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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
Or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-49890
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MTC TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware 02-0593816
(State or other (I.R.S.
jurisdiction Employer Identification
of incorporation or No.)
organization)
4032 Linden Avenue, 45432
Dayton, OH
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (937) 252-9199
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [_] No [X]
As of June 28, 2002, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $236,894,831 (based on closing sales
price, on such date, of $19.00 per share).
As of March 12, 2003, there were 12,937,737 shares of common stock, $0.001
par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2003 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report.
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-K
Page
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Part I.
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 26
Item 3. Legal Proceedings..................................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders................................... 27
Part II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 27
Item 6. Selected Financial Data............................................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 41
Item 8. Financial Statements and Supplementary Data........................................... 42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 65
Part III.
Item 10. Directors and Executive Officers of the Registrant.................................... 65
Item 11. Executive Compensation................................................................ 65
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters............................................................................. 65
Item 13. Certain Relationships and Related Party Transactions.................................. 65
Item 14. Controls and Procedures............................................................... 65
Part IV.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 66
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I
Item 1. Business
Overview
MTC Technologies, Inc., was incorporated in Delaware in April, 2002, and
holds all of the capital stock of Modern Technologies Corp., which was
incorporated in 1985. MTC Technologies, through its wholly-owned subsidiaries,
provides sophisticated engineering and technical, information technology,
intelligence operations and program management services focusing primarily on
U.S. defense, intelligence and civilian federal government agencies. For the
years ended December 31, 2002 and 2001 over 87% and 80%, respectively, of our
revenue was derived from our customers in the Department of Defense and the
intelligence community, including the U.S. Air Force, U.S. Army and joint
military commands. Having served the defense community since our founding in
1984, we believe we are strategically positioned to assist the federal
government as it increases its focus on modernizing defense capabilities and
maintaining national security.
We develop and implement innovative, real-world solutions to complex
engineering, technical and management problems. We combine a comprehensive
knowledge of our customers' business processes with the practical application
of advanced engineering and information technology tools, techniques and
methods to create value-added solutions for our customers. Many of our services
are mission-critical and have allowed us to maintain long-standing
relationships with our key customers. Approximately 70% of our personnel are
located at our customers' facilities. For the year ended December 31, 2002, we
provided approximately 77% of our services directly to our customers as a prime
contractor, delivering many mission-critical services. Serving as a prime
contractor in close proximity to our customers has allowed us to maintain
long-standing relationships that have been important to our growth. We have
supported the Air Force's functions at Wright-Patterson Air Force Base (AFB),
Ohio for 18 years and have supported the Army in command, control,
communications, computers and intelligence (C4I) activities at Ft. Monmouth,
New Jersey for 14 years. We opened offices at Warner Robins AFB, Georgia and at
Tinker AFB, Oklahoma in 1990 and 1991, respectively, providing support for the
Air Force in logistics and sustainment and began our relationship with NASA
over 8 years ago.
From 2001 to 2002, our revenue grew approximately 28%. We believe we are
well positioned to continue our internal revenue growth by leveraging our
existing customer relationships and diverse contract vehicles, including
General Service Administration (GSA) schedules and Blanket Purchase Agreements
(BPAs). We believe our contract base to be well diversified with over 230
active contracts, including task orders on GSA contracts and major
government-wide acquisition contracts (GWACs). In July, 2001, we were one of
six awardees of the Air Force's Flexible Acquisition and Sustainment Tool
(FAST) contract with a ceiling of $7.4 billion. As of February 28, 2003, we had
been awarded 33 task orders with total revenue potential of over $825 million
(assuming customer exercise of all options) under the FAST contract.
Under the FAST contract, we expect to have the opportunity to compete for
several hundred million dollars in task orders each year over the approximate
six-year remaining life as the U.S. Air Force maintains and modernizes aircraft
and defense systems. To capitalize on these opportunities, we anticipate
expanding our use of subcontractors and hiring additional employees in response
to specific bidding opportunities. We also anticipate that responding to
customer needs quickly and efficiently under the FAST contract will require us
to use third party hardware and software, which we believe will become
increasingly material to our business. Given the short history of the FAST
contract and the constantly evolving needs of our customers, it is impossible
to quantify the extent to which future FAST contract opportunities will require
us to use subcontractors, hire additional employees or use third party hardware
and software. To date, we have used 80 subcontractors in connection with our
activities under the FAST contract and have hired 20 additional employees to
support our expanding FAST contract business. The number of subcontractors that
we use and the number of employees that
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
we hire in the future will depend on the number of awards we receive and the
skill sets required by each. Accordingly, any attempt to predict these numbers
would be speculative.
Over the past five years our business plan has primarily focused on
providing services to our existing federal government customers, while
organically growing our revenue and expanding our government client base.
Historically, acquisitions have played a small role in our revenue growth and
overall business plan. We completed one acquisition in August 2000 for
approximately $4.0 million in consideration. This acquisition had minimal
impact on revenues because the acquired company was performing a large portion
of its business as a subcontractor to us prior to the acquisition. In addition,
we acquired AMCOMP Corporation (AMCOMP) in October, 2002, for approximately
$7.3 million, plus the potential of up to an additional $3.3 million over the
next three years if certain goals are achieved. AMCOMP contributed
approximately $3.2 million in revenue for the year and quarter ended December
31, 2002. The most significant shift in our business plan during the past five
years has been our focus on bidding larger contract opportunities as a full and
open prime contractor.
During the last five years, we have also successfully added new government
customers, particularly in the intelligence area. We began serving the National
Security Agency six years ago and the National Reconnaissance Office four years
ago. We have also successfully expanded our customer base within the U.S. Air
Force, adding the Pacific Air Forces, Air Force Special Operations Command
(AFSOC), the Air Force Space and Missile Systems Center (with the acquisition
of AMCOMP), and the Headquarters Air Force Materiel Command (AFMC).
Our management team has substantial experience providing specialized
services to the Department of Defense, intelligence community and other federal
government agencies. Most of our senior executives have served in high-level
positions in the armed forces or the intelligence community and maintain
significant contacts with these organizations. Our chief executive officer has
served as a senior executive of three public companies and has 14 years of
public company experience in the defense industry. Our management team is
supported by a high quality staff of approximately 1,100 people, and over 87%
of our employees are professional staff. Our professional staff is highly
educated with approximately 25% possessing advanced degrees. More than 68% of
our employees hold government security clearances, including approximately 15%
with Top Secret clearance or higher, allowing us to work with our customers in
highly classified environments.
Market Opportunity
The Federal Government Market. The federal government is the largest
purchaser of services and solutions in the U.S. with a total annual budget for
2003 of $2.1 trillion. The discretionary budget for defense and non-defense
items is $773 billion, representing more than one-third of the total federal
budget. The defense budget for 2003 is $379 billion, including a $10 billion
emergency fund, and is expected to grow to $442 billion by 2007. Budgets for
civilian agencies that we support, such as NASA, are included in the
non-defense portion. Information technology continues to be a focus area across
all organizations in the federal government. The independent market research
firm, INPUT, predicts that information technology spending will grow from
$37.1 billion in 2002 to $63.3 billion in 2007.
Government Contracts and Contracting. The federal procurement process for
information technology solutions has evolved dramatically over the last decade.
Traditionally, each government agency purchased goods and services through
single contracts awarded after a lengthy competitive bidding process in which
prospective suppliers would submit separate proposals for particular programs.
Though this process produced competitive outcomes, it prevented agencies from
moving swiftly to fulfill their technology needs. Through legislative and
regulatory initiatives to enable government agencies to adopt more commercial
purchasing practices, the federal government developed a variety of additional
contracting methods. While single-award contracts are still widely used,
government agencies are increasingly relying on indefinite delivery indefinite
quantity, or IDIQ, contracts, GWACs, and GSA contracts.
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
IDIQ contracts establish preferred provider relationships with the federal
government. These contracts qualify contractors to provide specified goods and
services to the issuing agency but generally do not obligate the agency to
purchase any particular amount of goods or services. To procure goods or
services under the contract, the agency issues a task order to the contractor
that details the agency's needs. Although agencies often administer IDIQ
contracts for their own procurement needs, they sometimes issue contracts in
which they administer procurement for their own needs as well as the needs of
other federal agencies. These contracts are known as GWACs and are often
awarded to multiple prime contractors, all of whom are thereby qualified to
supply the same goods and services to any agency of the federal government.
Qualified contractors often compete with each other to obtain task orders under
GWACs. The lower cost, reduced procurement time and increased flexibility of
GWACs have made them popular among many agencies for large-scale procurements
of technology services. GSA contracts are procurement contracts administered by
the GSA on behalf of the entire federal government. Like GWACs, any agency of
the government can procure goods and services from any contractor awarded a GSA
contract at the prices and terms stated in the contract.
We believe these changes in procurement regulations have benefited the
federal government through lower acquisition costs, faster acquisition cycles,
more flexible contract terms, and more stable contractor/customer
relationships. We believe that contractors have also benefited from these same
reforms through lower marketing costs, stronger customer relationships, and
more flexible contract terms. We also believe that the more commercial-like
practice of having to re-win contracts much more frequently than under the
traditional single contract awards has resulted in better performing
contractors gaining market share at the expense of poorly performing
contractors.
Key Growth Factors. There are several key factors that we believe will
continue to drive the growth of the federal government market and our business:
. Increased spending on national defense, intelligence and homeland
security. The threat of terrorist incidents and instability in foreign
areas of interest to the U.S. has stimulated additional funding for
federal programs in the defense industry.
National Defense. Defense spending accounts for 18% of the federal
government's 2003 budget. The 2003 defense budget represents a 9%
increase over 2002. This increase is largely allocated to fighting
terrorism, enhancing intelligence gathering and sustaining current
military readiness. The Under Secretary of Defense Comptroller
divides the defense budget into 23 areas, four of which account for
92% of this budget. We support the top four areas, which include (i)
the military, (ii) operation and maintenance, (iii) procurement and
(iv) research, development, test and evaluation.
Intelligence. Budgets for intelligence agencies are classified, but
figures released for 1997 and 1998 indicated intelligence budgets of
$26.6 billion and $26.7 billion, respectively. President Bush stated
in his January 29, 2002, State of the Union address that improved
intelligence-gathering would be a top budget priority. Congress
recently approved an 8% increase in the intelligence budget for the
current fiscal year.
Homeland Security. In September 2001, both houses of Congress passed
legislation that allows for up to $40 billion in emergency spending.
Of the $40 billion, approximately 40% has or will be spent by the
Department of Defense and the Department of Energy. Homeland security
activities account for approximately $10 billion, or 25%, of the
emergency spending funds. The government's efforts in homeland
security include (i) mitigating and responding to attacks,
(ii) investigating and prosecuting terrorism, (iii) improving
transportation security and systems and (iv) supporting national
security.
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
. Ongoing modernization of information technology and communication
infrastructures. The federal government has invested heavily in large,
proprietary information systems and special purpose communications
networks, which were often developed using standards unique to the
government. These legacy systems often are expensive to maintain, lack
scalability and are incompatible with current technologies. In addition,
many of these systems serve mission-critical functions where even a minor
failure can lead to substantial losses, including potential loss of life.
The need to improve the government's outdated technology infrastructure
systems is increasing demand for information technology services.
. Increased reliance of government customers on outsourced technology
services. The independent market research firm INPUT estimates that the
federal government information technology outsourcing budget will grow
from $6.4 billion in 2002 to $14.5 billion in 2007, a compound annual
growth rate of 17.6%, due to the government's need for cost-effective
technologies and efficient services. Moreover, the federal government's
need to outsource is expected to grow over time as its technically
skilled employees retire. The Office of Personnel Management projects
that 281,000 federal employees (approximately 19% of the total employees)
will retire by 2005. Given the difficulty the federal government has
experienced in hiring and retaining skilled technology personnel in
recent years, we believe the federal government will need to rely heavily
on technology service providers that have experience with government
legacy systems, can sustain mission-critical operations and have the
required government security clearances to deploy qualified personnel in
classified environments. For example, the government increasingly relies
on contractors to acquire, integrate, manage and sustain major components
of the defense system.
. Increased emphasis on defense system sustainment and modernization. To
balance the costs of new initiatives like homeland defense with the costs
of ongoing military operations, the Department of Defense is emphasizing
upgrading existing platforms to next generation technologies rather than
procuring completely new systems. For example, rather than replace an
entire generation of aircraft, the U.S. Air Force has decided in some
cases to invest in upgrading its current aircraft using the latest
information technology and weapons systems. To accomplish this in an
environment of military personnel reductions, the armed services are
increasingly dependent on highly skilled contractors that can provide the
full spectrum of services needed to support these activities.
Our Competitive Advantages
We believe we are well positioned to meet the rapidly evolving needs of the
U.S. defense, intelligence and civilian federal government agencies because we
possess important business strengths, including the following:
Ability to Leverage the Breadth and Depth of Our Capabilities through Our
Diverse Contract Vehicles. Our broad array of technical and program management
capabilities and diverse contract vehicles afford us opportunities to expand
our business with existing customers and to develop relationships with new
customers.
. Breadth and depth of our capabilities. We have the domain expertise in
our customers' systems and infrastructures that allows us to provide
total systems solutions, either as discrete or bundled services, each
designed to meet the customer's specific requirements. The breadth and
depth of our capabilities have allowed us to expand our services and win
large contracts and task orders in support of our customers' increasing
requirements.
. Diverse contract vehicles. Our diverse contract vehicles allow our
customers to access our services. These types of contracts are intended
to pre-qualify the bidders to expedite the contracting process. Our
vehicles include GWACs and BPA, GSA and other IDIQ contracts.
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Responsive Bidding Practices. Our flexible management structure, culture
and bid tracking system allow us to respond quickly to new business
opportunities. While our infrastructure allows us to be sophisticated and
organized in our bidding practices, our flat organizational structure promotes
timely and rapid decisions. We empower our employees with the authority to
identify, assess, pursue and respond to new business opportunities. Our FAST
contract tracking system incorporates a web-based system with an industry
standard software product. This system posts requests for proposals (RFPs) on a
website accessible to potential subcontractors and coordinates the
dissemination of bid information and the collection of proposals on a real-time
basis. In light of recent federal procurement reform, which emphasizes rapid
response time, we believe that our ability to respond quickly to bids provides
us a competitive advantage.
Highly Qualified Staff with Security Clearances. We emphasize hiring and
retaining an experienced and skilled staff that is augmented with former
high-ranking government personnel.
. Military and industry experience. We have developed a culture that
attracts and helps to retain seasoned employees, resulting in a staff of
which approximately 65% have 20 or more years of combined military and
industry experience. A majority of our technical staff have a wide range
of engineering and information technology expertise combined with an
in-depth knowledge of the domain operations of our customers.
. Highly educated. Our professional staff is highly educated, with
approximately 25% possessing advanced degrees. Moreover, a number of our
professional staff are specialists in certain key areas. For example, we
have employees specialized in Special Operations Forces (SOF) and other
Air Force programs; Signals Intelligence (SIGINT), Measurement and
Signatures Intelligence (MASINT), Imagery Intelligence (IMINT) and other
intelligence activities; propulsion and other NASA engineering areas; as
well as a number of highly sensitive and mission-critical programs.
. Security clearances. We are able to satisfy the strict security
clearance requirements for personnel who work on classified programs for
the Department of Defense and the intelligence community. More than 68%
of our approximately 1,100 employees have government security clearances.
Approximately 15% of our employees hold Top Secret security clearances or
higher. We also maintain facility clearances, as required, to support
classified programs.
Experienced and Disciplined Management Team. Most of our senior managers
have extensive experience supporting the Department of Defense and the
intelligence community. With their deep knowledge base, valued relationships
and strong reputations, our management plays a key role in building and
sustaining our customer base.
. Tenure and experience. All of our senior managers have 20 or more years
of combined military and/or industry experience and 80% are former senior
military officers or intelligence officers, providing the experience and
leadership capabilities needed to continue our impressive growth. These
managers have also been with our family of companies for an average of
ten years.
. Training. All of our senior managers benefit from a sophisticated
internal training program that provides them with the business skills to
complete projects on time while minimizing costs, resulting in maximized
margins. Our training methodology and processes have formed the
foundation for our ISO program and were instrumental in us achieving ISO
certification in 2002.
Strong Customer Relationships. We have a successful track record of
fulfilling our customers' needs as demonstrated by our long-term relationships
with many of our largest customers. We have supported technical services
programs for the U.S. Air Force for 18 years and similar programs for the U.S.
Army for 14 years. In addition, we have supported the intelligence community
for 8 years and provided business and highly technical modeling and simulation
support to NASA for 8 years.
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Our Business Strategy
Our objective is to profitably grow our business using the following
strategies:
Grow Business with Our Existing Customers. We plan to continue to increase
the level of our existing services and expand the scope of new services we
provide to our existing customers by leveraging our diverse contract vehicles.
Many of our customers have increasing requirements and responsibilities due to
the government's emphasis on defense and national security. As a result, our
customers continue to outsource more of their existing activities, while
introducing new program areas that we believe we can support. Our diverse
capabilities allow us to provide a wide variety of services to our existing
customers as they expand their activities. We believe our high level of
customer satisfaction and deep knowledge of our customers' business processes
enhance our position to provide these additional services. In addition,
approximately 70% of our personnel are on-site with our customers, which we
believe provides us insight into our customers' future needs.
Expand Our Customer Base. We intend to leverage our long-term customer
relationships, diverse skill base, varied contract vehicles and industry
reputation to expand our customer base to new customers. We intend to focus on
those areas that we believe provide opportunities for growth and where we can
provide value-added services. Our large contract portfolio allows us to rapidly
respond and provide support to new customers. For example, we were one of six
awardees of the $7.4 billion FAST contract. We believe our past performance and
industry reputation with previous U.S. Air Force customers were major factors
in our award of the FAST contract, and we expect that many of the task orders
we win under this contract will help us expand into new customer areas.
