<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1997 or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-21755
MASTECH CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1802235
------------ ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1004 McKee Road
Oakdale, Pennsylvania 15071
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 787-2100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
The number of shares of the registrant's Common Stock, par value $.01 per share,
outstanding as of September 30, 1997 was 21,657,150 shares.
<PAGE>
MASTECH CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED INCOME STATEMENTS FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 3
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
Report of Independent Public Accountants 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK SENSITIVE INSTRUMENTS 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
EXHIBIT INDEX 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MASTECH CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues......................................... $53,231 $30,937 $135,821 $90,336
Cost of revenues................................. 36,340 23,185 94,708 65,558
------- ------- -------- -------
Gross profit..................................... 16,891 7,752 41,113 24,778
Selling, general and administrative expense...... 9,397 5,276 24,628 14,670
Non-recurring charge............................. 130 __ 389 --
------- ------- -------- -------
Income from operations........................... 7,364 2,476 16,096 10,108
Interest and other income (expense), net......... 204 (75) 1,034 (21)
------- ------- -------- -------
Income before income taxes....................... 7,568 2,401 17,130 10,087
Provision for income taxes....................... 3,027 -- 6,852 --
------- ------- -------- -------
Net income....................................... $ 4,541 $ 2,401 $ 10,278 $10,087
======= ======= ======== =======
Net income per common share (1).................. $0.21 $0.47
======= ========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Information Information
----------- -----------
<S> <C> <C>
Net income....................................... $ 2,401 $10,087
Pro forma income taxes (2)....................... 961 4,035
------- -------
Pro forma net income............................. $ 1,440 $ 6,052
======= =======
Pro forma net income per
common share..................................... $ 0.08 $ 0.32
======= =======
</TABLE>
(1) The number of shares outstanding is 21,657,150 at September 30, 1997.
(2) At an assumed 40% income tax rate.
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
MASTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (cost approximates market value)............ $31,497 $45,997
Accounts receivable, net of allowance for uncollectible accounts...... 44,815 23,160
Unbilled receivables.................................................. 2,377 1,410
Employee and related party advances................................... 1,990 2,591
Prepaid and other assets.............................................. 709 601
------- -------
Total current assets............................................... 81,388 73,759
------- -------
Net equipment and leasehold improvements.............................. 6,736 3,750
------- -------
Total assets............................................................ $88,124 $77,509
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility............................................. $ 2,207 $ 2,077
Accounts payable...................................................... 4,293 3,934
Accrued payroll and related costs..................................... 14,794 8,898
Other accrued liabilities............................................. 2,291 1,342
S corporation dividend payable....................................... -- 6,500
Deferred revenue...................................................... -- 116
Deferred income taxes................................................. 1,200 1,200
------- -------
Total current liabilities.......................................... 24,785 24,067
------- -------
Deferred income taxes................................................... 1,733 2,683
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, 21,657,150 and
21,654,600 shares issued and outstanding, respectively............. 217 217
Additional paid-in capital............................................ 51,362 51,168
Retained earnings..................................................... 10,475 197
Deferred compensation................................................. (387) (776)
Currency translation adjustment....................................... (61) (47)
------- -------
Total shareholders' equity......................................... 61,606 50,759
------- -------
Total liabilities and shareholders' equity.............................. $88,124 $77,509
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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, 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......... -- -- -- (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 previously approved
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.
