<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, 1998 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 Exchange 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, 1998 was 49,041,861 shares.
<PAGE>
MASTECH CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION 3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED INCOME STATEMENTS FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 3
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AS OF SEPTEMBER 30, 1998
AND DECEMBER 31, 1997 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK SENSITIVE INSTRUMENTS 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MASTECH CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in Thousands Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $103,405 $64,209 $277,575 $168,453
Cost of revenues 68,756 44,472 185,878 118,858
-------- ------- -------- --------
Gross profit 34,649 19,737 91,697 49,595
Selling, general and administrative 19,685 12,148 52,933 32,557
-------- ------- -------- --------
Income from operations 14,964 7,589 38,764 17,038
Merger related expenses - - 3,212 -
Other income (735) (114) (2,138) (881)
-------- ------- -------- --------
Income before income taxes 15,699 7,703 37,690 17,919
Provision for income taxes 5,495 3,148 14,789 7,354
-------- ------- -------- --------
Net income $ 10,204 $ 4,555 $ 22,901 $ 10,565
======== ======= ======== ========
Net income per common share, basic and diluted $ 0.20 $ 0.10 $ 0.46 $ 0.23
======== ======= ======== ========
</TABLE>
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, 1998 December 31, 1997
------------------ -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,928 $ 82,924
Investments 58,500 -
Accounts receivable, net 70,971 60,366
Unbilled receivables 11,751 1,829
Employee and related party advances 3,206 2,578
Prepaid and other assets 2,730 1,511
Deferred income taxes 3,636 2,154
-------- --------
Total current assets 174,722 151,362
Net equipment and leasehold improvements 14,340 8,775
Intangible assets, net 5,980 1,923
-------- --------
Total assets $195,042 $162,060
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facilities $ - $ 6,905
Accounts payable 7,365 5,319
Accrued payroll and related costs 24,569 17,949
Accrued income taxes 1,455 2,005
Other accrued liabilities 14,489 8,256
-------- --------
Total current liabilities 47,878 40,434
Other long term liabilities 467 490
Deferred income taxes 884 1,710
Shareholders' equity:
Preferred stock, without par value: 20,000,000 shares
authorized, 1 share and 0 shares of Series A Preferred
Stock issued and outstanding, respectively - -
Common stock, par value $0.01 per share:
200,000,000 shares authorized, 49,041,861 and
48,789,800 shares issued and outstanding, respectively 490 252
Additional paid-in capital 109,572 105,375
Retained earnings 36,637 14,722
Deferred compensation - (258)
Net unrealized gain/(loss) on investments 346 -
Currency translation adjustment (1,232) (665)
-------- --------
Total shareholders' equity 145,813 119,426
-------- --------
Total liabilities and shareholders' equity $195,042 $162,060
======== ========
</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 Series A Preferred Additional
-------------------- -------------------- Paid-in Retained
Shares Par Value Shares Par Value Capital Earnings
------ --------- ------ --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 48,789,800 $252 - $ - $105,375 $14,722
Net income - - - - - 22,901
Amortization of deferred
compensation - - - - - -
Exercise of stock options,
includes effect of tax
benefit recognized 252,061 1 - - 3,935 -
Two-for-one stock split
effected in the form of a
stock dividend paid on
April 10, 1998 - 237 - - - (237)
Issuance of preferred stock - - 1 - - -
Non-cash merger costs - - - - 262 -
Dividends-paid by Quantum - - - - - (749)
Net unrealized gain/(loss)
on investments - - - - - -
Currency translation
adjustment - - - - - -
---------- ---- -- ---- -------- -------
Balance, September 30, 1998
(Unaudited) 49,041,861 $490 1 $ - $109,572 $36,637
========== ==== == ==== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Net Currency Total
Deferred Unrealized Translation Shareholders'
Compensation Gain/(Loss) Adjustment Equity
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 $(258) $ - $ (665) $119,426
Net income - - - 22,901
Amortization of deferred
compensation 258 - - 258
Exercise of stock options,
includes effect of tax
benefit recognized - - - 3,936
Two-for-one stock split
effected in the form of a
stock dividend paid on
April 10, 1998 - - - -
Issuance of preferred stock - - - -
Non-cash merger costs - - - 262
Dividends-paid by Quantum - - - (749)
Net unrealized gain/(loss)
on investments - 346 - 346
Currency translation
adjustment - - (567) (567)
------ ---- ------- --------
Balance, September 30, 1998
(Unaudited) $ - $346 $(1,232) $145,813
====== ==== ======= ========
</TABLE>
5
<PAGE>
MASTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATIONS
Operations:
Net income $ 22,901 $ 10,565
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization 2,390 1,073
Allowance for uncollectible accounts 326 592
Deferred income taxes, net (1,448) (943)
Non-cash merger cost 262 -
Amortization of deferred compensation 258 389
Amortization of bond premium 328 -
Working capital items:
Accounts receivable and unbilled receivables (20,853) (24,780)
Advances (628) 668
Prepaid and other assets (2,125) (92)
Accounts payable 2,046 237
Accrued and other current liabilities 12,326 6,577
-------- --------
Net cash flow from operations 15,783 (5,714)
-------- --------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (4,154) -
Additions to equipment and leasehold improvements (7,858) (4,150)
Purchase of investments (72,693) -
Sale of investments 13,866 -
Unrealized gain on investments 346 -
-------- --------
Net cash flow from investing activities (70,493) (4,150)
-------- --------
FINANCING ACTIVITIES:
Net (payments)/borrowings under revolving credit facilities (6,905) 1,849
Proceeds from exercise of stock options 3,935 32
Dividends paid (749) (6,772)
-------- --------
Net cash flow from financing activities (3,719) (4,891)
-------- --------
Effect of currency translation on cash (567) (2)
-------- --------
Net change in cash and cash equivalents (58,996) (14,757)
Cash and cash equivalents, beginning of period 82,924 46,566
-------- --------
Cash and cash equivalents, end of period $ 23,928 $ 31,809
======== ========
Supplemental disclosure:
Cash payments for interest $ 167 $ 224
======== ========
Cash payments for taxes $ 15,642 $ 7,485
======== ========
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements included herein
have been prepared by Mastech Corporation (the "Company") in accordance with
generally accepted accounting principles for the interim financial information
and Article 10 of Regulation S-X under the Securities Exchange Act of 1934,
as amended. The consolidated financial statements as of and for the quarter
ended September 30, 1998 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, 1997. Accordingly,
the accompanying consolidated financial statements do not include all of the
information and notes 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 and nine months
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998.
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. INVESTMENTS
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". The Company has determined that all of its
investments are to be classified as available-for-sale and recorded at fair
value.
3. STOCK SPLIT
On March 17, 1998, the Company's Board of Directors declared a two-for-one
stock split that was effected in the form of a stock dividend paid on April 10,
1998 to shareholders of record on March 27, 1998. All share and per share
amounts included in the Company's consolidated financial statements have been
retroactively restated to reflect the split for all periods presented.
