<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 March 31, 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 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 April 10, 1998 was 47,338,952 shares.
<PAGE>
MASTECH CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 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 MONTHS ENDED MARCH 31, 1998
AND MARCH 31, 1997 3
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1998 AND DECEMBER 31, 1997 4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AS OF MARCH 31, 1998
AND DECEMBER 31, 1997 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH
31, 1998 AND MARCH 31, 1997 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 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
</TABLE>
2
<PAGE>
PART I. 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
March 31, 1998 March 31, 1997
------------------- ------------------
<S> <C> <C>
Revenues.................................................... $69,768 $37,531
Cost of revenues............................................ 46,676 26,732
------- -------
Gross profit................................................ 23,092 10,799
Selling, general and administrative......................... 12,981 7,415
------- -------
Income from operations...................................... 10,111 3,384
Interest income, net........................................ 736 464
------- -------
Income before income taxes.................................. 10,847 3,848
Provision for income taxes................................. 4,339 1,539
------- -------
Net income.................................................. $ 6,508 $ 2,309
======= =======
Net income per common share,
basic and diluted (1).................................... $0.14 $0.05
======= =======
</TABLE>
(1) The income per common share includes a two-for-one stock split of the
common stock effected in the form of a stock dividend paid on
April 10, 1998.
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
MASTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
----------------------- -----------------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 82,892 $ 82,408
Accounts receivable, net...................................... 60,044 51,920
Unbilled receivables.......................................... 4,722 1,829
Employee and related party advances........................... 2,910 1,777
Prepaid and other assets...................................... 1,778 1,309
Deferred income taxes......................................... 354 --
-------- --------
Total current assets....................................... 152,700 139,243
Net equipment and leasehold improvements...................... 9,774 8,308
Intangible assets, net 1,927 1,923
-------- --------
Total assets.................................................... $164,401 $149,474
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility..................................... $ 1,650 $ 1,721
Accounts payable.............................................. 4,995 4,342
Accrued payroll and related costs............................. 21,422 17,088
Accrued income taxes.......................................... 3,913 1,585
Other accrued liabilities..................................... 1,557 2,342
Deferred revenue.............................................. -- 127
Deferred income taxes......................................... -- 46
-------- --------
Total current liabilities.................................. 33,537 27,251
-------- --------
Deferred income taxes........................................... 1,358 1,710
Shareholders' equity:
Preferred stock, without par value: 20,000,000 shares
authorized, no shares outstanding........................... -- --
Common stock, par value $0.01 per share:
200,000,000 shares authorized, 47,336,600 and
47,166,800 shares issued and outstanding, respectively..... 474 236
Additional paid-in capital.................................... 107,579 105,390
Retained earnings............................................. 22,074 15,803
Deferred compensation......................................... (129) (258)
Currency translation adjustment............................... (492) (658)
-------- --------
Total shareholders' equity................................. 129,506 120,513
-------- --------
Total liabilities and shareholders' equity...................... $164,401 $149,474
======== ========
</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, 1997 47,166,800 $236 $105,390 $15,803 $(258) $(658) $120,513
Net income...................... -- -- -- 6,508 -- -- 6,508
Amortization of deferred
compensation.................. -- -- -- -- 129 -- 129
Exercise of stock options,
includes effect of tax
benefit recognized............ 169,800 1 2,189 -- -- -- 2,190
Two-for-one stock split
effected in the form of a
stock dividend paid on
April 10, 1998................. -- 237 -- (237) -- -- --
Currency translation
adjustment.................... -- -- -- -- -- 166 166
---------- ---- -------- ------- ----- ----- --------
Balance, March 31, 1998
(Unaudited)...................... 47,336,600 $474 $107,579 $22,074 $(129) $(492) $129,506
========== ==== ======== ======= ===== ===== ========
</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)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
CASH FLOW FROM OPERATIONS MARCH 31, 1998 MARCH 31, 1997
----------------------- -----------------------
<S> <C> <C>
OPERATIONS:
Net income......................................... $ 6,508 $ 2,309
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization.................... 678 207
Allowance for uncollectible accounts............. 92 75
Deferred income taxes, net....................... (752) (50)
Amortization of deferred compensation............ 129 131
Working capital items:
Accounts receivable and unbilled receivables..... (11,109) (7,847)
Advances......................................... (1,133) 1,088
Prepaid and other assets......................... (469) (57)
Accounts payable................................. 653 (384)
Accrued and other current liabilities............ 5,750 2,879
-------- -------
Net cash flow from operations................. 347 (1,649)
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired................. (48) --
Additions to equipment and leasehold
improvements.................................... (2,100) (1,677)
-------- -------
Net cash flow from investing activities....... (2,148) (1,677)
FINANCING ACTIVITIES:
Net borrowings (payments) under revolving
credit facility................................... (71) 647
Proceeds from exercise of stock options............ 2,190 --
-------- -------
Net cash flow from financing activities....... 2,119 647
Effect of currency translation on cash............... 166 57
-------- -------
Net change in cash and cash equivalents.............. 484 (2,622)
Cash and cash equivalents, beginning of period....... 82,408 45,997
-------- -------
Cash and cash equivalents, end of period............. $ 82,892 $43,375
======== =======
Supplemental disclosure:
Cash payments for taxes.......................... $ 2,203 $ 299
</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 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 and Exchange Act of 1934,
as amended. The consolidated financial statements as of and for the quarter
ended March 31, 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 months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
The use of generally accepted accounted 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. 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, per share and
shareholders' equity amounts included in the Company's consolidated financial
statements have been retroactively restated to reflect the split for all
periods presented.
