<PAGE>
As filed with the Securities and Exchange Commission on October 30, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
MASTECH CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 7371 25-1802235
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
1004 MCKEE ROAD
OAKDALE, PA 15071
(412) 787-2100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
SUNIL WADHWANI, CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MASTECH CORPORATION
1004 MCKEE ROAD
OAKDALE, PA 15071
(412) 787-2100
(Name and address, including zip code, and telephone number, including area
code, of agent for service)
---------------
COPIES TO:
CARL A. COHEN DOUGLAS R. NEWKIRK
BUCHANAN INGERSOLL PROFESSIONAL SACHNOFF & WEAVER, LTD.
CORPORATION 30 S. WACKER, 29TH FLOOR
ONE OXFORD CENTRE CHICAGO, IL 60606
301 GRANT STREET, 20TH FLOOR (312) 207-1000
PITTSBURGH, PA 15219
(412) 562-8800
---------------
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
AMOUNT OFFERING MAXIMUM
TITLE OF EACH CLASS OF TO BE PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE (2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value... 3,450,000 $27.875 $96,168,750 $29,142.04
</TABLE>
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(1) Includes 450,000 shares that are subject to an over-allotment option
granted to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
-----------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 30, 1997
PROSPECTUS , 1997
3,000,000 SHARES
[MASTECH LOGO]
COMMON STOCK
Of the 3,000,000 shares of Common Stock offered hereby, 1,800,000 shares are
being sold by Mastech Corporation ("Mastech" or the "Company") and 1,200,000
shares are being sold by the Selling Shareholders. See "Principal and Selling
Shareholders." The Company will not receive any part of the proceeds from the
sale of shares by the Selling Shareholders.
Upon completion of this offering, directors and executive officers of the
Company will beneficially own approximately 63.9% of and have voting power over
approximately 44.8% of the Common Stock.
The Common Stock is traded on the Nasdaq National Market under the symbol
"MAST." On October 29, 1997, the last reported sale price of the Common Stock
was $31 1/4 per share. See "Price Range of Common Stock."
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
- --------------------------------------------------------------------------------
<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 $900,000, which will be paid by the
Company.
(3) The Selling Shareholders have granted to the Underwriters a 30-day option
to purchase up to 450,000 additional shares of Common Stock at the Price to
the Public, less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions, Proceeds to
the Company and Proceeds to the Selling Shareholders will be $ ,
$ , $ and $ , respectively. The Company will not
receive any of the proceeds from the sale of shares of Common Stock by the
Selling Shareholders pursuant to the Underwriters' over-allotment, if
exercised. See "Principal and Selling Shareholders" and "Underwriting."
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 , 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY SECURITIES, INC.
COWEN & COMPANY
<PAGE>
[Diagram Reflecting Market Opportunities and Mastech Strategies]
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."
-------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
-------------------------
Mastech(R) and SmartAPPS(SM) are service marks of the Company. Windows(R) is a
registered trademark of Microsoft Corporation. All other trademarks, service
marks and trade names referred to in this Prospectus are the property of their
respective owners.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Consolidated Financial Statements and related Notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, all information contained in
this Prospectus assumes that the Underwriters' over-allotment option is not
exercised. Unless otherwise indicated, references to the "Company" or "Mastech"
include Mastech Corporation and its wholly owned subsidiaries.
THE COMPANY
Mastech Corporation ("Mastech" or the "Company") is a worldwide provider of
information technology ("IT") services to large and medium-sized 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, Internet/intranet
services and applications maintenance outsourcing. These services are provided
in a 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. To enhance its services, Mastech has formed
business alliances with leading software companies such as Baan, Oracle and
PeopleSoft. In addition, the Company has developed its own proprietary
methodologies and tools, under the name SmartAPPS, that enhance the
productivity of the Company's Year 2000 and other services.
Mastech's revenues have grown from $13.5 million in 1991 to $123.4 million in
1996 and $135.8 million for the nine months ended September 30, 1997. During
1997, Mastech has provided IT services to over 475 clients worldwide in a
diverse range of industries. These clients include AT&T, Citibank, EDS, IBM,
Intel, Oracle and Wal-Mart. The Company sets high standards for client
responsiveness and project quality. A significant number of the Company's
clients have selected Mastech on a recurring basis to provide additional
services.
Mastech believes that the growth of the IT services industry offers
significant opportunities and has developed a set of strategies that the
Company believes differentiate it from competitors. These strategies include:
(i) the development of a global recruitment network through which the Company
recruits and deploys qualified IT professionals from a number of countries to
address the shortage of IT professionals in the U.S. and other developed
countries; (ii) a focus on applications services including ERP package
implementation, Year 2000 and Internet/intranet services; (iii) the development
of proprietary technology, including an automated tool for Year 2000 code
conversions and other programming language translations; (iv) international
expansion to leverage the growing need for value-added IT services in areas
outside the U.S.; and (v) the development of an extensive offshore software
development infrastructure to provide cost advantages to clients that are
increasingly short of resources.
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, 1997, the Company employed approximately 2,400 IT
professionals, over 1,500 of whom were in the U.S., with the remainder in
Canada, Europe, the Middle East, Singapore, Japan, India and Australia. To
support the Company's growth and to meet the increased demand for IT
professionals, the Company has embarked on an aggressive recruiting strategy,
designed to significantly increase the number of IT professionals hired. The
Company is also establishing a network of training centers in which it trains
new recruits in value-added technologies such as PeopleSoft, Oracle
Applications, Java/HTML and Year 2000 solutions.
3
<PAGE>
In 1995, the Company began marketing its services 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 the U.S., the Company maintains
international offices in Toronto, Singapore, London, Sydney, Tokyo, Amsterdam
and the Middle East. As a result of the Company's expanding international
operations, as of September 30, 1997, it had over 470 employees working with
over 90 clients outside the U.S.
To provide cost advantages to clients that are increasingly short of
resources, Mastech is investing 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 30 engagements for Mastech clients in the U.S. and
Canada. Two additional centers are under development in Pune and Madras, India.
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.
RECENT DEVELOPMENTS
In October 1997, the Company entered into a non-binding letter of intent to
purchase for cash the assets of an Australian IT services company. The
aggregate purchase price is not expected to exceed $6 million. The Company
anticipates closing this transaction prior to December 31, 1997. While there
can be no assurance that the Company will be successful in closing this
acquisition, the Company believes that the acquisition, if consummated, will
enhance its ability to service clients' needs and expand its market presence in
Australia. See "Risk Factors--Risks Related to Possible Acquisitions."
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............. 1,800,000 shares
Common Stock offered by the Selling
Shareholders.................................... 1,200,000 shares
Common Stock to be outstanding after the
offering........................................ 23,457,500 shares (1)
Use of proceeds................................. Expansion of existing
operations, including the
Company's international
marketing and offshore
software development
operations, development of
new service lines and
possible acquisitions of
related businesses; and
general corporate purposes,
including working capital.
Nasdaq National Market symbol................... MAST
</TABLE>
- --------------------
(1) Excludes 2,160,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan under which options to purchase
1,253,150 shares were outstanding as of October 15, 1997 at a weighted
average exercise price of $16.48 per share. See "Management--Employee
Benefit Plans" and "--Employment Agreements."
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............... $20,161 $38,709 $70,050 $103,676 $123,400 $90,336 $135,821
Gross profit........... 7,314 12,573 20,135 31,262 33,947 24,778 41,113
Income from operations
(1).................. 2,707 2,744 11,349 18,259 12,874 10,108 16,096
Income before income
taxes................ 2,732 2,724 11,444 18,396 12,828 10,087 17,130
Provision for income
taxes (2)............ -- -- -- -- 4,136 -- 6,852
------- ------- ------- -------- -------- ------- --------
Net income............. $ 2,732 $ 2,724 $11,444 $ 18,396 $ 8,692 $10,087 $ 10,278
Net income per common
share................ $ 0.47
Pro forma income taxes
(2).................. 1,093 1,090 4,578 7,358 4,915 4,035
Pro forma net income... $ 1,639 $ 1,634 $ 6,866 $ 11,038 $ 3,777 $ 6,052
Pro forma net income
per common
share (2)............ $ 0.09 $ 0.09 $ 0.38 $ 0.60 $ 0.20 $ 0.32
Weighted average number
of common shares
outstanding.......... 18,255 18,255 18,255 18,255 18,790 18,665 21,855
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
---------------------------
ACTUAL AS ADJUSTED(3)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $31,497 $ 84,035
Working capital.................................... 56,603 109,141
Total assets....................................... 88,124 140,662
Total shareholders' equity......................... 61,606 114,144
</TABLE>
- --------------------
(1) Income from operations for the year ended December 31, 1996 reflects a non-
recurring charge of $875,000 incurred pursuant to an agreement with an
executive to pay, as compensation for past services, an amount equal to the
value of 54,600 shares of Common Stock at the initial public offering price
of $15 per share. The Company has reflected this payment along with the
applicable tax withholdings as a non-recurring charge. In the nine months
ended September 30, 1997, income from operations reflects a non-recurring
charge of $389,000 relating to the amortization of deferred compensation of
this same executive.
(2) The Company's S-corporation status terminated on December 16, 1996 in
connection with the Company's initial public offering of Common Stock,
thereby subjecting the Company's income to federal and state taxes at the
corporate level. Pro forma net income and pro forma net income per common
share reflect federal and state income taxes (assuming a 40% effective tax
rate) as if the Company had been taxed as a C corporation for all periods
presented. See Note 10 of Notes to Consolidated Financial Statements for
information concerning the computation of pro forma net income per common
share. In connection with the Company's conversion from S-corporation
status to C-corporation status, the Company recorded a provision for income
taxes of $3.9 million in the fourth quarter of 1996.
(3) Adjusted to give effect to the sale of 1,800,000 shares of Common Stock
offered by the Company at an assumed public offering price of $31 1/4 per
share, net of underwriting discounts and commissions and estimated costs of
this offering. See "Use of Proceeds" 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
temporary work visas and permanent residency status has been diminished, could
lead to significant employee attrition. In the first eight months of 1996, the
Company experienced a higher than normal rate of employee attrition because
the Company was experiencing delays in securing the first-stage approval for
permanent residency status for its foreign employees working in the U.S. This
attrition resulted in the Company incurring increased costs for IT
professionals and a reduction in its revenue growth. See "Business--Human
Resources," "Business--Competition" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview."
GOVERNMENT REGULATION OF IMMIGRATION
The Company recruits its IT professionals on a global basis to create a
mobile workforce that it can deploy wherever required and, therefore, must
comply with the immigration laws in the countries in which it operates,
particularly the U.S. Over 90% of Mastech's IT professionals are citizens of
other countries, with most of those in the U.S. working under H-1B temporary
visas. Under current law, there is a statutory limit of 65,000 new H-1B visas
that may be issued in any government fiscal year. In the federal fiscal year
ended September 30, 1997, this limit was reached for the first time in August.
In years in which this limit is reached, the Company may be unable to obtain
enough H-1B visas to bring sufficient foreign employees to the U.S. If the
Company were unable to obtain H1-B visas for its employees in sufficient
quantities or at a sufficient rate for a significant period of time, 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 employment-based visas and
permanent residency visas 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 or result in the Company having
insufficient qualified personnel to perform all of the engagements that might
otherwise be available to the Company. Any such restrictions or limitations on
the Company's hiring practices could have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Human Resources."
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's revenues and operating results are subject to significant
variation from quarter to quarter depending on a number of factors, including
the timing and number of client projects commenced and completed during the
quarter, the number of working days in a quarter, employee hiring, attrition
and utilization rates and the mix of time-and-materials projects versus fixed-
price projects during the quarter. The Company recognizes revenues on time-
and-materials projects as the services are performed, while revenues on fixed-
price projects are
6
<PAGE>
recognized using the percentage of completion method. Although fixed-price
projects have not contributed significantly to revenues and profitability to
date, operating results may be adversely affected in the future by cost
overruns on fixed-price projects. Because a high percentage of the Company's
expenses are relatively fixed, variations in revenues may cause significant
variations in operating results. Additionally, the Company 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, Japan and the U.K. in 1996, and
Australia, the Netherlands and the Middle East during the first nine months of
1997. These operations depend greatly upon business, immigration and
technology transfer laws in those countries, and upon the continued
development of technology infrastructure. There can be no assurance that the
Company's international operations will be profitable or support the Company's
growth strategy. The risks inherent in the Company's international business
activities include unexpected changes in regulatory environments, foreign
currency fluctuations, tariffs and other trade barriers, difficulties in
managing international operations and potential foreign tax consequences,
including repatriation of earnings and the burden of complying with a wide
variety of foreign laws and regulations. The failure of Mastech to manage
growth, attract and retain personnel, manage major development efforts,
profitably deliver services, or a significant interruption of the Company's
ability to transmit data via satellite, could have a material adverse impact
on the Company's ability to successfully maintain and develop its
international operations and could have a material adverse effect on the
Company's business, operating results and financial condition.
Although the Company's ownership of a U.S. trademark registration covering
the service mark "Mastech" gives the Company the presumption of ownership in
the U.S. of the "Mastech" mark for the services identified in the
registration, there can be no assurance that the Company is entitled to use
the designation "Mastech" in all international operations and there is the
possibility that third parties have superior rights to the "Mastech" mark (or
similar marks) outside the U.S. See "Business--Business Strategies" and "--
Intellectual Property Rights."
EXPOSURE TO REGULATORY AND GENERAL ECONOMIC CONDITIONS IN INDIA
A significant element of the Company's business strategy is to increase the
utilization of its offshore software development centers in India. Mastech has
utilized an offshore software development center in Bangalore for
approximately one year and is in the process of opening two more centers in
Pune and Madras, India. The Company also operates recruiting and training
centers in 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 (temporary exemptions from
taxation on operating income), liberalized import and export duties and
preferential rules on foreign investment and repatriation. To be eligible for
certain of these tax benefits, the Company must continue to meet certain
conditions. A failure to meet such conditions in the future could result in
the cancellation of the benefits. There can be no assurance that such tax
benefits will be continued in the future at their current levels. 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
7
<PAGE>
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. There are relatively
few barriers to entry into the Company's markets and the Company may face
additional competition from new entrants into its markets. In addition, there
is a risk that clients may elect to increase their internal IT resources to
satisfy their 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 both for the first nine months of 1997 and the year ended December
31, 1996. EDS accounted for approximately 13% and 9%, of the Company's
revenues for the first nine months of 1997 and the year ended December 31,
1996, respectively. 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 $123.4 million in 1996 and $135.8 million for
the nine months ended September 30, 1997. The number of employees has grown
from 250 in 1991 to 2,696 as of September 30, 1997. 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,
ERP package implementation, Internet/intranet services and offshore software
development. The Company opened offices in Canada and Singapore in 1995, Japan
and the U.K. in 1996, and Dallas, Texas, Australia, the Netherlands and the
Middle East during the first nine months of 1997. In addition, the Company's
offshore software development center in Bangalore has been operational for
over a year and two additional centers in Pune and Madras, India are scheduled
to become operational during the first quarter of 1998. 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."
8
<PAGE>
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."
A significant number of organizations are attempting to migrate business
applications from a mainframe environment to advanced technologies, including
client/server architectures. As a result, the Company's ability to remain
competitive will be dependent on several factors, including its ability to
help existing employees maintain or develop mainframe skills and to train and
hire employees with skills in advanced technologies. The Company's failure to
hire, train and retain employees with such skills could have a material
adverse impact on the Company's business. See "Business--Human Resources." The
Company's ability to remain competitive will also be dependent on its ability
to design and implement, in a timely and cost-effective manner, effective
transition strategies for clients moving from the mainframe environment to
client/server or other advanced architectures. The failure of the Company to
design and implement such transition strategies in a timely and cost-effective
manner 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 or that such covenants will be enforceable. 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."
RISK OF PREFERRED VENDOR CONTRACTS
The Company is a party to several "preferred vendor" contracts and is
seeking additional similar contracts in order to obtain new or additional
business from large or medium-sized 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, or the loss of such status, may preclude the Company from
providing services to existing or potential clients, except as a
subcontractor, which could have a material adverse effect on the Company's
business, operating results and financial condition. 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
9
<PAGE>
operational or financial problems. Further, acquisitions may involve a number
of special risks, including diversion of management's attention, failure to
retain key acquired personnel, unanticipated events or circumstances and legal
liabilities and amortization of acquired intangible assets, some or all of
which could have a material adverse effect on the Company's business, operating
results and financial condition. Client satisfaction or performance problems at
a single acquired firm could have a material adverse impact on the reputation
of the Company as a whole. In addition, there can be no assurance that acquired
businesses, if any, will achieve anticipated revenues and earnings. While the
Company from time to time considers acquisition opportunities, except for the
acquisitions of affiliated companies described in this Prospectus, it has never
acquired a business. The Company recently entered into a non-binding letter of
intent to acquire an Australian IT services company. 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 "Prospectus Summary--Recent Developments."
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in part upon certain methodologies and tools it
uses in designing, developing and implementing applications systems and other
proprietary intellectual property rights. The Company is also developing
proprietary conversion tools, specifically tools tailored to address the Year
2000 problem. The Company relies upon a combination of nondisclosure and other
contractual arrangements and trade secret, copyright and trademark laws to
protect its proprietary rights and the proprietary rights of third parties from
whom the Company licenses intellectual property. The Company enters into
confidentiality agreements with its employees and limits distribution of
proprietary information. There can be no assurance that the steps taken by the
Company in this regard will be adequate to deter misappropriation of
proprietary information or that the Company will be able to detect unauthorized
use and take appropriate steps to enforce its intellectual property rights.
Although the Company 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."
LIMITED TRADING HISTORY OF COMMON STOCK; STOCK PRICE VOLATILITY
The Common Stock first became publicly traded on December 17, 1996 after the
Company's initial public offering at $15 per share. Between December 17, 1996
and October 29, 1997, the closing sale price has ranged from a low of $11 1/2
per share to a high of $35 per share. The market price of the Common Stock
could continue to fluctuate substantially due to a variety of factors,
including quarterly fluctuations in results of operations, adverse
circumstances affecting the introduction or market acceptance of new products
and services offered by the Company, announcements of new products and services
by competitors, changes in the IT environment, changes in earnings estimates by
analysts, changes in accounting principles, sales of Common Stock by existing
holders, loss of key personnel and other factors. The market price for the
Common Stock may also be affected by the Company's ability to meet analysts'
expectations, and any failure to meet such expectations, even if minor, could
have a material adverse effect on the market price of the Common Stock. In
addition, the stock market is subject to extreme price and volume fluctuations.
This volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
these companies. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. Any such litigation instigated against
the Company could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, operating results and financial condition. See "Price Range
of Common Stock."
10
<PAGE>
CONTROL BY EXISTING SHAREHOLDERS
Upon completion of this offering, Messrs. Wadhwani and Trivedi will
beneficially own approximately 63.4% of, and have voting power over
approximately 44.3% of, the Company's Common Stock. Messrs. Wadhwani and
Trivedi will, as a practical matter, be able to elect the entire Board of
Directors and to control or veto matters requiring shareholder approval,
including certain fundamental transactions such as a merger, consolidation or
the sale of substantially all of the assets of the Company, which may require
the approval of the holders of 66 2/3% of the votes cast. Messrs. Wadhwani and
Trivedi have entered into a shareholders agreement requiring each of them to
vote their shares of Common Stock in favor of the other in the election of
directors. The approval of the Government of India/Reserve Bank of India will
be required for the Company to continue to own Mascot Systems Private Limited
("Mascot Systems") and Scott Systems Private Limited ("Scott Systems") if the
ownership of the Company by persons of Indian origin, in the aggregate, falls
below 60% of the voting power of the Company. The Company's ability to raise
additional capital by the issuance of Common Stock or voting Preferred Stock or
to sell control of the Company to a third party or to use Common Stock to
acquire other businesses may be restricted if the Company is unable to obtain
the required approval. The Company is applying for the approval of the
Government of India for the reduction of ownership by persons of Indian origin
below the 60% level. Although there can be no assurance that such approval will
be granted, the Company is not aware of any reason why its application should
not be approved. See "The Company," "Management--Executive Officers and
Directors" and "Principal and Selling Shareholders."
POTENTIAL DECREASE IN DEMAND FOR YEAR 2000 SERVICES
The Company earned approximately 4% and 7% of its revenues from Year 2000
engagements in the year ended December 31, 1996 and the nine months ended
September 30, 1997, respectively. The Company expects that it will continue to
receive increased revenues from additional Year 2000 engagements in the near
term. However, the Company expects that Year 2000 engagements and revenues
derived from such engagements will peak prior to calendar year 2000 as
companies address their needs. Thereafter, the Company expects that revenues
derived from Year 2000 engagements will steadily decline. In the absence of
additional revenues from other sources, a decline in such engagements could
have a material adverse effect on the Company's business, operating results and
financial condition.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation, as amended
("Articles") and the Pennsylvania Business Corporation Law (the "PBCL") will
effectively make it more difficult for a third party to acquire control of the
Company by means of a tender offer or a proxy contest for the election of
directors or otherwise. The Company's Articles contain provisions which: (i)
classify the Board of Directors into three classes, with one class being
elected each year; (ii) require the approval of holders of 66 2/3% of the votes
cast on a proposal to amend the Articles, effect a merger or consolidation of
the Company, sell, lease or exchange all or substantially all of the Company's
assets or dissolve and wind-up the affairs of the Company, unless any such
proposal is unanimously approved by all of the Company's directors; and (iii)
require the approval of four of the Company's five directors for action by the
Board of Directors. These provisions may have the effect of lengthening the
time required for a person to acquire control of the Company through a proxy
contest for the election of a majority of the Board of Directors, may
discourage bids for the Common Stock at a premium over the market price and may
deter efforts to obtain control of the Company. See "Description of Capital
Stock--Certain Provisions Affecting Control of the Company."
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after completion of this offering, the Company will have
23,457,500 shares of Common Stock outstanding, of which the 3,000,000 shares
sold pursuant to this offering as well as the 5,520,000 shares sold in the
initial public offering will be freely tradable without restriction or further
registration under the Securities
11
<PAGE>
Act of 1933, as amended (the "Securities Act"), except those shares acquired in
the public market by affiliates of the Company. In addition, 1,253,150 shares
of Common Stock (250,800 of which become exercisable on or before December 31,
1997) are issuable upon exercise of outstanding stock options, which shares
have been registered by the Company under the Securities Act and after issuance
upon exercise will be freely tradable without restriction. Of the remaining
outstanding shares of Common Stock, 14,934,600 shares are "restricted
securities" within the meaning of Rule 144 under the Securities Act ("Rule
144") and may only be sold at prescribed times and subject to the manner of
sale, volume, notice and information restrictions of Rule 144. The Company and
Messrs. Wadhwani and Trivedi have agreed not to offer, sell, contract to sell
or otherwise dispose of, directly or indirectly, any Common Stock beneficially
owned by them, or any securities convertible into or exchangeable or
exercisable for Common Stock, except those shares registered and sold as part
of this offering until 90 days after the date of this Prospectus, without the
prior consent of Donaldson, Lufkin & Jenrette Securities Corporation. Following
the 90 day lock-up period, all of the restricted securities will become
eligible for sale, subject to Rule 144, except for 4,487,392 shares of Common
Stock held in family trusts established by Messrs. Wadhwani and Trivedi which
may not be sold prior to November 30, 1998 pursuant to the terms of a
shareholders agreement with the Company. The Company granted Messrs. Wadhwani
and Trivedi certain demand and piggyback registration rights prior to the
Company's initial public offering covering an aggregate of 16,080,000 shares of
Common Stock, which rights will be exercised, in part, as part of this
offering. 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. See "Shares Eligible
for Future Sale," "Management--Employment Agreements" and "Underwriting."
FIXED-PRICE PROJECTS
The Company undertakes certain projects billed on a fixed-price basis, which
is distinguishable from the Company's principal method of billing on a time-
and-materials basis. The failure of the Company to complete such projects
within budget would expose the Company to risks associated with cost overruns,
which could have a material adverse effect on the Company's business, operating
results and financial condition. Revenues derived from fixed-price projects
represented 2.1%, 2.6, and 3.7% of revenues for 1995, 1996 and the nine months
ended September 30, 1997, respectively. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
POSSIBLE ISSUANCES OF PREFERRED STOCK
Shares of Preferred Stock may be issued by the Company in the future without
shareholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding stock of the Company. The Company has no present
plans to issue any shares of Preferred Stock. See "Description of Capital
Stock--Preferred Stock."