4. COMPREHENSIVE INCOME
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which the Company adopted as of January 1, 1998. SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS No. 130 requires companies to report all changes in equity
during a period, except those resulting from investment by owners and
distribution to owners, in a financial statement or footnote disclosure for the
period in which they are recognized. The Company has chosen to disclose
comprehensive income, which encompasses net income, foreign currency translation
adjustments and net unrealized gain (loss) on investments, in the following
table.
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
(dollars in thousands)
Net income $10,204 $4,555 $22,901 $10,565
Other comprehensive gain (loss):
Net unrealized gain (loss) on investment 346 - 346 -
Foreign currency translation adjustment 268 (73) (567) (2)
------- ------ ------- ------
Total comprehensive income $10,818 $4,482 $22,680 $10,563
======= ====== ======= =======
</TABLE>
The adoption of SFAS No. 130 had no impact on the Company's net income or
shareholders' equity.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
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 a 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. SFAS No. 131 is effective for financial statements issued for periods
beginning after December 15, 1997. The Company will adopt SFAS No. 131 as a part
of its December 31, 1998 year-end financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133), which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 is effective for periods after June 15, 1999. Management does not anticipate
that the adoption of this statement will have a significant effect on the
Company's financial position.
6. ACQUISITIONS
QUANTUM
On June 1, 1998, the Company acquired all of the issued and outstanding capital
stock of Quantum Information Resources Limited, a Canadian corporation
("Quantum") pursuant to a business combination the terms of which were contained
in that certain Combination and Exchange Agreement dated June 1, 1998 (the
"Exchange Agreement"). Pursuant to the Exchange Agreement the shareholders of
Quantum received 1,623,000 exchangeable non-voting shares of Quantum which are
convertible into the same number of shares of the Company's common stock (the
"Exchangeable Shares") and PNC Bank, National Association received 1 share of
Series A Preferred Stock, as trustee for the shareholders of Quantum, pursuant
to which such shareholders were granted the right to vote the Company common
stock underlying the Exchangeable Shares. Based on representations made by the
Quantum shareholders in the Exchange Agreement, the Company issued these
securities pursuant to the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act").
Quantum provides information technology services primarily in Canada and parts
of the United States. The business combination was accounted for as a pooling of
interests and, accordingly, the Company's consolidated financial statements have
been restated to include results for Quantum for all periods presented.
8
<PAGE>
MC COMPUTER SERVICES
On July 1, 1998 the Company acquired privately-held MC Computer Services Pty
Limited, ("MCCS") a Canberra, Australia-based information technology services
provider. MCCS provides a wide range of high-level information technology
services such as applications development, consultant services, systems analysis
and design, and project management. The acquisition has been accounted for as a
purchase and management expects it to be accretive to future earnings. Operating
results have been included in the Company's consolidated financial statements
since the date of acquisition, but pro forma information has not been presented
because it is immaterial.
7. ACQUISITION RELATED EXPENSES
In connection with the acquisition of Quantum, $3.2 million or $0.06 per share
of acquisition-related costs and expenses were incurred and have been charged to
expense in the second quarter of 1998.
8. SUBSEQUENT EVENT
On October 28, 1998 the Company announced the acquisition of International MIS,
Inc. ("IMIS"), a business and information technology consulting firm based in
San Francisco, CA. IMIS provides the financial industry with high-level project
management and business analysis consulting services. The acquisition will be
accounted for as a purchase and management expects it to be accretive to future
earnings.
9
<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,
1998, and the related consolidated statements of income and shareholders' equity
for the three month and nine month periods ended September 30, 1998 and 1997,
and consolidated statements of cash flows for the nine month periods ended
September 30, 1998 and 1997. 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, referred to
above, for them to be in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
October 22, 1998
10
<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. As
used herein, "Mastech" or the "Company" shall mean Mastech Corporation and each
of its consolidated subsidiaries.
OVERVIEW
Mastech Corporation was incorporated in Pennsylvania on November 12, 1996.
Mastech Systems Corporation, a Pennsylvania corporation through which the
business of the Company has been conducted since its inception in July 1986, is
an indirect, wholly owned subsidiary of the Company.
Mastech'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. Revenues on 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, completions 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.
Mastech sells its services to large and medium-sized organizations. The
Company's sales force is organized to meet the needs of the marketplace through
four primary divisions: (i) the U.S. Client Services Division; (ii) the
Solutions Division; (iii) the Enterprise Package Solutions Division; and (iv)
the International Division.
The U.S. Client Services Division includes six 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.
The U.S. Client 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.
The Enterprise Package Solutions Division manages engagements and provides IT
professionals trained in ERP 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.
11
<PAGE>
The International Division operates through offices in ten 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997
Revenues. The Company's revenues increased 61%, or $39.2 million to $103.4
million for the third quarter of 1998 from $64.2 million for the third quarter
of 1997. Of this 61% growth in revenues, U.S. Client Services Division,
Enterprise Package Solutions Division, and International Division contributed
24%, 19% and 18%, respectively. The increases in Enterprise Package Solutions
and U.S. Client Services Divisions can be attributed to additional services
provided to existing clients and continued market penetration. The increase in
the International Division is primarily the result of increased market
penetration primarily in Europe and Australia.
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 75.6% to $34.6 million for the third quarter of
1998 from $19.7 million for the third quarter of 1997. Gross profit as a
percentage of revenues for the current quarter of 33.5% increased when compared
with 30.7% for the third quarter in 1997. The primary reasons for the increase
in gross profits as a percentage of revenues were higher margins in the
Enterprise Package Solutions Division and U.S. Client Services Division.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of costs associated with the Company's sales and
marketing efforts, executive management, finance and human resource functions,
facilities and telecommunication costs and other general overhead expenses.
Selling, general and administrative expenses increased 62%, or $7.5 million to
$19.7 million in the third quarter of 1998 from $12.1 million in the third
quarter 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.
Interest and Other Income (Expense), Net. Other income was $735,000 for the
third quarter of 1998 compared to $114,000 for the third quarter of 1997. This
increase in other income is the result of increased interest income from the
investment of the net proceeds from the Company's secondary offering of common
stock completed in December 1997.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues. The Company's revenues increased 65%, or $109.1 million to $277.6
million for the nine months ended September 30, 1998 from $168.5 million for the
nine months ended September 30, 1997. Of this 65% growth in revenues, U.S.
Client Services Division, Enterprise Package Solutions Division and
International Division contributed 20%, 18% and 17%, respectively. The increases
in Enterprise Package Solutions and U.S. Client Services Divisions can be
attributed to additional services provided to existing clients and continued
market penetration. The increase in the International Division is primarily the
result of increased market penetration primarily in Europe and Australia.
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 85% to $91.7 million for the nine months ended
September 30, 1998 compared with $49.6 million for the same period in 1997.
Gross profit as a percentage of revenues for the current nine-month period of
33% increased when compared with 29.4% for the same period in 1997.
12
<PAGE>
The primary reasons for the increase in gross profits as a percentage of
revenues were higher margins in the Enterprise Package Solutions Division, U.S.
Client Services Division and Solutions Division.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of costs associated with the Company's sales and
marketing efforts, executive management, finance and human resource functions,
facilities and telecommunication costs and other general overhead expenses.
Selling, general and administrative expenses increased 62.6%, or $20.4 million
to $52.9 million for the nine month period ended September 30, 1998 from $32.6
million for the prior year period. 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.