5
<PAGE>
MASTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(Unaudited)
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Operations:
Net income......................................... $ 10,278 $ 10,087
Adjustments to reconcile net income to cash
provided by operations:
Depreciation..................................... 1,012 149
Allowance for uncollectible accounts............. 445 500
Minority interest................................ -- 9
Deferred income taxes, net....................... (950) --
Amortization of deferred compensation............ 389 --
Working capital items:
Accounts receivable and unbilled receivables..... (23,067) (3,176)
Employee and related party advances.............. 601 (200)
Prepaid and other assets......................... (108) 207
Accounts payable................................. 359 1,930
Accrued and other current liabilities............ 6,729 605
-------- --------
Net cash flow from operations................. (4,312) 10,111
-------- --------
INVESTING ACTIVITIES:
Additions to equipment and leasehold
improvements.................................... (3,998) (1,825)
-------- --------
Net cash flow from investing activities (3,998) (1,825)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under revolving credit facility 130 2,215
Proceeds from exercise of stock options 32 --
Dividends paid..................................... (6,338) (12,545)
-------- --------
Net cash flow from financing activities....... (6,176) (10,330)
-------- --------
Effect of currency translation on cash............... (14) (64)
-------- --------
Net change in cash and cash equivalents.............. (14,500) (2,108)
Cash and cash equivalents, beginning of period....... 45,997 3,026
-------- --------
Cash and cash equivalents, end of period............. $ 31,497 $ 918
======== ========
Supplemental disclosure:
Cash payments for interest....................... $ 17 $ 58
Cash payments for income taxes................... $ 6,946 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by Mastech Corporation ("Mastech" or the "Company") in accordance with
generally accepted accounting principles for interim financial information and
Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as
amended. The consolidated financial statements for the quarter ended September
30, 1997 should be read in conjunction with the Company's consolidated financial
statements (and notes thereto) included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996. Accordingly, the accompanying
consolidated financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, all
adjustments considered necessary for a fair presentation of the accompanying
consolidated financial statements have been included, and all adjustments are of
a normal and recurring nature. Operating results for the three month and nine
month periods ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
The use of generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. RECENTLY ISSUED 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 period.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130), which establishes standards for reporting and display of comprehensive
income and its components in financial statements. As required by SFAS No. 130,
the Company expects to adopt the new standard in the first quarter of fiscal
1999. The Company has reviewed SFAS No. 130 and determined that the only
component of comprehensive income which applies to the Company will be foreign
currency translation adjustments currently recorded directly to shareholders'
equity in accordance with Statement of Financial Accounting Standards No. 52,
"Accounting for the Translation of Foreign Currency Transactions and Foreign
Currency Financial Statements".
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS No. 131), which requires the use of
the "management approach" model for segment reporting. The management approach
model is based on the way the Company's management organizes segments within the
Company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure or any other manner in which management segregates a
company. The Company will be required to adopt this standard for the fiscal
year ended December 31, 1998. Although early adoption is permitted, the
Company will not adopt this statement until fiscal year end 1998.
7
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of Mastech Corporation:
We have reviewed the accompanying consolidated balance sheet of Mastech
Corporation (a Pennsylvania Corporation) and subsidiaries as of September 30,
1997, and the related consolidated income statements for the three month and
nine month periods and related consolidated statements of cash flows and
shareholders' equity for the nine month period then ended. These consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
October 24, 1997
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this report.
OVERVIEW
Mastech Corporation was incorporated in Pennsylvania on November 12, 1996.
Mastech Systems Corporation ("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 ("the IPO"). Subsequent to the IPO, Mascot Systems Pvt., Ltd. (" Mascot
Systems "), and Scott Systems Pvt., Ltd. (" Scott Systems" ), both of which are
corporations organized under the laws of India, became wholly-owned subsidiaries
of Mastech Systems. Unless the context otherwise requires, references in this
Quarterly Report on Form 10-Q to " Mastech " or the " Company " includes the
Company and its subsidiaries.
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, Enterprise
Resource Planning ("ERP") package implementation services, Internet/intranet
services and maintenance outsourcing. These services are provided in a variety
of computing environments and use leading technologies, including client/server
architectures, object-oriented programming, distributed databases and the latest
networking and communications technologies.
The Company's revenues are derived from fees paid by clients for professional
services. Historically, a substantial majority of the Company's projects have
been client-managed. On client-managed projects, Mastech provides professional
services as a member of the project team on a time-and-materials basis. The
Company recognizes revenues on time-and-materials projects as the services are
performed. On Mastech-managed projects, Mastech takes complete responsibility
for project management, and bills the client on a time-and-materials or fixed-
price basis. Fixed-price contracts are recognized 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.
9
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997
COMPARED TO THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1996
Revenues
The Company's revenues increased 72.1%, to $53.2 million for the third quarter
of 1997 from $30.9 million for the third quarter of 1996. This revenue growth
was due primarily to successful market penetration by the Company's domestic
Enterprise Package Solutions division which increased its revenues by $7.2
million. The Company also experienced an increase of $5.9 million in revenues
from its preferred vendor service contract with EDS. Additionally, the
Company's international revenues increased by $3.6 million during this same
period as a result of its expansion into the Canadian, European and Asia Pacific
markets.
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, as well as the independent contractors used by the Company.
Gross profit increased 117.9% to $16.9 million for the third quarter of 1997
from $7.8 million for the third quarter of 1996. Gross profit, as a percentage
of revenues, increased to 31.7% in the third quarter of 1997 from 25.1% in the
third quarter of 1996. The primary reasons for the $9.1 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 12.1% in the third
quarter of 1996 to 4.3% in the third quarter of 1997. The net increase in the
number of IT professionals (including independent contractors) used by the
Company was 432 for the third quarter of 1997 compared to 60 for the third
quarter of 1996.
