<PAGE>
As filed with the Securities and Exchange Commission on October 15, 1996
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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MASTECH CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 7371 25-1529755
(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)
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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)
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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. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER SHARE(3) PRICE(1)(2)(3) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................... $ $114,080,080 $34,569
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</TABLE>
(1) Includes shares subject to an overallotment option granted to the
Underwriters.
(2) Pursuant to Rule 457(o) under the Securities Act, the aggregate initial
offering price of all Common Stock registered pursuant to this
Registration Statement will not exceed $114,080,080.
(3) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act.
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 OCTOBER 15, 1996
PROSPECTUS
, 1996
SHARES
[LOGO OF MASTECH CORPORATION]
COMMON STOCK
Of the shares of Common Stock offered hereby, shares are
being sold by Mastech Corporation ("Mastech" or the "Company") and
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 $ and $ per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price.
Application has been made for the Common Stock to be approved for quotation
on the Nasdaq National Market under the symbol "MAST."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 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 $ , which will be paid by the
Company.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option
to purchase up to 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 that graphically depicts Company's SMART-APPS Methodologies.
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.
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/SM/ and SMART-APPS/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
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 100-for-1
split of the shares of the Company's common stock, par value $.01 per share
("Common Stock"), which will occur prior to completion of this offering.
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
SMART-APPS, 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, Nike, Oracle and Wal-Mart. The Company sets high standards for
client responsiveness and project quality. Over the last five years, more than
80% of its clients have selected Mastech to provide additional services after
an initial engagement. 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 the U.K. and Japan. 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 three 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. Two 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
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THE OFFERING
Common Stock offered by the Company... shares
Common Stock offered by the Selling shares
Shareholders..........................
Common Stock to be outstanding after shares (1)
the offering..........................
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 MAST
symbol................................
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(1) Excludes: (i) shares of Common Stock reserved for issuance under
the Company's 1996 Stock Incentive Plan, under which options to purchase a
total of shares are expected to be granted upon the effective date of
this offering; and (ii) 150,000 shares of Common Stock to be issued 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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
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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............... $13,513 $20,161 $38,705 $70,050 $103,676 $49,260 $59,399
Gross profit........... 4,607 6,560 11,440 19,821 31,017 14,796 16,490
Income from operations
(1)................... 1,808 2,711 2,608 11,458 18,188 9,099 7,608
Net income (2)......... 1,838 2,737 2,616 11,528 18,351 9,191 7,664
Pro forma net income
(3)................... 1,103 1,642 1,570 6,917 11,011 5,515 4,598
Pro forma net income
per share (3)......... $ 0.04 $ 0.07 $ 0.06 $ 0.28 $ 0.44 $ 0.22 $ 0.18
Weighted average number
of common shares
outstanding........... 25,000 25,000 25,000 25,000 25,000 25,000 25,000
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
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ACTUAL AS ADJUSTED (4)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash............................................ $ 400 $
Working capital................................. 12,017
Total assets.................................... 25,685
Total shareholders' equity...................... 12,707
</TABLE>
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(1) Includes a non-recurring 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 Financial Statements for information concerning this
non-recurring 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 Financial Statements for information concerning the computation of
pro forma net income per share.
(4) Adjusted to give effect to: (i) the payment 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 $5.3 million upon termination of the Company's S Corporation
status; and (iii) the offering of shares of Common Stock by the
Company at an assumed initial public offering price of $ 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 six 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. 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, a
variation in revenues may cause significant variations in operating results.
Additionally, the
6
<PAGE>
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 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. See "Business--
Business Strategies."
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, through an affiliated company, two more centers in
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 30% of
revenues for the six months ended June 30, 1996 and approximately 29% of
revenues in calendar year 1995. EDS accounted for almost 10% of the Company's
revenues in each of these periods. 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, through an
affiliated company, offshore software development centers in 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. 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. See "Business--Business Strategies."
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.
A Company named "Mastek" has asked the Company to withdraw its servicemark
application for the name "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 name
"Mastech" in the U.K. 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 % 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 all matters requiring
shareholder approval, provided that they vote together on such matters. Each
of Messrs. Wadhwani and Trivedi have agreed to vote their shares of Common
Stock in favor of the other in the election of directors. After the
acquisition of Mascot Systems Private Limited ("Mascot Systems") and Scott
Systems Private Limited ("Scott Systems") by the Company, the approval of the
Reserve Bank of India will be required for Messrs. Wadhwani and Trivedi to own
in the aggregate less than 60% of the voting power of Mastech. 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 Bylaws, as amended ("Bylaws") 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
shares of Common Stock outstanding, of which the 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 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. The Company has
granted Messrs. Wadhwani and Trivedi certain demand and piggyback registration
rights covering an aggregate of shares of Common Stock (
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 shares of Common Stock reserved for issuance under
the Company's Stock Incentive Plan and up to 150,000 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.
Purchasers of shares of Common Stock in this offering will experience
immediate and substantial dilution of $ 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. 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.
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 this
offering. See "Use of Proceeds."
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
11
<PAGE>
THE COMPANY
Mastech Corporation is a Pennsylvania corporation founded in July 1986.
Messrs. Wadhwani and Trivedi are the Company's Co-Chairman and Chief Executive
Officer and the Company's Co-Chairman and President, respectively, and
together they beneficially own substantially all of the outstanding Common
Stock of the Company. See "Management" and "Principal and Selling
Shareholders."
Messrs. Wadhwani and Trivedi are the direct or indirect controlling
shareholders of 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. The
Company has entered into an agreement with Messrs. Wadhwani and Trivedi
pursuant to which Messrs. Wadhwani and Trivedi will transfer their controlling
interest in Mascot Systems to the Company for a purchase price expected to be
less than $200,000 (the actual amount will be based upon a valuation of their
interest in Mascot Systems). Similarly, the Company has entered into an
agreement with Messrs. Wadhwani and Trivedi providing for the merger of the
majority shareholder of Scott Systems, which is wholly-owned by Messrs.
Wadhwani and Trivedi, with and into the Company for nominal consideration.
Consummation of these transactions is subject to several conditions,
including: (i) completion of this offering; and (ii) approval of the transfers
by the Reserve Bank of India, which approval is expected to be received before
or shortly after the date of this offering. Mastech also expects to acquire
the minority shares of Mascot Systems and Scott Systems for an amount expected
to be less than $50,000, also subject to the approval of the Reserve Bank of
India. After completion of these transactions, Mascot Systems and Scott
Systems will be wholly-owned subsidiaries of the Company. Pending completion
of these transactions, the Company has entered into agreements with Mascot
Systems and Scott Systems pursuant to which Mascot Systems and Scott Systems
will provide services exclusively to Mastech at cost and all contracts and
commercial arrangements of Mascot Systems and Scott Systems must be approved
by Mastech. 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.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 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 $ , assuming an initial public offering price
of $ 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 $ million as of the
date of this Prospectus; and (iii) general corporate purposes, including
working capital. The Company has no present commitments or agreements 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. 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."
12
<PAGE>
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 $
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 of approximately $5.8 million for deferred income taxes on its
balance sheet and a one-time tax expense of the same amount. 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
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.
13
<PAGE>
CAPITALIZATION
The following table sets forth the total capitalization of the Company as of
June 30, 1996, and as adjusted to give effect to: (i) the S Corporation
Dividend, estimated to be approximately $ million and the recognition of a
$5.3 million deferred tax liability upon termination of the Company's S
Corporation status (see "S Corporation Dividend"); and (ii) the sale of
shares of Common Stock by the Company (at an assumed initial public offering
price of $ 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 Financial Statements and related Notes thereto
included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility.................................. $ 1,500 $ 1,500
======= =======
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;
25,000,000 shares issued and outstanding;
shares issued
and outstanding, as adjusted (1)........................ 250 --
Additional paid-in capital............................... 1
Retained earnings........................................ 12,456
------- -------
Total shareholders' equity............................. 12,707
------- -------
Total capitalization................................. $12,707 $
======= =======
</TABLE>
- ---------------------
(1) Excludes: (i) shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan, under which stock options to purchase
a total of shares are expected to be granted upon the effective date
of this offering; and (ii) 150,000 shares of Common Stock to be issued
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 June 30, 1996, the Company's net tangible book value was approximately
$12.7 million or $0.51 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 150,000 shares of Common Stock
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 shares of Common Stock (at an assumed initial
public offering price of $ per share) and the application of the estimated
net proceeds therefrom, the pro forma net tangible book value of the Company
at June 30, 1996 would have been $ million or $ per share. This amount
represents an immediate increase in net tangible book value of $ per share
to existing shareholders and an immediate dilution of $ 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.................... $
Net tangible book value per share at June 30, 1996............... $0.51
Increase in net tangible book value per share attributable to new
investors........................................................
Pro forma net tangible book value per share after this offering....
-----
Dilution in net tangible book value per share to new investors..... $
=====
</TABLE>
The following table summarizes, on a pro forma basis as of June 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 $ 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).................... 25,000,000 % $2,500 % $0.0001
New investors (1).......
---------- ----- ---------- ---------
Total................. 100.0% 100.0%
========== ===== ========== =========
</TABLE>
- ---------------------
(1) Sales by the Selling Shareholders in this offering will reduce the number
of shares held by existing shareholders of the Company to shares
or % of the total number of shares outstanding after this offering
( shares or % if the Underwriters' over-allotment option is
exercised in full) and will increase the number of shares held by new
investors to shares or % of the total number of shares of
Common Stock outstanding after this offering ( shares or % 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, are derived from the Company's 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 each
of the interim periods ended June 30, 1995 and 1996, have been derived from
unaudited financial statements of the Company, which in the opinion of
management include all adjustments that are necessary for a fair presentation
of the results for the interim periods, and all such adjustments are of a
normal recurring nature. The results of operations for the interim period
ended June 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 Financial
Statements and related Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 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............... $13,513 $20,161 $38,705 $70,050 $103,676 $ 49,260 $ 59,399
Cost of revenues....... 8,906 13,601 27,265 50,229 72,659 34,464 42,909
------- ------- ------- ------- -------- -------- --------
Gross profit........... 4,607 6,560 11,440 19,821 31,017 14,796 16,490
Selling, general and
administrative........ 2,799 3,849 5,890 8,363 12,829 5,697 8,882
Non-recurring charges
(1)................... -- -- 2,942 -- -- -- --
------- ------- ------- ------- -------- -------- --------
Income from operations. 1,808 2,711 2,608 11,458 18,188 9,099 7,608
Interest expense
(income), net.......... (30) (26) (8) (70) (163) (92) (56)
------- ------- ------- ------- -------- -------- --------
Net income (2)......... 1,838 2,737 2,616 11,528 18,351 9,191 7,664
Pro forma income taxes
(3).................... 735 1,095 1,046 4,611 7,340 3,676 3,066
------- ------- ------- ------- -------- -------- --------
Pro forma net income
(3)................... $ 1,103 $ 1,642 $ 1,570 $ 6,917 $ 11,011 $ 5,515 $ 4,598
======= ======= ======= ======= ======== ======== ========
Pro forma net income
per share (3)......... $ 0.04 $ 0.07 $ 0.06 $ 0.28 $ 0.44 $ 0.22 $ 0.18
======= ======= ======= ======= ======== ======== ========
Weighted average number
of common shares
outstanding........... 25,000 25,000 25,000 25,000 25,000 25,000 25,000
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
-------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash................... $ 66 $ 494 $ 2,887 $ 4,095 $ 2,910 $ 1,860 $ 400
Working capital........ 3,104 4,270 5,422 13,704 14,860 14,569 12,017
Total assets........... 3,742 5,567 12,356 22,514 25,452 25,023 25,685
Total shareholders'
equity................. 3,441 4,558 5,674 14,010 15,374 14,967 12,707
</TABLE>
- ---------------------
(1) The non-recurring charge in 1993 relates to federal taxes on employee
earnings for 1991, 1992 and 1993. See Note 6 of Notes to Financial
Statements for information concerning this non-recurring 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 Financial Statements for information concerning the
computation of pro forma net income per share.
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. 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 SMART-APPS 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.