Interest and Other Income (Expense), Net. Other income was $2.1 million for the
year to date period ended September 30, 1998 compared to $881,000 for the same
period in 1997. This increase in other income is the result of increased
interest income from the investment of the net proceeds from the Company's
secondary offering of common stock completed in December 1997.
LIQUIDITY AND CAPITAL RESOURCES
In December 1997, the Company completed the registration of 3,000,000 pre-split
shares of the Company's common stock for sale to the public in an underwritten
offering. The net proceeds to the Company of the offering were $51.3 million
after deducting underwriting discounts, commissions and offering expenses paid
by the Company. In addition, the net proceeds to the Company, generated from its
initial public offering in December 1996, were approximately $45.6 million,
after deducting underwriting discounts and commissions and offering expenses
paid by the Company. The proceeds from both offerings have been used primarily
for working capital and other general purposes. The remaining proceeds have been
temporarily invested in short-term, investment grade, interest bearing
securities.
The Company has and will use these proceeds 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. Management currently anticipates that the proceeds
from these offerings together with the existing sources of liquidity and cash
generated from operations will be sufficient to satisfy its cash needs at least
through the next twelve months.
Historically, the Company has financed its working capital requirements through
internally generated funds and with the proceeds from the aforementioned
offerings. The Company's financial statements reflect cash flow provided by
operations of approximately $15.8 million for the nine months ended September
30, 1998, and cash flow used by operations of $5.7 million for the same period
in 1997.
For the nine months ended September 30, 1998, the Company recorded its net
purchase of investments of $58.5 million. These investments are classified as
available-for-sale and recorded at fair value.
Capital expenditures for the nine months ended September 30, 1998 and 1997 were
approximately $7.9 million and $4.2 million, respectively. During the nine-month
periods ended September 30, 1998 and 1997, the Company spent approximately $3.5
million and $2.5 million, respectively on computer and related equipment to
support its technical, consulting and administrative functions. The Company also
spent approximately $3.1 million and $1.3 million during the same periods in
1998 and 1997, respectively, in connection with the buildout and other
development of the infrastructure for its offshore software development and
training facilities in India. During the next twelve months, the Company expects
to incur approximately $2.0 million in remaining costs to license and implement
its new management information system. A portion of this cost will be expensed.
Effective May 30, 1997, the Company replaced an existing revolving credit
facility with a new $25.0 million revolving credit facility with PNC Bank,
National Association (the "Facility"). The Facility bears interest at a rate
equal to LIBOR
13
<PAGE>
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. There
were no borrowings outstanding against this facility as of September 30, 1998.
During the first quarter of 1998, Mascot Systems had aggregate borrowings of
approximately $1.7 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.
These borrowings were repaid by the Company in May 1998.
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 the results of
operations.
YEAR 2000
The Year 2000 ("Y2K") problem refers to problems which may occur because some
computer systems currently record years in a two digit format. These computer
systems may have difficulty recognizing or processing date information after
December 31, 1999. The Y2K problem may also occur with embedded chips. The
Company has been working to evaluate the potential effect of the Y2K problem on
the Company's operations.
Internal Systems
The Company developed a plan to evaluate its key internal computer systems. The
plan consisted of the following four phases: Inventory; Evaluation/Assessment of
Y2K Risk; Remediation and Testing. The Company has completed all phases of
evaluation for the internal financial and operational systems located at the
corporate headquarters of the Company. Based upon written documentation and
information available on vendor websites, certain testing procedures for
business critical hardware and software were developed and implemented by the
Company. An independent third party reviewed both vendor information, testing
results, and conducted other tests to validate work performed. As a result of
this, the Company does not believe that the internal computer systems at its
corporate headquarters will experience significant Y2K problems.
The Company is in various phases of evaluation with respect to other locations
of the Company in the United States and foreign sites. The Company expects that
it will complete the evaluation of all of its locations by January 31, 1999.
Cost of Year 2000 Compliance Efforts
The Company does not expect to incur substantial costs with respect to its Y2K
compliance efforts and the Company has not deferred other information technology
projects as a result of the Y2K problem. To date, the Company has incurred
expenses totaling approximately $69,000 and anticipates that its total expenses
will not exceed $175,000. These figures are primarily reflective of the costs
associated with the use of third parties to review and validate work performed
and the costs assessing Y2K problems relating to or arising with respect to
third parties. The cost estimates do not include the cost of internal efforts by
Company personnel. The Company has not separately accounted for these internal
costs.
Third Party Relationships
The Company has contacted its key vendors regarding their Y2K compliance
efforts. Although the Company has received some information from its vendors
regarding their Y2K compliance efforts, there can be no assurance that the
Company will not experience disruptions in its ability to conduct its business
because of Y2K problems experienced by the Company's vendors.
In addition, the Company has contacted its key customers regarding their Y2K
compliance efforts. Although the Company has received some information from its
customers regarding their Y2K compliance efforts, there can be no assurance that
such customers will not experience disruptions in their business which would
result in material adverse affects to the Company. One example of a worst case
scenario would be a failure in the accounting
14
<PAGE>
systems of a significant number of the Company's key clients due to the Y2K
problem that resulted in a delay in the payment of invoices issued by the
Company for services and expenses.
Potential Liability to Third Parties
The Company has participated in Y2K remediation projects for some of its
customers. Although the Company has no reason to believe that any such work will
result in litigation against the Company, it is possible that the Company could
be materially adversely affected by litigation in connection with the Y2K
remediation services provided by the Company.
The Company's policy has been to attempt to include provisions in client
contracts that, among other things, disclaim implied warranties, limit the
duration of express warranties, limit the Company's liability to the amount of
fees paid by the client to the Company in connection with the project, and
disclaim any liability arising from third-party software that is implemented,
customized or installed by the Company. The Company also maintains insurance to
protect against potential liability in connection with Y2K remediation services
provided by the Company. There can be no assurance that the Company will be able
to obtain the desired contractual protections in agreements, or that any such
contractual provisions will prevent clients from asserting claims against the
Company with respect to the Y2K issue. There also can be no assurance that the
contractual protections, if any, obtained by the Company or the insurance
coverage will operate to protect the Company from, or adequately limit the
amount of, any liability arising from claims asserted against the Company.
Contingency Plan
The Company is developing a contingency plan to address various situations which
may result if the Company experiences Y2K problems. The plan will include
identification of major systems, dependencies on third parties and resources and
strategies necessary to restore operations or work around failures. It is
expected that the contingency plan will be completed by April 30, 1999. There
can be no assurance that the contingency plan developed by the Company will
adequately protect the Company from internal Y2K problems or prevent service
interruption or failures experienced by customers and suppliers from having a
material adverse effect on the Company.
Demand for Year 2000 Services
Many of the Company's clients need to repair or replace their legacy systems
because of Y2K issues. The Company believes this is favorably impacting the
demand for its services and products. The Company provides certain direct Y2K
services, the market for which the Company expects to diminish over time. The
Company also believes that as companies focus on Y2K issues, other less critical
projects may not be initiated or may be suspended. Because the Company provides
a broad range of information technology services, the Company does not expect a
decrease in the overall demand for its services as the Y2K problem is addressed.
