<PAGE>
As filed with the Securities and Exchange Commission on December 16, 1996
Registration No. 333-14169
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3 To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
MASTECH CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 7371 25-1802235
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
1004 MCKEE ROAD
OAKDALE, PA 15071
(412) 787-2100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
SUNIL WADHWANI, CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MASTECH CORPORATION
1004 MCKEE ROAD
OAKDALE, PA 15071
(412) 787-2100
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
---------------
COPIES TO:
CARL A. COHEN DOUGLAS R. NEWKIRK
BUCHANAN INGERSOLL PROFESSIONAL SACHNOFF & WEAVER, LTD.
CORPORATION 30 S. WACKER, 29TH FLOOR
ONE OXFORD CENTRE CHICAGO, IL 60606
301 GRANT STREET, 20TH FLOOR (312) 207-1000
PITTSBURGH, PA 15219
(412) 562-8854
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 16, 1996
PROSPECTUS
, 1996
4,800,000 SHARES
[LOGO of MASTECH CORPORATION]
COMMON STOCK
Of the 4,800,000 shares of Common Stock offered hereby, 3,400,000 shares are
being sold by Mastech Corporation ("Mastech" or the "Company") and 1,400,000
shares are being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any part of the proceeds from the
sale of shares by the Selling Shareholders.
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $14.00 and $16.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. Upon completion of this offering, directors and officers
of the Company will beneficially own approximately 77.9% of and have voting
power over approximately 57.2% of the Company's Common Stock.
The Common Stock has been approved for quotation on the Nasdaq National
Market upon issuance under the symbol "MAST."
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
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<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total (3)............... $ $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses, estimated at $1,000,000, which will be paid by
the Company.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option
to purchase up to 720,000 additional shares of Common Stock at the Price to
the Public, less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions, Proceeds to
the Company and Proceeds to the Selling Shareholders will be $ ,
$ , $ and $ , respectively. The Company will not receive any
of the proceeds from the sale of shares of Common Stock by the Selling
Shareholders pursuant to the Underwriters' over-allotment, if exercised.
See "Underwriting" and "Principal and Selling Shareholders."
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or in
part. It is expected that delivery of the share certificates will be made in
New York, New York, on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
COWEN & COMPANY
MONTGOMERY SECURITIES
PARKER/HUNTER
INCORPORATED
<PAGE>
[DIAGRAMS]
Diagram on inside front cover is a graphic depiction of the chart on page 24.
This chart consists of two columns which summarize industry trends and
Mastech's strategies for addressing these trends.
Diagram on inside back cover depicts Company's SMART-APPS Methodologies.
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, 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. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors."
-------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
-------------------------
Mastech(R) and SmartAPPS(SM) are service marks of the Company. Windows(R) is a
registered trademark of Microsoft Corporation. All other trademarks, service
marks and trade names referred to in this Prospectus are the property of their
respective owners.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, all information contained in
this Prospectus: (i) assumes that the Underwriters' over-allotment option is
not exercised; and (ii) has been adjusted to give retroactive effect to a 72.8-
for-1 split of the shares of the Company's common stock, par value $.01 per
share ("Common Stock"). Unless otherwise indicated, references to the "Company"
or "Mastech" include Mastech Corporation and its majority-owned subsidiaries,
except that the Consolidated Financial Statements and related Notes do not
include the results of Mascot Systems, an affiliate of the Company which was
acquired on December 16, 1996.
THE COMPANY
Mastech Corporation ("Mastech" or the "Company") 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 has provided IT services to over 300 clients worldwide
in a diverse range of industries. These clients include AT&T, Citibank, EDS,
IBM, Intel, Oracle and Wal-Mart. The Company sets high standards for client
responsiveness and project quality. A significant number of the Company's
clients have selected Mastech to provide additional services. 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.
One of the key elements of Mastech's growth has been its ability to recruit
and deploy, on short notice, experienced IT professionals on a worldwide basis.
As of September 30, 1996, the Company employed 1,149 IT professionals, over 900
of whom were in the United States, with the remainder in the Far East, Canada
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.
Mastech has demonstrated the scalability of its business model in the United
States by growing its revenues from $13.5 million in 1991 to $103.7 million in
1995. The Company is now replicating this 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 and Tokyo. The Company also plans to open
offices in Australia, South Africa 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. Mastech is
investing, through an affiliated company, in an extensive offshore software
development infrastructure in India, including four state-of-the-art software
development centers. The center in Bangalore, India has been operational for
over a year and is conducting over 20 engagements for Mastech clients in the
U.S. and Canada. Three additional centers are under development. The Company
believes that this offshore infrastructure, with the ability to accommodate
1,500 IT professionals when complete, will represent one of the largest
offshore presences in the industry.
3
<PAGE>
THE OFFERING
Common Stock offered by the Company... 3,400,000 shares
Common Stock offered by the Selling
Shareholders.......................... 1,400,000 shares
Common Stock to be outstanding after
the offering.......................... 21,600,000 shares (1)
Use of proceeds....................... 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; payment of
undistributed S Corporation earnings;
and general corporate purposes,
including working capital.
Proposed Nasdaq National Market
symbol................................ MAST
- --------------------
(1) Excludes: (i) 2,160,000 shares of Common Stock reserved for issuance under
the Company's 1996 Stock Incentive Plan; and (ii) up to 109,200 shares of
Common Stock issuable after this offering as part of a compensation
arrangement with an executive officer. See "Management--Employee Benefit
Plans" and "--Employment Agreements."
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............... $13,531 $20,161 $38,709 $70,050 $103,676 $76,156 $90,336
Gross profit........... 4,999 7,314 12,573 20,032 31,160 22,448 24,564
Income from operations
(1).................... 1,877 2,707 2,744 11,328 18,317 13,580 10,389
Net income (2)......... 1,895 2,732 2,724 11,425 18,453 13,670 10,382
Pro forma net income
(3).................... 1,137 1,639 1,634 6,855 11,072 8,202 6,229
Pro forma net income
per share (3).......... $ 0.06 $ 0.09 $ 0.09 $ 0.38 $ 0.61 $ 0.45 $ 0.33
Weighted average number
of common shares
outstanding (4)....... 18,255 18,255 18,255 18,255 18,255 18,255 18,665(5)
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------
ACTUAL AS ADJUSTED (6)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash............................................ $ 668 $43,098
Working capital................................. 12,436 50,166
Total assets.................................... 26,835 69,265
Total shareholders' equity...................... 13,373 51,103
</TABLE>
- --------------------
(1) Includes a charge of approximately $2.9 million in 1993 related to federal
taxes on employee earnings for 1991, 1992 and 1993. See Note 6 of Notes to
Consolidated Financial Statements for information concerning this charge.
(2) For all periods shown, the Company elected to be treated as an S
Corporation and, as a result, the income of the Company has been taxed for
federal and state purposes directly to the Company's shareholders rather
than to the Company.
(3) 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. See Note 10 of
Notes to Consolidated Financial Statements for information concerning the
computation of pro forma net income per share.
(4) Weighted average number of common shares outstanding used to calculate pro
forma net income per share includes 54,600 shares, which the Company
estimates will be issued as part of a compensation arrangement with an
executive officer after this offering. In connection with this arrangement,
the Company will incur an expense of $819,000 in the period in which the
closing of this offering occurs. See "Management--Employment Agreements."
(5) The weighted average number of common shares outstanding used to calculate
pro forma net income per share reflects 410,867 shares, representing the
number of shares which, when multiplied by the assumed initial public
offering price of $15.00 per share, would have been sufficient to replace
the capital in excess of earnings withdrawn as dividends. See Note 10 of
Notes to Consolidated Financial Statements.
(6) Adjusted to give effect to: (i) the payment of $4.0 million to the
Company's current shareholders of previously undistributed earnings taxed
or taxable to its shareholders; (ii) the recognition of a deferred tax
liability of approximately $4.7 million upon termination of the Company's S
Corporation status; and (iii) the offering of 3,400,000 shares of Common
Stock by the Company at an assumed initial public offering price of $15.00
per share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds," "S Corporation Dividend" and "Capitalization."
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, investors
should consider carefully the following factors in connection with an
investment in the shares of the Common Stock offered hereby.
RECRUITMENT AND RETENTION OF IT PROFESSIONALS
The Company's business involves the delivery of professional services and is
labor-intensive. The Company's success depends upon its ability to attract,
develop, motivate and retain highly-skilled IT professionals and project
managers, who possess the technical skills and experience necessary to deliver
the Company's services. Qualified IT professionals are in great demand
worldwide and are likely to remain a limited resource for the foreseeable
future. There can be no assurance that qualified IT professionals will
continue to be available to the Company in sufficient numbers, or that the
Company will be successful in retaining current or future employees. Failure
to attract or retain qualified IT professionals in sufficient numbers could
have a material adverse effect on the Company's business, operating results
and financial condition. Historically, the Company has done most of its
recruiting outside of the countries where the client work is performed.
Accordingly, any perception among the Company's IT professionals, whether or
not well founded, that the Company's ability to assist them in obtaining H-1B
temporary work permits and permanent residency status has been diminished,
could lead to significant employee attrition. In the first eight months of
1996, the Company experienced a higher than normal rate of employee attrition
because the Company was experiencing delays in securing the first stage
approval for permanent residency status for its foreign employees working in
the U.S. This attrition resulted in the Company incurring increased costs for
IT professionals and a reduction in its revenue growth. See "Business--Human
Resources," "Business--Competition" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
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 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
materially 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. See "Business--Human Resources."
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's revenues and operating results are subject to significant
variation from quarter to quarter depending on a number of factors, including
the timing and number of client projects commenced and completed during the
quarter, the number of working days in a quarter, employee hiring, attrition
and utilization rates and the mix of time-and-materials projects versus fixed-
price projects during the quarter. The Company recognizes revenues on time-
and-materials projects as the services are performed, while revenues on fixed-
price projects are recognized using the percentage of completion method.
Although fixed-price projects have not contributed significantly to revenues
and profitability to date, operating results may be adversely affected in the
future by cost overruns on fixed-price projects. Because a high percentage of
the Company's expenses are relatively fixed, variations in revenues may cause
significant variations in operating results. Additionally, the Company
6
<PAGE>
periodically incurs cost increases due to both the hiring of new employees and
strategic investments in its infrastructure in anticipation of future
opportunities for revenue growth. No assurances can be given that quarterly
results will not fluctuate, causing a material adverse effect on the Company's
business and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Results."
INCREASING SIGNIFICANCE OF NON-U.S. OPERATIONS AND RISKS OF INTERNATIONAL
OPERATIONS
The Company's international consulting and offshore software development
operations are important elements of its growth strategy. The Company opened
offices in Canada and Singapore in 1995 and in Japan and the U.K. during the
first eight months of 1996. These operations depend greatly upon business,
immigration and technology transfer laws in those countries, and upon the
continued development of technology infrastructure. There can be no assurance
that the Company's international operations will be profitable or support the
Company's growth strategy. The risks inherent in the Company's international
business activities include unexpected changes in regulatory environments,
foreign currency fluctuations, tariffs and other trade barriers, difficulties
in managing international operations and potential foreign tax consequences,
including repatriation of earnings and the burden of complying with a wide
variety of foreign laws and regulations. The failure of Mastech to manage
growth, attract and retain personnel, manage major development efforts,
profitably deliver services, or a significant interruption of the Company's
ability to transmit data via satellite, could have a material adverse impact
on the Company's ability to successfully maintain and develop its
international operations and could have a material adverse effect on the
Company's business, operating results and financial condition.
Although the Company's ownership of a U.S. trademark registration covering
the service mark "Mastech" gives the Company the presumption of ownership in
the U.S. of the "Mastech" mark for the services identified in the
registration, there can be no assurance that the Company is entitled to use
the designation "Mastech" in all international operations and there is the
possibility that third parties have superior rights to the "Mastech" mark (or
similar marks) outside the U.S. See "Business--Business Strategies" and "--
Intellectual Property Rights."
EXPOSURE TO REGULATORY AND GENERAL ECONOMIC CONDITIONS IN INDIA
A significant element of the Company's business strategy is to continue to
develop offshore software development centers in India. Mastech has utilized
an offshore software development center in Bangalore for approximately one
year and plans to open three more centers in Bangalore, Madras and Pune,
India. The Indian government exerts significant influence over its economy. In
the recent past, the Indian government has provided significant tax incentives
and relaxed certain regulatory restrictions in order to encourage foreign
investment in certain sectors of the economy, including the technology
industry. Certain of these benefits that directly affect the Company include,
among others, tax holidays, liberalized import and export duties and
preferential rules on foreign investment and repatriation. Changes in the
business or regulatory climate of India could have a material adverse effect
on the Company's business, operating results and financial condition.
Although wage costs in India are significantly lower than in the U.S. and
elsewhere for comparably skilled IT professionals, wages in India are
increasing at a faster rate than in the U.S. In the past, India has
experienced significant inflation and shortages of foreign exchange, and has
been subject to civil unrest and acts of terrorism. Changes in inflation,
interest rates, taxation or other social, political, economic or diplomatic
developments affecting India in the future could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--Business Strategies."
INTENSE 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
7
<PAGE>
applications solutions needs. Further, the IT services industry is undergoing
consolidation which may result in increasing pressure on margins. These
factors may limit the Company's ability to increase prices commensurate with
increases in compensation. There can be no assurance that the Company will
compete successfully with existing or new competitors. See "Business--
Competition."
CONCENTRATION OF REVENUES; RISK OF TERMINATION
The Company has in the past derived, and may in the future derive, a
significant portion of its revenues from a relatively limited number of
clients. The Company's five largest clients represented approximately 29% of
revenues for the nine months ended September 30, 1996 and calendar year 1995.
EDS accounted for almost 9% of the Company's revenues for the nine months
ended September 30, 1996 and almost 10% of the Company's revenues in calendar
year 1995. Most of the Company's projects are terminable by the client without
penalty. An unanticipated termination of a major project could result in the
loss of substantial anticipated revenues and could require the Company to
maintain or terminate a significant number of unassigned IT professionals,
resulting in a higher number of unassigned IT professionals and/or significant
termination expenses. The loss of any significant client or project could have
a material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Clients."
MANAGEMENT OF GROWTH
The Company's business has experienced rapid growth over the years that
could strain the Company's managerial and other resources. Revenues have grown
from $13.5 million in 1991 to $103.7 million in 1995, and the number of
employees has grown from 250 in 1991 to 1,296 as of September 30, 1996. The
Company's continued growth depends on adding key managers, increasing its
international operations, adding service lines and growing its offshore
infrastructure. The Company has broadened its range of services to include
Year 2000 compliance and offshore software development. The Company opened
offices in Canada and Singapore in 1995 and in Japan and the U.K. during the
first eight months of 1996. In addition, the Company plans to open offshore
software development centers in Bangalore, Madras and Pune, India. Effective
management of these growth initiatives will require the Company to continue to
improve its operational, financial and other management processes and systems.
The failure to manage growth effectively could have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business--Business Strategies."
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SOLUTIONS
The IT services industry is characterized by rapid technological change,
evolving industry standards, changing client preferences and new product
introductions. The Company's success will depend in part on its ability to
develop IT solutions that keep pace with changes in the IT services industry.
There can be no assurance that the Company will be successful in addressing
these developments on a timely basis or that, if these developments are
addressed, the Company will be successful in the marketplace. In addition,
there can be no assurance that products or technologies developed by others
will not render the Company's services uncompetitive or obsolete. The
Company's failure to address these developments could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Business--The IT Services Industry."
DEPENDENCE ON PRINCIPALS
The success of the Company is highly dependent on the efforts and abilities
of Sunil Wadhwani and Ashok Trivedi, the Company's Co-Chairman and Chief
Executive Officer and the Company's Co-Chairman and President, respectively.
Although Messrs. Wadhwani and Trivedi have entered into employment agreements
containing noncompetition, nondisclosure and nonsolicitation covenants, these
contracts do not guarantee that they will continue their employment with the
Company. The loss of the services of either of these key executives for any
reason could have a material adverse effect on the Company's business,
operating results and financial condition. See "Management--Executive Officers
and Directors."
8
<PAGE>
RISK OF PREFERRED VENDOR CONTRACTS
The Company is aggressively pursuing "preferred vendor" contracts in order
to obtain new or additional business from large clients. Clients enter into
these contracts to reduce the number of vendors and obtain better pricing in
return for a potential increase in the volume of business to the preferred
vendor. While these contracts are expected to generate higher volumes, they
generally result in lower margins. Although the Company attempts to lower
costs to maintain margins, there can be no assurance that the Company will be
able to sustain margins on such contracts. In addition, the failure to be
designated a preferred vendor may preclude the Company from providing services
to existing or potential clients, except as a subcontractor. See "Business--
Clients."
RISKS RELATED TO POSSIBLE ACQUISITIONS
The Company may expand its operations through the acquisition of additional
businesses. There can be no assurance that the Company will be able to
identify, acquire or profitably manage additional businesses or successfully
integrate any acquired businesses into the Company without substantial
expenses, delays or other operational or financial problems. Further,
acquisitions may involve a number of special risks, including diversion of
management's attention, failure to retain key acquired personnel,
unanticipated events or circumstances and legal liabilities and amortization
of acquired intangible assets, some or all of which could have a material
adverse effect on the Company's business, operating results and financial
condition. Client satisfaction or performance problems at a single acquired
firm could have a material adverse impact on the reputation of the Company as
a whole. In addition, there can be no assurance that acquired businesses, if
any, will achieve anticipated revenues and earnings. While the Company from
time to time considers acquisition opportunities, except for the acquisitions
of affiliated companies described in this Prospectus, it has never acquired a
business and as of the date of this Prospectus has no existing agreements,
understandings or commitments to effect any acquisition. The failure of the
Company to manage its acquisition strategy successfully could have a material
adverse effect on the Company's business, operating results and financial
condition.
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in part upon certain methodologies it utilizes
in designing, developing and implementing applications systems and other
proprietary intellectual property rights. The Company is also developing
proprietary conversion tools, specifically tools tailored to address the Year
2000 problem. 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.
Furthermore, there can be no assurance that such an action, if brought, will
be successfully defended by the Company. Although the Company believes that
its services do not infringe on the intellectual property rights of others and
that it has all rights necessary to utilize the intellectual property employed
in its business, the Company is subject to the risk of litigation alleging
infringement of third-party intellectual property rights. Any such claims
could require the Company to spend significant sums in litigation, pay
damages, develop non-infringing intellectual property or acquire licenses to
the intellectual property which is the subject of asserted infringement. See
"Business--Intellectual Property Rights."
9
<PAGE>
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
of the Company. The initial public offering price per share of the Common
Stock will be determined by negotiations among management of the Company, the
Selling Shareholders and the representatives of the Underwriters (the
"Representatives"), There can be no assurance that an active public market in
the Company's Common Stock will develop or be sustained. The stock market has
from time to time experienced extreme price and volume fluctuations that have
often been unrelated to the operating performance of particular companies. In
addition, factors such as announcements of technological innovations, new
products or services or new client engagements by the Company or its
competitors or third parties, as well as market conditions in the IT services
industry, may have a significant impact on the market price of the Company's
Common Stock. See "Underwriting."
CONTROL BY EXISTING SHAREHOLDERS
Upon completion of this offering, Messrs. Wadhwani and Trivedi will
beneficially own approximately 77.8% of and have voting power over
approximately 57% of the Company's Common Stock. As a result, Messrs. Wadhwani
and Trivedi will be able to elect the entire Board of Directors, and will
retain the voting power to control matters requiring shareholder approval,
provided that they vote together on such matters, other than certain
fundamental transactions such as a merger, consolidation or the sale of
substantially all of the assets of the Company, which may require the approval
of the holders of 66 2/3% of the votes cast. Messrs. Wadhwani and Trivedi have
entered into a shareholders agreement requiring each of them to vote their
shares of Common Stock in favor of the other in the election of directors. The
approval of the Government of India/Reserve Bank of India will be required for
the Company to continue to own Mascot Systems Private Limited ("Mascot
Systems") and Scott Systems Private Limited ("Scott Systems") if the ownership
of the Company by persons of Indian origin, in the aggregate, falls below 60%
of the voting power of the Company. The Company's ability to raise additional
capital by the issuance of Common Stock or voting Preferred Stock or to sell
control of the Company to a third party may be restricted if the Company is
unable to obtain the required approval. See "The Company," "Management--
Executive Officers and Directors" and "Principal and Selling Shareholders."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation, as amended
("Articles") and the Pennsylvania Business Corporation Law (the "PBCL") will
effectively make it more difficult for a third party to acquire control of the
Company by means of a tender offer or a proxy contest for the election of
directors or otherwise. The Company's Articles contain provisions which: (i)
classify the Board of Directors into three classes, with one class being
elected each year; (ii) require the approval of holders of 66 2/3% of the
votes cast on a proposal to amend the Articles, effect a merger or
consolidation of the Company, sell, lease or exchange all or substantially all
of the Company's assets or dissolve and wind-up the affairs of the Company,
unless any such proposal is unanimously approved by all of the Company's
directors; and (iii) require the approval of four of the Company's five
directors for action by the Board of Directors. These provisions may have the
effect of lengthening the time required for a person to acquire control of the
Company through a proxy contest for the election of a majority of the Board of
Directors, may discourage bids for the Common Stock at a premium over the
market price and may deter efforts to obtain control of the Company. See
"Description of Capital Stock--Certain Provisions Affecting Control of the
Company."