POTENTIAL LIABILITY TO CLIENTS
Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be
difficult to quantify. Although the Company attempts to contractually
limit its liability for damages arising from errors, mistakes, omissions or
negligent acts in rendering its services, there can be no assurance that its
attempts to limit liability will be successful. 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.
12
<PAGE>
SIGNIFICANT UNALLOCATED NET PROCEEDS
None of the anticipated net proceeds of this offering have 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. The principal
purposes of this offering are to obtain additional working capital and to
provide liquidity to the Company's shareholders. See "Use of Proceeds."
BENEFITS OF OFFERING TO SELLING SHAREHOLDERS
The Selling Shareholders will receive substantial proceeds from this offering
and certain other benefits in connection with this offering. This offering will
provide liquidity to the Selling Shareholders for the shares of Common Stock
they presently own. After deduction of underwriting discounts and commissions,
the aggregate realized gain as a result of this offering by the Selling
Shareholders will be approximately $ million. Upon completion of this
offering, the Selling Shareholders will beneficially own an aggregate of 63.4%
of the outstanding Common Stock.
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. The Company's ability to pay dividends is subject to
the requirement of its revolving credit facility with PNC Bank that the Company
satisfy certain financial covenants. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Dividend Policy."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Included in this Prospectus are various forward-looking statements,
including, among others, the expected growth related to the Year 2000 problem,
the Company's goals and strategies, the importance and expected growth of the
IT applications solutions market, the pace of change in the IT marketplace, the
demand for IT services, the ability of the Company to capitalize on offshore
investments and infrastructure, the Company's goal to expand service offerings
and to pursue acquisitions, and the ability to leverage Year 2000 engagements
into additional contracts.
These statements are forward-looking and reflect the Company's current
expectations. Such statements are subject to a number of risks and
uncertainties, including, but not limited to, changes in the economic and
political environments, changes in technology and changes in the IT
marketplace. In light of the many risks and uncertainties surrounding the
Company and the IT marketplace, a prospective purchaser should keep in mind
that there can be no assurance that the forward-looking statements described in
this Prospectus will transpire.
13
<PAGE>
THE COMPANY
Since its inception in July 1986, the business of the Company has been
conducted through Mastech Systems Corporation, a Pennsylvania corporation
("Mastech Systems"). Mastech Systems is an indirect, wholly owned subsidiary
of the Company. Mastech Holding Corporation, a Delaware holding company and
wholly owned subsidiary of the Company, owns all of the issued and outstanding
stock of Mastech Systems.
In addition to Mastech Systems, the Company has two wholly owned operating
subsidiaries: Mascot Systems and Scott Systems, both of which are corporations
organized under the laws of India. Mascot Systems provides offshore software
development services to the Company and its clients from India and Scott
Systems provides recruiting and training services to the Company in India.
The offshore software development services provided by the Company to its
clients are provided through Mascot Systems. Mascot Systems leases from
Messrs. Wadhwani and Trivedi the real estate in Bangalore at which offshore
software development activities are conducted and expects to lease real estate
from them for the Company's planned offshore software development centers in
Pune and Madras, India. 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 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 1,800,000 shares of
Common Stock offered by the Company (after deduction of underwriting discounts
and commissions and estimated offering expenses payable by the Company) are
estimated to be approximately $52.5 million based upon an assumed public
offering price of $31 1/4 per share. The Company expects to use the net
proceeds from this offering for: (i) expansion of existing operations,
including the Company's international marketing and offshore software
development operations, development of new service lines and possible
acquisitions of related businesses; and (ii) general corporate purposes,
including working capital. Pending such uses, the net proceeds of this
offering will be invested in short-term, investment grade, interest-bearing
securities. The principal purposes of this offering are to obtain additional
working capital and provide liquidity to the Company's shareholders. See
"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."
PRICE RANGE OF COMMON STOCK
The Common Stock has been traded on the Nasdaq National Market under the
symbol MAST since December 17, 1996. The following table sets forth, for the
periods indicated, the range of high and low closing sale prices for the
Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1996
Fourth Quarter (from December 17, 1996)...................... $19 $17 1/8
1997
First Quarter................................................ $21 7/8 $15
Second Quarter............................................... $23 3/4 $11 1/2
Third Quarter................................................ $35 $22 3/8
Fourth Quarter (through October 29, 1997).................... $34 7/8 $26 5/8
</TABLE>
On October 29, 1997, the last reported sale price of the Common Stock was
$31 1/4 per share. On October 24, 1997, the Company had 66 holders of record
of the Common Stock.
14
<PAGE>
DIVIDEND POLICY
The Company intends to retain all of its future earnings to fund growth and
the operation of its business and therefore does not anticipate paying any
cash dividends in the foreseeable future. Future cash dividends, if any, will
be at the discretion of the Company's Board of Directors and will depend upon,
among other things, the Company's future operations and earnings, capital
requirements and surplus, general financial condition, contractual
restrictions and such other factors as the Board of Directors may deem
relevant. The Company's ability to pay dividends is subject to the requirement
of its revolving credit facility with PNC Bank that the Company satisfy
certain financial covenants. The Company distributed approximately $6.3
million of the proceeds from the initial public offering to Messrs. Wadhwani
and Trivedi as part of the S corporation termination. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations---
Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth the short-term debt and total capitalization
of the Company as of September 30, 1997, and as adjusted to give effect to the
sale by the Company of 1,800,000 shares of Common Stock (at an assumed public
offering price of $31 1/4 per share) and the application of the estimated net
proceeds therefrom as described in "Use of Proceeds." The following table
should be read in conjunction with the Consolidated Financial Statements and
related Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Revolving credit facility........................... $ 2,207 $2,207
=========== ============
Shareholders' equity:
Preferred stock, without par value; 20,000,000
shares authorized; no shares outstanding......... $ -- $ --
Common stock, $0.01 par value, per share;
100,000,000 shares authorized;
21,657,150shares issued and outstanding;
23,457,150 shares issued and outstanding, as
adjusted (1)..................................... 217 235
Additional paid-in capital......................... 51,362 103,882
Retained earnings.................................. 10,475 10,475
Deferred compensation.............................. (387) (387)
Currency translation adjustment.................... (61) (61)
----------- ------------
Total shareholders' equity....................... 61,606 114,144
----------- ------------
Total capitalization........................... $61,606 $114,144
=========== ============
</TABLE>
- ---------------------
(1) Excludes 2,160,000 shares of Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan under which options to purchase
1,253,150 shares were outstanding as of October 15, 1997 at a weighted
average exercise price of $16.48 per share. See "Management--Employee
Benefit Plans" and "--Employment Agreements."
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the five years
ended December 31, 1996 and the nine months ended September 30, 1996, are
derived from the Company's Consolidated Financial Statements and related Notes
thereto which have been audited by Arthur Andersen LLP, independent public
accountants. The selected financial data as of and for the nine months ended
September 30, 1997 are unaudited but, in the opinion of management, include
all adjustments that are necessary for a fair presentation of the results for
the nine months, and all such adjustments are of a normal recurring nature.
The results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for any other interim
period or for the full year. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and
related Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............... $20,161 $38,709 $70,050 $103,676 $123,400 $ 90,336 $ 135,821
Cost of revenues....... 12,847 26,136 49,915 72,414 89,453 65,558 94,708
------- ------- ------- -------- -------- --------- ----------
Gross profit........... 7,314 12,573 20,135 31,262 33,947 24,778 41,113
Selling, general and
administrative
expenses.............. 4,607 9,829 8,786 13,003 21,073 14,670 25,017
------- ------- ------- -------- -------- --------- ----------
Income from operations
(1)................... 2,707 2,744 11,349 18,259 12,874 10,108 16,096
Interest income
(expense), net........ 26 9 69 164 (43) (12) 1,034
Minority interest in
net loss (income) of
subsidiaries.......... (1) (29) 26 (27) (3) (9) --
------- ------- ------- -------- -------- --------- ----------
Income before income
taxes................. 2,732 2,724 11,444 18,396 12,828 10,087 17,130
Provision for income
taxes................. -- -- -- -- 4,136 -- 6,852
------- ------- ------- -------- -------- --------- ----------
Net income............. $ 2,732 $ 2,724 $11,444 $ 18,396 $ 8,692 $ 10,087 $ 10,278
======= ======= ======= ======== ======== ========= ==========
Net income per common $ 0.47
share................. ==========
Pro forma income taxes
(2)................... 1,093 1,090 4,578 7,358 4,915 4,035
------- ------- ------- -------- -------- ---------
Pro forma net income... $ 1,639 $ 1,634 $ 6,866 $ 11,038 $ 3,777 $ 6,052
======= ======= ======= ======== ======== =========
Pro forma net income
per common share (2).. $ 0.09 $ 0.09 $ 0.38 $ 0.60 $ 0.20 $ 0.32
======= ======= ======= ======== ======== =========
Weighted average number
of common shares
outstanding .......... 18,255 18,255 18,255 18,255 18,790 18,665 21,885
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 499 $ 2,897 $ 4,124 $ 3,026 $ 45,997 $ 918 $ 31,497
Working capital........ 4,238 5,678 13,745 14,594 49,692 10,405 56,603
Total assets........... 5,695 12,461 22,847 25,754 77,509 27,991 88,124
Total shareholders'
equity................. 4,626 5,972 14,262 15,671 50,759 13,149 61,606
</TABLE>
- ---------------------
(1) Income from operations for the year ended December 31, 1996 reflects a
non-recurring charge of $875,000 incurred pursuant to an agreement with an
executive to pay, as compensation for past services, an amount equal to
the value of 54,600 shares of Common Stock at the initial public offering
price of $15 per share. The Company has reflected this payment along with
the applicable tax withholdings as a non-recurring charge. In the nine
months ended September 30, 1997, income from operations reflects a non-
recurring charge of $389,000 relating to the amortization of deferred
compensation of this same executive.
(2) The Company's S-corporation status terminated on December 16, 1996 in
connection with the Company's initial public offering of Common Stock,
thereby subjecting the Company's income to federal and state taxes at the
corporate level. Pro forma net income and pro forma net income per share
reflect federal and state taxes (assuming a 40% effective tax rate) as if
the Company had been taxed as a C corporation for all periods presented.
See Note 10 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net income per common share. In
connection with the Company's conversion from S-corporation status to C-
corporation status, the Company recorded a provision for income taxes of
$3.9 million in the fourth quarter of 1996.
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 Corporation was incorporated in Pennsylvania on November 12, 1996.
Mastech Systems, a Pennsylvania corporation through which the business of the
Company has been conducted since its inception in July 1986, is an indirect,
wholly owned subsidiary of the Company. In December 1996, Mastech completed
the initial public offering of its Common Stock. Subsequent to the initial
public offering, Mascot Systems and Scott Systems, both of which are
corporations organized under the laws of India, became wholly owned
subsidiaries of Mastech Systems.
Mastech is a worldwide provider of IT services to large and medium-sized
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, Internet/intranet services and applications
maintenance outsourcing. These services are provided in a 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.
The Company's revenues are derived from fees paid by clients for
professional services. Historically, a substantial majority of the Company's
projects have been client-managed. On client-managed projects, Mastech
provides professional services as a member of the project team on a time-and-
materials basis. The Company recognizes revenues on time-and-materials
projects as the services are performed. On Mastech-managed projects, Mastech
assumes responsibility for project management and bills the client on a time-
and-materials or fixed-price basis. Fixed-price contracts are recognized by
the percentage of completion method. Revenues from international operations do
not include revenues generated through offshore software development centers
on U.S. client engagements.
Mastech's most significant cost is its personnel expense, which consists
primarily of salaries and benefits of the Company's billable personnel. The
number of IT professionals assigned to projects may vary depending on the size
and duration of each engagement. Moreover, project terminations and completion
and scheduling delays may result in periods when personnel are not assigned to
active projects. Mastech manages its personnel costs by closely monitoring
client needs and basing personnel increases on specific project engagements.
While the number of IT professionals may be adjusted to reflect active
projects, the Company must maintain a sufficient number of professionals to
respond to demand for the Company's services on both existing projects and new
engagements. In the first eight months of 1996, the Company experienced a
higher than normal rate of employee attrition because the Company was
experiencing delays in securing the first stage approval for permanent
residency status for some of its professionals. This attrition resulted in
increased costs for IT professionals and reduced revenue growth during this
period. 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 and have remained at such levels
since that date.
17
<PAGE>
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 implementation 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 have not yet been fully realized.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected
statements of operations data as a percentage of revenues:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- --------------------
1994 1995 1996 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........... 71.3 69.9 72.5 72.6 69.7
-------- -------- -------- ------ ------
Gross profit............... 28.7 30.1 27.5 27.4 30.3
Selling, general and
administrative expenses
(1)........................ 12.5 12.5 17.1 16.2 18.4
-------- -------- -------- ------ ------
Income from operations..... 16.2 17.6 10.4 11.2 11.9
Interest and other income
(expense), net............. 0.1 0.1 0.0 0.0 0.7
-------- -------- -------- ------ ------
Income before income taxes. 16.3 17.7 10.4 11.2 12.6
Provision for income taxes. -- -- 3.4 -- 5.0
-------- -------- -------- ------ ------
Net income................. 16.3% 17.7% 7.0% 11.2% 7.6%
</TABLE>
- ---------------------
(1) Includes non-recurring charges of .7% and .3% of total revenues for the
year ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues. The Company's revenues increased 50.4%, or $45.5 million from
$90.3 million in the first nine months of 1996 to $135.8 million in the first
nine months of 1997. This growth in revenues was due primarily to successful
market penetration by the Company's domestic Enterprise Package Solutions
Division, which increased its revenues $17.2 million. The Company also
experienced an increase of $9.2 million in revenues from its preferred vendor
service contract with EDS. Additionally, the Company's international revenues
increased by $9.5 million during this same period as a result of its expansion
into the Canadian, European and Asia Pacific markets. The Company broadened
its client base from 345 clients in the first nine months of 1996 to 475
clients in the first nine months of 1997.
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. Gross profit increased 65.9% from $24.8 million in the first nine
months of 1996 to $41.1 million in the first nine months of 1997. Gross profit
as a percentage of revenues increased from 27.4% in the first nine months of
1996 to 30.3% in the first nine months of 1997. The primary reasons for the
$16.3 million increase were higher margins in the Company's new service areas
such as the Enterprise Package Solutions Division and a significant decline in
the number of independent contractors used by the Company. Costs associated
with the use of independent contractors as a percentage of revenues decreased
from 16.7% in the first nine months of 1996 to 8.0% in the first nine months
of 1997. The number of IT professionals (including independent contractors)
used by the Company increased from 1,394 as of September 30, 1996 to 2,471 as
of September 30, 1997.
18
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of costs associated with the Company's sales
and marketing efforts, executive management, finance and human resource
functions, facilities and telecommunication costs and other general overhead
expenses. Selling, general and administrative expenses increased 70.5%, or
$10.3 million from $14.7 million for the first nine months of 1996 to $25.0
million for the first nine months of 1997. As a percentage of revenues,
selling, general and administrative expenses increased from 16.2% for the
first nine months of 1996 to 18.4% for the first nine months of 1997. The
increase in selling, general and administrative expenses reflects the
Company's continued investment in infrastructure and in the initiatives
required to implement the Company's marketing strategies. These costs include
the development of additional service offerings, the expansion of its global
recruiting capabilities, the opening of additional international offices, the
establishment of training centers and the continued expansion of its offshore
software development centers. In addition, the Company has incurred
incremental costs subsequent to the Company's initial public offering. The
incremental costs associated with the Company's public company status were
approximately $1.2 million for the first nine months of 1997.
Interest and Other Income (Expense), Net. Other income was $1.0 million for
the first nine months of 1997 compared to other expense of $21,000 for the
first nine months of 1996. This increase in other income is the result of
increased interest income from the investment of the net proceeds from the
Company's initial public offering. This increase in interest income was,
however, partially offset by an increase in interest expense charged on
borrowings outstanding under the Company's revolving credit facilities,
principally to support the Company's Indian operations. These borrowings
increased the Company's interest expense from $103,000 for the first nine
months of 1996 to $426,000 for the first nine months of 1997. See "--Liquidity
and Capital Resources." Other income and expense was not significant in any
period prior to the nine months ended September 30, 1997.
1996 COMPARED TO 1995
Revenues. The Company's revenues increased 19.0% from $103.7 million in 1995
to $123.4 million in 1996. This growth in revenues was primarily attributable
to additional services provided to existing clients, engagements with new
clients and the Company's continued expansion into international markets. The
Company broadened its client base from 308 clients in 1995 to 369 clients in
1996. Revenues from the Company's international operations increased from $1.4
million in 1995 to $11.1 million in 1996. The Company's revenue growth was
limited by higher than normal employee attrition in the first eight months of
1996.
Gross Profit. Gross profit increased 8.6% from $31.3 million in 1995 to
$33.9 million in 1996. Gross profit as a percentage of revenues declined from
30.1% in 1995 to 27.5% in 1996. This decrease is directly attributable to an
increase in costs for IT professionals, including higher salaries, employee
bonuses, relocation expense and an increase in the use of independent
contractors, incurred during 1996 as a result of a higher than normal rate of
employee attrition. In the first eight months of 1996, the Company experienced
this higher than normal rate of employee attrition because the Company was
experiencing delays in securing the first-stage approval from the Department
of Labor ("DOL") for permanent residency status for some of its professionals.
This attrition resulted in increased costs for IT professionals and reduced
revenue growth. In response to this attrition problem, the Company increased
its U.S. recruiting efforts, enhanced its training programs and worked with
the DOL to revise its filing procedures to resolve the delays. As a result of
these initiatives, the Company's employee attrition rate returned to normal
historical levels in September 1996. Costs associated with the use of
independent contractors as a percentage of cost of revenues increased from
10.1% in 1995 to 16.3% in 1996. The number of IT professionals utilized by the
Company (including independent contractors) increased from 1,248 as of
December 31, 1995 to 1,529 as of December 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 62.1% from $13.0 million in 1995 to $21.1
million in 1996. As a percentage of revenues, selling, general and
administrative expenses increased from 12.5% in 1995 to 17.1% in 1996. This
increase was primarily attributable to the expenses incurred to build the
infrastructure necessary to support the Company's continued revenue
19
<PAGE>
growth. In addition to the incremental costs previously mentioned, the Company
initiated a sales force recruiting program which resulted in a 50% increase
from 1995 to 1996 in the number of sales-related personnel. In the fourth
quarter of 1996, the Company recorded a non-recurring charge of $0.9 million
related to an executive compensation agreement which provides for, among other
things, a cash payment equal to the value of 54,600 shares of Common Stock at
the initial public offering.
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 revenues from systems integrators, additional services delivered to
existing clients, engagements with new clients and, for the first time,
revenues from international operations. The Company broadened its client base
from 285 clients in 1994 to 308 clients in 1995. The increase in revenues was
partially offset by a planned decrease in government contracts.
Gross Profit. Gross profit increased 55.3% from $20.1 million in 1994 to
$31.3 million in 1995. Gross profit also increased as a percentage of revenues
from 28.7% to 30.1%. This increase in margins was attributable to billing
rates increasing at a slightly higher level than professional salaries. Also,
the shift of available resources away from government contracts to more
profitable projects enabled the Company to attain a higher gross profit margin
in 1995. The increase in gross profit was partially offset by higher personnel
expenses resulting from the hiring of additional professionals to support the
increase in client engagements. The number of IT professionals increased from
1,005 as of December 31, 1994 to 1,248 as of December 31, 1995. Costs
associated with the use of independent contractors as a percentage of cost of
revenues increased from approximately 1.0% in 1994 to 10.1% in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 48.0% from $8.8 million in 1994 to $13.0
million in 1995, representing 12.5% of revenues in both 1994 and 1995.
Expenses incurred in 1995 include costs related to the start-up of two foreign
offices, the relocation of the Company's headquarters and a general expansion
of the sales, marketing and administrative functions to support the Company's
continued revenue growth.
20
<PAGE>
QUARTERLY RESULTS
Set forth below are selected income statement data for the seven fiscal
quarters ended September 30, 1997. This information is derived from unaudited
financial statements which include, in the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the information for such periods. This information should be
read in conjunction with the Consolidated Financial Statements and related
Notes thereto contained elsewhere in this Prospectus. Results of operations
for any fiscal quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $28,595 $30,804 $30,937 $33,064 $37,531 $45,059 $53,231
Cost of revenues........ 20,488 21,885 23,185 23,895 26,732 31,636 36,340
------- ------- ------- ------- ------- ------- -------
Gross profit............ 8,107 8,919 7,752 9,169 10,799 13,423 16,891
Selling, general and
administrative
expenses (1).......... 4,702 4,692 5,276 6,403 7,415 8,075 9,527
------- ------- ------- ------- ------- ------- -------
Income from operations.. 3,405 4,227 2,476 2,766 3,384 5,348 7,364
Interest income
(expense), net.......... 27 33 (72) (31) 464 366 204
Minority interest in net
loss (income)
of subsidiaries....... (3) (3) (3) 6 -- -- --
------- ------- ------- ------- ------- ------- -------
Income before income
taxes................... 3,429 4,257 2,401 2,741 3,848 5,714 7,568
Provision for income
taxes................... -- -- -- 4,136 1,539 2,286 3,027
------- ------- ------- ------- ------- ------- -------
Net income.............. 3,429 4,257 2,401 (1,395) $ 2,309 $ 3,428 $ 4,541
======= ======= =======
Pro forma income taxes.. 1,370 1,704 961 880
------- ------- ------- -------
Pro forma net income.... $ 2,059 $ 2,553 $ 1,440 $(2,275)
======= ======= ======= =======
</TABLE>
- ---------------------
(1) Includes non-recurring charges of $875,000, $130,000, $129,000 and
$130,000 in the four quarters ended September 30, 1997, respectively.
The Company's revenues and operating results are subject to significant
variation from quarter to quarter depending on a number of factors, including
the timing and number of client projects commenced and completed during the
quarter, the number of working days in a quarter, employee hiring, attrition
and utilization rates and the mix of time-and-materials projects versus fixed-
price projects during the quarter. Although fixed-price projects have not
contributed significantly to revenues and profitability to date, operating
results may be adversely affected in the future by cost overruns on fixed-
price projects. Because a high percentage of the Company's expenses are
relatively fixed, variations in revenues may cause significant variations in
operating results. Additionally, the Company periodically incurs cost
increases due to both the hiring of new employees and strategic investments in
its infrastructure in anticipation of future opportunities for revenue growth.
No assurances can be given that quarterly results will not fluctuate, causing
a material adverse effect on the Company's business and financial condition.
LIQUIDITY AND CAPITAL RESOURCES
The net proceeds generated from the Company's initial public offering were
approximately $45.6 million, after deducting underwriting discounts and
commissions and offering expenses paid by the Company. These proceeds have
been temporarily invested in short-term, investment grade, interest bearing
securities. During the nine months ended September 30, 1997, the Company used
the net proceeds to pay approximately $0.9 million of corporate income taxes
related to the termination of its status as an S corporation. In April 1997,
the Company also paid a dividend of approximately $6.3 million of
undistributed S-corporation earnings from these proceeds.
21
<PAGE>
Prior to the initial public offering, the Company generally financed its
working capital requirements through internally generated funds. Since the
initial public offering, the Company has financed its working capital
requirements through internally generated funds and with the proceeds from the
offering. The Company's financial statements reflect cash flow used by
operations of approximately $4.3 million for the nine months ended September
30, 1997, and cash flow provided by operations of $10.1 million for the nine
months ended September 30, 1996. The Company's cash provided by operations
prior to the initial public offering does not reflect any income tax expense
due to the Company's prior status as an S corporation. Prior to the initial
public offering, the Company made S-corporation distributions to its
shareholders and in 1997 made the final S-corporation distributions.
Capital expenditures for the first nine months of 1997 and 1996 were
approximately $4.0 and $1.8 million, respectively. During the first nine
months of 1997, the Company spent approximately $1.1 million in connection
with the buildout and other development of the infrastructure for its offshore
software development and training facilities in India. The Company also spent
approximately $1.2 million related to the implementation of a new management
information system during this period. The estimated remaining cost to license
and implement this new software, which is year 2000 compliant, is
approximately $800,000.