However, given the lack of precedent for an issue of this nature, the Company's
ability to accurately forecast the impact of the Y2K issue on its future
financial performance is limited.
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, hedging of any
market risk sensitive instruments, the accretive effect on earnings of
acquisitions and the impact of the Year 2000 issue. Results actually achieved
thus may differ materially from expected results included in these statements.
15
<PAGE>
In order to meet client demand for the Company's services, the Company expects
to continue to increase its professional staff and may open additional sales and
operations offices in North America and internationally. Although the Company's
plans to hire personnel and to possibly open additional offices are in response
to increased demand for the Company's services, a portion of these expenses
will be incurred in anticipation of increased demand. Operating results and
liquidity may be adversely affected if market demand and revenues do not
increase as anticipated. As the Company expands its international operations, a
number of factors, including market acceptance of the Company's services,
significant fluctuations in currency exchange rates, and changes in general
economic, political, and regulatory conditions, could adversely affect future
results and liquidity.
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 rate sensitive instruments for the purpose of
managing its foreign currency exchange rate risk.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In December 1996, Mastech completed the initial public offering of its Common
Stock (Registration Number 33-14169). The net proceeds to the Company from the
sale of the 3,400,000 pre-split shares of Common Stock offered by the Company
(after deducting underwriting discounts, commissions and offering expenses paid
by the Company) were approximately $45.6 million. The Company submitted its
initial Form SR for filing with the Securities and Exchange Commission on March
20, 1997 reporting for the period from December 16, 1996 (the effective date of
the Company's registration statement for its initial public offering) through
March 16, 1997. The following table reflects, as of September 30, 1998, and for
each of the previous quarterly periods an estimate of the amount of net offering
proceeds used by the Company and the purpose for which they were used:
<TABLE>
<CAPTION>
(dollars in thousands)
12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 Total
-------- ------- ------- ------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tax payments $ - $ 3,000 $ 1,900 $ 2,800 $ 3,100 $ 2,300 $ - $ - $13,100
Other working capital items 820 2,180 950 - 3,900 1,200 - - 9,050
------ ------- ------- ------- ------- ------- ------- ------- -------
Total working capital items 820 5,180 2,850 2,800 7,000 3,500 - - 22,150
====== ======= ======= ======= ======= ======= ======= ======= =======
S-corporation dividend - - 6,300 - - - - - 6,300
Subsidiary loans - - - 4,050 - 3,000 - - 7,050
Acquisition of Asia Pacific
Computer consultants - - - - 3,000 - - - 3,000
------ ------- ------- ------- ------- ------- ------- ------- -------
$ 820 $ 5,180 $ 9,150 $ 6,850 $10,000 $ 6,500 $ - $ - $38,500
====== ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
On June 1, 1998, the Company acquired all of the issued and outstanding capital
stock of Quantum Information Resources Limited, a Canadian corporation
("Quantum") pursuant to a business combination the terms of which were contained
in that certain Combination and Exchange Agreement dated June 1, 1998 (the
"Exchange Agreement"). Pursuant to the Exchange Agreement the shareholders of
Quantum received 1,623,000 exchangeable non-voting shares of Quantum which are
convertible into the same number of shares of Mastech common stock (the
"Exchangeable Shares") and PNC Bank, National Association received 1 share of
Series A Preferred Stock, as trustee for the shareholders of Quantum, whereby
such shareholders were granted the right to vote the Company common stock
underlying the Exchangeable Shares. Based on representations made by the Quantum
shareholders in the Exchange Agreement, the Company issued the Exchangeable
Shares pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act").
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Government Regulation of Immigration
The Company recruits its IT professionals on a global basis 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,
17
<PAGE>
with most of those in the U.S. working under H-1B temporary visas. On October
22, 1998, the "American Competitiveness and Workforce Improvement Act" was
signed into law. The H-1B annual quota for fiscal year 1999 was increased from
65,000 to 115,000. The quota for fiscal years 2000 and 2001 will be 115,000 and
107,500 respectively. If the Company is unable to obtain H-1B 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 adversely affected.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are being filed with this report:
Exhibit Number Description Page
- -------------- ----------- ----
10.1 Amended and Restated 1996 Stock Incentive Plan 21
11.1 Statement regarding computation of per share earnings. 34
27 Financial Data Schedule 35
(b) Reports on Form 8-K:
The Company did not file any Current Report on Form 8-K during the
quarter ended September 30, 1998.
18
<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 16, 1998 /s/ Sunil Wadhwani
Co-Chairman and Chief Executive Officer
Dated: November 16, 1998 /s/ Jeffrey McCandless
Vice President, Finance
19
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
10.1 Amended and Restated 1996 Stock Incentive Plan 21
11.1 Statement regarding computation of per share earnings. 34
27 Financial Data Schedule 35
20
<PAGE>
Exhibit 10.1
Mastech Corporation
AMENDED AND RESTATED 1996 STOCK INCENTIVE PLAN
Section 1. General Purpose of the Plan; Definitions. The name of the plan is
the Mastech Corporation Amended 1996 Stock Incentive Plan (the "Plan"). The
purpose of the Plan is to encourage and enable the officers, employees,
directors and consultants of Mastech Corporation (the "Company") and its
Subsidiaries upon whose judgment, initiative and efforts the Company largely
depends for the successful conduct of its business to acquire a proprietary
interest in the Company. It is anticipated that providing such persons with a
direct stake in the Company's welfare will assure a closer identification of
their interests with those of the Company, thereby stimulating their efforts on
the Company's behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Exchange Act of 1934, as amended.
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, Restricted Stock Awards, Stock Awards, Performance Share Awards and
Stock Appreciation Rights.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Effective Date" means the date on which the Plan is approved by the
stockholders as set forth in Section 19.
"Fair Market Value" of the Stock on any given date means (i) if the Stock
is admitted to quotation on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the Fair Market Value on any given date
shall be the average of the highest bid and lowest asked prices of the Stock
reported for such date or, if no bid and asked prices were reported for such
date, for the last day preceding such date for which such prices were reported,
or (ii) if the Stock is admitted to trading on a United States securities
exchange or the NASDAQ National Market System, the Fair Market Value on any date
shall be the closing price reported for the Stock on such exchange or system for
such date or, if no sales were reported for such date, for the last day
preceding such date for which a sale was reported; (iii) notwithstanding the
foregoing, the Fair Market Value of the Stock on the effective date of the
Initial Public Offering shall be the offering price to the public of the Stock
on such date; and (iv) if the Fair Market Value cannot be determined on the
basis previously set forth in this definition on the date that
21
<PAGE>
Fair Market Value is to be determined, The Board shall in good faith determine
the Fair Market Value of the Stock on such date.
"Incentive Stock Option" means any Stock Option designated and qualified as
an "incentive stock option" as defined in Section 422 of the Code.
"Independent Director" means a member of the Board who is not an employee
or officer of the Company or any Subsidiary.
"Initial Public Offering" means the first underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Stock to the public.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any Option to purchase shares of Stock
granted pursuant to Section 6.
"Performance Share Award" means any Award granted pursuant to Section 12.