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 six 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 three 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 has 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 of
approximately $5.8 million 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. 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 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>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 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............. 70.4 71.7 70.1 70.0 72.2
-------- -------- -------- -------- --------
Gross profit................. 29.6 28.3 29.9 30.0 27.8
Selling, general and
administrative.............. 15.3 11.9 12.4 11.5 15.0
Non-recurring charges........ 7.6 -- -- -- --
-------- -------- -------- -------- --------
Income from operations....... 6.7% 16.4% 17.5% 18.5% 12.8%
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues. The Company's revenues increased 20.6% from $49.3 million in the
first six months of 1995 to $59.4 million in the first six 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 256 clients in the first six months of 1995 to 301 clients in
the first six months of 1996. Revenues from the Company's international
operations increased from $0.2 million in the first six months of 1995 to $4.2
million in the first six months of 1996. The Company's revenue growth was
limited by higher than normal employee attrition in the first six 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 1,153 as of June 30, 1995 to 1,305 as
of June 30, 1996. Gross profit increased 11.4% from $14.8 million in the first
six months of 1995 to $16.5 million in the first six months of 1996. Gross
profit as a percentage of revenues declined from 30.0% in the first six months
of 1995 to 27.8% in the first six 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.
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 55.9% from $5.7 million
in the first six months of 1995 to $8.9 million in the first six months of
1996. As a percentage of revenues, selling, general and administrative
expenses increased from 11.5% in the first six months of 1995 to 15.0% in the
first six 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.
18
<PAGE>
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 234 clients in 1994 to 270 clients in 1995. The increase in revenues was
partially offset by a planned decrease in government projects.
Gross Profit. Gross profit increased 56.5% from $19.8 million in 1994 to
$31.0 million in 1995. Gross profit also increased as a percentage of revenues
from 28.3% to 29.9%. 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 1,236 as of December 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 53.4% from $8.4 million in 1994 to $12.8
million in 1995 and also increased as a percentage of revenues from 11.9% in
1994 to 12.4% in 1995. These increases occurred due to the start-up costs 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 198 clients in 1993 to 234 clients in
1994.
Gross Profit. Gross profit increased 73.3% from $11.4 million in 1993 to
$19.8 million in 1994 but declined as a percentage of revenues from 29.6% to
28.3%. 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 42.0% from $5.9 million in 1993 to $8.4
million in 1994 but declined as a percentage of revenues from 15.3% to 11.9%.
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 six fiscal
quarters ended June 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
19
<PAGE>
such periods. This information should be read in conjunction with the
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,
1995 1995 1995 1995 1996 1996
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $24,107 $25,153 $26,896 $27,520 $28,595 $30,804
Cost of revenues........ 16,941 17,523 19,352 18,843 20,855 22,054
------- ------- ------- ------- ------- -------
Gross profit............ 7,166 7,630 7,544 8,677 7,740 8,750
Selling, general and
administrative......... 2,698 2,999 3,243 3,889 4,429 4,453
------- ------- ------- ------- ------- -------
Income from operations.. 4,468 4,631 4,301 4,788 3,311 4,297
Interest expense
(income)............... (47) (45) (35) (36) (23) (33)
------- ------- ------- ------- ------- -------
Net income.............. 4,515 4,676 4,336 4,824 3,334 4,330
Pro forma income taxes.. 1,806 1,870 1,734 1,930 1,334 1,732
------- ------- ------- ------- ------- -------
Pro forma net income.... $ 2,709 $ 2,806 $ 2,602 $2,894 $ 2,000 $ 2,598
======= ======= ======= ======= ======= =======
</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, a variation 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 June 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 $3.9, $4.6, $16.2 and
$6.6 million for the years ended December 31, 1993, 1994 and 1995 and for the
six months ended June 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 six month period ended June 30, 1996 were
$351,000 and $264,000, respectively. The Company does not currently have any
material commitments for capital expenditures.
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 5.6% at June 30, 1996) plus 1.5% 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 half 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 June 30, 1996, $13.5 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.
20
<PAGE>
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.
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 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 SMART-APPS, 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, Nike, Oracle and Wal-Mart. The Company sets high standards for
client responsiveness and project quality. Over the last five years, more than
80% of its clients have selected Mastech to provide additional services after
an initial engagement. 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 the U.K. and Japan. 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 three 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. Two 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 that 80% of
multi-user commercial applications will run on client/server platforms by 1998
and cites the shortage of experienced implementation personnel as the largest
and most costly inhibitor of migration to current generation technologies. 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, many 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. According to Gartner Group,
over the next three years leading 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 three 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 SMART-APPS 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, SAP R/3 and PeopleSoft.
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 affiliate 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 Canada and Singapore and in 1996, the Company
opened offices in the U.K. and Japan. 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 affiliate, in an extensive
offshore infrastructure in India, including three state-of-the-art software
development centers. When completed, these centers will have 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 SMART-APPS
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 affiliate, offshore software development centers in 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
- --------------------------------------------------------------------------------
.SMART-APPS Client/Server >Project management
>Requirements analysis and
. Languages: C/C++, VisualBasic, definition
Delphi >Evaluation and selection of
applications packages
>Prototyping and re-use
. Tools: Powerbuilder, Gupta,
Developer/2000, Small talk >Data modeling, data warehousing
>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
- --------------------------------------------------------------------------------
.SMART-APPS Migrate >Project management
>Automated tools development
.Methodology and Automated
Conversion Tools >User interface conversion
>Code conversion and testing
>Control language conversion
>Data migration
>Cutover and implementation
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
.SMART-APPS 2000 >Impact analysis
Impact Assessment and >Project planning
Automated Conversion Tools >Year 2000 conversion
>Compliance testing and validation
.SMART-APPS 2000
>Cutover and implementation
.Viasoft
.Microfocus Revolve
- --------------------------------------------------------------------------------
SPECIALTY PACKAGE IMPLEMENTATION
- --------------------------------------------------------------------------------
.Oracle Applications >Project management
.Baan Triton >Customization
.PeopleSoft >Integration
.SAP R/3 >Migration
>Database design and administration
>Systems support
>Training
- --------------------------------------------------------------------------------
APPLICATIONS MAINTENANCE OUTSOURCING
- --------------------------------------------------------------------------------
. SMART-APPS 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.
SMART-APPS METHODOLOGIES AND TOOLS
Mastech's proprietary SMART-APPS 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 SMART-APPS 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. SMART-APPS
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. "SMART-APPS Client/Server" incorporates the Rapid
Architected Application Development technique to deliver this service to
clients. "SMART-APPS Convert" provides for database mapping and re-
engineering, followed by source conversion using automated tools. "SMART-APPS
2000" provides impact analysis, project planning and conversion solutions to
the Year 2000 problem. "SMART-APPS 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 targets large commercial organizations and sells its services
through a direct sales force of over 35 sales professionals. The Company's
U.S. sales force is primarily based at the Company's headquarters and is
organized into regions under three Regional Directors. The Company's U.S.
sales force is comprised of Account Managers, who focus on telemarketing the
Company's services to organizations within a specific territory. Further, the
Company has dedicated Account Managers for its major clients. These Account
Managers, the Regional Directors, and senior management meet frequently with
these clients to maintain strong client relationships. The Company maintains a
proprietary database and uses third-party services to track information on
several thousand prospects. The Company's Account Managers identify needs for
services and work with the Company's Resource Managers, who assign IT
professionals to client engagements. In international offices, the Company has
Country Managers and sales teams to sell its entire range of services.
A dedicated solutions sales force helps the Account Managers cross-sell
Mastech's applications solutions to its clients by using a combination of
face-to-face, consultative selling and applications solutions knowledge. This
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sales force works with service line Business Managers who develop and present
the Company's proposed solution. Each proposal provides information about the
Company, its approach and methodology, schedules, team members, references,
pricing and other terms. The Company also teams with major systems integrators
such as IBM and Deloitte & Touche to bid on major engagements.
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. Over the last five years, more than 80% of the Company's
clients have selected Mastech to provide additional services after an initial
engagement.
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.
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 Carribbean
Phillip 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>
In the first six months of 1996, approximately 30% of the Company's revenues
were derived from its top five clients (EDS, IBM, the U.S. Department of
Defense, Unisys and Oracle). In 1995, approximately 29% of the Company's
revenues were derived from these same five clients. EDS accounted for almost
10% of the Company's revenues in each of these periods.
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
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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 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 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.
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 and
its Scott Systems affiliate have over 70 full-time employees dedicated
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<PAGE>
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 1,296 employees
comprised of 1,149 IT professionals, 46 sales and marketing personnel and 101
general and administrative personnel In addition, the Company uses independent
contractors to staff client engagements. As of September 30, 1996, the Company
had 151 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 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.
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<PAGE>
A company named "Mastek" has asked the Company to withdraw its servicemark
application for the name "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 name
"Mastech" in the U.K. 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 30,000 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 an option, through June 1997, to lease an
additional 7,000 square feet. The Company believes that this location has
sufficient space for its current and anticipated near-term needs.
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, an affiliate of the Company controlled by Messrs. Wadhwani
and Trivedi, leases 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............ 44 Co-Chairman, Chief Executive Officer and Director
Ashok Trivedi............. 48 Co-Chairman, President and Director
Michael Zugay............. 44 Vice President--Finance
Steven Shangold........... 38 Vice President--U.S. Sales and Marketing
Ajmal Noorani............. 35 Vice President--International Operations
Sushma Rajagopalan........ 33 Vice President--Resourcing
Murali Balasubamanyam..... 41 Vice President--Human Resources
Shekar Sivasubramanian.... 33 Vice President--Applications Solutions
</TABLE>
SUNIL WADHWANI has served as Co-Chairman of the Company since October 1996,
and as a Director and the Chief Executive Officer since 1986. From 1986
through September 1996, he served as Chairman of the Company. 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 of the Company since October 1996,
and as a Director and the President of the Company since 1988. From 1988
through September 1996, Mr. Trivedi also served as Secretary of the Company.
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 . From March 1992 through 1996, he served as
the Company's Sales Director--Commercial Division. From 1982 through February
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
1994, Mr. Noorami 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 M.S. 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>
1992 and June 1993, she held various managerial positions with the
Company. From 1988 to 1992, Ms. Rajagopalan was an Assistant Vice
President--Human Resources with Citibank. 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 General Manager (Human Resources) with HCL Group of Companies from
1992 to September 1994. From to 1992, he served as for
. 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 September 1995 to August 1996, he served as the
Company's Director of . Between 1991 and August 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 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
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
34
<PAGE>
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 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
--------------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS (1) COMPENSATION (2)
<S> <C> <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) Bonuses were paid in 1995 for 1994 performance. The bonus amounts shown
for Steven Shangold include sales commissions of $24,944.
(2) All other compensation amounts include the estimated value of tax and
financial planning services paid for by the Company ($ ) and the
nonemployment-related benefit of a car lease ($ ).
(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."
EMPLOYEE BENEFIT PLANS
Stock Incentive Plan. The Company has reserved an aggregate of
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
35
<PAGE>
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 shares. Although no
options or other grants have been granted under the Stock Incentive Plan, the
Board of Directors intends to do so upon completion of 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.
401(K) PLAN. The Company maintains a 401(k) profit sharing and defined
contribution plan (the "401(k) Plan"). All employees of the Company who have
reached 21 years of age and 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 is a party to substantially identical employment contracts with
Messrs. Wadhwani and Trivedi, pursuant to which, effective upon completion of
this offering, each of them will serve as an executive of
36
<PAGE>
the Company at an annual base salary of not less than $400,000, plus an annual
bonus of $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. 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 executives agree to noncompetition,
nonsolicitation and nondisclosure covenants during the term of the agreement
and for two years after the termination of their employment for any reason.
The other Named Executive Officers are parties to employment contracts which
outline their responsibilities and provide generally for base compensation,
plus annual incentive bonuses, varying by position and length of service to
the Company. These executives are "at will" employees of the Company and can
be terminated with or without cause or they may resign, in any case, upon
giving the other party the contractually specified notice. These employment
contracts contain non-competition, nonsolicitation and nondisclosure covenants
extending, in most cases, two years beyond the termination of their employment
for any reason.
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 75,000 shares of Common Stock. 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. In
addition, the agreement provides that Mr. Shangold will be granted 75,000
shares of restricted stock which will vest on June 30, 1998. In the event that
Mr. Shangold leaves the employ of the Company or is terminated for Cause, the
shares of restricted stock will be forfeited.
37
<PAGE>
CERTAIN TRANSACTIONS
Mascot Systems is an Indian corporation controlled by Messrs. Wadhwani and
Trivedi. The Company has engaged Mascot Systems as a subcontractor to perform
offshore software development projects. For the six months ended June 30,
1996, and the year ended December 31, 1995, the Company paid Mascot Systems
approximately $583,000 and $205,000, respectively, for these services.