Effective May 30, 1997, the Company entered into a $25.0 million revolving
credit facility (the "Facility") with PNC Bank, National Association. The
Facility bears interest at a rate equal to LIBOR plus 1.0% or prime at the
Company's option and borrowings are unsecured. The Facility contains certain
restrictive covenants and financial ratio requirements which would limit
distributions to shareholders and additional borrowings. Historically, the
Company has not used its revolving credit facilities to finance its working
capital needs, and as of September 30, 1997, $25.0 million remained available
for borrowing under the Facility.
As of September 30, 1997, Mascot Systems had aggregate borrowings of
approximately $2.2 million outstanding under revolving credit agreements with
ICICI Banking Corporation Limited and IndusInd Bank Limited, both of India.
Interest rates charged on these borrowings range from 18.75% to 19.25% per
year. As of September 30, 1997, there are no additional amounts available for
borrowing under these facilities. These borrowings will be repaid by the
Company prior to December 31, 1997.
The Company currently anticipates that the proceeds from this offering
together with existing sources of liquidity and cash generated from operations
will be sufficient to satisfy its cash needs at least through the next twelve
months.
The Company does not believe that inflation had a significant impact on the
Company's results of operations for the periods presented. On an ongoing
basis, the Company attempts to minimize any effects of inflation on its
operating results by controlling operating costs and, whenever possible,
seeking to insure that billing rates reflect increases in costs due to
inflation.
The Company invoices its clients in the local currency of the country in
which the client is located. Gains and losses as a result of fluctuations in
foreign currency exchange rates have not had a significant impact on results
of operations.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128), which establishes new standards for computing and presenting earnings
per share and applies to entities with publicly and non-publicly held common
stock. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. SFAS No. 128 requires restatement of all prior period
earnings per share data presented. The Company has determined that the
adoption of SFAS No. 128 will not change reported earnings per share for any
periods.
22
<PAGE>
BUSINESS
SUMMARY
Mastech is a worldwide provider of IT services to large and medium-sized
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, Internet/intranet services and applications
maintenance outsourcing. These services are provided in a 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. To enhance its services, Mastech has formed business alliances
with leading software companies such as Baan, Oracle and PeopleSoft. In
addition, the Company has developed its own proprietary methodologies and
tools, under the name SmartAPPS, that enhance the productivity of the
Company's Year 2000 and other services.
Mastech's revenues have grown from $13.5 million in 1991 to $123.4 million
in 1996 and $135.8 million for the nine months ended September 30, 1997.
During 1997, Mastech has provided IT services to over 475 clients worldwide in
a diverse range of industries. These clients include AT&T, Citibank, EDS, IBM,
Intel, Oracle and Wal-Mart. The Company sets high standards for client
responsiveness and project quality. A significant number of the Company's
clients have selected Mastech on a recurring basis to provide additional
services.
Mastech believes that the growth of the IT services industry offers
significant opportunities and has developed a set of strategies that the
Company believes differentiate it from competitors. These strategies include:
(i) the development of a global recruitment network through which the Company
recruits and deploys qualified IT professionals from a number of countries to
address the shortage of IT professionals in the U.S. and other developed
countries; (ii) a focus on applications services including ERP package
implementation, Year 2000 and Internet/intranet services; (iii) the
development of proprietary technology, including an automated tool for Year
2000 code conversions and other programming language translations; (iv)
international expansion to leverage the growing need for value-added IT
services in areas outside the U.S.; and (v) the development of an extensive
offshore software development infrastructure to provide cost advantages to
clients that are increasingly short of resources.
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, 1997, the Company employed approximately 2,400 IT
professionals, over 1,500 of whom were in the U.S., with the remainder in
Canada, Europe, the Middle East, Singapore, Japan, India and Australia. To
support the Company's growth and to meet the increased demand for IT
professionals, the Company has embarked on an aggressive recruiting strategy,
designed to significantly increase the number of IT professionals hired. The
Company is also establishing a network of training centers in which it trains
new recruits in value-added technologies such as PeopleSoft, Oracle
Applications, Java/HTML and Year 2000 solutions.
In 1995, the Company began marketing its services 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 the U.S., the Company maintains
international offices in Toronto, Singapore, London, Sydney, Tokyo, Amsterdam
and the Middle East. As a result of the Company's expanding international
operations, as of September 30, 1997, it had over 470 employees working with
over 90 clients outside the U.S.
To provide cost advantages to clients that are increasingly short of
resources, Mastech is investing 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 30 engagements for Mastech clients in the U.S. and
Canada. Two additional centers are under development in
23
<PAGE>
Pune and Madras, India. 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.
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
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 the cost
worldwide to fix this problem (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 U.S., Western Europe
and Japan. The Information Technology Association of America has estimated a
current shortage of 190,000 IT professionals in the U.S. alone and indicated
that this shortage is exacerbated by a decreasing number of students
graduating from U.S. universities with sufficient skills to fill the
24
<PAGE>
growing demand for IT professionals. Problems associated with the Year 2000
are expected to compound the shortage, as qualified IT professionals are
diverted from normal development activities to handle more urgent Year 2000
compliance issues.
International Demand for IT Services. Organizations in countries other than
the U.S. are making the transition from mainframes to client/server
architectures, implementing integrated applications packages and addressing
the Year 2000 problem. The Company believes that many of these organizations
have lagged behind U.S. companies in these areas and are now aggressively
adopting new technologies. As a result, several of these markets are
experiencing faster growth than the U.S. market. For example, according to an
industry source, growth in the IT services industry through the year 2000 will
be 19.6% in the Asia/Pacific region, compared to 11.5% in the U.S.
Growth in Offshore Software Development. In light of the large and growing
backlog of applications development projects, the shortage of qualified IT
professionals in developed countries and the rising costs of applications
development and support, an increasing number of organizations are turning to
offshore software development. This approach offers a number of benefits,
including lower costs, faster delivery, more flexible scheduling and access to
a larger pool of skilled IT professionals. India is widely acknowledged as the
leader in offshore software development due to its large English-speaking
software talent pool, low labor costs and investments in technical education
and telecommunications. Many large organizations, including AT&T, Citicorp,
Digital Equipment, General Electric, Hewlett-Packard, IBM, Motorola and Oracle
are using offshore software development in India. The Gartner Group predicts
that over the next two years many organizations will spend a significant
percentage 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.
25
<PAGE>
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
and leverage the Company's strengths in ways that 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 proprietary and licensed tools to automate the
conversion process
. Use offshore capabilities for competitive advantage
. Convert into maintenance and client/server migration
engagements
- ---------------------------------------------------------------------------------------------
. Shortage of IT professionals >Accelerate global recruitment of high-quality IT
professionals
. Recruit and deploy on a worldwide basis
. Expand global network of recruiting and training
centers
- ---------------------------------------------------------------------------------------------
. Rapid growth in international >Continue expansion in key global markets
demand for IT services . Expand existing operations through acquisitions
. Establish operations in additional countries
>Leverage centralized "low-overhead" model
- ---------------------------------------------------------------------------------------------
. Growth in offshore software >Continue expansion of offshore development capability
development . Enhance capability to serve key foreign markets
. Expand to three state-of-the-art centers in India
</TABLE>
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 Applications 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, ERP package implementation services,
Internet/intranet services and applications maintenance outsourcing. These
services are provided in a wide variety of computing environments, and use
leading technologies, including client/server architectures, object-oriented
programming languages and tools, distributed database management systems and
the latest networking and communications technologies. In addition, the Company
has developed proprietary SmartAPPS methodologies and tools to enhance
productivity. The Company's broad range of services allows it to offer clients
a single source for IT applications solutions and enables it to cross-sell
services throughout clients' organizations.
Provide ERP Package Implementation Services. The Company leverages its
client/server expertise by providing ERP package implementation services for
Oracle Applications, Baan, PeopleSoft and SAP R/3, including project
management, customization, integration, migration, database design and
administration, systems support and training. The Company's status as an
Oracle, Baan and PeopleSoft business partner results in direct industry
referrals and enhanced industry recognition and enables the Company to broaden
its client base,
26
<PAGE>
maintain technological leadership and increase its competitiveness. In order
to meet the growing demand for ERP professionals, the Company recently
established 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. Mastech has developed a proprietary conversion methodology, known
as SmartAPPS, that can be adapted for various types of programming language
translation. SmartAPPS automates a high percentage of the activity required
for impact analysis and conversion of programming languages such as MVS COBOL.
Developed by the Company's Advanced Technology Group, the SmartAPPS toolset
uses compiler technology to incorporate natural language-based analysis and
transformations, and is designed and built with object-oriented languages,
providing generic capabilities that have the potential to address other
conversion and translation needs.
Accelerate Global Recruitment 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 addition to the U.S.,
the Company recruits in India, Canada, the U.K., Singapore, Australia, the
Philippines, Russia, Bulgaria, Brazil, Sri Lanka and South Africa. The Company
maintains a proprietary database of qualified candidates, enabling it to
respond to changing manpower requirements rapidly, as well as to manage and
increase the efficiency of its workforce. The Company advertises in leading
newspapers and trade magazines and has dedicated recruiters in its offices
worldwide. The Company also recruits recent college graduates, provides them
with training in key technologies and deploys them on client engagements.
Continue Expansion 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 $123.4 million in 1996 and $135.8
million for the nine months ended September 30, 1997. The Company's strategy
is to capitalize on the large and growing demand for IT services overseas and
to leverage its client base of large multinational corporations that need
support on a global basis. The Company opened offices in Canada and Singapore
in 1995, in Japan and the U.K. in 1996 and in Australia, the Netherlands and
the Middle East during the first nine months of 1997. The Company has
successfully grown these international operations to over 470 employees. The
Company also plans to open offices in South Africa and Latin America.
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. During
1997, the Company has served approximately 385 clients in 44 states from its
headquarters in Pittsburgh and offices in Washington, D.C., Dallas and San
Francisco. Similarly, the Company's office in Toronto serves clients
throughout Canada. This strategy has provided the Company with the benefits of
a national presence without the costs associated with a large network of
branch offices.
Continue Expansion of Offshore Software Development Capability. To meet the
growing worldwide demand for offshore software development services, Mastech
is continuing to invest, through its Mascot Systems subsidiary, in an
extensive offshore infrastructure in India, including three state-of-the-art
software development centers. When completed, these centers will have
approximately 130,000 square feet of total space and the capacity to
accommodate approximately 1,500 IT professionals. The first center, located in
Bangalore (known as India's "Silicon Valley"), has been operational for over a
year and is conducting over 30 engagements for clients in the U.S. and Canada.
This center is connected via secure, high-speed satellite links to the
Company's headquarters and client sites. Two additional centers in Pune and
Madras, India are planned to be operational in the first quarter of 1998. The
Company believes that 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 independent
contractor relationships to offer such services.
27
<PAGE>
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; (v) Internet/intranet services; and
(vi) applications maintenance outsourcing. These services are provided in a
variety of computing environments and use leading technologies including
client/server architectures, object-oriented programming languages and tools,
distributed database management systems, groupware and the latest networking
and communications technologies. In addition, the Company has developed
proprietary SmartAPPS methodologies and tools to enhance productivity.
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 assumes responsibility for project
management and bills the client on a time-and-materials or fixed-price basis.
The number of Mastech-managed projects is increasing and these projects
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 additional offshore
software development centers in Pune and Madras, India. Offshore software
development offers clients certain advantages as compared to domestic
development, including: (i) significant cost savings; (ii) faster delivery, as
larger teams can be deployed; (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.
28
<PAGE>
The Company's services are described below:
METHODS/TOOLS SERVICES
- --------------------------------------------------------------------------------
CLIENT/SERVER DESIGN AND DEVELOPMENT
- --------------------------------------------------------------------------------
.SmartAPPS Client/Server >Project management
>Requirements analysis and
. Languages: C/C++, definition
VisualBasic, Delphi >Evaluation and selection of
SmallTalk, Java applications packages
>Prototyping and re-use
. Tools: Powerbuilder, Gupta, >Data modeling, data warehousing
Developer/2000, Lotus Notes >Applications systems design and
development
. DBMS/4GLs: Oracle, Informix, >Database design and administration
Sybase, Unify, SQLServer >Systems development and
implementation
. GUI: Windows, Motif, X- >Technology education and training
Windows, OpenLook
. CASE Tools: Oracle*CASE,
IEF, Bachman
- --------------------------------------------------------------------------------
CONVERSION/MIGRATION
- --------------------------------------------------------------------------------
.SmartAPPS Migrate >Project management
Methodology and Automated >Automated tools development
Conversion Tools >User interface conversion
>Code conversion and testing
>Control language conversion
>Data migration
>Cutover and implementation
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
.SmartAPPS 2000 >Impact analysis
Impact Assessment and >Project planning
Automated Conversion Tools >Year 2000 conversion
>Compliance testing and validation
.Viasoft >Cutover and implementation
.Microfocus Revolve
- --------------------------------------------------------------------------------
ERP PACKAGE IMPLEMENTATION
- --------------------------------------------------------------------------------
.Oracle Applications >Project planning
>Customization
.Baan >Integration
>Migration
.PeopleSoft >Database design and administration
>Systems support
.SAP R/3 >Training
- --------------------------------------------------------------------------------
INTERNET/INTRANET
- --------------------------------------------------------------------------------
.SmartAPPS Net >Mentoring services
>Consulting services
. Languages: Java, Javascript, >Application development services
HTML, C++, CGI >Enterprise Java application development
and deployment
. Tools: NetDynamics, >Object-oriented analysis and design
ColdFusion, MS FrontPage, >Training services
Netscape Livewire Pro >Design, development and deployment of
. DBMS/4GLs: Oracle, Sybase, applications that web-enable databases and
Progress, Informix, SQL legacy systems
Server
. Methodologies: UML for Java,
JavaBeans Component Framework
for Enterprise Java component
development
- --------------------------------------------------------------------------------
29
<PAGE>
METHODS/TOOLS SERVICES
- -------------------------------------------------------------------------------
APPLICATIONS MAINTENANCE OUTSOURCING
- -------------------------------------------------------------------------------
. SmartAPPS Maintain >Project planning
Methodology and Tools >Baseline assessment and service
level definition
>Process enhancements
>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
ADDITIONAL SERVICES--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.
SALES AND MARKETING
Mastech sells its services to large and medium-sized organizations through a
direct sales force of over 70 professionals. The Company's sales force is
organized to meet the needs of the marketplace through four primary divisions:
(i) the U.S. Services Division; (ii) the Solutions Division; (iii) the
Enterprise Package Solutions Division; and (iv) the International Division.
Sales directors and representatives in each division are highly incentivized
to cross-sell the services of other divisions.
The U.S. Services Division includes four geographic regions, each of which
is directed by a Regional Director. Each region includes multiple new business
development managers. These individuals use a proprietary database of several
thousand prospects to telemarket Mastech's services nationally. The Company
subsequently sends interested prospective clients a written proposal providing
information about the Company, its approach and methodology, schedules, team
members, pricing and terms. Mastech leverages the mobility of its software
professionals and its cost effective telephone selling model to service all
areas of the U.S. Each geographic region also includes Corporate Account
Managers who are responsible for selling Mastech's services to existing
clients. These managers, Regional Directors and senior management meet
frequently on a direct, face-to-face basis with clients.
The U.S. Services Division also focuses on developing national and global
relationships with major systems integrators such as EDS, IBM, KPMG Peat
Marwick, Ernst & Young and Oracle. Mastech assists these integrators in
meeting their customers' needs by providing specialized technical expertise
and complementary capabilities such as offshore development.
The Solutions Division is responsible for securing and managing Mastech-
managed engagements. This division has a dedicated sales and marketing team
responsible for generating and qualifying leads and developing detailed
project estimates and proposals. This team sells directly to large and medium-
sized organizations and also partners with large systems integrators.
30
<PAGE>
The Enterprise Package Solutions Division manages engagements and provides
IT professionals trained in ERP package implementation services. This division
works directly with end-user clients and also as partners with both the ERP
software vendors and systems integrators on teamed implementation efforts.
The International Division operates through offices in seven different
countries. Each office is supervised by a Country Manager and supported by
dedicated sales personnel that sell directly to new clients using an approach
similar to the Company's U.S. sales approach. Additionally, these offices
focus on leveraging Mastech's existing relationships with its U.S.-based
multinational clients. These relationships are particularly strong with global
systems integrators and often provide a foundation on which each of Mastech's
international offices can build.
Mastech's marketing organization works closely with the sales organization
to constantly improve results by supporting it with market research to assist
in strategic planning and tactical decision making, trade show selection and
exhibit planning, marketing literature, advertising and public relations
support. The marketing organization develops messages and positioning for such
activities by analyzing market trends and competitors' activities.
CLIENTS
Substantially all of the Company's clients are large and medium-sized
organizations. During the nine months ended September 30, 1997, the Company
has provided services to over 475 clients worldwide in a diverse range of
industries. The Company's strategy is to maximize its client retention rate
and secure follow-on engagements by providing high-quality services and client
responsiveness. A significant number of the Company's clients have selected
Mastech on a recurring basis to provide additional services.
The Company is a preferred vendor for several large organizations, including
Associates Bancorp, Bank of America, EDS, IBM Year 2000 Global Services, 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 and medium-sized organizations. These contracts generally
result in lower margins due to negotiated discounts, but are expected to
generate higher revenues with lower selling costs.
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 Ameritech Royal Caribbean
Philip Morris General Motors AT&T Ryder Systems
Sears Hitachi MCI Union Pacific
Wal-Mart Intel U.S. Cellular USAirways
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL INTEGRATORS &
HEALTH CARE SERVICES VENDORS
----------- --------- -------------
<S> <C> <C>
Blue Cross/Blue Shield Bank of America Cap Gemini
Foxmeyer Citibank EDS
Health America Deutsche Bank Ernst & Young
Kaiser Foundation Health The Hartford IBM
Merck NationsBank Oracle
</TABLE>
During the first nine months of 1997, approximately 30% of the Company's
revenues were derived from its top five clients (EDS, Ernst & Young, IBM, The
Hartford and Cap Gemini). EDS accounted approximately 13% of the Company's
revenues for the nine months ended September 30, 1997.
31
<PAGE>
REPRESENTATIVE ENGAGEMENTS
Examples of the Company's engagements, which are representative of the nature
of its services, are set forth below:
CLIENT/SERVER DESIGN AND DEVELOPMENT: RE-ENGINEERING SOLUTION FOR A CONSUMER
PRODUCTS COMPANY.
Problem. A consumer products company needed to re-engineer its business
processes in order to implement an integrated, enterprise-wide system that
would incorporate high-tech tools such as hand-held computers to allow its
employees to check a customer's account history and produce point-of-sale
invoices.
Solution. Mastech designed and developed an integrated, enterprise-wide
system comprised of 12 different applications using Oracle Designer 2000.
Mastech's engagement team recommended the hardware, software and development
methodology. Mastech's responsibilities included project management, vendor
management, application and database architecture design, analysis and re-
engineering of the enterprise-wide processes implementation, training and
maintenance support.
CONVERSION/MIGRATION: LARGE-SCALE CONVERSION FOR A STATE GOVERNMENT AGENCY.
Problem. A large state government agency in the U.S. needed to convert all of
its applications from a Unisys mainframe to an IBM environment.
Solution. Mastech used a combination of on-site and offshore project teams to
complete the project. Mastech's offshore software development center in
Bangalore, 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.
ERP 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 organizational and functional lines. Mastech specialists are providing
Oracle Financials and Manufacturing expertise to customize and implement the
General Ledger, Inventory and Accounts Payable modules of Oracle Financials,
the Inventory and Purchasing modules of Oracle Manufacturing, and to develop
interfaces between the materials planning system and the Oracle Applications,
data conversion routines and additional functionality.
APPLICATIONS MAINTENANCE OUTSOURCING: OFFSHORE APPLICATION ENHANCEMENT
AND SUPPORT FOR A LARGE CANADIAN INVESTMENT FIRM.
Problem. One of Canada's largest investment firms needed to maintain its
application systems in a cost-effective manner.
Solution. Mastech used its offshore software development capabilities to
maintain the client's applications. The client was able to obtain the benefits
of on-site development support and coordination, while taking advantage of
Mastech's management and offshore software development and support capability.
Mastech's scope of work included requirements analysis, design of enhancements,
modification and testing of existing programs to incorporate enhancements, and
implementation of changes.
32
<PAGE>
INTERNET/INTRANET SOLUTIONS: A BIG SIX CONSULTING FIRM NEEDED JAVA
SPECIALISTS TO HELP IT DEVELOP AN INTERNET PRESENCE.
Problem. A Big Six consulting firm wanted to broaden its range of services
through the Internet by developing applications to support the delivery of
content and transactions capability to its entrepreneurial clients.
Solution. Mastech's Java specialists helped analyze, design, prototype and
develop the system by writing VisualBasic modules, JavaScript routines and CGI
scripts. They also evaluated various technologies for transaction processing
monitors and remote automation objects to address issues related to running a
client-server application over the Internet.
HUMAN RESOURCES
The Company's success depends in large part on its ability to attract,
develop, motivate and retain highly skilled IT professionals. The Company has
over 90 full-time employees dedicated to recruiting IT professionals and
managing its human resources. The Company recruits in a number of countries,
including India, the U.S., Canada, the U.K., Singapore, Australia, the
Philippines, Russia, Bulgaria, Brazil, Sri Lanka and South Africa. 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 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 benefits package
includes Company-subsidized health insurance, group life insurance, a long-
term disability plan, Company-subsidized health club memberships and tuition
reimbursement. The Company intends to continue 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 two to ten years of IT
experience. As of September 30, 1997, the Company had 2,696 employees
comprised of 2,389 IT professionals, 74 sales and marketing personnel and 233
general and administrative personnel. Over 90% of Mastech's IT professionals
are citizens of other countries, with most of those in the U.S. working under
H-1B temporary work permits. See "Risk Factors--Government Regulation of
Immigration." In addition, the Company uses independent contractors to support
client engagements. As of September 30, 1997, the Company had 82 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
33
<PAGE>
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.
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 56,234 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, 2001 and provides for two additional options to extend the lease
for consecutive five-year terms. The Company believes that this location has
sufficient space for its current and anticipated needs through 1997 and is
currently exploring leasing additional space at its headquarters and at other
locations. The Company has sales offices in Washington, D.C., Dallas and San
Francisco.
The Company has sales offices in several countries in order to develop
business internationally. The Company currently leases office space in London,
Singapore, Sydney, Amsterdam, the Middle East, Toronto and Tokyo. These
locations allow the Company to respond quickly to the needs of its
international clients and to recruit qualified IT professionals in these
markets.
Mascot Systems leases one offshore software development facility totaling
approximately 30,000 square feet in Bangalore, India and one recruiting
facility totaling approximately 4,200 square feet. 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 scheduled for
completion during the first quarter of 1998.
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.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's directors and executive officers and their respective ages and
positions as of September 30, 1997, 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........... 45 Vice President--Finance
Murali Balasubamanyam... 42 Vice President--Human Resources
Steven Shangold......... 36 Vice President--U.S. Sales and Marketing
Paul Oliver, Ph.D....... 57 Vice President--Solutions Division
Lisa Kustra............. 37 Vice President--Enterprise Package Solutions Division
Ajmal Noorani........... 35 Vice President--International Operations
Sushma Rajagopalan...... 34 Vice President--Global Resourcing and Recruiting
Michel Berty............ 58 Director
J. Gordon Garrett....... 58 Director
Ed Yourdon.............. 53 Director
</TABLE>
Sunil Wadhwani has served as Co-Chairman and Chief Executive Officer of the
Company since October 1996, and as a director since 1986. From 1986 through
September 1996, he served as Chairman of the Company and held several other
offices, including Vice President, Secretary and Treasurer. From 1981 to 1986,
Mr. Wadhwani served as President of Uro-Valve, Inc., a start-up manufacturer
of specialized medical devices that he founded in 1981. Prior to 1981, Mr.
Wadhwani worked as a management consultant assisting companies in strategic
planning, operations, marketing and sales. Mr. Wadhwani has a Master's degree
in Industrial Administration from Carnegie Mellon University and a Bachelor's
degree in Mechanical Engineering from the Indian Institute of Technology.