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after completion of this offering, the Company will have
21,600,000 shares of Common Stock outstanding, of which the 4,800,000 shares
sold pursuant to this offering will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except those shares acquired by affiliates of the Company.
The remaining 16,800,000 shares will be "restricted securities" within the
meaning of Rule 144 under the Securities Act. The Company and its shareholders
have agreed not to offer, sell, contract to sell or otherwise dispose of,
directly or indirectly, any Common Stock, or any securities convertible into
or exchangeable or exercisable for Common Stock, until 180 days after the date
of this Prospectus, without the prior consent of Donaldson, Lufkin & Jenrette
Securities Corporation. Following the 180 day lock-up period, all of the
restricted securities will become eligible for sale, subject to the manner of
10
<PAGE>
sale, volume, notice and information requirements of Rule 144, except for
2,667,392 shares of Common Stock held in family trusts established by Messrs.
Wadhwani and Trivedi which may not be sold prior to November 30, 1998 pursuant
to the terms of a shareholders agreement with the Company. The Company has
granted Messrs. Wadhwani and Trivedi certain demand and piggyback registration
rights covering an aggregate of 16,800,000 shares of Common Stock (16,080,000
shares if the Underwriter's over-allotment option is exercised in full). Sales
of substantial amounts of such shares in the public market or the availability
of such shares for future sale could adversely affect the market price of the
shares of Common Stock and the Company's ability to raise additional capital
at a price favorable to the Company. Approximately 90 days after the date of
this Prospectus, the Company expects to file a registration statement on Form
S-8 registering 2,160,000 shares of Common Stock reserved for issuance under
the Company's Stock Incentive Plan and up to 109,200 shares of Common Stock to
be issued to Steven Shangold, Vice President--U.S. Sales and Marketing, as
compensation pursuant to his agreement with the Company. See "Shares Eligible
for Future Sale," "Management--Employment Agreements" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share of Common Stock is substantially
higher than the net tangible book value per share of the Common Stock. At an
assumed initial public offering price at $15.00 per share, purchasers of
shares of Common Stock in this offering will experience immediate and
substantial dilution of $12.64 in the pro forma net tangible book value per
share of Common Stock. See "Dilution."
FIXED-PRICE PROJECTS
The Company undertakes certain projects billed on a fixed-price basis, which
is distinguishable from the Company's principal method of billing on a time-
and-materials basis. The failure of the Company to complete such projects
within budget would expose the Company to risks associated with cost overruns,
which could have a material adverse effect on the Company's business,
operating results and financial condition. Revenues derived from fixed-price
projects represented 1.3%, 2.2%, 2.1% and 2.6% of consolidated revenues for
1993, 1994, 1995 and the nine months ended September 30, 1996, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Overview."
POSSIBLE ISSUANCES OF PREFERRED STOCK
Shares of Preferred Stock may be issued by the Company in the future without
shareholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding stock of the Company. The Company has no present
plans to issue any shares of Preferred Stock. See "Description of Capital
Stock--Preferred Stock."
POTENTIAL LIABILITY TO CLIENTS
Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be
difficult to quantify. The Company's failure or inability to meet a client's
expectations in the performance of its services could result in a material
adverse change to the client's operations and therefore could give rise to
claims against the Company or damage the Company's reputation, adversely
affecting its business, operating results and financial condition. The Company
does not maintain insurance coverage for errors and omissions to cover such
claims.
SIGNIFICANT UNALLOCATED NET PROCEEDS
A substantial portion of the anticipated net proceeds of this offering has
not been designated for specific uses. Therefore, the Board of Directors will
have broad discretion with respect to the use of the net proceeds of
11
<PAGE>
this offering. The principal purposes of this offering are to obtain
additional working capital, create a public market for the Common Stock,
provide liquidity to the Company's shareholders and facilitate future access
by the Company to public equity markets. See "Use of Proceeds."
BENEFITS OF OFFERING TO SELLING SHAREHOLDERS
The Selling Shareholders will receive substantial proceeds from this
offering and certain other benefits in connection with this offering. This
offering will establish a public market for the Common Stock and provide
significantly increased liquidity to the Selling Shareholders for the shares
of Common Stock they will own after this offering. At an assumed initial
public offering price of $15.00 per share, after deduction of underwriting
discounts and commissions, the aggregate realized gain as a result of this
offering by the Selling Shareholders will be approximately $19.5 million
(exclusive of the S Corporation Dividend from the Company to the Selling
Shareholders, currently estimated to be $4.0 million). Upon completion of this
offering, the Selling Shareholders will beneficially own an aggregate of 77.8%
of the outstanding Common Stock.
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. The Company's ability to pay dividends is subject to
the requirement of its revolving credit facility with PNC Bank that the
Company maintain a consolidated net worth of at least $13.0 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." See "Dividend Policy."
THE COMPANY
Since its inception in July 1986, the business of the Company has been
conducted through Mastech Systems Corporation, a Pennsylvania corporation (the
"Operating Company"). The Operating Company is an indirect, wholly-owned
subsidiary of the Company, which is a newly-formed Pennsylvania corporation.
In addition to the Operating Company, the Company has two majority-owned
operating subsidiaries: Mascot Systems and Scott Systems, both of which are
corporations organized under the laws of India. Mascot Systems provides
offshore software development services to the Company from India and Scott
Systems provides recruiting and training services to the Company in India.
Mastech expects to acquire the minority shares of Mascot Systems and Scott
Systems for an amount expected to be less than $50,000, shortly after the
consummation of this offering. See "Certain Transactions."
The offshore software development services provided by the Company to its
clients are provided through Mascot Systems. Mascot Systems leases or will
lease from Messrs. Wadhwani and Trivedi the real estate in Bangalore, Pune and
Madras, India at which offshore software development activities are conducted.
See "Business--Services" and "Certain Transactions."
The Company maintains its principal executive offices at 1004 McKee Road,
Oakdale, PA 15071. The Company's World Wide Web address is
http://www.mastech.com. The Company's Web site is not part of this Prospectus.
The Company's telephone number is (412) 787-2100.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,400,000 shares of
Common Stock offered by the Company (after deduction of estimated underwriting
discounts and commissions and offering expenses payable by the Company) are
estimated to be approximately $46,430,000, assuming an initial public offering
price of $15.00 per share. The Company expects to use the net proceeds from
this 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 $4.0 million as of the date of this Prospectus; and (iii) general corporate
purposes, including working capital. Except for the acquisition of affiliated
companies described in this Prospectus, the Company has no present
commitments, agreements or understandings and is not presently conducting
negotiations with respect to any acquisitions. Pending such uses, the net
proceeds of this offering will be invested in short-term, investment grade,
interest-bearing securities. The principal purposes of this offering are to
obtain additional working capital, create a public market for the Common
Stock, provide liquidity to the Company's shareholders and facilitate future
access by the Company to public equity markets. See "S Corporation Dividend"
and "Business--Business Strategies."
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders. See "Principal and Selling Shareholders."
S CORPORATION DIVIDEND
Since it was founded in 1986, the Company has been a corporation subject to
taxation under Subchapter S of the Internal Revenue Code of 1986, as amended
("S Corporation"). As a result, substantially all of the Company's net income
has been attributed, for income tax purposes, directly to the Company's
shareholders rather than to the Company. The Company's S Corporation status
will terminate in connection with this offering and the Company will make a
final distribution to its existing shareholders of undistributed S Corporation
earnings, as explained below.
Prior to consummating this offering, the Company will declare an S
Corporation dividend to its existing shareholders in an aggregate amount
representing all undistributed earnings of the Company taxed or taxable to its
shareholders through the closing of this offering (the "S Corporation
Dividend"). The S Corporation Dividend is estimated to be approximately $4.0
million. Purchasers of Common Stock in this offering will not receive any
portion of the S Corporation Dividend.
Following termination of its S Corporation status, the Company will be
subject to income taxation on an accrual basis as a C Corporation. In
connection with the termination of its S Corporation status, the Company
estimates that it will record, in the period in which this offering occurs, a
liability, for deferred income taxes on its balance sheet and a one-time tax
expense of the same amount. As of September 30, 1996, this liability would
have been $4.7 million. The majority of this deferred tax liability will be
paid over four taxable years. The deferred tax liability will be recorded in
accordance with Statement of Financial Accounting Standards No. 109. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 2 of Notes to Consolidated Financial Statements.
DIVIDEND POLICY
The Company intends to retain all of its future earnings to fund growth and
the operation of its business and therefore does not anticipate paying any
cash dividends 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. The Company's ability to pay dividends is subject to the requirement
of its revolving credit facility with PNC Bank that the Company maintain a
consolidated net worth of at least $13.0 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
13
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as of
September 30, 1996, and as adjusted to give effect to: (i) the S Corporation
Dividend, estimated to be approximately $4.0 million and the recognition of a
$4.7 million deferred tax liability upon termination of the Company's S
Corporation status (see "S Corporation Dividend"); and (ii) the sale of
3,400,000 shares of Common Stock by the Company (at an assumed initial public
offering price of $15.00 per share) and the application of the estimated net
proceeds therefrom as described in "Use of Proceeds." The following table
should be read in conjunction with the Consolidated Financial Statements and
related Notes thereto included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility........................ $ 1,000 $ 1,000
============ ============
Shareholders' equity:
Preferred stock, without par value; 20,000,000
shares authorized;
no shares outstanding......................... -- --
Common stock, $.01 par value; 100,000,000
shares authorized;
18,200,000 shares issued and outstanding;
21,600,000 shares issued
and outstanding, as adjusted (1).............. 182 216
Additional paid-in capital..................... 11 46,407
Retained earnings.............................. 13,212 4,512
Currency translation adjustment................ (32) (32)
------------ ------------
Total shareholders' equity................... 13,373 51,103
------------ ------------
Total capitalization....................... $13,373 $ 51,103
============ ============
</TABLE>
- ---------------------
(1) Excludes: (i) 2,160,000 shares of Common Stock reserved for issuance under
the Company's 1996 Stock Incentive Plan; and (ii) up to 109,200 shares of
Common Stock issuable after this offering as part of a compensation
arrangement with an executive officer. See "Management--Employee Benefit
Plans" and "--Employment Agreements."
14
<PAGE>
DILUTION
As of September 30, 1996, the Company's net tangible book value was
approximately $13.4 million or $0.73 per share. Net tangible book value per
share represents the Company's total tangible assets less the Company's total
liabilities, divided by the aggregate number of shares of Common Stock
outstanding. After giving effect to: (i) the declaration of the S Corporation
Dividend; (ii) the recording of deferred income taxes upon termination of the
Company's S Corporation status; (iii) the issuance of 54,600 shares of Common
Stock which the Company estimates will be issued immediately after this
offering as part of a compensation arrangement with an executive officer (see
"Management--Employment Agreements"); and (iv) the sale by the Company of
3,400,000 shares of Common Stock (at an assumed initial public offering price
of $15.00 per share) and the application of the estimated net proceeds
therefrom, the pro forma net tangible book value of the Company at September
30, 1996 would have been $51.1 million or $2.36 per share. This amount
represents an immediate increase in net tangible book value of $1.63 per share
to existing shareholders and an immediate dilution of $12.64 per share to
purchasers of Common Stock in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $15.00
Net tangible book value per share at September 30, 1996......... $0.73
Increase in net tangible book value per share attributable to
new investors................................................... 1.63
Pro forma net tangible book value per share after this offering... 2.36
------
Dilution in net tangible book value per share to new investors.... $12.64
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1996, the differences in the number of shares of capital stock purchased from
the Company, the total consideration paid and the average price paid per share
by existing shareholders and new investors at the assumed initial public
offering price of $15.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing shareholders
(1).................... 18,200,000 84.3% $ 2,500 * $0.0001
New investors (1)....... 3,400,000 15.7 51,000,000 100.0% $ 15.00
---------- ----- ----------- -----
Total................. 21,600,000 100.0% $51,002,500 100.0%
========== ===== =========== =====
</TABLE>
- ---------------------
*Less than one-tenth of one percent.
(1) Sales by the Selling Shareholders in this offering will reduce the number
of shares held by existing shareholders of the Company to 16,800,000
shares or 77.8% of the total number of shares outstanding after this
offering (16,080,000 shares or 74.4% if the Underwriters' over-allotment
option is exercised in full) and will increase the number of shares held
by new investors to 4,800,000 shares or 22.2% of the total number of
shares of Common Stock outstanding after this offering (5,520,000 shares
or 25.6% if the Underwriters' over-allotment option is exercised in full).
See "Principal and Selling Shareholders."
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below for the five years ended
December 31, 1995 and the nine months ended September 30, 1996, are derived
from the Company's Consolidated Financial Statements and related Notes thereto
which have been audited by Arthur Andersen LLP, independent public
accountants. The selected financial data as of and for the interim period
ended September 30, 1995 are unaudited but, in the opinion of management,
include all adjustments that are necessary for a fair presentation of the
results for the interim period, and all such adjustments are of a normal
recurring nature. The results of operations for the interim period ended
September 30, 1996, are not necessarily indicative of the results to be
expected for any other interim period or for the full year. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and related Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $13,531 $20,161 $38,709 $70,050 $103,676 $ 76,156 $ 90,336
Cost of revenues....... 8,532 12,847 26,136 50,018 72,516 53,708 65,772
------- ------- ------- ------- -------- --------- ---------
Gross profit........... 4,999 7,314 12,573 20,032 31,160 22,448 24,564
Selling, general and
administrative (1).... 3,122 4,607 9,829 8,704 12,843 8,868 14,175
------- ------- ------- ------- -------- --------- ---------
Income from operations. 1,877 2,707 2,744 11,328 18,317 13,580 10,389
Interest income
(expense), net........ 30 26 9 71 163 128 2
Minority interest in
net loss (income) of
subsidiaries.......... (12) (1) (29) 26 (27) (38) (9)
------- ------- ------- ------- -------- --------- ---------
Net income (2)......... 1,895 2,732 2,724 11,425 18,453 13,670 10,382
Pro forma income taxes
(3)................... 758 1,093 1,090 4,570 7,381 5,468 4,153
------- ------- ------- ------- -------- --------- ---------
Pro forma net income
(3)................... $ 1,137 $ 1,639 $ 1,634 $ 6,855 $ 11,072 $ 8,202 $ 6,229
======= ======= ======= ======= ======== ========= =========
Pro forma net income
per share (3)......... $ 0.06 $ 0.09 $ 0.09 $ 0.38 $ 0.61 $ 0.45 $ 0.33
======= ======= ======= ======= ======== ========= =========
Weighted average number
of common shares
outstanding (4)....... 18,255 18,255 18,255 18,255 18,255 18,255 18,665(5)
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash................... $ 72 $ 499 $ 2,897 $ 4,100 $ 2,947 $ 1,930 $ 668
Working capital........ 3,084 4,238 5,531 13,701 14,996 13,024 12,436
Total assets........... 3,861 5,695 12,461 22,665 25,606 24,393 26,835
Total shareholders'
equity................ 3,513 4,626 5,830 14,101 15,567 13,478 13,373
</TABLE>
- ---------------------
(1) Includes a charge of approximately $2.9 million in 1993 related to federal
taxes on employee earnings for 1991, 1992 and 1993. See Note 6 of Notes to
Consolidated Financial Statements for information concerning this charge.
(2) For all periods shown, the Company elected to be treated as an S
Corporation and, as a result, the income of the Company has been taxed for
federal and state purposes directly to the Company's shareholders rather
than to the Company.
(3) 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. See
Note 10 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net income per share.
(4) Weighted average number of common shares outstanding used to calculate pro
forma net income per share includes 54,600 shares, which the Company
estimates will be issued as part of a compensation arrangement with an
executive officer after this offering. In connection with this
arrangement, the Company will incur an expense of $819,000 in the period
in which the closing of this offering occurs. See "Management--Employment
Agreements."
(5) The weighted average number of common shares outstanding used to calculate
pro forma net income per share reflects 410,867 shares, representing the
number of shares which, when multiplied by the assumed initial public
offering price of $15.00 per share, would have been sufficient to replace
the capital in excess of earnings withdrawn as dividends. See Note 10 of
Notes to Consolidated Financial Statements.
16
<PAGE>
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. Factors that could cause or contribute
to such differences include those discussed in "Risk Factors."
OVERVIEW
Mastech was founded in 1986, has experienced revenue growth every year since
inception and has been profitable every year since 1987. 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. The Company is seeking to shift a larger portion of its business
to Mastech-managed projects, which are often performed on a fixed-price basis
and generally carry higher profit margins, by leveraging its reputation,
existing capabilities, proprietary SmartAPPS methodologies and tools and
offshore software development capabilities. As a result, fixed-price
contracts, which are recognized on the percentage of completion method,
represent an increasing portion of the Company's revenues. Revenues derived
from fixed-price projects represented 1.3%, 2.2%, 2.1% and 2.6% of
consolidated revenues for 1993, 1994, 1995 and the nine months ended September
30, 1996, respectively.
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, 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. In the first eight months of 1996, the Company experienced a
higher than normal rate of employee attrition because the Company was
experiencing delays in securing the first stage approval 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 Department of Labor 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. Additionally, the Company believes that
its ability to recruit and retain IT professionals should be further enhanced
by its ability to offer employees stock-based incentive awards, such as stock
options, after this offering.
Since July 1995, the Company has incurred significant incremental expenses
to help ensure that the Company has both an adequate number of skilled IT
professionals and 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 establishment of a
recruiting division to recruit IT professionals in the U.S. and worldwide;
(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 a training center
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.
17
<PAGE>
Following termination of its S Corporation status, the Company will be
subject to income taxation on an accrual basis. In connection with such
termination, the Company estimates that it will record a liability for
deferred income taxes on its balance sheet and a one-time tax expense of the
same amount in the period in which this offering occurs. As of September 30,
1996, this liability would have been $4.7 million. The majority of this
deferred liability will be paid over four taxable years and the liability will
be recorded in accordance with Statement of Financial Accounting Standards No.
109. See "S Corporation Dividend" and Note 2 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected
statements of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ------------------
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
Revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............. 67.5 71.4 69.9 70.5 72.8
-------- -------- -------- -------- --------
Gross profit................. 32.5 28.6 30.1 29.5 27.2
Selling, general and
administrative.............. 25.4 12.4 12.4 11.7 15.7
-------- -------- -------- -------- --------
Income from operations....... 7.1% 16.2% 17.7% 17.8% 11.5%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Revenues. The Company's revenues increased 18.6% from $76.2 million in the
first nine months of 1995 to $90.3 million in the first nine months of 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 296 clients in the first nine months of 1995 to 345 clients
in the first nine months of 1996. Revenues from the Company's international
operations increased from $0.6 million in the first nine months of 1995 to
$7.6 million in the first nine months of 1996. The Company's revenue growth
was limited by higher than normal employee attrition in the first nine 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 1,173 as of September 30, 1995 to
1,394 as of September 30, 1996. Gross profit increased 9.4% from $22.4 million
in the first nine months of 1995 to $24.6 million in the first nine months of
1996. Gross profit as a percentage of revenues declined from 29.5% in the
first nine months of 1995 to 27.2% in the first nine months of 1996. This
decrease is attributable to an increase in costs for IT professionals,
including higher salaries and employee bonuses and an increase in the use of
independent contractors, incurred during the period as a result of the higher
than normal rate of employee attrition discussed above. While the Company does
not separately track revenues from the use of independent contractors, the
Company believes that the percentage of cost of revenues attributable to
independent contractors approximates the percentage of revenues generated by
such contractors. Costs associated with the use of independent contractors as
a percentage of cost of revenues increased from 10.4% in the first nine months
of 1995 to 18.0% in the first nine months of 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of costs associated with the Company's sales
and marketing efforts, executive, finance and human resource functions,
facilities and telecommunication costs and other general overhead expenses.
Selling, general and administrative expenses increased 59.8% from $8.9 million
in the first nine months of 1995 to $14.2 million in
18
<PAGE>
the first nine months of 1996. As a percentage of revenues, selling, general
and administrative expenses increased from 11.7% in the first nine months of
1995 to 15.7% in the first nine months of 1996. This increase was primarily
attributable to the expenses incurred to build the infrastructure necessary to
support the Company's anticipated revenue growth.
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 55.6% from $20.0 million in 1994 to
$31.2 million in 1995. Gross profit also increased as a percentage of revenues
from 28.6% 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 10.3% in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 47.6% from $8.7 million in 1994 to $12.8
million in 1995, representing 12.4% 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.
1994 COMPARED TO 1993
Revenues. The Company's revenues increased 81.0% from $38.7 million in 1993
to $70.1 million in 1994. The overall growth in revenues was attributable to
additional services delivered to existing clients, engagements with new
clients and increases in hourly billing rates. Historically, the Company had
sold exclusively to client end-users. In 1994, the Company initiated a
strategy to sell to systems integrators. Revenues from this new business
segment were $5.3 million in 1994. Revenues from a large federal government
contract increased from $0.4 million in 1993 to $5.2 million in 1994. The
Company broadened its client base from 227 clients in 1993 to 285 clients in
1994.