Selling, General and Administrative Expense
Selling, general and administrative expense consist of costs associated with the
Company's sales and marketing efforts, executive management, finance and human
resource functions, facilities and communications costs and other general
overhead expenses. Selling, general and administrative expenses increased 78.1%,
to $9.4 million for the third quarter of 1997 from $5.3 million for the third
quarter of 1996. As a percentage of revenues, selling, general and
administrative expenses increased to 17.7% for the third quarter of 1997 from
17.1% for the third quarter of 1996. 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 IPO for executive
compensation and for compliance with the regulatory filing requirements imposed
upon public companies. The incremental costs associated with the Company's
public status are approximately $333,000 for the third quarter of 1997.
In the three months ended September 30, 1997, the Company has reflected the
amortization of deferred compensation for an executive officer as a non-
recurring charge.
Interest and Other Income (Expense), net
Other income and expense consists primarily of interest income and interest
expense. Other income was $204,000 for the third quarter of 1997 compared to
other expense of $75,000 for the third quarter of 1996. The increase in other
income is the result of increased interest income from the investment of the net
proceeds from the IPO. 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 $90,000 in the third quarter of 1996 to $180,000 in the third
quarter of 1997. (See Liquidity and Capital Resources.)
10
<PAGE>
Liquidity and Capital Resources
The Company's financial statements reflect cash flow used by operations of
approximately $2.9 million for the three months ended September 30, 1997, and
cash flow provided by operations of approximately $3.0 million for the three
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. During the three months
ended September 30, 1997, the Company paid approximately $0.3 million of
corporate income taxes related to the termination of its status as an S
corporation.
Capital expenditures for the three months ended September 30, 1997 and September
30, 1996 were approximately $1.3 million and $1.1 million, respectively. During
the three months ended September 30,1997, the Company spent approximately $0.2
million related to the implementation of a new management information system.
The estimated remaining cost of this new software, which is year 2000
compliant, is $800,000.
RESULTS OF OPERATIONS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
COMPARED TO THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
Revenues
The Company's revenues increased 50.4%, to $135.8 million for the first nine
months of 1997 from $90.3 million for the first nine months of 1996. This
revenue growth was due primarily to successful market penetration by the
Company's domestic Enterprise Package Solutions division which increased its
revenues by $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 to 475 clients
in the first nine months of 1997 from 345 clients in the first nine months of
1996.
Gross Profit
Gross profit increased 65.9%, to $41.1 million for the first nine months of 1997
from $24.8 million for the first nine months of 1996. Gross profit, as a
percentage of revenues, increased to 30.3% for the first nine months of 1997
from 27.4% for the first nine months of 1996. 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 12.1% in the first nine months of 1996 to 5.6% in the first nine
months of 1997. The number of IT professionals (including independent
contractors) used by the Company increased to 2,471 as of September 30, 1997
from 1,394 as of September 30, 1996.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 67.9%, to $24.6 million
for the first nine months of 1997 from $14.7 million for the first nine months
of 1996. As a percentage of revenues, selling, general and administrative
expenses increased to 18.1% for the first nine months of 1997 from 16.2% for
the first nine months of 1996. 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 IPO. The
incremental costs associated with the Company's public status are approximately
$1.2 million for the first nine months of 1997.
In the nine months ended September 30, 1997, the Company has reflected the
amortization of deferred compensation for an executive officer as a non-
recurring charge.
11
<PAGE>
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. The increase in
other income is the result of increased interest income from the investment of
the net proceeds from the IPO. 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.)
Liquidity and Capital Resources
The net proceeds generated from the IPO were approximately $45.6 million, after
deducting underwriting discounts and commissions and estimated offering expenses
paid by the Company. These monies have been temporarily invested in short-term,
investment grade, interest bearing securities. 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.
Prior to the IPO, the Company generally financed its working capital
requirements through internally generated funds. Since the IPO, the Company has
financed its working capital requirements through internally generated funds and
with the proceeds from the offering. The Company's management expects this
trend to continue. 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 approximately $10.1 million
for the nine months ended September 30, 1996. Prior to the initial public
offering, the Company made S corporation distributions to its shareholders, and
in 1997 it made the final S corporation distributions.