Ashok Trivedi has served as Co-Chairman and President of the Company since
October 1996, and as a director since 1988. From 1988 through September 1996,
Mr. Trivedi served as President of the Company and held other offices,
including Secretary and Treasurer. From 1976 to 1988, he held various
marketing and management positions with Unisys Corporation. Mr. Trivedi has a
Master's degree in Business Administration 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 24 years of financial and
operational experience. Mr. Zugay has a Bachelor's degree in Business
Management from Indiana University of Pennsylvania.
Murali Balasubamanyam has served as a Vice President--Human Resources of the
Company since October 1995. From September 1994 to October 1995, he served as
the Company's Director--Human Resources. Prior to joining the Company, he
served as Deputy General Manager (Human Resources) with HCL Group of Companies
from November 1992 to September 1994. From March 1990 to October 1992, he
served as General Manager (Human Resources) for Fedders Lloyd Corp. He also
served as Head of Personnel with PCL-Dell from 1986 to 1989. He has a
Bachelor's degree in Business Administration from Madurai University.
Steven Shangold has served as Vice President--U.S. Sales and Marketing of
the Company since October 1995. From February 1992 through September 1995, he
served as the Company's Sales Director--Commercial
35
<PAGE>
Division. From 1982 through January 1992, he was employed by Redshaw
Corporation (a subsidiary of ITT/Hartford that markets integrated software
packages to the insurance industry), most recently as Vice President--U.S.
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.
Paul Oliver, Ph.D. has served as Vice President--Solutions Division of the
Company since June 1997. From July 1985 to March 1997 he was employed by Booz
Allen & Hamilton as Vice President and Officer-in-Charge of its Systems
Engineering and Integration practice. Prior to 1985, he served as Vice
President--Systems Integration for American Management Systems, Inc. and
President of EDS World Corporation, the international subsidiary of EDS. He
has earned a Doctoral degree in Computer Science from the University of North
Carolina, a Master of Science degree in Mathematics from Ohio State University
and a Bachelor's degree in Mathematics from the University of Maryland.
Lisa Kustra has served as Vice President--Enterprise Package Solutions
Division of the Company since September 1997. From January 1996 to August
1997, she served as the Director of the Company's Enterprise Package Solutions
Division. From August 1992 to December 1995, Ms. Kustra held various
managerial positions with the Company including National Sales Manager-
Strategic Alliance Division. Ms. Kustra has earned Bachelor's degrees in
Business Management and Psychology from the University of Pittsburgh.
Ajmal Noorani has served as Vice President--International Operations of the
Company since May 1996. From June 1994 to May 1996, he was employed by Mellon
Bank as an Assistant Vice President--Corporate Finance. From 1990 to May 1994,
Mr. Noorani held a number of positions with the Company, including Director--
Government Division. Between 1988 and 1990 he was a Senior Management
Consultant at Arthur Andersen & Co. Mr. Noorani has a Master's degree in
Industrial Administration from Carnegie-Mellon University and a Bachelor's
degree in Engineering from Maharaja Sayajrao University.
Sushma Rajagopalan has served as Vice President--Global Resourcing and
Recruiting of the Company since October 1995. From June 1993 to October 1995,
she served as the Company's Director--Federal Division, and between November
1992 and June 1993, she held various managerial positions with the Company.
From June 1988 to December 1991, Ms. Rajagopalan was an Assistant Vice
President--Human Resources with Citibank in India. She has a Master's degree
in Personnel Management from the Tata Institute of Social Sciences.
Michel Berty was appointed as a director of the Company effective
immediately after the Company's initial public offering in December 1996. He
currently serves as the consultant to the President of Director for Cap Gemini
Sogeti Group (CGS) and as a U.S. representative for P.A.C., a foreign
consulting company. Mr. Berty served in various executive and management
positions with CGS from 1972 through April 1997, most recently, from 1992
through April 1997, as Chief Executive Officer and President of the American
subsidiary of CGS. Mr. Berty also serves as a member of the board of directors
of Computron Software, Inc., INTERSOLV, Sapiens International, Level 8 Systems
and ZMAX.
J. Gordon Garrett was appointed as a director of the Company effective
immediately after the Company's initial public offering in December 1996. He
is currently Senior Vice President of Ricoh Corp., Caldwell, New Jersey and
Chief Executive Officer of Ricoh Canada, formerly Gestetner North America, a
position he has held since 1995. From 1991 to 1995, Mr. Garrett was Chairman
of the Board, Chief Executive Officer and President of Information Systems
Management (ISM) Corporation. He also held the position of President of
Gestetner USA from 1989 to 1991 and NULOGIX Technical Services, Inc. (a
majority owned subsidiary of IBM).
Ed Yourdon was appointed as a director of the Company effective immediately
after the Company's initial public offering in December 1996. Mr. Yourdon has
served as a consultant to the information technology industry for the past
five years, most currently focusing on the Internet, business re-engineering,
object technology and the design of Internet/intranet software applications.
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
36
<PAGE>
consists of five members. The Board of Directors is divided into three
classes, each of whose members serve for a staggered three-year term. Messrs.
Berty and Garrett are Class A Directors and their terms will expire in 2000.
Messrs. Trivedi and Yourdon are Class B Directors and their terms will expire
in 1998. Mr. Wadhwani is a Class C Director and his term will expire in 1999.
At each annual meeting of shareholders, the appropriate number of directors
are elected for a three-year term to succeed the directors of the same class
whose terms are then expiring.
BOARD COMMITTEES
The Board has an Audit Committee comprised of Messrs. Garrett, Berty and
Wadhwani, a majority of whom are independent directors. The Audit Committee's
duties include recommending to the Board of Directors the firm of independent
accountants to audit the Company's financial statements, reviewing the scope
and results of the independent auditors' activities and the fees proposed and
charged therefor, reviewing the adequacy of internal controls and reviewing
the scope and results of internal audit activities, and reporting the results
of the committee's activities to the full Board.
The Board has a Compensation Committee, consisting of Messrs. Garrett, Berty
and Trivedi, a majority of whom are independent directors. The Compensation
Committee is responsible for reviewing and approving matters involving the
compensation of directors and executive officers of the Company, periodically
reviewing management development plans, administering the incentive
compensation plans and making recommendations to the full Board on these
matters.
The Board has an Executive Committee, consisting of Messrs. Wadhwani and
Trivedi, which exercises the full power of the Board of Directors between
meetings of the Board, provided that the Executive Committee does not have
power or authority to: (i) approve any fundamental change that requires
shareholder approval; (ii) create or fill vacancies on the Board of Directors;
(iii) adopt, amend or repeal the Bylaws; (iv) take any action with respect to
the compensation of executive officers; (v) take any other action committed by
resolution of the Board of Directors to another committee of the Board of
Directors; (vi) authorize the issuance of any shares of the Company's stock;
or (vii) authorize any distributions with respect to the Company's outstanding
shares.
DIRECTOR COMPENSATION
Directors who are not executive officers of the Company are paid an annual
retainer of $20,000, and all directors are reimbursed for travel expenses
incurred in connection with attending Board and committee meetings. Directors
are not entitled to additional fees for serving on committees of the Board of
Directors. Pursuant to the terms of the Company's 1996 Stock Incentive Plan,
each of Messrs. Berty, Garrett and Yourdon, the nonemployee directors of the
Company, were granted options to purchase 15,000 shares of Common Stock. The
exercise price for these options is $15, which was the price per share for the
Common Stock in the Company's initial public offering. The options vest in
annual installments equally over three years commencing December 16, 1997, and
expire ten years after grant, subject to earlier termination if the optionee
ceases to serve as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Company's initial public offering, 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. Following the
initial public offering, the Compensation Committee, which consists of Messrs.
Garrett, Berty and Trivedi was formed.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
earned by the Company's Chief Executive Officer and each of the four other
most highly compensated executive officers of the Company whose aggregate
salary and bonus compensation exceeded $100,000 (collectively, the "Named
Executive Officers") during the two years ended December 31, 1996:
37
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------------- --------------------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION STOCK AWARDS OPTIONS/SARS COMPENSATION
(2) (#)
<S> <C> <C> <C> <C> <C> <C> <C>
Sunil Wadhwani.......... 1996 $168,000(3) $ -- $21,050(4) $ -- -- $ --
Co-Chairman and Chief 1995 108,102(3) -- -- -- -- --
Executive Officer
Ashok Trivedi........... 1996 168,000(3) -- 20,963(4) -- -- --
Co-Chairman and 1995 108,102(3) -- -- -- -- --
President
Steven Shangold......... 1996 126,667 74,265 -- 819,000(5) 25,000 819,000(5)
Vice President--U.S. 1995 68,333 170,003 -- -- -- --
Sales and Marketing
Michael Zugay........... 1996 120,000 19,000 -- -- 56,000 --
Vice President--Finance 1995 71,923 5,000 -- -- -- --
Sushma Rajagopalan...... 1996 100,000 17,000 -- -- 65,000 --
Vice President--Global 1995 78,333 26,000 -- -- -- --
Resourcing and
Recruiting
</TABLE>
- ---------------------
(1) Bonuses were paid in 1995 and 1996 for performance in 1994 and 1995,
respectively. The bonus paid in 1995 to Mr. Shangold includes sales
commissions of $24,944.
(2) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted because such perquisites and other personal benefits
constitute less than 10% of the total annual salary and bonus for the Named
Executive Officer for such year.
(3) In addition to these salary amounts, during 1995 and 1996 (prior to the
Company' initial public offering), Messrs. Wadhwani and Trivedi received
Subchapter S distributions as shareholders of the Company.
(4) The Company leases automobiles for Messrs. Wadhwani and Trivedi. The
taxable income during 1996 for the automobiles leased was $21,050 for Mr.
Wadhwani and $20,963 for Mr. Trivedi.
(5) As compensation for past services, the Company paid Mr. Shangold an amount
equal to the value of 109,200 shares of Common Stock at the initial public
offering price of $15 per share. One-half of this payment was made in cash,
at Mr. Shangold's election. The remaining half of this obligation was
satisfied through the issuance of 54,600 shares of restricted Common Stock.
The aggregate value of such restricted Common Stock, which vests on June
30, 1998, was $1,037,400 at December 31, 1996.
The following table sets forth the number of shares of the Common Stock
underlying options granted, the exercise price per share and the expiration
date of all options granted to each of the Named Executive Officers during
1996.
OPTION GRANTS DURING 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION GRANT DATE
EXECUTIVE OFFICER GRANTED (1) FISCAL YEAR PER SHARE DATE VALUE (2)
<S> <C> <C> <C> <C> <C>
Steven Shangold......... 25,000 3.12% $15.00 12/16/06 $146,500
Michael Zugay........... 56,000 7.00% 15.00 12/16/06 328,160
Sushma Rajagopalan...... 65,000 8.12% 15.00 12/16/06 380,900
</TABLE>
- ---------------------
(1) The options granted during 1996 vest as follows: (i) 6,000 options for Mr.
Zugay and 15,000 options for Ms. Rajagopalan will vest in equal
installments on June 16, 1997 and December 16, 1997; (ii) 50,000 options
each for Mr. Zugay and Ms. Rajagopalan will vest in equal annual
installments over five years commencing December 16, 1997; and (iii) 25,000
options awarded to Mr. Shangold will vest in equal annual installments over
three years commencing December 16, 1999.
38
<PAGE>
(2) The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions for grants in 1996: (i) risk-free interest rate of
6.2%; (ii) expected dividend yield of 0.0%; (iii) expected life of options
of six years; and (iv) an expected volatility rate of 24.5%.
The following table sets forth the aggregate dollar value of all options
exercised and the total number of unexercised options held, on December 31,
1996, by each of the Named Executive Officers:
AGGREGATED OPTION EXERCISES DURING 1996 AND 1996 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FISCAL YEAR END (#) AT FISCAL YEAR END (1)
------------------------- -------------------------
SHARES ACQUIRED VALUE
EXECUTIVE OFFICER ON EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
<S> <C> <C> <C> <C>
Steven Shangold......... -- $-- -- / 25,000 $-- / $100,000
Michael Zugay........... -- -- -- / 56,000 -- / 224,000
Sushma Rajagopalan...... -- -- -- / 65,000 -- / 260,000
</TABLE>
- ---------------------
(1) The closing price for the Common Stock as reported on the Nasdaq National
Market on December 31, 1996 (the last day of trading in 1996) was $19.
Value is calculated on the basis of the difference between the option
exercise price and $19, multiplied by the number of shares of Common Stock
underlying the option.
EMPLOYEE BENEFIT PLANS
Stock Incentive Plan. The Company has reserved an aggregate of 2,160,000
shares of Common Stock for issuance under the 1996 Stock Incentive Plan (the
"Stock Incentive Plan"), which may be granted to directors, officers and other
employees and consultants of the Company and its subsidiaries. The Stock
Incentive Plan permits: (i) the grant of incentive stock options; (ii) the
grant of non-qualified stock options; (iii) the issuance or sale of Common
Stock with or without vesting or other restrictions ("Stock Grants"); (iv) the
grant of Common Stock upon the attainment of specified performance goals
("Performance Share Awards"); and (v) the grant of stock appreciation rights.
In addition, directors who are not employees or officers of the Company
("Independent Directors") will automatically be eligible for certain grants
under the Stock Incentive Plan, as described below. On and after the date the
Stock Incentive Plan becomes subject to Section 162(m) of the Internal Revenue
Code of 1986, as amended, the maximum number of shares of Common Stock that
may be awarded to any one individual in any calendar year is 200,000 shares.
Since the inception of the Stock Incentive Plan, options have been granted to
247 employees. As of October 15, 1997, 1,253,150 shares were subject to
outstanding options and 903,950 shares remained available for future grants
under the Stock Incentive Plan.
The Stock Incentive Plan is 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
39
<PAGE>
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 are granted
to each non-employee director upon such director's initial appointment or
election to the Board. 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) defined contribution plan (the
"401(k) Plan"). All employees of the Company who have completed six months of
employment are eligible to participate in the 401(k) Plan, pursuant to which
each participant may contribute up to 15% of eligible compensation (up to a
statutorily prescribed annual limit of $9,500 in 1997). The Company does not
currently match contributions made by employees to the 401(k) Plan. All
amounts contributed by employee participants and earnings on these
contributions are fully vested at all times. Employee participants may elect
to invest their contributions in various established funds.
EMPLOYMENT AGREEMENTS
The Company has entered into substantially identical employment contracts
with Messrs. Wadhwani and Trivedi, pursuant to which each of them serves as an
executive officer of the Company at an annual base salary of not less than
$300,000, plus an annual bonus of up to $200,000 if performance goals to be
established by the Compensation Committee of the Board of Directors are met.
The agreements have a term of 24 months and automatically extend for one month
at the end of each month unless either party gives notice of their intention
to terminate the agreement at the end of the term. The agreements provide that
upon termination of employment by the Company other than for cause (as defined
in the agreements) or death, disability or retirement, the Company shall pay
the officer a lump sum amount equal to the amount the executive would have
been paid, based upon his base salary at the time of termination, if such
executive had remained an employee for the full term of his contract, plus
shares of Common Stock having a value equal to the value of the executive's
vested stock options and stock appreciation rights. In such event, the Company
will also provide health insurance for the executive for the remainder of his
life at the level in effect for other executives prior to his termination for
the remainder of the term. In the event the executive is terminated due to a
disability, the Company will continue to pay for three years the executive's
salary and an amount equal to his bonus in the year prior to his termination,
reduced by any amounts paid to the executive under the Company's disability
plan. Under the agreements, the Company agrees to indemnify the executive to
the full extent not prohibited by law for liabilities he incurs in his
capacity as a director, officer or controlling person of the Company. Under
the agreements, the executives agree to a noncompetition covenant during the
term of the agreement and for one year after the termination of their
employment for cause and to nonsolicitation and nondisclosure covenants during
the term of the agreement and for one year after the termination of their
employment for any reason.
40
<PAGE>
The other Named Executive Officers are parties to employment agreements
which outline their responsibilities and provide generally for base salary
plus annual incentive bonuses. These executives are "at- will" employees of
the Company and can be terminated by the Company with or without cause or they
may resign. Under the agreements, the executives are entitled to three months'
salary continuation if they are terminated by the Company without cause
generally, and to six months' salary continuation if they are terminated by
the Company without cause during the 90 days following the sale of the Company
to a third party. The employment agreements also contain confidentiality
provisions and noncompetition and nonsolicitation covenants.
In October 1996, the Company entered into an agreement with Steven Shangold,
the Company's Vice President of U.S. Sales and Marketing, pursuant to which
the Company agreed to pay Mr. Shangold, as compensation for past services, an
amount equal to the value of 109,200 shares of Common Stock. One-half of the
foregoing payment was made promptly following the closing of the Company's
initial public offering in cash at the election of Mr. Shangold. The remaining
half was paid in the form of 54,600 shares of restricted Common Stock which
will vest on June 30, 1998. If Mr. Shangold voluntarily leaves the employment
of the Company or is terminated by the Company for cause before that date, the
shares of restricted Common Stock will be forfeited. If Mr. Shangold is
terminated without cause, upon the sale of the Company or upon death before
that date, the shares of restricted Common Stock will vest on a pro rata
basis.
41
<PAGE>
CERTAIN TRANSACTIONS
Mascot Systems, an Indian corporation, is a wholly owned subsidiary of the
Company. The Company uses Mascot Systems to perform offshore software
development projects. During 1996, Mascot Systems billed the Company
approximately $205,000 for the services it provided to the Company. Prior to
the initial public offering in December 1996, Mascot Systems was controlled by
Messrs. Wadhwani and Trivedi.
The Company purchased the shares of Mascot Systems held by Messrs. Wadhwani
and Trivedi for $170,000, which price was based upon an independent valuation
of that interest. The purchase price was paid from the Company's working
capital. In transactions completed shortly after the Company's initial public
offering, the Company also purchased the minority shares of Mascot Systems,
which were previously held by relatives of Messrs. Wadhwani and Trivedi.
Mascot Systems is currently operating one and constructing two other
offshore software development facilities in the cities of Bangalore, Pune and
Madras, India, respectively. For the year ended December 31, 1996, the Company
advanced Mascot Systems $865,000 towards buildout and other costs of setting
up and operating these facilities. Upon completion of the acquisition of
Mascot Systems by the Company, the aggregate amount of these advances was
eliminated in consolidation.
Scott Systems, an Indian corporation, is a wholly owned subsidiary of the
Company. The Company uses Scott Systems to recruit and train IT professionals
in India. Prior to the Company's initial public offering, Scott Systems was an
Indian corporation indirectly controlled by Messrs. Wadhwani and Trivedi
through a Pennsylvania corporation known as SWAT Systems Corporation ("SWAT").
The Company entered into a merger agreement with SWAT pursuant to which SWAT
was merged with and into Mastech shortly before the completion of the initial
public offering. Messrs. Wadhwani and Trivedi received nominal consideration
in this transaction. The Company also entered into an agreement to purchase
the minority shares of Scott Systems, some of which were held by relatives of
Messrs. Wadhwani and Trivedi, for $26,000.
Mascot Systems leases from Messrs. Wadhwani and Trivedi the office space for
the offshore software development facility in Bangalore, India. The
acquisition of the real estate and the construction of this office building
(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, which floor is owned by Messrs. Wadhwani
and Trivedi. The lease has a one-year term expiring in March 1998 and the rent
is approximately $7,000 per year. Mascot Systems also leases a 30,000 square
foot office building located in Bangalore from Messrs. Wadhwani and Trivedi.
This lease has a five-year term expiring in October 2001 and the rent is
approximately $110,000 per year. The offshore software development facilities
located in Pune and Madras, India are expected to be operational sometime
during the first quarter of 1998. Mascot Systems expects to enter into two
additional leases with Messrs. Wadhwani and Trivedi for these facilities. The
facility in Pune is a 35,000 square foot office building and the facility in
Madras is a 65,000 square foot office building.
Scott Systems leases, for its training facilities, approximately 2,100
square feet of office space on one floor of an office building located in
Mumbai (Bombay), India. The leased space is divided into five separately owned
suites owned individually by Messrs. Wadhwani and Trivedi. The leases have a
one-year term expiring in April 1998 and the aggregate rent is $20,000 per
year. Scott Systems also leases further office space of approximately 900
square feet on another floor in the same office building which is owned by
Messrs. Wadhwani and Trivedi. The lease has a one-year term expiring in
October 1998 and the rent is $6,000 per year.
The Company believes that the terms of the leases described above are no
less favorable to the Company than could be obtained from unrelated third
parties.
42
<PAGE>
During the first six months of 1996, the Company was a party to three real
property leases with Messrs. Wadhwani and Trivedi for residential space near
its Pittsburgh headquarters. The leased premises included two condominium
units and one single family residence. These leased premises were used to
accommodate out-of-town IT professionals temporarily working at the Company's
Pittsburgh facility or in transit to another working location. The aggregate
monthly rental for these leased premises was $3,000 per month plus the
operating costs of the premises. The Company terminated these leases in the
second quarter of 1996. Various residential properties are owned by Messrs.
Wadhwani and Trivedi in India and will be leased by the Company for similar
purposes.
As an S corporation prior to the initial public offering, the net income of
the Company was attributed, for federal (and some state) income tax purposes,
directly to the Company's shareholders rather than to the Company. During
1996, the Company from time to time paid the corresponding income taxes due on
these amounts on behalf of Messrs. Wadhwani and Trivedi in the form of
interest-free advances which they later repaid. The highest aggregate amounts
of advances outstanding to Mr. Wadhwani and the Wadhwani Family Qualified
Subchapter S Trust during 1996 and for the nine months ended September 30,
1997 were $1.7 million and $86,000, respectively. The highest aggregate
amounts of advances outstanding to Mr. Trivedi during 1996 and for the nine
months ended September 30, 1997 were $1.7 million and $86,000, respectively.
Prior to the closing of the initial public offering, the Company and the
Selling Shareholders entered into an agreement whereby the Selling
Shareholders agreed to cause the Company to terminate its S-corporation
election effective December 16, 1996. The Company agreed to indemnify the
Selling Shareholders for the amount of any increase in taxable income
allocable to them in the event of any audit of the Company's tax returns.
Prior to the closing of the initial public offering, the Board of Directors
of the Company adopted a resolution requiring all future transactions,
including any loans from the Company to its officers, directors, principal
shareholders or affiliates, to be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested members
of the Board of Directors or, if required by law, a majority of the
disinterested shareholders, and requiring such transactions to be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
43
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 27, 1997, and as
adjusted to reflect the sale of the shares offered hereby, by: (i) each person
known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock; (ii) each director of the Company; (iii) each of the
Named Executive Officers; and (iv) all directors and executive officers of the
Company as a group. Except as noted, all persons listed below have sole voting
and investment power with respect to their shares of Common Stock, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
----------------------- NUMBER OF -----------------------
NUMBER OF SHARES NUMBER OF
NAME SHARES PERCENT BEING OFFERED SHARES PERCENT
<S> <C> <C> <C> <C> <C>
Sunil Wadhwani (1)(2)... 8,040,000 37.1% 600,000 7,440,000 31.7%
Ramesh Thadani, as co-
trustee of a Wadhwani
family trust (2)(3).... 1,333,696 6.2 -- 1,333,696 5.7
Ashok Trivedi (2)(4).... 8,040,000 37.1 600,000 7,440,000 31.7
Arun Nayar, as co-
trustee of certain
Trivedi family trusts
(2)(5)................. 2,243,696 10.4 -- 2,243,696 9.6
Mohan Phanse, as co-
trustee of certain
Trivedi family trusts
(2)(5)................. 1,333,696 6.2 -- 1,333,696 5.7
Michel Berty (6)........ 5,000 * -- 5,000 *
J. Gordon Garrett (6)... 6,000 * -- 6,000 *
Ed Yourdon (6).......... 5,000 * -- 5,000 *
Michael Zugay (7)....... 16,000 * -- 16,000 *
Steven Shangold......... 54,600 * -- 54,600 *
Sushma Rajagopalan (8).. 26,000 * -- 26,000 --
All directors and
executive officers as a
group (12 persons) (9). 16,252,600 74.6 1,200,000 15,052,600 63.9
</TABLE>
- ---------------------
*Less than 1%
(1) Includes 2,243,696 shares held by three family trusts, for which Mr.