Gross Profit. Gross profit increased 59.3% from $12.6 million in 1993 to
$20.0 million in 1994 but declined as a percentage of revenues from 32.5% to
28.6%. This reduction was attributable to higher salary and fringe benefit
costs for IT professionals and increased travel and relocation costs. Also,
the large federal government contract referred to above generated lower profit
margins. The increase in gross profit was partially offset by higher personnel
costs resulting from hiring additional professionals to support the
significant increase in client engagements. The number of IT professionals
increased from 641 as of December 31, 1993 to 1,005 as of December 31, 1994.
Costs associated with the use of independent contractors as a percentage of
cost of revenues decreased from 3.8% in 1993 to approximately 1.0% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 11.4% from $9.8 million in 1993 to $8.7
million in 1994 and declined as a percentage of revenues from 25.4% to 12.4%.
Selling, general and administrative expenses in 1993 include a charge of $2.9
million related to federal taxes on employee earnings for 1991, 1992 and 1993.
Excluding this charge, selling, general and administrative expenses increased
26.4% in 1994, but declined as a percentage of revenues from 17.8% in 1993
19
<PAGE>
to 12.4% in 1994. This improvement, as a percentage of revenues, occurred
because the Company was able to support the revenue growth in 1994 without a
proportionate increase in management, marketing personnel and associated
costs.
QUARTERLY RESULTS
Set forth below are selected income statement data for the seven fiscal
quarters ended September 30, 1996. This information is derived from unaudited
financial statements which include, in the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the information for such periods. This information should be
read in conjunction with the Consolidated Financial Statements and related
Notes thereto contained elsewhere in this Prospectus. Results of operations
for any fiscal quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $24,107 $25,153 $26,896 $27,520 $28,595 $30,804 $30,937
Cost of revenues........ 16,898 17,492 19,318 18,808 20,667 21,871 23,234
------- ------- ------- ------- ------- ------- -------
Gross profit............ 7,209 7,661 7,578 8,712 7,928 8,933 7,703
Selling, general and
administrative......... 2,681 2,970 3,217 3,975 4,602 4,621 4,952
------- ------- ------- ------- ------- ------- -------
Income from operations.. 4,528 4,691 4,361 4,737 3,326 4,312 2,751
Interest income
(expense).............. 47 45 36 35 23 33 (54)
Minority interest in net
(income) loss of
subsidiaries........... (12) (13) (13) 11 (3) (3) (3)
------- ------- ------- ------- ------- ------- -------
Net income.............. 4,563 4,723 4,384 4,783 3,346 4,342 2,694
Pro forma income taxes.. 1,825 1,889 1,754 1,913 1,338 1,737 1,078
------- ------- ------- ------- ------- ------- -------
Pro forma net income.... $ 2,738 $ 2,834 $ 2,630 $2,870 $ 2,008 $ 2,605 $ 1,616
======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company's revenues and operating results are subject to significant
variation from quarter to quarter depending on a number of factors, including
the timing and number of client projects commenced and completed during the
quarter, the number of working days in a quarter, employee hiring, attrition
and utilization rates and the mix of time-and-materials versus fixed-price
projects during the quarter. Although fixed-price projects have not
contributed significantly to revenues and profitability to date, operating
results may be adversely affected in the future by cost overruns on fixed-
price projects. Because a high percentage of the Company's expenses are
relatively fixed, variations in revenues may cause significant variations in
operating results. Additionally, the Company periodically incurs cost
increases due to both the hiring of new employees and strategic investments in
its infrastructure in anticipation of future opportunities for revenue growth.
No assurances can be given that quarterly results will not fluctuate, causing
a material adverse effect on the Company's business, operating results and
financial condition.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1996, the Company generally financed
its working capital and distributions to shareholders through internally
generated funds. The Company's cash provided by operations was $4.0, $4.6,
$16.2 and $9.8 million for the years ended December 31, 1993, 1994 and 1995
and for the nine months ended September 30, 1996, respectively. The Company's
cash provided by operations prior to this offering does not reflect any income
tax expense due to the Company's status as an S Corporation. Capital
expenditures for the year end December 31, 1995 and the nine-month period
ended September 30, 1996 were $363,000 and $569,000, respectively. The Company
does not currently have any material commitments for capital expenditures.
20
<PAGE>
The Company 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 5.4% at September 30, 1996) plus 1.5% or prime
(8.25% at September 30, 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. In the first nine months of 1996, the
Company borrowed funds for the purpose of making distributions to
shareholders, which the shareholders used to help finance construction of
three offshore software development centers in India. As of September 30,
1996, $14.0 million remained available for borrowing under the Facility. The
Company expects to increase the amount available under the Facility to $25.0
million effective upon the completion of this offering.
The Company currently anticipates that the proceeds from this offering
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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, was issued in October 1995. The Company will be required
to adopt the new standard no later than fiscal 1996, although early adoption
is permitted. This standard establishes the fair value based method (the "FAS
123 Method") rather than the intrinsic value based method as the preferred
accounting methodology for stock-based compensation arrangements. Entities are
allowed to: (i) continue to use the intrinsic value based methodology in their
basic financial statements and provide in the footnotes pro forma net income
and earnings per share information as if the FAS 123 Method had been adopted;
or (ii) adopt the FAS 123 Method. The Company anticipates providing the
required disclosures in the Notes to the Consolidated Financial Statements.
21
<PAGE>
BUSINESS
SUMMARY
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. 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 has provided IT services to over 300 clients worldwide
in a diverse range of industries. These clients include AT&T, Citibank, EDS,
IBM, Intel, Oracle and Wal-Mart. The Company sets high standards for client
responsiveness and project quality. A significant number of the Company's
clients have selected Mastech to provide additional services. 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.
One of the key elements of Mastech's growth has been its ability to recruit
and deploy, on short notice, experienced IT professionals on a worldwide
basis. As of September 30, 1996, the Company employed 1,149 IT professionals,
over 900 of whom were in the United States, with the remainder in the Far
East, Canada 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.
Mastech has demonstrated the scalability of its business model in the United
States by growing its revenues from $13.5 million in 1991 to $103.7 million in
1995. The Company is now replicating this 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 and Tokyo. The Company
also plans to open offices in Australia, South Africa 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. Mastech
is investing in an extensive offshore software development infrastructure in
India, including four state-of-the-art software development centers. The
center in Bangalore, India has been operational for over a year and is
conducting over 20 engagements for Mastech clients in the U.S. and Canada.
Three additional centers are under development. The Company believes that this
offshore infrastructure, with the ability to accommodate 1,500 IT
professionals when complete, will represent one of the largest offshore
presences in the industry.
22
<PAGE>
THE IT SERVICES INDUSTRY
OVERVIEW
The growing worldwide demand for IT services has been driven by the
increasing reliance on IT as a strategic tool for addressing critical business
issues. Intense competition, deregulation, globalization and technological
innovation are accelerating the rate of change in business. Organizations face
constant pressures to improve the quality of products and services, reduce
cost and time to market, improve operating efficiencies and strengthen
customer relationships. In order to achieve these objectives, organizations
are re-engineering their business processes and improving the information
systems which enable and support the re-engineered processes. Simultaneously,
rapid advances in technology have accelerated demand for the transition from
mainframe to client/server architectures, from separate systems to enterprise-
wide integrated applications and from internal to inter-enterprise computing.
As a result of the variety and complexity of new technologies, IT
departments must integrate and manage distributed computing environments
consisting of multiple operating systems, databases, programming languages and
networking protocols, and must implement custom and packaged software
applications to support business objectives. As organizations deal with this
complexity, IT departments have also been overwhelmed by the large number of
software applications that need to be rewritten, re-engineered or converted in
order to effect the transition to newer technologies and address the Year 2000
problem. In addition, external economic factors are forcing companies to focus
on core competencies and trim their IT workforce.
Accordingly, to support their growing IT needs, many organizations utilize
experienced third-party IT service providers to assist in the development and
implementation of IT solutions and services. According to industry sources,
the worldwide market for IT services was estimated at $185 billion in 1995,
with a projected market of $292 billion in the year 2000. The U.S. IT services
market is projected to grow from $75 billion in 1995 to $130 billion in the
year 2000.
INDUSTRY TRENDS
The Company believes that the following key industry trends will have a
major influence on the worldwide IT services market:
Growth in ERP Packaged Software. Organizations are increasingly turning to
ERP packaged software applications such as SAP R/3, Oracle Applications, Baan
Triton and PeopleSoft. By customizing and deploying these large, integrated
applications packages, organizations seek to replace, on a global, enterprise-
wide basis, their aging legacy applications, which have limited functionality
and integration. However, the implementation of these packages is a major
undertaking and requires highly specialized skill sets and functional
expertise, which are in short supply.
The Year 2000 Problem. As the millennium approaches, many existing computer
applications will malfunction because they are unable to process dates
properly beyond December 31, 1999. A typical organization may have thousands
of programs which need to be analyzed, altered and tested, making the task
enormously time and labor intensive. Industry sources estimate that on average
a company will spend $7-8 million on Year 2000 conversion, while a Fortune 100
company may spend $50-100 million, and that the cost worldwide (including in-
house costs) will be between $300 billion and $600 billion.
Shortage of IT Professionals. There is a growing shortage of IT
professionals in developed countries, particularly the United States, Western
Europe and Japan. As companies continue to migrate from centralized mainframe
architectures to distributed client/server technologies, the demand for IT
professionals will rise. As an example, Gartner Group predicts a 60% increase
in the number of organizations utilizing client/server platforms through the
year 2000. In addition, the Year 2000 problem will exacerbate the shortage of
IT professionals in the next three years.
23
<PAGE>
International Demand for IT Services. Organizations in countries other than
the U.S. are making the transition from mainframes to client/server
architectures, implementing integrated applications packages and addressing
the Year 2000 problem. The Company believes that many of these organizations
have lagged behind U.S. companies in these areas and are now aggressively
adopting new technologies. As a result, several of these markets are
experiencing faster growth than the U.S. market. For example, according to an
industry source, growth in the IT services industry through the year 2000 will
be 19.6% in the Asia/Pacific region, compared to 11.5% in the U.S.
Growth in Offshore Software Development. 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. This approach offers a number of benefits,
including lower costs, faster delivery, more flexible scheduling and access to
a larger pool of skilled IT professionals. India is widely acknowledged as the
leader in offshore software development due to its large English-speaking
software talent pool, low labor costs and investments in technical education
and telecommunications. Many large organizations, including AT&T, Citicorp,
Digital Equipment, General Electric, Hewlett-Packard, IBM, Motorola and Oracle
are using offshore software development in India. The Gartner Group predicts
that over the next three years many organizations will spend up to 40% of
their legacy budgets for offshore projects. The Company believes that the
demand for offshore software development is further increased by the Year 2000
problem, solutions for which are expected to be highly labor-intensive while
providing little incremental benefit and, therefore, require a low-cost
solution.
BUSINESS STRATEGIES
Mastech's objective is to become a leading worldwide provider of IT services
using the best available technologies to deliver strategic business solutions
to its clients. The Company's business strategies address key industry trends,
leverage the Company's strengths and distinguish Mastech from its competitors.
The key elements of these strategies are set forth below:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDUSTRY TRENDS MASTECH STRATEGIES
- -------------------------------------------------------------------------------
<S> <C>
. Rapid growth in demand for > Provide a broad range of applications solutions
IT applications services . Leverage proprietary methodologies and tools
. Focus on key technologies
. Cross-sell solutions to client base
- ---------------------------------------------------------------------------------------------
. Growth in ERP packaged software > Provide ERP package implementation services
. Focus on Oracle, Baan, SAP and PeopleSoft
. Leverage alliances with leading vendors
. Create global network of ERP training centers
- ---------------------------------------------------------------------------------------------
. The Year 2000 problem > Offer a complete range of Year 2000 services
. Use offshore capabilities for competitive advantage
. Convert into maintenance and client/server migration
engagements
- ---------------------------------------------------------------------------------------------
. Shortage of IT professionals > Develop a global, mobile pool of high-quality IT
professionals
. Recruit and deploy on a worldwide basis
. Expand its global network of recruiting and training
centers
- ---------------------------------------------------------------------------------------------
. Rapid growth in international > Replicate U.S. success in key global markets
demand for IT services . Expand operations in Canada, Singapore, the U.K. and
Japan
. Establish operations in additional countries
> Leverage centralized "low-overhead" model
- ---------------------------------------------------------------------------------------------
. Growth in offshore software > Develop an extensive offshore software development
development infrastructure
. Expand to four state-of-the-art centers in India
</TABLE>
24
<PAGE>
The Company believes that these strategies, combined with the breadth of its
technical and business experience and knowledge of global markets, position it
to capitalize on market opportunities for growth. Each of the foregoing
strategies is discussed in more detail below:
Provide a Broad Range of Application Solutions. Mastech provides its clients
with a single source for a broad range of IT applications solutions and
services, including client/server design and development, conversion/migration
services, Year 2000 services, specialty package implementation services and
applications maintenance outsourcing. These services are provided in a wide
variety of computing environments, and use leading technologies, including
client/server architectures, object-oriented programming languages and tools,
distributed database management systems and the latest networking and
communications technologies. In addition, the Company has developed
proprietary SmartAPPS methodologies and tools to enhance productivity. The
Company's broad range of services allows it to offer clients a single source
for IT applications solutions and enables it to cross-sell services throughout
clients' organizations.
Provide ERP Package Implementation Services. The Company leverages its
client/server expertise by providing ERP package implementation services for
Oracle Applications, Baan Triton, PeopleSoft and SAP R/3. The Company's status
as an Oracle and Baan business partner results in direct industry referrals
and enhanced industry recognition and enables the Company to broaden its
client base, maintain technological leadership and increase its
competitiveness. In order to meet the growing demand for ERP professionals,
the Company recently established, through its Scott Systems subsidiary, an ERP
Applications Training Center in Bombay, which currently graduates over 20
trained professionals each month, and intends to set up similar training
centers in other cities in the U.S., Canada and India.
Offer a Complete Range of Year 2000 Services. The Company's Year 2000
service line offers impact assessment, project planning, conversion, testing
and implementation services. The Company's strategy is to convert Year 2000
projects into applications maintenance outsourcing and client/server migration
engagements. The Company has an alliance with Viasoft, Inc., a leading
provider of productivity tools and Year 2000 methodologies for legacy
platforms. The Company has also developed proprietary impact assessment tools
for client/server environments, which enable it to serve a segment of the
market that the Company believes has been largely ignored by competition.
Mastech's in-house Tools Development Group is also developing automated
conversion and testing tools, which will enhance the productivity of the
Company's conversion teams.
Develop a Global, Mobile Pool of High-Quality IT Professionals. Mastech's
growth has been driven by its ability to recruit and deploy, on short notice,
experienced IT professionals on a worldwide basis. In anticipation of future
growth and heightened competition for IT professionals, the Company has
embarked on an aggressive recruiting strategy, designed to more than double
the number of IT professionals hired. The Company advertises in leading
newspapers and trade magazines and has dedicated recruiters in its offices
worldwide. The Company also plans to set up a global network to recruit recent
college graduates, provide them with training in software engineering
techniques and key technologies and deploy them on client engagements.
Replicate U.S. Success in Key Global Markets. Mastech has demonstrated the
scalability of its business model in the United States by increasing its
revenues from $13.5 million in 1991 to $103.7 million in 1995. The Company
believes that this model can be replicated internationally due to the large
and growing demand for IT services overseas and the Company's client base of
large multinational corporations that need support on a global basis. In 1995,
the Company opened offices in Toronto and Singapore and in 1996, the Company
opened offices in London and Tokyo. The Company has successfully grown these
international operations to over 200 employees. The Company also plans to open
offices in Australia, South Africa and Continental Europe.
Leverage Centralized "Low-Overhead" Model. Mastech has adopted a centralized
approach to selling and servicing its worldwide client base, instead of using
a large network of branch offices to serve clients in local markets. For
example, the Company currently serves approximately 270 clients in over 40
states from its headquarters in Pittsburgh and offices in Washington D.C. and
San Francisco. Similarly, in Canada, the
25
<PAGE>
Company's office in Toronto serves clients throughout the country. This
strategy has provided the Company with the benefits of a national presence
without the costs associated with a large network of branch offices.
Develop an Extensive Offshore Software Development Infrastructure. To meet
the growing worldwide demand for offshore software development services,
Mastech is investing, through its Mascot Systems subsidiary, in an extensive
offshore infrastructure in India, including four state-of-the-art software
development centers. When completed, these centers will have over 130,000 sq.
ft. of total space and the capacity to accommodate 1,500 IT professionals. The
first center, located in Bangalore (known as India's "Silicon Valley"), has
been operational for over a year, is conducting over 20 engagements for
clients in the U.S. and Canada and can accommodate 500 IT professionals. This
center is connected via secure, high-speed satellite links to the Company's
headquarters and client sites. The Company believes this offshore
infrastructure, when complete, will be one of the largest in the industry and
will differentiate it from those competitors who either have no offshore
capability or depend on subcontractor relationships to offer such services.
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 an existing offshore
software development center in Bangalore, India which is 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
Bangalore, Madras and Pune, India. These centers offer clients certain
advantages as compared to onshore development, including: (i) cost savings of
as much as 50%; (ii) faster delivery, as larger teams can be employed; (iii)
virtual 24-hour project schedules, due to the time difference between North
America and India; and (iv) improved access to a large pool of IT
professionals.
26
<PAGE>
The Company's services are described below:
- --------------------------------------------------------------------------------
METHODS/TOOLS SERVICES
CLIENT/SERVER DESIGN AND DEVELOPMENT
- --------------------------------------------------------------------------------
.SmartAPPS Client/Server >Project management
>Requirements analysis and
. Languages: C/C++, VisualBasic,definition
Delphi SmallTalk, Java >Evaluation and selection of
applications packages
>Prototyping and re-use
. Tools: Powerbuilder, Gupta, >Data modeling, data warehousing
Developer/2000, Lotus Notes
>Applications systems design and
. DBMS/4GLs: Oracle, Informix, development
Sybase, Unify, SQLServer >Database design and administration
>Systems development and
implementation
. GUI: Windows, Motif, X-Windows,
OpenLook
>Technology education and training
. CASE Tools: Oracle*CASE, IEF,
Bachman
- --------------------------------------------------------------------------------
MIGRATION/CONVERSION
- --------------------------------------------------------------------------------
.SmartAPPS Migrate >Project management
Methodology and Automated >Automated tools development
Conversion Tools
>User interface conversion
>Code conversion and testing
>Control language conversion
>Data migration
>Cutover and implementation
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
.SmartAPPS 2000 >Impact analysis
Impact Assessment and
Automated Conversion Tools >Project planning
>Year 2000 conversion
.Viasoft >Compliance testing and validation
.Microfocus Revolve >Cutover and implementation
- --------------------------------------------------------------------------------
SPECIALTY PACKAGE IMPLEMENTATION
- --------------------------------------------------------------------------------
.Oracle Applications >Project management
>Customization
.Baan Triton
>Integration
.PeopleSoft
>Migration
.SAP R/3
>Database design and administration
>Systems support
>Training
- --------------------------------------------------------------------------------
APPLICATIONS MAINTENANCE OUTSOURCING
- --------------------------------------------------------------------------------
. SmartAPPS Maintain >Baseline assessment and service
level definition
>Process enhancements
Methodology and Tools
>Modifications/enhancements to
functionality
>Interfaces and integration with new
systems
>Configuration management
>Documentation and standardization
>Applications productivity
improvement
>Trouble-shooting and problem
resolution
>24-hours, 7-days per week emergency
support
27
<PAGE>
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.
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
chance 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 40 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.
28
<PAGE>
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 four
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.
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 has
provided services to over 300 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. A significant number of the Company's clients have selected
Mastech to provide additional services.
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:
<TABLE>
<CAPTION>
CONSUMER PRODUCTS MANUFACTURING TELECOMMUNICATIONS TRANSPORTATION
----------------- ------------- ------------------ --------------
<S> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
INTEGRATORS &
HEALTH CARE FINANCIAL SERVICES VENDORS
----------- ------------------ -----------------
<S> <C> <C>
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
</TABLE>
29
<PAGE>
In 1995 and in the first nine months of 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% of the
Company's revenues in 1995 and almost 9% for the nine months ended September
30, 1996.
REPRESENTATIVE ENGAGEMENTS
Examples of the Company's engagements, which are representative of the
nature of its services, are set forth below:
CLIENT/SERVER DESIGN AND DEVELOPMENT: RE-ENGINEERING SOLUTION FOR A
CONSUMER PRODUCTS COMPANY.
Problem. A consumer products company needed to re-engineer its business
processes in order to implement an integrated, enterprise-wide system that
would incorporate high-tech tools such as hand-held computers to allow its
employees to check a customer's account history and produce point-of-sale
invoices.