Pursue Strategic Acquisitions. We plan to enhance our internal growth by
selectively pursuing strategic acquisitions of businesses that can broaden our
domain expertise and service offerings, allowing us to establish relationships
in new program areas and expand our geographic coverage and customer base. We
intend to be highly selective in our acquisition program and will focus on
acquiring businesses valued between $10 million and $100 million that provide
value-added services and solutions for the defense and intelligence
communities. We also will consider opportunities that would enable us to
leverage our reputation and experienced management team in areas of high growth
potential.
Our Services
We operate through four principal service areas, which are offered
separately or in combination across our customer base:
Engineering and Technical Services. We offer a broad range of engineering
and technical services to enhance the functionality and performance of defense
systems, weapons platforms, battlefield personnel and delivery systems. Our
engineering and technical services include determination of systems
requirements and goals, rapid prototyping, design, development and integration
of new systems and subsequent sustainment and support. We evaluate system
designs to determine if performance enhancements or cost savings can be derived
through the integration of new technologies. Our engineering services also
include reverse engineering older systems, modeling and simulation of proposed
systems and performance testing of prototypes and final systems.
Information Technology. We design, develop, upgrade and integrate complex,
mission-critical information technology systems. Our services also include
security engineering, network design, software development, enterprise
application integration, database development, test and evaluation,
configuration management, training and implementation support. We also provide
simulation and modeling services to evaluate the efficiency and value of
technology systems before they are implemented. Many of our engagements include
web-enablement and integration of legacy business systems, allowing our
customers to benefit from their prior investments. We also design, install and
maintain local area and wide area networks.
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Intelligence Operations. We provide Command, Control, Communications,
Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) services to
intelligence agencies. In connection with these services, we design, develop
and manage reconnaissance platforms, real-time signal processing systems,
sensors, ground stations and data links, as well as evaluate and support
ongoing operational intelligence collection activities. We offer specialized
capabilities such as airborne and space intelligence, surveillance and
reconnaissance (ISR), signals and imagery intelligence and strategic warfare
planning. We also support a variety of data collection and analysis activities.
We maintain fully accredited Sensitive Compartmented Information Facilities
(SCIF) including communications and processing capabilities for technical
support of specialized systems and sensitive technologies. Much of this work is
tightly controlled within compartmented and special access security channels.
Program Management. We provide program management support that extends the
useful life of existing defense systems and reduces life-cycle costs. Program
management activities include developing and implementing acquisition
strategies, cost modeling, identification of suppliers and vendors, provision
planning, contract performance monitoring, program planning and scheduling,
financial management, operational effectiveness analysis, risk analysis and
security planning. Specifically, we provide engineering and sustainment support
and modifications of and upgrades to defense systems featuring new sensor
devices, radios, engines and other electronic components. We are involved in
support programs to extend the service of aging aircraft and other defense
systems and components, which includes the sourcing for and repair of
diminishing parts for our customers.
Our Core Capabilities
We apply the following core capabilities across our four service areas
described above:
Systems Support. We provide complete life-cycle support of military,
defense, intelligence and Information Technology (IT) systems. The activities
start with requirements analysis and system design and then move to acquisition
and integration of these systems. We continue our support into the operation
and support phases and provide continuing improvements and sustainment.
Acquisition Management. We assist our customers with strategy and planning,
cost analysis, scheduling, delivery and performance assessment for the
acquisition of systems and services. Many of our managers previously served as
acquisition managers for the government and have extensive knowledge of the
process and program needs.
Systems Integration. We provide systems integration of hardware and
software components for our customers' systems. We analyze customer systems,
applications and platforms and develop solutions to sustain or improve system
performance and increase system availability.
Network Design and Maintenance. We provide network support services for
complex communications systems. Our communications engineers and technicians
provide site surveys, engineering and installation support for local area
networks, wide area networks, telephone switches and cable plants, including
the installation of fiber-optic cable systems at government facilities
throughout the world.
Information Assurance. We provide comprehensive information assurance
programs that assess and implement integrated physical, technical, operations,
personnel, computer and communication security requirements, including disaster
recovery assessment. We design, test and certify security systems as well as
provide audits and inspections. These services are provided for both classified
and unclassified systems.
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Logistics Activities. We design and develop integrated logistics support
plans designed to optimize the deployment, readiness, performance and
subsequent extraction of military personnel and equipment. We also design
sophisticated platforms that coordinate and integrate information management
systems.
Testing and Evaluation. We test and evaluate complex, mission-critical
hardware and software systems. Our services improve the performance,
reliability, maintainability, supportability and effectiveness of many defense
and weapon systems. We develop and operate customized testing and evaluation
facilities that are both fixed and mobile.
Business Process Outsourcing. We assist customers in the management of
certain supply processes to improve performance and reduce costs. We develop
training programs, define meaningful performance metrics, support process
definition and reengineering, perform cost modeling and source and procure
parts.
The following chart shows how our core capabilities cross over our four
service areas:
Capabilities by Service Area
Engineering
and Information Intelligence Program
Technical Technology (C4ISR) Management
----------- ----------- ------------ ----------
Systems Support............... [_] [_] [_] [_]
Acquisition Management........ [_] [_] [_] [_]
Systems Integration........... [_] [_] [_] O
Network Design and Maintenance O [_] O
Information Assurance......... O [_] [_] O
Logistics Activities.......... O O [_] [_]
Testing and Evaluation........ [_] O [_] [_]
Business Process Outsourcing.. O [_]
- --------
Major Area of Emphasis: [_]
Supporting Area of Emphasis: O
Our Customers
Our customers primarily include U.S. federal government intelligence,
military and civilian agencies. Our revenue derived from our federal government
customers, consisting primarily of the Department of Defense and the
intelligence community, accounted for more than 87% of our total revenue for
the year ended December 31, 2002. This percentage is an increase over the
previous three years, when the percentage was approximately 80%. For the year
ended December 31, 2002, we derived approximately 77% of our revenue as a prime
contractor and approximately 23% of our revenue as subcontractor to other
defense companies.
Our federal government customers comprise a substantial number of separate
agencies, offices, departments or divisions that directly, or through a prime
contractor, use our services as a separate customer. Many of these customers
have independent decision-making and contracting authority within their
organizations. For example, under the Air Force's ASC/BPA, program managers
throughout the Air Force are able to purchase a wide range of our services.
While task orders under this agreement together accounted for approximately 20%
of our revenue for the year ended December 31, 2002, we believe our contract
base within Air Force customers and among our other customer organizations is
well diversified. Our tasks under the ASC/BPA support or have supported over 30
different customer organizations using over 70 individual task orders.
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
The following departments and agencies are representative of our government
customer base during the year ended December 31, 2002. Due to the sensitive
nature of our intelligence business base and in accordance with our customers'
preferences and requirements, we are prohibited from disclosing detailed
information regarding specific intelligence customers that we support or the
specific systems involved.
U.S. Air Force
----------------------------------------------------
. Secretary of Air Force . Aeronautical Systems
(Pentagon) Center
. Air Combat Command . F-16 System
. Headquarters, Program Office
Offices . Air Combat System
supported: Director Program Office
for Plans and . F-15 System
Programs, Director Program Office
for Requirements . Reconnaissance
and Director for Systems Program
Logistics Office
. 9th Reconnaissance . Joint Strike
Wing Fighter Systems
. Air Mobility Command Program Office
. Headquarters, . Flight Training
Offices supported: System Program
Director for Office
Operations and . B-1B System
Director for Plans Program Office
. Electronic Systems . Training Systems
Center Product Group
. Integrated Digital . Special Operations
Equipment Office . C-130J Systems
. Warner Robins Air Program Office
Logistics Center . B-2 Systems
. Special Operations Program Office
Program Office . JSECST System
. C-130 Program Program Office
Office . Propulsion System
. Oklahoma City Air Program Office
Logistics Center . Aerospace
. B-1B System Enterprise System
Program Office Program Office
. B-52 System . Department of
Program Office Defense Deskbook
. CALCM System . KC-135 System
Program Office Program Office
. Ogden Air Logistics . Joint Helmet
Center Mounted Cueing
. Communications System Program
Directorate Office
. Space and C3I . Tri-Service
Directorate Standoff Attack
. Air Force Research Missile System
Laboratory Program Office
. Sensors Directorate . Headquarters Air Force
. Material Lab Materiel Command
. Transformation
Office
. Air Force Space and
Missile Systems Center
11
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
U.S. Army
--------------------------------------------------------
. U.S. Army CECOM . U.S. Army
Acquisition Center, Tank-Automotive and
Fort Monmouth, NJ Armaments Command
. Software (TACOM), Picatinny
Engineering Arsenal
Directorate . U.S. Army TACOM
. Program Executive ARDEC
Officer for . U.S. Army TACOM
Intelligence and . Watercraft
Electronic Commodity Business
Warfare, and Unit (CBU)
Sensors (PEO IEW&S) . Watercraft Systems
. Night Vision and Management Office
Electronic Sensors (WSMO)
Directorate (NVESD) . Watercraft
. Command and Inspection Branch
Control (WIB)
Directorate (C2D) . Brigade Combat
. Intelligence and Team (PM-BCT)
Information . TARDEC, PM
Warfare Watercraft
Directorate (I2WD) . TARDEC, HCCC SAMP
. . TARDEC, PM-LAV
Survivability/Lethality . U.S. Army, Command,
Analysis Control,
Directorate of the Communications,
Army Research Computers and
Laboratory Intelligence (C4I)
. Systems Systems Branch, Fort.
Acquisition Monmouth
Division . U.S. Army, Office of
. Special Operations the Project
Forces Manager--PM Army
. Command and Tactical Command and
Control Control System (PM,
Integration/ ATCCS), Fort Monmouth,
Interoperability NJ, Fort Hood, TX and
(CIPO) Group Fort Lewis, WA
. Command & Control . U.S. Army TRADOC,
Directorate., Requirements
Research, Integration
Development and Directorate, Fort
Engineering Center Eustis and Fort
(RDEC) Monroe, VA
. Project Manager, . U.S. Army,
Force XXI Battle PM--TC-AIMS, Fort
Command Brigade Belvoir, VA
and Below (FBCB2) . U.S. Army, USA CECOM
. Program Manager, Acquisition Center
Signals Warfare . Project Manager
(PM SW) Soldier
. Office of Product (PM-Soldier) and
Manger (PM) Project
Firefinder Manager-Mobile
. PM Common Ground Electric Programs
Station/Joint (PM-MEP) at Fort
Tactical Terminal Belvoir, VA
(CGS/JTT)
. PM
JointSTARS/JTT/CTT
U.S. Joint Commands Civilian and Other
------------------------------ -------------------------
. U.S. Strategic Command . National Aeronautics
(STRATCOM) and Space
. Joint Personnel Administration (NASA)
Recovery Agency
. National Security
Agency
. National
Reconnaissance Office
. U.S. Transportation
Command (USTRANSCOM)
. Defense Information
Systems Agency (DISA)
. Defense Finance and
Accounting Service
. Ballistic Missile
Defense Organization
Our Diverse Contract Vehicles
We compete for task orders through a variety of arrangements or contract
vehicles. Our vehicles include GWACs and BPA, GSA and IDIQ contracts. We have
contract vehicles in each of our service areas, allowing us to compete for
business from a variety of customers. In addition, we have several blanket
arrangements under which we can work with customers in multiple service areas.
The contract vehicles are structured with various terms and include
time-and-materials, fixed-price and cost-plus contracts. Approximately 20% of
our 2002 revenue was under one contract vehicle, the Aeronautical Systems
Center BPA, or ASC/BPA, which expires in
12
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
September, 2005. Some of that work, however, was previously performed on GSA
schedules and, if necessary, could possibly be converted once again to GSA
vehicles, or other contracts we have. We also had approximately 17% of our 2002
revenue under the FAST contract, which has an option end date in September,
2008. In prior years, we previously performed a portion of the work we are now
performing on the FAST contract on other contract vehicles. While the FAST
contract represents an increasingly large percentage of our total revenue, we
believe that the broad array of engineering, technical and management services
we provide to the federal government through various contract vehicles allows
for diversified business growth. No other task order, including individual
contracts under our GSA vehicles, accounted for more than 6% of revenue in 2002.
Our contract base is well diversified with over 230 active contracts,
including task orders on GSA contracts and major GWACs, as of December 31,
2002. The typical initial terms for our government contracts range from three
years to five years, with most having an initial term of three years. The
contracts may be extended by the customer for additional years.
The following table identifies some of our GSA, GWAC and IDIQ contract
vehicles that have undefined scopes and significant ceilings:
Period of performance
---------------------
Title Start End Option end date Customer Current ceiling
- ----- -------- -------- --------------- --------- ---------------
FAST................................... 09/26/01 09/25/06 09/25/08 Air Force $7.4 billion
GSA corporate contract*................ 07/01/01 02/28/05 02/28/20 GSA No Ceiling
Special Operations Forces (SOF) Support
Services Contract I (SSSC I)......... 03/26/97 06/05/04 None Air Force $190 million
Special Operations Forces (SOF) Support
Services Contract II (SSSC II)....... 09/03/02 09/02/07 09/02/17 Air Force $ 440 million
ASC/BPA................................ 08/08/00 09/30/05 None Air Force No Ceiling
CECOM BPA.............................. 12/17/99 02/28/05 Not Specified Army No Ceiling
GSA Professional Engineering Services
(PES)................................ 11/15/99 11/14/04 11/16/14 GSA No Ceiling
Technical Acquisition Support Services 03/31/00 03/30/05 None Air Force No Ceiling
- --------
* Management and Organizational Business Improvement Services (MOBIS),
Information Technology Professional Services (ITPS), Financial Management
(FM) and SECURITY GSA schedules were recently incorporated into this
corporate contract.
Backlog
Backlog, which consists of funded and unfunded portions, is our estimate of
the remaining future revenue from existing signed contracts, assuming the
exercise of all options relating to those contracts. This estimate includes
revenue for solutions that we believe will be provided in the future under the
terms of executed, multiple-award contracts in which we are not the sole
provider, meaning that the customers could turn to our competitors to fulfill
the contract. It also includes an estimate of revenue on existing task orders
that are under IDIQ contracts.
We define funded backlog as the portion of backlog for which funding
currently is appropriated and obligated to us under the contract by the
purchasing agency or otherwise authorized for payment to us by the customers
upon completion of a specified portion of work, less revenue previously
recognized. Our funded backlog does not include the full potential value of our
contracts because Congress often appropriates funds for a particular program or
contract on a yearly or quarterly basis, even though the contract may call for
performance over a number of years.
13
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
We define unfunded backlog as the net of the total estimated potential value
of our contracts, less revenue recognized to date. Our assessment of a
contract's potential value is based upon factors such as historical trends,
competition and budget availability. However, there can be no assurance that
the unfunded contract value will be realized as contract revenue or earnings.
We review unfunded backlog on a quarterly basis to determine whether any
adjustments are necessary.
The primary source of our backlog is contracts with the federal government.
Our estimated backlog at the end of the two most recently completed fiscal
years was as follows:
December 31, 2002 December 31, 2001
----------------- -----------------
Estimated Total Backlog $ 1.1 billion $244 million
Funded Backlog......... $ 141 million $ 43 million
Of our funded backlog as of December 31, 2002, approximately 18%, or $26
million, will remain at the end of the fiscal year. We have increased our
funded backlog by approximately $98 million from December 31, 2001, primarily
due to the funding increases in the FAST and ASC/BPA contracts as well as the
acquisition of AMCOMP Corporation, which contributed approximately $18 million
to funded backlog. Although our funded backlog at December 31, 2002, is in
excess of our trailing twelve-month revenue, we feel that a more typically
sustainable funded backlog is in the range of 40% to 60% of trailing
twelve-month revenue.
Sales and Marketing
We have a highly disciplined sales and marketing process utilizing the
relationships of our senior management and business development staff. We also
seek to leverage existing customer relationships and respond to competitive
solicitations. We identify, assess and respond to new business opportunities
quickly. We draw on the experience and knowledge of senior personnel across the
company, including those working on-site with our customers. We have also
established a formal process for evaluating new business opportunities and use
our tracking systems to track the status of each bid opportunity. We have
effectively used GSA contracts to respond quickly to emerging customer
requirements.
To supplement and complement our core competencies, we have relationships
with industry partners that enable us to work together on contracts. While we
are the prime contractor on most of our contracts, we serve as subcontractor
when teaming in that manner furthers our goals of expanding our customer base
or pursuing high growth markets.
Employees
As of December 31, 2002, we had approximately 1,100 employees, including
more than 68% with government security clearances of Secret or higher and
approximately 15% with security clearances of Top Secret or higher. Obtaining a
security clearance typically requires a candidate to be sponsored by the
government with respect to a particular requirement, entails extensive
background investigations that typically take from six months to a year or more
and, for the more restricted access, requires successful completion of
polygraph testing. Non-technical employees serve primarily in support roles.
None of our employees is a party to any collective bargaining agreements. We
consider our relations with employees to be good.
We believe that we are successful in retaining our employees by offering
competitive salary structures, attractive incentive compensation and benefits
programs, career growth opportunities, flexibility in work assignments and the
opportunity to perform mission-critical services, often in classified
environments. Before we pursue external recruiting, we typically offer our
current employees the opportunity to respond to new internal job opportunities.
14
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Competition
We believe that the major competitive factors in our market are strong
customer relationships, a reputation for quality, a record of successful past
contract performance, a seasoned management team with domain expertise, a staff
with distinctive technical competencies, security clearances and competitive
prices. Our key competitors currently include divisions of large defense
contractors, such as Boeing, Lockheed Martin, Northrop Grumman, Raytheon, L-3
Communications and TRW; engineering and technical services firms such as SAIC,
Jacobs Engineering Group, Veridian and Anteon; as well as information
technology service companies, such as CACI International, Computer Sciences
Corporation, DynCorp and Titan. Our strategy to compete with these companies
includes growing our business with existing customers by targeting new
outsourcing opportunities and expanding our customer base by targeting
potential U.S. Air Force, U.S. Army and intelligence community customers. As
part of our competitive strategy, we plan to expand our geographic coverage and
customer base by selectively pursuing strategic acquisitions of other service
providers. We envision pursuing acquisitions of companies valued between $10
million and $100 million. We expect that competition in this field will
intensify in the future. Some of our competitors have longer operating
histories, significantly greater research and development, financial,
technological, marketing and human resources capabilities, as well as greater
name recognition and a larger customer base than we have.