The Company has entered into an agreement to purchase all of the shares of
Mascot Systems from Messrs. Wadhwani and Trivedi for less than $200,000 in
cash (the actual amount will be based upon a valuation of their interests in
Mascot Systems). The purchase price for this acquisition will be paid from the
Company's working capital. The outstanding minority shares of Mascot Systems,
which are held by relatives of Messrs. Wadhwani and Trivedi, will be either
repurchased by Mascot Systems or purchased by the Company, in either case, for
nominal consideration. These transactions, which are subject to the approval
of the Reserve Bank of India, are expected to be completed before or shortly
after consummation of this offering. Upon completion of these transactions,
Mascot Systems will become a wholly-owned subsidiary of the Company.
Mascot Systems is currently operating one and developing two other offshore
software development facilities in the cities of Bangalore, Pune and Madras,
India. For the six months ended June 30, 1996, and the year ended December 31,
1995 the Company advanced Mascot Systems $866,000 and $865,000, respectively,
towards the cost of setting up and operating these facilities. Upon completion
of the acquisition of Mascot Systems by the Company, the aggregate amount of
these advances will be eliminated in consolidation.
Scott Systems is an Indian corporation indirectly controlled by Messrs.
Wadhwani and Trivedi through a Pennsylvania corporation known as SWAT Systems
Corporation ("SWAT"). The Company has engaged Scott Systems to recruit and
train IT professionals in India. For the six months ended June 30, 1996, and
the year ended December 31, 1995, the Company paid Scott Systems approximately
$270,000 and $289,000, respectively, for these services.
The Company has entered into a merger agreement with SWAT pursuant to which
SWAT will be merged with and into Mastech. Messrs. Wadhwani and Trivedi will
receive nominal consideration in this transaction. This transaction, which is
subject to the approval of the Reserve Bank of India, is expected to be
completed before or shortly after the closing of this offering. Upon
completion of this transaction, Scott Systems will become a majority-owned
subsidiary of the Company. Mastech expects to acquire the shares of Scott
Systems held by the remaining minority shareholders as promptly as practicable
after closing of this offering for an amount expected to be less than $50,000.
Pending the completion of the acquisitions of Mascot Systems and Scott
Systems by the Company, as described above, the Company has entered into
agreements with Mascot Systems and Scott Systems pursuant to which Mascot
Systems and Scott Systems have agreed to provide services exclusively to the
Company at their cost.
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
38
<PAGE>
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.
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 third quarter of 1996.
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 six 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 were reimbursed by them. The highest aggregate
amount of advances outstanding to Mr. Wadhwani and the Wadhwani Subchapter S
Family Trust during 1995 and the first six months of 1996 were $144,824 and
$581,863, respectively. The highest aggregate amount of advances outstanding
to Mr. Trivedi during 1995 and the first six months of 1996 were $120,017 and
$215,871, respectively. This practice will be discontinued prior to the
effective date of this offering.
The Company and the Selling Shareholders, immediately prior to this
offering, became parties to an agreement whereby the Selling Shareholders have
agreed to cause the Company to terminate its S Corporation election
immediately upon consummation of this offering. The Company has agreed to
indemnify the Selling Shareholders from 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 whereby all
future transactions, including any loans from the Company to its officers,
directors, principal shareholders or affiliates, will 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 will be on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties.
39
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 14, 1996, 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)... 12,500,000 50.0%
Ashok Trivedi (2)(3).... 12,500,000 50.0%
Steven Shangold (4)..... 150,000 * --
Sushma Rajagopalan...... -- * --
All directors and
executive officers as a
group
(8 persons)............ 25,150,000 100.0%
</TABLE>
- ---------------------
*Less than 1%
(1) Includes 1,250,000 shares held of record by Mr. Wadhwani as co-trustee of
the Wadhwani Qualified Subchapter "S" Family Trust.
(2) The address of Messrs. Wadhwani and Trivedi is c/o Mastech Corporation,
1004 McKee Road, Oakdale, Pennsylvania 15071.
(3) Includes 1,250,000 shares held of record by Mr. Trivedi as co-trustee of
the Trivedi Qualified Subchapter "S" Family Trust.
(4) Includes 150,000 shares of Common Stock, of which 75,000 shares are
subject to restriction, that Mr. Shangold will have the right to receive
upon completion of this offering.
40
<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
shares of Common Stock and no shares of Preferred Stock. As of ,
1996, there were four 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, require the
approval of at least 66 2/3% of the votes cast by all 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 vote to remove
any director, any class of directors or the entire Board of Directors without
cause.
The Bylaws 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
Company's 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
41
<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, Bylaws 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 all 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 either voting
against it or simply not voting in favor of 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.
42
<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 Chemical Mellon
Shareholder Services, L.L.C.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have shares of
Common Stock outstanding. See "Capitalization." Of these shares, the
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 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 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.
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 ( 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 is a party to a Shareholders Agreement with Sunil Wadhwani and
Ashok Trivedi, dated and effective upon completion of this offering,
pursuant to which the Company granted certain registration rights to Messrs.
Wadhwani and Trivedi. 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. Under the Shareholders Agreement, the Company is 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
the registration on a Form S-3 more than once in any six-month period, or if
the aggregate market value of such securities to be registered is less than
$10.0 million. 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 have unlimited piggyback registration rights at the Company's
expense, subject to certain restrictions set forth in the
44
<PAGE>
Shareholders Agreement. In addition, the Company has agreed to indemnify the
holders of such registration rights and each underwriter in any such offering
against certain liabilities, including liabilities under the Securities Act.
The registration rights 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
shares of Common Stock reserved for issuance under the Company's Stock
Incentive Plan and up to 150,000 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...............................................................
=====
</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 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
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.
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<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 valuation 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>
MASTECH CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996
(unaudited)............................................................... F-3
Income Statements for the years ended December 31, 1993, 1994 and 1995 and
for the six month periods ended June 30, 1995 and 1996 (unaudited)........ F-4
Statements of Shareholders' Equity for the years ended December 31, 1993,
1994
and 1995 and the six month period ended June 30, 1996 (unaudited)......... F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995
and the six month periods ended June 30, 1995 and 1996 (unaudited)........ F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
After the proposed transactions discussed in Note 9 to Mastech Corporation's
Financial Statements are effected, we expect to be in a position to render the
following audit report.
Arthur Andersen LLP
March 14, 1996
To Mastech Corporation:
We have audited the accompanying balance sheets of Mastech Corporation (a
Pennsylvania corporation, formerly Mastech Systems Corporation) as of December
31, 1994 and 1995, and the related statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. 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 as of
December 31, 1994 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Pittsburgh, Pennsylvania,
March 14, 1996
(except for the matters discussed in
Note 9 for which the date is
, 1996)
F-2
<PAGE>
MASTECH CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash........................................... $ 4,095 $ 2,910 $ 400
Accounts receivable, net of allowance for
uncollectible accounts
(Note 7)...................................... 16,300 19,146 21,408
Unbilled receivables........................... 807 1,504 1,557
Advances--
Affiliates.................................... -- 593 1,097
Other......................................... 946 368 373
Prepaid and other expenses..................... 60 417 160
------- ------- -------
Total current assets....................... 22,208 24,938 24,995
------- ------- -------
Equipment and leasehold improvements, at cost:
Equipment...................................... 538 858 1,105
Leasehold improvements......................... 47 79 96
------- ------- -------
585 937 1,201
Less--Accumulated depreciation................. (279) (423) (511)
------- ------- -------
Net equipment and leasehold improvements..... 306 514 690
------- ------- -------
Total assets............................... $22,514 $25,452 $25,685
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 3)............. $ -- $ -- $ 1,500
Accounts payable (includes outstanding checks
of $729 as
of June 30, 1996)............................. 2,068 1,524 3,460
Accrued payroll and related costs.............. 6,153 7,820 7,708
Other accrued liabilities...................... 283 734 310
------- ------- -------
Total current liabilities.................. 8,504 10,078 12,978
------- ------- -------
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, 25,000,000
shares issued
and outstanding.............................. 250 250 250
Additional paid-in capital..................... 1 1 1
Retained earnings.............................. 13,759 15,123 12,456
------- ------- -------
Total shareholders' equity................. 14,010 15,374 12,707
------- ------- -------
Total liabilities and shareholders' equity. $22,514 $25,452 $25,685
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MASTECH CORPORATION
INCOME STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- ----------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................... $38,705 $70,050 $103,676 $49,260 $59,399
Cost of revenues............. 27,265 50,229 72,659 34,464 42,909
------- ------- -------- ------- -------
Gross profit................. 11,440 19,821 31,017 14,796 16,490
Selling, general and
administrative.............. 5,890 8,363 12,829 5,697 8,882
Non-recurring charges........ 2,942 -- -- -- --
------- ------- -------- ------- -------
Income from operations....... 2,608 11,458 18,188 9,099 7,608
Interest expense (income),
net......................... (8) (70) (163) (92) (56)
------- ------- -------- ------- -------
Net income................... $ 2,616 $11,528 $ 18,351 $ 9,191 $ 7,664
======= ======= ======== ======= =======
<CAPTION>
PRO FORMA INFORMATION--(UNAUDITED)
--------------------------------------------
(NOTE 10)
<S> <C> <C> <C> <C> <C>
Net income................... $ 2,616 $11,528 $ 18,351 $ 9,191 $ 7,664
Pro forma income taxes....... 1,046 4,611 7,340 3,676 3,066
------- ------- -------- ------- -------
Pro forma net income......... $ 1,570 $ 6,917 $ 11,011 $ 5,515 $ 4,598
======= ======= ======== ======= =======
Pro forma net income per
common share................ $ 0.06 $ 0.28 $ 0.44 $ 0.22 $ 0.18
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MASTECH CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1992...................... 25,000,000 $250 $ 1 $ 4,307 $ 4,558
Net income.............. -- -- -- 2,616 2,616
Dividends paid.......... -- -- -- (1,500) (1,500)
---------- ---- --- -------- --------
Balance, December 31,
1993...................... 25,000,000 250 1 5,423 5,674
Net income.............. -- -- -- 11,528 11,528
Dividends paid.......... -- -- -- (3,192) (3,192)
---------- ---- --- -------- --------
Balance, December 31,
1994...................... 25,000,000 250 1 13,759 14,010
Net income.............. -- -- -- 18,351 18,351
Dividends paid.......... -- -- -- (16,987) (16,987)
---------- ---- --- -------- --------
Balance, December 31,
1995...................... 25,000,000 250 1 15,123 15,374
Net income.............. -- -- -- 7,664 7,664
Dividends paid.......... -- -- -- (10,331) (10,331)
---------- ---- --- -------- --------
Balance, June 30, 1996
(unaudited)............... 25,000,000 $250 $ 1 $ 12,456 $ 12,707
========== ==== === ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MASTECH CORPORATION
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash was provided by (used
for)
Operations:
Net income................ $ 2,616 $11,528 $ 18,351 $ 9,191 $ 7,664
Adjustment to reconcile
net income to cash
provided by operations:
Depreciation............ 74 101 144 58 88
Provision for
uncollectible accounts. -- 150 302 150 316
Working capital items:
Accounts receivable..... (4,250) (8,402) (3,845) (4,662) (2,631)
Advances................ (192) (652) (15) (42) (509)
Prepaid and other
expenses............... (28) 17 (358) (97) 257
Accounts payable........ 959 531 (544) (408) 1,936
Accrued and other
current liabilities.... 4,752 1,291 2,118 1,960 (536)
------- ------- -------- ------- --------
Total provided by
operations........... 3,931 4,564 16,153 6,150 6,585
------- ------- -------- ------- --------
Investing activities:
Additions to equipment and
leasehold improvements... (84) (160) (351) (151) (264)
Change in other assets.... 46 (4) -- -- --
------- ------- -------- ------- --------
Total used for
investing activities. (38) (164) (351) (151) (264)
------- ------- -------- ------- --------
Financing activities:
Net change in revolving
credit facility.......... -- -- -- -- 1,500
Dividends paid............ (1,500) (3,192) (16,987) (8,234) (10,331)
------- ------- -------- ------- --------
Total used for
financing activities. (1,500) (3,192) (16,987) (8,234) (8,831)
------- ------- -------- ------- --------
Net increase (decrease) in
cash....................... 2,393 1,208 (1,185) (2,235) (2,510)
Cash, beginning of period... 494 2,887 4,095 4,095 2,910
------- ------- -------- ------- --------
Cash, end of period......... $ 2,887 $ 4,095 $ 2,910 $ 1,860 $ 400
======= ======= ======== ======= ========
Supplemental data:
Cash payments for
interest................. $12 $10 $3 $2 $14
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MASTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
1.OPERATIONS:
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.