Solution. Mastech designed and developed an integrated, enterprise-wide
system comprised of 12 different applications using Oracle Designer 2000.
Mastech's engagement team recommended the hardware, software and development
methodology. Mastech's responsibilities included project management, vendor
management, application and database architecture design, analysis and re-
engineering of the enterprise-wide processes implementation, training and
maintenance support.
CONVERSION/MIGRATION: LARGE-SCALE CONVERSION FOR A STATE GOVERNMENT AGENCY.
Problem. A large state government agency in the U.S. needed to convert all
of its applications from a UNISYS mainframe to an IBM environment.
Solution. Mastech used a combination of on-site and offshore project teams
to complete the project. Mastech's offshore software development center in
India developed conversion tools to increase productivity by automating the
source language conversion. The offshore team developed eight conversion tools
to manage the conversion of two million lines of code involving three
different source languages, two on-line transaction processing environments
and the conversion from a network database to a relational database.
SPECIALTY PACKAGE IMPLEMENTATION: MIGRATION OF A UTILITY COMPANY'S SYSTEMS
TO ORACLE APPLICATIONS.
Problem. A major utility company needed to reduce costs to remain
competitive in the marketplace. Over the years, it had developed multiple
independent systems on a variety of platforms, resulting in isolated
information that could not be consolidated for an in-depth and accurate
analysis of costs.
Solution. Upon Mastech's recommendation, the utility decided to implement
Oracle Financials and Manufacturing ERP packages to obtain faster access to
critical information, better decision-making capability, improved
understanding of costs using activity-based costing and the ability to compile
information across organization and functional lines. Mastech specialists are
providing Oracle Financials and Manufacturing expertise to customize and
implement the General Ledger, Inventory and Accounts Payable modules of Oracle
Financials, the Inventory and Purchasing modules of Oracle Manufacturing, and
to develop interfaces between the materials planning system and the Oracle
Applications, data conversion routines and additional functionality.
APPLICATIONS MAINTENANCE OUTSOURCING: OFFSHORE APPLICATION ENHANCEMENT AND
SUPPORT FOR A LARGE CANADIAN INVESTMENT FIRM.
Problem. One of Canada's largest investment firms needed to maintain its
application systems in a cost-effective manner.
Solution. Mastech used its offshore software development capabilities to
maintain the client's applications. The client was able to obtain the benefits
of on-site development support and coordination, while taking advantage of
Mastech's management and offshore software development and support capability.
Mastech's scope of work included requirements analysis, design of
enhancements, modification and testing of existing programs to incorporate
enhancements, and implementation of changes.
30
<PAGE>
INTERNET/INTRANET SOLUTIONS: A BIG SIX CONSULTING FIRM NEEDED JAVA
SPECIALISTS TO HELP IT DEVELOP AN INTERNET PRESENCE.
Problem. A Big Six consulting firm wanted to broaden its range of services
through the Internet by developing applications to support the delivery of
content and transactions capability to its entrepreneurial clients.
Solution. Mastech's Java specialists helped analyze, design, prototype and
develop the system by writing VisualBasic modules, JavaScript routines and CGI
scripts. They also evaluated various technologies for transaction processing
monitors and remote automation objects to address issues related to running a
client-server application over the Internet.
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.
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. Following this offering, the Company intends to use 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 September 30, 1996, the Company had 1,329 employees
comprised of 1,149 IT professionals, 46 sales and marketing personnel and 134
general and administrative personnel. 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. See"Risk Factors--Government Regulation of
Immigration." In addition, the Company uses independent contractors to staff
client engagements. As of September 30, 1996, the Company had 245 independent
contractors working on client engagements.
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
31
<PAGE>
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
servicemark 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. See "Risk Factors--Intellectual Property
Rights."
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.
FACILITIES
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. The Company believes that this location has sufficient space for
its current and anticipated near-term needs. The Company also has offices in
Washington D.C. and San Francisco.
The Company has also recently opened offices in several countries in order
to develop business internationally. The Company currently leases office space
in London, Singapore, Toronto and Tokyo. These locations allow the Company to
respond quickly to the needs of its international clients and to recruit
qualified IT professionals in these markets.
Mascot Systems leases two offshore software development facilities totaling
34,200 square feet in Bangalore, India. These facilities were established by
Messrs. Wadhwani and Trivedi to deliver the Company's offshore software
development services to the Company's clients worldwide. Mascot Systems
intends to lease from Messrs. Wadhwani and Trivedi 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.
LITIGATION
The Company is not a party to any litigation that is expected to have a
material adverse effect on the Company or its business.
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's directors and executive officers and their respective ages and
positions as of September 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Sunil Wadhwani............ 43 Co-Chairman, Chief Executive Officer and Director
Ashok Trivedi............. 47 Co-Chairman, President and Director
Michael Zugay............. 44 Vice President--Finance
Steven Shangold........... 35 Vice President--U.S. Sales and Marketing
Ajmal Noorani............. 34 Vice President--International Operations
Sushma Rajagopalan........ 33 Vice President--Resourcing
Murali Balasubamanyam..... 41 Vice President--Human Resources
Shekar Sivasubramanian.... 32 Vice President--Applications Solutions
</TABLE>
SUNIL WADHWANI has served as Co-Chairman and Chief Executive Officer of the
Company since October 1996, and a Director since 1986. From 1986 through
September 1996, he served as Chairman of the Company and held several other
offices, including Vice President, Secretary and Treasurer. From 1981 to 1986,
Mr. Wadhwani served as President of Uro-Valve, Inc., a start-up manufacturer
of specialized medical devices that he founded in 1981. Prior to 1981 Mr.
Wadhwani worked as a management consultant assisting companies in strategic
planning, operations, marketing and sales. Mr. Wadhwani has a Master's degree
in Industrial Administration from Carnegie-Mellon University and a Bachelor's
degree in Mechanical Engineering from the Indian Institute of Technology.
ASHOK TRIVEDI has served as Co-Chairman and President of the Company since
October 1996, and as a Director since 1988. From 1988 through September 1996,
Mr. Trivedi served as President of the Company and held other offices,
including Secretary and Treasurer. From 1976 to 1988, he held various
marketing and management positions with Unisys Corporation. Mr. Trivedi has a
Master's in Business Administration degree from Ohio University and a Master
of Science degree in Physics from Delhi University.
MICHAEL ZUGAY has served as Vice President--Finance of the Company since
March 1995. From March 1994 to March 1995, he served as an independent
consultant to the steel industry. From 1990 through February 1994, he served
as President and CEO of Bliss-Salem, Inc., a provider of products to the steel
industry. He was also Bliss-Salem's Vice President of Finance and
Administration from 1986 to 1990. Prior to this, he served in various
positions at Bekaert Steel Wire Corporation and KPMG Peat Marwick LLP. Mr.
Zugay is a certified public accountant with over 23 years of financial and
operational experience. Mr. Zugay has a Bachelor's degree in Business
Management from Indiana University of Pennsylvania.
STEVEN SHANGOLD has served as Vice President--U.S. Sales and Marketing of
the Company since October 1995. From February 1992 through September 1995, he
served as the Company's Sales Director--Commercial Division. From 1982 through
January 1992, he was employed by Redshaw Corporation (a subsidiary of
ITT/Hartford that markets integrated software packages to the insurance
industry), most recently as Vice President--Sales and Marketing. Mr. Shangold
holds a Bachelor's degree in Management from Syracuse University, and a
Bachelor's degree in Advertising from the S.I. Newhouse School.
AJMAL NOORANI has served as Vice President--International Operations of the
Company since May 1996. From June 1994 to May 1996, he was employed by Mellon
Bank as an Assistant Vice President--Corporate Finance. From 1990 to May 1994,
Mr. Noorani held a number of positions with the Company, including Director--
Government Division. Between 1988 and 1990 he was a Senior Management
Consultant at Arthur Andersen & Co. Mr. Noorani has a Master's degree in
Industrial Administration from Carnegie-Mellon University and a Bachelor's
degree in Engineering from Maharaja Sayajrao University.
SUSHMA RAJAGOPALAN has served as a Vice President--Resourcing of the Company
since October 1995. From June 1993 to October 1995, she served as the
Company's Director--Federal Division, and between
33
<PAGE>
November 1992 and June 1993, she held various managerial positions with the
Company. From June 1988 to October 1991, Ms. Rajagopalan was an Assistant Vice
President--Human Resources with Citibank in India. She has a Master's degree in
Personnel Management from the Tata Institute of Social Sciences.
MURALI BALASUBAMANYAM has served as a Vice President--Human Resources of the
Company since October 1995. From September 1994 to October 1995, he served as
the Company's Director--Human Resources. Prior to joining the Company, he
served as Deputy General Manager (Human Resources) with HCL Group of Companies
from November 1992 to September 1994. From March 1990 to October 1992, he
served as General Manager (Human Resources) for Fedders Lloyd Corp. He also
served as Head of Personnel with PCL-Dell, from 1986 to 1989. He has a
Bachelor's degree in Business Administration from Madurai University.
SHEKAR SIVASUBRAMANIAN has served as Vice President--Applications Solutions
since August 1996. From July 1995 to August 1996, he served as the Company's
Director of Projects. Between May 1991 and July 1995, he served as Program
Manager in charge of the Company's largest contract with IBM. Prior to joining
the Company, he held various management and technical positions with Tata
Consultancy Services. He has an MBA in Finance from the University of Missouri
and a Bachelor's degree in Mechanical Engineering from the Indian Institute of
Technology.
The Company's executive officers are appointed annually by, and serve at the
discretion of, the Board of Directors. Each executive officer is a full-time
employee of the Company. The Board of Directors currently consists of two
members. The Company expects to fill the three current vacancies on the Board
with independent directors within 90 days following the consummation of this
offering. The Board of Directors is divided into three classes, each of whose
members serve for a staggered three-year term. The Board is comprised of two
Class I Directors (to be appointed within 90 days after the closing of this
offering), two Class II Directors (Mr. Wadhwani and one to be appointed within
90 days after the closing of this offering) and one Class III Director (Mr.
Trivedi). At each annual meeting of shareholders, the appropriate number of
directors will be elected for a three-year term to succeed the directors of the
same class whose terms are then expiring. The terms of the Class I Directors,
Class II Directors and Class III Directors will expire upon the election and
qualification of successor directors at the annual meetings of shareholders
held in calendar years 1997, 1998 and 1999, respectively. There are no family
relationships between any director or executive officer of the Company.
BOARD COMMITTEES
The Audit Committee will be responsible for reviewing with management the
financial controls, accounting, audit and reporting activities of the Company.
The Audit Committee will review the qualifications of the Company's independent
auditors, make recommendations to the Board of Directors regarding the
selection of independent auditors, review the scope, fees and results of any
audit and review non-audit services and related fees provided by the
independent auditors. The members of the Audit Committee have not yet been
appointed. A majority of the members of the Audit Committee will be independent
directors.
The Compensation Committee will be responsible for the administration of all
salary and incentive compensation plans for the officers and key employees of
the Company, including bonuses. The Compensation Committee will also administer
the Company's Stock Incentive Plan. The members of the Compensation
34
<PAGE>
Committee have not yet been appointed. A majority of the members of the
Compensation Committee will be independent directors.
No director has been appointed to the Company's Audit Committee or
Compensation Committee as of the date of this Prospectus. The Board of
Directors does not have a nominating committee. The selection of nominees for
the Board of Directors will be made by the entire Board of Directors.
DIRECTOR COMPENSATION
Directors who are not executive officers of the Company will be paid an
annual retainer of $20,000, and all directors will be reimbursed for travel
expenses incurred in connection with attending board and committee meetings.
Directors are not entitled to additional fees for serving on committees of the
Board of Directors. Pursuant to the terms of the formula program of the
Company's Stock Incentive Plan, each director of the Company appointed after
the completion of this offering who is not otherwise employed by the Company
automatically will be granted options to purchase 15,000 shares of Common
Stock. See "Management--Employee Benefit Plans; Independent Director Options."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee prior to this offering.
Accordingly, Messrs. Wadhwani and Trivedi, the Company's Co-Chairman and Chief
Executive Officer and the Company's Co-Chairman and President, respectively,
had responsibility for all decisions with respect to executive officer
compensation.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
earned by the Company's Chief Executive Officer and each of the other most
highly compensated executive officers whose salary and bonus compensation for
the fiscal year ended December 31, 1995 exceeded $100,000 (collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
--------------------------
NAME AND PRINCIPAL POSITION SALARY BONUS (2)
<S> <C> <C>
Sunil Wadhwani...................................... $108,000(3) $ --
Co-Chairman and Chief Executive Officer
Ashok Trivedi....................................... 108,000(3) --
Co-Chairman and President
Steven Shangold..................................... 68,333 170,003
Vice President--U.S. Sales and Marketing
Sushma Rajagopalan.................................. 79,543 26,000
Vice President--Resourcing
</TABLE>
- ---------------------
(1) In accordance with the rules of the Securities and Exchange Commission
other compensation in the form of perquisites and other personal benefits
has been omitted because such perquisites and other personal benefits
constitute less than 10% of the total annual salary and bonus for the named
executive officer for such year.
(2) Bonuses were paid in 1995 for 1994 performance. The bonus amount shown for
Steven Shangold includes sales commissions of $24,944.
(3) In addition to these salary amounts, Messrs. Wadhwani and Trivedi received
Subchapter S distributions as shareholders of the Company. Following this
offering, Messrs. Wadhwani and Trivedi will have a revised compensation
structure. See "Management--Employment Agreements" and "S Corporation
Dividend."
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<PAGE>
EMPLOYEE BENEFIT PLANS
Stock Incentive Plan. The Company has reserved an aggregate of 2,160,000
shares of Common Stock for issuance under the 1996 Stock Incentive Plan (the
"Stock Incentive Plan"), which may be granted to directors, officers and other
employees and consultants of the Company and its subsidiaries. The Stock
Incentive Plan permits: (i) the grant of incentive stock options; (ii) the
grant of non-qualified stock options; (iii) the issuance or sale of Common
Stock with or without vesting or other restrictions ("Stock Grants"); (iv) the
grant of Common Stock upon the attainment of specified performance goals
("Performance Share Awards"); and (v) the grant of stock appreciation rights.
In addition, directors who are not employees or officers of the Company
("Independent Directors") will automatically be eligible for certain grants
under the Stock Incentive Plan, as described below. On and after the date the
Stock Incentive Plan becomes subject to Section 162(m) of the Internal Revenue
Code of 1986, as amended, the maximum number of shares of Common Stock that
may be awarded to any one individual in any calendar year is 200,000 shares.
Although no options or other grants have been granted under the Stock
Incentive Plan, the Board of Directors intends to do so in connection with
this offering.
The Stock Incentive Plan will be administered by the Board of Directors or
by a committee designated by the Board ("Administrator"). Subject to the
provisions of the Stock Incentive Plan, the Administrator has full power to
determine, from among the persons eligible for grants under the Stock
Incentive Plan: (i) the individuals to whom grants will be granted; (ii) the
combination of grants to participants; and (iii) the specific terms of each
grant. Incentive stock options may be granted only to officers or other
employees of the Company or its subsidiaries, including members of the Board
of Directors who are also employees of the Company or its subsidiaries.
The option exercise price of each option granted under the Stock Incentive
Plan is determined by the Administrator but, in the case of incentive stock
options may not be less than 100% of the fair market value of the underlying
shares on the date of grant. Incentive stock options may not be exercisable
more than ten years from the date the option is granted. If any employee of
the Company or any subsidiary owns or is deemed to own at the date of grant
shares of stock representing in excess of 10% of the combined voting power of
all classes of stock of the Company, the exercise price for incentive stock
options granted to such employee may not be less than 110% of the fair market
value of the underlying shares on that date and the option may not be
exercisable more than five years from the date the option is granted. Upon the
exercise of options, the option exercise price must be paid: (i) in cash; (ii)
by delivery to the Company of a notice of exercise with an irrevocable
direction to a registered broker-dealer to sell a sufficient number of shares
and to deliver the sales proceeds directly to the Company; or (iii) in the
sole discretion of the Administrator, by delivery of shares of Common Stock
that have been previously owned by the optionee for at least six months.
The Board of Directors can terminate or amend the Stock Incentive Plan at
any time, except that no such action may adversely affect any right or
obligation regarding any awards previously made under the Stock Incentive Plan
without the consent of the recipient. In the event of any changes in the
capital structure of the Company, such as a stock dividend or split-up, the
Board of Directors must make equitable adjustments to outstanding unexercised
awards so that the net value of the award is not changed.
INDEPENDENT DIRECTOR OPTIONS. The Stock Incentive Plan provides for the
automatic grant of non-qualified stock options to Independent Directors. Under
such provisions, options to purchase 15,000 shares of Common Stock will be
granted to each individual who first becomes a member of the Board of
Directors after the closing date of this offering and who is not then an
employee of the Company or any subsidiary of the Company. The option exercise
price for options granted to Independent Directors under the Stock Incentive
Plan will equal the then fair market value of the underlying Common Stock.
Options granted to Independent Directors under the foregoing provisions will
vest in annual installments over three years commencing on the first
anniversary of the date of grant and will expire ten years after grant,
subject to earlier termination if the optionee ceases to serve as a director.
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<PAGE>
401(K) PLAN. The Company maintains a 401(k) defined contribution plan (the
"401(k) Plan"). All employees of the Company who have completed six months of
employment are eligible to participate in the 401(k) Plan, pursuant to which
each participant may contribute up to 15% of eligible compensation (up to a
statutorily prescribed annual limit of $9,500 in 1996). The Company does not
currently match contributions made by employees to the 401(k) Plan. All
amounts contributed by employee participants and earnings on these
contributions are fully vested at all times. Employee participants may elect
to invest their contributions in various established funds.
EMPLOYMENT AGREEMENTS
The Company has entered into substantially identical employment contracts
with Messrs. Wadhwani and Trivedi, pursuant to which each of them will serve
as an executive officer of the Company at an annual base salary of not less
than $300,000, plus an annual bonus of up to $200,000 if performance goals to
be established by the Compensation Committee of the Board of Directors are
met. The agreements have a term of 24 months and automatically extend for one
month at the end of each month unless either party gives notice of their
intention to terminate the agreement at the end of the term. The agreements
provide that upon termination of employment by the Company other than for
cause (as defined in the agreements) or death, disability or retirement, the
Company shall pay the officer a lump sum amount equal to the amount the
executive would have been paid, based upon his base salary at the time of
termination, if such executive had remained an employee for the full term of
his contract, plus shares of Common Stock having a value equal to the value of
the executive's vested stock options and stock appreciation rights. In such
event, the Company will also provide health insurance for the executive for
the remainder of his life at the level in effect for other executives prior to
his termination for the remainder of the term. In the event the executive is
terminated due to a disability, the Company will continue to pay for three
years the executive's salary and an amount equal to his bonus in the year
prior to his termination, reduced by any amounts paid to the executive under
the Company's disability plan. Under the agreements, the Company agrees to
indemnify the executive to the full extent not prohibited by law for
liabilities he incurs in his capacity as a director, officer or controlling
person of the Company. Under the agreements, the executives agree to a
noncompetition covenant during the term of the agreement and for one year
after the termination of their employment for cause and to nonsolicitation and
nondisclosure covenants during the term of the agreement and for one year
after the termination of their employment for any reason.
The other Named Executive Officers are parties to employment agreements
which outline their responsibilities and provide generally for base salary
plus annual incentive bonuses. These executives are "at will" employees of the
Company and can be terminated by the Company with or without cause or they may
resign. Under the agreements, the executives are entitled to three months'
salary continuation if they are terminated by the Company without cause
generally, and to six months' salary continuation if they are terminated by
the Company without cause during the 90 days following the sale of the Company
to a third party. The employment agreements also contain confidentiality
provisions and noncompetition and nonsolicitation covenants.
In October 1996, the Company entered into an agreement with Steven Shangold,
the Company's Vice President of U.S. Sales and Marketing, pursuant to which
the Company agreed to pay Mr. Shangold, as compensation for past services, an
amount equal to the value of 109,200 shares of Common Stock. One half of the
foregoing payment will be made promptly following the closing of this offering
and will be paid in cash or in Common Stock at the election of Mr. Shangold.
The remaining half will be paid in the form of 54,600 shares of restricted
Common Stock which will vest on June 30, 1998. If Mr. Shangold voluntarily
leaves the employment of the Company or is terminated by the Company for cause
before that date, the shares of restricted stock will be forfeited. If Mr.
Shangold is terminated without cause, upon the sale of the Company or upon
death, the shares of restricted stock will vest on a pro rata basis.
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<PAGE>
CERTAIN TRANSACTIONS
Mascot Systems is an Indian corporation which, prior to becoming a
subsidiary of the Company, was controlled by Messrs. Wadhwani and Trivedi. The
Company has in the past engaged Mascot Systems as a subcontractor to perform
offshore software development projects. For the nine months ended September
30, 1996, and the year ended December 31, 1995, the Company paid Mascot
Systems approximately $735,000 and $205,000, respectively, for these services.
