status
terminated in connection with its public offering of common stock, and the
Company will make a final distribution to its former S corporation shareholders
of undistributed S corporation earnings, as explained below.
On December 16, 1996, the Company's Board of Directors declared an S
corporation dividend to former S corporation shareholders in an aggregate
amount representing all undistributed earnings of the Company taxed or taxable
to its shareholders through December 16, 1996 (the "S corporation Dividend").
The S corporation Dividend is recorded in the accompanying consolidated balance
sheets at December 31, 1996 in the amount of $6.5 million.
13. Business Segment Information:
The Company is predominantly engaged in providing information technology
services to large organizations. The following is information about the
Company's operations by geographical area.
December 31
----------------------------
(Dollars in Thousands) 1994 1995 1996
- ----------------------------------------------------------------------
Revenues-
Revenues-United States $70,050 $102,248 $112,308
Revenues (including intergeographic
revenues of $1,706, $565 and $648
for the years 1996, 1995 and 1994,
respectively) - Foreign 648 1,993 12,798
Adjustments and Eliminations (648) (565) (1,706)
- ----------------------------------------------------------------------
Consolidated $70,050 $103,676 $123,400
- ----------------------------------------------------------------------
Operating Income (Loss)-
United States $11,291 $18,713 $11,554
Foreign 58 (454) 1,320
------ ------- -------
Consolidated 11,349 18,259 12,874
- ----------------------------------------------------------------------
Other income (expenses), net, including
interest and general corporate
expenses 95 137 (46)
- ----------------------------------------------------------------------
Income before income taxes $11,444 $18,396 $12,828
- ----------------------------------------------------------------------
Identifiable assets-
United States $22,545 $24,780 $74,146
Foreign 302 974 3,363
- ----------------------------------------------------------------------
Consolidated $22,847 $25,754 $77,509
- ----------------------------------------------------------------------
Sales to a single customer did not aggregate 10% or more of total revenues.
The Company derives no revenue from export activity.
33
MASTECH CORPORATION
Notes to Consolidated Financial Statements--(Continued)
14. Quarterly Financial Information (Unaudited):
Three Months Ended
----------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31,
(Dollars in thousands, except per share data)
1995
Net sales....................... $24,107 $25,153 $26,896 $ 27,520
Gross profit.................... 7,196 7,650 7,548 8,868
Income from operations.......... 4,484 4,664 4,280 4,831
Net income...................... $ 4,519 $ 4,696 $ 4,303 $ 4,878
======= ======= ======= ========
Pro forma net income............ $ 2,712 $ 2,817 $ 2,582 $ 2,927
Pro forma net income per share.. $ 0.15 $ 0.15 $ 0.14 $ 0.16
1996
Net sales....................... $28,595 $30,804 $30,937 $ 33,064
Gross profit.................... 8,107 8,919 7,752 9,169
Income from operations.......... 3,405 4,227 2,476 2,766
Net income (loss)............... $ 3,429 $ 4,257 $ 2,401 (1,395)
======= ======= ======= ========
Pro forma net income (loss)..... $ 2,059 $ 2,553 $ 1,440 ($2,275)
Pro forma net income (loss) per
share.......................... $ 0.11 $ 0.14 $ 0.08 ($ 0.12)
Item 9. Disagreements on Accounting and Financial Disclosure:
Not applicable
34
PART III
Item 10. Directors and Officers of Registrant:
The information required by this item is incorporated by reference from the
information under the caption "Management and Directors" in the Company's
definitive proxy statement to be filed.
Item 11. Executive Compensation:
The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" in the Company's
definitive proxy statement to be filed provided that the information in such
proxy statement under the captions "Performance Graph" and "Compensation
Committee Report on Executive Compensation'' should not be incorporated
by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management:
The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Company's definitive proxy statement to be filed.