"Restricted Stock Award" means any Award granted pursuant to Section 10.
"Stock" means the Common Stock, par value $.01 per share, of the Company,
subject to adjustments pursuant to Section 14.
"Stock Appreciation Right" or "SAR" means any Award granted pursuant to
Section 7.
"Stock Award" means any award granted pursuant to Section 11.
"Subsidiary" means any corporation or other entity (other than the Company)
in any unbroken chain of corporations or other entities, beginning with the
Company, if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the economic interest or the total combined voting
power of all classes of stock or other interests in one of the other
corporations or entities in the chain.
Section 2. Administration. The Plan shall be administered by the full Board
of Directors of the Company or a committee of such Board of Directors comprised
of two or more "Non-Employee Directors" within the meaning of Rule 16b-3(a)(3)
promulgated under the Act (the "Plan Administrator"). Subject to the provisions
of the Plan, the Plan Administrator is authorized to:
(a) construe the Plan and any Award under the Plan;
(b) select the directors, officers, employees and consultants of
the Company and its Subsidiaries to whom Awards may be granted;
22
<PAGE>
(c) determine the number of shares of Stock to be covered by any
Award;
(d) determine and modify from time to time the terms and
conditions, including restrictions, of any Award and to approve
the form of written instrument evidencing Awards;
(e) accelerate at any time the exercisability or vesting of all or
any portion of any Award and/or to include provisions in awards
providing for such acceleration;
(f) impose limitations on Awards, including limitations on transfer
and repurchase provisions;
(g) extend the exercise period within which Stock Options may be
exercised; and
(h) determine at any time whether, to what extent, and under what
circumstances Stock and other amounts payable with respect to
an Award shall be deferred either automatically or at the
election of the participant and whether and to what extent the
Company shall pay or credit amounts constituting interest (at
rates determined by the Plan Administrator) or dividends or
deemed dividends on such deferrals.
The determination of the Plan Administrator on any such matters shall be
conclusive.
Section 3. Delegation of Authority to Grant Awards. The Plan Administrator,
in its discretion, may delegate to the Co-Chairmen of the Company all or part of
the Plan Administrator's authority and duties with respect to granting Awards to
individuals who are not subject to the reporting provisions of Section 16 of the
Act or "covered employees" within the meaning of Section 162(m) of the Code. The
Plan Administrator may revoke or amend the terms of such a delegation at any
time, but such revocation shall not invalidate prior actions of the Co-Chairmen
that were consistent with the terms of the Plan.
Section 4. Eligibility. Directors, officers, employees and consultants of
the Company or its Subsidiaries who, in the opinion of the Plan Administrator,
are mainly responsible for the continued growth and development and future
financial success of the business shall be eligible to participate in the Plan.
In addition, Independent Directors are eligible to receive an automatic grant of
Stock Options pursuant to Section 9 hereof.
Section 5. Shares Subject to the Plan. The number of shares of Stock which
may be issued pursuant to the Plan shall be 10% of the total of (i) the number
of shares outstanding on each December 31, beginning on December 31, 1998, or
(ii) the largest number of shares outstanding on any previous December 31;
provided, however, that the foregoing formula shall never result in a decrease
- --------
in the maximum number of shares available under this Plan. For purposes of the
foregoing limitation, the shares of Stock underlying any Awards which are
forfeited, canceled, reacquired by the Company, satisfied without the issuance
of Stock or
23
<PAGE>
otherwise terminated (other than by exercise) shall be added back to the number
of shares of Stock available for issuance under the Plan. Notwithstanding the
foregoing, on and after the date that the Plan is subject to Section 162(m) of
the Code, Stock Options with respect to no more than 400,000 shares of Stock may
be granted to any one individual participant during any one calendar year
period. To the extent that an SAR is granted in conjunction with an Option, the
shares covered by such SAR and Option shall be counted only once. Common Stock
to be issued under the Plan may be either authorized and unissued shares or
shares held in treasury by the Company.
Section 6. Stock Options. Options granted pursuant to the Plan may be
either Options which are Incentive Stock Options or Non-Qualified Stock Options.
Incentive Stock Options and Non-Qualified Stock Options shall be granted
separately hereunder. The Plan Administrator, shall determine whether and to
what extent Options shall be granted under the Plan and whether such Options
granted shall be Incentive Stock Options or Non-Qualified Stock Options;
provide, however, that: (a) Incentive Stock Options may be granted only to
employees of the Company or any Subsidiary that is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code; and (b) No Incentive Stock
Option may be granted following the tenth anniversary of the effective date of
the Plan. The provisions of the Plan and any stock Option agreement pursuant to
which Incentive Stock Options shall be issued shall be construed in a manner
consistent with Section 422 of the Code (or any successor provision) and rules
and regulations promulgated thereunder.
Section 7. Stock Appreciation Rights. The Plan Administrator may, from time
to time, subject to the provisions of the Plan, grant SARs to eligible
participants. Such SARs may be granted (i) alone, (ii) simultaneously with the
grant of an Option (either an Incentive Stock Option or Non-Qualified Stock
Option) and in conjunction therewith or in the alternative thereto or (iii)
subsequent to the grant of a Non-Qualified Stock Option and in conjunction
therewith or in the alternative thereto.
(a) An SAR shall entitle the holder upon exercise thereof to
receive from the Company, upon a written request filed with the
Secretary of the Company at its principal offices (the
"Request"), (i) a number of shares of Stock (with or without
restrictions as to substantial risk of forfeiture and
transferability, as determined by the Plan Administrator in its
sole discretion), (ii) an amount of cash, or (iii) any
combination of shares of Stock and cash, as specified in the
Request (but subject to the approval of the Plan Administrator
in its sole discretion, at any time up to and including the
time of payment, as to the making of any cash payment), having
an aggregate Fair Market Value equal to the product of (i) the
excess of the Fair Market Value, on the day of such Request, of
one share of Stock over the exercise price per share specified
in such SAR or its related Option, multiplied by (ii) the
number of shares of Stock for which such SAR shall be
exercised.
24
<PAGE>
(b) The exercise price of an SAR granted alone shall be determined
by the Plan Administrator, but may not be less than the Fair
Market Value of the underlying Stock on the date of grant. An
SAR granted simultaneously with or subsequent to the grant of
an Option and in conjunction therewith or in the alternative
thereto shall have the same exercise price as the related
Option, shall be transferable only upon the same terms and
conditions as the related Option, and shall be exercisable only
to the same extent as the related Option; provided, however,
-------- -------
that an SAR, by its terms, shall be exercisable only when the
Fair Market Value of the Stock subject to the SAR and related
Option exceeds the exercise price thereof.
(c) Upon exercise of an SAR granted simultaneously with or
subsequent to an Option and in the alternative thereto, the
number of shares of Stock for which the related Option shall be
exercisable shall be reduced by the number of shares of Stock
for which the SAR shall have been exercised. The number of
shares of Stock for which an SAR shall be exercisable shall be
reduced upon any exercise of a related Option by the number of
shares of Stock for which such Option shall have been
exercised.
(d) Any SAR shall be exercisable upon such additional terms and
conditions as may be prescribed by the Plan Administrator.