Intellectual Property
Our solutions are not generally dependent upon patent protection. To protect
our trade secrets, we routinely enter into confidentiality and non-disclosure
agreements with our employees, consultants, subcontractors and prospective
consultants and subcontractors.
Our rights in intellectual property that we develop depend in part on the
degree to which the intellectual property is developed with our private funds,
rather than with funds of the federal government. Our federal government
contracts routinely provide that we may retain ownership rights in works of
authorship and inventions developed during the performance of those contracts.
However, the rights granted to the federal government are, from time to time,
the subject of negotiation and typically include the right of the federal
government to use and share our intellectual property with other government
contractors, making it impossible for us to prevent their non-exclusive use of
our intellectual property. Our ability to protect our rights in intellectual
property developed or delivered under government contracts also is dependent
upon our compliance with applicable federal procurement statutes and
regulations. There can be no assurance that the steps we take to protect our
intellectual property will be adequate to deter misappropriation or to prevent
use by others of our intellectual property.
RISKS RELATED TO OUR BUSINESS
We are dependent on contracts with the U.S. federal government for
substantially all of our revenue.
For the year ended December 31, 2002, we derived approximately 93% of our
revenue from federal government contracts, either as a prime contractor or a
subcontractor. We expect that federal government contracts will continue to be
the primary source of our revenue for the foreseeable future. If we were
suspended or debarred from contracting with the federal government generally,
or any significant agency in the intelligence community or Department of
Defense, or if our reputation or relationship with government agencies were
impaired or the government otherwise ceased doing business with us or
significantly decreased the amount of business it does with us, our business,
prospects, financial condition or operating results would be materially harmed.
We could be debarred or suspended for, among other things, actions or omissions
that are deemed by the government to be so serious or compelling that they
affect our contractual responsibilities. For example, we could be disbarred for
commission of a fraud or criminal offense in connection with obtaining,
attempting to obtain or performing a contract, or for embezzlement, fraud,
forgery, falsification or other causes identified in
15
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Subpart 9.4 of the Federal Acquisition Regulations. In addition, changes in
federal government contracting policies could directly affect our financial
performance. Among the factors that could materially adversely affect our
federal government contracting business are:
. budgetary constraints affecting federal government spending generally, or
defense and intelligence spending in particular, and annual changes in
fiscal policies or available funding;
. changes in federal government programs, priorities, procurement policies
or requirements;
. new legislation, regulations or government union pressures, on the nature
and amount of services the government may obtain from private contractors;
. federal governmental shutdowns (such as occurred during the government's
1996 fiscal year) and other potential delays in the government
appropriations process; and
. delays in the payment of our invoices by government payment offices due
to problems with, or upgrades to, government information systems, or for
other reasons.
These or other factors could cause federal governmental agencies, or prime
contractors where we are acting as a subcontractor, to reduce their purchases
under contracts, to exercise their right to terminate contracts or to not
exercise options to renew contracts, any of which could have a material adverse
effect on our financial condition and operating results.
Our FAST contract is likely to affect our operating results.
FAST is a multiple award, Indefinite Delivery Indefinite Quantity (IDIQ)
contract with a $7.4 billion ceiling supporting the U.S. Air Force over its
approximate six-year remaining life. The FAST contract accounted for
approximately 17% of our 2002 revenue. If the FAST contract is terminated, or
if we fail to be awarded tasks as anticipated, our revenue growth could suffer.
In addition, although we believe the FAST contract presents an opportunity for
significant growth, program management and the significant use of
subcontractors are generally less profitable than our other activities. The
FAST contract and or other similar contracts are expected to become a
significant part of our business, and our operating margins as a percentage of
total revenue are expected to lessen.
We face competition, including under the FAST contract, from other firms,
some of which have substantially greater resources, industry presence and
name recognition.
We operate in highly competitive markets and generally encounter intense
competition to win contracts. We compete with many other firms, ranging from
small specialized firms to large diversified firms, some of which have
substantially greater financial, management and marketing resources than we do.
For example, under the FAST contract, we regularly compete for task orders with
companies that have annual operating revenues exceeding $20 billion. Our
competitors may be able to provide customers with different or greater
capabilities or benefits than we can provide in areas such as geographic
presence, price and the availability of key professional personnel. As part of
our competitive strategy, we plan to expand our geographic coverage and
customer base by selectively pursuing strategic acquisitions of other service
providers. We envision pursuing acquisitions of companies valued between $10
million and $100 million. Our failure to compete effectively with respect to
any of these or other factors could have a material adverse effect on our
business, prospects, financial condition or operating results.
16
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
If our subcontractors fail to perform their contractual obligations, our prime
contract performance and our ability to obtain future business could be
materially and adversely impacted.
Our performance of government contracts may involve the issuance of
subcontracts to other companies upon which we rely to perform all or a portion
of the work we are obligated to deliver to our customers. There is a risk that
we may have disputes with subcontractors concerning a number of issues,
including the quality and timeliness of work performed by the subcontractor,
customer concerns about the subcontractor, or our decision not to extend
existing task orders or issue new task orders under a subcontract. A failure by
one or more of our subcontractors to satisfactorily deliver on a timely basis
the agreed-upon supplies and/or perform the agreed-upon services may materially
and adversely impact our ability to perform our obligations as a prime
contractor. As we continue to expand into the program management area under the
FAST contract, our exposure to this risk will increase as a result of our
reliance on subcontractors that provide specialized products. In extreme cases,
subcontractor performance deficiencies could result in the government
terminating our contract for default. A default termination could expose us to
liability for excess costs of reprocurement by the government and have a
material adverse effect on our ability to compete for future contracts and task
orders.
We may lose money on some contracts if we miscalculate the resources we need to
perform under them.
We enter into three types of federal government contracts for our services:
time-and-materials, fixed-price and cost-plus. For the year ended December 31,
2002, we derived 61%, 24% and 15% of our revenue from time-and-materials,
fixed-price and cost-plus contracts, respectively. For 2001, these percentages
of revenue were 72%, 16% and 12%, respectively.
Each of these types of contracts, to differing degrees, involves the risk
that we could underestimate our cost of performance, which may result in a
reduced profit or a loss on the contract for us. Under time-and-materials
contracts, we are reimbursed for labor at negotiated hourly billing rates and
for certain expenses. We assume financial risk on time-and-materials contracts
because we assume the risk of performing those contracts at negotiated hourly
rates. Under fixed-price contracts, we perform specific tasks for a fixed
price. Compared to cost-plus contracts, fixed-price contracts generally offer
higher margin opportunities, but involve greater financial risk because we bear
the impact of cost overruns and receive the benefit of cost savings. Under
cost-plus contracts, we are reimbursed for allowable costs and paid a fee,
which may be fixed or performance-based. To the extent that the actual costs
incurred in performing a cost-plus contract are within the contract ceiling and
allowable under the terms of the contract and applicable regulations, we are
entitled to reimbursement of our costs, plus a profit. However, if our costs
exceed the ceiling or are not allowable under the terms of the contract or
applicable regulations, we may not be able to recover those costs.
Our profits could be adversely affected if our costs under any of these
contracts exceed the assumptions we used in bidding for the contract. Although
we believe that we have recorded adequate provisions in our consolidated
financial statements for losses on our contracts, our contract loss provisions
may not be adequate to cover all actual losses that we may incur in the future.
Our quarterly operating results may vary widely.
Our quarterly revenue and operating results may fluctuate significantly in
the future. A number of factors cause our revenue, cash flow and operating
results to vary from quarter to quarter, including:
. fluctuations in revenue earned on fixed-price contracts and contracts
with a performance-based fee structure;
. commencement, completion or termination of contracts during any
particular quarter;
. timing of spending activities by the federal government;
17
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
. variable purchasing patterns under government GSA schedules, BPAs and
IDIQ contracts;
. changes in Presidential administrations, Congressional majorities and
other senior federal government officials that affect the funding of
programs;
. changes in policy or budgetary measures that adversely affect government
contracts in general;
. the timing, nature and cost of hardware requirements for our program
management services, particularly in light of our expected expansion of
these services under the FAST contract; and
. scheduling of holidays and vacations, which reduce revenue without a
significant reduction in costs.
Changes in the volume of services provided under existing contracts and the
number of contracts commenced, completed or terminated during any quarter may
cause significant variations in our cash flow from operations because a
relatively large amount of our expenses are fixed. We incur significant
operating expenses during the start-up and early stages of large contracts and
typically do not receive corresponding payments in that same quarter. We may
also incur significant or unanticipated expenses when contracts expire, are
terminated or are not renewed. In addition, payments due to us from government
agencies may be delayed due to billing cycles or as a result of failures of
governmental budgets to gain Congressional and Executive approval in a timely
manner.
Our senior management is important to our customer relationships.
We believe that our success depends in large part on the continued
contributions of our senior management team. We rely on our executive officers
and senior managers to generate business and execute programs successfully. In
addition, the relationships and reputations that members of our management team
have established and continue to maintain with government and military
personnel contribute to our ability to maintain good customer relations and to
identify new business opportunities. The loss of Michael W. Solley, our Chief
Executive Officer, or any member of our senior management team could impair our
ability to identify and secure new contracts and otherwise to manage our
business successfully. While we have entered into a retention agreement with
Mr. Solley, that agreement does not prevent him from terminating his employment.
Failure to maintain strong relationships with other contractors or
subcontractors could result in a decline in our revenue.
For calendar year 2002, we derived approximately 23% of our revenue from
contracts in which we acted as a subcontractor to other contractors or from
teaming activities in which we and other contractors have formed to bid on and
execute particular contracts or programs. We expect to continue to depend on
relationships with other contractors for a portion of our revenue in the
foreseeable future. Our business, prospects, financial condition or operating
results could be adversely affected if other contractors eliminate or reduce
their subcontracts or teaming relationships with us, either because they choose
to establish relationships with our competitors or because they choose to
directly offer services that compete with our business, or if the government
terminates or reduces these other contractors' programs or does not award them
new contracts. Consolidation in the industry may result in increased cost and
lack of availability of subcontractors, which could adversely affect our
business, prospects, financial condition or operating results.
We must recruit and retain skilled employees to succeed in our
labor-intensive business.
We believe that an integral part of our success is our ability to provide
our customers with skilled employees who have advanced information technology
and engineering technical services skills and who work well with our customers.
These employees are in great demand and are likely to remain a limited resource
in the foreseeable future. If we are unable to recruit and retain a sufficient
number of these employees, our ability to maintain and
18
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
grow our business could be negatively impacted. We obtain some of our contracts
on the strength of certain personnel the customer considers key to our
successful performance under the contract. If we are unable to provide these
key personnel or acceptable substitutions, the customer may not fund the
contract.
If we fail to manage our growth, including the expansion of our program
management activities under the FAST contract, our revenue and earnings could
be adversely impacted.
Our business strategy is to continue to expand our operations, including the
expansion of our program management activities under the FAST contract. This
strategy may strain our management, operational and financial resources. If we
make mistakes in deploying our financial or operational resources or fail to
hire the additional qualified personnel necessary to support higher levels of
business, our revenue and earnings could be adversely affected.
Covenants in our credit facility may restrict our financial and operating
flexibility, including our ability to pursue strategic acquisitions.
Although we have not had any outstanding borrowings under any credit
facility since shortly after our initial public offering, we have established a
credit facility with a consortium of banks that provides for an initial line of
credit of $35 million. At our request, the total line of credit may increase to
$50 million, subject to the banks' approval and our satisfaction of certain
conditions.
Prior to requesting advances under our credit facility, and any time we have
borrowings outstanding under the agreement, we are subject to certain covenants
that limit or restrict our ability, among other things, to borrow money outside
of the amounts committed under our credit facility; to make acquisitions; to
dispose of our assets outside the ordinary course of business; to use
borrowings for particular purposes; to create or hold subsidiaries; to transfer
equity interests in subsidiaries; to extend credit or become a guarantor; to
encumber our property or assets; to invest more than a limited amount in fixed
assets or improvements; to change our accounting policies or the nature of our
business; to purchase real estate; to merge or consolidate; and to pay
dividends. The agreement also requires us to maintain specified financial
standards relating to our tangible net worth, our net worth, our fixed charge
coverage, our interest coverage and the ratio of our funded indebtedness to our
adjusted earnings. We are also subject to other financial covenants that are
typical to an agreement of this type. In addition, the ratio of our funded
indebtedness to our adjusted earnings can affect the interest rates we pay,
even if we satisfy the minimum required standard. Our ability to satisfy these
standards can be affected by events beyond our control, and we cannot assure
you that we will satisfy them. We have pledged substantially all our personal
property to secure our repayment of any borrowings that we make under our
credit facility. Any default by us under our credit agreement could have a
material adverse effect on our business if the default is not waived by our
creditors. In addition, any refusal by our lenders to consent to certain
transactions could prohibit us from undertaking actions that are necessary to
maintain or expand our business.
We may undertake acquisitions that could increase our costs or liabilities or
be disruptive.
While we have limited acquisition experience, one of our business strategies
is to selectively pursue acquisitions of companies in targeted geographic areas
that provide services to specific governmental agencies. We may not be able to
locate suitable acquisition candidates at prices that we consider appropriate
or to finance acquisitions on terms that are satisfactory to us. Even if we
identify an appropriate acquisition candidate, we may not be able to negotiate
satisfactory terms for the acquisition, finance the acquisition or, if the
acquisition occurs, integrate the acquired business into our existing business.
Negotiations of potential acquisitions and the integration of acquired business
operations could disrupt our business by diverting management's attention from
day-to-day operations. The difficulties of integration may be increased by the
necessity of coordinating geographically dispersed organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. We also may not realize cost efficiencies or synergies that we
anticipated
19
20
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
when selecting our acquisition candidates. Further, our decision to acquire a
company may not be driven by cost efficiencies, synergies or increasing
revenue. For example, we may seek to acquire one or more of our subcontractors
because we do not want to risk losing our relationship with the subcontractor
if it is acquired by one of our competitors. In addition, we may need to record
write-downs from future impairments of intangible assets, which could reduce
our future reported earnings. At times, acquisition candidates may have
liabilities or adverse operating issues that we fail to discover through due
diligence prior to the acquisition. Acquisitions of businesses or other
material operations may require additional debt or equity financing, resulting
in additional leverage or dilution of ownership.
RISKS RELATED TO GOVERNMENT CONTRACTING
Federal government spending priorities may change in a manner adverse to our
business.
Our business depends upon continued federal government expenditures on
intelligence, defense and other programs that we support. The overall U.S.
defense budget declined from time to time in the late 1980s and the early
1990s. While spending authorizations for intelligence and defense-related
programs by the government have increased in recent years, and in particular
after the September 11, 2001 terrorist attacks, future levels of expenditures
and authorizations for those programs may decrease, remain constant or shift to
programs in areas where we do not currently provide services. A significant
decline in government expenditures, or a shift of expenditures away from
programs that we support, could adversely affect our business, prospects,
financial condition or operating results.
Our federal government contracts may be terminated by the government at any
time, and if we do not replace them, our operating results may be adversely
affected.
We derive most of our revenue from federal government contracts that
typically span one or more base years and one or more option years. The option
periods may cover more than half of the contract's potential duration. Federal
government agencies generally have the right not to exercise these option
periods. In addition, our contracts typically also contain provisions
permitting a government customer to terminate the contract for its convenience,
as well as for our default. A decision by a government agency not to exercise
option periods or to terminate contracts could result in significant revenue
shortfalls.
If the government terminates a contract for convenience, we may recover only
our incurred or committed costs, settlement expenses and profit on work
completed prior to the termination. We cannot recover anticipated profit on
terminated work. If the government terminates a contract for default, we may
not recover even those amounts, and instead may be liable for excess costs
incurred by the government in procuring undelivered items and services from
another source.
Federal government contracts contain other provisions that may be unfavorable
to contractors.
Federal government contracts contain provisions and are subject to laws and
regulations that give the government rights and remedies not typically found in
commercial contracts. As described above, these allow the government to
terminate a contract for convenience or decline to exercise an option to renew.
They also permit the government to do the following:
. reduce or modify contracts or subcontracts;
. cancel multi-year contracts and related orders if funds for contract
performance for any subsequent year become unavailable;
. claim rights in products and systems produced by us; and
. suspend or debar us from doing business with the federal government.
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
We must comply with complex procurement laws and regulations.
We must comply with and are affected by laws and regulations relating to the
formation, administration and performance of federal government contracts,
which affect how we do business with our customers and may impose added costs
on our business. Among the most significant regulations are:
. the Federal Acquisition Regulations, and agency regulations supplemental
to the Federal Acquisition Regulations, which comprehensively regulate
the formation, administration and performance of government contracts;
. the Truth in Negotiations Act, which requires certification and
disclosure of all cost and pricing data in connection with contract
negotiations;
. the Cost Accounting Standards and Cost Principles, which impose
accounting requirements that govern our right to reimbursement under
certain cost-based government contracts; and
. laws, regulations and executive orders restricting the use and
dissemination of information classified for national security purposes
and the exportation of certain products and technical data.
Moreover, we are subject to industrial security regulations of the
Department of Defense and other federal agencies that are designed to safeguard
against foreigners' access to classified information. If we were to come under
foreign ownership, control or influence, our federal government customers could
terminate or decide not to renew our contracts, and it could impair our ability
to obtain new contracts.
Our contracts are subject to audits and cost adjustments by the federal
government.
The federal government audits and reviews our performance on contracts,
pricing practices, cost structure and compliance with applicable laws,
regulations and standards. Like most large government contractors, our direct
and indirect contract costs are audited and reviewed on a continual basis.