Wadhwani is a co-trustee with sole investment power and no voting power
over such shares.
(2) The address of Messrs. Wadhwani, Trivedi, Thadani, Nayar and Phanse is c/o
Mastech Corporation, 1004 McKee Road, Oakdale, Pennsylvania 15071.
(3) Mr. Thadani is a co-trustee of two of the Wadhwani family trusts referred
to in note 1, above, with no investment power and sole voting power over
such shares.
(4) Includes 2,243,696 shares held by three family trusts, for which Mr.
Trivedi is a co-trustee with sole investment power and no voting power
over such shares.
(5) Mr. Nayar is co-trustee of the three Trivedi family trusts and Mr. Phanse
is co-trustee of two of the Trivedi family trusts, in each case, referred
to in note 4, above, with no investment power and shared voting power over
such shares.
(6) Includes 5,000 shares of Common Stock underlying options which are
exercisable on or before December 31, 1997 or within 60 days after such
date.
(7) Includes 16,000 shares of Common Stock underlying options which are
exercisable on or before December 31, 1997 or within 60 days after such
date.
(8) Includes 25,000 shares of Common Stock underlying options which are
exercisable on or before December 31, 1997 or within 60 days after such
date.
(9) Includes 197,000 shares of Common Stock underlying options which are
exercisable on or before December 31, 1997 or within 60 days after such
date.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists 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. The Company currently has
outstanding 21,657,500 shares of Common Stock and no shares of Preferred
Stock. On October 24, 1997, the Company had 66 holders of record of the 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 vote of a class of such shareholders of the
Company, it shall be authorized upon receiving the affirmative vote of a
majority of the votes cast by such shareholders, or by such class of
shareholders, entitled to vote thereon. The Articles, however, in addition
require the approval of at least 66 2/3% of the votes cast by shareholders of
the Company, voting together as a single class, for the following: (i) the
approval of a fundamental change under the Pennsylvania Business Corporation
Law of 1988, as amended ("PBCL"), including amendments of the Articles, a
merger or consolidation of the Company for which shareholder approval is
required by law, share exchanges, the sale or other disposition of all or
substantially all of the assets of the Company or a division of the Company,
and the voluntary dissolution and winding up of the Company ("Fundamental
Transactions"), unless any such Fundamental Transaction is unanimously
approved by all the directors of the Company; and (ii) the amendment of the
Bylaws unless any such amendment is unanimously approved by all the directors
of the Company. The Articles provide that the shareholders may remove any
director, any class of directors or the entire Board of Directors without
cause by the vote of 66 2/3% of the votes cast by shareholders entitled to
vote thereon. The Articles permit shareholder action to be taken by the
written consent of the shareholders entitled to cast the minimum number of
votes that would be necessary to authorize the action at a meeting at which
all shareholders entitled to vote thereon are present and voting.
The Articles provide that the Board of Directors shall consist of five
persons and that the Board shall be divided into three classes of directors,
each class as nearly equal in number as possible, with one class being elected
each year for a three-year term. The classification of the Board helps to
ensure continuity of corporate leadership and policy; however, it also has the
effect of making it more difficult for a person to acquire control of the
Company's Board of Directors because at least two annual meetings are
necessary to effect a change in a majority of the Company's directors.
Further, the Articles provide that the approval of at least four of the
directors is required for Board action.
45
<PAGE>
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 the
liquidation preferences of any outstanding Preferred Stock. The Common Stock
does not carry preemptive rights, is not redeemable, does not have any
conversion rights, is not subject to further calls and is not subject to any
sinking fund provisions. The outstanding shares of Common Stock are and the
shares offered by the Company in this offering will be, when issued and paid
for, fully paid and nonassessable. Except in certain circumstances as
discussed below under "Certain Provisions Affecting Control of the Company,"
the Common Stock is not subject to discriminatory provisions based on
ownership thresholds.
The rights, preferences and privileges of holders of Common Stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future. See "Description of Capital Stock--Preferred Stock."
PREFERRED STOCK
The Company is authorized to issue up to 20,000,000 shares of Preferred
Stock. The Board of Directors is authorized, subject to any limitations
prescribed by law, without further shareholder approval, to issue such shares
of Preferred Stock in one or more series, with such rights, preferences,
privileges and restrictions, including voting rights, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be established by the Board of Directors at the time of issuance.
The issuance of Preferred Stock by the Board of Directors could adversely
affect the rights of holders of Common Stock. For example, the issuance of
shares of Preferred Stock could result in securities outstanding that would
have preference over the Common Stock with respect to dividends and in
liquidation and that could (upon conversion or otherwise) enjoy all of the
rights of the Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by third persons to obtain
control of the Company through merger, tender offer, proxy or consent
solicitation or otherwise, by making such attempts more difficult to achieve
or more costly. The Board of Directors may issue Preferred Stock without
shareholder approval and with voting rights that could adversely affect the
voting power of holders of Common Stock. There are no agreements or
understandings for the issuance of Preferred Stock, and the Company has no
plans to issue any shares of Preferred Stock. See "Risk Factors--Possible
Issuances of Preferred Stock."
CERTAIN PROVISIONS AFFECTING CONTROL OF THE COMPANY
General. Certain provisions of the Company's Articles and the PBCL operate
with respect to extraordinary corporate transactions, such as mergers,
reorganizations, tender offers, sales or transfers of substantially all of the
Company's assets or the liquidation of the Company, and could have the effect
of delaying or making more difficult a change in control of the Company in
certain circumstances.
Certain Provisions of the Articles. The Articles provide, among other
things, that Fundamental Transactions and Bylaw amendments must be approved by
at least 66 2/3% of the votes cast by shareholders of the Company, unless the
transaction or amendment is unanimously approved by all of the directors of
the Company. This provision is intended to require that Fundamental
Transactions and Bylaw amendments have either the unanimous mandate of the
Company's Board of Directors, who are statutorily charged in the first
instance with managing the business and affairs of the corporation, or the
support of a substantial percentage of the corporation's shareholders. This
provision, however, makes it more difficult to obtain approval of a
Fundamental Transaction that is approved by a majority but not all of the
directors. Further, the holders of 33 1/3% or more of the shares cast on a
Fundamental Transaction can effectively block the transaction by voting
against it. As a result of this provision, a Fundamental Transaction or Bylaw
amendment that is supported by a majority of the Company's directors and by
the holders of a majority of the outstanding voting shares of the Company
46
<PAGE>
may not be approved. Upon completion of this offering, Messrs. Wadhwani and
Trivedi will beneficially own approximately 63.4% of the Common Stock and have
voting power over 44.3% of the Common Stock.
Certain Provisions of the PBCL. The Company is governed by a set of
interrelated provisions of the PBCL which are designed to support the validity
of actions taken by the Board of Directors in response to takeover bids,
including specifically the Board's authority to "accept, reject or take no
action" with respect to a takeover bid, and permitting the unfavorable
disparate treatment of a takeover bidder. Another provision of the PBCL gives
the directors broad discretion in considering the best interests of the
corporation, including a provision which permits the Board, in taking any
action, to consider various corporate interests, including employees,
suppliers, clients and communities in which the corporation is located, the
short and long-term interests of the corporation, and the resources, intent
and conduct of any person seeking to acquire control of the corporation. These
provisions may have the effect of making more difficult and thereby
discouraging attempts to acquire control of the Company in a transaction that
the Board determines not to be in the best interests of the Company.
The Company has elected to opt-out of certain antitakeover provisions of the
PBCL, including: (i) provisions which prohibit certain business combinations
(as defined in the PBCL) involving a corporation that has voting shares
registered under the Exchange Act and an "interested shareholder" (generally
defined to include a person who beneficially owns shares representing at least
20% of the votes that all shareholders would be entitled to cast in an
election of directors of the corporation) unless certain conditions are
satisfied or an exemption is applicable; (ii) provisions concerning a
"control-share acquisition" in which the voting rights of certain shareholders
of the corporation (specifically, a shareholder who acquires 20%, 33 1/3% or
50% or more of the voting power of the corporation) are conditioned upon the
consent of a majority vote at a meeting of the independent shareholders of the
corporation after disclosure by such shareholder of certain information, and
with respect to which such shareholder is effectively deprived of voting
rights if consent is not obtained; (iii) provisions pursuant to which any
profit realized by a "controlling person or group," generally defined as a 20%
beneficial owner, from the disposition of any equity securities within twenty-
four months prior to, and eighteen months succeeding, the acquisition of such
control is recoverable by the corporation; (iv) provisions pursuant to which
severance payments are to be made by the corporation to any eligible employee
of a covered corporation whose employment is terminated, other than for
willful misconduct, within ninety days before, or twenty-four months after, a
control-share acquisition; and (v) provisions pursuant to which any holder of
voting shares of a registered corporation who objects to a "control
transaction" (generally defined as the acquisition by a person or group (the
"controlling person or group") that would entitle the holders thereof to cast
at least 20% of the votes that all shareholders would be entitled to cast in
an election of the directors of the corporation) is entitled to make a written
demand on the controlling person or group for payment of the fair value of the
voting shares of the corporation held by the shareholder. Given the ownership
structure of the Company after this offering, the Company's Board of Directors
believed that there was a risk that one or more of these provisions could be
inadvertently triggered by the normal activities of the Company and its
principal shareholders and that, therefore, it was in the best interests of
the Company to opt-out of these provisions.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 23,457,500 shares of
Common Stock outstanding. See "Capitalization." Of these shares, the 3,000,000
shares sold in this offering and the 5,520,000 shares issued in the Company's
initial public offering will be freely tradable without restriction or further
registration under the Securities Act, except that any shares purchased by
"affiliates" of the Company in the public market, 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. In addition,
1,253,150 shares of Common Stock (250,800 of which become exercisable on or
before December 31, 1997) are issuable upon the exercise of outstanding stock
options, which shares have been registered by the Company under the Securities
Act and after issuance upon exercise will be freely tradable without
restriction. Of the remaining shares of Common Stock, 14,934,600 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. Of these Restricted Shares,
14,880,000 will be subject to a lock-up period expiring 90 days after the date
of this Prospectus (the "Lock-Up Period"). Beginning after the expiration of
the Lock-Up Period (or earlier upon the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation), 14,880,000 of the Restricted Shares
may be sold in the public market subject to Rule 144 under the Securities Act,
except for 4,487,392 shares held in family trusts established by Messrs.
Wadhwani and Trivedi which may not be sold prior to November 30, 1998 pursuant
to the terms of a shareholders agreement with the Company.
In general, under Rule 144 of the Securities Act as currently in effect, a
person (or persons whose shares are aggregated) who has beneficially owned
Restricted Shares for at least one year, 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 (234,576 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 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 two 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.
REGISTRATION RIGHTS
Pursuant to terms of a Shareholders Agreement, at any time after December
17, 1997, 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 at the Company's expense
on no more than two occasions. 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 a
registration on a Form S-3 more than once in any six-month period. Also
pursuant to the Shareholders Agreement, if the Company proposes to register
any of its Common Stock under the Securities Act for sale to the public,
Messrs. Wadhwani and Trivedi, subject to any lock-up agreements entered into
by Messrs. Wadhwani and Trivedi, will have unlimited piggyback registration
rights at the Company's expense, subject to certain restrictions set forth in
the Shareholders Agreement. In addition, the Company agrees to indemnify
Messrs. Wadhwani and Trivedi against certain liabilities, including
liabilities under the Securities Act, that they may incur in connection with
this offering and any offering governed by the Shareholders Agreement. 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 registration rights granted to Messrs.
Wadhwani and Trivedi will be subject to the lock-up agreement which will
restrict their ability to exercise their registration rights during the Lock-
Up Period.
48
<PAGE>
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."
49
<PAGE>
UNDERWRITING
Subject to certain terms and conditions of an Underwriting Agreement dated
, 1997 (the "Underwriting Agreement"), the underwriters named below
(the "Underwriters"), who are represented by Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Goldman, Sachs & Co., NationsBanc Montgomery
Securities, Inc. and Cowen & Company (the "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, an aggregate of 3,000,000 shares of Common Stock at the
public offering price per share less the underwriting discounts and
commissions set forth on the cover of this Prospectus. The number of shares of
Common Stock that each Underwriter has agreed to purchase is set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
Goldman, Sachs & Co...................................................
NationsBanc Montgomery Securities, Inc................................
Cowen & Company.......................................................
---------
Total............................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to the approval by their counsel of certain legal
matters and to certain other conditions. The Underwriters are obligated to
purchase and accept delivery of all the shares of Common Stock offered hereby
(other than those covered by the over-allotment option described below) if any
are purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the price to the public set forth on the cover
page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow to certain other
dealers, a concession not in excess of $ per share. After this offering, the
public offering price and other selling terms may be changed by the
Representatives at any time without notice.
The Selling Shareholders have granted to the Underwriters an option,
exercisable within 30 calendar days after the date of the Underwriting
Agreement, to purchase from time to time, in whole or in part, up to an
aggregate of 450,000 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriters may exercise such option solely to
cover over-allotments, if any, made in connection with this offering. To the
extent that the Underwriters exercise such option, each Underwriter will
become obligated, subject to certain conditions, to purchase its pro rata
portion of such additional shares based on such Underwriter's percentage
underwriting commitment as indicated in the preceding table.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under
the Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company and the Selling Shareholders each have agreed subject to certain
exceptions, not to: (i) offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock; or (ii)
enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise) during the
50
<PAGE>
Lock-Up Period without the prior written consent of DLJ. In addition, the
Company has also agreed not to file any registration statement during the
Lock-Up Period with respect to, and each of the Selling Shareholders has
agreed not to make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock without DLJ's prior written
consent.
The foregoing arrangements do not extend to any shares issuable upon
exercise of options granted under the Stock Incentive Plan. As of October 15,
1997, options to acquire 64,750 shares are currently exercisable and options
to acquire an additional 186,050 shares will become exercisable during the
Lock-Up Period.
Other than in the United States, no action has been taken by the Company,
the Selling Shareholders or the Underwriters that would permit a public
offering of the shares of Common Stock offered hereby in any jurisdiction
where action for that purpose is required. The shares of Common Stock offered
hereby may not be offered or sold, directly or indirectly, nor may this
Prospectus or any other offering material or advertisements in connection with
the offer and sale of any such shares of Common Stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons into whose possession this Prospectus comes are advised to inform
themselves about and to observe any restrictions relating to the offering of
the Common Stock and the distribution of this Prospectus. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
shares of Common Stock offered hereby in any jurisdiction in which such an
offer or a solicitation is unlawful.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase shares of Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive
market maker generally may not exceed 30% of its average daily trading volume
in the Common Stock during a specified two-month prior period, or 200 shares,
whichever is greater. A passive market maker must identify passive market
making bids as such on the Nasdaq electronic inter-dealer reporting system.
Passive market making may stabilize or maintain the market price of the Common
Stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot this offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate
short positions or to stabilize the price of the Common Stock. These
activities may stabilize or maintain the market price of the Common Stock
above independent market levels. The Underwriters are not required to engage
in these activities and may end any of these activities at any time.
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 for each of the three years ended December 31, 1996
and the nine months ended September 30, 1996 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 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.
51
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith, files reports,
inspected at the offices of the National Association of Securities Dealers,
Inc., Reports Section, 1735 K Street, N.W., Washington, DC 20006. The
Registration Statement, including the exhibits and schedules thereto, may be
obtained from the Commission's web site at www.sec.gov.
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement (together with
any amendments or supplements thereto, to the "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. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement. 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. 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 the exhibits and schedules
thereto, is also available at the Commission's site on the World Wide Web at
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.
52
<PAGE>
GLOSSARY
Set forth below are the definitions of certain terms used in this
Prospectus:
"Applications" are the computer software programs that perform a desired task,
such as inventory control analysis, cost analysis, accounts receivable and
payable, payroll, shipping and scheduling.
"Client/server" describes the linking, or networking, of two or more computers
to allow multiple users to access and share information. Client/server design
is contrasted with "mainframe" design.
"Conversion" is the process of converting data and applications from one
format to another in connection with an organization's adoption of different,
usually more technologically advanced, hardware or software.
"Distributed computing environments" describes the use of multiple types of
hardware and software applications within an organization, often in multiple
locations.
"Enterprise Resource Planning" packages, such as SAP R/3, Oracle Applications,
Baan and PeopleSoft, are large, integrated applications packages used to
manage information on an enterprise-wide basis.
"Hardware" is the physical computer system on which software applications
operate.
"Information technology" describes the use of computers and software
applications to manage information within an organization.
"Legacy" hardware and applications are information technology systems based on
older technologies.
"Mainframe" describes a large, centralized computer on which an organization
maintains information.
"Migration" is the process of moving applications and data from one computing
environment, such as a mainframe environment, to another, such as a
client/server environment.
"Object-oriented programming" is a type of software design in which various
independently developed software applications are linked together as needed to
achieve the desired programming result.
"Operating system" is the software that controls the allocation of computer
resources to various software applications in order to maximize the efficiency
of those resources.
"Software" is the code that directs computer hardware to manipulate other
software or data in a desired way.
"Year 2000" refers to the software problems resulting from the date change on
December 31, 1999 to the year 2000. Many software applications must be
modified in order to operate properly after this date.
53
<PAGE>
MASTECH CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and September
30, 1997 (unaudited)...................................................... F-3
Consolidated Income Statements for the years ended December 31, 1994, 1995
and 1996 and the nine months ended September 30, 1996 and 1997
(unaudited).............................................................. F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended September 30,
1997 (unaudited)......................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and the nine months ended September 30, 1996 and 1997
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Mastech Corporation:
We have audited the accompanying consolidated balance sheets of Mastech
Corporation (a Pennsylvania corporation) and subsidiaries as of December 31,
1995 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996, and the consolidated statements of income and cash
flow for the nine months ended September 30, 1996. These Financial Statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these Financial Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the Financial Statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Financial Statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the Financial Statements referred to above present fairly,
in all material respects, the financial position of Mastech Corporation and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 and the nine months ended September 30, 1996, in
conformity with generally accepted accounting principles.
Pittsburgh, Pennsylvania, Arthur Andersen LLP
February 13, 1997
F-2
<PAGE>
MASTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (cost
approximates market value).......... $ 3,026 $45,997 $31,497
Accounts receivable, net of allowance
for uncollectible
accounts............................ 19,146 23,160 44,815
Unbilled receivables................. 1,504 1,410 2,377
Employee and related party advances.. 526 2,591 1,990
Prepaid and other assets............. 421 601 709
------- ------- -------
Total current assets............. 24,623 73,759 81,388
------- ------- -------
Equipment and leasehold improvements,
at cost:
Equipment............................ 1,548 3,932 7,729
Leasehold improvements............... 147 736 937
------- ------- -------
1,695 4,668 8,666
Less--Accumulated depreciation....... (564) (918) (1,930)
------- ------- -------
Net equipment and leasehold
improvements...................... 1,131 3,750 6,736
------- ------- -------
Total assets..................... $25,754 $77,509 $88,124
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 4)... $ -- $ 2,077 $ 2,207
Accounts payable..................... 1,412 3,934 4,293
Accrued payroll and related costs.... 7,822 8,898 14,794
Other accrued liabilities............ 795 1,342 2,291
S corporation dividend payable (Note
12)................................. -- 6,500 --
Deferred revenue..................... -- 116 --
Deferred income taxes................ -- 1,200 1,200
------- ------- -------
Total current liabilities........ 10,029 24,067 24,785
------- ------- -------
Minority interest...................... 54 -- --
Deferred income taxes.................. -- 2,683 1,733
Commitments (Note 6)
Shareholders' equity:
Preferred stock, without par value:
20,000,000 shares authorized, no
shares outstanding.................. -- -- --
Common stock, par value $0.01 per
share: 100,000,000 shares
authorized, 18,200,000, 21,654,600
and 21,657,150 shares issued and
outstanding, respectively (Note 9).. 182 217 217
Additional paid-in capital........... 106 51,168 51,362
Retained earnings.................... 15,384 197 10,475
Deferred compensation (Note 9)....... -- (776) (387)
Currency translation adjustment...... (1) (47) (61)
------- ------- -------
Total shareholders' equity....... 15,671 50,759 61,606
------- ------- -------
Total liabilities and
shareholders' equity............ $25,754 $77,509 $88,124
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MASTECH CORPORATION
CONSOLIDATED INCOME STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- --------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................... $70,050 $103,676 $123,400 $90,336 $135,821
Cost of revenues............. 49,915 72,414 89,453 65,558 94,708
------- -------- -------- ------- --------
Gross profit................. 20,135 31,262 33,947 24,778 41,113
Selling, general and
administrative expenses...... 8,786 13,003 20,198 14,670 24,628
Non-recurring charge (Note
8)........................... -- -- 875 -- 389
------- -------- -------- ------- --------
Income from operations....... 11,349 18,259 12,874 10,108 16,096
Interest (income) expense,
net.......................... (69) (164) 43 12 (1,034)
Minority interest in net loss
(income) of subsidiaries..... 26 (27) (3) (9) --
------- -------- -------- ------- --------
Income before income taxes... 11,444 18,396 12,828 10,087 17,130
Provision (credit) for income
taxes........................
Current.................... -- -- 253 -- 6,852
Deferred................... -- -- (17) -- --
Termination of S
corporation status........ -- -- 3,900 -- --
------- -------- -------- ------- --------
Provision for income
taxes................... -- -- 4,136 -- 6,852
------- -------- -------- ------- --------
Net income................... $11,444 $ 18,396 $ 8,692 $10,087 $ 10,278
======= ======== ======== ======= ========
Net income per common share.. $ 0.47
========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA INFORMATION--
(UNAUDITED)
---------------------------------
<S> <C> <C> <C> <C>
Net income.................................... $11,444 $ 18,396 $ 8,692 $10,087
Pro forma income taxes........................ 4,578 7,358 4,915 4,035
------- -------- -------- -------
Pro forma net income.......................... $ 6,866 $ 11,038 $ 3,777 $ 6,052
======= ======== ======== =======
Pro forma net income per common share......... $ 0.38 $ 0.60 $ 0.20 $ 0.32
======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MASTECH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CURRENCY TOTAL
-------------------- PAID-IN RETAINED DEFERRED TRANSLATION SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS COMPENSATION ADJUSTMENT EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993.................... 18,200,000 $182 $ 106 $ 5,723 $ -- $(39) $ 5,972
Net income............ -- -- -- 11,444 -- -- 11,444
Dividends............. -- -- -- (3,192) -- -- (3,192)
Currency translation
adjustment........... -- -- -- -- -- 38 38
---------- ---- ------- -------- ----- ---- --------
Balance, December 31,
1994.................... 18,200,000 182 106 13,975 -- (1) 14,262
Net income............ -- -- -- 18,396 -- -- 18,396
Dividends............. -- -- -- (16,987) -- -- (16,987)
Currency translation
adjustment........... -- -- -- -- -- -- --
---------- ---- ------- -------- ----- ---- --------
Balance, December 31,
1995.................... 18,200,000 182 106 15,384 -- (1) 15,671
Net income............ -- -- -- 8,692 -- -- 8,692
Dividends............. -- -- -- (19,045) -- -- (19,045)
Issuance of common
stock................ 3,400,000 34 50,216 (4,644) -- -- 45,606
Disproportionate
dividend (Note 11)... -- -- -- (190) -- -- (190)
Acquisition of
minority interest in
Scott Systems........ -- -- 28 -- -- -- 28
Restricted stock
award................ 54,600 1 818 -- (819) -- --
Amortization of
deferred
compensation......... -- -- -- -- 43 -- 43
Currency translation
adjustment........... -- -- -- -- -- (46) (46)
---------- ---- ------- -------- ----- ---- --------
Balance, December 31,
1996.................... 21,654,600 217 51,168 197 (776) (47) 50,759
Net Income............ -- -- -- 10,278 -- -- 10,278
Reduction of previ-
ously authorized S
corporation dividend. -- -- 162 -- -- -- 162
Amortization of
deferred
compensation......... -- -- -- -- 389 -- 389
Exercise of stock
options.............. 2,550 -- 32 -- -- -- 32
Currency translation
adjustment........... -- -- -- -- -- (14) (14)
---------- ---- ------- -------- ----- ---- --------
Balance, September 30,
1997 (unaudited)....... 21,657,150 $217 $51,362 $ 10,475 $(387) $(61) $ 61,606
========== ==== ======= ======== ===== ==== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
MASTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flow From Operations
Net income................ $11,444 $ 18,396 $ 8,692 $ 10,087 $ 10,278
Adjustments to reconcile
net income to cash
provided by operations:
Depreciation............ 137 206 354 149 1,012
Allowance for
uncollectible accounts. 150 200 175 500 445
Minority interest....... (27) 28 (54) 9 --
Deferred income taxes,
net.................... -- -- 3,883 -- (950)
Amortization of deferred
compensation........... -- -- 43 -- 389
Working capital items:
Accounts receivable and
unbilled receivables... (8,402) (3,743) (4,095) (3,176) (23,067)
Employee and related
party advances......... (715) 479 (2,065) (200) 601
Prepaid and other
assets................. 4 (353) (180) 207 (108)
Accounts payable........ 775 (713) 2,522 1,930 359
Accrued and other
current liabilities.... 1,348 2,183 1,739 605 6,729
------- -------- -------- -------- --------
Net cash flow from
operations............. 4,714 16,683 11,014 10,111 (4,312)
------- -------- -------- -------- --------
Investing Activities:
Additions to equipment and
leasehold improvements... (333) (794) (2,973) (1,825) (3,998)
Acquisition of minority
interest in Scott
Systems.................. -- -- 28 -- --
------- -------- -------- -------- --------
Net cash flow from
investing activities... (333) (794) (2,945) (1,825) (3,998)
------- -------- -------- -------- --------
Financing Activities:
Net borrowings under
revolving credit
facility................. -- -- 2,077 2,215 130
Net proceeds from issuance
of common stock.......... -- -- 45,606 -- --
Proceeds from exercise of
stock options............ -- -- -- -- 32
Disproportionate dividend. -- -- (190) -- --
Dividends paid............ (3,192) (16,987) (12,545) (12,545) (6,338)
------- -------- -------- -------- --------
Net cash flow from
financing activities... (3,192) (16,987) 34,948 (10,330) (6,176)
------- -------- -------- -------- --------
Effect of currency
translation on cash......... 38 -- (46) (64) (14)
Net change in cash and cash
equivalents................. 1,227 (1,098) 42,971 (2,108) (14,500)
Cash and cash equivalents,
beginning of period......... 2,897 4,124 3,026 3,026 45,997
------- -------- -------- -------- --------
Cash and cash equivalents,
end of period............... $ 4,124 $ 3,026 $ 45,997 $ 918 $ 31,497
======= ======== ======== ======== ========
Supplemental disclosure:
Non cash financing
activities:
Cash payments for
interest................. $ 10 $ 3 $ 223 $ 58 $ 17
Cash payments for income
taxes.................... $ -- $ -- $ -- $ -- $ 6,946
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION RELATED TO SEPTEMBER 30, 1997 IS UNAUDITED)
1.OPERATIONS:
In conjunction with the closing of its initial public offering on December
16, 1996, Mastech Systems Corporation, the entity through which the business
of the Company had been conducted since its inception in July 1986, became an
indirect, wholly owned subsidiary of Mastech Corporation ("Mastech" or the
"Company"), which is a newly formed Pennsylvania corporation.