The Risk Factors on pages 6 to 11 of this registration statement are
incorporated herein by reference.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying Financial Statements reflect the application of the
following significant accounting policies:
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 and leasehold improvements over
their estimated useful lives of five to seven years.
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 June 30, 1996, this
liability would have been approximately $5.3 million.
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.
F-7
<PAGE>
MASTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Through April 30, 1996, the Company provided for group medical costs through
self-insurance programs. The amounts charged to expense for group medical
claims were approximately $498,000, $1,195,000, $2,005,000, $952,000 and
$632,000 for the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1995 and 1996, respectively. 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.
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 plus 1 1/2% and are payable upon demand.
There were no borrowings under this arrangement during the year ended December
31, 1995. Borrowings of $1,500,000 were outstanding as of June 30, 1996.
Average outstanding borrowings under this arrangement were $141,781, $185,385
and $746,154 for the years ended December 31, 1993 and 1994 and the six months
ended June 30, 1996, respectively.
4.RELATED PARTY TRANSACTIONS:
The two majority 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, $18,000 and
$18,000 for the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1995 and 1996, respectively. Future minimum payments
under these leases are approximately $12,000 per year plus annual operating
costs of the properties through 1996.
The Company remits fees for software consulting services, recruiting and
training provided by affiliated entities in which the Company's shareholders
own a majority interest. Fees for these services were approximately $916,000,
$493,000, $494,000, $297,000 and $853,000 for the years ended December 31,
1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996,
respectively.
F-8
<PAGE>
MASTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
<S> <C>
1996 $ 499,000
1997 452,000
1998 417,000
1999 383,000
2000 165,000
Thereafter --
----------
Total $1,916,000
==========
</TABLE>
Rental expense was approximately $148,000, $178,000, $300,000, $160,000 and
$363,000 for the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 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.
6.NON-RECURRING CHARGES:
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") 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 are included in non-recurring charges in the accompanying 1993
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 and 1995.
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 $692,000 as of December 31, 1994 and 1995 and June 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.
F-9
<PAGE>
MASTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9.SUBSEQUENT EVENTS:
In connection with the proposed initial public offering by the Company,
subsequent to June 30, 1996, the following transactions are anticipated to
occur:
(i) 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;
(ii) a 100-for-1 stock split effected as a stock dividend; and
(iii) an increase in the authorized capital stock to 100,000,000 shares of
Common Stock and 20,000,000 shares of Preferred Stock.
Accordingly, the Company's shareholders' equity accounts, the number of
shares and earnings per share in the accompanying Financial Statements have
been retroactively restated.
10.PRO FORMA INFORMATION (UNAUDITED):
The pro forma adjustments for income taxes included in the accompanying
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.
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............................. 7,166 7,630 7,544 8,677
Income from operations................... 4,468 4,631 4,301 4,788
Net income............................... $ 4,515 $ 4,676 $ 4,336 $ 4,824
======= ======= ======= =======
Pro forma net income..................... $ 2,709 $ 2,806 $ 2,602 $ 2,894
======= ======= ======= =======
Pro forma net income per share........... $ 0.11 $ 0.11 $ 0.10 $ 0.12
======= ======= ======= =======
1996
Net sales................................ $28,595 $30,804
Gross profit............................. 7,740 8,750
Income from operations................... 3,311 4,297
Net income............................... $ 3,334 $ 4,330
======= =======
Pro forma net income..................... $ 2,000 $ 2,598
======= =======
Pro forma net income per share........... $ 0.08 $ 0.10
======= =======
</TABLE>
F-10
<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
The Offering.............................................................. 4
Risk Factors.............................................................. 6
The Company............................................................... 12
Use of Proceeds........................................................... 12
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
Index to 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
[LOGO OF MASTECH CORPORATION]
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..................................................
Printing and engraving expenses.....................................
Legal fees and expenses.............................................
Accounting fees and expenses........................................
Blue Sky fees and expenses (including legal fees)...................
Transfer agent and rights agent and registrar fees and expenses.....
Miscellaneous.......................................................
-------
Total.............................................................
=======
</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 (the
"BCL") provides that a business corporation shall have the power to indemnify
any person who was or is a party, or is threatened to be made a party, to any
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as director, officer, employee or agent of another corporation or
other enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably believed to be
in, or not opposed to, the best interests of the corporation and, with respect
to any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful. In the case of an action by or in the right of the corporation, such
indemnification is limited to expenses (including attorneys' fees) actually,
and reasonably incurred by such person in connection with the defense or
settlement of such action, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person has been
adjudged to be liable to the corporation unless, and only to the extent that,
a court determines upon application that, despite the adjudication of
liability, but in view of all the circumstances, such person is fairly and
reasonably entitled to indemnity for the expenses that the court deems proper.
Article 8 of the Company's By-laws, as amended, provides that the Company
shall indemnify any person who was or is made a party to, or threatened to be
made a party to, or is involved in, any action, suit, or proceeding (including
actions by or in the right of the Company) by reason of the fact that he or
she is or was a director or officer of the Company (or is or was serving at
the request of the Company as a director, officer, trustee, employee, or agent
of a related enterprise including service with respect to an employee benefit
plan, or is or was serving at the specific written request of the Company as a
director, officer, trustee, employee, or agent of an unrelated enterprise)
against all expenses and liability he or she actually incurs, including,
without limitation, judgments and amounts paid or to be paid in settlement of,
or in actions brought by, or in the right of the Company, to the fullest
extent not prohibited by law. Article 8 also provides that directors and
officers shall be entitled to payment in advance of expenses incurred in
defending any such action, suit, or proceeding, upon receipt of an undertaking
to repay all amounts so advanced if it is ultimately determined that they are
not entitled to be indemnified or, in the case of criminal action, a majority
of the Board of Directors so determines. In addition, the Company has entered
into indemnification agreements with each of its directors which entitle the
director to indemnification for certain expenses to the fullest extent not
prohibited by law.
II-1
<PAGE>
The Bylaws 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 and its subsidiaries also carry insurance insuring their
officers and directors against certain liabilities which they might incur as
directors or officers of the Company or of any other organization which they
serve at the its request, including certain liabilities under the Securities
Act of 1933.
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
Act:
1. In October 1996 the Company entered into an agreement pursuant to which
it agreed to compensate one of its executive officers in the form of an
issuance restricted stock which vest 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.
2. A 100-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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<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 dated by and between the
Company and
Sunil Wadhwani and Ashok Trivedi.
10.2* -- 1996 Stock Incentive Plan.
Agreement dated October 14, 1996 between the Company and
10.3* -- Steven Shanghold.
10.4* -- Form of Employment Agreement between the Company and the
executive officers named on the schedule attached thereto.
Operating Agreement between the Company and Mascot Systems
10.5* -- Private Limited.
10.6* -- Operating Agreement between the Company and SWAT Systems.
10.7* -- Lease Agreement by and between Mascot Systems Private Limited
and Messrs. Wadhwani and Trivedi for real estate in Bangalore,
India.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
10.8* -- Lease Agreement by and between Mascot Systems Private Limited
and Messrs. Wadhwani and Trivedi for real estate in Pune,
India.
10.9* -- Lease Agreement by and between Mascot Systems Private Limited
and Messrs. Wadhwani and Trivedi for real estate in Madras,
India.
10.10* -- Stock Purchase Agreement by and between the Company and Mascot
Systems
10.11* -- Merger Agreement by and between the Company and SWAT Systems.
10.12* -- Form of S Corporation Termination, Tax Allocation and
Indemnification Agreement.
10.13* -- Revolving Credit Facility between the Company and PNC Bank.
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>
- ---------------------
*To be filed by amendment.
(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-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Pittsburgh, Pennsylvania on October
15, 1996.
MASTECH CORPORATION
/s/ Sunil Wadhwani
By:
---------------------------------
Sunil Wadhwani
Co-Chairman and Chief Executive
Officer
SIGNATURES
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
Sunil Wadhwani (Principal Executive
Officer)
* Co-Chairman, President
- ------------------------ and Director /s/ Sunil Wadhwani
Ashok Trivedi --------------------
*Sunil Wadhwani
For himself and as
attorney-in-fact.
Officer and Principal
* Vice President--Finance October 15, 1996
- ------------------------ (Principal Accounting
Michael Zugay Financial Officer)
II-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULES
We have audited in accordance with generally accepted auditing standards,
the Financial Statements of Mastech Corporation and have issued our report
thereon dated March 14, 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
March 14, 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
June 30, 1996........... Allowance for uncollectible accounts 500 316 (124) 692
</TABLE>
S-2
<PAGE>
Exhibit 1.1
Shares
MASTECH CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
__________, 1996
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
COWEN & COMPANY
MONTGOMERY SECURITIES
PARKER/HUNTER INCORPORATED
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
140 Broadway
New York, New York 10005
Dear Sirs:
Mastech Corporation, a Pennsylvania corporation (the "Company"), and
the stockholders of the Company named in Schedule II hereto, (collectively, the
"Selling Stockholders"), severally propose to sell an aggregate of __________
shares of common stock, par value $.01, of the Company (the "Firm Shares"), to
the several underwriters named in Schedule I hereto (the "Underwriters"). The
Firm Shares consist of __________ shares to be issued and sold by the Company
and __________ outstanding shares to be sold by the Selling Stockholders. The
Company also proposes to issue and sell to the several Underwriters not more
than __________ additional shares of common stock, par value $.01, of the
Company (the "Additional Shares"), if requested by the Underwriters as provided
in Section 2 hereof. The Firm Shares and the Additional Shares are herein
collectively called the Shares. The shares of common stock of the Company to
be outstanding after giving effect to the sales contemplated hereby are
hereinafter referred to as the Common Stock. The Company and the Selling
Stockholders are hereinafter collectively called the Sellers.
1. Registration Statement and Prospectus. The Company has prepared and
-------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
accordance
-1-
<PAGE>
with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively called the
"Act"), a registration statement on Form S-1 including a prospectus relating to
the Shares, which may be amended. The registration statement, as amended at
the time when it becomes effective, including a registration statement (if any)
filed pursuant to Rule 462(b) under the Act increasing the size of the offering
registered under the Act and information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Act, is hereinafter referred to as the Registration Statement; and the
prospectus in the form first used to confirm sales of Shares is hereinafter
referred as the Prospectus.
2. Agreements to Sell and Purchase. On the basis of the representations
-------------------------------
and warranties contained in this Agreement, and subject to its terms and
conditions, (i) the Company agrees to issue and sell __________ Firm Shares,
(ii) each Selling Stockholder agrees, severally and not jointly, to sell the
number of Firm Shares set forth opposite such Selling Stockholder's name in
Schedule II hereto, and (iii) each Underwriter agrees, severally and not
jointly, to purchase from each Seller at a price per share of $______ (the
"Purchase Price") the number of Firm Shares (subject to such adjustments to
eliminate fractional shares as you may determine) which bears the same
proportion to the total number of Firm Shares to be sold by such Seller as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) each Selling Stockholder
agrees, severally and not jointly, to sell the number of Additional Shares set
forth opposite such Selling Stockholder's name in Schedule __ hereto, and (ii)
the Underwriters shall have the right to purchase, severally and not jointly, up
to an aggregate __________ Additional Shares from such Selling Stockholders at
the Purchase Price. Additional Shares may be purchased solely for the purpose
of covering over-allotments made in connection with the offering of the Firm
Shares. The Underwriters may exercise their right to purchase Additional
Shares in whole or in part from time to time by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof. The date specified in any such
notice shall be a business day (i) no earlier than the Closing Date (as
hereinafter defined), (ii) no later than ten business days after such notice has
been given and (iii) no earlier than two business days after such notice has
been given. If any Additional Shares are to be purchased, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) which bears the same proportion to the total number of
Additional Shares to be purchased from the Company as the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule I bears to the total
number of Firm Shares.