3. 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 and foreign currency
translation adjustments, in the following table.
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998 March 31, 1997
(Dollars in Thousands)
--------------------------
<S> <C> <C>
Net income $6,508 $2,309
Other comprehensive gain:
Foreign currency translation adjustment 166 57
------ ------
Total comprehensive income $6,674 $2,366
====== ======
</TABLE>
The adoption of SFAS No. 130 had no impact on the Company's net income or
shareholders' equity.
7
<PAGE>
4. 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.
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 March 31, 1998,
and the related consolidated income statement, consolidated statements of cash
flows and consolidated shareholders' equity for the three month periods ended
March 31, 1998 and March 31, 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.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
April 24, 1998
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. 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, 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. 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. Professional Services Division; (ii) the
Solutions Division; (iii) the Enterprise Package Solutions Division; and (iv)
the International Division.
9
<PAGE>
The U.S. Professional Services Division includes five 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. Professional 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 package implementation services. This division
works directly with end-user clients and also as partners with both the ERP
software vendors and systems integrators on teamed implementation efforts.
The International Division operates through offices in six 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 MARCH 31, 1998
COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. The Company's revenues increased 85.9%, or $32.2 million from $37.5
million in the first quarter of 1997 to $69.8 million in the first quarter of
1998. This growth in revenues was primarily attributable to the continued market
penetration by the Enterprise Package Solutions Division and Solutions
Division, additional services provided to existing clients by the U.S.
Professional Services Division, engagements with new clients through all
divisions, and the Company's continued expansion into international 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 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 113.8% from $10.8 million in the first quarter
of 1997 to $23.1 million in the first quarter of 1998. Gross profit as a
percentage of revenues increased from 28.8% in the first quarter of 1997 to
33.1% in the first quarter of 1998. The primary reasons for the $12.3 million
increase were higher margins in the U.S. Professional Services Division and
Solutions Division, and a decline in the number of independent contractors used
by the Company's U.S. Professional Services Division. Costs associated with the
use of independent contractors as a percentage of cost of revenues on a
consolidated basis decreased from 10.7% in the first quarter of 1997 to 6.5% in
the first quarter of 1998.
10
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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 75.1%, or $5.6 million
from $7.4 million in the first quarter of 1997 to $13.0 million in the first
quarter of 1998. 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 $736,000 for the
first quarter of 1998 compared to $464,000 for the first 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.
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. 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 used by
operations of approximately $1.7 million for the first quarter of 1997, and cash
flow provided by operations of $347,000 for the first quarter of 1998.
Capital expenditures for the first quarters of 1997 and 1998 were approximately
$1.7 million and $2.1 million, respectively. During the first quarters of 1997
and 1998, the Company spent approximately $421,000 and $1.1 million,
respectively on computer and related equipment to support its technical,
consulting and administrative functions. The Company also spent approximately
$1.2 million and $500,000 during the first quarters of 1997 and 1998,
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 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. The Company did not borrow against the Facility during
the first quarter of 1998.
11
<PAGE>
As of March 31, 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. As of March
31, 1998, there are no additional amounts available for borrowing under these
facilities. 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.
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.
12
<PAGE>
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 or for any other purpose.
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. 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 $46,430,000. 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 reflects, as of March 31, 1998 and for each of the three
month periods ended, an estimate of the amount of net offering proceeds
received by the Company from its initial public offering used for each of
the purposes listed below.