Section 8. Terms of Options and SARs. Each Option or SAR granted under the
Plan shall be evidenced by an agreement between the Company and the person to
whom such Option or SAR is granted and shall be subject to the following terms
and conditions:
(a) Subject to adjustment as provided in Section 14 of this Plan,
the price at which each share covered by an Option may be
purchased shall be determined in each case by the Plan
Administrator; provided, however, that such price shall not, in
the case of an Incentive Stock Option, be less than the Fair
Market Value of the underlying Stock at the time the Option is
granted. If an optionee owns (or is deemed to own under
applicable provisions of the Code and rules and regulations
promulgated thereunder) more than ten percent (10%) of the
combined voting power of all classes of the stock of the
Company and an Option granted to such optionee is intended to
qualify as an Incentive Stock Option, the Option price shall be
no less than 110% of the Fair Market Value of the Common Stock
covered by the Option on the date the Option is granted.
(b) The aggregate Fair Market Value of shares of Stock with respect
to which Incentive Stock Options are first exercisable by the
optionee in any calendar year (under all plans of the Company)
shall not exceed the limitations, if any, imposed by Section
422(d) of the Code (or any successor provision). If any Option
designated as an Incentive Stock Option, either alone or in
conjunction with any other Option or Options,
25
<PAGE>
exceeds the foregoing limitation, the portion of such Option in
excess of such limitation shall automatically be reclassified
(in whole share increments and without fractional share
portions) as a Non-Qualified Stock Option, with later granted
Options being so reclassified first.
(c) Neither an Option nor an SAR shall be transferable by the
participant otherwise than by will or by the laws of descent
and distribution or pursuant to a domestic relations order.
After the death of the participant, the Option or SAR may be
transferred to the Company upon such terms and conditions, if
any, as the Plan Administrator and the personal representative
or other person entitled to exercise the Option or SAR may
agree within the period specified in subsection 8(d)(iii)
hereof.
(d) An Option or SAR may be exercised in whole at any time, or in
part from time to time, within such period or periods (not to
exceed ten years from the granting of the Option in the case of
an Incentive Stock Option) as may be determined by the Plan
Administrator and set forth in the agreement (such period or
periods being hereinafter referred to as the "Option Period"),
provided that, unless the agreement provides otherwise:
(i) If a participant who is an employee of the Company shall
cease to be employed by the Company, all Options and SARs
to which the employee is then entitled to exercise may be
exercised only within three months after the termination
of employment and within the Option Period or, if such
termination was due to disability or retirement (as
hereinafter defined), within one year after termination of
employment and within the Option Period. Notwithstanding
the foregoing: (a) in the event that any termination of
employment shall be for Cause (as defined herein) or the
participant becomes an officer or director of, a
consultant to or employed by a Competing Business (as
defined herein), during the Option Period, then any and
all Options and SARs held by such participant shall
forthwith terminate; and (b) the Plan Administrator may,
in its sole discretion, extend the Option Period of any
Option or SAR for up to three years from the date of
termination of employment regardless of the original
Option Period. For purposes of the Plan, retirement shall
mean the termination of employment with the Company, other
than for Cause, at any time after the age 65.
For purposes of this Plan, the term "Cause" shall mean (a)
with respect to an individual who is party to a written
agreement with the Company which contains a definition of
"cause" or "for cause" or words of similar import for
purposes of termination of employment thereunder by the
Company, "cause" or "for cause" as
26
<PAGE>
defined in such agreement; (b) in all other cases (I) the
willful commission by an employee of a criminal or other
act that causes substantial economic damage to the Company
or substantial injury to the business reputation of the
Company; (II) the commission of an act of fraud in the
performance of such person's duties to or on behalf of the
Company; or (III) the continuing willful failure of a
person to perform the duties of such person to the Company
(other than a failure to perform duties resulting from
such person's incapacity due to illness) after written
notice thereof (specifying the particulars thereof in
reasonable detail) and a reasonable opportunity to cure
such failure are given to the person by the Board of
Directors of the Company or the Plan Administrator. For
purposes of the Plan, no act, or failure to act, on the
part of any person shall be considered "willful" unless
done or omitted to be done by the person other than in
good faith and without reasonable belief that the person's
action or omission was in the best interest of the
Company.
For purposes of this Plan, the term "Competing Business"
shall mean: any person, corporation or other entity
engaged in the business of (a) providing information
technology services or (b) selling or attempting to sell
any product or service which is the same as or similar to
products or services sold by the Company within the last
year prior to termination of such person's employment,
consultant relationship or directorship, as the case may
be, hereunder.
(ii) If a participant who is a director of the Company shall
cease to serve as a director of the Company, any Options
or SARs then exercisable by such director may be exercised
only within three months after the cessation of service
and within the Option Period unless such cessation was due
to disability, in which case such optionee may exercise
such Option or SAR within one year after cessation of
service and within the Option Period. Notwithstanding the
foregoing: (a) if any cessation of service as a director
was the result of removal for Cause or the participant
becomes an officer or director of, a consultant to or
employed by a Competing Business during the Option Period,
any Options and SARs held by such participant shall
forthwith terminate; and (b) the Plan Administrator may in
its sole discretion extend the Option Period of any Option
or SAR for up to three years from the date of cessation of
service regardless of the original Option Period;
(iii) If the participant shall die during the Option Period, any
Options or SARs then exercisable may be exercised only
within one year after
27
<PAGE>
the participant's death and within the Option Period and
only by the participant's personal representative or
persons entitled thereto under the participant's will or
the laws of descent and distribution;
(iv) The Option or SAR may not be exercised for more shares
(subject to adjustment as provided in Section 14) after
the termination of the participant's employment, cessation
of service as a director or the participant's death, as
the case may be, than the participant was entitled to
purchase thereunder at the time of the termination of the
participant's employment or the participant's death; and
(v) If a participant owns (or is deemed to own under
applicable provisions of the Code and regulations
promulgated thereunder) more than 10% of the combined
voting power of all classes of stock of the Company (or
any parent or subsidiary corporation of the Company) and
an Option granted to such participant is intended to
qualify as an Incentive Stock Option, the Option by its
terms may not be exercisable after the expiration of five
years from the date such Option is granted.
(e) The Option exercise price of each share purchased pursuant to
an Option shall be paid in full at the time of each exercise
(the "Payment Date") of the Option (i) in cash; (ii) by
delivering to the Company a notice of exercise with an
irrevocable direction to a broker-dealer registered under the
Act to sell a sufficient portion of the shares and deliver the
sale proceeds directly to the Company to pay the exercise
price; (iii) in the discretion of the Plan Administrator,
through the delivery to the Company of previously-owned shares
of Common Stock having an aggregate Fair Market Value equal to
the Option exercise price of the shares being purchased
pursuant to the exercise of the Option; provided, however, that
shares of Common Stock delivered in payment of the Option price
must have been held by the participant for at least six (6)
months in order to be utilized to pay the Option price; (iv) in
the discretion of the Plan Administrator, through an election
to have shares of Common Stock otherwise issuable to the
optionee withheld to pay the exercise price of such Option; or
(v) in the discretion of the Plan Administrator, through any
combination of the payment procedures set forth in subsections
(i)-(iv) of this Section 8(e).