Although audits have been completed on our incurred contract costs through
2000, audits for costs incurred or work performed after 2000 remain ongoing
and, for much of our work in recent years, have not yet commenced. In addition,
non-audit reviews by the government may still be conducted on all our
government contracts. An audit of our work, including an audit of work
performed by companies we have acquired or may acquire, could result in a
substantial adjustment to our revenue because any costs found to be improperly
allocated to a specific contract will not be reimbursed, and revenue we have
already recognized may need to be refunded. If a government review or
investigation uncovers improper or illegal activities, we may be subject to
civil and criminal penalties and administrative sanctions, including
termination of contracts, forfeiture of claims and profits, suspension of
payments, treble damages, statutory penalties, fines and suspension or
debarment from doing business with federal government agencies, which could
materially adversely affect our business, prospects, financial condition or
operating results. In addition, we could suffer serious harm to our reputation
if allegations of impropriety were made against us.
Restrictions on or other changes to the federal government's use of service
contracts may harm our operating results.
We derive a significant amount of revenue from service contracts with the
federal government. The government may face restrictions from new legislation,
regulations or government union pressures on the nature and amount of services
the government may obtain from private contractors. For example, the
Truthfulness, Responsibility and Accountability in Contracting Act, proposed in
2001, would have limited and severely delayed the government's ability to use
private service contractors. Although this proposal was not enacted, it or
similar legislation could be proposed at any time. Any reduction in the
government's use of private contractors to provide services would adversely
impact our business.
21
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Our participation in the competitive bidding process, from which we derive
significant revenue, presents a number of risks.
We derive significant revenue from federal government contracts that were
awarded through a competitive bidding process. Most of the business that we
expect to seek in the foreseeable future likely will be awarded through
competitive bidding. Competitive bidding presents a number of risks, including
the:
. need to bid on programs in advance of the completion of their design,
which may result in unforeseen technological difficulties and cost
overruns;
. substantial cost and managerial time and effort that we spend to prepare
bids and proposals for contracts that may not be awarded to us;
. need to accurately estimate the resources and cost structure that will be
required to service any contract we are awarded; and
. expense and delay that may arise if our competitors protest or challenge
contract awards made to us pursuant to competitive bidding, and the risk
that any such protest or challenge could result in the resubmission of
bids on modified specifications, or in termination, reduction or
modification of the awarded contract.
In addition, pricing pressures may arise from increased competition and
therefore reduce our operating margins.
If we are unable to win particular contracts that are awarded through the
competitive bidding process, we may not be able to operate in the market for
services that are provided under those contracts for a number of years. If we
are unable to consistently win new contract awards over any extended period,
our business and prospects will be adversely affected.
We may not receive the full amount authorized under contracts that we have
entered into and may not accurately estimate our backlog and GSA schedule
value.
The maximum contract value specified under a government contract that we
enter into is not necessarily indicative of revenue that we will realize under
that contract. For example, we derive some of our revenue from government
contracts in which we are not the sole provider, meaning that the government
could turn to other companies to fulfill the contract, and from IDIQ contracts,
which specify a maximum but only a token minimum amount of goods or services
that may be provided under the contract. In addition, Congress often
appropriates funds for a particular program on a yearly basis, even though the
contract may call for performance that is expected to take a number of years.
As a result, contracts typically are only partially-funded at any point during
their term, and all or some of the work to be performed under the contracts may
remain unfunded unless and until Congress makes subsequent appropriations and
the procuring agency allocates funding to the contract. As described above,
most of our existing contracts are subject to modification and termination at
the federal government's discretion. Moreover, there can be no assurance that
any contract included in our estimated contract value that generates revenue
will be profitable. Nevertheless, we look at these contract values, including
values based on the assumed exercise of options relating to these contracts, in
estimating the amount of our backlog. Because we may not receive the full
amount we expect under a contract, our backlog may not accurately estimate our
revenue. Also, in recent years we have been deriving an increasing percentage
of our revenue under GSA schedules. GSA schedules are procurement vehicles
under which government agencies may, but are not required to, purchase
professional services or products. We have developed a method of calculating
GSA schedule value that we use to evaluate estimates for the revenue we may
receive under our GSA schedules. We believe our method of determining GSA
schedule value is based on reasonable estimates and assumptions. However, there
can be no assurance that our methodology accurately estimates GSA schedules
value. Estimates of future revenue included in backlog and GSA schedule value
are not necessarily precise and the receipt and
22
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
timing of any of this revenue is subject to various contingencies, many of
which are beyond our control. For a discussion of these contingencies see
"Business--Backlog" above. We may never realize the revenue on programs
included in backlog and GSA schedule value.
Security breaches in classified government systems could adversely affect our
business.
Many of the programs we support and systems we develop, install and maintain
involve managing and protecting information involved in intelligence, national
security and other classified government functions. A security breach in one of
these systems could cause serious harm to our business, damage our reputation
and prevent us from being eligible for further work on critical classified
systems for federal government customers. Losses that we could incur from such
a security breach could exceed the policy limits that we have for errors and
omissions insurance, which generally do not exceed $1 million per task order
awarded.
Our business is dependent upon obtaining and maintaining required security
clearances.
Many of our federal government contracts require our employees to maintain
various levels of security clearances, and we are required to maintain certain
facility security clearances complying with federal government requirements.
Obtaining and maintaining security clearances for employees involves a lengthy
process, and it is difficult to identify, recruit and retain employees who
already hold security clearances. If our employees are unable to obtain or
retain security clearances or if our employees who hold security clearances
terminate employment with us, the customer whose work requires cleared
employees could terminate the contract or decide not to renew it upon its
expiration. In addition, we expect that many of the contracts on which we will
bid will require us to demonstrate our ability to obtain facility security
clearances and perform work with employees who hold specified types of security
clearances. To the extent we are not able to obtain facility security
clearances or engage employees with the required security clearances for a
particular contract, we may not be able to bid on or win new contracts, or
effectively rebid on expiring contracts.
Our employees may engage in misconduct or other improper activities.
We are exposed to the risk that employee fraud or other misconduct could
occur. Misconduct by employees could include intentional failures to comply
with federal government procurement regulations and failing to disclose
unauthorized activities to us. Employee misconduct could also involve the
improper use of our customers' sensitive or classified information, which could
result in regulatory sanctions and serious harm to our reputation. It is not
always possible to deter employee misconduct, and the precautions we take to
prevent and detect this activity may not be effective in controlling unknown or
unmanaged risks or losses.
RISKS RELATED TO OUR COMMON STOCK
Mr. Soin, our founder and Chairman is the majority stockholder of the Company.
Mr. Soin, our majority stockholder, owns or controls approximately 54% of
the voting power and outstanding shares of our common stock. Accordingly, Mr.
Soin will control the vote on all matters submitted to a vote of the holders of
our common stock. As long as Mr. Soin beneficially owns a majority of the
voting power of our common stock, he will have the ability, without the consent
of our public stockholders, to elect all members of our board of directors and
to control our management and affairs. Mr. Soin's voting control may have the
effect of preventing or discouraging transactions involving an actual or a
potential change in control of the Company, regardless of whether a premium is
offered over then-current market prices. Mr. Soin will be able to cause or
prevent a change in control of the Company.
We do, and in the past we have done, business with entities that are
controlled by or otherwise related to Mr. Soin. See Item 13. "Certain
Relationships and Related Party Transactions" below.
The interests of Mr. Soin may conflict with the interests of other holders
of our common stock.
23
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
We have contracts with entities that are owned or controlled by, or otherwise
affiliated with, Mr. Soin, our founder and Chairman, the terms of which were
not negotiated at arm's length.
We currently lease three of our properties, including our headquarters, from
BC Real Properties, LLC, which is controlled by Mr. Soin. We have also made
arrangements to use aircraft owned by our majority stockholder's family limited
partnership or jointly owned by us and our majority stockholder's family
limited partnership. From time to time, we enter into subcontracting
relationships with other government contractors that are affiliated with Mr.
Soin. While we believe that the terms and conditions of these agreements with
entities owned or controlled by, or otherwise affiliated with, Mr. Soin reflect
or will reflect prevailing market conditions, we cannot assure you that they
are or will be as favorable to us as the terms and conditions that might be
negotiated by independent parties on an arm's-length basis. For more
information, see Item 13. "Certain Relationships and Related Party
Transactions" below.
A substantial number of shares of our common stock will be eligible for sale
by Mr. Soin in the near future, which could affect the market price of our
common stock.
A substantial number of shares of our common stock will be eligible for sale
by Mr. Soin after March 24, 2003. We cannot predict the effect that any future
sales of shares of our common stock by Mr. Soin, or the availability of such
shares for sale, will have on the market price of our common stock. We believe
that sales of substantial numbers of shares of our common stock by Mr. Soin, or
the perception that such sales could occur, could depress or otherwise
adversely affect the market price of our common stock.
In conjunction with our initial public offering, Mr. Soin entered into a
lock-up agreement with the underwriters and us pursuant to which he agreed not
to sell, pledge or otherwise dispose of his shares, without the prior written
consent of Legg Mason Wood Walker, Incorporated, for a period of 270 days after
the date of the prospectus used in our initial public offering, or March 24,
2003. After this lock-up agreement expires, Mr. Soin's shares will be eligible
for sale in the public market. Legg Mason Wood Walker, Incorporated, on behalf
of the underwriters, may release Mr. Soin from his lock-up agreement at any
time and without notice, which would allow for earlier sale of shares in the
public market.
Under a registration rights agreement, beginning on March 25, 2003, Mr. Soin
will have "demand" registration rights as well as "piggyback" registration
rights in connection with future offerings of our common stock. "Demand"
registration rights will allow Mr. Soin to cause the Company to file a
registration statement registering all or some of his shares. "Piggyback"
registration rights will require us to provide notice to Mr. Soin if we propose
to register any of our securities under the Securities Act and grant him the
right to include his shares in our registration statement. If Mr. Soin
exercises these registration rights, he will be able to sell his shares
included on a registration statement without the volume restriction and manner
of sale requirements imposed on affiliates under Rule 144 of the Securities Act.
Provisions in our charter documents could make a merger, tender offer or
proxy contest difficult.
Our certificate of incorporation and bylaws may discourage, delay or prevent
a change in control of the Company that stockholders may consider favorable. In
addition, provisions in our certificate of incorporation and bylaws and in the
Delaware corporate law may make it difficult for stockholders to change the
composition of the board of directors in any one year and thus may make it
difficult to change the composition of management. Our certificate of
incorporation and bylaws:
. authorize the issuance of blank check preferred stock that could be
issued by our board of directors to thwart a takeover attempt;
24
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
. prohibit cumulative voting in the election of directors, which would
otherwise allow holders of less than a majority of the stock to elect
some directors;
. stagger our board of directors, making it more difficult to elect a
majority of the directors on our board and preventing our directors from
being removed without cause;
. limit who may call special meetings of stockholders;
. prohibit stockholder action by written consent, requiring all actions to
be taken at a meeting of the stockholders;
. establish advance notice requirements for nominating candidates for
election to our board of directors or for proposing matters that can be
acted upon by stockholders at stockholder meetings; and
. require that vacancies on our board of directors, including newly-created
directorships, be filled only by a majority vote of directors then in
office.
In addition, Section 203 of the Delaware General Corporation Law may
discourage, delay or prevent a change in control by prohibiting the Company
from engaging in a business combination with an interested stockholder for a
period of three years after the person becomes an interested stockholder.
Executive Officers of the Registrant
The following table identifies our executive officers and indicates their
ages and positions as of December 31, 2002:
Name Age Position
- ---- --- --------
Rajesh K. Soin... 55 Chairman of the Board and Director
Michael W. Solley 45 President, Chief Executive Officer and Director
David S. Gutridge 56 Chief Financial Officer, Executive Vice President, Secretary,
Treasurer, and Director
Benjamin D. Crane 67 Chief Operating Officer and Executive Vice President
Donald H. Weisert 59 Senior Vice President and Assistant Chief Operating Officer
Hugh K. Bolton... 44 Senior Vice President
James C. Clark... 61 Senior Vice President
Set forth below is biographical information for our executive officers.
Rajesh K. Soin has served as Chairman of the Board of MTC Technologies, Inc.
since May 2002. Mr. Soin has also served as Chairman of the Board of Directors
and Chief Executive Officer of Soin International, LLC, a holding company
previously known as MTC International, LLC and an affiliate of the Company,
since 1998. Mr. Soin also served as Chairman of the Board and Chief Executive
Officer of Modern Technologies Corp. from 1984 until May 2002.
Michael W. Solley has served as President and Chief Executive Officer of MTC
Technologies, Inc. since May 2002, and as President of Modern Technologies
Corp. since March 2000. Prior to that, Mr. Solley served from 1998 to 2000 as
Executive Vice President of Nichols Research Corporation, a provider of
engineering services to, among other customers, the Department of Defense and
other federal agencies. Mr. Solley also served as President of the Government
Segment for Nichols from 1999 until 2000, and as President of the Government
Information Technology Segment for Nichols from 1996 until 1998. At Nichols,
Mr. Solley was responsible for the defense business of the company and
conducted several acquisitions. Nichols merged with Computer Sciences
Corporation in November 1999, and Mr. Solley continued to serve as the
President of the CSC/Nichols defense business until March 2000.
25
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
David S. Gutridge has served as Chief Financial Officer, Executive Vice
President, Secretary and Treasurer of MTC Technologies, Inc. since April 2002.
Mr. Gutridge joined Modern Technologies Corp., the predecessor and primary
subsidiary of the Company, in 1993 and served as a Group President and Chief
Operating Officer until 1998. Mr. Gutridge served as a Group President and
Chief Operating Officer of Soin International, LLC (formerly MTC International,
LLC), a holding company overseeing a number of businesses and investments and
an affiliate of the Company, from 1998 until 2002. At Soin International, Mr.
Gutridge had direct responsibility for two manufacturing operations, oversaw
real estate operations and evaluated acquisitions, financings and investment
vehicles.
Benjamin D. Crane, Colonel, U.S. Air Force (Ret.), joined us in 1987 and has
served as our Chief Operating Officer since January 2000. Mr. Crane served as
our Director of Aerospace Division from 1991 to 2000, Central Region Planner
from 1991 to 1994, Director of Project Management from 1989 to 1991 and Senior
Manager for Air Force contracts from 1987 to 1989. Prior to joining us, Mr.
Crane served in the U.S. Air Force for 29 years, concluding as the Deputy
Commander Strategic Systems Program.
Donald H. Weisert, Colonel, U.S. Air Force (Ret.), joined us in 1992 and
serves as our Senior Vice President and Assistant Chief Operating Officer. Mr.
Weisert served as our Vice President and Director from 1999 to 2002, Department
Manager from 1994 to 1999 and Program Manager from 1992 to 1994. Prior to
joining us, Mr. Weisert served in the U.S. Air Force for 26 years, concluding
as the Chief of Engineering and Manufacturing Development of the B-2 Advanced
Technology Bomber Program Office.
Hugh K. Bolton joined us in 1992 and serves as our Senior Vice President
with direct oversight of all Intelligence Community business operations. Mr.
Bolton served as our Vice President and Director from 1999 to 2002, and in
various technical and management positions from 1992 to 1999. Prior to joining
us, Mr. Bolton served in the U.S. Air Force supporting highly sensitive
programs within the Air Force and U.S. Intelligence Community.
James C. Clark, Colonel U.S. Air Force (Ret.), joined us in 1991 and serves
as our Senior Vice President with direct oversight of all our Engineering
business operations. Mr. Clark served as our Vice President and Director from
1999 to 2002, and in various technical and management positions from 1991 to
1999. Prior to joining us, Mr. Clark served in the U.S. Air Force for 26 years,
concluding as the Chief, Logistics Research Division.
Item 2. Properties
We have maintained our corporate headquarters in Dayton, Ohio since 1984. We
presently lease a 53,000 square foot facility at 4032 Linden Avenue. The lease
expires on December 31, 2003. We anticipate entering into a long-term lease
sometime in 2003, however, the terms and conditions have not yet been
determined. That facility is leased from an entity owned by our majority
stockholder. See Note K. Related Party Transactions.
We lease a total of 174,572 square feet in 22 locations throughout the
United States, 174,098 square feet of which is used by us and 474 square feet
of which is subleased by us to other parties. Our aggregate monthly lease
payment is approximately $182,000. Our customers pay directly for approximately
5.2% of our total square footage, accounting for $14,096 of our total monthly
payment. No lease of ours extends beyond May 31, 2006.
We maintain one Sensitive Compartmented Information Facility (SCIF),
comprising approximately 3,500 square feet in Dayton, Ohio. This is a
reinforced facility with multiple secure zones, protected electronically and
restricted to special classified "need to know" program access. This facility
is also cleared for Top-Secret Sensitive Compartmented Information (SCI) and
Special Access data handling and storage. Four of our other locations in the
United States are cleared for secret handling and storage.
26
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Item 3. Legal Proceedings
From time to time, we are involved in legal proceedings arising in the
ordinary course of business. We do not believe that any pending litigation will
have a material adverse effect on our financial condition or results of
operations. See Note Q. Contingencies for further discussion of pending
litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 2002, through the solicitation of
proxies or otherwise. We intend to present the following matters to a vote of
security holders in connection with its 2003 Annual Meeting of Stockholders on
April 22, 2003:
1. Elect two directors
2. Approve the adoption of our 2002 Equity and Performance Incentive Plan
3. Ratify the selection of Ernst & Young LLP as independent accountants
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
Our common stock is quoted on the Nasdaq National Market, and began trading
under the symbol "MTCT" on June 28, 2002. As of March 12, 2003, there were
12,960,237 shares of common stock outstanding that were held by approximately
1,800 stockholders, three of which were stockholders of record.
The following table lists the high and low sales price for our common stock
as quoted on the Nasdaq Stock Market for quarters in 2002 in which our common
stock was publicly traded. There were no dividends declared or paid during
these periods. See Dividend Policy below.
Sales Price
-------------
2002 High Low
---- ------ ------
Second quarter $19.00 $17.00
Third quarter. $22.46 $15.65
Fourth quarter $25.54 $21.20
Dividend Policy
We currently intend to retain any future earnings to support the development
and expansion of our business and do not anticipate paying cash dividends in
the foreseeable future. Payment of future dividends will be at the discretion
of our board of directors after taking into account various factors, including
our financial condition, operating results, cash needs, growth plans and the
terms of any credit agreements that we may be a party to at the time. Our
current credit facility has limitations on our ability to pay dividends. In
addition, the terms of any future credit agreement may prevent us from paying
any dividends or making any distributions or payments with respect to our
capital stock.