-2-
<PAGE>
The Sellers hereby agree, severally and not jointly, and the Company shall,
concurrently with the execution of this Agreement, deliver an agreement executed
by (i) each of the directors and officers of the Company who is not a Selling
Stockholder and (ii) each stockholder listed on Annex I hereto, pursuant to
which each such person agrees, not to offer, sell, contract to sell, grant any
option to purchase, or otherwise dispose of any common stock of the Company or
any securities convertible into or exercisable or exchangeable for such common
stock or in any other manner transfer all or a portion of the economic
consequences associated with the ownership of any such common stock, except to
the Underwriters pursuant to this Agreement, for a period of ___ days after the
date of the Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. Notwithstanding the foregoing, during such
period (i) the Company may grant stock options pursuant to the Company's
existing stock option plan and (ii) the Company may issue shares of its common
stock upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof.
3. Terms of Public Offering. The Sellers are advised by you that the
------------------------
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the effective date of the Registration Statement as
in your judgment is advisable and (ii) initially to offer the Shares upon the
terms set forth in the Prospectus.
4. Delivery and Payment. Delivery to the Underwriters of and payment for
--------------------
the Firm Shares shall be made at 10:00 A.M., New York City time, on the third or
fourth business day unless otherwise permitted by the Commission pursuant to
Rule 15c6-1 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (the "Closing Date") following the date of the initial public offering, at
such place outside the State of New York as you shall designate. The Closing
Date and the location of delivery of and the form of payment for the Firm Shares
may be varied by agreement between you and the Sellers.
Delivery to the Underwriters of, and payment for, any Additional Shares to
be purchased by the Underwriters shall be made at such place as you shall
designate at 10:00 A.M., New York City time, on the date specified in the
applicable exercise notice given by you pursuant to Section 2 (an "Option
Closing Date"). Any such Option Closing Date and the location of delivery of
and the form of payment for such Additional Shares may be varied by agreement
between you and the Company.
Certificates for the Shares shall be registered in such names and issued in
such denominations as you shall request in writing not later than two full
business days prior to the Closing Date or an Option Closing Date, as the case
may be. Such certificates shall be made available to you for inspection not
later than 9:30 A.M., New York City time, on the business day next preceding the
Closing Date or an Option Closing Date, as the case may be. Certificates in
definitive form evidencing the Shares shall be delivered to you on the Closing
Date or an Option Closing Date, as the case may be, with any transfer taxes
thereon duly paid by the respective Sellers, for the respective accounts of the
several Underwriters, against payment of the Purchase Price therefor by wire
transfer of same day funds to the order of the applicable Sellers.
-3-
<PAGE>
5. Agreements of the Company. The Company agrees with you:
-------------------------
(a) To use its best efforts to cause the Registration Statement to
become effective at the earliest possible time.
(b) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) when the Registration Statement has become effective and
when any post-effective amendment to it becomes effective, (ii) of any request
by the Commission for amendments to the Registration Statement or amendments or
supplements to the Prospectus or for additional information, (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction, or the initiation of any proceeding for
such purposes, and (iv) of the happening of any event during the period referred
to in paragraph (e) below which makes any statement of a material fact made in
the Registration Statement or the Prospectus untrue or which requires the making
of any additions to or changes in the Registration Statement or the Prospectus
in order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal or lifting of such order at the earliest possible time.
(c) To furnish to you, without charge, five signed copies of the
Registration Statement as first filed with the Commission and of each amendment
to it, including all exhibits, and to furnish to you and each Underwriter
designated by you such number of conformed copies of the Registration Statement
as so filed and of each amendment to it, without exhibits, as you may reasonably
request.
(d) Not to file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or to
make any amendment or supplement to the Prospectus of which you shall not
previously have been advised or to which you shall reasonably object; and to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or supplement to the Prospectus which
may be necessary or advisable in connection with the distribution of the Shares
by you, and to use its best efforts to cause the same to become promptly
effective.
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period as in the opinion of counsel for
the Underwriters a prospectus is required by law to be delivered in connection
with sales by an Underwriter or a dealer, to furnish to each Underwriter and
dealer as many copies of the Prospectus (and of any amendment or supplement to
the Prospectus) as such Underwriter or dealer may reasonably request.
(f) If during the period specified in paragraph (e) any event shall
occur as a result of which, in the opinion of counsel for the Underwriters it
becomes necessary
-4-
<PAGE>
to amend or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if it is necessary to amend or supplement the
Prospectus to comply with any law, forthwith to prepare and file with the
Commission an appropriate amendment or supplement to the Prospectus so that the
statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with law, and to furnish to each Underwriter and to
such dealers as you shall specify, such number of copies thereof as such
Underwriter or dealers may reasonably request.
(g) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such qualification in effect so long as required
for distribution of the Shares and to file such consents to service of process
or other documents as may be necessary in order to effect such registration or
qualification.
(h) To mail and make generally available to its stockholders as soon
as reasonably practicable an earnings statement covering a period of at least
twelve months after the effective date of the Registration Statement (but in no
event commencing later than 90 days after such date) which shall satisfy the
provisions of Section 11(a) of the Act, and to advise you in writing when such
statement has been so made available.
(i) During the period of five years after the date of this Agreement,
(i) to mail as soon as reasonably practicable after the end of each fiscal year
to the record holders of its Common Stock a financial report of the Company and
its subsidiaries on a consolidated basis (and a similar financial report of all
unconsolidated subsidiaries, if any), all such financial reports to include a
consolidated balance sheet, a consolidated statement of operations, a
consolidated statement of cash flows and a consolidated statement of
shareholders' equity as of the end of and for such fiscal year, together with
comparable information as of the end of and for the preceding year, certified by
independent certified public accountants, and (ii) to mail and make generally
available as soon as practicable after the end of each quarterly period (except
for the last quarterly period of each fiscal year) to such holders, a
consolidated balance sheet, a consolidated statement of operations and a
consolidated statement of cash flows (and similar financial reports of all
unconsolidated subsidiaries, if any) as of the end of and for such period, and
for the period from the beginning of such year to the close of such quarterly
period, together with comparable information for the corresponding periods of
the preceding year.
(j) During the period referred to in paragraph (i), to furnish to you
as soon as available a copy of each report or other publicly available
information of the Company mailed to the holders of Common Stock or filed with
the Commission and such other publicly available information concerning the
Company and its subsidiaries as you may reasonably request.
-5-
<PAGE>
(k) To pay all costs, expenses, fees and taxes incident to (i) the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including financial statements and exhibits), each preliminary
prospectus and all amendments and supplements to any of them prior to or during
the period specified in paragraph (e), (ii) the printing and delivery of the
Prospectus and all amendments or supplements to it during the period specified
in paragraph (e), (iii) the printing and delivery of this Agreement, the
Preliminary and Supplemental Blue Sky Memoranda and all other agreements,
memoranda, correspondence and other documents printed and delivered in
connection with the offering of the Shares (including in each case any
disbursements of counsel for the Underwriters relating to such printing and
delivery), (iv) the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of the several states (including in
each case the fees and disbursements of counsel for the Underwriters relating to
such registration or qualification and memoranda relating thereto), (v) filings
and clearance with the National Association of Securities Dealers, Inc. in
connection with the offering, (vi) the listing of the Shares on the Nasdaq
National Market (vii) furnishing such copies of the Registration Statement, the
Prospectus and all amendments and supplements thereto as may be requested for
use in connection with the offering or sale of the Shares by the Underwriters or
by dealers to whom Shares may be sold and (viii) the performance by the Sellers
of their other obligations under this Agreement.
(l) To use its best efforts to maintain the inclusion of the Common
Stock in the Nasdaq National Market (or on a national securities exchange) for a
period of five years after the effective date of the Registration Statement.
(m) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
6. Representations and Warranties of the Company and the Selling
-------------------------------------------------------------
Stockholders. The Company and the Selling Stockholders represent and warrant to
- ------------
each Underwriter that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or threatened by the Commission.
(b) (i) Each part of the Registration Statement, when such part
became effective, did not contain and each such part, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, (ii) the Registration Statement
and the Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Act and (iii) the Prospectus does not
contain and, as amended or supplemented, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to
-6-
<PAGE>
make the statements therein, in the light of the circumstances under which they
were made, not misleading, except that the representations and warranties set
forth in this paragraph (b) do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, and each Registration Statement filed
pursuant to Rule 462(b) under the Act, if any, complied when so filed in all
material respects with the Act; and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(d) The Company owns, beneficially and of record, [90]% {of the
capital stock} of Mascot Systems Private Limited, a company organized under the
laws of India ("Mascot Systems"), and [79.2]% {of the capital stock} of Scott
Systems Private Limited, a company organized under the laws of India organized
under the laws of India ("Scott Systems" and, together with Mascot Systems, the
"Subsidiaries"); all such shares of capital stock are owned by the Company free
and clear of any security interest, claim, lien, encumbrance or adverse interest
of any nature. The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the Subsidiaries.
(e) The Company and each of the Subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority to carry on its business as it is currently being conducted and to
own, lease and operate its properties, and each is duly qualified and is in good
standing as a foreign corporation authorized to do business in each jurisdiction
in which the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so qualified would
not have a material adverse effect on the Company and the Subsidiaries, taken as
a whole.
(f) The merger contemplated by the SWAT Merger Agreement dated
__________, 1996 (the "SWAT Merger Agreement"), between SWAT Systems
Corporation, a Pennsylvania corporation ("SWAT"), and the Company has been duly
and validly consummated and has become effective under applicable law. No
consent, approval, authorization or order of any government or governmental
agency which had jurisdiction over either of the parties to the SWAT Merger
Agreement or over their respective properties was required for the execution and
delivery of the SWAT Merger Agreement and the consummation of the transactions
contemplated thereby, except for such consents, approvals, authorizations or
orders as have been duly and timely received or obtained. The performance of
the SWAT Merger Agreement and the consummation of the transactions therein
contemplated did not result in a breach or violation of any of the terms or
provisions of, or constitute a default under, (i) any bond, debenture, note or
other evidence of indebtedness, indenture, mortgage, deed of trust or loan
agreement, or
-7-
<PAGE>
under any material lease, contract, joint venture or other agreement, in each
case to the best of the Company's knowledge, to which any of the parties to the
SWAT Merger Agreement was a party or by which any of such parties or their
respective properties were bound, (ii) the charter or by-laws of the Company or
SWAT, or (iii) any law or, to the best of the Company's knowledge, order of any
court which had jurisdiction over either of the parties to the SWAT Merger
Agreement or over their respective property.
(g) The purchase of [ %] of the outstanding capital stock of Mascot
Systems contemplated by the Mascot Stock Purchase Agreement dated __________,
1996 (the "Mascot Stock Purchase Agreement"), among Sunil Wadwhami, Ashok
Trivedi and the Company has been duly and validly consummated and has become
effective under applicable law. No consent, approval, authorization or order of
any government or governmental agency which had jurisdiction over any of the
parties to the Mascot Stock Purchase Agreement or over their respective
properties was required for the execution and delivery of the Mascot Stock
Purchase Agreement and the consummation of the transactions contemplated
thereby, except for such consents, approvals, authorizations or orders as have
been duly and timely received or obtained. The performance of the Mascot Stock
Purchase Agreement and the consummation of the transactions therein contemplated
did not result in a breach or violation of any of the terms or provisions of, or
constitute a default under, (i) any bond, debenture, note or other evidence of
indebtedness, indenture, mortgage, deed of trust or loan agreement, or under any
material lease, contract, joint venture or other agreement, in each case to the
best of the Company's knowledge, to which any of the parties to the Mascot Stock
Purchase Agreement was a party or by which any of such parties or their
respective properties were bound, (ii) the charter or by-laws of either of the
parties to the Mascot Stock Purchase Agreement, or (iii) any law or, to the best
of the Company's knowledge, order of any court which had jurisdiction over any
of the parties to the Mascot Stock Purchase Agreement or over their respective
property.