Mastech is a worldwide provider of information technology ("IT") services to
large and medium-sized 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, Internet/intranet services and applications
maintenance outsourcing. These services are provided in a 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. To enhance its services, Mastech has formed business alliances
with leading software companies such as Baan, Oracle and PeopleSoft. In
addition, the Company has developed its own proprietary methodologies and
tools, under the name SmartAPPS, that enhance the productivity of the
Company's Year 2000 and other services.
Mascot Systems Pvt, Ltd. ("Mascot"), a wholly owned foreign subsidiary, was
acquired upon the closing of the Company's initial public offering. Mascot is
currently operating one and constructing two other offshore software
development centers in the cities of Bangalore, Pune and Madras, India,
respectively. Mascot's current operations serve as Mastech's single source for
offshore software development. Also, effective December 16, 1996, SWAT Systems
Corporation, a Pennsylvania corporation ("SWAT"), was merged with and into
Mastech resulting in SWAT's wholly owned subsidiary, Scott Systems Pvt, Ltd.
("Scott"), an India-based corporation, becoming a wholly owned subsidiary of
Mastech. Scott provides IT professional recruiting and training services. As
of December 31, 1996, all of Mascot, SWAT and Scott's revenues were derived
from services provided to Mastech. These transactions are described in Note
11.
The Risk Factors on pages 6, 7, 8 and 11 of the Prospectus entitled
"Recruitment and Retention of IT Professionals," "Government Regulation of
Immigration," "Exposure to Regulatory and General Economic Conditions in
India," "Concentration of Revenue; Risk of Termination," and "Potential
Decrease in Demand for Year 2000 Services" are incorporated herein by
reference.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying Consolidated Financial Statements reflect the application
of the following significant accounting policies:
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
Accounts Receivable
The Company extends credit to clients based upon management's assessment of
their creditworthiness. Substantially all of the Company's revenues (and the
resulting accounts receivable) are from large companies,
F-7
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
major systems integrators and governmental agencies. The allowance for
uncollectible accounts was approximately $500,000, $675,000 and $1,120,000 as
of December 31, 1995 and 1996 and September 30, 1997, respectively.
Revenue Recognition
The Company recognizes revenue on time-and-materials contracts as the
services are performed for clients. Revenues on fixed-price contracts are
recognized using the percentage of completion method. Percentage of completion
is determined by relating the actual cost of work performed to date to the
estimated total cost for each contract. If the estimate indicates a loss on a
particular contract, a provision is made for the entire estimated loss without
reference to the percentage of completion.
Depreciation
The Company provides for depreciation using the straight-line method in
amounts which allocate the costs of equipment over their estimated useful
lives of five to seven years, and leasehold improvements over the shorter of
the life of the improvement or of the underlying lease term.
Currency Translation Adjustment
The financial statements of foreign subsidiaries are translated using the
exchange rate in effect at year-end for balance sheet accounts and the average
exchange rate in effect during the year for revenue and expense accounts.
Translation gains and losses are excluded from the consolidated income
statements and are instead reported as the currency translation adjustment
component of shareholders' equity.
The functional currency of international offices and foreign subsidiaries is
the currency of the country in which the office or subsidiary is located.
Revenues of the Company are billed in the currency of the country in which the
customer is located. Translation gains and losses arising from differences
between the functional and billing currencies are recognized in the
consolidated income statements.
Income Taxes
Prior to its initial public offering, the Company elected to be taxed under
Subchapter S of the Internal Revenue Code of 1986, as amended ("S
corporation") for income tax purposes. Accordingly, the income of the Company
was reported on the individual income tax returns of its shareholders.
Therefore, the financial statements do not include a provision for income
taxes related to income prior to the closing of the public offering.
The Company's S-corporation status terminated in connection with the
Company's initial public offering, thereby subjecting the Company's income to
federal and state income taxes at the corporate level. Due to temporary
differences in recognition of revenues and expenses, income for financial
reporting purposes has exceeded income for income tax purposes. Accordingly,
the application of the provisions of SFAS No. 109, "Accounting for Income
Taxes" resulted in the recognition of deferred tax liabilities (and a
corresponding one-time charge to expense) of $3.9 million as of the date the S
corporation was terminated. The majority of this tax provision will be paid
over the next four years.
In the recent past, the government of India has provided incentives, in the
form of tax holidays, to encourage foreign investment. No tax holidays have
been granted to the Company as of September 30, 1997.
F-8
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Through April 30, 1996, the Company provided for group medical costs through
self-insurance programs. The amounts charged to expense for group medical
claims were approximately $1,195,000, $2,005,000 and $669,000 for the years
ended December 31, 1994, 1995 and 1996, respectively. Estimated claims
incurred but not reported were $500,000, $370,000 and $0 as of December 31,
1995 and 1996, and September 30, 1997, respectively, and are included in other
accrued liabilities in the accompanying consolidated balance sheets. As of
April 30, 1996, the Company had stop/loss insurance coverage related to these
programs. Effective May 1, 1996, the Company maintains coverage through a
fully insured premium-based plan.
Financial Instruments
The fair values and carrying amounts of the Company's financial instruments,
primarily accounts receivable and payable, are approximately equivalent. The
financial instruments are classified as current and will be liquidated within
the next operating cycle.
Pro Forma Information (Unaudited):
The pro forma adjustments for income taxes included in the accompanying
consolidated income statements are based upon the statutory rates in effect
for C corporations during the periods presented.
3.INCOME TAXES
The Company's S-corporation status terminated in connection with the
Company's initial public offering, thereby subjecting the Company's income to
federal and state income taxes at the corporate level. The Company accounts
for income taxes in accordance with the provisions of SFAS No. 109. Except for
the effect of the reversal of net deductible temporary differences, the
Company is not aware of any significant differences between book and taxable
income in future years.
Prior to the initial public offering, the Company elected Subchapter S-
corporation status for income tax purposes. Accordingly, the income of the
Company was reported on the individual income tax returns of its shareholders.
The financial statements, therefore, do not include a provision for income
taxes prior to the closing of the public offering.
The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
C corporation income before taxes for the 15 day
period ended December 31, 1996 and the nine months
ended September 30, 1997, respectively............. $ 413 $17,130
Net taxable temporary differences................... 4 1,100
Current portion of S corporation deferred revenue... 123 --
------ -------
Book taxable income as a C corporation.............. 540 18,230
Income taxes at the statutory rate.................. 216 7,292
Provision for change in tax status to C corporation. 3,900 --
Other, net.......................................... 20 (440)
------ -------
Provision for income taxes.......................... $4,136 $ 6,852
====== =======
</TABLE>
F-9
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes as shown in the accompanying consolidated
statements of income, include the following components:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current provision--
Federal............................................ $ 216 $5,634
State.............................................. -- 1,028
Foreign............................................ 37 190
------ ------
Total current provision.......................... 253 6,852
Deferred credit.................................... (17) --
Termination of S corporation status................ 3,900 --
------ ------
Total provision for income taxes..................... $4,136 $6,852
====== ======
</TABLE>
The components of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets.................................. $ (17) $ (17)
Deferred tax liabilities............................. 3,900 2,950
------ ------
Total deferred tax liability......................... $3,883 2,933
====== ======
Consisting of
Current liability
S corporation deferred revenue..................... $1,200 $1,200
Deferred liability
S corporation deferred revenue..................... 2,395 1,445
Other.............................................. 288 288
------ ------
$3,883 $2,933
====== ======
</TABLE>
4.REVOLVING CREDIT FACILITY:
The Company had available borrowings under a revolving credit facility with
a bank. Borrowings under this arrangement were unsecured, were limited to
$15.0 million, bear interest at LIBOR, as defined (7.07 % and 7.50% at
December 31, 1996 and 1995, respectively), plus 1.0% or the prime rate (8.25%
and 8.50% at December 31, 1996 and 1995, respectively) and were payable upon
demand. There were no borrowings outstanding under this arrangement as of
December 31, 1996 and 1995. Average outstanding borrowings under this
arrangement were $535,000 and $1.4 million for the nine months ended September
30, 1997 and the year ended December 31, 1996, respectively. There were no
borrowings under this arrangement during the year ended December 31, 1995.
Effective May 30, 1997, the Company replaced the above mentioned revolving
credit facility with a new revolving credit facility. Borrowings under the new
credit facility are unsecured, are limited to $25.0 million, bear interest at
LIBOR, as defined (6.70% at September 30, 1997), plus 1.0% or the prime rate
(8.5% at September 30, 1997) and are payable upon demand. There were no
borrowings outstanding under this arrangement as of September 30, 1997.
Average outstanding borrowings under this arrangement were $230,000 for the
nine month period ended September 30, 1997.
F-10
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996 and September 30, 1997, Mascot Systems had
borrowings outstanding under revolving credit agreements with ICICI Banking
Corporation Limited and IndusInd Bank Limited, both of India. Borrowings under
these facilities are secured by deposits of the controlling shareholders of
the Company. Of the $2.1 million and $2.2 million borrowed and outstanding
under these agreements at December 31, 1996 and September 30, 1997,
respectively, the following interest rates apply:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------------------------ -------------------------------------
ANNUAL INTEREST ANNUAL INTEREST
AMOUNT BORROWED RATE AMOUNT BORROWED RATE
<S> <C> <C> <C>
$ 995,000 18.75% $1,903,000 18.75%
1,082,000 19.25% 304,000 19.25%
---------- ----------
$2,077,000 $2,207,000
========== ==========
</TABLE>
These borrowings will be repaid by the Company prior to December 31, 1997.
5.RELATED PARTY TRANSACTIONS:
The controlling shareholders leased residential properties to the Company
under lease agreements which were terminated during 1996. Payments in
accordance with these arrangements were approximately $36,000, $36,000 and
$9,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
The Company has loans outstanding from the Company's controlling
shareholders of $0, $16,000 and $16,000 as of September 30, 1997, December 31,
1996 and 1995, respectively. These loans are included in accounts payable in
the consolidated balance sheets.
As an S corporation, the net income of the Company was attributed, for
federal (and some state) income tax purposes, directly to the Company's
shareholders rather than to the Company. During 1995, 1996 and the nine months
ended 1997, the Company had from time to time paid the corresponding income
taxes due on these amounts on behalf of the controlling shareholders in the
form of interest-free advances which were later repaid. The highest aggregate
amounts of advances outstanding to one of the controlling shareholders and his
Qualified Subchapter S Trust during 1995, 1996 and the nine months ended
September 30, 1997 were approximately $117,000, $1,682,000 and $86,000,
respectively. The highest aggregate amounts of advances outstanding to the
other controlling shareholder during 1995, 1996 and the nine months ended
September 30, 1997 were approximately $117,000, $1,682,000 and $86,000,
respectively.
Mascot Systems leases from the controlling shareholders the office space for
the offshore software development facilities in Bangalore, India. The
acquisition of the real estate and the construction of this office building
(but not the buildout of the office space) was financed entirely by the
controlling shareholders out of personal funds. Specifically, Mascot Systems
leases approximately 4,200 square feet of office space on one floor of an
office building located in Bangalore which floor is owned by the controlling
shareholders. The lease has a one-year term expiring in March 1998, and the
rent is approximately $7,000 per year. Mascot Systems also leases a 30,000-
square-foot office building located in Bangalore from the controlling
shareholders. This lease has a five-year term expiring in October 2001, and
the annual rent is approximately $110,000 per year. The offshore software
development facilities located in Pune and Madras, India are scheduled to be
operational sometime during the first quarter of 1998. Mascot Systems expects
to enter into two additional leases with the controlling shareholders for
these facilities. The facility in Pune is a 35,000-square-foot office
building, and the facility in Madras is a 65,000-square-foot office building.
See also Note 11.
F-11
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Scott Systems leases, for its training facilities, approximately 2,100
square feet of office space on one floor of an office building located in
Mumbai (Bombay, India). The leased space is divided into five separately owned
suites owned individually by the controlling shareholders. The leases have a
one-year term expiring in April 1998, and the aggregate rent is $20,000 per
year. Scott Systems also leases further office space of approximately 900
square feet on another floor in the same office building which is owned by the
controlling shareholders. The lease has a one-year term expiring in October
1998, and the rent is $6,000 per year. See also Note 11.
The Company believes that the terms of the leases described above are no
less favorable to the Company than could be obtained from unrelated third
parties.
6.COMMITMENTS:
The Company rents certain office facilities and equipment under
noncancelable operating leases which provide for the following future minimum
rental payments as of December 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 AMOUNT
<S> <C>
1997 $ 735,000
1998 621,000
1999 582,000
2000 239,000
Thereafter --
----------
Total $2,177,000
==========
</TABLE>
Rental expense was approximately $179,000, $500,000, $778,000 and $822,000
for the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1997, respectively.
The Company has employment agreements with its controlling shareholders and
certain of its executive officers which provide generally for specified
minimum salaries and bonuses based upon the Company's performance.
7.EMPLOYEE BENEFIT PLANS:
The Company adopted a 401(k) benefit plan effective January 1, 1995.
Eligible employees, as defined in the plan, may contribute up to 15% of
eligible compensation, as defined. The Company does not contribute to this
plan.
8.NON-RECURRING CHARGES:
In October 1996, the Company entered into an agreement with an executive
pursuant to which the Company agreed to pay this individual, as compensation
for past services, an amount equal to the value of 109,200 shares of Common
Stock at the initial public offering price of $15 per share. One-half of this
payment was made in cash, at the election of the executive, on December 16,
1996. The remaining half of this obligation was satisfied on December 16, 1996
via the issuance of 54,600 shares of restricted Common Stock, as described in
Note 9. The Company has reflected the cash payment along with the applicable
tax withholdings as a non-recurring charge in the accompanying consolidated
statements of income for the year ended December 31, 1996.
In the nine months ended September 30, 1997, the Company has reflected the
amortization of deferred compensation of this same executive as a non-
recurring charge in the accompanying consolidated statements of income.
9.STOCK-BASED COMPENSATION AND RESTRICTED STOCK AWARD:
Effective December 16, 1996, the Company adopted the 1996 Stock Incentive
Plan (the "Plan") for directors, executive management and key personnel. The
Plan provides for the issuance of up to 2,160,000 stock-
F-12
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
based incentive awards at the market value of the stock at the date of grant.
The Company accounts for the Plan under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." Had compensation costs for
the Plan been determined consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123),
pro forma net income for the year ended December 31, 1996 would have been
reduced by $12,000 and there would have been no impact on pro forma net income
per common share for the same period.
During 1996 and the nine months ended September 30, 1997, options covering a
total of 845,550 and 392,500 shares, respectively, of Common Stock were
granted under the Plan. The right to purchase these options expires 10 years
from the date of grant or earlier if an option holder ceases to be employed by
the Company for any reason. A summary of stock option activity follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
-------------------------- ------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER OF SHARES OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
- ---------------- --------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Options outstanding, begin-
ning of period............ 845,550 $15.00 -- --
Granted.................... 392,500 $18.94 845,550 $15.00
Exercised.................. 2,550 $15.00 -- --
Lapsed and forfeited....... -- -- -- --
--------- ------ ------- ------
Options outstanding, end of
period.................... 1,235,500 $16.25 845,550 $15.00
--------- ------ ------- ------
Options exercisable, end of
period.................... 64,750 $15.00 -- --
--------- ------ ------- ------
</TABLE>
STOCK OPTIONS OUTSTANDING AT SEPTEMBER 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------
WEIGHTED
RANGE OF AVERAGE REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- --------------- --------- ------------------------ ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$15.00 890,000 9.24 $15.00 64,750 $15.00
$16.13 55,000 9.44 $16.13 -- --
$18.00 225,000 9.67 $18.00 -- --
$24.38 35,000 9.81 $24.38 -- --
$26.00 3,500 9.85 $26.00 -- --
$31.38 25,000 10.00 $31.38 -- --
$31.75 2,000 9.99 $31.75 -- --
--------- ----- ------ ------ ------
1,235,500 9.36 $16.25 64,750 $15.00
========= ===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
STOCK OPTION
SUMMARY OF STOCK OPTIONS PRICE TOTAL
<S> <C> <C>
Weighted average fair value of options granted during 1996*. $5.86 $5.86
===== =====
</TABLE>
*The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1996
<S> <C>
Risk free interest rate.................................................. 6.2%
Expected dividend yield.................................................. 0.0%
Expected life of options................................................. 6 yrs.
Expected volatility rate................................................. 24.5%
</TABLE>
There were 1,314,450 and 921,950 shares reserved for future grants under the
1996 Stock Option Plan at December 31, 1996 and September 30, 1997,
respectively.
F-13
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective December 16, 1996, the Company entered into an employment
agreement with an executive that included the granting of 54,600 shares of
restricted common stock. During the restricted period (from December 16, 1996
to June 30, 1998), the restricted stock vests ratably and daily. The agreement
provides for partial awards and forfeitures under various circumstances. At
December 31, 1996 and September 30, 1997, the Company's consolidated balance
sheet reflects deferred compensation of $776,000 and $387,000, respectively,
related to this award, as an offset to shareholders' equity. Compensation
expense of $43,000 and $389,000 related to the vesting of restricted shares
during 1996 and the nine months ended September 30, 1997, respectively, has
been recorded in the Company's consolidated income statement.
10.PRO FORMA INCOME PER COMMON SHARE AND INCOME PER SHARE:
Pro forma net income and net income per common share is calculated by
dividing pro forma net income and net income, respectively, by the weighted
average number of common shares plus incremental common stock equivalent
shares (shares issuable upon exercise of stock options). Incremental common
stock equivalent shares are calculated for each measurement period based on
the treasury stock method which uses the monthly average market price per
share.
The weighted average common shares and common share equivalents were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996 SEPTEMBER 30, 1997
<S> <C> <C> <C>
18,254,600 18,254,600 18,790,262 21,854,736
</TABLE>
The 1996 weighted average shares outstanding as calculated above also
includes 393,462 common shares, which represents the number of shares, when
multiplied by the initial public offering price, would have been sufficient to
replace the capital in excess of earnings withdrawn as dividends during the
period.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No.
128), which establishes new standards for computing and presenting earnings
per share and applies to entities with publicly and non-publicly held common
stock. SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. SFAS No. 128 requires restatement of all prior period
earnings per share data presented. The Company has determined that the
adoption of SFAS No. 128 will not change reported earnings per share for any
period.
11.BUSINESS ACQUISITIONS:
Mascot Systems, prior to becoming a subsidiary of the Company, was owned by
Mastech's controlling shareholders. The Company has in the past engaged Mascot
Systems as a subcontractor to perform offshore software development projects.
On December 16, 1996, the Company purchased the shares of Mascot Systems held
by the controlling shareholders for $170,000. This price was based upon an
independent valuation of that interest and paid from the Company's working
capital. The Company has also purchased the minority shares of Mascot Systems,
which were held by relatives of the controlling shareholders, for $20,000,
based upon an independent valuation. This transaction has been reflected as a
disproportionate dividend in the accompanying statements of shareholders'
equity.
Scott Systems, prior to becoming a subsidiary of the Company, was indirectly
controlled by Mastech's controlling shareholders through SWAT Systems
Corporation. The Company has in the past engaged Scott Systems to recruit and
train IT professionals in India. On December 16, 1996, SWAT was merged with
and into Mastech and Scott Systems thereby became a subsidiary of the Company.
The controlling shareholders received nominal consideration in this
transaction. The Company also purchased the minority shares of Scott Systems,
some of which are held by relatives of the controlling shareholders, for
$26,000.
F-14
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The accompanying Consolidated Financial Statements present the financial
position, results of operations and cash flows of the Company and the
aforementioned entities as if they had been combined from inception in a
manner similar to a pooling of interests.
12.S-CORPORATION DIVIDEND:
Since it was founded in 1986, the Company had elected S-corporation status
for income tax purposes. As a result, substantially all of the Company's net
income was attributed, for income tax purposes, directly to the Company's
shareholders rather than to the Company. The Company's S-corporation status
terminated in connection with its public offering of common stock, and the
Company will make a final distribution to its former S-corporation
shareholders of undistributed S-corporation earnings, as explained below.
On December 16, 1996, the Company's Board of Directors declared an S-
corporation dividend to former S-corporation shareholders in an aggregate
amount representing the estimated amount of all undistributed earnings of the
Company taxed or taxable to its shareholders through December 16, 1996 (the
"S-corporation Dividend"). The S-corporation Dividend is recorded in the
accompanying consolidated balance sheets at December 31, 1996 in the amount of
$6.5 million. The S-corporation Dividend was paid in the amount of $6.3
million in 1997 with the difference being recognized as an increase in
additional paid-in capital as shown in the accompanying consolidated
statements of shareholders' equity.