All of our assets consist of the stock of one of our subsidiaries. We will
have to rely upon dividends and other payments from our subsidiaries to
generate the funds necessary to make dividend payments, if any, on our common
stock. Our subsidiaries, however, are legally distinct from us and have no
obligation to pay amounts to us. The ability of our subsidiaries to make
dividend and other payments to us is subject to, among other things, the
availability of funds, the terms of our subsidiaries' indebtedness and
applicable state laws.
27
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Use of Proceeds
On June 27, 2002, our registration statement (No. 333-87590) relating to our
initial public offering was declared effective by the Securities and Exchange
Commission and the Company, Mr. Rajesh K. Soin and the underwriters signed an
underwriting agreement pursuant to which the Company and Mr. Soin agreed to
sell shares covered by the registration statement to the underwriters at $15.81
per share. The Company agreed to sell 2,500,000 of these shares and Mr. Soin
agreed to sell 2,500,000 of these shares. The Company did not receive any of
the proceeds from the sale of the shares by Mr. Soin. The managing underwriters
for the offering were Legg Mason Wood Walker, Incorporated, Raymond James &
Associates, Inc., Jefferies/Quarterdeck, LLC and Jefferies & Company, Inc. and
BB&T Capital Markets, a Division of Scott & Stringfellow, Inc. The underwriters
offered these shares to the public at $17.00 per share. The initial public
offering was consummated on July 3, 2002.
All of the registered shares were sold in the public offering. The aggregate
price of the 2,500,000 shares registered on behalf of each of Mr. Soin and the
Company was $42.5 million and the aggregate offering price of the 2,500,000
shares sold to date by each of Mr. Soin and the Company was $42.5 million. The
Company's share of the total underwriting discount was approximately $3.0
million and the Company incurred approximately $1.4 million of other expenses
(including filing, legal, and accounting fees), none of which was paid to the
Company's directors or officers or their affiliates or to persons owning 10% or
more of any class of the Company's common stock. The Company's net proceeds
from the offering of the 2,500,000 shares were approximately $38.1 million.
Approximately $21.0 million of the Company's net proceeds from the offering
were used to repay the principal and accrued interest outstanding under the
Company's term loan and revolving credit facility.
The underwriters also had an option to purchase an additional 375,000 shares
of common stock from the Company and an additional 375,000 shares from Mr. Soin
to cover over-allotments. This option was exercised in full by the underwriters
on July 1, 2002, and all of these shares were sold by the underwriters for
$17.00 per share. The aggregate price of the 375,000 shares registered on
behalf of each of Mr. Soin and the Company was $6.4 million and the aggregate
offering price of the 375,000 shares sold to date by each of Mr. Soin and the
Company was $6.4 million. The Company's share of the total underwriting
discount was approximately $0.5 million and the Company incurred approximately
$0.2 million of other expenses (including filing, legal, and accounting fees),
none of which was paid to the Company's directors or officers or their
affiliates or to persons owning 10% or more of any class of our common stock.
The Company's net proceeds from the sale of the 375,000 shares were
approximately $5.7 million.
We intend to use the remainder of the net proceeds from the offering
(together with cash on hand and additional borrowings) for working capital and
general corporate purposes, including all or a portion of the costs of any
complementary businesses we selectively decide to acquire in the future. On
October 18, 2002, we used approximately $7.3 million of these proceeds to
acquire 100% of the outstanding common stock of AMCOMP Corporation. We have no
other present commitments, agreements or understandings to acquire any
businesses. Pending final use of the proceeds we have invested the remaining
net proceeds of approximately $17.0 million from our initial public offering in
short-term, investment grade, interest-bearing securities or guaranteed
obligations of the United States and its agencies.
Item 6. Selected Financial Data
The tables below set forth selected consolidated financial data for the
years ended December 31, 2002, 2001, 2000, 1999, September 30, 1998, and the
three months ended December 31, 1998. There were no cash dividends declared or
paid in any of the periods presented. Prior to June 28, 2002, we were an S
corporation for income tax purposes, and as a consequence, we paid no federal
income tax and paid only certain state income taxes.
28
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
This selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included
elsewhere in this document.
Three
months
Year ended December 31, ended Year ended
----------------------------------------------- December 31, September 30,
2002 2001 2000 1999 1998 1998
----------- ---------- ---------- ----------- ------------ -------------
(in thousands, except share and per share data)
Income statement data:
Revenue..................... $ 118,540 $ 92,590 $ 75,961 $ 70,319 $ 16,811 $ 73,340
Cost of revenue............. 96,356 75,248 61,866 59,069 14,429 61,239
----------- ---------- ---------- ----------- ----------- -----------
Gross profit................ 22,184 17,342 14,095 11,250 2,382 12,101
General and administrative
expenses excluding
management fees to related
party and stock
compensation expense...... 7,792 5,074 4,965 5,435 1,645 4,878
Management fees to related
party(1).................. 556 2,395 2,549 1,015 -- --
Stock compensation
expense(2)................ 5,215 -- -- -- -- --
----------- ---------- ---------- ----------- ----------- -----------
Total general and
administrative expenses... 13,563 7,469 7,514 6,450 1,645 4,878
Intangible asset
amortization(3)........... 119 1,086 471 -- -- --
----------- ---------- ---------- ----------- ----------- -----------
Operating income............ 8,502 8,787 6,110 4,800 737 7,223
Net interest expense
(income).................. 160 570 618 425 (91) 97
----------- ---------- ---------- ----------- ----------- -----------
Income from continuing
operations before income
tax expense............... 8,342 8,217 5,492 4,375 828 7,126
Income tax expense.......... 656 -- -- -- -- --
----------- ---------- ---------- ----------- ----------- -----------
Income from continuing
operations................ 7,686 8,217 5,492 4,375 828 7,126
Loss from discontinued
operations(4)............. -- (453) (1,182) (2,877) (1,144) (2,968)
----------- ---------- ---------- ----------- ----------- -----------
Net income (loss)........... $ 7,686 $ 7,764 $ 4,310 $ 1,498 $ (316) $ 4,158
=========== ========== ========== =========== =========== ===========
Basic and diluted earnings
(loss) per common share
from continuing
operations................ $ 0.67 $ 0.83 $ 0.56 $ 0.27 $ 0.05 $ 0.40
Weighted average basic
shares outstanding........ 11,405,351 9,887,482 9,887,482 16,479,961 17,797,468 17,797,468
Weighted average diluted
shares outstanding........ 11,538,802 9,887,482 9,887,482 16,479,961 17,797,468 17,797,468
29
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
December 31,
---------------------------------------- September 30,
2002 2001 2000 1999 1998 1998
------- ------- ------- ------- ------- -------------
(in thousands)
Balance sheet data:
Working capital(5)..................... $36,895 $10,115 $11,311 $ 7,865 $11,070 $ 8,190
Total assets........................... 71,488 25,734 41,003 29,864 29,363 29,707
Long-term obligations(5)............... -- 13,075 18,418 15,262 9,822 18,092
Stockholders' equity (deficiency in net
assets)(5)........................... 49,778 (121) 10,913 4,461 10,352 11,614
- --------
(1)/ /The management fees to a related party were paid to a wholly owned
affiliate of our then sole stockholder. The nature of the services
received from the affiliate included our then sole stockholder's services
as our Chief Executive Officer, assistance with negotiating financing
arrangements, assistance with evaluating acquisition candidates and legal
services. These fees ceased on March 31, 2002. Although the management
fees have been eliminated, most of these costs have been replaced on an
annual recurring basis, and by virtue of being a public company, we now
incur certain general and administrative costs not previously incurred.
(2)/ /Non-cash stock compensation expense of $5.2 million was recognized in
March, 2002, in connection with the issuance to three senior executives of
non-qualified options to purchase 415,273 shares of common stock pursuant
to Rule 701 under the Securities Act of 1933. The charge represents the
difference between the option price of $4.19 and the estimated fair market
value of the common stock on the date of grant of $16.75 per share. For
more information, please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note O to our
consolidated financial statements.
(3) We adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective
January 1, 2002, and discontinued the amortization of goodwill as of that
date. In addition, we achieved full amortization of the purchase price
allocated to the contracts of RJO Enterprises, Inc., in September, 2001. In
October, 2002, after acquiring AMCOMP Corporation, we began amortizing the
purchase price allocated to the contracts of AMCOMP Corporation of $3.0
million, over their estimated useful life of 6.5 years as determined by an
independent appraisal.
(4) In anticipation of our initial public offering, we disposed of or
discontinued substantially all of our operations that were not related to
our core business. For more information, please see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Discontinued Operations" and Note I to our consolidated
financial statements.
(5) On July 3, 2002 we successfully completed our initial public offering of
common stock and received net proceeds of approximately $43.8 million from
the offering, after deducting our portion of estimated expenses and the
underwriting discount. The proceeds were used to pay off our debt and to
fund the October, 2002, purchase of AMCOMP Corporation for approximately
$7.3 million, with the balance invested in short-term securities. Working
capital at December 31, 2002, includes approximately $22 million of cash
and cash equivalents, primarily consisting of the balance of the proceeds
from our initial public offering.
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial
statements and related notes included elsewhere in this Form 10-K. Portions of
this document that are not statements of historical or current fact are
forward-looking statements. The forward-looking statements in this document
involve risk and uncertainties, such as statements of our plans, objectives,
expectations and intentions. The cautionary statements made in this document
should be read as applying to all related forward-looking statements wherever
they appear. Our actual results could differ materially from those anticipated
in the forward-looking statements. Factors that could cause our actual results
to differ materially from those anticipated include, but are not limited to,
the following: risks related to the growth of our FAST contract, including
strains on resources and decreases in operating margins; federal government
audits and cost adjustments; differences between authorized amounts and amounts
received by us under government contracts; government customers' failure to
exercise options under contracts; changes in federal government (or other
applicable) procurement laws, regulations, policies and budgets; our ability to
attract and retain qualified personnel; our ability to retain contracts during
re-bidding processes; pricing pressures; undertaking acquisitions that might
increase our costs or liabilities or be disruptive; integration of
acquisitions; and changes in general economic and business conditions.
Overview
We provide sophisticated engineering and technical, information technology,
intelligence operations and program management services focusing primarily on
U.S. defense, intelligence and civilian federal government agencies. For the
years ended December 31, 2002 and 2001, over 87% and 80%, respectively, of our
revenue was derived from our customers in the Department of Defense and the
intelligence community, including the U.S. Air Force, U.S. Army and joint
military commands.
We report operating results and financial data as a single segment and
believe our contract base is well diversified with over 230 active contracts,
including task orders on GSA contracts and major government-wide acquisition
contracts (GWACs), as of December 31, 2002. While approximately 20% of our 2002
revenue was under one contract vehicle, the Aeronautical Systems Center BPA, or
ASC/BPA, which expires in September, 2005, some of that work was previously
performed on GSA schedules and, if necessary, could possibly be converted to
GSA vehicles or other contracts we have. We also had approximately 17% of our
2002 revenue under the FAST contract, which has an option end date in
September, 2008. In prior years we previously performed a portion of the work
we are now performing on the FAST contract on other contract vehicles. While
the FAST contract represents an increasingly large percentage of our total
revenue, we believe that the broad array of engineering, technical and
management services we provide to the federal government through various
contract vehicles allows for diversified business growth. No other task order,
including individual contracts under our GSA vehicles, accounted for more than
6% and 8.5% of revenue for the years ended December 31, 2002 and 2001,
respectively.
In July 2001, we were one of six awardees of the FAST contract with a
ceiling of $7.4 billion. Under the FAST contract, we expect to have the
opportunity to compete for several hundred million dollars in task orders each
year over the approximate six year remaining life as the Air Force maintains
and modernizes aircraft and defense systems. As of February 28, 2003, we had
been awarded 33 task orders worth more than $825 million, if all options are
exercised. Although we believe the FAST contract presents an opportunity for
significant additional growth and expansion of our services, we expect that
many of the task orders we may be awarded under the FAST contract will be for
program management services, which historically have been less profitable than
our other activities. In addition, the FAST contract will involve significantly
greater use of subcontractors than the Company has historically used. Margins
on subcontractor-based revenues are less favorable than the margins on our
direct work. Since the FAST contract is expected to be a significant part of
our business for the next several years, we anticipate our operating margins,
as a percentage of total revenue, will be diminished, while growing in absolute
dollars.
Our federal government contracts, which comprised about 93% of our revenue
in 2002, are subject to government audits of our direct and indirect costs. The
incurred cost audits have been completed through
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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
December 31, 2000 and the rates have been agreed to. We do not anticipate any
material adjustment to our financial statements in subsequent periods for
audits not yet completed.
In 2002 and 2001, we provided approximately 77% and 62%, respectively, of
our services directly to our customers as a prime contractor and the balance
indirectly as a subcontractor. Approximately 79% of our 2002 revenue consisted
of the work of our employees, and the balance was provided by the work of
subcontractors. We anticipate that our work as a prime contractor on the FAST
contract will involve a significant increase in the use of subcontractors.
We typically provide our services under contracts with a base term, often of
three years, and option terms, typically two to four additional one-year terms
or more, which the customer can exercise on an annual basis. We also have
contracts with fixed terms, some extending as long as five or six years.
Although we occasionally obtain government contracts in which the contracting
agency obligates funding for the full term of the contract, most of our
government contracts receive incremental funding, which subjects us to the
risks associated with the government's annual appropriations process.
Contract Types. When contracting with our government customers, we enter
into one of three basic types of contracts: time-and-materials, fixed-price and
cost-plus.
. Time-and-materials contracts. Under a time-and-materials contract, we
receive a fixed hourly rate for each direct labor hour worked, plus
reimbursement for our allowable direct costs. To the extent that our
actual labor costs vary significantly from the negotiated rates under a
time-and-materials contact, we can either make more money than we
originally anticipated or lose money on the contract.
. Fixed-price contracts. Under fixed-price contracts, we agree to perform
specified work for a firm fixed price. If our actual costs exceed our
estimate of the costs to perform the contract, we may generate less
profit or incur a loss. A significant portion of our fixed-price contract
work is under a fixed-price level-of-effort contract, which represents a
similar level of risk to our time-and-materials contracts, under which we
agree to perform certain units of work for a fixed price per unit. We
generally do not undertake high-risk work, such as software development,
under fixed-price contracts.
. Cost-plus contracts. Under cost-plus contracts, we are reimbursed for
allowable costs and receive a supplemental fee, which represents our
profit. Cost-plus fixed fee contracts specify the contract fee in dollars
or as a percentage of anticipated costs. Cost-plus incentive fee and
cost-plus award fee contracts provide for increases or decreases in the
contract fee, within specified limits, based upon actual results as
compared to contractual targets for factors such as cost, quality,
schedule and performance.
The following table provides information about the percentage of revenue
attributable to each of these types of contracts for the periods indicated:
Year ended
December 31,
-------------
2002 2001 2000
---- ---- ----
Time-and-materials 61% 72% 62%
Fixed-price....... 24 16 23
Cost-plus......... 15 12 15
--- --- ---
Total.......... 100% 100% 100%
=== === ===
Critical Accounting Policies
Revenue Recognition. Our critical accounting policies primarily relate to
revenue recognition and related cost estimation. We recognize revenue on
time-and-materials contracts to the extent of billable rates times hours
32
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
delivered plus the costs of any allowable expenses incurred. We recognize
revenue on fixed-price contracts under the percentage-of-completion method
based on costs incurred in relation to total estimated costs, or upon delivery
of specific products or services as appropriate. We recognize revenue on
cost-plus contracts to the extent of allowable costs incurred plus a
proportionate amount of the fee earned. We consider performance-based fees,
including award fees, under any contract type to be earned only when we can
demonstrate satisfaction of a specific performance goal or we receive
contractual notification from a customer that the fee has been earned. In all
cases, we recognize revenue only when pervasive evidence of an arrangement
exists (including when waiting for formal funding authorization under federal
government contracts), services have been rendered, the contract price is fixed
or determinable, and collection is reasonably assured.
Contract revenue recognition inherently involves estimation. From time to
time, circumstances develop that require us to revise our total estimated costs
or revenue expected. In most cases, these changes relate to changes in the
contractual scope of our work, and do not significantly impact the expected
profit rate on a contract. We record the cumulative effects of any revisions to
our estimated total costs and revenue in the period in which the circumstances
become known.
Cost of Revenue. Cost of revenue primarily consists of the costs for
providing our services to customers, which primarily includes the salaries and
wages, plus associated fringe benefits, of our employees directly serving
customers, plus the occupancy and other infrastructure costs necessary to
support those employees. Cost of revenue also includes the cost of
subcontractors and outside consultants, third-party materials, such as hardware
and software, that we purchase and provide to the customer as part of the
contract, depreciation and any other costs, such as travel expenses, incurred
to support contract efforts.
General and Administrative Expenses. General and administrative expenses
include the salaries and wages, plus associated fringe benefits, of our
employees not performing work directly for customers. Among the functions
included in these expenses are contracts, administration, business development,
accounting, human resources, information systems support, and executive and
senior management. General and administrative expenses also include
depreciation and amortization, occupancy, and travel expenses for employees
performing general and administrative functions. For the year ended December
31, 2002, it also includes a non-cash stock compensation expense of
approximately $5.2 million.
Included in general and administrative expenses prior to March 31, 2002,
were management fees paid to a related party. The management fees were paid to
a wholly owned affiliate of our then sole stockholder. The nature of services
received from the affiliate included our then sole stockholder's services as
our Chief Executive Officer, assistance with negotiating financing
arrangements, assistance with evaluating acquisition candidates and legal
services. These fees ceased on March 31, 2002. We continue to rent certain
facilities and utilize aircraft from entities related to our majority
stockholder. Although the management fees have been eliminated, most of these
costs have been replaced on a recurring basis and, by virtue of being a public
company, we now incur certain general and administrative costs not previously
incurred.