Item 13. Certain Relationships and Related Transactions:
The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" in the Company's definitive
proxy statement to be filed.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
--------------------
The following consolidated financial statements of the registrant and its
subsidiaries are included on pages 19 to 34 and the report of independent public
accountants is included on page 19 in this Form 10-K.
Report of Independent Public Accountants.
Consolidated Balance Sheets- December 31, 1995 and 1996.
Consolidated Income Statements- Years ended December 31, 1994, 1995 and 1996.
Consolidated Statements of Shareholders' Equity- Years ended December 31,
1994, 1995 and 1996.
Consolidated Statements of Cash Flows- Years ended December 31, 1994, 1995 and
1996.
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
------------------------------------------
The following consolidated financial statement schedules shown below should
be read in conjunction with the consolidated financial statements on pages 20 to
34 in this Form 10-K. All other schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
Notes thereto.
The following items appear immediately following the signature pages:
Report of Independent Public Accountants on Consolidated Financial Statement
Schedules.
Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts for the three years ended
December 31, 1996.
Financial Data Schedules
3. Exhibits
--------
Exhibits required by Item 601 of Regulation S-K are listed in the Exhibit
Index, which is incorporated herein by reference.
(b) Reports on Form 8-K: Not applicable
35
EXHIBIT INDEX
- -------------
Sequentially
Exhibit No. Description of Exhibit Numbered Page
------------------------- ------------------------------------------------------------------------------------ -------------
3.1 - Articles of Incorporation of the Company are incorporated by reference from Exhibit N/A
3.1 to Mastech Corporation's Registration Statement on Form S-1, Commission File
No. 333-14169, filed on November 19, 1996.
3.2 - Bylaws of the Company are incorporated by reference from Exhibit 3.2 to Mastech N/A
Corporation's Registration Statement on Form S-1, Commission File No. 333-14169,
filed on November 19, 1996.
4.1 - Form of certificate representing the Common Stock of the Company are incorporated N/A
by reference from Exhibit 4.1 to Mastech Corporation's Registration Statement on
Form S-1, Commission File No. 333-14169, filed on November 19, 1996.
10.1 - Form of Employment Agreement by and between the Company and Sunil Wadhwani and N/A
Ashok Trivedi is incorporated by reference from Exhibit 10.1 to Mastech
Corporation's Registration Statement on Form S-1, Commission File No. 333-14169,
filed on November 19, 1996.*
10.2 - 1996 Stock Incentive Plan is incorporated by reference from Exhibit 10.2 to Mastech N/A
Corporation's Registration Statement on Form S-1, Commission File No. 333-14169,
filed on November 19, 1996.*
10.3 - Agreement dated October 14, 1996 between Mastech Systems Corporation (f/k/a Mastech N/A
Corporation) and Steven Shangold, as amended by Addendum dated as of November 18,
1996, is incorporated by reference from Exhibit 10.3 to Mastech Corporation's
Registration Statement on Form S-1, Commission File No. 333-14169, filed on
November 19, 1996.*
10.4 - Form of Employment Agreement by and between the Company and each of its Executive N/A
Officers is incorporated by reference from Exhibit 10.4 to Mastech Corporation's
Registration Statement on Form S-1, Commission File No. 333-14169, filed on
December 16, 1996.*
10.5 - Shareholders Agreement by and among the Company, Sunil Wadhwani and Ashok Trivedi N/A
and the Joinder Agreement by Grantor Retained Annuity Trusts established by Messrs.
Wadhwani and Trivedi are incorporated by reference from Exhibit 10.5 to Mastech
Corporation's Registration Statement on Form S-1, Commission File No. 333-14169,
filed on December 16, 1996.
10.10 - Lease Agreement dated January 15, 1995 by and between Mascot Systems Private N/A
Limited and Messrs. Wadhwani and Trivedi for real estate in Bangalore, India is
incorporated by reference from Exhibit 10.10 to Mastech Corporation's Registration
Statement on Form S-1, Commission File No. 333-14169, filed on November 19, 1996.