13.BUSINESS SEGMENT INFORMATION:
The Company is predominantly engaged in providing information technology
services to large and medium-sized organizations. The following is information
about the Company's operations by geographical area.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues--
Revenues--United States............... $70,050 $102,248 $112,308
Revenues (including intergeographic
revenues of $1,706, $565 and $648 for
the years 1996, 1995 and 1994,
respectively)--Foreign............... 648 1,993 12,798
Adjustments and eliminations.......... (648) (565) (1,706)
------- -------- --------
Consolidated............................ $70,050 $103,676 $123,400
======= ======== ========
Operating Income (Loss)--
United States......................... $11,291 $ 18,713 $ 11,554
Foreign............................... 58 (454) 1,320
------- -------- --------
Consolidated.......................... 11,349 18,259 12,874
------- -------- --------
Other income (expenses), net,
including interest and general
corporate expenses................... 95 137 (46)
Income before income taxes.............. $11,444 $ 18,396 $ 12,828
======= ======== ========
Identifiable assets--
United States......................... $22,545 $ 24,780 $ 74,146
Foreign............................... 302 974 3,363
------- -------- --------
Consolidated............................ $22,847 $ 25,754 $ 77,509
------- -------- --------
</TABLE>
Sales to one client represented approximately 13% of total revenues for the
nine months ended September 30, 1997. The Company derives no revenue from
export activity.
F-15
<PAGE>
MASTECH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14.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
Revenues................... $ 24,107 $ 25,153 $ 26,896 $ 27,520
Gross profit............... 7,196 7,650 7,548 8,868
Income from operations..... 4,484 4,664 4,280 4,831
Net income................. $ 4,519 $ 4,696 $ 4,303 $ 4,878
=========== =========== =========== ===========
Pro forma net income....... $ 2,712 $ 2,817 $ 2,582 $ 2,927
Pro forma net income per
common share.............. $ 0.15 $ 0.15 $ 0.14 $ 0.16
1996
Revenues................... $ 28,595 $ 30,804 $ 30,937 $ 33,064
Gross profit............... 8,107 8,919 7,752 9,169
Income from operations..... 3,405 4,227 2,476 2,766
Net income (loss).......... $ 3,429 $ 4,257 $ 2,401 $ (1,395)
=========== =========== =========== ===========
Pro forma net income
(loss).................... $ 2,059 $ 2,553 $ 1,440 $ (2,275)
Pro forma net income (loss)
per common share.......... $ 0.11 $ 0.14 $ 0.08 $ (0.12)
1997
Revenues................... $ 37,531 $ 45,059 $53,231
Gross profit............... 10,799 13,423 16,891
Income from operations..... 3,384 5,348 7,364
Income before income taxes. 3,848 5,714 7,568
Provision for income taxes. 1,539 2,286 3,027
Net income................. $ 2,309 $ 3,428 $ 4,541
=========== =========== ===========
Net income per common
share..................... $ 0.11 $ 0.16 $ 0.21
</TABLE>
15.SUBSEQUENT EVENTS:
In October 1997, the Company entered into a non-binding letter of intent to
purchase for cash the assets of an Australian IT services company.
F-16
<PAGE>
[Diagram Describing Mastech SMARTAPPS Methodologies and Tools]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OF-
FER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANYTIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 14
Use of Proceeds........................................................... 14
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 15
Capitalization............................................................ 15
Selected Financial Data................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of 17
Operations...............................................................
Business.................................................................. 23
Management................................................................ 35
Certain Transactions...................................................... 42
Principal and Selling Shareholders........................................ 44
Description of Capital Stock.............................................. 45
Shares Eligible for Future Sale........................................... 48
Underwriting.............................................................. 50
Legal Matters............................................................. 51
Experts................................................................... 51
Additional Information.................................................... 52
Glossary.................................................................. 53
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
[MASTECH LOGO]
COMMON STOCK
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY
SECURITIES, INC.
COWEN & COMPANY
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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............... $ 29,142
NASD filing fee................................................... 9,686
Nasdaq National Market additional listing fee..................... 17,500
Printing and engraving expenses................................... 175,000
Legal fees and expenses........................................... 160,000
Accounting fees and expenses...................................... 125,000
Blue Sky fees and expenses (including legal fees)................. 3,000
Transfer agent and registrar fees and expenses.................... 35,000
Miscellaneous..................................................... 345,672
--------
Total........................................................... $900,000
========
</TABLE>
All of the above expenses will be paid by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subchapter D of Chapter 17 of the Pennsylvania Business Corporation Law
("PBCL") provides in general that a corporation may indemnify any person,
including its directors, officers and employees, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or proceeding, whether civil, criminal, administrative or investigative
(including actions by or in the right of the corporation) by reason of the
fact that he or she is or was a representative of or serving at the request of
the corporation, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
or her in connection with the action or proceeding if he or she is determined
by the board or directors, or in certain circumstances by independent legal
counsel or the shareholders, to have acted in good faith and in a manner he or
she reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal proceeding, had no reason
believe his or her conduct was unlawful. In the case of actions by or in the
right of the corporation, indemnification is not permitted in respect of any
claim, issue or matter as to which the person has been adjudged to be liable
to the corporation except to the extent a court determines that the person is
fairly and reasonably entitled to indemnification. In any case, to the extent
that the person has been successful on the merits or otherwise in defense of
any claim, issue or matter, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith. Subchapter D of Chapter 17 also provides that the
indemnification permitted or required thereby is not exclusive of any other
rights to which a person seeking indemnification may be entitled.
Article 10 of the Company's Articles of Incorporation provides that the
Company shall indemnify and hold harmless to the full extent not prohibited by
law, as the same exists or may be amended, interpreted or implemented (but, in
the case of any amendment, only to the extent that such amendment permits the
Company to provide broader indemnification rights than the Company is
permitted to provide prior to such amendment), each person who was or is made
a party or is threatened to be made a party to or is otherwise involved in (as
witness or otherwise) any threatened, pending or completed action, suit, or
proceeding, whether civil, criminal, administrative or investigative and
whether or not by or in the right of the Company or otherwise (hereinafter, a
"proceeding"), by reason of the fact that he or she, or a person of whom he or
she is the heir, executor or administrator, is or was a director or executive
officer of the Company or is or was serving at the request of the
II-1
<PAGE>
Company as a director, officer or trustee of another corporation or of a
partnership, joint venture, trust or other enterprise (including without
limitation service with respect to employee benefit plans), or where the basis
of such proceeding is any alleged action or failure to take any action by such
person while acting in an official capacity as a director or executive officer
of the Company, or in any other capacity on behalf of the Company while such
person is or was serving as a director or executive officer of the Company,
against all expenses, liability and loss, including but not limited to
attorney's fees, judgments, fines, excise taxes or penalties and amounts paid
or to be paid in settlement (whether with or without court approval), actually
and reasonably incurred or paid by such person in connection therewith. The
right to indemnification is a contract right and includes the right to be paid
by the Company the expenses incurred in defending any such proceeding (or part
thereof) or in enforcing his or her rights to indemnification in advance of
the final disposition thereof promptly after receipt by the Company of a
request therefor stating in reasonable detail the expenses incurred; provided,
however, that to the extent required by law, the payment of such expenses
incurred by a director or executive officer of the Company in advance of the
final disposition of a proceeding shall be made only upon receipt of an
undertaking, by or on behalf of such person, to repay all amounts so advanced
if and to the extent it shall ultimately be determined by a court that he or
she is not entitled to be indemnified by the Company.
The Company has entered into employment agreements with Sunil Wadhwani and
Ashok Trivedi, Co-Chairman and Chief Executive Officer and Co-Chairman and
President, respectively, which entitle them to be indemnified in their
capacities as directors, officers and controlling shareholders of the Company
to the full extent not prohibited by law. The Company also has entered into a
Shareholders Agreement with Messrs. Wadhwani and Trivedi pursuant to which the
Company agrees to indemnify them against certain liabilities, including
liabilities under the securities laws, that they may incur in connection with
any offering effected pursuant to their registration rights under the
Shareholders Agreement, including the offering contemplated by this
Registration Statement.
The Articles of the Company also provide pursuant to Section 1713 of the
PBCL that a director of Mastech shall not be personally liable for monetary
damages as such for any action taken, or any failure to take any action,
unless: (1) the director has breached or failed to perform the duties of
his/her office under Section 1712 of the PBCL (relating to standard of conduct
and justifiable reliance); and (2) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. This limitation
on the personal liability of directors of Company does not apply to: (1) the
responsibility or liability of a director pursuant to any criminal statute; or
(2) the liability of a director for the payment of taxes pursuant to local,
state or Federal law.
The Company has purchased insurance insuring its directors and officers
against certain liabilities which they might incur as directors or officers of
the Company or of any other organization which they serve at its request,
including certain liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act:
1. In November 1996, the Company issued 250,000 shares of Common Stock to
the shareholders of the Company referenced in the within prospectus in
connection with the initial capitalization of the Company. The total
consideration for such shares was $2,500.
2. In October 1996, Mastech Systems Corporation entered into an agreement,
as amended in November 1996 to be applicable to the Company, pursuant to which
it agreed to compensate one of its executive officers in the form of an
issuance of up to 109,200 shares of restricted stock of the Company which
vests over a period of two years. Pursuant to this agreement, the executive
could elect to receive certain compensation for past services in the form of
cash or 54,600 shares promptly following the closing of the Company's initial
public offering. The executive elected to receive cash in lieu of shares with
respect to 54,600 shares subject to this agreement and was granted 54,600
shares of restricted Common Stock on December 16, 1996 in satisfaction of the
Company's remaining obligation under the agreement.
II-2
<PAGE>
3. A 72.8-for-1 stock split of the Common Stock was effected on December 16,
1996 immediately prior to the Company's initial public offering.
The sale and issuance of the shares were exempt from registration by virtue
of either Sections 3(a), 3(b) or 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 by and between the Company and
Sunil Wadhwani and Ashok Trivedi.
10.2* -- 1996 Stock Incentive Plan.
10.3* -- Agreement dated October 14, 1996 between Mastech Systems
Corporation (f/k/a Mastech Corporation) and Steven Shangold,
as amended by Addendum dated as of November 18, 1996.
10.4* -- Form of Employment Agreement by and between the Company and
each of its Executive Officers.
10.5* -- Shareholders Agreement by and among the Company, Sunil
Wadhwani and Ashok Trivedi and the Joinder Agreement by
Grantor Retained Annuity Trusts established by Messrs.
Wadhwani and Trivedi.
10.10* -- Lease Agreement dated January 16, 1995 by and between Mascot
Systems Private Limited and Messrs. Wadhwani and Trivedi for
real estate in Bangalore, India.
10.11* -- Lease Agreement dated November 6, 1996 by and between Mascot
Systems Private Limited and Messrs. Wadhwani and Trivedi for
real estate in Bangalore, India.
10.12* -- Lease Agreement dated April 1, 1996 by and between Scott
Systems Private Limited and Messrs. Wadhwani and Trivedi for
real estate in Bombay, India.
10.13* -- Lease Agreement dated April 1, 1996 by and between Scott
Systems Private Limited and Sunil Wadhwani for real estate in
Bombay, India.
10.14* -- Lease Agreement dated April 1, 1996 by and between Scott
Systems Private Limited and Ashok Trivedi for real estate in
Bombay, India.
10.15* -- Stock Purchase Agreement by and between the Company and
Messrs. Wadhwani and Trivedi for their shares of Mascot
Systems Private Limited.
10.16* -- Agreement and Plan of Merger by and between the Company and
SWAT Systems.
10.17* -- Form of S Corporation Revocation, Tax Allocation and
Indemnification Agreement.
10.18* -- Sublease Agreement dated February 10, 1995 by and between
Westinghouse Electric Corporation and the Company for the
Company's Oakdale, PA headquarters, as amended by amendment
dated March 20, 1996.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <C> <S>
10.19* -- Form of Shareholders Agreement by and among the Company, Sunil
Wadhwani and Ashok Trivedi.
10.20* -- Form of Capital Contribution Agreement by and among the Company,
Sunil Wadhwani, Ashok Trivedi and their respective family trusts.
10.21** -- Credit Agreement among Mastech Systems Corporation as the
Borrower, the Lenders which are or may in the future become
parties hereto and PNC Bank, National Association, as the Agent;
dated as of May 30, 1997.
11.1 -- Statement regarding computation of net income and pro forma net
income per share.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Buchanan Ingersoll Professional Corporation (included
in Exhibit 5.1).
24.1 -- Powers of Attorney executed by the persons named therein
(included on signature page).
27 -- Financial Data Schedule.
</TABLE>
- ---------------------
* Incorporated herein by reference to exhibit of the same number of the Form
S-1 Registration Statement of the Registrant (Registration No. 333-14169).
** Incorporated herein by reference to Exhibit 10.1 in the Form 10-Q (SEC File
No. 000-21755) dated as of August 14, 1997.
(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) 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 (2) that for the purpose of determining any
liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Pittsburgh, Pennsylvania on October
30, 1997.
MASTECH CORPORATION
/s/ Sunil Wadhwani
By:
---------------------------------
Sunil Wadhwani
Co-Chairman and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sunil Wadhwani, Ashok Trivedi and Michael Zugay,
and each of them individually, as his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and any subsequent registration statements pursuant to Rule 462 of
the Securities Act and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
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
/s/ Sunil Wadhwani
- ------------------------ (Principal Executive Officer)
Sunil Wadhwani
/s/ Ashok Trivedi Co-Chairman, President and Director
- ------------------------
Ashok Trivedi
Vice President--Finance
/s/ Michael Zugay (Principal Accounting Officer and Principal
- ------------------------ Financial Officer)
Michael Zugay
Director
/s/ J. Gordon Garrett
- ------------------------
J. Gordon Garrett
Director
/s/ Michel Berty
- ------------------------
Michel Berty
/s/ Ed Yourdon Director
- ------------------------
Ed Yourdon
II-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULES
To the Board of Directors and Shareholders of Mastech Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Mastech Corporation and have issued
our report thereon dated February 13, 1997. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 16(b) is the responsibility of the
Company's management and 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. The 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
February 13, 1997
S-1
<PAGE>
SCHEDULE II
MASTECH CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEDUCTIONS--
BALANCE AT CHARGED TO AMOUNTS BALANCE AT
BEGINNING OF COSTS AND DEEMED TO BE END OF
PERIOD ENDED DESCRIPTION PERIOD EXPENSES UNCOLLECTIBLE PERIOD
<S> <C> <C> <C> <C> <C>
December 31, 1994....... Allowance for uncollectible accounts $150 $150 $ -- $ 300
December 31, 1995....... Allowance for uncollectible accounts 300 302 (102) 500
December 31, 1996....... Allowance for uncollectible accounts 500 299 (124) 675
September 30, 1997...... Allowance for uncollectible accounts 675 445 -- 1,120
(unaudited)
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
3.1* -- Articles of Incorporation of the Company.
3.2* -- Bylaws of the Company.
4.1* -- Specimen stock certificate representing the Common Stock.
5.1 -- Opinion of Buchanan Ingersoll Professional Corporation.
10.1* -- Form of Employment Agreement by and between the Company and
Sunil Wadhwani and Ashok Trivedi.
10.2* -- 1996 Stock Incentive Plan.
10.3* -- Agreement dated October 14, 1996 between Mastech Systems
Corporation (f/k/a Mastech Corporation) and Steven Shangold,
as amended by Addendum dated as of November 18, 1996.
10.4* -- Form of Employment Agreement by and between the Company and
each of its Executive Officers.
10.5* -- Shareholders Agreement by and among the Company, Sunil
Wadhwani and Ashok Trivedi and the Joinder Agreement by
Grantor Retained Annuity Trusts established by Messrs.
Wadhwani and Trivedi.
10.10* -- Lease Agreement dated January 16, 1995 by and between Mascot
Systems Private Limited and Messrs. Wadhwani and Trivedi for
real estate in Bangalore, India.
10.11* -- Lease Agreement dated November 6, 1996 by and between Mascot
Systems Private Limited and Messrs. Wadhwani and Trivedi for
real estate in Bangalore, India.
10.12* -- Lease Agreement dated April 1, 1996 by and between Scott
Systems Private Limited and Messrs. Wadhwani and Trivedi for
real estate in Bombay, India.
10.13* -- Lease Agreement dated April 1, 1996 by and between Scott
Systems Private Limited and Sunil Wadhwani for real estate in
Bombay, India.
10.14* -- Lease Agreement dated April 1, 1996 by and between Scott
Systems Private Limited and Ashok Trivedi for real estate in
Bombay, India.
10.15* -- Stock Purchase Agreement by and between the Company and
Messrs. Wadhwani and Trivedi for their shares of Mascot
Systems Private Limited.
10.16* -- Agreement and Plan of Merger by and between the Company and
SWAT Systems.
10.17* -- Form of S Corporation Revocation, Tax Allocation and
Indemnification Agreement.
10.18* -- Sublease Agreement dated February 10, 1995 by and between
Westinghouse Electric Corporation and the Company for the
Company's Oakdale, PA headquarters, as amended by amendment
dated March 20, 1996.
10.19* -- Form of Shareholders Agreement by and among the Company, Sunil
Wadhwani and Ashok Trivedi.
10.20* -- Form of Capital Contribution Agreement by and among the
Company, Sunil Wadhwani, Ashok Trivedi and their respective
family trusts.
10.21** -- Credit Agreement among Mastech Systems Corporation as the
Borrower, the Lenders which are or may in the future become
parties hereto and PNC Bank, National Association, as the
Agent; dated as of May 30, 1997.
</TABLE>
<PAGE>
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <C> <S>
11.1 -- Statement regarding computation of net income and pro forma
net income per share.
21.1 -- Subsidiaries of Registrant.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Buchanan Ingersoll Professional Corporation
(included in Exhibit 5.1).
24.1 -- Powers of Attorney executed by the persons named therein
(included on signature page).
27 -- Financial Data Schedule.
</TABLE>
- ---------------------
* Incorporated herein by reference to exhibit of the same number of the Form
S-1 Registration Statement of the Registrant (Registration No. 333-14169).
** Incorporated herein by reference to Exhibit 10.1 in the Form 10-Q (SEC File
No. 000-21755) dated as of August 14, 1997.
<PAGE>
3,000,000 Shares
MASTECH CORPORATION Exhibit 1.1
Common Stock
UNDERWRITING AGREEMENT
----------------------
November __ , 1997
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY SECURITIES, INC.
COWEN & COMPANY
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
MASTECH CORPORATION, a Pennsylvania corporation (the "Company"), proposes
to issue and sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), and certain shareholders of the Company named in Schedule II
hereto (the "Selling Shareholders") severally propose to sell to the several
Underwriters, an aggregate of 3,000,000 shares of the Common Stock $0.01 par
value per share of the Company (the "Firm Shares"), of which 1,800,000 shares
are to be issued and sold by the Company and 1,200,000 shares are to be sold by
the Selling Shareholders, each Selling Shareholder selling the amount set forth
opposite such Selling Shareholder's name in Schedule II hereto. The Selling
Shareholders also propose to issue and sell to the several Underwriters not more
than an additional 450,000 shares of the Company's Common Stock, $0.01 par value
per share (the "Additional Shares") if requested by the Underwriters as provided
in Section 2 hereof. The Firm Shares and the Additional Shares are hereinafter
referred to collectively as 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
Shareholders are hereinafter sometimes referred to collectively as the
"Sellers."
Section 1. Registration Statement and Prospectus. The Company has prepared
and filed
1
<PAGE>
with the Securities and Exchange Commission (the "Commission") in accordance
with the provisions of the Securities Act of 1933, as amended, and the rules and
regulations of the Commission thereunder (collectively, the "Act"), a
registration statement on Form S-1, including a prospectus, relating to the
Shares. The registration statement, as amended at the time it became effective,
including the 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 to as the
"Prospectus". If the Company has filed or is required pursuant to the terms
hereof to file a registration statement pursuant to Rule 462(b) under the Act
registering additional shares of Common Stock (a "Rule 462(b) Registration
Statement"), then, unless otherwise specified, any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462(b)
Registration Statement.
Section 2. Agreements to Sell and Purchase and Lock-Up Agreements. 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
1,800,000 Firm Shares, (ii) each Selling Shareholder agrees, severally and not
jointly, to sell the number of Firm Shares set forth opposite such Selling
Shareholder's name in the middle column of 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) that 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 Schedules 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, each Selling Shareholder
agrees, severally and not jointly, to sell the number of Optional Shares set
forth opposite such Selling Shareholder's name in the right column of Schedule
II and the Underwriters shall have the right to purchase, severally and not
jointly, up to an aggregate of 450,000 Additional Shares from the respective
Selling Shareholders 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 Attorneys (as defined in Section 7(c), below)
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, which date shall be a business day (i) no earlier
than two business days after such notice has been given (and, in any event, no
earlier than the Closing Date (as hereinafter defined)) and (ii) no later than
ten 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.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to sell,
sell any option or
2
<PAGE>
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers all or a portion of the economic consequences
associated with the ownership of any Common Stock (regardless of whether any of
the transactions described in clause (i) or (ii) is to be settled by the
delivery of Common Stock, or such other securities, in cash or otherwise),
except to the Underwriters pursuant to this Agreement, for a period of 90 days
after the date of the Prospectus (the "Lock-Up Period") without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ").
Notwithstanding the foregoing, during such period (i) the Company may grant
stock options pursuant to the Company's existing stock option plan, provided
that such stock options by their terms do not become exerciseable during Lock-Up
Period and (ii) the Company may issue shares of Common Stock upon the exercise
of an option or warrant or the conversion of a security outstanding on the date
hereof. The Company also agrees not to file any registration statement with
respect to any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock during the Lock-Up Period without
the prior written consent of DLJ. In addition, each Selling Shareholder agrees
that during the Lock-Up Period, without the prior written consent of DLJ, it
will not make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock. The Company shall, prior to or
concurrently with the execution of this Agreement, deliver an agreement executed
by (i) each Selling Shareholder, (ii) each of the directors and officers of the
Company who is not a Selling Shareholder and (iii) each shareholder listed on
Annex I hereto to the effect that such person will not, during the period
commencing on the date such person signs such agreement and ending upon
expiration of the Lock-Up Period, without the prior written consent of DLJ, (A)
engage in any of the transactions described in the first sentence of this
paragraph or (B) make any demand for, or exercise any right with respect to, the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock.
Section 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 execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
Section 4. Delivery and Payment. Delivery to the Underwriters of and
payment for the Firm Shares shall be made at 9:00 A.M., New York City time, on
November __, 1997 (the "Closing Date") at such place as you shall designate. The
Closing Date and the location of delivery of and payment for the Firm Shares may
be varied by agreement between you and the Company.
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 9:00 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 payment for
such Additional Shares may be varied by agreement between you and the
3
<PAGE>
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 prior to the
Closing Date or the applicable 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 the applicable 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 to the Sellers
of the Purchase Price therefor by wire transfer of Federal or other funds
immediately available in New York City.
Section 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) 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, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires 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 use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you 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.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not 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 after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment 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
4
<PAGE>
cause any such amendment to the Registration Statement to become promptly
effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement 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 in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary 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, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable 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 applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) 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 registration or 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; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its shareholders as soon as
practicable an earnings statement covering the twelve-month period ending
December 31, 1998, that 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.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated
5
<PAGE>
or this Agreement is terminated, to pay or cause to be paid all expenses
incident to the performance of the Sellers' obligations under this Agreement,
including: (i) the fees, disbursements and expenses of the Company's counsel,
the Company's accountants and any Selling Shareholder's counsel (in addition to
the Company's counsel) in connection with the registration and delivery of the
Shares under the Act and all other fees and expenses in connection with the
preparation, printing, filing and distribution of the Registration Statement
(including financial statements and exhibits), any preliminary prospectus, the
Prospectus and all amendments and supplements to any of the foregoing, including
the mailing and delivering of copies thereof to the Underwriters and dealers in
the quantities specified herein, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) all costs of printing or producing this
Agreement and any other agreements or documents in connection with the offering,
purchase, sale or delivery of the Shares, (iv) all expenses in connection with
the registration or qualification of the Shares for offer and sale under the
securities or Blue Sky laws of the several states and all costs of printing or
producing any Preliminary and Supplemental Blue Sky Memoranda in connection
therewith (including the filing fees and fees and disbursements of counsel for
the Underwriters in connection with such registration or qualification and
memoranda relating thereto), (v) the filing fees and disbursements of counsel
for the Underwriters in connection with the review and clearance of the offering
of the Shares by the National Association of Securities Dealers, Inc., (vi) all
fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all costs
and expenses incident to the listing of the Shares on the Nasdaq National
Market, (vii) the cost of printing certificates representing the Shares, (viii)
the costs and charges of any transfer agent, registrar and/or depositary, and
(ix) all other costs and expenses incident to the performance of the obligations
of the Company and the Selling Shareholders hereunder for which provision is not
otherwise made in this Section. The provisions of this Section 5(i) shall not
supersede or otherwise affect any agreement that the Company and the Selling
Shareholders may otherwise have for allocation of such expenses among
themselves.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) 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.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
6
<PAGE>
Section 6. Representations and Warranties of the Company and the Selling
--------------------------------------------------------------
Shareholders. The Company and the Selling Shareholders represent and warrant to
- ------------
each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and 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) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, 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 (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) 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 and (B) will comply in all material respects with the Act and (iv)
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 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 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, 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, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) The Company owns, beneficially and of record, 100% of the capital
stock of MSC Company, a corporation organized and existing under the Delaware
General Corporation law ("Mastech Delaware"). Mastech Delaware owns 100% of the
capital stock Mastech Systems Corporation, a Pennsylvania corporation ("Old
Mastech"). Old Mastech owns, beneficially and of record, 100% of the capital
stock of SWAT Systems Corporation, a Pennsylvania corporation ("SWAT"). The
Company owns beneficially through SWAT, and SWAT owns of record, 100%
7
<PAGE>
of the issued and outstanding capital stock of Scott Systems Private Limited, a
company organized under the laws of India organized under the laws of India
("Scott Systems"). The Company owns beneficially100% of the capital stock of
Mascot Systems Private Limited, a company organized under the laws of India
("Mascot Systems"); all such shares of capital stock are owned by the respective
entity indicated above as owner free and clear of any security interest, claim,
lien, encumbrance or adverse interest of any nature. Mascot Systems and Scott
Systems are hereinafter collectively referred to as the "Affiliated Companies."