(f) The Plan Administrator, in its discretion, may authorize "stock
retention Options" which provide, upon the exercise of an
Option previously granted under this Plan (a "prior Option"),
using previously owned shares, for the automatic issuance of a
new Option under this Plan with an exercise price equal to the
current Fair Market Value and for up to the number of shares
equal to the number of previously-owned shares
28
<PAGE>
delivered in payment of the exercise price of the prior Option.
Such stock retention Option shall have the same Option Period
as the prior Option.
(g) Nothing contained in the Plan nor in any Award agreement shall
confer upon any participant any right with respect to the
continuance of employment by the Company nor interfere in any
way with the right of the Company to terminate his employment
or change his compensation at any time.
(h) The Plan Administrator may include such other terms and
conditions not inconsistent with the foregoing as the Plan
Administrator shall approve. Without limiting the generality of
the foregoing sentence, the Plan Administrator shall be
authorized to determine that Options or SARs shall be
exercisable in one or more installments during the term of the
Option, subject to the attainment of performance goals and
objectives and the right to exercise may be cumulative as
determined by the Plan Administrator.
Section 9. Independent Director Options. Anything to the contrary
notwithstanding, each Independent Director who is first elected or appointed to
serve as a director commencing after the effective time of the Initial Public
Offering shall automatically be granted Non-Qualified Stock Options to purchase
15,000 shares of Stock. The Option exercise price for Options granted to
Independent Directors under the Plan will be equal the Fair Market Value of the
Stock on the date of grant. Options granted to Independent Directors under the
foregoing provisions will be granted on the date that such Independent Director
is first elected or appointed to serve as a director and will vest in equal
annual installments over three years commencing on the 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.
Section 10. Restricted Stock Awards.
(a) The Plan Administrator may grant Restricted Stock Awards to any
officer, employee or consultant of the Company and its
Subsidiaries. A Restricted Stock Award entitles the recipient
to acquire shares of Stock subject to such restrictions and
conditions as the Plan Administrator may determine at the time
of grant ("Restricted Stock"). Conditions may be based on
continuing employment (or other business relationship) and/or
achievement of pre-established performance goals and
objectives.
(b) Upon execution of a written instrument setting forth the
Restricted Stock Award and paying any applicable purchase
price, a participant shall have the rights of a shareholder
with respect to the Stock subject to the Restricted Stock
Award, including, but not limited to the right to vote and
receive dividends with respect thereto; provided, however, that
shares of Stock subject to Restricted Stock Awards that have
not vested shall be subject to the restrictions on
transferability described in Section 10(d) below. Unless the
Plan Administrator shall otherwise determine,
29
<PAGE>
certificates evidencing the Restricted Stock shall remain in
the possession of the Company until such Restricted Stock is
vested as provided in Section 10(c) below.
(c) The Plan Administrator at the time of grant shall specify the
date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which
Restricted Stock shall become vested, subject to such further
rights of the Company or its assigns as may be specified in the
instrument evidencing the Restricted Stock Award. If the
grantee or the Company, as the case may be, fails to achieve
the designated goals or the grantee's relationship with the
Company is terminated prior to the expiration of the vesting
period, the grantee shall forfeit all shares of Stock subject
to the Restricted Stock Award which have not then vested.
(d) Unvested Restricted Stock may not be sold, assigned
transferred, pledged or otherwise encumbered or disposed of
except as specifically provided herein or in the written
instrument evidencing the Restricted Stock Award.
Section 11. Stock Awards. The Plan Administrator may, in its sole
discretion, grant (or sell at a purchase price determined by the Plan
Administrator) a Stock Award to any officer, employee or consultant of the
Company or its Subsidiaries, pursuant to which such individual may receive
shares of Stock free of any vesting restrictions (a "Stock Award") under the
Plan. Stock Awards may be granted or sold as described in the preceding
sentence in respect of past services or other valid consideration, or in lieu of
any cash compensation due to such individual.
Section 12. Performance Share Awards. A Performance Share Award is an Award
entitling the recipient to acquire shares of Stock upon the attainment of
specified performance goals. The Plan Administrator may make Performance Share
Awards independent of or in connection with the granting of any other Award
under the Plan. Performance Share Awards may be granted under the Plan to any
officer, employee or consultant of the Company or its Subsidiaries, including
those who qualify for awards under other performance plans of the Company. The
Plan Administrator in its sole discretion shall determine whether and to whom
Performance Share Awards shall be made, the performance goals applicable under
each such Award, the periods during which performance is to be measured, and all
other limitations and conditions applicable to the awarded Performance Shares;
provided, however, that the Plan Administrator may rely on the performance goals
and other standards applicable to other performance plans of the Company in
setting the standards for Performance Share Awards under the Plan.
Section 13. Tax Withholding.
(a) Whenever shares are to be issued or cash is to be paid under
the Plan, the Company shall have the right to require the
participant to remit to the Company an amount sufficient to
satisfy federal, state and local tax withholding requirements
prior to the delivery of any certificate for shares or any
proceeds; provided, however, that in the case of a participant
who
30
<PAGE>
receives an Award of shares under the Plan which is not
fully vested, the participant shall remit such amount on the
first business day following the Tax Date. The "Tax Date" for
purposes of this Section 13 shall be the date on which the
amount of tax to be withheld is determined. If a participant
makes a disposition of shares acquired upon the exercise of an
Incentive Stock Option within either two years after the Option
was granted or one year after its exercise by the participant,
the participant shall promptly notify the Company and the
Company shall have the right to require the participant to pay
to the Company an amount sufficient to satisfy federal, state
and local tax withholding requirements.
(b) A participant who is obligated to pay the Company an amount
required to be withheld under applicable tax withholding
requirements may pay such amount (i) in cash; (ii) in the
discretion of the Plan Administrator, through the delivery to
the Company of previously-owned shares of Common Stock having
an aggregate Fair Market Value on the Tax Date equal to the tax
obligation provided that the previously owned shares delivered
in satisfaction of the withholding obligations must have been
held by the participant for at least six (6) months; or (iii)
in the discretion of the Plan Administrator, through a
combination of the procedures set forth in subsections (i) and
(ii) of this Section 13(b).
(c) A participant who is obligated to pay to the Company an amount
required to be withheld under applicable tax withholding
requirements in connection with either the exercise of a Non-
Qualified Stock Option, or the receipt of a Restricted Stock
Award, Stock Award or Performance Share Award under the Plan
may, in the discretion of the Plan Administrator, elect to
satisfy this withholding obligation, in whole or in part, by
requesting that the Company withhold shares of stock otherwise
issuable to the participant having a Fair Market Value on the
Tax Date equal to the amount of the tax required to be
withheld; provided, however, that shares may be withheld by the
Company only if such withheld shares have vested. Any
fractional amount shall be paid to the Company by the
participant in cash or shall be withheld from the participant's
next regular paycheck.
(d) An election by a participant to have shares of stock withheld
to satisfy federal, state and local tax withholding
requirements pursuant to Section 13(c) must be in writing and
delivered to the Company prior to the Tax Date.
Section 14. Adjustment of Number and Price of Shares.