Net Interest Expense. Net interest expense is primarily related to interest
expense accrued under any outstanding borrowings and interest income generated
by our investments.
Income taxes. On June 28, 2002, we changed our S corporation status to C
corporation status under Internal Revenue Service regulations. As a result of
this change, we were required under Statement of Financial Accounting Standard
(SFAS) No. 109, Accounting for Income Taxes, to establish deferred tax
balances. As a result, a deferred tax benefit of approximately $2.6 million,
and current and non-current deferred tax assets were recognized in June, 2002,
primarily for timing differences between book and tax reporting associated with
accrued compensation items. We recorded a provision for federal and state
income taxes during the six months ended December 31, 2002. Prior to June 28,
2002, under our S corporation election, all items of income and
33
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
expense were "passed through" and taxed at the stockholder level. Therefore, we
were not required to record a provision for federal and state income taxes.
Discontinued Operations
In anticipation of our initial public offering, we disposed of or
discontinued substantially all of our operations that were not related to our
core business. Accordingly, effective December 31, 2001, we distributed our
wholly owned subsidiaries, MTC Manufacturing, Inc. (a manufacturer of steel and
aluminum products with sales of approximately $4 million in 2001) and Freund
Laws, Inc. (a non-operating company whose sole function was ownership of a
partnership interest in a dormant business), and our majority interest in a
real estate partnership, BC Golf Limited Partnership, to our then sole
stockholder. The distributions of these entities have been recorded as
discontinued operations. The operating results of these entities for the years
ended December 31, 2001 and 2000 were:
Years ended
December 31,
---------------
2001 2000
------ -------
(in thousands)
Revenue........... $5,831 $ 2,804
Costs and expenses 6,284 3,986
------ -------
Net loss.......... $ (453) $(1,182)
====== =======
Results of Operations
The following table sets forth, for each period indicated, the percentage of
items in the statement of income in relation to revenue:
Years ended December 31,
-----------------------
2002 2001 2000
----- ----- -----
Revenue.............................................. 100.0% 100.0% 100.0%
Cost of revenue...................................... 81.3 81.3 81.4
----- ----- -----
Gross profit......................................... 18.7 18.7 18.6
General and administrative expenses:
Third party....................................... 6.1 5.1 6.1
Related party..................................... 0.9 3.0 3.8
Stock compensation expense........................ 4.4 -- --
----- ----- -----
Total general and administrative expenses..... 11.4 8.1 9.9
Intangible asset amortization........................ 0.1 1.1 0.6
----- ----- -----
Operating income..................................... 7.2 9.5 8.1
Net interest expense................................. 0.1 0.6 0.8
----- ----- -----
Income from continuing operations before income tax
provision.......................................... 7.1 8.9 7.3
Income tax provision................................. 0.6 -- --
----- ----- -----
Income from continuing operations.................... 6.5 8.9 7.3
Loss from discontinued operations.................... -- (0.5) (1.6)
----- ----- -----
Net income (loss).................................... 6.5% 8.4% 5.7%
===== ===== =====
Prior to June 28, 2002, we operated as an S corporation and were not subject
to federal or certain state income taxes in any of the periods presented. See
income tax discussion below.
34
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Comparison of Year Ended December 31, 2002 and Year Ended December 31, 2001
Revenue: Revenue for the year ended December 31, 2002 increased 28.0%, or
approximately $26.0 million, to $118.5 million as compared to $92.5 million for
the year ended December 31, 2001. The increase primarily resulted from the
following:
. Approximately $14.1 million increase in subcontract revenue recognized
under the FAST contract;
. Approximately $9 million net additional revenue resulting from new
contracts and task orders, including U.S. Marine Corps Infrastructure,
U.S. Army Technical, Engineering, Fabrication, and Operations Support
Service, FAST, ASC/BPA and Cruise Missile Product Group Advisory and
Analysis Support projects, partially offset by other programs which ended
in 2002; and
. $3.2 million of revenue growth resulting from the acquisition of AMCOMP
Corporation in October 2002.
Gross Profit: Gross profit for the year ended December 31, 2002 increased
27.9%, or approximately $4.8 million, to $22.2 million as compared to $17.3
million for the year ended December 31, 2002. This increase primarily reflects
the significant increase in revenue. Gross profit as a percentage of revenue
was 18.7% for the years ended December 31, 2002 and 2001.
General and administrative expenses: Total general and administrative
expenses for the year ended December 31, 2002, increased 81.6%, or
approximately $6.1 million, to $13.6 million as compared to $7.5 million for
the year ended December 31, 2001. The increase was primarily a result of the
$5.2 million non-cash stock compensation expense that was recorded in March,
2002, as discussed below. Without this charge, general and administrative
expenses for the year ended December 31, 2002, would have increased 11.8% or
$0.9 million as compared to the prior year. The major factors which contributed
to the net increase were:
. Third party general and administrative expenses for the year ended
December 31, 2002 increased 55.2%, or approximately $2.6 million, to $7.3
million as compared to $4.7 million for the year ended December 31, 2001
for the following items:
-- Approximately $1.3 million increase in salary expense resulting from
a $0.75 million expense recognized for the retention bonus for the
Chief Executive Officer and approximately $0.5 million in additional
salaries, primarily resulting from the increase in base compensation
of our Chief Executive Officer, the addition of the Chief Financial
Officer's salary, and other salaried positions;
-- Approximately $0.7 million increase in professional fees;
-- Approximately $0.4 million increase in insurance expense related to
premiums paid for directors and officers insurance; and
-- Approximately $0.2 million increase in depreciation expense.
. Related party general and administrative expenses decreased 61.7%, or
$1.7 million, to $1.1 million as compared to $2.8 million for the year
ended December 31, 2001. This decrease was primarily a result of the
ceasing to pay related party management fees as of March 31, 2002, as
discussed above in Critical Accounting Policies.
. Non-cash stock compensation expense of approximately $5.2 million was
recognized in March, 2002, in connection with the issuance to three
senior executives of non-qualified options to purchase 415,273 shares of
common stock. The charge represents the difference between the option
price of $4.19 and the estimated fair market value of the common stock on
the date of grant of $16.75 per share. All other options issued since
March, 2002, have an option price equal to the estimated fair market
value of the shares at the date of the grant and as such require no
charge against earnings.
35
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Intangible asset amortization: Intangible asset amortization for the year
ended December 31, 2002 decreased 89.1%, or approximately $1.0 million, to $0.1
million as compared to $1.1 million for the year ended December 31, 2001. This
decrease is a result of achieving full amortization of the purchase price
allocated to the contracts of RJO Enterprises, Inc., in September, 2001, and
the discontinuance of the amortization of goodwill acquired in connection with
the acquisition of certain assets of RJO Enterprises, Inc., on January 1, 2002,
when we adopted SFAS No. 142, which terminated the policy of goodwill
amortization. In October, 2002, after acquiring AMCOMP Corporation, we began
amortizing the purchase price allocated to the contracts of AMCOMP Corporation
of $3.0 million over their estimated useful life of 6.5 years as determined by
an independent appraiser, resulting in a charge to earnings of approximately
$119,000.
Operating income: Operating income for the year ended December 31, 2002
decreased 3.2%, or $0.3 million, to $8.5 million as compared to $8.8 million
for the year ended December 31, 2001. This decrease was caused by the accrual
of the non-cash stock compensation expense of $5.2 million. Without this
expense, operating income would have increased 56.1%, or $4.9 million, to $13.7
million, primarily a result of the increased gross profit.
Net interest expense: Net interest expense for the year ended December 31,
2002, decreased 71.9%, or $0.4 million, to $0.2 million as compared to $0.6
million for the year ended December 31, 2001. We repaid all outstanding debt in
July 2002 with the proceeds from our initial public offering and invested the
balance of the proceeds, which has resulted in decreased net interest expense.
Income tax expense: On June 28, 2002, we changed our S corporation status
to C corporation status under Internal Revenue Service regulations. This change
required us to establish deferred tax balances, in accordance with SFAS No.
109. As a result, a deferred tax benefit of approximately $2.6 million, and
current and non-current deferred tax assets were recognized in June, 2002,
primarily for timing differences between book and tax reporting associated with
accrued compensation items. The income tax expense of $0.7 million for the year
ended December 31, 2002, includes a net deferred tax benefit of $1.5 million
and current income tax expense of $2.1 million recognized on net income
generated since we changed to a C corporation on June 28, 2002 (i.e., during
the six months ended December 31, 2002). Excluding the $2.6 million deferred
tax benefit recognized in June 2002, our effective tax rate for the period we
were a C corporation was approximately 40%.
Income from continuing operations: Income from continuing operations
decreased 6.5%, or approximately $0.5 million, to $7.7 million for the year
ended December 31, 2002, compared to $8.2 million for the year ended December
31, 2001. The decrease resulted primarily from the $5.2 million non-cash stock
compensation expense, partially offset by the $2.6 million income tax benefit
recognized during the second quarter of 2002. Without these two items, income
from continuing operations would have been approximately $10.3 million for an
increase of 24.8% over 2001. However, income from continuing operations for
2001 does not reflect any income tax expense, due to the Company's S
corporation status as discussed above.
Comparison of Year Ended December 31, 2001 and Year Ended December 31, 2000
Revenue: Revenue for the year ended December 31, 2001 increased 21.9%, or
$16.6 million, to $92.6 million as compared to the same period in 2000. This
increase was primarily the result of task orders won under the ASC/BPA, which
we were awarded in 2001, and additional task orders under various GSA vehicles.
Gross Profit: Gross profit for the year ended December 31, 2001, increased
23.0%, or approximately $3.2 million, to $17.3 million as compared to $14.1
million for the year ended December 31, 2000. This increase primarily reflects
the significant increase in revenue. Gross profit as a percentage of revenue
for the year ended December 31, 2001, slightly increased to 18.7% as compared
to 18.6% for the year ended December 31, 2000.
36
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
General and administrative expenses: Total general and administrative
expenses were $7.5 million for the year ended December 31, 2001 and 2000. Total
general and administrative expenses declined from 9.9% of revenue for the year
ended December 31, 2000, to 8.1% of revenue for the year ended December 31,
2001. Included in related party general and administrative expenses for the
years ended December 31, 2001 and 2000 were management fees of $2,395,000 and
$2,549,000, respectively. The amounts in 2001 reflected a decrease in
compensation expense and fringe benefits to our majority stockholder and
Chairman of the Board and an increase in airplane expenses.
Intangible asset amortization: Intangible asset amortization for the year
ended December 31, 2001 increased 130.6%, or approximately $0.6 million to $1.1
million as compared to $0.5 million for the year ended December 31, 2000. This
increase is a result of the amortization of the purchase price allocated to the
contracts of RJO Enterprises, Inc., which was purchased on August 31, 2000,
and, consequently, 2000 only reflected 4 months of amortization.
Operating income: Operating income for the year ended December 31, 2001
increased 43.8%, or $2.7 million, to $8.8 million as compared to the same
period in 2000. This increase primarily results from increased revenue and the
fact that general and administrative expenses declined as a percentage of
revenue.
Net interest expense: Net interest expense for the year ended December 31,
2001 declined 7.8%, or less than $0.1 million, to $0.6 million as compared to
the same period in 2000. This decline reflects a modest increase in average
bank borrowings that was mitigated by declining interest rates.
Effects of Inflation
In 2002, we conducted approximately 61% of our business under
time-and-materials contracts, where labor rates are often fixed for several
years or adjusted by modest increases. We generally have been able to price
these contracts in a manner to accommodate the rates of inflation experienced
in recent years. Also in 2002, we conducted about 15% of our business under
cost-plus contracts, which automatically adjust revenue to cover costs
increased by inflation. We conducted the remaining 24% of our business under
fixed-price contracts, which generally have not been adversely affected by
inflation.
Liquidity and Capital Resources
Historically, our positive cash flow from operations and our available
credit facility have provided adequate liquidity to fund the operational needs
of our federal government service business, as well as the operational needs of
a number of unrelated businesses that have been disposed of or discontinued. In
the future, these funds will be available exclusively for pursuing our federal
government service business.
On July 3, 2002, we successfully completed our initial public offering of
common stock and received net proceeds of approximately $43.8 million from the
offering, after deducting our portion of estimated expenses and the
underwriting discount. The proceeds were used to pay off our bank debt, with
the balance being invested in short-term securities. On October 18, 2002, we
used $7.3 million of these proceeds, including acquisition costs, to acquire
100% of the outstanding common stock of AMCOMP Corporation. We plan to use the
remaining proceeds for working capital and general corporate purposes, possibly
including the acquisitions of additional complementary businesses. Our cash and
cash equivalents balance on December 31, 2002 was approximately $22.0 million.
In 2001 and 2000 we typically maintained minimal cash balances and have had all
available cash credited daily against our borrowings under our line of credit.
Our working capital was $36.9 million at December 31, 2002 and $10.1 million
at December 31, 2001. Our working capital increased $26.8 million in 2002 for
several reasons including:
37
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
. An approximate $21.9 million increase in cash and cash equivalents,
primarily representing the balance of the net proceeds from our initial
public offering, plus our operating earnings since the date of the
initial public offering less the $7.3 million paid for our acquisition of
AMCOMP Corporation;
. An approximate $10.4 million increase in accounts receivable and costs
and estimated earnings in excess of amounts billed. This increase is
primarily related to the significant increase in revenue in 2002, and our
acquisition of AMCOMP Corporation, which contributed approximately $1.0
million to the increase in accounts receivable. Our days sales
outstanding in accounts receivable (including billings in excess of cost
and estimated profits and cost and estimated profits in excess of
billings) increased to 79 days at December 31, 2002, as compared to 78
days at December 31, 2001. This increase was primarily the result of the
significant increase in our cost and estimated earnings in excess of
billings on uncompleted contracts, which is directly related to the
increase in the amount of our business that is being conducted under
fixed price contracts;
. An approximate $1.1 million increase in prepaid expenses and other assets
resulting from the recognition of a $0.3 million current deferred income
tax asset and a $0.2 million income tax receivable in 2002 recorded
subsequent to our conversion from an S corporation to a C corporation for
income tax purposes in the second quarter of 2002. Additionally, prepaid
expenses increased approximately $0.6 million primarily as a result of
the increase in prepaid directors and officers insurance that was
purchased in June, 2002, upon becoming a public company; and
. Partially offsetting the increases in working capital was an approximate
$6.2 million increase in accounts payable, primarily attributable to
increased subcontract costs and purchased materials that resulted from
the increased revenue in 2002, primarily on the FAST contract.
Our operating activities provided cash of $7.2 million for the year ended
December 31, 2002. The operating cash was primarily net income adjusted for:
(a) the approximate $5.2 million of non-cash stock compensation expense, (b)
the approximate $1.3 million deferred income tax benefit, (c) $0.5 million of
depreciation and amortization expense, and (d) the changes in working capital
as discussed above.
Our operating activities provided cash of $10.4 million for the year ended
December 31, 2001 and $3.5 million for the year ended December 31, 2000. The
$6.9 million increase in cash provided by operating activities was due to
growth in net income of approximately $3.5 million, adjusted for non-cash items
and discontinued operations, combined with a net change in working capital
provided by operations of approximately $3.4 million.
Our investing activities used cash of $8.1 million for the year ended
December 31, 2002 compared with $0.8 million in the same period of 2001. The
primary difference in cash used in investing activities was due to the cash
paid for the acquisition of AMCOMP of approximately $7.3 million, including
acquisition expenses. This increase was partially offset by a $0.9 million
decrease in advances to affiliates. No further advances to affiliates have been
or will be made subsequent to March 31, 2002, and all balances at that date
have been paid in full. We currently anticipate that capital expenditures for
2003 will be approximately $1 million.
Our investing activities used cash of $0.8 million in the year ended
December 31, 2001 compared with $6.6 million in the same period of 2000. The
net cash used in 2001 was primarily attributable to increases in advances to
affiliates. In 2000, the primary use of cash in investing activities was the
$3.9 million acquisition of substantially all the assets of a division of RJO
Enterprises, Inc. and an increase in advances to affiliates of $2.5 million.
The balance of receivables resulting from advances to affiliates was
distributed to our then sole stockholder at December 31, 2001.
38
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
During the year ended December 31, 2002, cash provided from financing
activities was $22.7 million. The cash was primarily provided by the net
proceeds of the initial public offering of approximately $43.8 million. We used
a portion of these proceeds to repay our total bank debt outstanding on July 3,
2002. During the year ended December 31, 2002, we repaid our revolving credit
facility and our term loan agreement, reducing the amount outstanding under
those instruments from $14.1 million as of December 31, 2001 to zero. Prior to
our initial public offering, we also made approximately $9.2 million of
distributions to our majority stockholder, offset by a $2.0 million capital
contribution from our majority stockholder.
During the year ended December 31, 2001, we used $9.3 million in cash for
financing activities as compared to $4.6 million in cash provided by financing
activities in the same period in 2000. In 2000, cash from financing activities
was provided by net borrowings of $3.2 million in addition to our then sole
stockholder making capital contributions of $4.1 million to finance the buyout
of a former stockholder. We also distributed $2.6 million to our then sole
stockholder in 2000. During the year ended December 31, 2001, we repaid
$4.8 million of debt and distributed $4.5 million to our then sole stockholder.
In January, 2003, we replaced our $15 million revolving line of credit with
a $35 million revolving line of credit. We can increase this line to $50
million subject to meeting certain requirements and obtaining our banks'
approval. The agreement is for an initial term of three years and has an
"evergreen" feature whereby it can be extended an additional year, each year,
by mutual agreement with our banks.
The interest rate we would pay if we had any borrowings under our line of
credit through March 31, 2003, would be prime rate less 25 basis points or 150
basis points above the London Interbank Offered Rate (LIBOR) rate. After March
31, 2003, the interest rate we would pay if we have any borrowings will be
dependent on the ratio of funded debt to earnings before interest, taxes,
depreciation, and amortization (EBITDA).
In the event that we utilize the new revolving line of credit, any
borrowings under the agreement would be secured by a general lien on our
consolidated assets, we would be subject to certain restrictions, and we would
be required to meet certain financial covenants. The restrictions include among
other things, limitations on our ability to pay dividends.