The Affiliated Companies, Mastech Delaware and Old Mastech are referred to
collectively as the "Subsidiaries." The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the Subsidiaries.
(e) Each of the Company and its 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 described in the Prospectus 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 business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole (a
"Material Adverse Effect").
(f) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(g) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Shareholders) 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 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.
(h) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(i) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(j) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or
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instrument that is material to the Company and its subsidiaries, taken as a
whole, to which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries or their respective property is bound.
(k) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) 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
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(l) There are no legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is or could be a party or to
which any of their respective property is or could be subject that are required
to be described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.
(m) Neither the Company nor any of its 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") or any provisions of
the Employee Retirement Income Security Act of 1974, as amended, or the rules
and regulations promulgated thereunder, except for such violations which, singly
or in the aggregate, would not have a Material Adverse Effect.
(n) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a Material Adverse Effect. Each such
Authorization is valid and in full force and effect and each of the Company and
its subsidiaries is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both,
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<PAGE>
would allow, revocation, suspension or termination of any such Authorization or
results or, after notice or lapse of time or both, would result in any other
impairment of the rights of the holder of any such Authorization; and such
Authorizations contain no restrictions that are burdensome to the Company or any
of its subsidiaries; except where such failure to be valid and in full force and
effect or to be in compliance, the occurrence of any such event or the presence
of any such restriction would not, singly or in the aggregate, have a Material
Adverse Effect.
(o) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
Material Adverse Effect.
(o) 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 any 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
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.
(p) This Agreement has been duly authorized, executed and delivered by the
Company.
(q) Arthur Andersen LLP are independent public accountants with respect to
the Company and its subsidiaries as required by the Act.
(r) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein 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; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated 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) are, in all material respects, accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company.
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(s) 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 (except where the
failure to possess such Permits would not have a material adverse effect on the
Company and the Subsidiaries, taken as a whole). 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.
(s) Except as disclosed in or specifically contemplated by the Prospectus,
the Company and its Subsidiaries have sufficient intellectual property rights
(including, without limitation, trademarks, trade names, patent rights, mask
works, copyrights and licenses) 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), 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, except as disclosed in or specifically contemplated by
the Prospectus, the Company has no knowledge of any 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.
(t) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(u) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(v) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
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<PAGE>
(u) Each certificate signed by any officer of the Company and delivered to
the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
(v) Except as disclosed in or specifically contemplated by the Prospectus,
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. Further, no
holder of any security of the Company has any right to require that shares owned
by him be included in the Registration Statement, other than holders who have
executed this Agreement as Selling Shareholders, whose rights have been fully
satisfied and discharged by the inclusion in the Registration Statement of the
respective numbers of Shares set forth opposite their names in Schedule.
(w) 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.
(x) 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 than those being
contested in good faith and for which adequate reserves have been
Section 7. Representations and Warranties of the Selling Shareholders.
Each Selling Shareholder represents and warrants to each Underwriter that:
(a) Such Selling Shareholder is the lawful owner of the Shares to be sold
by such Selling Shareholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
(b) The Shares to be sold by such Selling Shareholder have been duly
authorized and are validly issued, fully paid and non-assessable.
(c) Such Selling Shareholder has, and on the Closing Date will have, full
legal right, power and authority, and all authorization and approval required by
law, to enter into this Agreement, the Custody Agreement signed by such Selling
Shareholder Buchanan Ingersoll Professional Corporation, as Custodian, relating
to the deposit of the Shares to be sold by such Selling Shareholder (the
"Custody Agreement") and the Power of Attorney of such Selling Shareholder
appointing Michael J. Zugay and Carl A. Cohen, and each of them as such Selling
Shareholder's attorneys-in-fact (the "Attorneys") to the extent set forth
therein, relating to the transactions contemplated hereby and by the
Registration Statement and the Custody Agreement (the "Power of Attorney") and
to sell, assign, transfer and deliver the Shares to be sold by such Selling
Shareholder in the manner provided herein and therein.
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<PAGE>
(d) This Agreement has been duly authorized, executed and delivered by or
on behalf of such Selling Shareholder.
(e) The Custody Agreement of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding agreement of such Selling Shareholder, enforceable in accordance
with its terms.
(f) The Power of Attorney of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding instrument of such Selling Shareholder, enforceable in accordance
with its terms, and, pursuant to such Power of Attorney, such Selling
Shareholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Shareholder's behalf this Agreement
and any other document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and thereby
and to deliver the Shares to be sold by such Selling Shareholder pursuant to
this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by such
Selling Shareholder 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, equities and claims whatsoever.
(h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Selling Shareholder by or on
behalf of such Selling Shareholder, the compliance by such Selling Shareholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
or Blue Sky laws of the various states), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Shareholder, if such Selling
Shareholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder or any property of such Selling
Shareholder is bound or (iii) violate or conflict with any applicable law or any
rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over such Selling Shareholder or any property
of such Selling Shareholder.
(i) The information in the Registration Statement under the caption
"Principal and Selling Shareholders" which specifically relates to such Selling
Shareholder does not, and will not on the Closing Date, 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 the light of the
circumstances under which they were made, not misleading.
(j) At any time during the period described in Section 5(d), if there is
any change in the information referred to in Section 7(i), such Selling
Shareholder will immediately notify you
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<PAGE>
of such change.
(k) Each certificate signed by or on behalf of such Selling Shareholder
and delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Shareholder to the
Underwriters as to the matters covered thereby.
Section 8. Indemnification. (a) The Sellers, jointly and severally, agree
to indemnify and hold harmless each Underwriter, its directors, its officers 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 (including, without limitation, any legal or other
expenses incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims, damages,
liabilities or judgments) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), the Prospectus (or any amendment or supplement 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 Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein. Notwithstanding the foregoing, the
aggregate liability of any Selling Shareholder pursuant to this Section 8(a)
shall be limited to an amount equal to the total proceeds (before deducting
expenses) received by such Selling Shareholder from the Underwriters for the
sale of the Shares sold by such Selling Shareholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Shareholder and each person, if any, who controls such Selling Shareholder
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 such Underwriter
but only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such
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Underwriter). Any indemnified party 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 the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party 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
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
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 (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Underwriters, their officers and
directors and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii)
the fees and expenses of more than one separate firm of attorneys (in addition
to any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and all persons, if any, who control the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all
Selling Shareholders and all persons, if any, who control any Selling
Shareholder within the meaning of either such Section, and all such fees and
expenses shall be reimbursed as they are incurred. In the case of any such
separate firm for the Underwriters, their officers and directors and such
control persons of any Underwriters, such firm shall be designated in writing by
Donaldson, Lufkin & Jenrette Securities Corporation. In the case of any such
separate firm for the Company and such directors, officers and control persons
of the Company, such firm shall be designated in writing by the Company. In the
case of any such separate firm for the Selling Shareholders and such control
persons of any Selling Shareholders, such firm shall be designated in writing by
the Attorneys. The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than twenty business days after the indemnifying
party shall have received a request from the indemnified party for reimbursement
for the fees and expenses of counsel (in any case where such fees and expenses
are at the expense of the indemnifying party) and, prior to the date of such
settlement, the indemnifying party shall have failed to comply with such
reimbursement request. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement or compromise of, or
consent to the entry of judgment with respect to, any pending or threatened
action in respect of which the indemnified party is or could have been a party
and indemnity or contribution may be or could have been sought hereunder by the
indemnified party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the indemnified party from all liability on claims
that are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
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(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient 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 8(d)(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 8(d)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand 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 on the
one hand and the Underwriters on the other hand 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 on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Shareholders on the one hand or the
Underwriters on the other hand 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 incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. 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) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
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(f) Each Selling Shareholder hereby designates Mastech Corporation, 1004
McKee Road, Oakdale, PA 15071, as its authorized agent, upon which process may
be served in any action which may be instituted in any state or federal court in
the State of New York by any Underwriter, any director or officer of any
Underwriter or any person controlling any Underwriter asserting a claim for
indemnification or contribution under or pursuant to this Section 8, and each
Selling Shareholder 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 Selling Shareholder, at the address for notices specified
in Section 12 hereof.
Section 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.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and 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) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Sunil Wadhwani and Michael Zugay in their capacities as
the Chief Executive Officer and Vice President Finance of the Company,
confirming the matters set forth in Sections 6(t), 9(a) and 9(b) and that the
Company has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by the
Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus, other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole, (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling Shareholder
contained in this
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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 on
the Closing Date a certificate dated the Closing Date from each Selling
Shareholder to such effect and to the effect that such Selling Shareholder has
complied with all of the agreements and satisfied all of the conditions herein
contained and required to be complied with or satisfied by such Selling
Shareholder on or prior to the Closing Date.
(f) 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
Shareholders, to the effect that:
(i) each of the Company and its 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 described in the Prospectus and
to own, lease and operate its properties;
(ii) each of the Company and its 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;
(iii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Shareholders) have been
duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights;
(iv) 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;
(v) all of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company and by or on behalf of each Selling Shareholder;
(vii) the authorized capital stock of the Company 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
18
<PAGE>
the best of such counsel's knowledge after due inquiry, pending before or
contemplated by the Commission;
(ix) the statements under the captions "Risk Factors -- Anti-
Takeover Provisions," "--Shares Eligible for Future Sale," "Business-
Intellectual Property Rights," "--Litigation," "Description of Capital
Stock" and "Shares Eligible for Future Sale," in the Prospectus and Items
14 and 15 of Part II of the Registration Statement, insofar as such
statements constitute a summary of the 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 any of its 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 any of its
subsidiaries is in default in the performance of any obligation, agreement,
covenant or condition contained in any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the Company and
its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound;
(xi) the execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions hereof
and the consummation of the transactions contemplated hereby will not (A)
require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except such
as may be required under the securities or Blue Sky laws of the various
states), (B) 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 indenture, loan agreement, mortgage, lease
or other agreement or instrument that is material to the Company and its
subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound, (C) violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over the
Company, any of its subsidiaries or their respective property or (D) result
in the suspension, termination or revocation of any Authorization of the
Company or any of its subsidiaries or any other impairment of the rights of
the holder of any such Authorization;
(xii) after due inquiry, such counsel does not know of any legal
or governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is or could be a party or to which any of their
respective property is or could be subject that are required to be
described in the Registration Statement or the Prospectus and are not so
described, or of any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required;
(xiii) neither the Company nor any of its subsidiaries has
violated any
19
<PAGE>
Environmental Law or any provisions of the Employee Retirement Income
Security Act of 1974, as amended, or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate,
would not have a Material Adverse Effect;
(xiv) each of the Company and its subsidiaries has such
Authorizations of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations
and all courts and other tribunals, including, without limitation, under
any applicable Environmental Laws, as are necessary to own, lease, license
and operate its respective properties and to conduct its business, except
where the failure to have any such Authorization or to make any such filing
or notice would not, singly or in the aggregate, have a Material Adverse
Effect; each such Authorization is valid and in full force and effect and
each of the Company and its subsidiaries is in compliance with all the
terms and conditions thereof and with the rules and regulations of the
authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of
any notice from any authority or governing body) which allows or, after
notice or lapse of time or both, would allow, revocation, suspension or
termination of any such Authorization or results or, after notice or lapse
of time or both, would result in any other impairment of the rights of the
holder of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be
in compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a Material Adverse
Effect;
(xv) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended;
(xvi) to the best of such counsel's knowledge after due inquiry,
there are no contracts, agreements or understandings between the Company
and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities
of the Company or to require the Company to include such securities with
the Shares registered pursuant to the Registration Statement;
(xvii) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and
other financial data included therein as to which no opinion need be
expressed) comply as to form with the Act, (B) such counsel has no reason
to believe that, at the time the Registration Statement became effective or
on the date of this Agreement, the Registration Statement and the
prospectus included therein (except for the financial statements and other
financial data as to which such counsel need not express any belief)
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading and (C) such counsel has no reason to
believe that the Prospectus, as amended or supplemented, if applicable
(except for the financial
20
<PAGE>
statements and other financial data, as aforesaid) contains any untrue
statement of a material fact or omits 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;
(xviii) each Selling Shareholder is the lawful owner of the Shares
to be sold by such Selling Shareholder pursuant to this Agreement and has
good and clear title to such Shares, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever;
(xix) each Selling Shareholder has full legal right, power and
authority, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and the Power of Attorney of
such Selling Shareholder and to sell, assign, transfer and deliver the
Shares to be sold by such Selling Shareholder in the manner provided herein
and therein;
(xx) the Custody Agreement of each Selling Shareholder has been
duly authorized, executed and delivered by such Selling Shareholder and is
a valid and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms;
(xxi) the Power of Attorney of each Selling Shareholder has been
duly authorized, executed and delivered by such Selling Shareholder and is
a valid and binding instrument of such Selling Shareholder, enforceable in
accordance with its terms, and, pursuant to such Power of Attorney, such
Selling Shareholder has, among other things, authorized the Attorneys, or
any one of them, to execute and deliver on such Selling Shareholder's
behalf this Agreement and any other document they, or any one of them, may
deem necessary or desirable in connection with the transactions
contemplated hereby and thereby and to deliver the Shares to be sold by
such Selling Shareholder pursuant to this Agreement;
(xxii) upon delivery of and payment for the Shares to be sold by
each Selling Shareholder 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, equities and claims
whatsoever; and
(xxiii) the execution, delivery and performance of this Agreement
and the Custody Agreement and Power of Attorney of each Selling Shareholder
by such Selling Shareholder, the compliance by such Selling Shareholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (A) require any
consent, approval, authorization or other order of, or qualification with,
any court or governmental body or agency (except such as may be required
under the securities or Blue Sky laws of the various states), (B) conflict
with or constitute a breach of any of the terms or provisions of, or a
default under, the organizational documents of such Selling Shareholder, if
such Selling Shareholder is not an individual, or any indenture, loan
agreement, mortgage, lease or other agreement or instrument to
21
<PAGE>
which such Selling Shareholder is a party or by which any property of such
Selling Shareholder is bound or (C) violate or conflict with any applicable
law or any rule, regulation, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over such Selling
Shareholder or any property of such Selling Shareholder.
The opinion of Buchanan Ingersoll Professional Corporation described in
Section 9(f) above shall be rendered to you at the request of the Company and
the Selling Shareholders and shall so state therein.
(g) 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 Sections 9(f)(iv), 9(f)(vi) (but only with respect to
the Company), 9(f)(ix) (but only with respect to the statements under the
caption "Description of Capital Stock" and "Underwriting") and 9(f)(xvii).
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), Buchanan Ingersoll Professional Corporation and Sachnoff & Weaver,
Ltd. 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.
(h) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from Arthur Andersen LLP, independent
public accountants, containing the information and statements of the type
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.(12)
(i) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(j) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(k) The Company and the Selling Shareholders shall not have failed on 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 or the
Selling Shareholders, as the case may be, on or prior to the Closing Date.
(l) You shall have received on the Closing Date, a certificate of each
Selling Shareholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Shareholder is not a
U.S. Person, 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).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder
22
<PAGE>
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.
Section 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by
the parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) 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, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (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,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (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 has 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 agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, 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 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 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 any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the
23
<PAGE>
aggregate number of Firm Shares to be purchased by all Underwriters and
arrangements satisfactory to you, the Company and the Selling Shareholders for
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any non-
defaulting Underwriter, the Company or the Selling Shareholders. 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, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. If, on an Option Closing Date, any Underwriter or Underwriters
shall fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than one-
tenth of the aggregate number of Additional Shares to be purchased on such date,
the non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase such Additional Shares or (ii) purchase not
less than the number of Additional Shares that such non-defaulting Underwriters
would have been obligated to purchase on such date in the absence of such
default. 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.
Section 11. Agreements of the Selling Shareholders. Each Selling
Shareholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Shareholder to the Underwriters.
(b) To do and perform all things to be done and performed by such
Selling Shareholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold by
such Selling Shareholder pursuant to this Agreement.
Section 12. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (i) if to the Company, to Mastech
Corporation, 1004 McKee road, Oakdale, Pennsylvania; (ii) if to the Selling
Shareholders, to Carl Cohen or Michael Zugay c/o Buchanan Ingersoll Professional
Corporation, One Oxford Center, 301 Grant Street, 20th Floor, Pittsburgh, PA
15219, and (iii) if to any Underwriter or to you, to you c/o Donaldson, Lufkin &
Jenrette Securities Corporation, 277 Park Avenue, New York, New York 10172,
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 Company, the Selling Shareholders and 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, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Shareholder or any person controlling such Selling
Shareholder, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement.
24
<PAGE>
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Selling
Shareholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement 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 a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
25
<PAGE>
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.
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Shareholders and the several Underwriters.
Very truly yours,
Mastech Corporation
By:
-----------------------------------------
Title:
THE SELLING SHAREHOLDERS NAMED IN SCHEDULE II
HERETO, ACTING SEVERALLY
By
-----------------------------------------
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
NATIONSBANC MONTGOMERY SECURITIES, INC.
COWEN & COMPANY
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By
-----------------------------
26
<PAGE>
SCHEDULE I
----------
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
- ------------ ---------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
NationsBank Montgomery Securities, Inc.
Cowen & Company
---------
Total 3,000,000
=========
</TABLE>
<PAGE>
SCHEDULE II
-----------
Selling Shareholders
--------------------
<TABLE>
<CAPTION>
Number of Firm Shares Number of Optional
Name Being Sold Shares Being Sold
- ----- --------------------- -----------------
<S> <C> <C>
Sunil Wadhwani 600,000 225,000
Ashok Trivedi 600,000 225,000
------- -------
Total 1,200,000 450,000
========= =======
</TABLE>
<PAGE>
Annex I
[To be completed]
1
<PAGE>
Exhibit 5.1
BUCHANAN INGERSOLL PROFESSIONAL CORPORATION
One Oxford Centre
301 Grant Street, 20th Floor
Pittsburgh, PA 15219-1410
October 29, 1997
Mastech Corporation
1004 McKee Road
Oakdale, PA 15071
Gentlemen:
In connection with the Registration Statement on Form S-1 (the
"Registration Statement"), to be filed by Mastech Corporation, a Pennsylvania
corporation (the "Company"), under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the public offering of an aggregate of up to
3,450,000 shares of the Company's Common Stock, par value of $.01 per share, of
which (a) 1,800,000 shares will be purchased by the underwriters from the
Company; (b) 1,200,000 shares will be purchased by the underwriters from Ashok
Trivedi and Sunil Wadhwani (the "Selling Shareholders"); and (c) up to 450,000
shares may be purchased by the underwriters from the Selling Shareholders, if
the underwriters exercise the option granted to them by the Selling Shareholders
to cover over-allotments (collectively, the "Shares"), we, as counsel for the
Company, have examined such corporate records, other documents, and questions of
law as we have considered necessary or appropriate for the purposes of this
opinion.
Upon the basis of such examination, we advise you that in our opinion:
(i) the Shares to be issued and sold by the Company have been duly and
validly authorized and, when sold in the manner contemplated by the underwriting
agreement (the "Underwriting Agreement") filed as an exhibit to the Registration
Statement and upon receipt by the Company of payment therefor as provided in the
Underwriting Agreement, will be legally issued, fully paid and non-assessable;
and
(ii) the Shares to be sold by the Selling Shareholders have been duly and
validly authorized, legally issued and are fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and any amendment thereto, including any and all post-effective
amendments and any registration statement relating to the same offering that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act,
and to the reference to this firm under the caption "Legal Matters. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act.
Very truly yours,
Buchanan Ingersoll Professional Corporation
By: /s/ James J. Barnes
<PAGE>
EXHIBIT 11.1
MASTECH CORPORATION
CALCULATION OF NET INCOME AND PRO FORMA NET INCOME PER SHARE OF COMMON STOCK
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1997
-----------------
<S> <C>
Weighted average common shares.................. 21,655,482
Dilutive effect of stock options................ 199,254
-----------
Total weighted average shares................... 21,854,736
===========
Net income...................................... $ 10,278
===========
Net income per common share..................... $ 0.47
===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
Year ended December 31, September 30,
------------------------------------------------------------ -----------------
1994 1995 1996 1996
------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Weighted average common shares ................... 18,200,000 18,200,000 18,342,200 18,200,000
Dilutive effect of stock issued within one
year of the offering............................ 54,600 54,600 54,600 54,600
Effect of shares sufficient to replace capital
in excess of earnings withdrawn as
dividends....................................... -- -- 393,462 410,867
----------- ----------- ----------- -----------
Total weighted average shares..................... 18,254,600 18,254,600 18,790,262 18,665,467
=========== =========== =========== ===========
Pro forma net income.............................. $ 6,866 $ 11,038 $ 3,777 $ 6,052
=========== =========== =========== ===========
Pro forma net income per common share............. $ 0.38 $ 0.60 $ 0.20 $ 0.32
=========== =========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF
MASTECH CORPORATION
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME OF SUBSIDIARY INCORPORATION
------------------ -------------
<S> <C>
Mastech Holding Company Delaware
Mastech Systems Corporation Pennsylvania
Mascot Systems Pvt. Ltd. India
Scott Systems Pvt. Ltd. India
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
October 29, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRATION STATEMENT ON FORM
S-1 AND IS QUALIFIED IN ITS ENTIRETY TO REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1997 JAN-01-1997 JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1997 SEP-30-1996 SEP-30-1996
<CASH> 31,497 31,497 918 918
<SECURITIES> 0 0 0 0
<RECEIVABLES> 48,312 48,312 25,326 25,326
<ALLOWANCES> 1,120 1,120 1,000 1,000
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 81,388 81,388 25,184 25,184
<PP&E> 8,666 8,666 3,520 3,520
<DEPRECIATION> 1,930 1,930 713 713
<TOTAL-ASSETS> 88,124 88,124 27,991 27,991
<CURRENT-LIABILITIES> 24,785 24,785 14,779 14,779
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 217 217 182 182
<OTHER-SE> 61,389 61,389 12,967 12,967
<TOTAL-LIABILITY-AND-EQUITY> 88,124 88,124 27,991 27,991
<SALES> 53,231 135,821 30,937 90,336
<TOTAL-REVENUES> 53,231 135,821 30,937 90,336
<CGS> 36,340 97,708 23,185 65,558
<TOTAL-COSTS> 45,867 119,725 28,461 80,228
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 134 446 190 498
<INTEREST-EXPENSE> (204) (1,034) 75 21
<INCOME-PRETAX> 7,568 17,130 2,401 10,087
<INCOME-TAX> 3,027 6,852 0 0
<INCOME-CONTINUING> 4,541 10,278 2,401 10,087
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 4,541 10,278 2,401 10,087
<EPS-PRIMARY> 0.21 0.47 0 0
<EPS-DILUTED> 0.21 0.47 0 0
</TABLE>