Capital expenditures for the nine months of 1997 and 1996 were approximately
$4.0 million and $1.8 million, respectively. During the first nine months of
1997, the Company incurred approximately $1.1 million in connection with the
building of the infrastructure for its offshore software development and
training facilities in India. During the first nine months of 1997, the Company
spent approximately $1.2 million related to the implementation of a new
management information system.
Effective May 30, 1997, the Company entered into a $25.0 million revolving
credit facility (the ''Facility'') with PNC Bank, National Association (the
"Lender"). 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 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 annum. 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.
On October 30, 1997, the Company filed a registration statement on Form S-1 with
the Securities and Exchange Commission to initiate the registration of 3,000,000
shares of the Company's common stock for sale to the public. Of this total,
1,800,000 shares will be newly issued by the Company, and 1,200,000
shares will be sold by selling shareholders. The net proceeds of the offering,
after deducting underwriting discounts, commissions and offering expenses to be
paid by the Company, will be used to develop new services, to expand existing
operations, including offshore software development operations, for possible
acquisitions of related businesses, and for general corporate purposes,
including working capital. The Company will not receive any part of the proceeds
from the sale of shares by the selling shareholders. Management currently
anticipates that the proceeds from this offering together with the
12
<PAGE>
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 the 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 the results of
operations.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995
The statements contained in the section captioned Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical are "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.
These forward-looking statements represent the Company's present expectations or
beliefs concerning future events. The Company cautions that such statements are
qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements including statements
pertaining to future uses of the IPO proceeds, the financing of the Company's
working capital requirements and hedging of any market risk sensitive
instruments. Results actually achieved thus may differ materially from expected
results included in these statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK SENSITIVE INSTRUMENTS
The Company currently does not invest excess funds in derivative financial
instruments or other market risk sensitive instruments for the purpose of
managing its foreign currency exchange rate risk or for any other purpose.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
SECONDARY OFFERING OF SECURITIES
On October 30, 1997, the Company filed a registration statement on Form
S-1 with the Securities and Exchange Commission to initiate the
registration of 3,000,000 shares of the Company's common stock for sale
to the public. Of this total, 1,800,000 shares will be newly issued
by the Company, and 1,200,000 shares will be sold by 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
Company's Common Stock. The registration statement filed with the SEC
relating to these securities has not yet become effective.
PENDING ACQUISITION
In October, 1997, the Company entered into a non-binding letter
of intent to purchase for cash the assets of an Australian Information
Technology ("IT") services company. The aggregate purchase price is not
expected to exceed $6 million. The Company anticipates closing this
acquisition prior to December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are being filed with this report:
Exhibit Number Description Page
- -------------- ----------- ----
11.1 Statement regarding computation of per share earnings. 17
(b) Reports on Form 8-K:
The Company did not file any Current Report on Form 8-K during the
quarter ended September 30, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MASTECH CORPORATION
(REGISTRANT)
Dated: November 14, 1997 /s/ Sunil Wadhwani
Co-Chairman and Chief Executive Officer
Dated: November 14, 1997 /s/ Michael J. Zugay
Vice President-Finance and Secretary
15
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
11.1 Statement regarding computation of per share earnings. 17
27 Financial Data Schedule *
* Incorporated herein by reference to exhibit of the same number of the
Form S-1 Registration Statement of the Company (registration No. 333-39123).
16
<PAGE>
EXHIBIT 11.1
MASTECH CORPORATION
CALCULATION OF PER SHARE EARNINGS
----------------------------------
(Dollars in thousands, except per share data)
---------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
(Pro Forma (Pro Forma
Information) Information)
<S> <C> <C> <C> <C>
Weighted average common shares.................... 21,656,609 18,200,000 21,655,482 18,200,000
Dilutive effect of stock issued within one year
of the initial public offering................... --- 54,600 --- 54,600
Effect of shares sufficient to replace capital in
excess of earnings withdrawn as dividends........ --- 410,867 --- 410,867
Dilutive effect of common stock equivalents 383,467 --- 199,254 ---
----------- ----------- ----------- -----------
Total weighted average shares..................... 22,040,076 18,665,467 21,854,736 18,665,467
=========== =========== =========== ===========
Net income........................................ $ 4,541 $ 10,278
=========== ===========
Pro forma net income.............................. $ 1,440 $ 6,052
=========== ===========
Net income per common share....................... $ 0.21 $ 0.47
=========== ===========
Pro forma net income per common share............. $ 0.08 $ 0.32
=========== ===========
</TABLE>