(h) The purchases by the Company of the minority [interests] in
Mascot Systems and Scott Systems contemplated by the Mascot Minority Stock
Purchase Agreement and the Scott Minority Stock Purchase Agreement, each dated
__________, 1996 (collectively, the "Minority Stock Purchase Agreements"),
between the holders of the minority interests in each of the Subsidiaries, and
the Company will be duly and validly consummated and will become effective under
applicable law[, upon approval of the Reserve Bank of India]. No consent,
approval, authorization or order of any government or governmental agency[,
other than the Reserve Bank of India], which has jurisdiction over any of the
parties to the Minority Stock Purchase Agreements or over their respective
properties is required for the execution and delivery of the Minority Stock
Purchase Agreements and the consummation of the transactions contemplated
thereby, except for such consents, approvals, authorizations or orders as have
been duly and timely received or obtained. The performance of the Minority
Stock Purchase Agreement and the consummation of the transactions therein
contemplated will not result in a breach or violation of any of the terms or
provisions of, or constitute a default under, (i) any bond, debenture, note or
other evidence of indebtedness, indenture, mortgage, deed of trust or loan
agreement, or under any material lease, contract, joint venture or other
agreement, in
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each case to the best of the Company's knowledge, to which any of the parties to
the Minority Stock Purchase Agreements was a party or by which any of such
parties or their respective properties were bound, (ii) the charter or by-laws
of either of the parties to the Minority Stock Purchase Agreements, or (iii)
[subject to approval by the Bank of India] any law or, to the best of the
Company's knowledge, order of any court which had jurisdiction over any of the
parties to the Minority Stock Purchase Agreements or over their respective
property.
(i) All the outstanding shares of capital stock of the Company and the
Subsidiaries (including the Shares to be sold by the Selling Stockholders) have
been duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights; and the Shares to be issued and
sold by the Company hereunder have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as provided by this
Agreement, will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or similar rights.
(j) The authorized capital stock of the Company, including the Common
Stock, conforms as to legal matters to the description thereof contained in the
Prospectus.
(k) Neither the Company nor either of the Subsidiaries is in violation
of its respective charter or by-laws or in default in the performance of any
obligation, agreement or condition contained in any bond, debenture, note or any
other evidence of indebtedness or in any other agreement, indenture or
instrument material to the conduct of the business of the Company and the
Subsidiaries, taken as a whole, to which the Company or either of the
Subsidiaries is a party or by which it or either of the Subsidiaries or their
respective property is bound.
(l) The execution, delivery and performance of this Agreement, the [S
Corporation Termination Agreement, the Tax Allocation and Indemnification
Agreement] collectively, the "Ancillary Agreements"), compliance by the Company
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and by the Ancillary Agreements will not
require any consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body, except as
such may be required under the securities or Blue Sky laws of the various
states, and will not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of the Company or any
of its subsidiaries or any agreement, indenture or other instrument to which it
or any of its subsidiaries is a party or by which it or any of the Subsidiaries
or their respective property is bound, or violate or conflict with any laws,
administrative regulations or rulings or court decrees applicable to the Company
or the Subsidiaries, or their respective property.
(m) Except as otherwise set forth in the Prospectus, there are no
material legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any of their respective property is
the subject, and, to
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the best of the Company's knowledge, no such proceedings are threatened or
contemplated. No contract or document of a character required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement is not so described or filed as required.
(n) Neither the Company nor either of the Subsidiaries has violated
any foreign, federal, state or local law or regulation relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), nor any
foreign, federal or state law relating to discrimination in the hiring,
promotion or pay of employees nor any applicable federal or state wages and
hours laws, nor any provisions of the Employee Retirement Income Security Act or
the rules and regulations promulgated thereunder, which in each case might
result in any material adverse change in the business, prospects, financial
condition or results of operation of the Company and the Subsidiaries, taken as
a whole.
(o) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits"), including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease and operate its respective
properties and to conduct its business; the Company and each of its subsidiaries
has fulfilled and performed all of its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the holder of any such permit; and, except as
described in the Prospectus, such permits contain no restrictions that are
materially burdensome to the Company or any of its subsidiaries.
(p) In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business, operations
and properties of the Company and its subsidiaries, in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up, closure
of properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company has
reasonably concluded that such associated costs and liabilities would not,
singly or in the aggregate, have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(q) Except as otherwise set forth in the Prospectus or such as are not
material to the business, prospects, financial condition or results of operation
of the Company and its subsidiaries, taken as a whole, the Company and each of
the Subsidiaries has good and marketable title, free and clear of all liens,
claims, encumbrances and restrictions except liens for taxes not yet due and
payable, to all property and assets described in the Registration Statement as
being owned by it. All leases to which the Company or either of the
Subsidiaries is a party are valid and binding and no default has occurred or is
continuing thereunder, which might result in any material adverse change in the
business, prospects, financial condition or results of operation of the Company
and its
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subsidiaries taken as a whole, and the Company and the Subsidiaries enjoy
peaceful and undisturbed possession under all such leases to which any of them
is a party as lessee with such exceptions as do not materially interfere with
the use made by the Company or such Subsidiary.
(r) The Company and each of the Subsidiaries maintain reasonably
adequate insurance.
(s) Arthur Andersen LLP are independent public accountants with
respect to the Company as required by the Act.
(t) The financial statements, together with related schedules and
notes forming part of the Registration Statement and the Prospectus (and any
amendment or supplement thereto), present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and the Subsidiaries on the basis stated in the Registration Statement at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; and the other financial and
statistical information and data set forth in the Registration Statement and the
Prospectus (and any amendment or supplement thereto) is, in all material
respects, accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company.
(u) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own, lease and operate its
respective properties and to conduct its business in the manner described in the
Prospectus, subject to such qualifications as may be set forth in the
Prospectus; the Company and each of the Subsidiaries has fulfilled and performed
all of its material obligations with respect to such permits and no event has
occurred which allows, or after notice or lapse of time would allow, revocation
or termination thereof or results in any other material impairment of the rights
of the holder of any such permit, subject in each case to such qualification as
may be set forth in the Prospectus; and, except as described in the Prospectus,
such permits contain no restrictions that are materially burdensome to the
Company or any of its subsidiaries.
(v) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and the Subsidiaries have sufficient intellectual
property rights (including, without limitation, trademarks, trade names, patent
rights, mask works, copyrights and licenses), approvals and governmental
authorizations to conduct their businesses as now conducted; the expiration of
any intellectual property rights (including, without limitation, trademarks,
trade names, patent rights, mask works, copyrights and licenses), approvals or
governmental authorizations would not have a material adverse effect on the
condition (financial or otherwise), business, results of operations or prospects
of the Company or the Subsidiaries; and the Company has no knowledge of any
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infringement by it or the Subsidiaries of intellectual property rights
(including, without limitation, trademarks, trade names, patent rights, mask
works, copyrights and licenses), trade secret or other similar rights of others,
and there is no claim being made against the Company or the Subsidiaries
regarding trademark, trade name, patent, mask work, copyright, license, trade
secret or other infringement of intellectual property rights which could have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company or on the operations or
prospects of Subsidiaries.
(w) The Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(x) No holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the Company.
(y) [The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).]
(z) The Company has filed a registration statement pursuant to Section
12(g) of the Exchange Act, to register the Common Stock, has filed an
application to list the Shares on the Nasdaq National Market, and has received
notification that the listing has been approved, subject to notice of issuance.
(aa) Except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed therein by
Item 404 of Regulation S-K of the Commission.
(bb) There is (i) no significant unfair labor practice complaint
pending against the Company or any of its subsidiaries or, to the best knowledge
of the Company, threatened against any of them, before the National Labor
Relations Board or any state or local labor relations board, and no significant
grievance or more significant arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the Company or any of its
subsidiaries or, to the best knowledge of the Company, threatened against any of
them, and (ii) no significant strike, labor dispute, slowdown or stoppage
pending against the Company or any of its subsidiaries or, to the best knowledge
of the Company, threatened against it or any of its subsidiaries except for such
actions specified in clause (i) or (ii) above, which, singly or in the aggregate
could not reasonably be expected to have a material adverse effect on the
Company and its subsidiaries, taken as a whole.
(cc) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other
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than those being contested in good faith and for which adequate reserves have
been provided.
7. Representations and Warranties of the Selling Stockholders. Each
----------------------------------------------------------
Selling Stockholder severally represents and warrants to each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date (and Option Closing Date, if applicable) will have, good and clear
title to such Shares, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever.
(b) Upon delivery of and payment for such Shares pursuant to this
Agreement, good and clear title to such Shares will pass to the Underwriters,
free of all restrictions on transfer, liens, encumbrances, security interests
and claims whatsoever.
(c) Such Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority to enter into this Agreement and the
Custody Agreement between the Selling Stockholders and
__________________________________, as Custodian (the "Custody Agreement") and
to sell, assign, transfer and deliver such Shares in the manner provided herein
and therein, and this Agreement and the Custody Agreement have been duly
authorized, executed and delivered by such Selling Stockholder and each of this
Agreement and the Custody Agreement is a valid and binding agreement of such
Selling Stockholder enforceable in accordance with its terms, except as rights
to indemnity and contribution hereunder may be limited by applicable law.
(d) The power of attorney signed by such Selling Stockholder
appointing _________________ and ________________, or either one of them, as his
attorney-in-fact to the extent set forth therein with regard to the transactions
contemplated hereby and by the Registration Statement and the Custody Agreement
has been duly authorized, executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding instrument of such Selling Stockholder
enforceable in accordance with its terms, and, pursuant to such power of
attorney, such Selling Stockholder has authorized _________________ and
________________, or either one of them, to execute and deliver on his behalf
this Agreement and any other document necessary or desirable in connection with
transactions contemplated hereby and to deliver the Shares to be sold by such
Selling Stockholder pursuant to this Agreement.
(e) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might reasonably be
expected to, cause or result in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares
pursuant to the distribution contemplated by this Agreement, and other than as
permitted by the Act, the Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
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<PAGE>
(f) The execution, delivery and performance of this Agreement by such
Selling Stockholder, compliance by such Selling Stockholder with all the
provisions hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body (except
as such may be required under the Act, state securities laws or Blue Sky laws)
and will not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, organizational documents of such Selling
Stockholder, if not an individual, or any agreement, indenture or other
instrument to which such Selling Stockholder is a party or by which such Selling
Stockholder or property of such Selling Stockholder is bound, or violate or
conflict with any laws, administrative regulation or ruling or court decree
applicable to such Selling Stockholder or property of such Selling Stockholder.
(g) Such parts of the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relate to such Selling
Stockholder do not, and will not on the Closing Date (and any Option Closing
Date, if applicable), contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of circumstances under which they were made, not
misleading.
(h) At any time during the period described in paragraph 5(e) hereof,
if there is any change in the information referred to in paragraph 7(g) above,
the Selling Stockholders will immediately notify you of such change.
8. Indemnification. (a) The Company and each Selling Stockholder,
---------------
jointly and severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), from and against any and all losses, claims, damages,
liabilities and judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or the
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) or any preliminary prospectus, or caused by
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or judgments are
caused by any such untrue statement or omission or alleged untrue statement or
omission based upon information relating to any Underwriters furnished in
writing to the Company by or on behalf of any Underwriter through you expressly
for use therein. Notwithstanding the foregoing, the aggregate liability of any
Selling Stockholder pursuant to the provisions of this paragraph shall be
limited to an amount equal to the aggregate purchase price received by such
Selling Stockholder from the sale of such Selling Stockholder's Shares
hereunder; provided, however, that the foregoing indemnity agreement with
------------------
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages and
liabilities and judgments purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then
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amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Shares to such person, and if the
Prospectus (as so amended and supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or judgment.
(b) In case any action shall be brought against any Underwriter or any
person controlling such Underwriter, based upon any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement thereto
and with respect to which indemnity may be sought against the Company and the
Selling Stockholders, such Underwriter shall promptly notify the Company and the
Selling Stockholders in writing and the Company and the Selling Stockholders
shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to such indemnified party and payment of all fees and expenses.
Any Underwriter or any such controlling person shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Underwriter or such controlling person unless (i) the employment of such counsel
has been specifically authorized in writing by the Company, (ii) the Company and
the Selling Stockholders shall have failed to assume the defense and employ
counsel or (iii) the named parties to any such action (including any impleaded
parties) include both such Underwriter or such controlling person and the
Company or any Selling Stockholder, as the case may be, and such Underwriter or
such controlling person shall have been advised by such counsel that there may
be one or more legal defenses available to it which are different from or
additional to those available to the Company or the Selling Stockholders, as the
case may be, (in which case the Company and the Selling Stockholders shall not
have the right to assume the defense of such action on behalf of such
Underwriter or such controlling person, it being understood, however, that the
Company and the Selling Stockholders shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all such Underwriters and controlling
persons, which firm shall be designated in writing by Donaldson, Lufkin &
Jenrette Securities Corporation and that all such fees and expenses shall be
reimbursed as they are incurred). A Seller shall not be liable for any
settlement of any such action effected without the written consent of such
Seller but if settled with the written consent of such Seller, such Seller
agrees to indemnify and hold harmless any Underwriter and any such controlling
person from and against any loss or liability by reason of such settlement.