Any other provision of the Plan notwithstanding:
31
<PAGE>
(a) If, through or as a result of any merger, consolidation, sale
of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other similar
transaction, the outstanding shares of Stock are increased or
decreased or are exchanged for a different number or kind of
shares or other securities of the Company, or additional shares
or new or different shares or other securities of the Company
or other non-cash assets are distributed with respect to such
shares of Stock or other securities, the Plan Administrator
shall make an appropriate or proportionate adjustment in (i)
the number of Stock Options that can be granted to any one
individual participant, (ii) the number and kind of shares or
other securities subject to any then outstanding Awards under
the Plan, and (iii) the price for each share subject to any
then outstanding Stock Options under the Plan, without changing
the aggregate exercise price (i.e., the exercise price
multiplied by the number of shares) as to which such Stock
Options remain exercisable. The adjustment by the Plan
Administrator shall be final, binding and conclusive.
(b) In the event that, by reason of a corporate merger,
consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the Board of Directors shall
authorize the issuance or assumption of a stock Option or stock
Options in a transaction to which Section 424(a) of the Code
applies, then, notwithstanding any other provision of the Plan,
the Plan Administrator may grant an Option or Options upon such
terms and conditions as it may deem appropriate for the purpose
of assumption of the old Option, or substitution of a new
Option for the old Option, in conformity with the provisions of
Code Section 424(a) and the rules and regulations thereunder,
as they may be amended from time to time.
(c) No adjustment or substitution provided for in this Section 14
shall require the Company to issue or to sell a fractional
share under any stock Option agreement or share award agreement
and the total adjustment or substitution with respect to each
stock Option and share award agreement shall be limited
accordingly.
(d) In the case of (i) the dissolution or liquidation of the
Company, (ii) a merger, reorganization or consolidation in
which the Company is acquired by another person or entity
(other than a holding company formed by the Company), (iii) the
sale of all or substantially all of the assets of the Company
to an unrelated person or entity, or (iv) the sale of all of
the stock of the Company to a unrelated person or entity (in
each case, a "Fundamental Transaction"), the Plan and all
Awards granted hereunder shall terminate, unless provision is
made in connection with the Fundamental Transaction for the
assumption of the Awards heretofore granted, or the
substitution of such Awards with new awards of the
32
<PAGE>
successor entity, with appropriate adjustment as to the number
and kind of shares and, if appropriate, the per share exercise
price as provided in Subsections (a) and (b) of this Section
14. In the event of such termination each participant shall be
notified of such proposed termination and permitted to exercise
for a period of at least 15 days prior to the date of such
termination all Options and SARs held by such participant which
are then exercisable.
Section 15. Amendment and Discontinuance. The Board of Directors may alter,
amend, suspend or discontinue the Plan, provided that no such action shall
deprive any person without such person's consent of any rights theretofore
granted pursuant hereto.
Section 16. Compliance with Governmental Regulations. Notwithstanding any
provision of the Plan or the terms of any agreement entered into pursuant to the
Plan, the Company shall not be required to issue any shares hereunder prior to
registration of the shares subject to the Plan under the Securities Act of 1933
or the Act, if such registration shall be necessary, or before compliance by the
Company or any participant with any other provisions of either of those acts or
of regulations or rulings of the Securities and Exchange Commission thereunder,
or before compliance with other federal and state laws and regulations and
rulings thereunder, including the rules any applicable exchange or of the Nasdaq
Stock Market. The Company shall use its best efforts to effect such
registrations and to comply with such laws, regulations and rulings forthwith
upon advice by its counsel that any such registration or compliance is
necessary.
Section 17. Compliance with Section 16. With respect to persons subject to
Section 16 of the Act, transactions under this Plan are intended to comply with
all applicable conditions of Rule 16b-3 (or its successor rule and shall be
construed to the fullest extent possible in a manner consistent with this
intent). To the extent that any Award fails to so comply, it shall be deemed to
be modified to the extent permitted by law and to the extent deemed advisable by
the Plan Administrator in order to comply with Rule 16b-3.
Section 18. Participation by Foreign Nationals. The Plan Administrator may,
in order to fulfill the purposes of the Plan and without amending the Plan,
modify grants to foreign nationals or United States citizens employed abroad in
order to recognize differences in local law, tax policy or custom.
Section 19. Effective Date of Plan. The Plan became effective on December
8, 1996, the date of approval and adoption of the Plan by requisite vote of the
holders of the outstanding shares of Stock and was amended and restated on June
1, 1998.
33
<PAGE>
EXHIBIT 11.1
MASTECH CORPORATION
CALCULATION OF PER SHARE EARNINGS
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------
1998 1997
---- ----
<S> <C> <C>
Basic earnings per share:
Net income $10,204 $4,555
============ ============
Divided by:
Weighted average common shares 49,017,829 44,936,218
============ ============
Basic earnings per share $0.20 $0.10
============ ============
Diluted earnings per share:
Net income $10,204 $4,555
============ ============
Divided by the sum of:
Weighted average common shares 49,017,829 44,936,218
Dilutive effect of common stock equivalents 832,171 763,834
------------ ------------
Diluted average common shares 49,850,000 45,700,052
============ ============
Diluted earnings per share $0.20 $0.10
============ ============
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
----------------------------------------
1998 1997
---- ----
<S> <C> <C>
Basic earnings per share:
Net income $22,901 $10,565
============ ============
Divided by:
Weighted average common shares 48,961,044 44,933,964
============ ============
Basic earnings per share $0.46 $0.23
============ ============
Diluted earnings per share:
Net income $22,901 $10,565
============ ============
Divided by the sum of:
Weighted average common shares 48,961,044 44,933,964
Dilutive effect of common stock equivalents 849,357 396,008
------------ ------------
Diluted average common shares 49,810,401 45,329,972
============ ============
Diluted earnings per share $0.46 $0.23
============ ============
</TABLE>
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY TO REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> SEP-30-1997 SEP-30-1998
<CASH> 31,809 23,928
<SECURITIES> 0 58,500
<RECEIVABLES> 57,332 84,263
<ALLOWANCES> 1,267 1,541
<INVENTORY> 0 0
<CURRENT-ASSETS> 93,753 174,722
<PP&E> 9,804 19,121
<DEPRECIATION> 2,593 4,781
<TOTAL-ASSETS> 100,964 195,042
<CURRENT-LIABILITIES> 38,429 47,878
<BONDS> 0 0
0 0
0 0
<COMMON> 233 490
<OTHER-SE> 60,067 145,323
<TOTAL-LIABILITY-AND-EQUITY> 100,964 195,042
<SALES> 168,453 277,575
<TOTAL-REVENUES> 168,453 277,575
<CGS> 118,858 185,878
<TOTAL-COSTS> 151,415 238,811
<OTHER-EXPENSES> 389 258
<LOSS-PROVISION> 447 787
<INTEREST-EXPENSE> (881) (2,138)
<INCOME-PRETAX> 17,919 37,690
<INCOME-TAX> 7,354 14,789
<INCOME-CONTINUING> 10,565 22,901
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,565 22,901
<EPS-PRIMARY> 0.23 0.46
<EPS-DILUTED> 0.23 0.46
</TABLE>