On December 16, 1996, the Company purchased the shares of Mascot Systems
held by Messrs. Wadhwani and Trivedi for $170,000, which price was based upon
an independent valuation of that interest. The purchase price was paid from
the Company's working capital. The Company has entered into an agreement to
purchase the minority shares of Mascot Systems, which are held by relatives of
Messrs. Wadhwani and Trivedi, for $20,000, based upon an independent
valuation. These transactions are expected to be completed shortly after
completion of this offering.
Mascot Systems is currently operating one and developing three other
offshore software development facilities in the cities of Bangalore, Pune and
Madras, India. For the nine months ended September 30, 1996, and the year
ended December 31, 1995 the Company advanced Mascot Systems $1,163,000 and
$865,000, respectively, towards the cost of setting up and operating these
facilities. In connection with the Company's acquisition of Mascot Systems,
the aggregate amount of these advances will be eliminated in consolidation.
Scott Systems is an Indian corporation which, prior to becoming a subsidiary
of the Company, was indirectly controlled by Messrs. Wadhwani and Trivedi
through a Pennsylvania corporation known as SWAT Systems Corporation ("SWAT").
The Company has in the past engaged Scott Systems to recruit and train IT
professionals in India. For the nine months ended September 30, 1996, and the
year ended December 31, 1995, the Company paid Scott Systems approximately
$343,000 and $289,000, respectively, for these services.
On December 16, 1996, SWAT was merged with and into Mastech and Scott
Systems thereby became a subsidiary of the Company. Messrs. Wadhwani and
Trivedi received nominal consideration in this transaction. The Company has
entered into an agreement to purchase the minority shares of Scott Systems,
some of which are held by relatives of Messrs. Wadhwani and Trivedi, for
$26,000. The transfer of shares held by SWAT to the Company as a result of the
merger and the acquisition of minority shares by the Company require the
approval of the Reserve Bank of India.
Mascot Systems leases or intends to lease from Messrs. Wadhwani and Trivedi
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 Messrs. Wadhwani and Trivedi 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 Messrs. Wadhwani and Trivedi. 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 Messrs. Wadhwani and Trivedi. 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
December 1996 and February 1997, respectively. Mascot Systems expects to enter
into two additional leases with Messrs. Wadhwani and Trivedi 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.
Scott Systems leases, for its training facilities, approximately 2,100
square feet of office space on one floor of an office building located in
Mumbai (Bombay), India. The leased space is divided into five separately owned
suites owned individually by Messrs. Wadhwani and Trivedi. The leases have a
one-year term expiring in April 1997 and the aggregate rent is $20,000 per
year. Scott Systems intends to lease further office space of approximately 900
square feet on another floor in the same office building which is owned by
Messrs. Wadhwani and Trivedi. The lease will have a one year term expiring in
October 1997 and the rent will be $6,000 per year.
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<PAGE>
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.
During 1995 and the first six months of 1996, the Company was a party to
three real property leases with Messrs. Wadhwani and Trivedi for residential
space near its Pittsburgh headquarters. The leased premises included two
condominium units and one single family residence. These leased premises were
used to accommodate out-of-town IT professionals temporarily working at the
Company's Pittsburgh facility or in transit to another working location. The
aggregate monthly rental for these leased premises was $3,000 per month plus
the operating costs of the premises. The Company terminated these leases in the
second quarter of 1996. Various residential properties are owned by Messrs.
Wadhwani and Trivedi in India and will be leased by the Company for similar
purposes.
As an S Corporation, the net income of the Company has been attributed, for
federal (and some state) income tax purposes, directly to the Company's
shareholders rather than to the Company. During 1995 and the first nine months
of 1996, the Company has from time to time paid the corresponding income taxes
due on these amounts on behalf of Messrs. Wadhwani and Trivedi in the form of
interest-free advances which they later repaid. The highest aggregate amounts
of advances outstanding to Mr. Wadhwani and the Wadhwani Family Qualified
Subchapter S Trust during 1995 and the first nine months of 1996 were $116,586
and $1,682,048, respectively. The highest aggregate amounts of advances
outstanding to Mr. Trivedi during 1995 and the first nine months of 1996 were
$116,583 and $1,681,941, respectively. This practice will be discontinued prior
to the effective date of this offering.
The Company and the Selling Shareholders have entered into an agreement
whereby the Selling Shareholders will agree to cause the Company to terminate
its S Corporation election in connection with this offering. The Company is
obligated to indemnify the Selling Shareholders for the amount of any increase
in taxable income allocable to them in the event of any audit of the Company's
tax returns.
The Board of Directors of the Company has adopted a resolution requiring all
future transactions, including any loans from the Company to its officers,
directors, principal shareholders or affiliates, to be approved by a majority
of the Board of Directors, including a majority of the independent and
disinterested members of the Board of Directors or, if required by law, a
majority of the disinterested shareholders, and requiring such transactions to
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 10, 1996, and as
adjusted to reflect the sale of the shares offered hereby, by: (i) each person
known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) each director of the Company; (iii) each of the
Named Executive Officers; and (iv) all Directors and executive officers of the
Company as a group. Except as noted, all persons listed below have sole voting
and investment power with respect to their shares of Common Stock, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
---------------------- NUMBER OF -----------------------
NUMBER OF SHARES BEING NUMBER OF
NAME SHARES PERCENT OFFERED SHARES PERCENT
<S> <C> <C> <C> <C> <C>
Sunil Wadhwani (1)(2)... 9,100,000 50.0% 700,000 8,400,000 38.9%
Ramesh Thadani, as co-
trustee of a
Wadhwani family trust
(2)(3)................. 1,333,696 7.3 0 1,333,696 6.2
Ashok Trivedi (2)(4).... 9,100,000 50.0 700,000 8,400,000 38.9
Arun Nayar, as co-
trustee of certain
Trivedi family trusts
(2)(5)................. 2,243,696 12.3 0 2,243,696 10.4
Mohan Phanse, as co-
trustee of certain
Trivedi family trusts
(2)(5)................. 1,333,696 7.3 0 1,333,696 6.2
Steven Shangold (6)..... 109,200 * -- 109,200 *
Sushma Rajagopalan...... -- -- -- -- --
All directors and
executive officers as a
group
(8 persons)(6)......... 18,309,200 100.0 1,400,000 16,909,200 77.9
</TABLE>
- ---------------------
*Less than 1%
(1) Includes 2,243,696 shares held by three family trusts, for which Mr.
Wadhwani is a co-trustee with sole investment power and no voting power
over such shares.
(2) The address of Messrs. Wadhwani, Trivedi, Thadani, Nayar and Phanse is c/o
Mastech Corporation, 1004 McKee Road, Oakdale, Pennsylvania 15071.
(3) Mr. Thadani is a co-trustee of two of the Wadhwani family trusts referred
to in note 1, above, with no investment power and sole voting power over
such shares.
(4) Includes 2,243,696 shares held by three family trusts, for which Mr.
Trivedi is a co-trustee with sole investment power and no voting power
over such shares.
(5) Mr. Nayar is co-trustee of the three Trivedi family trusts and Mr. Phanse
is co-trustee of two of the Trivedi family trusts, in each case, referred
to in note 4, above, with no investment power and shared voting power over
such shares.
(6) Includes 109,200 shares of Common Stock, of which 54,600 shares are
subject to restriction, that Mr. Shangold will have the right to receive
upon completion of this offering.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock, par value $.01 per
share, and 20,000,000 shares of Preferred Stock, without par value. The
following description of the capital stock of the Company is a summary, and as
such, it does not purport to be complete and is subject, and qualified in its
entirety by reference to, the more complete descriptions contained in: (i) the
Articles of Incorporation of the Company, as amended (the "Articles"), and the
Bylaws of the Company, as amended (the "Bylaws"), copies of each of which are
incorporated by reference as exhibits to the Registration Statement of which
this Prospectus is a part; and (ii) the certificate of designation relating to
any series of Preferred Stock that may be established by the Board of
Directors. Upon completion of this offering, the Company will have outstanding
21,600,000 shares of Common Stock and no shares of Preferred Stock. As of
December 10, 1996, there were eight record holders of record of Common Stock.
COMMON STOCK
The Company is authorized to issue up to 100,000,000 shares of Common Stock.
Subject to the rights and preferences that may be applicable to any
outstanding Preferred Stock, the holders of Common Stock are entitled to
receive dividends, when, if and as declared by the Board of Directors of the
Company.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by shareholders. Shareholders do not have cumulative
voting rights in the election of directors, meaning that the holders of a
majority of the shares entitled to vote in any election of directors may elect
all of the directors standing for election. The Bylaws require shareholders
desiring to either nominate persons for election as a director or present
matters for business at a shareholders meeting to give advance notice of such
nominations and/or matters to the Company.
Generally, whenever any corporate action is to be taken by vote of the
shareholders of the Company, or by a class of such shareholders of the
Company, it shall be authorized upon receiving the affirmative vote of a
majority of the votes cast by such shareholders, or by such class of
shareholders, entitled to vote thereon. The Articles, however, in addition
require the approval of at least 66 2/3% of the votes cast by shareholders of
the Company, voting together as a single class, for the following: (i) the
approval of a fundamental change under the Pennsylvania Business Corporation
Law of 1988, as amended ("PBCL"), including amendments of the Articles, a
merger or consolidation of the Company for which shareholder approval is
required by law, share exchanges, the sale or other disposition of all or
substantially all of the assets of the Company, a division of the Company, and
the voluntary dissolution and winding up of the Company ("Fundamental
Transactions"), unless any such Fundamental Transaction is unanimously
approved by all the directors of the Company; and (ii) the amendment of the
Bylaws unless any such amendment is unanimously approved by all the directors
of the Company. The Articles provide that the shareholders may remove any
director, any class of directors or the entire Board of Directors without
cause by the vote of 66 2/3% of the votes cast by shareholders entitled to
vote thereon. The Articles permit shareholder action to be taken by the
written consent of the shareholders entitled to cast the minimum number of
votes that would be necessary to authorize the action at a meeting at which
all shareholders entitled to vote thereon are present and voting.
The Articles provide that the Board of Directors shall consist of five
persons and that the Board shall be divided into three classes of directors,
each class as nearly equal in number as possible, with one class being elected
each year for a three-year term. The classification of the Board helps to
ensure continuity of corporate leadership and policy; however, it also has the
effect of making it more difficult for a person to acquire control of the
Company's Board of Directors because at least two annual meetings are
necessary to effect a change in a majority of the Company's directors.
Further, the Articles provide that the approval of at least four of the
directors is required for Board action.
In the event of a liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after the payment of all liabilities of the Company and subject to
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<PAGE>
the liquidation preferences of any outstanding Preferred Stock. The Common
Stock does not carry preemptive rights, is not redeemable, does not have any
conversion rights, is not subject to further calls and is not subject to any
sinking fund provisions. The outstanding shares of Common Stock are and the
shares offered by the Company in this offering will be, when issued and paid
for, fully paid and nonassessable. Except in certain circumstances as
discussed below under "Certain Provisions Affecting Control of the Company,"
the Common Stock is not subject to discriminatory provisions based on
ownership thresholds.
The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future. See "Description of Capital Stock--Preferred Stock."
PREFERRED STOCK
The Company is authorized to issue up to 20,000,000 shares of Preferred
Stock. The Board of Directors is authorized, subject to any limitations
prescribed by law, without further shareholder approval, to issue such shares
of Preferred Stock in one or more series, with such rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be established by the Board of Directors at the time of issuance.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock. For example, the issuance of
shares of Preferred Stock could result in securities outstanding that would
have preference over the Common Stock with respect to dividends and in
liquidation and that could (upon conversion or otherwise) enjoy all of the
rights of the Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by third persons to obtain
control of the Company through merger, tender offer, proxy or consent
solicitation or otherwise, by making such attempts more difficult to achieve
or more costly. The Board of Directors may issue Preferred Stock without
shareholder approval and with voting rights that could adversely affect the
voting power of holders of Common Stock. There are no agreements or
understandings for the issuance of Preferred Stock, and the Company has no
plans to issue any shares of Preferred Stock. See "Risk Factors-- Possible
Issuances of Preferred Stock."
CERTAIN PROVISIONS AFFECTING CONTROL OF THE COMPANY
General. Certain provisions of the Company's Articles and the PBCL operate
with respect to extraordinary corporate transactions, such as mergers,
reorganizations, tender offers, sales or transfers of substantially all of the
Company's assets or the liquidation of the Company, and could have the effect
of delaying or making more difficult a change in control of the Company in
certain circumstances.
Certain Provisions of the Articles. The Articles provide, among other
things, that Fundamental Transactions and Bylaw amendments must be approved by
at least 66 2/3% of the votes cast by shareholders of the Company, unless the
transaction or amendment is unanimously approved by all of the directors of
the Company. This provision is intended to require that Fundamental
Transactions and Bylaw amendments have either the unanimous mandate of the
Company's Board of Directors, who are statutorily charged in the first
instance with managing the business and affairs of the corporation, or the
support of a substantial percentage of the corporation's shareholders. This
provision, however, makes it more difficult to obtain approval of a
Fundamental Transaction that is approved by a majority but not all of the
directors. Further, the holders of 33 1/3% or more of the shares cast on a
Fundamental Transaction can effectively block the transaction by voting
against it. Upon completion of this offering, each of Messrs. Wadhwani and
Trivedi will beneficially own in excess of 33 1/3% of the Company's Common
Stock. As a result of this provision, a Fundamental Transaction or Bylaw
amendment that is supported by the holders of a majority of the Company's
directors and by a majority of the outstanding voting shares of the Company
may not be approved.
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<PAGE>
Certain Provisions of the PBCL. The Company is governed by a set of
interrelated provisions of the PBCL which are designed to support the validity
of actions taken by the Board of Directors in response to takeover bids,
including specifically the Board's authority to "accept, reject or take no
action" with respect to a takeover bid, and permitting the unfavorable
disparate treatment of a takeover bidder. Another provision of the PBCL gives
the directors broad discretion in considering the best interests of the
corporation, including a provision which permits the Board, in taking any
action, to consider various corporate interests, including employees,
suppliers, clients and communities in which the corporation is located, the
short and long-term interests of the corporation, and the resources, intent
and conduct of any person seeking to acquire control of the corporation. These
provisions may have the effect of making more difficult and thereby
discouraging attempts to acquire control of the Company in a transaction that
the Board determines not to be in the best interests of the Company.
The Company has elected to opt-out of certain antitakeover provisions of the
PBCL, including: (i) provisions which prohibit certain business combinations
(as defined in the PBCL) involving a corporation that has voting shares
registered under the Exchange Act and an "interested shareholder" (generally
defined to include a person who beneficially owns shares representing at least
20% of the votes that all shareholders would be entitled to cast in an
election of directors of the corporation) unless certain conditions are
satisfied or an exemption is applicable; (ii) provisions concerning a
"control-share acquisition" in which the voting rights of certain shareholders
of the corporation (specifically, a shareholder who acquires 20%, 33 1/3% or
50% or more of the voting power of the corporation) are conditioned upon the
consent of a majority vote at a meeting of the independent shareholders of the
corporation after disclosure by such shareholder of certain information, and
with respect to which such shareholder is effectively deprived of voting
rights if consent is not obtained; (iii) provisions pursuant to which any
profit realized by a "controlling person or group," generally defined as a 20%
beneficial owner, from the disposition of any equity securities within twenty-
four months prior to, and eighteen months succeeding, the acquisition of such
control is recoverable by the corporation; (iv) provisions pursuant to which
severance payments are to be made by the corporation to any eligible employee
of a covered corporation whose employment is terminated, other than for
willful misconduct, within ninety days before, or twenty-four months after, a
control-share acquisition; and (v) provisions pursuant to which any holder of
voting shares of a registered corporation who objects to a "control
transaction" (generally defined as the acquisition by a person or group (the
"controlling person or group") that would entitle the holders thereof to cast
at least 20% of the votes that all shareholders would be entitled to cast in
an election of the directors of the corporation) is entitled to make a written
demand on the controlling person or group for payment of the fair value of the
voting shares of the corporation held by the shareholder. Given the ownership
structure of the Company after this offering, the Company's Board of Directors
believed that there was a risk that one or more of these provisions could be
inadvertently triggered by the normal activities of the Company and its
principal shareholders and that, therefore, it was in the best interests of
the Company to opt-out of these provisions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 21,600,000 shares of
Common Stock outstanding. See "Capitalization." Of these shares, the 4,800,000
shares sold in this offering will be freely tradable without restriction or
further registration under the Securities Act, except that any shares
purchased by "affiliates" of the Company, as that term is defined under the
Securities Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below. The remaining 16,800,000 shares
of Common Stock are restricted securities (the "Restricted Shares") within the
meaning of Rule 144 under the Securities Act, and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemption offered by Rule 144.
The Company's current shareholders have agreed not to sell or otherwise
dispose of any of their shares of Common Stock for a period of 180 days after
the effective date of this offering (the "Lock-Up Period") without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ"). Because of these restrictions, on the date of this Prospectus, none
of the shares, other than the 4,800,000 shares offered hereby, will be
eligible for sale. Beginning after the expiration of the Lock-Up Period (or
earlier upon the prior written consent of DLJ), all of the Restricted Shares
may be sold in the public market subject to Rule 144 under the Securities Act,
except for 2,667,392 shares held in family trusts established by Messrs.
Wadhwani and Trivedi which may not be sold prior to November 30, 1998 pursuant
to the terms of a shareholders agreement with the Company.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least two
years, including a person who may be deemed an Affiliate of the Company, may
sell within any three-month period a number of shares of Common Stock that
does not exceed the greater of 1% of the then outstanding shares of Common
Stock of the Company (216,000 shares after giving effect to this offering) or
the average weekly trading volume of the Common Stock as reported through the
Nasdaq National Market during the four calendar weeks preceding such sale.
Sales under Rule 144 of the Securities Act are subject to certain restrictions
relating to manner of sale, notice and the availability of current public
information about the Company. In addition, under Rule 144(k) of the
Securities Act, a person who is not an Affiliate of the Company at any time 90
days preceding a sale, and who has beneficially owned shares for at least
three years, would be entitled to sell such shares immediately following this
offering without regard to the volume limitations, manner of sale provisions
or notice or other requirements of Rule 144. The Commission has proposed to
amend the holding period required by Rule 144 to permit sales of "restricted"
securities after one year rather than two years (and two years rather than
three years for "non-affiliates" under Rule 144(k)).
REGISTRATION RIGHTS
The Company has entered into a Shareholders Agreement with Sunil Wadhwani
and Ashok Trivedi, pursuant to which the Company has granted them certain
registration rights. Pursuant to the Shareholders Agreement, at any time
beginning two years after the completion of this offering, Messrs. Wadhwani
and Trivedi (and certain transferees including members of their families and
trusts and other entities controlled by them) each have the right, subject to
certain restrictions set forth in the Shareholders Agreement, to require the
Company to register under the Securities Act the Common Stock owned by such
holders on the date of this offering at the Company's expense on no more than
two occasions. The Company is be obligated to use its best efforts to qualify
for registration of securities on Form S-3 under the Securities Act. After the
Company has qualified for the use of Form S-3, Messrs. Wadhwani and Trivedi
have the right to an unlimited number of registrations on such form; the
Company is not, however, required to effect a registration on a Form S-3 more
than once in any six-month period. Also pursuant to the Shareholders
Agreement, if, at any time following this offering, subject to the lock-up
agreements entered into by Messrs. Wadhwani and Trivedi, the Company proposes
to register any of its Common Stock under the Securities Act for sale to the
public, Messrs. Wadhwani and Trivedi will have unlimited piggyback
registration rights at the Company's expense, subject to certain restrictions
set forth in the Shareholders Agreement. In addition, the Company agrees to
indemnify Wadhwani and Trivedi against certain
44
<PAGE>
liabilities, including liabilities under the Securities Act, that they may
incur in connection with this offering and in connection with any offering
governed by the Shareholders Agreement. The registration rights to be granted
to Messrs. Wadhwani and Trivedi under the Shareholders Agreement are not
exclusive and the Company could determine to register shares owned by Messrs.
Wadhwani and Trivedi other than pursuant to the Shareholders Agreement.
The Company intends to register on a registration statement on Form S-8,
approximately 90 days after the date of this Prospectus, a total of 2,160,000
shares of Common Stock reserved for issuance under the Company's Stock
Incentive Plan and up to 109,200 shares of Common Stock which may be issued to
Steven Shangold as compensation pursuant to the terms of the Company's
agreement with Mr. Shangold. See "Management--Employment Agreements."
Prior to this offering there has been no market for the Common Stock of the
Company. The Company can make no prediction as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares for sale
will have on the market price prevailing from time to time. Nevertheless, sales
of significant numbers of shares of the Common Stock in the public market,
could adversely affect the market price of the Common Stock and could impair
the Company's future ability to raise capital through an offering of its equity
securities. See "Risk Factors--Shares Eligible for Future Sale."