Notwithstanding the immediately preceding sentence, if in any case where the
fees and expenses of counsel are at the expense of the indemnifying party and an
indemnified party shall have requested the indemnifying party to reimburse the
indemnified party for such fees and expenses of counsel as incurred, such
indemnifying party agrees that it shall be liable for any settlement of any
action effected without its written consent if (i) such settlement is entered
into more than ten business days after the receipt by such indemnifying party of
the aforesaid request and (ii) such indemnifying party shall have failed to
reimburse the indemnified party in accordance with such request
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<PAGE>
for reimbursement prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, any person controlling the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, controlling such Selling Stockholder within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act to the
same extent as the foregoing indemnity from the Sellers to each Underwriter but
only with reference to information relating to such Underwriter furnished in
writing by or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any preliminary prospectus. In case
any action shall be brought against the Company, any of its directors, any such
officer or any person controlling the Company or any Selling Stockholder or any
person controlling such Selling Stockholder based on the Registration Statement,
the Prospectus or any preliminary prospectus and in respect of which indemnity
may be sought against any Underwriter, the Underwriter shall have the rights and
duties given to the Sellers (except that if any Seller shall have assumed the
defense thereof) such Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of such Underwriter), and the
Company, its directors, any such officers and any person controlling the Company
and the Selling Stockholders and any person controlling such Selling
Stockholders shall have the rights and duties given to the Underwriter, by
Section 8(b) hereof.
(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments (i) in such proportion as is appropriate to
reflect the relative benefits received by the Sellers on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Sellers and
the Underwriters in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Sellers and the Underwriters shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Sellers, and the total underwriting discounts and commissions received by the
Underwriters, bear to the total price to the public of the Shares, in each case
as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers and the Underwriters shall be
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determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 8(d) are several in proportion to the respective number of Shares
purchased by each of the Underwriters hereunder and not joint.
(e) Each Seller hereby designates Mastech Corporation, 1004 McKee
Road, Oakdale, Pennsylvania 15071, a Pennsylvania corporation, as its authorized
agent, upon which process may be served in any action, suit or proceeding which
may be instituted in any state or federal court in the State of New York by any
Underwriter or person controlling an Underwriter asserting a claim for
indemnification or contribution under or pursuant to this Section 8, and each
Seller will accept the jurisdiction of such court in such action, and waives, to
the fullest extent permitted by applicable law, any defense based upon lack of
personal jurisdiction or venue. A copy of any such process shall be sent or
given to such Seller, at the address for notices specified in Section 13 hereof.
9. Conditions of Underwriters' Obligations. The several obligations of
---------------------------------------
the Underwriters to purchase the Firm Shares under this Agreement are subject to
the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
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(b) The Registration Statement shall have become effective not later
than 5:00 P.M. (and in the case of a Registration Statement filed under Rule
462(b) of the Act, not later than 10:00 p.m.), New York City time, on the date
of this Agreement or at such later date and time as you may approve in writing,
and at the Closing Date no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been commenced or shall be pending before or contemplated by
the Commission.
(c) (i) Since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, there shall not have been any
material adverse change, or any development involving a prospective material
adverse change, in the condition, financial or otherwise, or in the earnings,
affairs or business prospects, whether or not arising in the ordinary course of
business, of the Company, (ii) since the date of the latest balance sheet
included in the Registration Statement and the Prospectus there shall not have
been any change, or any development involving a prospective material adverse
change, in the capital stock or in the long-term debt of the Company from that
set forth in the Registration Statement and Prospectus, (iii) the Company and
its subsidiaries shall have no liability or obligation, direct or contingent,
which is material to the Company and its subsidiaries, taken as a whole, other
than those reflected in the Registration Statement and the Prospectus and (iv)
on the Closing Date you shall have received a certificate dated the Closing
Date, signed by _______________ and _______________, in their capacities as the
_______________ and _________________ of the Company, confirming the matters set
forth in paragraphs (a), (b), and (c) of this Section 9.
(d) All the representations and warranties of the Selling Stockholders
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received a certificate to such effect, dated the Closing Date, from each
Selling Stockholder.
(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of Buchanan Ingersoll Professional Corporation, counsel for the Company and the
Selling Stockholders, to the effect that:
(i) the Company [and each of the Subsidiaries] has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation and has the corporate power and
authority required to carry on its business as it is currently being conducted
and to own, lease and operate its properties;
(ii) the Company [and each of the Subsidiaries] is duly qualified and
is in good standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or leasing of
property requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the Company and the
Subsidiaries, taken as a whole;
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(iii) all of the outstanding shares of capital stock of, or other
ownership interests in, each of the Subsidiaries have been duly and validly
authorized and issued and are fully paid and non-assessable, and are owned by
the Company, free and clear of any security interest, claim, lien, encumbrance
or adverse interest of any nature;
(iv) all the outstanding shares of Common Stock (including the Shares
to be sold by the Selling Stockholders) have been duly authorized and validly
issued and are fully paid, non-assessable and not subject to any preemptive or
similar rights;
(v) the Shares to be issued and sold by the Company hereunder have
been duly authorized, and when issued and delivered to the Underwriters against
payment therefor as provided by this Agreement, will have been validly issued
and will be fully paid and non-assessable, and the issuance of such Shares is
not subject to any preemptive or similar rights;
(vi) this Agreement has been duly authorized, executed and delivered
by the Company and each of the Selling Stockholders and is a valid and binding
agreement of the Company and each Selling Stockholder enforceable in accordance
with its terms (except as rights to indemnity and contribution hereunder may be
limited by applicable law);
(vii) the authorized capital stock of the Company, including the
Common Stock, conforms as to legal matters to the description thereof contained
in the Prospectus;
(viii) the Registration Statement has become effective under the Act,
no stop order suspending its effectiveness has been issued and no proceedings
for that purpose are, to the knowledge of such counsel, pending before or
contemplated by the Commission;
(ix) the statements under the captions "_______________",
"_______________", "_______________", "_______________", "_______________",
"_______________", "Description of Capital Stock" and "Underwriting" in the
Prospectus and Items 14 and 15 of Part II of the Registration Statement insofar
as such statements constitute a summary of legal matters documents or
proceedings referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings;
(x) neither the Company nor either of the Subsidiaries is in violation
of its respective charter or by-laws and, to the best of such counsel's
knowledge after due inquiry, neither the Company nor either of the Subsidiaries
is in default in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any other agreement, indenture or instrument material to the conduct of the
business of the Company and its subsidiaries, taken as a whole, to which the
Company or either of the Subsidiaries is a party or by which it or either of the
Subsidiaries or their respective property is bound;
-19-
<PAGE>
(xi) the execution, delivery and performance of this Agreement by the
Company and each Selling Stockholder, compliance by the Company and each Selling
Stockholder with all the provisions hereof and the consummation of the
transactions contemplated hereby will not require any consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body (except as such may be required under the Act
or other securities or Blue Sky laws) and will not conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the charter or
by-laws of the Company or any of its subsidiaries or the organizational
documents of any Selling Stockholder that is not an individual or any agreement,
indenture or other instrument to which the Company or any of its subsidiaries or
any Selling Stockholder is a party or by which the Company or any of its
subsidiaries or any Selling Stockholder or their respective properties are
bound, or violate or conflict with any laws, administrative regulations or
rulings or court decrees applicable to the Company or any of its subsidiaries or
any Selling Stockholder or their respective properties;
(xii) after due inquiry, such counsel does not know of any legal or
governmental proceeding pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of their respective property is subject
which is required to be described in the Registration Statement or the
Prospectus and is not so described, or of any contract or other document which
is required to be described in the Registration Statement or the Prospectus or
is required to be filed as an exhibit to the Registration Statement which is not
described or filed as required;
(xiii) to the best of such counsel's knowledge, after due inquiry,
neither the Company nor any of its subsidiaries has violated any Environmental
Laws, nor any federal or state law relating to discrimination in the hiring,
promotion or pay of employees nor any applicable federal or state wages and
hours laws, nor any provisions of the Employee Retirement Income Security Act or
the rules and regulations promulgated thereunder, which in each case might
result in any material adverse change in the business, prospects, financial
condition or results of operation of the Company and its subsidiaries, taken as
a whole;
(xiv) the Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits"), including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease and operate its respective
properties and to conduct its business in the manner described in the
Prospectus; to the best of such counsel's knowledge, after due inquiry, the
Company and each of its subsidiaries has fulfilled and performed all of its
material obligations with respect to such permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the rights of
the holder of any such permit, subject in each case to such qualification as may
be set forth in the Prospectus; and, except as described in the Prospectus, such
permits contain no restrictions that are materially burdensome to the Company or
either of the Subsidiaries;
-20-
<PAGE>
(xv) the Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended;
(xvi) to the best of such counsel's knowledge, after due inquiry, no
holder of any security of the Company has any right to require registration of
shares of Common Stock or any other security of the Company;
(xvii) to the best of such counsel's knowledge, after due inquiry,
except as otherwise set forth in the Registration Statement or such as are not
material to the business, prospects, financial condition or results of operation
of the Company and its subsidiaries, taken as a whole, the Company and each of
the Subsidiaries has good and marketable title, free and clear of all liens,
claims, encumbrances and restrictions except liens for taxes not yet due and
payable, to all property and assets described in the Registration Statement as
being owned by it;
(xviii) to the best of such counsel's knowledge, after due inquiry,
all leases to which the Company or any of its subsidiaries is a party are valid
and binding and no default has occurred or is continuing thereunder, which might
result in any material adverse change in the business, prospects, financial
condition or results of operation of the Company and the Subsidiaries taken as a
whole, and the Company and the Subsidiaries enjoy peaceful and undisturbed
possession under all such leases to which any of them is a party as lessee with
such exceptions as do not materially interfere with the use made by the Company
or such subsidiary;
(xix) (1) the Registration Statement (including any Registration
Statement filed under 462(b) of the Act, if any) and the Prospectus and any
supplement or amendment thereto (except for financial statements as to which no
opinion need be expressed) comply as to form in all material respects with the
Act, and (2) such counsel believes that (except for financial statements, as
aforesaid) the Registration Statement and the prospectus included therein at the
time the Registration Statement became effective did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
that the Prospectus, as amended or supplemented, if applicable (except for
financial statements, as aforesaid) does not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(xx) the Custody Agreement has been duly authorized, executed and
delivered by each Selling Stockholder and is a valid and binding agreement of
such Selling Stockholder enforceable in accordance with its terms;
(xxi) each Selling Stockholder has full legal right, power and
authority, and any approval required by law (other than any approval imposed by
the applicable state securities and Blue Sky laws) to sell, assign, transfer and
deliver the Shares to be sold by him in the manner provided in this Agreement
and the Custody Agreement;
-21-
<PAGE>
(xxii) each Selling Stockholder has good and clear title to the
certificates for the Shares to be sold by him and upon delivery thereof,
pursuant hereto and payment therefor, good and clear title will pass to the
Underwriters, severally, free of all restrictions on transfer, liens,
encumbrances, security interests and claims whatsoever; and
(xxiii) the power of attorney signed by each Selling Stockholder
appointing _________________ and ___________, or either of them, as his
attorney-in-fact to the extent set forth therein with regard to the transactions
contemplated hereby and by the Registration Statement has been duly authorized,
executed and delivered by or on behalf of each Selling Stockholder and are valid
and binding instruments of such Selling Stockholder enforceable in accordance
with its terms, and pursuant to such power of attorney, each of the Selling
Stockholders has authorized _________________ and ________________, or either of
them, to execute and deliver on their behalf this Agreement and any other
document necessary or desirable in connection with transactions contemplated
hereby and to deliver the Shares to be sold by them pursuant to this Agreement
In giving such opinion with respect to the matters covered by clause (xvii)
such counsel may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
The opinion of Buchanan Ingersoll Professional Corporation described in
paragraph (e) above shall be rendered to you at the request of the Company or
one or more of the Selling Stockholders, as the case may be, and shall so state
therein.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing Date,
of ____________________, counsel for the Subsidiaries to the effect that:
(i) Each of the Subsidiaries has been duly organized and is validly
existing as a {__________} in good standing under the laws of [India];
(ii) Mascot Systems has _____ {shares} of {type of} stock authorized,
_______ of which are issued and outstanding; all necessary and proper corporate
proceedings have been taken in order to authorize validly such authorized stock;
all outstanding shares of {type of} stock have been duly and validly issued, are
fully paid and non-assessable, have been issued in compliance with Indian law,
were not issued in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase any securities;
(iii) Scott Systems has _____ {shares} of {type of} stock authorized,
_______ of which are issued and outstanding; all necessary and proper
-22-
<PAGE>
corporate proceedings have been taken in order to authorize validly such
authorized stock; all outstanding shares of {type of} stock have been duly and
validly issued, are fully paid and non-assessable, have been issued in
compliance with Indian law, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase any securities;
(iv) The [Selling Stockholders] own beneficially and of record _______
shares of {type of} stock of Mascot Systems and SWAT owns beneficially and of
record _______ shares of {type of} stock of Scott Systems, in each case free and
clear of of any security interest, claim, lien, encumbrance or adverse interest
of any nature;
(v) The {describe transactions contemporaneous with offering or other
material transaction} and the consummation of the transactions contemplated
hereby and by the Ancillary Agreements will not result in a breach of, or
constitute a default under, any indenture, mortgage, deed of trust, trust
{constructive or other}, loan agreement, lease, franchise, license or other
agreement or instrument to which any of the Subsidiaries is a party or by which
any of its properties may be bound, or violate any statute, judgment, decree,
order, rule or regulation known to such counsel of any court or governmental
body having jurisdiction over the Subsidiaries or any of their properties and to
the best of such counsel's knowledge, no approval, authorization, order or
consent of any court, regulatory body, administrative agency or other
governmental body is required for {describe transactions contemporaneous with
offering or other material transaction} the execution and delivery of this
Agreement, the Ancillary Agreements or the Shareholders Agreement or the
consummation by the Selling Shareholders of the transactions contemplated herein
and therein, except as have been made or obtained;
(vi) The statements set forth in the Prospectus under the headings
"__________," "__________" and "__________," insofar as such statements
constitute a summary of the terms of legal matters, documents, agreements or
other instruments or governmental, regulatory or other legal proceedings, are
fair and accurate in all material respects.