<TABLE>
<CAPTION>
(Dollars in Thousands)
12/31/96 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 Total
-------- ------- ------- ------- ------- ------- --------
<S> <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>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Year 2000
The "Year 2000" issue concerns the potential exposures related to the automated
generation of business and financial misinformation resulting from the use of
computer programs which have been written using two digits, rather than four, to
define the applicable year of business transactions. The Company has evaluated,
and is continuing to evaluate, the potential cost associated with becoming Year
2000 compliant. The Company believes that its principal staffing and financial
systems, which are licensed from and maintained by third party software
development companies, are Year 2000 compliant. The Company is currently in the
process of selecting additional staffing and financial systems which management
expects to be Year 2000 compliant. Management does not anticipate that the
remaining costs associated with assuring that its internal systems will be Year
2000 compliant will be material to its business, operations or financial
condition.
In 1997, the Company initiated a complete risk evaluation and assessment study
to determine the preparedness level of customers, vendors, and other service
providers for the Year 2000 and the subsequent impact on the Company. The review
will be completed in June 1998 and based upon the results of the review, ongoing
Year 2000 impact analysis and risk assessment will continue as management deems
appropriate. The Company expects to incur internal staff costs as well as
consulting and other expenses related to the risk evaluation and assessment
project. Cost estimates for the project are not yet available.
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, with most of those in the U.S. working under H-1B temporary
visas. Under current law, there is a statutory limit of 65,000 new H-1B visas
that may be issued in any government fiscal year. This limit was reached in May
of the current federal fiscal year which ends on September 30, 1998. 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
materially adversely affected.
There are, however, motions before the U.S. Congress to pass legislation that
would significantly increase the quota of H-1B temporary visas for the current
and subsequent federal fiscal years.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are being filed with this report:
<TABLE>
<CAPTION>
Exhibit Number Description Page
- -------------- ----------- -----
<S> <C> <C>
11.1 Statement regarding computation of per share earnings. 16
27 Financial Data Schedule 17
</TABLE>
(b) Reports on Form 8-K:
The Company did not file any Current Report on Form 8-K during the
quarter ended March 31, 1998.
13
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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: May 14, 1998 /s/ Sunil Wadhwani
Co-Chairman and Chief Executive Officer
Dated: May 14, 1998 /s/ Jeffrey McCandless
Vice President, Finance
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description Page
- ----------------- ----------- ------
<S> <C> <C>
11.1 Statement regarding computation of per share earnings. 16
27 Financial Data Schedule 17
</TABLE>
15
<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
------------------------------------------
March 31, 1998 March 31, 1997
---------------------- ------------------
<S> <C> <C>
Basic earnings per share
Net income $ 6,508 $ 2,309
Divided by:
Weighted average common shares 47,268,216 43,309,200
----------- -----------
Basic earnings per share $ 0.14 $ 0.05
=========== ===========
Diluted earnings per share
Net income $ 6,508 $ 2,309
Divided by the sum of:
Weighted average common shares 47,268,216 43,309,200
Dilutive effect of common stock equivalents 881,832 161,192
----------- -----------
Diluted average common shares 48,150,048 43,470,392
----------- -----------
Diluted earnings per share $ 0.14 $ 0.05
=========== ===========
</TABLE>
<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> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 82,408 82,892
<SECURITIES> 0 0
<RECEIVABLES> 52,960 65,898
<ALLOWANCES> 1,040 1,132
<INVENTORY> 0 0
<CURRENT-ASSETS> 139,243 152,700
<PP&E> 10,080 12,180
<DEPRECIATION> 1,772 2,406
<TOTAL-ASSETS> 149,474 164,401
<CURRENT-LIABILITIES> 27,251 33,537
<BONDS> 0 0
0 0
0 0
<COMMON> 236 474
<OTHER-SE> 120,277 129,032
<TOTAL-LIABILITY-AND-EQUITY> 149,474 164,401
<SALES> 195,967 69,768
<TOTAL-REVENUES> 195,967 69,768
<CGS> 135,149 46,676
<TOTAL-COSTS> 169,957 59,657
<OTHER-EXPENSES> 518 129
<LOSS-PROVISION> 995 90
<INTEREST-EXPENSE> (1,414) (736)
<INCOME-PRETAX> 26,010 10,847
<INCOME-TAX> 10,404 4,339
<INCOME-CONTINUING> 15,606 6,508
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 15,606 6,508
<EPS-PRIMARY> 0.36 0.14
<EPS-DILUTED> 0.36 0.14
</TABLE>