45
<PAGE>
UNDERWRITING
Subject to certain terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Donaldson, Lufkin &
Jenrette Securities Corporation, Cowen & Company, Montgomery Securities and
Parker/Hunter Incorporated are acting as Representatives, have severally
agreed to purchase from the Company and the Selling Shareholders, and the
Company and the Selling Shareholders have agreed severally to sell to each of
the Underwriters, the number of shares of Common Stock (the "Shares") set
forth opposite their respective names at the initial public offering price per
share less the underwriting discounts and commissions set forth on the cover
of this Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
Cowen & Company.......................................................
Montgomery Securities.................................................
Parker/Hunter Incorporated............................................
---------
Total............................................................... 4,800,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase the Shares are subject to approval of certain legal
matters by their counsel and to certain other conditions. If any of the Shares
are purchased by the Underwriters pursuant to the Underwriting Agreement, the
Underwriters are obligated to purchase all Shares (other than those covered by
the over-allotment option described below).
The Company and the Selling Shareholders have been advised by the
Underwriters that they propose to offer the Shares to the public initially at
the price to the public set forth on the cover page of this Prospectus and to
certain dealers at such price, less a concession not in excess of $ per
Share. The Underwriters may allow, and such dealers may re-allow, a concession
not in excess of $ per Share to certain other dealers. After this
offering, the offering price and other selling terms may be changed by the
Underwriters.
Pursuant to the Underwriting Agreement, the Selling Shareholders have
granted to the Underwriters an option, exercisable not later than 30 calendar
days from the date of the Underwriting Agreement, to purchase up to an
aggregate of 720,000 additional shares at the initial offering price set forth
on the cover page of this Prospectus, less the underwriting discounts and
commissions, solely to cover over-allotments.
To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of the option shares as the number of Shares to be purchased by it
shown in the above table bears to the total number of Shares shown in the
above table, and the Selling Shareholders will be obligated, pursuant to the
option, to sell such Shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the Shares. If purchased, the Underwriters will sell such additional 720,000
shares on the same terms as those on which the Shares are being offered.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act.
The Company, the Selling Shareholders and the executive officers and
directors of the Company have each agreed that during the Lock-Up Period they
will not, without the prior written consent of DLJ, sell, offer to sell,
contract to sell, grant any option to purchase or otherwise dispose of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, other than the Shares, except that the Company
may grant options under its 1996 Stock Incentive Plan, provided that, without
the prior written consent of DLJ, such options shall not be exercisable during
such period.
46
<PAGE>
The Representatives have informed the Company and the Selling Shareholders
that the Underwriters do not intend to confirm sales to any discretionary
accounts without prior specific written approval of the customer.
Prior to this offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be negotiated among the
Company, the Selling Shareholders and the Representatives. Among the factors
to be considered in determining the initial public offering price of the
Common Stock, in addition to prevailing market conditions, will be the
Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuations of
companies in related businesses.
LEGAL MATTERS
The validity of the issuance of the Common Stock offered hereby and certain
other legal matters in connection with this offering will be passed upon for
the Company by Buchanan Ingersoll Professional Corporation, Pittsburgh,
Pennsylvania. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Sachnoff & Weaver, Ltd., Chicago,
Illinois.
EXPERTS
The Financial Statements included in this Prospectus and the Financial
Statement Schedule included in this Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, to the extent and for
the periods as indicated in their reports with respect thereto, and are
included therein in reliance upon the authority of said firm as experts in
giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement, of which this
Prospectus constitutes a part, on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules to the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement and the exhibits and schedules filed as a
part of the Registration Statement. Statements contained in this Prospectus
concerning the contents of any contract or any other document referred to are
not necessarily complete; reference is made in each instance to the copy of
such contract or document filed as an exhibit to the Registration Statement.
Each such statement is qualified in all respects by such reference to such
exhibit.
The Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C., public reference facilities maintained by the Commission in Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional
offices of the Commission: Seven World Trade Center, Room 1400, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street N.W.,
Washington, D.C. 20549, Room 1024, at prescribed rates. The Registration
Statement, including the exhibits and schedules thereto, is also available at
the Commission's site on the World Wide Web at http://www.sec.gov. Copies of
reports, proxy and information statements and other information regarding the
Company are also available at the Commission's Web site.
47
<PAGE>
GLOSSARY
Set forth below are the definitions of certain terms used in this Prospectus:
"Applications" are the computer software programs that perform a desired task,
such as inventory control analysis, cost analysis, accounts receivable and
payable, payroll, shipping and scheduling.
"Client/server" describes the linking, or networking, of two or more computers
to allow multiple users to access and share information. Client/server design
is contrasted with "mainframe" design.
"Conversion" is the process of converting data and applications from one format
to another in connection with an organization's adoption of different, usually
more technologically advanced, hardware or software.
"Distributed computing environments" describes the use of multiple types of
hardware and software applications within an organization, often in multiple
locations.
"Enterprise Resource Planning" packages, such as SAP R/3, Oracle Applications,
Baan Triton and PeopleSoft, are large, integrated applications packages used to
manage information on an enterprise-wide basis.
"Hardware" is the physical computer system on which software applications
operate.
"Information technology" describes the use of computers and software
applications to manage information within an organization.
"Legacy" hardware and applications are information technology systems based on
older technologies.
"Mainframe" describes a large, centralized computer on which an organization
maintains information.
"Migration" is the process of moving applications and data from one computing
environment, such as a mainframe environment, to another, such as a
client/server environment.
"Object-oriented programming" is a type of software design in which various
independently developed software applications are linked together as needed to
achieve the desired programming result.
"Operating system" is the software that controls the allocation of computer
resources to various software applications in order to maximize the efficiency
of those resources.
"Software" is the code that directs computer hardware to manipulate other
software or data in a desired way.
"Year 2000" refers to the software problems resulting from the date change on
December 31, 1999 to the year 2000. Many software applications must be modified
in order to operate properly after this date.
48
<PAGE>
MASTECH CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September
30, 1996.................................................................. F-3
Consolidated Income Statements for the years ended December 31, 1993, 1994
and 1995 and for the nine-month periods ended September 30, 1995
(unaudited) and 1996...................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1993, 1994 and 1995 and the nine-month period ended
September 30, 1996........................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and the nine-month periods ended September 30, 1995
(unaudited) and 1996...................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mastech Corporation:
We have audited the accompanying consolidated balance sheets of Mastech
Corporation (a Pennsylvania corporation, formerly Mastech Systems Corporation)
and subsidiaries as of December 31, 1994 and 1995 and September 30, 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, 1995 and
the nine-month period ended September 30, 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, 1994 and 1995 and September 30, 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1995 and the nine-month period ended
September 30, 1996, in conformity with generally accepted accounting
principles.
Pittsburgh, Pennsylvania,
October 31, 1996
(except for the matters discussed in
Note 9 for which the date is
December 16, 1996)
Arthur Andersen LLP
F-2
<PAGE>
MASTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30,
---------------- SEPTEMBER 30, 1996 (NOTE 10)
1994 1995 1996 (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.......................... $ 4,100 $ 2,947 $ 668 $ 668
Accounts receivable, net of
allowance for uncollectible
accounts (Note 7)............ 16,300 19,146 22,809 22,809
Unbilled receivables.......... 807 1,504 517 517
Advances--
Affiliates................... -- 593 1,124 1,124
Other........................ 969 370 536 536
Prepaid and other expenses.... 63 421 181 181
------- ------- ------- -------
Total current assets...... 22,239 24,981 25,835 25,835
------- ------- ------- -------
Equipment and leasehold
improvements, at cost:
Equipment..................... 660 995 1,450 1,450
Leasehold improvements........ 118 146 168 168
------- ------- ------- -------
778 1,141 1,618 1,618
Less--Accumulated
depreciation................. (352) (516) (618) (618)
------- ------- ------- -------
Net equipment and leasehold
improvements............... 426 625 1,000 1,000
------- ------- ------- -------
Total assets.............. $22,665 $25,606 $26,835 $26,835
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Revolving credit facility
(Note 3)..................... $ -- $ -- $ 1,000 $ 5,000
Accounts payable.............. 2,082 1,432 3,312 3,312
Accounts payable to
affiliates................... 36 16 16 16
Accrued payroll and related
costs........................ 6,153 7,820 8,255 8,255
Other accrued liabilities..... 267 717 816 816
Deferred income taxes......... -- -- -- 4,700
------- ------- ------- -------
Total current liabilities. 8,538 9,985 13,399 22,099
------- ------- ------- -------
Minority interest............... 26 54 63 63
Commitments and contingencies
(Note 5)
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
shares issued and
outstanding................. 182 182 182 182
Additional paid-in capital.... 11 11 11 11
Retained earnings............. 13,909 15,375 13,212 4,512
Currency translation
adjustment................... (1) (1) (32) (32)
------- ------- ------- -------
Total shareholders'
equity................... 14,101 15,567 13,373 4,673
------- ------- ------- -------
Total liabilities and
shareholders' equity..... $22,665 $25,606 $26,835 $26,835
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MASTECH CORPORATION
CONSOLIDATED INCOME STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues....................... $38,709 $70,050 $103,676 $76,156 $90,336
Cost of revenues............... 26,136 50,018 72,516 53,708 65,772
------- ------- -------- ------- -------
Gross profit................... 12,573 20,032 31,160 22,448 24,564
Selling, general and
administrative (Note 6)....... 9,829 8,704 12,843 8,868 14,175
------- ------- -------- ------- -------
Income from operations......... 2,744 11,328 18,317 13,580 10,389
Interest income (expense), net. 9 71 163 128 2
Minority interest in net loss
(income) of subsidiaries...... (29) 26 (27) (38) (9)
------- ------- -------- ------- -------
Net income..................... $ 2,724 $11,425 $ 18,453 $13,670 $10,382
======= ======= ======== ======= =======
<CAPTION>
PRO FORMA INFORMATION--(UNAUDITED)
----------------------------------------------
(NOTE 10)
<S> <C> <C> <C> <C> <C>
Net income..................... $ 2,724 $11,425 $ 18,453 $13,670 $10,382
Pro forma income taxes......... 1,090 4,570 7,381 5,468 4,153
------- ------- -------- ------- -------
Pro forma net income........... $ 1,634 $ 6,855 $ 11,072 $ 8,202 $ 6,229
======= ======= ======== ======= =======
Pro forma net income per common
share......................... $ 0.09 $ 0.38 $ 0.61 $ 0.45 $ 0.33
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MASTECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CURRENCY TOTAL
-------------------- PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS ADJUSTMENT EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992.................... 18,200,000 $182 $11 $ 4,452 $(19) $ 4,626
Net income............ -- -- -- 2,724 -- 2,724
Dividends paid........ -- -- -- (1,500) -- (1,500)
Currency translation
adjustment............ -- -- -- -- (20) (20)
---------- ---- --- -------- ---- --------
Balance, December 31,
1993.................... 18,200,000 182 11 5,676 (39) 5,830
Net income............ -- -- -- 11,425 -- 11,425
Dividends paid........ -- -- -- (3,192) -- (3,192)
Currency translation
adjustment............ -- -- -- -- 38 38
---------- ---- --- -------- ---- --------
Balance, December 31,
1994.................... 18,200,000 182 11 13,909 (1) 14,101
Net income............ -- -- -- 18,453 -- 18,453
Dividends paid........ -- -- -- (16,987) -- (16,987)
Currency translation
adjustment............ -- -- -- -- -- --
---------- ---- --- -------- ---- --------
Balance, December 31,
1995.................... 18,200,000 182 11 15,375 (1) 15,567
Net income............ -- -- -- 10,382 -- 10,382
Dividends paid........ -- -- -- (12,545) -- (12,545)
Currency translation
adjustment............ -- -- -- -- (31) (31)
---------- ---- --- -------- ---- --------
Balance, September 30,
1996.................... 18,200,000 $182 $11 $ 13,212 $(32) $ 13,373
========== ==== === ======== ==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MASTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- --------------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash was provided by (used
for)
Operations:
Net income................. $ 2,724 $11,425 $ 18,453 $13,670 $ 10,382
Adjustments to reconcile
net income to cash
provided by operations:
Depreciation............. 93 131 164 109 167
Provision for
uncollectible accounts.. -- 150 302 276 474
Minority interest........ 29 (26) 27 38 9
Working capital items:
Accounts receivable...... (4,250) (8,402) (3,845) (3,884) (3,150)
Advances................. (155) (679) 6 60 (697)
Prepaid and other
expenses................ (24) 4 (358) (256) 240
Accounts payable......... 840 685 (670) 75 1,880
Accrued and other current
liabilities............. 4,694 1,274 2,118 2,237 534
------- ------- -------- ------- --------
Total provided by
operations............ 3,951 4,562 16,197 12,325 9,839
------- ------- -------- ------- --------
Investing activities:
Additions to equipment and
leasehold improvements.... (98) (163) (363) (237) (569)
Change in other assets..... 46 (4) -- -- --
------- ------- -------- ------- --------
Total used for
investing activities.. (52) (167) (363) (237) (569)
------- ------- -------- ------- --------
Financing activities:
Net change in revolving
credit facility........... -- -- -- -- 1,000
Dividends paid............. (1,500) (3,192) (16,987) (14,256) (12,545)
------- ------- -------- ------- --------
Total used for
financing activities.. (1,500) (3,192) (16,987) (14,256) (11,545)
------- ------- -------- ------- --------
Effect of currency
translation on cash.......... (1) -- -- (2) (4)
Net increase (decrease) in
cash......................... 2,398 1,203 (1,153) (2,170) (2,279)
Cash, beginning of period.... 499 2,897 4,100 4,100 2,947
------- ------- -------- ------- --------
Cash, end of period.......... $ 2,897 $ 4,100 $ 2,947 $ 1,930 $ 668
======= ======= ======== ======= ========
Supplemental data:
Cash payments for interest. $12 $10 $3 $3 $58
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
1.OPERATIONS:
Mastech Corporation ("Mastech" or the "Company") 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.
All of the Company's outstanding common stock is owned directly or
indirectly by the Company's Chairman and its President. Effective with or
immediately prior to the initial public offering of the Company's common
stock, SWAT Systems Corporation, a company 100% owned by Mastech's
shareholders, will be merged into Mastech. SWAT Systems Corporation holds a
79% interest in Scott Systems Private Ltd., an Indian Corporation. The Company
remits fees for consulting and recruiting services provided by Scott. 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.
The Risk Factors on pages 6 to 12 of this registration statement are
incorporated herein by reference.
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 majority-owned subsidiaries. All material intercompany transactions
and balances have been eliminated in consolidation.
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.
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 income 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.
F-7
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
The Company has elected Subchapter S Corporation status for income tax
purposes. Accordingly, the income of the Company is reported on the individual
income tax returns of its shareholders. Certain events, including the public
offering of the Company's Common Stock, will automatically terminate its S
Corporation status, thereby subjecting future 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" will result in
the recognition of deferred tax liabilities (and a corresponding one-time
charge to expense) in the period in which the initial public offering occurs.
If the S Corporation status had been terminated as of September 30, 1996, this
liability would have been approximately $4.7 million.
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 September 30, 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.
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 $498,000, $1,195,000, $2,005,000, $1,307,000 and
$699,000 for the years ended December 31, 1993, 1994 and 1995 and the nine
months ended September 30, 1995 and 1996, respectively. Estimated claims
incurred but not reported were $195,000, $500,000 and $400,000 as of December
1994 and 1995 and September 30, 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.
Accounting for Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation, was issued in October 1995. The Company will be required
to adopt the new standard no later than fiscal 1996, although early adoption
is permitted. This standard establishes the fair value based method (the "FAS
123 Method") rather than the intrinsic value based method as the preferred
accounting methodology for stock-based compensation arrangements. Entities are
allowed to: (i) continue to use the intrinsic value based methodology in their
basic financial statements and provide in the footnotes pro forma net income
and earnings per share information as if the FAS 123 Method had been adopted;
or (ii) adopt the FAS 123 Method. The Company plans to adopt this statement by
providing the required pro forma disclosures in the footnotes, if applicable.
F-8
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain prior-year balances have been reclassified to conform to the current
period presentation.
3.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
$15,000,000, bear interest at LIBOR as defined, plus 1 1/2% (7.50%, 7.22% and
6.90% at December 31, 1994 and 1995 and September 30, 1996, respectively) or
the prime rate (8.50%, 8.50% and 8.25% at December 31, 1994 and 1995 and
September 30, 1996, respectively) and are payable upon demand. There were no
borrowings under this arrangement during the year ended December 31, 1995.
Borrowings of $1,000,000, with interest at 8.25%, were outstanding as of
September 30, 1996. Average outstanding borrowings under this arrangement were
$141,781, $185,385 and $1,254,745 for the years ended December 31, 1993 and
1994 and the nine months ended September 30, 1996, respectively.
4.RELATED PARTY TRANSACTIONS:
The shareholders lease residential properties to the Company under lease
agreements which extend through 1996. Payments in accordance with these
arrangements were approximately $36,000, $36,000, $36,000, $27,000 and $9,000
for the years ended December 31, 1993, 1994 and 1995 and the nine months ended
September 30, 1995 and 1996, respectively. The Company terminated these leases
in the second quarter of 1996.
The Company remits fees for software consulting services provided by
affiliated entities in which the Company's shareholders own a majority
interest. Fees for these services were approximately $-0-, $153,000, $205,000,
$-0- and $735,000 for the years ended December 31, 1993, 1994 and 1995 and the
nine months ended September 30, 1995 and 1996, respectively.
The terms of related party transactions are determined by periodic
negotiations. The above transactions were at prices and terms believed to be
equivalent to those available from unrelated parties.
The Company has loans outstanding from the Company's shareholders of $16,000
as of December 31, 1994 and 1995 and September 30, 1996. These loans are
included in accounts payable to affiliates in the consolidated balance sheets.
5.COMMITMENTS AND CONTINGENCIES:
The Company rents certain office facilities and equipment under
noncancelable operating leases which provide for the following future minimum
rental payments as of September 30, 1996:
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31 AMOUNT
<S> <C>
1996 $ 171,000
1997 500,000
1998 447,000
1999 408,000
2000 165,000
Thereafter --
----------
Total $1,691,000
==========
</TABLE>
Rental expense was approximately $151,000, $179,000, $301,000, $209,000 and
$558,000 for the years ended December 31, 1993, 1994 and 1995 and the nine
months ended September 30, 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.
F-9
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6.REVENUE AGENT ASSESSMENT:
During 1993, the Internal Revenue Service completed an employment tax review
resulting in the assessment of withholding taxes on certain employee expenses
paid by Mastech which were determined by the Internal Revenue Service to
represent compensation.
The Revenue Agent Review assessment (the "Assessment") was approximately
$2.9 million, representing federal income tax, federal unemployment tax and
FICA due on employee earnings for fiscal years 1991 and 1992 and taxes that
would have been withheld on 1993 compensation. This Assessment is included in
selling, general and administrative expenses in the accompanying 1993
consolidated income statement. The Assessment was paid in full in 1994. No
interest or penalties were assessed.
7.MAJOR CLIENTS AND CONCENTRATION OF CREDIT:
One client accounted for 10% of revenues in 1993. No single client accounted
for more than 10% of revenues in 1994, 1995 and the nine months ended
September 30, 1996.
The Company grants 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 $300,000,
$500,000 and $850,000 as of December 31, 1994 and 1995 and September 30, 1996,
respectively.
8.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.
9.SUBSEQUENT EVENTS:
In connection with the proposed initial public offering by the Company,
subsequent to September 30, 1996, the following transactions are anticipated
to occur:
(i) merger of SWAT Systems Corporation into the Company as described in
Note 1;
(ii) termination of the Company's S Corporation status as described in Note
2. In connection with the termination of S Corporation status the
Company will be required to record a deferred tax liability with a
corresponding one-time tax provision in accordance with SFAS No. 109;
(iii) Mastech Systems Corporation, which is the entity through which the
business of the Company has been conducted since its inception in
July 1986, will become an indirect, wholly-owned subsidiary of the
Company, which is a newly-formed Pennsylvania corporation;
(iv) a 72.8-for-1 stock split effected as a stock dividend;
(v) an increase in the authorized capital stock to 100,000,000 shares of
Common Stock and 20,000,000 shares of Preferred Stock; and
(vi) issuance, immediately following the initial public offering, of 54,600
shares of restricted Common Stock under an employment agreement. In
connection with this issuance, the Company will incur an expense of
$819,000 in the period in which the closing of this offering occurs.
Accordingly, the Company's shareholders' equity accounts and the number of
shares in the accompanying Consolidated Financial Statements have been
retroactively restated to give effect to the stock split and increase in
authorized capital stock.
F-10
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10.PRO FORMA INFORMATION (UNAUDITED):
The pro forma consolidated balance sheet as of September 30, 1996 reflects
an anticipated S Corporation dividend, estimated to be approximately $4.0
million, and the recording of a deferred tax liability as discussed in Note 2.
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. Pro forma earnings per share
were calculated by dividing pro forma net income by the weighted average
shares outstanding for each period. The weighted average outstanding shares
used to calculate the pro forma earnings per share reflect 54,600 shares of
Common Stock to be issued upon completion of the Company's initial public
offering as discussed in Note 9. The weighted average outstanding shares used
to calculate pro forma earnings per share for the nine months ended September
30, 1996 also reflects 410,867 common shares, representing the number of
shares which, when multiplied by the offering price, would have been
sufficient to replace the capital in excess of earnings withdrawn as dividends
(including the anticipated S Corporation dividend discussed above) during the
period.