In rendering such opinion, such counsel may rely as to matters of fact, on
certificates of the officers of the Subsidiaries and of governmental officials,
in which case their opinion is to state that they are so doing and that the
Underwriters are justified in relying on such opinions or certificates and
copies of said opinions or certificates are to be attached to the opin
(g) [Opinion of Immigration counsel.]
(h) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Sachnoff & Weaver, Ltd., counsel for the Underwriters, as to
the matters referred to in clauses (v), (vi) (but only with respect to the
Company), (viii), (ix) (but only with respect to the statements under the
captions "Description of Capital Stock" and "Underwriting") and (xvii) of the
foregoing paragraph (e). In giving such opinion with respect to the matters
covered by clause (xvii) such counsel may state that their opinion
-23-
<PAGE>
and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification except as specified.
(i) You shall have received a letter on and as of the Closing Date, in
form and substance satisfactory to you, from Arthur Andersen LLP, independent
public accountants, with respect to the financial statements and certain
financial information contained in the Registration Statement and the Prospectus
and substantially in the form and substance of the letter delivered to you by
Arthur Andersen LLP on the date of this Agreement.
(j) The Company and the Selling Stockholders shall not have failed at
or prior to the Closing Date to perform or comply with any of the agreements
herein contained and required to be performed or complied with by the Company at
or prior to the Closing Date.
(k) You shall have received on the Closing Date, a certificate of each
Selling Stockholder who is not a U.S. Person to the effect that such Selling
Stockholder is not a U.S. Person (as defined under applicable U.S. federal tax
legislation), which certificate may be in the form of a properly completed and
executed United States Treasury Department Form W-8 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
(l) You shall have received on the Closing Date a properly completed
and executed United States Treasury Department Form W-9 from each selling
stockholder.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
10. Effective Date of Agreement and Termination. This Agreement shall
-------------------------------------------
become effective upon the later of (i) execution of this Agreement and (ii) when
notification of the effectiveness of the Registration Statement has been
released by the Commission.
This Agreement may be terminated at any time prior to the Closing Date by
you by written notice to the Sellers if any of the following has occurred: (i)
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change or development
involving a prospective material adverse change in the condition, financial or
otherwise, of the Company and subsidiaries, taken as a whole, or the earnings,
affairs, or business prospects of the Company and its subsidiaries, taken as a
whole, whether or not arising in the ordinary course of business,
-24-
<PAGE>
which would, in your judgment, make it impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus, (ii) any outbreak or
escalation of hostilities or other national or international calamity or crisis
or change in economic conditions or in the financial markets of the United
States or elsewhere that, in your judgment, is material and adverse and would,
in your judgment, make it impracticable to market the Shares on the terms and in
the manner contemplated in the Prospectus, (iii) the suspension or material
limitation of trading in securities on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market System or limitation on prices for
securities on any such exchange or National Market System, (iv) the enactment,
publication, decree or other promulgation of any federal or state statute,
regulation, rule or order of any court or other governmental authority which in
your opinion materially and adversely affects, or will materially and adversely
affect, the business or operations of the Company or any Subsidiary, (v) the
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it or they have agreed to
purchase hereunder on such date and the aggregate number of Firm Shares or
Additional Shares, as the case may be, which such defaulting Underwriter or
Underwriters, as the case may be, agreed but failed or refused to purchase is
not more than one-tenth of the total number of Shares to be purchased on such
date by all Underwriters, each non-defaulting Underwriter shall be obligated
severally, in the proportion which the number of Firm Shares set forth opposite
its name in Schedule I bears to the total number of Firm Shares which all the
non-defaulting Underwriters, as the case may be, have agreed to purchase, or in
such other proportion as you may specify, to purchase the Firm Shares or
Additional Shares, as the case may be, which such defaulting Underwriter or
Underwriters, as the case may be, agreed but failed or refused to purchase on
such date; provided that in no event shall the number of Firm Shares or
--------
Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 10
by an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date or on an Option Closing Date, as the case may be, any
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares, or
Additional Shares, as the case may be, and the aggregate number of Firm Shares
or Additional Shares, as the case may be, with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares to be purchased
on such date by all Underwriters and arrangements satisfactory to you and the
applicable Sellers for purchase of such Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the applicable Sellers. In any such case
which does not result in termination of this Agreement, either you or the
Sellers shall have the right to postpone the Closing Date or the applicable
Option Closing Date, as the case may be, but in no event for longer than seven
days, in order that the required changes, if any, in
-25-
<PAGE>
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
11. Agreements of the Selling Stockholders. Each Selling Stockholder
--------------------------------------
severally agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes with respect to
the Shares to be sold by such Selling Stockholder; and
(b) To take all reasonable actions in cooperation with the Company and
the Underwriters to cause the Registration Statement to become effective at the
earliest possible time, to do and perform all things to be done and performed
under this Agreement prior to the Closing Date and to satisfy all conditions
precedent to the delivery of the Shares pursuant to this Agreement.
12. Miscellaneous. Notices given pursuant to any provision of this
-------------
Agreement shall be addressed as follows: (a) if to the Company, to Mastech
Corporation, 1004 McKee Road, Oakdale, PA 15071, (b) if to the Selling
Stockholders, to [NAME OF ATTORNEY-IN-FACT] c/o [ADDRESS OF ATTORNEY-IN-FACT]
and (c) if to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette
Securities Corporation, 140 Broadway, New York, New York 10005, Attention:
Syndicate Department, or in any case to such other address as the person to be
notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Selling Stockholders, the Company, its
officers and directors and of the several Underwriters set forth in or made
pursuant to this Agreement shall remain operative and in full force and effect,
and will survive delivery of and payment for the Shares, regardless of (i) any
investigation, or statement as to the results thereof, made by or on behalf of
any Underwriter or by or on behalf of the Sellers, the officers or directors of
the Company or any controlling person of the Sellers, (ii) acceptance of the
Shares and payment for them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters because of
any failure or refusal on the part of the Sellers to comply with the terms or to
fulfill any of the conditions of this Agreement, the Sellers agree to reimburse
the several Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Sellers, the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include
-26-
<PAGE>
a purchaser of any of the Shares from any of the several Underwriters merely
because of such purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
-27-
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
Mastech Corporation
By:_______________________________________
Title:
THE SELLING STOCKHOLDERS NAMED
IN SCHEDULE II HERETO
By:____________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
COWEN & COMPANY
MONTGOMERY SECURITIES
PARKER/HUNTER INCORPORATED
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:__________________________
-28-
<PAGE>
SCHEDULE I
----------
Underwriters Number of Firm Shares
- ------------------------------ to be Purchased
---------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
COWEN & COMPANY
MONTGOMERY SECURITIES
PARKER/HUNTER INCORPORATED
____________________
Total
-29-
<PAGE>
SCHEDULE II
-----------
Selling Stockholders
--------------------
Number of Firm
Name Shares Being Sold
- ---------------- -----------------
Sunil Wadhwani
Ashok Trivedi
_________________
Total
-30-
<PAGE>
ANNEX I
-------
Required Shareholder Lock-ups
-----------------------------
Sunil Wadhwani
Ashok Trivedi
Steven Shangold
-31-
<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
October 15, 1996
<PAGE>
EXHIBIT 24
FORM OF
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director and/or officer
of Mastech Systems Corporation (the "Company") hereby constitutes and appoints
Sunil Wadhwani and Ashok Trivedi, and each of them, the undersigned's true
and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution in each, for the undersigned in his or her name, place
and stead, in any and all capacities (including the undersigned's capacity
as a director and/or officer of the Company), granting unto said attorneys
in-fact and agents, and each of them, full power and authority to do and
perform each and every act and thing and to execute any and all instruments
which said attorneys-in-fact and agents, or any of them, may deem necessary
or advisable or which may be required to enable the Company to comply with
the Securities Act of 1933, as amended, and any rules, regulations or
requirements of the Securities and Exchange Commission in respect thereof,
in connection with the registration under said Act of Common Stock of the
Company and the offering thereof, as fully to all intents and purposes as
the undersigned might or could do in person, including specifically, but
without limiting the generality of the foregoing, the power and authority
to sign the name of the undersigned in the capacity of director and/or officer
of the Company to any registration statement to be filed with the Securities
and Exchange Commission in respect of said Common Stock, to any and all
amendments and supplements to any such registration statements, including
post-effective amendments thereto, and to any instruments or documents filed
as part of or in connection with any such registration statements or amendments
or supplements thereto, and to file such documents with the Securities and
Exchange Commission; and to do any and all acts and things and to execute
any and all instruments that said attorneys and agents and each of them
may deem necessary or desirable to enable the Company to comply with the
Securities Exchange Act of 1934, as amended, and any requirements of the
Securities and Exchange Commission thereunder, including specifically, but
without limiting the generality of foregoing, power and authority to sign
the name of the undersigned director and/or officer in such capacity, to
any application, report, instrument, certificate, form or other document,
and any and all supplements and amendments thereto, to be filed on behalf
of the Company with the Securities and Exchange Commission; and the undersigned
hereby ratifies and confirms all that said attorneys-in-fact and agents,
or any of them, or their or his or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents on the
date set forth opposite his or her name below.
Date: October , 1996 -----------------------------------------
--
Executed by the following individuals:
Sunil Wadhwani - Co-Chairman and Chief Executive Officer
Ashok Trivedi - Co-Chairman and President
Michael Zugay - Vice President - Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the Financial Statements included in the Registration Statement and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 DEC-31-1995
<CASH> 400 2,910
<SECURITIES> 0 0
<RECEIVABLES> 23,657 21,150
<ALLOWANCES> 692 500
<INVENTORY> 0 0
<CURRENT-ASSETS> 24,995 24,938
<PP&E> 1,201 937
<DEPRECIATION> 511 423
<TOTAL-ASSETS> 25,685 25,452
<CURRENT-LIABILITIES> 12,978 10,078
<BONDS> 0 0
0 0
0 0
<COMMON> 250 250
<OTHER-SE> 12,457 15,124
<TOTAL-LIABILITY-AND-EQUITY> 25,685 25,452
<SALES> 59,399 103,676
<TOTAL-REVENUES> 59,399 103,676
<CGS> 42,909 72,659
<TOTAL-COSTS> 51,791 85,488
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 316 302
<INTEREST-EXPENSE> (56) (163)
<INCOME-PRETAX> 7,664 18,351
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 7,664 18,351
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7,664 18,351
<EPS-PRIMARY> .18 .44
<EPS-DILUTED> .18 .44
</TABLE>