Management believes that the proceeds from our 2002 initial public offering,
together with cash generated by operations and amounts available under our
credit facility, will be sufficient to fund our working capital requirements,
debt service obligations and capital expenditures for the foreseeable future.
Our ability to generate cash from operations depends to a significant extent
on winning new contracts and re-competed contracts from our customers in
competitive bidding processes. If a significant portion of our government
contracts were terminated or if our win rate on new contracts or re-competed
contracts were to decline significantly, our operating cash flow would
decrease, which would adversely affect our liquidity and capital resources.
Accounting Changes
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, Business Combinations
(SFAS No. 141), and No. 142, Goodwill and Other Intangible Assets (SFAS No.
142). We adopted SFAS No. 142 on January 1, 2002. We have performed the first
step of the
39
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
goodwill impairment test and have concluded that goodwill is not impaired. The
table below shows the effect on net income had SFAS No. 142 been adopted in
prior periods:
December 31,
-------------
2001 2000
------ ------
(in thousands)
Net income.................................. $7,764 $4,310
Goodwill amortization....................... 114 38
------ ------
Adjusted net income...................... $7,878 $4,348
Basic and diluted earnings per common share:
Net income.................................. $ 0.79 $ 0.44
Goodwill amortization....................... $ 0.01 $ --
------ ------
Adjusted net income...................... $ 0.80 $ 0.44
====== ======
Recent Accounting Changes
In April, 2002, Statement of Financial Accounting Standard (SFAS) No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, (SFAS No. 145) was issued. SFAS No. 145
rescinds SFAS No. 4, Reporting Gains and Losses from the Extinguishment of
Debt-an amendment of APB Opinion No. 30, which required all gains or losses
from extinguishment of debt, if material, to be classified as an extraordinary
item, net of related income tax effect. As a result, the criteria set forth by
APB Opinion No. 30 will now be used to classify those gains or losses. SFAS No.
64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 was
rescinded. SFAS No. 44 was issued to establish accounting requirements for the
effect of transition to the provisions of the Motor Carrier Act of 1980, which
is no longer necessary. SFAS No. 145 also amends SFAS No. 13, Accounting for
Leases (SFAS No. 13), to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 became effective for fiscal years
beginning after May 15, 2002, with early application encouraged, with the
exception of the provisions of this statement relating to the amendment of
SFAS No. 13, which are effective for transactions occurring after May 15, 2002.
We do not anticipate any near term impact on the financial statements as a
result of adopting this statement.
In July, 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 is required to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. We have determined that
the adoption of SFAS No. 146 will have no impact on our financial position and
results of operations.
In December, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123
(SFAS No. 148). SFAS No. 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We currently do not intend to voluntarily change to the fair value
based method of accounting for stock-based compensation; however, we will be
including the pro forma disclosures required under this statement in our
quarterly reports, beginning with the quarter ending March 31, 2003.
40
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
In November, 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others, (FIN 45). FIN 45 elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations under
certain agreements and warranties it has issued. It also requires the guarantor
to recognize, at the inception of the guarantee, a liability for the fair value
of an obligation undertaken in issuing the guarantee. The recognition
requirements are effective for guarantees initiated after December 31, 2002. We
do not anticipate that the provisions of FIN 45 will have an impact on our
results of operations, financial positions or cash flows.
QUARTERLY RESULTS OF OPERATIONS
Our results of operations, particularly our revenue, gross profit and cash
flow, may vary significantly from quarter to quarter depending on a number of
factors, including the progress of contract performance, revenue earned on
contracts, the number of billable days in a quarter, the timing of customer
orders, changes in the scope of contracts and billing of other direct and
subcontract costs, the commencement and completion of contracts we have been
awarded and general economic conditions. Because a significant portion of our
expenses, such as personnel and facilities costs, are fixed in the short term,
successful contract performance and variation in the volume of activity, as
well as in the number of contracts or task orders commenced or completed during
any quarter, may cause significant variations in operating results from quarter
to quarter.
The federal government's fiscal year ends September 30. If a federal budget
for the next fiscal year has not been approved by that date in each year, our
customers may have to suspend engagements that we are working on until a budget
has been approved. Any suspensions may cause us to realize lower revenue in the
fourth quarter of the year. On October 23, 2002, the President approved the
fiscal 2003 Defense Appropriations bill. In addition, a change in Presidential
administrations, Congressional majorities or in other senior federal government
officials may negatively affect the rate at which the federal government
purchases technology and engineering services. The federal government's fiscal
year end can also trigger increased purchase requests from customers for
equipment and materials. Any increased purchase requests we receive as a result
of the federal government's fiscal year end would serve to increase our fourth
quarter revenues, but will generally decrease profit margins for that quarter,
as these activities typically are not as profitable as our normal service
offerings. Further, some of our subcontractors have calendar year ends and
sometimes submit large billings at the end of the calendar year that can cause
a spike in our revenue and expenses related to subcontracts. This will also
generally decrease our profit margins as revenues generated by billings from
subcontractors generally have much lower margins than our revenues generated by
direct work. As a result of the above factors, period-to-period comparisons of
our revenue and operating results may not be meaningful. Potential investors
should not rely on these comparisons as indicators of future performance as no
assurances can be given that quarterly results will not fluctuate, causing a
material adverse effect on our operating results and financial condition.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk relates to changes in interest rates for
borrowings under our revolving credit agreement. As a result of the initial
public offering that was completed July 3, 2002, all of the borrowings under
our revolving credit facility were repaid. Pending final use, we have invested
the remaining net proceeds of that offering in short-term, investment grade,
interest-bearing securities or guaranteed obligations of the United States and
its agencies. A hypothetical 10% change in interest rates on these securities
would not have a significant impact on future earnings or the fair market value
of the securities.
41
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................................ 43
Consolidated Balance Sheets as of December 31, 2002 and 2001............................ 44
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000...................................................... 45
Consolidated Statements of Stockholders' Equity (Deficiency in Net Assets) for the years
ended December 31, 2002, 2001 and 2000................................................ 46
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000...................................................... 47
Notes to the Consolidated Financial Statements.......................................... 48
42
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
MTC Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of MTC
Technologies, Inc. and subsidiaries (the "Company") as of December 31, 2002 and
2001, and the related consolidated statements of income, stockholders' equity
(deficiency in net assets) and cash flows for each of the three years in the
period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of MTC Technologies,
Inc. and subsidiaries at December 31, 2002 and 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Dayton, Ohio
February 19, 2003
43
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
2002 2001
------- -------
(dollar amounts in
thousands,
except share and per
share amounts)
CURRENT ASSETS:
Cash and cash equivalents (Note A)............................................... $21,950 $ 60
Marketable equity securities--trading............................................ -- 167
Restricted cash (Note A)......................................................... 2,503 --
Accounts receivable--net (Note B)................................................ 30,638 21,877
Cost and estimated earnings in excess of billings
on uncompleted contracts (Note B).............................................. 2,171 518
Prepaid expenses and other current assets........................................ 1,343 273
------- -------
Total current assets......................................................... 58,605 22,895
PROPERTY AND EQUIPMENT--Net (Note C)................................................ 1,652 1,136
GOODWILL (Note L and M)............................................................. 7,029 1,558
INTANGIBLE ASSETS, NET (Note L and M)............................................... 2,906 --
OTHER ASSETS (Note D)............................................................... 1,296 145
------- -------
$71,488 $25,734
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $11,345 $ 5,111
Restricted funds payable to the government (Note A).............................. 2,503 --
Compensation and related items................................................... 6,500 5,612
Amount due under earn-out agreement (Note L)..................................... 1,100 --
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note B).............................................. 262 1,057
Current maturities of long-term debt (Note E).................................... -- 1,000
------- -------
Total current liabilities.................................................... 21,710 12,780
LONG-TERM DEBT (Note E)............................................................. -- 13,075
COMMITMENTS AND CONTINGENT LIABILITIES (Notes E, F and Q)
STOCKHOLDERS' EQUITY (DEFICIENCY IN NET ASSETS):
Common stock, $0.001 par value, 50,000,000 shares authorized, 12,890,237 and
9,887,482 shares issued and outstanding at December 31, 2002, and 2001,
respectively,.................................................................. 13 10
Preferred stock, $0.001 par value, 5,000,000 shares authorized, none of which is
outstanding.................................................................... -- --
Paid-in capital (Note N)......................................................... 49,834 6,399
Due from stockholder (Note N).................................................... -- (2,000)
Retained earnings (deficit)...................................................... 343 (4,530)
Treasury stock................................................................... (412) --
------- -------
Total stockholders' equity (deficiency in net assets)........................ 49,778 (121)
------- -------
$71,488 $25,734
======= =======
See notes to consolidated financial statements.
44
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
-----------------------------------------
2002 2001 2000
----------- ---------- ----------
(dollar amounts in thousands, except share
and per share amounts)
Revenue (Note K)..................................... $ 118,540 $ 92,590 $ 75,961
Cost of revenue (Note K)............................. 96,356 75,248 61,866
----------- ---------- ----------
Gross profit......................................... 22,184 17,342 14,095
General and administrative expenses:
Third-party....................................... 7,285 4,695 4,652
Related party (Note K)............................ 1,063 2,774 2,862
Stock compensation expense (Note O)............... 5,215 -- --
----------- ---------- ----------
Total general and administrative expenses..... 13,563 7,469 7,514
Intangible asset amortization (Note M)............... 119 1,086 471
----------- ---------- ----------
Operating income..................................... 8,502 8,787 6,110
Interest income (expense):
Interest income (Note K).......................... 236 411 468
Interest expense.................................. (396) (981) (1,086)
----------- ---------- ----------
Net interest expense.......................... (160) (570) (618)
Income from continuing operations before income taxes 8,342 8,217 5,492
Income tax expense (Note P).......................... 656 -- --
----------- ---------- ----------
Income from continuing operations.................... 7,686 8,217 5,492
Loss from discontinued operations (Note I)........... -- (453) (1,182)
----------- ---------- ----------
Net income........................................... $ 7,686 $ 7,764 $ 4,310
=========== ========== ==========
Basic and diluted earnings per common share:
Income from continuing operations................. $ 0.67 $ 0.83 $ 0.56
Loss from discontinued operations................. -- (0.04) (0.12)
----------- ---------- ----------
Net income........................................ $ 0.67 $ 0.79 $ 0.44
=========== ========== ==========
Weighted average common shares outstanding:
Basic............................................. 11,405,351 9,887,482 9,887,482
Diluted........................................... 11,538,802 9,887,482 9,887,482
See notes to consolidated financial statements.
45
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN NET ASSETS)
Common Stock Retained Due
------------------ Paid-In Earnings From Treasury
Shares Amount Capital (Deficit) Stockholder Stock Total
---------- ------ ------- --------- ----------- -------- --------
(dollar amounts in thousands)
BALANCE--December 31,
1999........................ 9,887,482 $10 $ 344 $ 4,107 $ -- $ -- $ 4,461
Net income................. 4,310 4,310
Stockholder
contribution............. 4,055 4,055
Stockholder
distributions............ (2,633) (2,633)
---------- --- ------- -------- ------- ----- --------
BALANCE--December 31,
2000........................ 9,887,482 10 4,399 5,784 10,193
Net income................. 7,764 7,764
Stockholder
contribution............. 2,000 (2,000) --
Stockholder
distributions............ (18,078) (18,078)
---------- --- ------- -------- ------- ----- --------
BALANCE--December 31,
2001........................ 9,887,482 10 6,399 (4,530) (2,000) (121)
Net income................. 7,686 7,686
Stockholder
contribution............. 2,000 2,000
Stockholder
distributions............ (6,405) (2,813) (9,218)
Net proceeds from initial
public offering.......... 2,875,000 3 43,832 43,835
Stock compensation expense
related to issuance of
stock options............ 5,215 5,215
Exercise of stock
options.................. 145,273 608 608
Surrender of common
stock from stock option
transactions............. (17,518) (412) (412)
Other...................... 185 185
---------- --- ------- -------- ------- ----- --------
BALANCE--December 31,
2002........................ 12,890,237 $13 $49,834 $ 343 $ -- $(412) $ 49,778
========== === ======= ======== ======= ===== ========
See notes to consolidated financial statements.
46
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------
2002 2001 2000
------- ------- -------
(dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................................................ $ 7,686 $ 7,764 $ 4,310
Adjustments to reconcile net income to net cash provided by operating activities:
Compensation expense from stock options............................................ 5,215 -- --
Deferred income tax benefit........................................................ (1,268) -- --
Depreciation and amortization...................................................... 513 1,366 724
Discontinued operations............................................................ -- 453 1,182
Other.............................................................................. 10 3 (61)
Changes in operating assets and liabilities (net of acquisitions):
Accounts receivable................................................................ (7,710) (324) (4,444)
Costs and estimated earnings in excess of billings on uncompleted contracts........ (1,653) 1,081 (366)
Prepaid expenses and other assets.................................................. (710) (39) 297
Accounts payable................................................................... 5,770 (1,734) 1,577
Compensation and related items..................................................... 365 1,695 608
Billings in excess of costs and estimated earnings on uncompleted contracts........ (795) 330 (158)
Other current liabilities.......................................................... (178) (147) (201)
------- ------- -------
Net cash provided by operating activities........................................ 7,245 10,448 3,468
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable equity securities.................................... 167 33 71
Purchase of AMCOMP Corporation........................................................ (7,343) -- --
Purchase of RJO Enterprises, Inc...................................................... -- -- (3,875)
Purchase of marketable equity securities.............................................. (10) -- --
Proceeds from sale of property and equipment.......................................... -- 722 --
Additions to property and equipment................................................... (908) (659) (274)
Increase in advances to affiliates.................................................... -- (923) (2,520)
------- ------- -------
Net cash used in investing activities............................................ (8,094) (827) (6,598)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering................................................. 43,835 -- --
Issuance of common stock.............................................................. 609 -- --
Net (repayments) borrowings on the revolving credit agreement......................... (9,075) (5,907) 3,168
Payments on long-term debt............................................................ (5,000) (864) (22)
Proceeds from long-term borrowings.................................................... -- 2,000 --
Capital contribution.................................................................. 2,000 -- 4,055
Repurchase of common stock............................................................ (412) -- --
Cash distributions to stockholder..................................................... (9,218) (4,508) (2,633)
------- ------- -------
Net cash provided by (used in) financing activities.............................. 22,739 (9,279) 4,568
Net cash used in discontinued operations.............................................. -- (342) (1,452)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... 21,890 -- (14)
CASH AND CASH EQUIVALENTS:
Beginning of period................................................................... 60 60 74
------- ------- -------
End of period......................................................................... $21,950 $ 60 $ 60
======= ======= =======
NON-CASH DISTRIBUTION TO STOCKHOLDER:
Net assets of discontinued operations................................................. $ 3,464
Advances to affiliates................................................................ 9,055
Land and related development costs.................................................... 1,105
Other assets.......................................................................... 274
Other liabilities..................................................................... (328)
-------
$13,570
=======
See notes to consolidated financial statements.
47
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except share and per share amounts)
A. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations--We are primarily engaged in providing engineering and technical,
information technology, intelligence operations and program management services
focusing primarily on U.S. defense intelligence and civilian federal government
entities.
Sales to the federal government represent substantially all of our revenue.
Consequently, accounts receivable balances consist primarily of amounts due
from the federal government. In 2002, there were two contract vehicles
containing over 60 task orders, which accounted for approximately 37% of our
total revenue. While the contract vehicles represent a significant portion of
our total revenues, we believe that the broad array of engineering, technical
and management services we provide to the federal government through various
contract vehicles allows for diversified business growth.
Use of Estimates--The consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the United States
of America ("GAAP") and include amounts based on management's best estimates
and judgments. The use of estimates and judgments may affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates.
Principles of Consolidation--The consolidated financial statements include
the accounts of MTC Technologies, Inc. and its subsidiaries. All intercompany
transactions and balances have been eliminated.
Cash and Cash Equivalents--We consider all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. For
these investments, the carrying amount is a reasonable estimate of fair value.
Marketable Equity Securities--Marketable equity securities are classified as
trading and carried at estimated fair value with the unrealized holding gain or
loss recorded in the consolidated income statements. Realized gains and losses
from the sale of marketable equity securities are derived using the
specific-identification method for determining the cost of securities sold. The
estimated fair value of marketable equity securities is based on quoted market
prices. Unrealized net gains (losses) of $53 and $(154) for the years ended
December 31, 2001 and 2000, are included in general and administrative
expenses. There were no unrealized net gains or (losses) for the year ended
December 31, 2002.
Restricted Cash and Restricted Funds Payable to the Government--Restricted
cash and restricted funds payable to the government of $2,503 at December 31,
2002, includes proceeds from sales of government property that we conducted on
behalf of a government customer. We collect the funds from these sales and
periodically pay them to the government over the course of the contract.
Goodwill and Intangible Assets--Prior to the adoption of Statement of
Financial Accounting Standard (SFAS) No. 142, Goodwill and Intangible Assets,
on January 1, 2002, we amortized goodwill over fifteen years. Upon adoption of
SFAS No. 142, we discontinued amortization of goodwill. Purchase price
allocated to intangible assets is amortized using the straight-line method over
the estimated terms of the contracts. See Note M, Goodwill and Intangible
Assets.
48
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
Revenue and Cost Recognition--We recognize revenue on time-and-materials
contracts to the extent of billable rates times hours delivered, plus expenses
incurred. We recognize revenue on fixed-price contracts under the
percentage-of-completion method based on costs incurred in relation to total
estimated costs, or upon delivery of specific products or services, as
appropriate. We recognize revenue on cost-plus contracts to the extent of
allowable costs incurred plus a proportionate amount of the fee earned. We
record provisions for estimated losses on uncompleted contracts in the period
in which we identify those losses. We consider performance-based fees,
including award fees, under any contract type to be earned only when we can
demonstrate satisfaction of a specific performance goal or we receive
contractual notification from a customer that the fee has been earned. In all
cases, we recognize revenue only when pervasive evidence of an arrangement
exists (including when waiting for formal funding authorization under federal
government contracts), services have been rendered, the contract price is fixed
or determinable, and collection is reasonably assured.