11.QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C> <C>
1995
Net sales................................ $24,107 $25,153 $26,896 $27,520
Gross profit............................. 7,209 7,661 7,578 8,712
Income from operations................... 4,528 4,691 4,361 4,737
Net income............................... $ 4,563 $ 4,723 $ 4,384 $ 4,783
======= ======= ======= =======
Pro forma net income..................... $ 2,738 $ 2,834 $ 2,630 $ 2,870
======= ======= ======= =======
Pro forma net income per share........... $ 0.15 $ 0.16 $ 0.14 $ 0.16
======= ======= ======= =======
1996
Net sales................................ $28,595 $30,804 $30,937
Gross profit............................. 7,928 8,933 7,703
Income from operations................... 3,326 4,312 2,751
Net income............................... $ 3,346 $ 4,342 $ 2,694
======= ======= =======
Pro forma net income..................... $ 2,008 $ 2,605 $ 1,616
======= ======= =======
Pro forma net income per share........... $ 0.11 $ 0.14 $ 0.09
======= ======= =======
</TABLE>
F-11
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OF-
FER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANYTIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 12
Use of Proceeds........................................................... 13
S Corporation Dividend.................................................... 13
Dividend Policy........................................................... 13
Capitalization............................................................ 14
Dilution.................................................................. 15
Selected Financial Data................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 22
Management................................................................ 33
Certain Transactions...................................................... 38
Principal and Selling Shareholders........................................ 40
Description of Capital Stock.............................................. 41
Shares Eligible for Future Sale........................................... 44
Underwriting.............................................................. 46
Legal Matters............................................................. 47
Experts................................................................... 47
Additional Information.................................................... 47
Glossary.................................................................. 48
Index to Consolidated Financial Statements................................ F-1
</TABLE>
----------------
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,800,000 SHARES
[LOGO OF MASTECH COMPANY]
COMMON STOCK
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
COWEN & COMPANY
MONTGOMERY SECURITIES
PARKER/HUNTER
INCORPORATED
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be incurred in connection with the offering
described in this Registration Statement are:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 34,569
NASD filing fee................................................. 11,908
Nasdaq listing fee.............................................. 49,000
Printing and engraving expenses................................. 350,000
Legal fees and expenses......................................... 300,000
Accounting fees and expenses.................................... 200,000
Blue Sky fees and expenses (including legal fees)............... 10,000
Transfer agent and registrar fees and expenses.................. 5,000
Miscellaneous................................................... 39,523
----------
Total......................................................... $1,000,000
==========
</TABLE>
All of the above expenses will be paid by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law
("PBCL") provides in general that a corporation may indemnify any person,
including its directors, officers and employees, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or proceeding, whether civil, criminal, administrative or investigative
(including actions by or in the right of the corporation) by reason of the
fact that he or she is or was a representative of or serving at the request of
the corporation, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
or her in connection with the action or proceeding if he or she is determined
by the board or directors, or in certain circumstances by independent legal
counsel or the shareholders, to have acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal proceeding, had no reason
believe his or her conduct was unlawful. In the case of actions by or in the
right of the corporation, indemnification is not permitted in respect of any
claim, issue or matter as to which the person has been adjudged to be liable
to the corporation except to the extent a court determines that the person is
fairly and reasonably entitled to indemnification. In any case, to the extent
that the person has been successful on the merits or otherwise in defense of
any claim, issue or matter, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith. Subchapter D of Chapter 17 also provides that the
indemnification permitted or required thereby is not exclusive of any other
rights to which a person seeking indemnification may be entitled.
Article 10 of the Company's Articles of Incorporation provides that the
Company shall indemnify and hold harmless to the full extent not prohibited by
law, as the same exists or may be amended, interpreted or implemented (but, in
the case of any amendment, only to the extent that such amendment permits the
Company to provide broader indemnification rights than the Company is
permitted to provide prior to such amendment), each person who was or is made
a party or is threatened to be made a party to or is otherwise involved in (as
witness or otherwise) any threatened, pending or completed action, suit, or
proceeding, whether civil, criminal, administrative or investigative and
whether or not by or in the right of the Company or otherwise (hereinafter, a
"proceeding"), by reason of the fact that he or she, or a person of whom he or
she is the heir, executor or administrator, is or was a director or executive
officer of the Company or is or was serving at the request of the Company as a
director, officer or trustee of another corporation or of a partnership, joint
venture, trust or other
II-1
<PAGE>
enterprise (including without limitation service with respect to employee
benefit plans), or where the basis of such proceeding is any alleged action or
failure to take any action by such person while acting in an official capacity
as a director or executive officer of the Company, or in any other capacity on
behalf of the Company while such person is or was serving as a director or
executive officer of the Company, against all expenses, liability and loss,
including but not limited to attorney's fees, judgments, fines, excise taxes
or penalties and amounts paid or to be paid in settlement (whether with or
without court approval), actually and reasonably incurred or paid by such
person in connection therewith. The right to indemnification is a contract
right and includes the right to be paid by the Company the expenses incurred
in defending any such proceeding (or part thereof) or in enforcing his or her
rights to indemnification in advance of the final disposition thereof promptly
after receipt by the Company of a request therefor stating in reasonable
detail the expenses incurred; provided, however, that to the extent required
by law, the payment of such expenses incurred by a director or executive
officer of the Company in advance of the final disposition of a proceeding
shall be made only upon receipt of an undertaking, by or on behalf of such
person, to repay all amounts so advanced if and to the extent it shall
ultimately be determined by a court that he or she is not entitled to be
indemnified by the Company.
The Company has entered into employment agreements with Sunil Wadhwani and
Ashok Trivedi, Co-Chairman and Chief Executive Officer and Co-Chairman and
President, respectively, which entitle them to be indemnified in their
capacities as directors, officers and controlling shareholders of the Company
to the full extent not prohibited by law. The Company also has entered into a
Shareholders Agreement with Messrs. Wadhwani and Trivedi pursuant to which the
Company agrees to indemnify them against certain liabilities, including
liabilities under the securities laws, that they may incur in connection with
the offering contemplated by the Registration Statement and any offering
effected pursuant to their registration rights under the Shareholders
Agreement.
The Articles of the Company also provide pursuant to Section 1713 of the
PBCL that a director of Mastech shall not be personally liable for monetary
damages as such for any action taken, or any failure to take any action,
unless: (1) the director has breached or failed to perform the duties of
his/her office under Section 1712 of the PBCL (relating to standard of conduct
and justifiable reliance); and (2) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. This limitation
on the personal liability of directors of Company does not apply to: (1) the
responsibility or liability of a director pursuant to any criminal statute; or
(2) the liability of a director for the payment of taxes pursuant to local,
state or Federal law.
The Company also intends to purchase insurance insuring its directors and
officers against certain liabilities which they might incur as directors or
officers of the Company or of any other organization which they serve at its
request, including certain liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act:
1. In November 1996, the Company issued 250,000 shares of Common Stock to
the shareholders of the Company referenced in the within prospectus in
connection with the initial capitalization of the Company. The total
consideration for such shares was $2,500.
2. In October 1996, Mastech Systems Corporation entered into an agreement,
as amended in November 1996 to be applicable to the Company, pursuant to which
it agreed to compensate one of its executive officers in the form of an
issuance of restricted stock of the Company which vests over a period of two
years. In addition, pursuant to this agreement the executive may elect to
receive certain compensation for past services in the form of cash or shares,
the payment of which shall be made promptly following the closing of this
offering.
3. A 72.8-for-1 stock split of the Common Stock to be effective prior to the
closing of the offering.
The sale and issuance of the shares were exempt from registration by virtue
of Sections 3(a), 3(b) and 4(2) of the Securities Act and in reliance upon
Rule 701 promulgated thereunder.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS: UNLESS OTHERWISE INDICATED, ALL EXHIBITS WERE FILED WITH THE
REGISTRATION STATEMENT ON FORM S-1 DATED OCTOBER 15, 1996.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Articles of Incorporation of the Company.
3.2 -- Bylaws of the Company.
4.1 -- Specimen stock certificate representing the Common Stock.
5.1 -- Opinion of Buchanan Ingersoll Professional Corporation.
10.1 -- Form of Employment Agreement by and between the Company and
Sunil Wadhwani and Ashok Trivedi.
10.2 -- 1996 Stock Incentive Plan.
10.3 -- Agreement dated October 14, 1996 between Mastech Systems
Corporation (f/k/a Mastech Corporation) and Steven Shangold,
as amended by Addendum dated as of November 18, 1996.
10.4* -- Form of Employment Agreement by and between the Company and
each of its Executive Officers.
10.5* -- Shareholders Agreement by and among the Company, Sunil
Wadhwani and Ashok Trivedi and the Joinder Agreement by
Grantor Retained Annuity Trusts established by Messrs.
Wadhwani and Trivedi.
10.10 -- Lease Agreement dated January 16, 1995 by and between Mascot
Systems Private Limited and Messrs. Wadhwani and Trivedi for
real estate in Bangalore, India.
10.11 -- Lease Agreement dated November 6, 1996 by and between Mascot
Systems Private Limited and Messrs. Wadhwani and Trivedi for
real estate in Bangalore, India.
10.12 -- Lease Agreement dated April 1, 1996 by and between Scott
Systems Private Limited and Messrs. Wadhwani and Trivedi for
real estate in Bombay, India.
10.13 -- Lease Agreement dated April 1, 1996 by and between Scott
Systems Private Limited and Sunil Wadhwani for real estate in
Bombay, India.
10.14 -- Lease Agreement dated April 1, 1996 by and between Scott
Systems Private Limited and Ashok Trivedi for real estate in
Bombay, India.
10.15 -- Stock Purchase Agreement by and between the Company and
Messrs. Wadhwani and Trivedi for their shares of Mascot
Systems Private Limited.
10.16 -- Agreement and Plan of Merger by and between the Company and
SWAT Systems.
10.17 -- Form of S Corporation Revocation, Tax Allocation and
Indemnification Agreement.
10.18 -- Loan and Security Agreement dated July 1993 between the
Company and PNC Bank, as amended, by amendments dated August
1994, November 1994, June 1995 and June 1996.
10.19 -- Sublease Agreement dated February 10, 1995 by and between
Westinghouse Electric Corporation and the Company for the
Company's Oakdale, PA headquarters, as amended by amendment
dated March 20, 1996.
10.20 -- Form of Shareholders Agreement by and among the Company, Sunil
Wadhwani and Ashok Trivedi.
10.21* -- Form of Capital Contribution Agreement by and among the
Company, Sunil Wadhwani, Ashok Trivedi and their respective
family trusts.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<C> <C> <S>
11.1* -- Statement regarding computation of pro forma net income per share.
23.1* -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Buchanan Ingersoll Professional Corporation (included in
Exhibit 5.1).
24.1 -- Form of Power of Attorney executed by the persons named therein.
27 -- Financial Data Schedule.
</TABLE>
- ---------------------
*Filed herewith.
(B) FINANCIAL STATEMENTS SCHEDULES:
The following financial statement schedule is included in Part II of this
Registration Statement and should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere herein.
II. VALUATION AND QUALIFYING ACCOUNTS
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and (3) that for the
purpose of determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Pittsburgh,
Pennsylvania on December 16, 1996.
MASTECH CORPORATION
/s/ Sunil Wadhwani
By:
---------------------------------
Sunil Wadhwani
Co-Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE(S)
)
Co-Chairman, Chief Executive )
* Officer and Director )
- ------------------------ (Principal Executive )
Sunil Wadhwani Officer) )
)
* Co-Chairman, President and )
- ------------------------ Director ) /s/ Sunil Wadhwani
Ashok Trivedi ) -------------------
) *Sunil Wadhwani
* Vice President--Finance ) For himself and as
- ------------------------ (Principal Accounting ) attorney-in-fact.
Michael Zugay Officer and Principal )
Financial Officer) ) December 16, 1996
)
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULES
We have audited in accordance with generally accepted auditing standards,
the consolidated Financial Statements of Mastech Corporation and subsidiaries
and have issued our report thereon dated October 31, 1996. Our audits were
made for the purpose of forming an opinion on the basic Financial Statements
taken as a whole. The schedule listed in the accompanying index is presented
for purposes of complying with the Securities and Exchange Commission's rules
and regulations and is not part of the basic Financial Statements. This
schedule has been subjected to the auditing procedures applied in the audits
of the basic Financial Statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic Financial Statements taken as a whole.
Arthur Andersen LLP
Pittsburgh, Pennsylvania
October 31, 1996
S-1
<PAGE>
SCHEDULE II
MASTECH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEDUCTIONS--
AMOUNTS
BALANCE AT CHARGED TO DEEMED BALANCE AT
BEGINNING COSTS AND TO BE END OF
PERIOD ENDED DESCRIPTION OF PERIOD EXPENSES UNCOLLECTIBLE PERIOD
<S> <C> <C> <C> <C> <C>
December 31, 1993....... Allowance for uncollectible accounts $283 $ -- $(133) $150
December 31, 1994....... Allowance for uncollectible accounts 150 150 -- 300
December 31, 1995....... Allowance for uncollectible accounts 300 302 (102) 500
September 30, 1996...... Allowance for uncollectible accounts 500 474 (124) 850
</TABLE>
S-2
<PAGE>
EXHIBIT 10.4
AGREEMENT
This Agreement is made as of the latest date indicated below between
Mastech Systems Corporation, a Pennsylvania corporation (hereinafter called the
"Company") and the undersigned employee (hereinafter called the "Employee").
This Agreement is entered into contemporaneously with Employee's receipt of
certain stock options offered by Company which were not previously made
available to Employee.
WHEREAS, Employee is employed by the Company as an at-will employee whose
employment may be terminated by either party with or without reason or cause and
without any liability for such termination;
WHEREAS, this Agreement is necessary for the protection of Company's
legitimate and protectible business interests in its customers, prospective
customers, accounts and confidential, proprietary and trade secret information;
and
WHEREAS, this Agreement is a term and condition of Employee's employment
and is made in consideration for certain stock options offered to Employee
contemporaneously with this Agreement as well as Employee's continued employment
and access to Company's customers, prospective customers, accounts, and
confidential, proprietary and trade secret information.
NOW THEREFORE, for the consideration set forth herein, the receipt and
sufficiency of which is acknowledged by the parties, Company and Employee agree
as follows:
1. DEFINITIONS. As used herein:
-----------
(a) "Company" shall mean Mastech Systems Corporation and any affiliate
of Mastech Systems Corporation, including any direct or indirect parent or
subsidiary of Mastech Systems Corporation, as well as their respective operating
divisions.
(b) "Confidential Information" shall include, but is not necessarily
limited to, any information which may include, in whole or part, information
concerning the Company's accounts, sales, sales volume, sales methods, sales
proposals, customers and prospective customers, prospect lists, identity of
purchasing personnel in the employ of customers and prospective customers,
amount or kind of customer's purchases from the Company, the Company's source of
supply of products and/or personnel, sources of consultants, Company manuals,
formulae, products, processes, methods, machines, compositions, ideas,
improvements, inventions, research, computer programs, system documentation,
software products, patented products, copyrighted information, know how and
operating methods and any other trade secret or proprietary information
belonging to the Company or relating to the Company's affairs that is not public
information.
(c) "Customer(s)" shall mean any individual, corporation, partnership,
business or other entity (i) whose existence and business is known to Employee
as a result of Employee's access to the Company's customer lists or Customer
account information; or (ii) that
<PAGE>
is an entity with whom the Company has contracted or negotiated during the two
(2) year period preceding the termination of Employee's employment.
(d) "Competing Business" shall mean any individual, corporation,
partnership, business or other entity which provides or attempts to provide any
products or services that directly compete with products or services offered by
the Company, i.e., information technology services, including software
applications solutions and services, and which were sold by the Company at any
time and from time to time during the last two (2) years prior to Employee's
termination of employment. Notwithstanding the foregoing, the term Competing
Business does not include a corporation that derives at least $500 million of
its revenues from the sale of information technology services.
2. DUTIES. Employee, who is employed in the position set forth on
------
Schedule A hereof as of the date of this Agreement, agrees to be responsible for
such duties as are commensurate with and required by such position and any other
duties as may be assigned to Employee by Company from time to time. Employee
further agrees to perform his or her duties in a diligent, trustworthy, loyal,
businesslike, productive, and efficient manner and to use Employee's best
efforts to advance the business and goodwill of Company. Employee further
agrees to devote all of his or her business time, skill, energy and attention
exclusively to the business of the Company and to comply with all rules,
regulations and procedures of the Company. During the term of this Agreement,
Employee will not engage in any other business for Employee's own account or
accept any employment from any other business entity, or render any services,
give any advice or serve in a consulting capacity, whether gratuitously or
otherwise, to or for any other person, firm or corporation, other than as a
volunteer for charitable organizations, without the prior written approval of
the Company.
3. COMPENSATION. Employee's annual base salary as of the date of this
------------
Agreement is as set forth on Schedule A hereto. As compensation for Employee's
employment by the Company, the Company will pay the Employee during the period
of employment hereunder such remuneration as is determined to be appropriate by
the Company from time to time in its discretion.
4. BENEFITS. Employee will receive the standard Company benefits
--------
described in the Company Handbook which is incorporated as though fully set
forth in this Agreement and which may be modified at any time by the Company.
5. STOCK OPTIONS. Upon the initial public offering of the Company's
-------------
common stock, Employee shall receive that number of stock options covering the
Company's shares as is set forth on Schedule A hereto. Such options shall be
granted under the Company's Stock Incentive Plan as then in effect and shall be
subject to the Stock Option Agreement evidencing such stock options.
6. POLICIES AND PRACTICES. Employee agrees to abide by all rules,
----------------------
regulations and instruments established by the Company including the policies,
practices and procedures contained in the Company Employee Handbook which
Employee has received and which is incorporated by reference as though fully set
forth herein. The Company reserves the
-2-
<PAGE>
right to disregard the Company Employee Handbook in the event that a particular
portion of the Company Employee Handbook conflicts with this Agreement or is
deemed by the Company to be incompatible with Employee's position in the
Company, and the Company may amend the Handbook from time to time in its sole
discretion.
7. AGREEMENT NOT TO COMPETE. In order to protect the business interest
------------------------
and good will of the Company in respect to customers and accounts, and to
protect Confidential Information, Employee covenants and agrees that for the
entire period of time that this Agreement remains in effect, and for a period of
two (2) years after termination of Employee's employment for any reason he or
she will not:
(a) directly or indirectly contact any Customer of the Company for the
purpose of soliciting such Customer to purchase, lease or license a
product or service that is the same as, similar to, or in competition
with those products and/or services made, rendered, offered or under
development by the Company;
(b) engage in any activity or business as a consultant, independent
contractor, agent, employee, employer, officer, partner, director or
otherwise, alone or in association with any other person, corporation
or other entity, in any Competing Business operating in the United
States of America or any other country where the Company has conducted
business within the two (2) year period prior to the termination of
Employee's employment; provided, however, that this subsection (b)
shall not apply if the Employee is terminated by the Company without
cause after the sale of substantially all of the business or assets of
Mastech Systems Corporation to an unaffiliated third party for fair
value;
(c) directly or indirectly employ, or knowingly permit any company or
business directly or indirectly controlled by Employee to employ, any
person who is employed by the Company at any time during the term of
this Agreement, or in any manner to seek to induce any such person to
leave his or her employment with the Company; or
(d) directly or indirectly interfere with or attempt to disrupt the
relationship, contractual or otherwise, between the Company and any of
its employees or solicit, induce, or attempt to induce employees of
the Company to terminate employment with the Company and become self-
employed or employed with others in the same or similar business or
any product line or service provided by Company.
Employee acknowledges that the Company is engaged in business throughout
the United States as well as in other countries and that the marketplace for the
Company's products and services is worldwide. Employee further covenants and
agrees that the geographic, length of term and types of activities restrictions
(non-competition restrictions) contained in this Agreement are reasonable and
necessary to protect the legitimate business interests of the Company because of
the scope of the Company's business.
-3-
<PAGE>
In the event that a court of competent jurisdiction shall determine that
one or more of the provisions of this Section 7 is so broad as to be
unenforceable, then such provision shall be deemed to be reduced in scope or
length, as the case may be, to the extent required to make this Paragraph
enforceable. If the Employee violates the provisions of this Section 7, the
periods described therein shall be extended by that number of days which equals
the aggregate of all days during which at any time any such violations occurred.
8. NONDISCLOSURE AND NONUSE OF CONFIDENTIAL INFORMATION. The Employee
----------------------------------------------------
covenants and agrees during Employee's employment or any time after the
Termination of such employment, not to communicate or divulge to any person,
firm or corporation, either directly or indirectly, and to hold in strict
confidence for the benefit of the Company, all Confidential Information except
that employee may disclose such Information to persons, firms or corporations
who need to know such Information during the course and within the scope of
Employee's employment. Employee will not use any Confidential Information for
any purpose or for his or her personal benefit other than in the course and
within the scope of Employee's employment.