10.11 - Lease Agreement dated November 6, 1996 by and between Mascot Systems Private N/A
Limited and Messrs. Wadhwani and Trivedi for real estate in Bangalore, India is
incorporated by reference from Exhibit 10.11 to Mastech Corporation's Registration
Statement on Form S-1, Commission File No. 333-14169, filed on November 19, 1996.
10.12 - Lease Agreement dated April 1, 1996 by and between Scott Systems Private Limited N/A
and Messrs. Wadhwani and Trivedi for real estate in Bombay, India is incorporated
by reference from Exhibit 10.12 to Mastech Corporation's Registration Statement on
Form S-1, Commission File No. 333-14169, filed on November 19, 1996.
10.13 - Lease Agreement dated April 1, 1996 by and between Scott Systems Private Limited N/A
and Sunil Wadhwani for real estate in Bombay, India is incorporated by reference
from Exhibit 10.13 to Mastech Corporation's Registration Statement on Form S-1,
Commission File No. 333-14169, filed on November 19, 1996.
10.14 - Lease Agreement dated April 1, 1996 by and between Scott Systems Private Limited N/A
and Ashok Trivedi for real estate in Bombay, India is incorporated by reference
from Exhibit 10.14 to Mastech Corporation's Registration Statement on Form S-1,
Commission File No. 333-14169, filed on November 19, 1996.
36
Sequentially
Exhibit No. Description of Exhibit Numbered Page
------------------------- ------------------------------------------------------------------------------------ -------------
10.15 - Stock Purchase Agreement by and between the Company and Messrs. Wadhwani and N/A
Trivedi for their shares of Mascot Systems Private Limited (incorporated by
reference to Exhibit 10.15 on Form S-1 of Mastech Corporation, Commission File No.
333-14169, filed on November 19, 1996).
10.16 - Agreement and Plan of Merger by and between the Company and SWAT Systems is N/A
incorporated by reference from Exhibit 10.15 to Mastech Corporation's Registration
Statement on Form S-1, Commission File No. 333-14169, filed on November 19, 1996.
10.17 - Form of S corporation Revocation, Tax Allocation and Indemnification Agreement is N/A
incorporated by reference from Exhibit 10.17 to Mastech Corporation's Registration
Statement on Form S-1, Commission File No. 333-14169, filed on November 19, 1996.
10.18 - Loan and Security Agreement dated July 1993 between the Company and PNC Bank, as N/A
amended, by amendments dated August 1994, November 1994, June 1995 and June 1996 is
incorporated by reference from Exhibit 10.18 to Mastech Corporation's Registration
Statement on Form S-1, Commission File No. 333-14169, filed on November 19, 1996.
10.19 - Sublease Agreement dated February 10, 1995 by and between Westinghouse Electric N/A
Corporation and the Company for the Company's Oakdale, PA headquarters, as amended
by amendment dated March 20, 1996 is incorporated by reference from Exhibit 10.19
to Mastech Corporation's Registration Statement on Form S-1, Commission File No.
333-14169, filed on November 19, 1996.
10.21 - Form of Capital Contribution Agreement by and among the Company, Sunil Wadhwani, N/A
Ashok Trivedi and their respective family trusts is incorporated by reference from
Exhibit 10.21 to Mastech Corporation's Registration Statement on Form S-1,
Commission File No. 333-14169, filed on December 16, 1996.
11.1 - Statement regarding computation of pro forma net income per share. 38
12.0 - Annual Report to Security Holders (to be filed for the information of the N/A
Commission and is not deemed filed as a part of this Form 10-K).
23.1 - Consent of Arthur Andersen LLP 39
24.1 - Form of Power of Attorney executed by the persons named therein. 40
27.0 - Valuation and Qualifying Accounts (All others are inapplicable) 42
27.1 - Financial Data Schedule 43
* Management compensatory plan or arrangement
37