(a) Work Made For Hire. Employee recognizes and understands that his
------------------
or her duties at Company have included and may continue to include the
preparation of materials, including computer software and other written or
graphic materials, and that any such materials conceived or written by him or
her were done and shall continue to be done as "work made for hire" as defined
and used in the Copyright Act of 1976, 17 USC 1 et seq. In the event of
publication of such materials, Employee understands that since the work is a
"work made for hire," the Company will solely retain and own all rights in all
such materials, including the right to copyright.
(b) Disclosure of Discoveries, Ideas and Inventions. Employee
-----------------------------------------------
represents that he does not have any right, title or interest in, nor has he
made or conceived wholly or in part prior to the commencement of his employment
by the Company any discovery, idea and invention.
(c) Disclosure of Other Discoveries, Ideas and Inventions/Assignment
----------------------------------------------------------------
of Patents. Employee shall disclose promptly to the Company, any and all works,
- ----------
inventions, discoveries and improvements authored, conceived or made by Employee
during the period of employment and related to the business or activities of the
Company, solely or jointly with others, which is related to the lines of
business, work or investigation of the Company at the time of such discovery,
idea or invention or which results from, or is suggested by, any work which the
Employee may do for or on behalf of the Company, and hereby assigns and agrees
to assign all his interest therein to the Company or its nominee. Whenever
requested to do so by the Company, Employee shall execute any and all
applications, assignments or other instruments which the Company shall deem
necessary to apply for and obtain Letters Patent or Copyrights of the United
States or any foreign country or to otherwise protect the interest therein and
shall assist the Company in every proper way (entirely at the Company's expense,
including reimbursement to him for all expense and loss of income) to obtain
such patents and copyrights and to enforce them. Such obligations shall
continue beyond the termination of employment
-4-
<PAGE>
with respect to works, inventions, discoveries and improvements authored,
conceived or made by Employee during the period of employment, and shall be
binding upon Employee's assigns, executors, administrators and other legal
representatives. All such works, inventions, discoveries and improvements shall
remain the sole and exclusive property of the Company, whether patentable or
not.
9. RETURN OF MATERIALS. Upon termination of employment with Company for
-------------------
any reason, Employee shall promptly deliver to Company the originals and copies
of all correspondence, drawings, manuals, computerized information, letters,
notes, notebooks, reports, prospect lists, flow charts, programs, proposals, and
any documents concerning Company's customers or suppliers and, without limiting
the foregoing, will promptly deliver to Company any and all other documents or
materials containing or constituting Confidential Information.
10. TERMINATION. This Agreement may be terminated with or without cause
-----------
by either party without any liability for such termination by giving to the
other party at least fifteen (15) days prior written notice, except that the
covenants of Sections 6, 7, 8, 9, 11, 12, 13, 14, 15, 16 and 18 hereof shall
survive the termination of this Agreement. All payments due as of the date of
termination shall be paid in full within thirty (30) days of this date.
11. SEVERANCE. If the Employee's employment is at any time terminated by
---------
the Company without cause, then the Company shall pay the Employee a severance
payment equal to three (3) times the monthly base salary of the Employee then in
effect, payable in the form of salary continuation in accordance with the
Company's then existing payroll practices; provided, however, if the Employee's
employment is terminated by the Company without cause within 90 days after the
sale of substantially all of the business or assets of Mastech Systems
Corporation to an unaffiliated third party for fair value, then the Company (or
its successor) shall pay the Employee a severance payment equal to six (6) times
the monthly base salary of the Employee then in effect in accordance with the
Company's then existing payroll practices.
12. ENTIRE AGREEMENTS. This Agreement supersedes all prior agreements,
-----------------
written or oral, between the parties hereto concerning the subject matter
hereof.
13. CHOICE OF LAW, JURISDICTION AND VENUE. The parties agree that this
-------------------------------------
Agreement shall be deemed to have been made and entered into in Pennsylvania and
that the Law of the Commonwealth of Pennsylvania shall govern this Agreement.
Jurisdiction and venue is proper in any proceeding by the Company to enforce its
rights hereunder filed in any court geographically located in Allegheny County,
Pennsylvania.
14. ACKNOWLEDGMENTS OF EMPLOYEE. Employee hereby acknowledges and agrees
---------------------------
that:
(a) This Agreement is necessary for the protection of the legitimate
business interests of the Company.
-5-
<PAGE>
(b) the restrictions contained in this Agreement may be enforced in a
court of law whether or not Employee is terminated with or
without cause or for performance related reasons;
(c) The execution and delivery of this Agreement is a mandatory
condition precedent to the Employee's receipt of the
consideration provided herein;
(d) Employee has no intention of competing with the Company within
the limitations set forth above;
(e) Employee has received adequate and valuable consideration for
entering into this Agreement;
(f) Employee's covenants shall be construed as independent of any
other provision in this Agreement and the existence of any claim
or cause of action Employee may have against the Company, whether
predicated on this Agreement or not, shall not constitute a
defense to the enforcement by Company of these covenants;
(g) this Agreement does not prevent Employee from earning a
livelihood after termination of employment; and
(h) Employee further acknowledges that his or her education and
experience enables Employee to work for different types of
employers, so that it will not be necessary for Employee to
violate the provisions of this covenant not to compete in order
to remain economically viable.
15. FULL UNDERSTANDING. Employee acknowledges that Employee has carefully
------------------
read and fully understands all of the provisions of this Agreement and that
Employee, in consideration for the compensation set forth herein, is voluntarily
entering into this Agreement.
16. EQUITABLE RELIEF; FEES AND EXPENSES. Employee stipulates and agrees
-----------------------------------
that any breach of this Agreement by Employee will result in immediate and
irreparable harm to the Company, the amount of which will be extremely difficult
to ascertain, and that the Company could not be reasonably or adequately
compensated by damages in an action at law. For these reasons, the Company
shall have the right, without objection from Employee, to obtain such
preliminary, temporary or permanent injunctions or restraining orders or decrees
as may be necessary to protect the Company against, or on account of, any breach
by Employee of the provisions of this Agreement. Such right to equitable relief
is in addition to all other legal remedies the Company may have to protect its
rights. In the event the Company obtains any such injunction, order, decree or
other relief, in law or in equity, Employee shall be responsible for reimbursing
the Company for all costs associated with obtaining the relief, including
reasonable attorneys' fees, and expenses and costs of suit. Employee further
covenants and agrees that any order of court or judgment obtained by the Company
which enforces the Company's rights under this Agreement may be transferred,
without objection or opposition by
-6-
<PAGE>
Employee, to any court of law or other appropriate law enforcement body located
in any other country in the world where Company does business, and that said
court or body will give full force and effect to said order and or judgment.
17. AMENDMENTS. No supplement, modification, amendment or waiver of the
----------
terms of this Agreement shall be binding on the parties hereto unless executed
in writing by the party to be bound thereby. No waiver of any of the provisions
of this Agreement shall be deemed to or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided. Any failure to insist
upon strict compliance with any of the terms and conditions of this Agreement
shall not be deemed a waiver of any such terms or conditions.
-7-
<PAGE>
18. SUCCESSORS IN INTEREST. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the successors, assigns, heirs and legal
representatives of the parties hereto. The Company shall have the right to
assign this Agreement in connection with a merger involving the Company or a
sale or transfer of substantially all of the business and assets of the Company,
and Employee agrees to be obligated by this Agreement to any successor, assign
or surviving entity.
19. HEADINGS. The headings used in this Agreement are for convenience
--------
only and are not to be considered in construing or interpreting this Agreement.
MASTECH SYSTEMS
CORPORATION (COMPANY)
By: __________________________________ ______________________________________
(Employee)
Date: ________________________________ Date: ________________________________
-8-
<PAGE>
EXHIBIT 10.5
SHAREHOLDERS AGREEMENT
THIS SHAREHOLDERS AGREEMENT, dated as of NOVEMBER 30, 1996, by and
among Mastech Systems Corporation, a Pennsylvania corporation with its principal
place of business at 1004 McKee Road, Oakdale, Pennsylvania, 15071 (hereinafter,
"MSC"), Mastech Corporation, a Pennsylvania corporation also with its principal
place of business located at 1004 McKee Road, Oakdale, Pennsylvania, 15071
(hereinafter "Mastech"), Sunil Wadhwani, an individual currently residing in
Allegheny County, Pennsylvania ("Wadhwani") and Ashok K. Trivedi, an individual
currently residing in Allegheny County, Pennsylvania ("Trivedi") (hereinafter,
Wadhwani and Trivedi are referred to collectively as the "Shareholders" or
individually as a "Shareholder"):
WHEREAS, the parties desire to enter into this Agreement to, among
other things, set forth the relative rights of the parties with respect to the
transfer of certain of the shares of Mastech common stock, $.01 Par Value
("Mastech Common Stock") and MSC common stock, $.01 Par Value ("MSC Common
Stock") held by the Shareholders, which shares are more fully described on
Exhibit I attached hereto; and
WHEREAS, Mastech is contemplating an initial public offering of shares
of Mastech Common Stock (the "IPO"); and
WHEREAS, in connection with the IPO, MSC will be reorganized into an
indirect wholly-owned subsidiary of Mastech; and
WHEREAS, in connection with the reorganization of MSC, the
Shareholders and their Permitted Transferees (as such term is defined below)
will contribute all their MSC
<PAGE>
Common Stock to mastech, which contribution shall be considered an additional
capital contribution to Mastech by the Shareholders.
NOW, THEREFORE, in consideration of the mutual agreements and
covenants contained herein, and for other valuable consideration received, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Stock Transfer Restrictions.
----------------------------
Each Shareholder hereby agrees that, except as provided in paragraph 2
below, such Shareholder may not sell, transfer or assign, voluntarily or
involuntarily, or by any other means cause the beneficial or record ownership of
MSC Common Stock or Mastech Common Stock to be transferred for a period of 24
months commencing on the date first written above (the "Restricted Period").
2. Permitted Transfers.
--------------------
Notwithstanding the restrictions imposed under paragraph 1 above, the
Shareholders or their Permitted Transferees may (i) in connection with the
reorganization of MSC, transfer their shares of MSC Common Stock to Mastech
prior to the closing of the IPO; (ii) transfer MSC Common Stock and Mastech
Common Stock to a buyer or its designee in connection with the sale of the
business of Mastech or MSC to an independent third party buyer ("Buyer") during
the Restricted Period (whether such sale is effected by a sale of all or
substantially all of the assets of MSC or Mastech, or by the merger of MSC or
Mastech with or into a third party, or by the sale of shares of MSC or Mastech);
or (iii) transfer any or all of their shares of MSC Common Stock or Mastech
Common Stock to, or in trust for the benefit of, the
-2-
<PAGE>
Shareholder, his spouse, siblings, children or grandchildren, and any
shareholder which is a trust may make distributions of such shares of stock to
its settlor or beneficiaries (such a transferee being referred to herein as a
"Permitted Transferee"); provided however that any transferee of any of the
shares of MSC Common Stock or Mastech Common Stock shall, prior to becoming a
holder thereof, join in this Agreement.
3. Payment of Expenses.
--------------------
Mastech shall pay all costs and expenses in connection with this
Agreement and the performance thereof.
4. Assignment.
-----------
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, personal representatives, successors
and assigns; provided, however, that this Agreement may not be assigned by any
of the parties hereto without the prior written consent of the other parties
hereto.
5. Joinder by Subsequent Holders.
------------------------------
No shares of Mastech Common Stock or MSC Common Stock shall be issued
or transferred to any person except as permitted by this Agreement and until the
prospective holders of those certain shares join in this Agreement and consent
to be bound as a shareholder by the terms hereof.
6. Governing Law.
--------------
The provisions of this Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
-3-
<PAGE>
7. Termination.
------------
This Agreement shall terminate, and the shares of Mastech Common Stock
and MSC Common Stock subject to this Agreement shall be released from the terms
hereof:
(a) Upon the sale of the business of Mastech or MSC to a Buyer
during the Restricted Period (whether such sale is effected by a
sale of all or substantially all of the assets of MSC or Mastech,
or by the merger of MSC or Mastech with or into a third party, or
by the sale of shares of MSC or Mastech).
(b) Upon the bankruptcy, receivership or dissolution of MSC or
Mastech; or
(c) Upon the expiration of the Restricted Period.
8. Headings.
---------
The section headings in this Agreement are inserted solely as a matter
of convenience and for reference and are not a part of this Agreement.
9. Complete Agreement and Amendment.
---------------------------------
This Agreement constitutes the entire agreement between the parties
hereto, and supersedes any prior agreements concerning the subject matter hereof
whether written or oral. This Agreement may not be amended or modified except
by a written instrument executed by all parties hereto.
10. Execution Copies.
-----------------
The parties hereto may execute this Agreement in any number of
counterparts, each of which, when executed and delivered, shall be original; but
all such counterparts shall constitute one and the same instrument.
-4-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement
effective this 30th day of November, 1996.
ATTEST: MASTECH SYSTEMS CORPORATION
/s/ Sunil Wadhwani By: /s/ Ashok K. Trivedi
- -------------------------------- ----------------------------------
Name:
Title:
ATTEST: MASTECH CORPORATION
/s/ Sunil Wadhwani By: /s/ Ashok K. Trivedi
- -------------------------------- ----------------------------------
Name:
Title:
WITNESS:
/s/ James J. Barnes /s/ Sunil Wadhwani
- -------------------------------- ----------------------------------
Sunil Wadhwani - Shareholder
WITNESS:
/s/ James J. Barnes /s/ Ashok K. Trivedi
- -------------------------------- ----------------------------------
Ashok K. Trivedi - Shareholder
-5-
<PAGE>
EXHIBIT I
<TABLE>
<CAPTION>
Name Number of Shares
- ---- ----------------
MSC Common Stock Mastech Common Stock
---------------- --------------------
<S> <C> <C>
Sunil Wadhwani Annuity Trust No. 1 9,160 9,160
Sunil Wadhwani Annuity Trust No. 2 9,160 9,160
Ashok K. Trivedi Annuity Trust No. 1 9,160 9,160
Ashok K. Trivedi Annuity Trust No. 2 9,160 9,160
</TABLE>
-6-
<PAGE>
JOINDER
This Joinder is executed this 30th day of November, 1996 by Sunil
Wadhwani in his capacity as Trustee to the Sunil Wadhwani Annuity Trust No. 1
and the Sunil Wadhwani Annuity Trust No. 2, and Ashok K. Trivedi in his capacity
as Trustee to the Ashok K. Trivedi Annuity Trust No. 1 and the Ashok K. Trivedi
Annuity Trust No. 2 (hereinafter collectively referred to in their capacities as
Trustees as the "GRAT Shareholders").
WITNESSETH:
WHEREAS, Sunil Wadhwani and Ashok K. Trivedi, currently the beneficial
owners of all of the issued and outstanding shares of common stock of Mastech
Corporation ("Mastech") and Mastech Systems Corporation ("MSC"), desire to
transfer and assign to the GRAT Shareholders certain of those shares of Mastech
common stock and MSC common stock standing in their respective names on the
books of Mastech and MSC; and
WHEREAS, it is a condition to such transfer and assignment that the
GRAT Shareholders join in and agree to be bound by the terms of that certain
Shareholders' Agreement dated November 30, 1996 by and among Mastech, MSC and
Sunil Wadhwani and Ashok K. Trivedi as the individual shareholders of Mastech
and MSC (the "Shareholders Agreement").
NOW, THEREFORE, for good and valuable consideration and intending to
be legally bound hereby, the GRAT Shareholders join in and agree to be bound by
the terms of the Shareholders Agreement with the same effect as if they were
each an original signatory thereto.
IN WITNESS WHEREOF, the undersigned has caused this Joinder to be
executed by its duly authorized officer.
-7-
<PAGE>
WITNESS: GRAT SHAREHOLDERS:
Sunil Wadhwani Annuity Trust No. 1
/s/ James J. Barnes By: /s/ Sunil Wadhwani
- --------------------------------------- --------------------------------------
Sunil Wadhwani - Trustee
Sunil Wadhwani Annuity Trust No. 2
/s/ James J. Barnes By: /s/ Sunil Wadhwani
- --------------------------------------- --------------------------------------
Sunil Wadhwani - Trustee
Ashok K. Trivedi Annuity Trust No. 1
/s/ James J. Barnes By: /s/ Ashok K. Trivedi
- --------------------------------------- --------------------------------------
Ashok K. Trivedi - Trustee
Ashok K. Trivedi Annuity Trust No. 2
/s/ James J. Barnes By: /s/ Ashok K. Trivedi
- --------------------------------------- --------------------------------------
Ashok K. Trivedi - Trustee
-8-
<PAGE>
EXHIBIT 10.21
CAPITAL CONTRIBUTION AGREEMENT
THIS AGREEMENT, dated as of December 16, 1996, by and among Sunil
Wadhwani, Ashok Trivedi, The Wadhwani Family Qualified Subchapter S Trust, The
Trivedi Family Qualified Subchapter S Trust, The Sunil Wadhwani Annuity Trust
No. 1, the Sunil Wadhwani Annuity Trust No. 2, The Ashok K. Trivedi Annuity
Trust No. 1 and The Ashok K. Trivedi Annuity Trust No. 2 (each a "Shareholder"
and collectively the "Shareholders"), and Mastech Corporation, a Pennsylvania
corporation ("Mastech").
WHEREAS, the Shareholders own all of the issued and outstanding
capital stock of Mastech Systems Corporation, a Pennsylvania corporation
("Mastech Systems"); and
WHEREAS, each Shareholder owns the same number of shares of Common
Stock of Mastech as they own shares of Mastech Systems and collectively, the
Shareholders own all of the issued and outstanding capital stock of Mastech; and
WHEREAS, each Shareholder desires to transfer to Mastech as an
additional capital contribution the shares of Mastech Systems Common Stock owned
by each Shareholder; and
WHEREAS, the Shareholders will not receive any additional shares of
Mastech capital stock in connection with such capital contributions.
NOW, THEREFORE, the parties hereto, intending to be legally bound, do
hereby represent, warrant, covenant and agree as follows:
1. Capital Contributions to Mastech. Each Shareholder hereby agrees to
---------------------------------
contribute, assign and transfer to Mastech all of their right, title and
interest in shares of common stock of Mastech Systems; said contribution,
assignment and transfer to be further evidenced by a Stock Power executed on
even date herewith. Mastech hereby agrees to accept such capital contributions
by the Shareholders of their Mastech Systems Common Stock.
2. Timing of Contributions. The contributions described in Section 1 hereof
------------------------
shall be made immediately prior to the filing with the Securities and Exchange
Commission of Amendment No. 3 to Mastech's Registration Statement on Form S-1
containing financial statements reflecting the transactions contemplated hereby.
3. Miscellaneous. This Agreement shall be binding upon and shall inure to the
--------------
benefit of the parties hereto and their respective successors, heirs, executors,
administrators and assigns. This Agreement shall be interpreted in accordance
with the laws of the Commonwealth of Pennsylvania, without regard to any
jurisdiction's conflicts of law provisions. The parties hereto may execute this
Agreement in any number of counterparts, each of which when executed and
delivered, shall be an original, but all such counterparts shall constitute one
and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Capital
Contribution Agreement as of the day and year first above written.
MASTECH CORPORATION
By:__________________________________________
Title:_______________________________________
SHAREHOLDERS:
______________________________________________
Sunil Wadhwani
______________________________________________
Ashok Trivedi
The Wadhwani Family Qualified Subchapter S Trust:
By:____________________________________________
Title: Trustee
The Trivedi Family Qualified Subchapter S Trust:
By:____________________________________________
Title: Trustee
The Sunil Wadhwani Annuity Trust No. 1:
By:____________________________________________
Title: Trustee
The Sunil Wadhwani Annuity Trust No. 2:
By:____________________________________________
Title: Trustee
The Ashok K. Trivedi Annuity Trust No. 1:
By:____________________________________________
Title: Trustee
The Ashok K. Trivedi Annuity Trust No. 2:
By:____________________________________________
Title: Trustee
<PAGE>
EXHIBIT 11.1
MASTECH CORPORATION
CALCULATION OF PRO FORMA NET INCOME PER SHARE OF COMMON STOCK
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
Weighted average common shares.................... 18,200,000 18,200,000 18,200,000 18,200,000 18,200,000
Dilutive effect of stock issued within one
year of the offering............................ 54,600 54,600 54,600 54,600 54,600
Effect of shares sufficient to replace capital
in excess of earnings withdrawn as
dividends....................................... - - - - 410,867
----------- ----------- ----------- ----------- -----------
Total weighted average shares..................... 18,254,600 18,254,600 18,254,600 18,254,600 18,665,467
=========== =========== =========== =========== ===========
Pro forma net income.............................. $ 1,634 $ 6,855 $ 11,072 $ 8,202 $ 6,229
=========== =========== =========== =========== ===========
Pro forma net income per share of
common stock.................................... $ 0.09 $ 0.38 $ 0.61 $ 0.45 $ 0.33
=========== =========== =========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Pittsburgh, Pennsylvania
December 16, 1996