Contract revenue recognition inherently involves estimation. From time to
time, facts develop that require us to revise the total estimated costs or
revenues expected. In most cases, these changes relate to changes in the
contractual scope of the work, and do not significantly impact the expected
profit rate on a contract. We record the cumulative effects of any revisions to
the estimated total costs and revenues in the period in which the facts become
known.
Our federal government contracts are subject to subsequent government audit
of direct and indirect costs. The majority of such incurred cost audits have
been completed through 2000. Our management does not anticipate any material
adjustment to the consolidated financial statements in subsequent periods for
audits not yet completed.
Property and Equipment--We record our property and equipment at cost.
Depreciation and amortization of property and equipment are provided using
straight-line and accelerated methods over estimated useful lives. We use
estimated useful lives of 3-7 years for equipment, 5 years for vehicles, 5-7
years for furniture and fixtures and 5-39 years for leasehold improvements.
Long-lived Assets-- Long-lived assets and certain intangibles are reviewed
for impairment, based upon the undiscounted expected future cash flows,
whenever events or circumstances indicate that the carrying amount of such
assets may not be recoverable.
Fair Value of Financial Instruments--The carrying amount of our accounts
receivable, accounts payable and accrued expenses approximate their fair value.
There is currently no bank debt outstanding, however, our revolving credit
agreement has a floating interest rate that varies with current indices and, as
such, the recorded value would approximate fair value.
Income Taxes--On June 28, 2002, we changed our S corporation status to C
corporation status under Internal Revenue Service regulations. As a result of
this change, we were required under Statement of Financial Accounting Standard
(SFAS) No. 109, Accounting for Income Taxes, to establish deferred tax
balances. As a result, a deferred tax benefit of $2,644 and current and
non-current deferred tax assets were recognized in June, 2002, primarily for
timing differences between book and tax reporting associated with accrued
compensation items. We recorded a provision for federal and state income taxes
during the six months ended December 31, 2002.
Prior to June 28, 2002, under our S corporation election, all items of
income and expense were "passed through" and taxed at the stockholder level.
Therefore, we were not required to record a provision for federal and state
income taxes.
49
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
Earnings Per Common Share--Basic earnings per common share has been computed
by dividing net income (loss) available to common stockholders by the weighted
average number of shares of common stock outstanding during each period. Shares
issued during the period and shares reacquired during the period are weighted
for the portion of the period that they were outstanding. Diluted weighted
average shares outstanding equal basic weighted average shares outstanding for
the years ended December 31, 2001 and 2000 because there were no common stock
equivalents outstanding during any of these periods. The weighted average
shares for the year ended December 31, 2002 are as follows:
Year ended
December 31,
2002
------------
Basic weighted average common shares outstanding.. 11,405,351
Effect of potential exercise of stock options..... 133,451
----------
Diluted weighted average common shares outstanding 11,538,802
==========
Stock-Based Compensation--As permitted under SFAS No. 123, Accounting for
Stock-Based Compensation, we account for stock-based awards using the intrinsic
value method prescribed in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Accordingly, no compensation expense
has been recognized in the financial statements related to employee stock
option awards issued under the 2002 Equity and Performance Incentive Plan.
Compensation expense of $5,215 was recognized on options that were granted to
three key members of our senior management in May, 2002, to the extent that the
estimated fair value of the options exceeded the option price. The options
granted fulfilled a stock compensation award which was made in March, 2002.
Reclassifications--Certain amounts in the 2001 and 2000 consolidated
financial statements have been reclassified to conform to the 2002 presentation.
Recent Accounting Pronouncements--In April, 2002, SFAS No. 145, Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections (SFAS No. 145), was issued. SFAS No. 145 rescinds SFAS
No. 4, Reporting Gains and Losses from the Extinguishment of Debt-an amendment
of APB Opinion No. 30, which required all gains or losses from extinguishment
of debt, if material, to be classified as an extraordinary item, net of related
income tax effect. As a result, the criteria set forth by APB Opinion No. 30
will now be used to classify those gains or losses. SFAS No. 64 amended SFAS
No. 4, and is no longer necessary because SFAS No. 4 was rescinded. SFAS No. 44
was issued to establish accounting requirements for the effect of transition to
the provisions of the Motor Carrier Act of 1980, which is no longer necessary.
SFAS No. 145 also amends SFAS No. 13, Accounting for Leases (SFAS No. 13), to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS No.
145 became effective for fiscal years beginning after May 15, 2002, with early
application encouraged, with the exception of the provisions of this statement
relating to the amendment of SFAS No. 13, which are effective for transactions
occurring after May 15, 2002. We do not anticipate any near term impact on the
financial statements as a result of adopting this statement.
In July, 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan.
50
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
SFAS No. 146 is required to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. We do not anticipate that the
adoption of SFAS No. 146 will have any near-term impact on our financial
position and results of operations.
In December, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123
(SFAS No. 148). SFAS No. 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We currently do not intend to voluntarily change to the fair value
based method of accounting for stock-based compensation; however, we will be
including the pro forma disclosures required under this statement in our
quarterly reports, beginning with the quarter ending March 31, 2003. See Note
O. Stock-Based Compensation Plans for 2002 pro forma disclosures.
In November, 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
Indebtedness of Others, (FIN 45). FIN 45 elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations under
certain agreements and warranties it has issued. It also requires the guarantor
to recognize, at the inception of the guarantee, a liability for the fair value
of an obligation undertaken in issuing the guarantee. The recognition
requirements are effective for guarantees initiated after December 31, 2002. We
do not anticipate that the provisions of FIN 45 will have an impact on our
results of operations, financial positions or cash flows.
B. ACCOUNTS RECEIVABLE AND CONTRACTS IN PROGRESS
Unbilled recoverable costs and accrued profit represents costs incurred and
estimated fees earned on cost-plus fixed fee and time-and-materials service
contracts for which billings have not been presented to customers. Unbilled
amounts of $536 and $595 at December 31, 2002 and 2001, respectively, represent
retainers on government contracts that are expected to be collected during the
next fiscal year.
December 31,
----------------
2002 2001
------- -------
Amounts billed:
Federal government contracts............... $13,495 $14,142
Commercial contracts....................... 416 479
Related parties............................ 307 600
------- -------
14,218 15,221
Unbilled recoverable costs and accrued profit:
Federal government contracts............... 16,478 6,704
Commercial contracts....................... 42 (2)
------- -------
16,520 6,702
Other...................................... -- 103
------- -------
30,738 22,026
Less allowance for doubtful accounts....... (100) (149)
------- -------
$30,638 $21,877
======= =======
51
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
The following relates to fixed-price contracts:
Costs and Billings in
Estimated Excess of
Earnings Costs and
in Excess Estimated
of Billings Earnings
----------- -----------
December 31, 2002:
Costs and estimated earnings. $ 6,762 $ 6,391
Billings..................... (4,591) (6,653)
------- --------
$ 2,171 $ (262)
======= ========
December 31, 2001:
Costs and estimated earnings. $ 5,263 $ 14,483
Billings..................... (4,745) (15,540)
------- --------
$ 518 $ (1,057)
======= ========
Allowance for doubtful accounts:
Balance at Charged Balance
Beginning Charged to to Other at End
Year ended December 31, of Period Operations Accounts Write-offs of Period
----------------------- ---------- ---------- -------- ---------- ---------
2002.......... $149 $71 $-- $120 $100
==== === === ==== ====
2001.......... $125 $ 8 $42 $ 26 $149
==== === === ==== ====
2000.......... $ 69 $60 $50 $ 54 $125
==== === === ==== ====
C. PROPERTY AND EQUIPMENT
December 31,
----------------
2002 2001
------- -------
Equipment................................ $ 3,031 $ 2,547
Furniture and fixtures................... 522 480
Leasehold improvements................... 331 321
Vehicles................................. 450 18
------- -------
4,334 3,366
Accumulated depreciation and amortization (2,682) (2,230)
------- -------
Property and equipment, net.............. $ 1,652 $ 1,136
======= =======
Depreciation expense was $395, $279 and $254 for the years ended December
31, 2002, 2001 and 2000, respectively.
52
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
D. OTHER ASSETS
December 31,
-----------
2002 2001
------ ----
Deposits and other........... $ 144 $145
Deferred tax benefit (Note P) 1,152 --
------ ----
$1,296 $145
====== ====
E. LONG-TERM DEBT
December 31,
------------
2002 2001
---- -------
Revolving credit agreement:
Portion at LIBOR plus 2.5%.................................. $-- $ 3,500
Portion at prime rate plus 0.25%............................ -- 5,575
Term loan agreement, interest at prime rate or LIBOR plus 2.75% -- 5,000
--- -------
-- 14,075
Less--current maturities....................................... -- 1,000
--- -------
$-- $13,075
=== =======
In January, 2003, we replaced our $15,000 revolving line of credit with a
$35,000 revolving line of credit. We can increase this line to $50,000 subject
to meeting certain requirements and obtaining our banks' approval. The
agreement is for an initial term of three years and has an "evergreen" feature
whereby it can be extended an additional year, each year, by mutual agreement
with our banks.
The interest rate we would pay if we had any borrowings under our line of
credit through March 31, 2003, would be prime rate less 25 basis points or 150
basis points above the London Interbank Offered Rate (LIBOR) rate. After March
31, 2003, the interest rate we would pay if we have any borrowings will be
dependent on the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization (EBITDA).
In the event that we utilize the new revolving line of credit, any
borrowings under the agreement would be secured by a general lien on our
consolidated assets. In addition, we would be subject to certain restrictions,
and would be required to meet certain financial covenants. The restrictions
include among other things, limitations on our ability to pay dividends.
F. OPERATING LEASES
We lease certain administrative facilities from related parties and others.
The related party leases expire on December 31, 2003. We anticipate entering
into a long-term lease sometime in 2003, however, the terms and conditions have
not yet been determined. Operating leases require monthly payments and expire
at various dates through 2006. Additionally, renewal options for additional
terms of three to five years are included in most agreements. Total operating
lease expense totaled $2,055, $1,969 and $1,665 for the years ended December
31, 2002, 2001 and 2000, respectively.
53
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
Minimum annual rental payments under operating leases are as follows:
Year Ending
December 31,
------------
2003.... $1,996
2004.... 844
2005.... 376
2006.... 18
------
$3,234
======
G. SUPPLEMENTAL CASH FLOW INFORMATION
Other cash flow information for the year ended December 31, 2002, 2001 and
2000, is as follows:
December 31,
------------------
2002 2001 2000
------ ---- ------
Interest paid............................. $ 396 $981 $1,086
Federal, state and local income taxes paid $2,294 $ 60 $ 33
Non-cash payable under earn-out agreement. $1,100 $ -- $ --
H. PROFIT SHARING PLAN
We sponsor a defined contribution 401(k) profit sharing plan that covers all
eligible full-time and part-time employees. An eligible employee may make
pre-tax contributions to the plan of up to 15% of his or her compensation. We
provide 50% matching funds for eligible participating employees, limited to the
employee's participation of up to 10% of earnings. Our contributions to the
plan totaled $1,844, $1,293 and $1,019 for the years December 31, 2002, 2001
and 2000, respectively.
I. DISCONTINUED OPERATIONS
In anticipation of our initial public offering, we disposed of or
discontinued substantially all of our operations that were not related to our
core business. Accordingly, effective December 31, 2001, we distributed our
wholly owned subsidiaries, MTC Manufacturing, Inc. (a manufacturer of steel and
aluminum products with sales of approximately $4 million in 2001) and Freund
Laws, Inc. (a non-operating company whose sole function was ownership of a
partnership interest in a dormant business), and our majority interest in a
real estate partnership, BC Golf Limited Partnership, to our then sole
stockholder. The distributions of these entities have been recorded as
discontinued operations. The operating results of these entities for the years
ended December 31, 2001 and 2000 were:
December 31,
---------------
2001 2000
------ -------
Revenue........... $5,831 $ 2,804
Costs and expenses 6,284 3,986
------ -------
Net loss.......... $ (453) $(1,182)
====== =======
54
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
Distribution of Other Net Assets
In addition, at December 31, 2001, we distributed to our then sole
stockholder certain other net assets, which consisted primarily of advances to
affiliates, land and related development costs, and various liabilities. The
carrying amounts of these distributed net assets at distribution was $10,106.
Land and related development costs were sold during 2001 for $722.
J. BUSINESS SEGMENT
We operate as one segment, delivering a broad array of services primarily to
the federal government in four areas, which are offered separately or in
combination across our customer base. These services are Engineering and
Technical Services, Information Technology, Intelligence Operations and Program
Management. Although we offer the services referred to above, revenue is
internally reviewed by our management primarily on a contract basis. Therefore,
it would be impracticable to determine revenue by services offered. In
addition, there were no sales to any foreign customers.
K. RELATED PARTY TRANSACTIONS
We subcontract to, purchase services from, rent a portion of our facilities,
and utilize aircraft from various entities that are controlled by Mr. Soin, our
majority stockholder and Chairman of the Board of Directors. The following is a
summary of transactions with related parties:
Years Ended December 31,
----------------------
2002 2001 2000
------ ------ ------
Included in general and administrative expenses:
Shared services paid to related parties (Soin International). $ 584 $2,447 $2,676
Shared services charged to related parties................... (28) (169) (184)
Aircraft usage charges paid to Soin International............ 34 117 57
Rent paid to related parties................................. 473 379 313
------ ------ ------
$1,063 $2,774 $2,862
====== ====== ======
Other rent paid to related parties.............................. $ 144 $ 259 $ 355
====== ====== ======
Interest income from related parties............................ $ -- $ 257 $ 217
====== ====== ======
Sub-contracting services paid to related parties:
GTIC India (formerly MTC India).............................. $ 482 $ 475 $ 516
====== ====== ======
Aerospace Integration Corporation (AIC)...................... $ 146 $ 515 $1,188
====== ====== ======
Integrated Information Technology Company (IITC)............. $ -- $ -- $ 17
====== ====== ======
Revenues from related parties:
International Consultants, Inc. (ICI)........................ $ 402 $ 457 $ 185
====== ====== ======
AIC.......................................................... $ -- $ 40 $ 28
====== ====== ======
IITC......................................................... $1,730 $1,567 $1,441
====== ====== ======
Prior to March 31, 2002, we received administrative services from Soin
International, which is wholly owned by an entity related to Mr. Soin. The
charges for these services generally reflected the marginal cost of the
55
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
service provided, plus a pro-rata share of the associated fixed costs. In
addition, we lease our administrative and some operational facilities, and
utilize aircraft owned, or partially owned, by entities related to Mr. Soin.
In the second quarter of 2002, we purchased, at fair value of approximately
$431, a 90% ownership interest in an airplane owned by Soin Aviation. We have
also entered into a sharing arrangement with Soin Aviation under which we are
responsible for a pro-rata share of the fixed and marginal costs associated
with aircraft owned by us and Soin Aviation.
We believe that our subcontracting, lease, and other agreements with each of
the related parties identified above reflect prevailing market conditions at
the time they were entered into and contain substantially similar terms to
those that might be negotiated by independent parties on an arm's-length basis.
At December 31, 2002 and December 31, 2001, amounts due from related parties
were $307 and $600, respectively. At December 31, 2002, there were amounts
payable to related parties of $41.
L. ACQUISITIONS
RJO Enterprises, Inc.
On August 31, 2000, we purchased the assets and assumed certain liabilities
of RJO Enterprises, Inc. ("RJO"), a government contractor. The cash price of
the acquisition was $3,875. We recorded the acquisition using the purchase
method of accounting. The purchase price was allocated as follows:
Accounts receivable and other current assets............ $ 923
Intangible assets--Purchase price allocated to contracts 1,406
Property and equipment.................................. 271
Goodwill................................................ 1,711
Current liabilities..................................... (436)
------
Net assets acquired..................................... $3,875
======
Goodwill recognized under the agreement is deductible for income tax
purposes. The revenue of RJO reflected in the Company's 2000 consolidated
income statement was $1,781.
AMCOMP Corporation
On October 18, 2002, we acquired all of the outstanding stock of AMCOMP
Corporation (AMCOMP) from AMCOMP's shareholders. AMCOMP is a technology company
providing engineering services, primarily in the area of Space Systems, Global
Positioning Systems (GPS) Engineering and Information Technology, to the
Department of Defense, and other government agencies.
We used $7,343 of the proceeds from our recent initial public offering to
purchase 100% of the stock of AMCOMP and pay acquisition costs. Through 2004,
we may be required to make additional annual payments to AMCOMP's shareholders
as part of an earn-out provision of the stock purchase agreement. Under the
earn-out agreement, we could be required to pay up to an additional $3,300 in
purchase price should cumulative earnings meet certain goals over the period
October 11, 2002 through December 31, 2004. Based on the operating results of
AMCOMP for the year ended December 31, 2002, we have determined that a payment
of $1,100 will be required to be paid to the former AMCOMP shareholders prior
to April 15, 2003. We have recorded this earn-out
56
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
(dollar amounts in thousands, except per share amounts)
payment as an increase in goodwill and as an amount due under earn-out
agreement on our December 31, 2002 balance sheet.
The purchase price for the AMCOMP acquisition was allocated as follows:
Accounts receivable and other current assets............................ $ 1,094
Other assets............................................................ 14
Intangible assets--Purchase price allocated to contracts and non-compete
agreement............................................................. 3,025
Property and equipment.................................................. 3
Goodwill................................................................ 5,471
Current liabilities..................................................... (2,264)
-------
Net assets acquired..................................................... $ 7,343
=======
Current liabilities include the $1,100 amount due under the earn-out
agreement, which is required to be paid on or before April 15, 2003. Goodwill
recognized under the agreement is deductible for income tax purposes.
The value of the customer contract and non-compete covenant intangible
assets was based on an independent appraisal. The customer contract intangible
asset will be amortized over 6.5 years, the estimated remaining life of the
contracts including renewals, and the non-compete covenant intangible asset
will be amortized over 2 years, the life of the agreement.
The acquisition is consistent with our growth strategies to acquire
complementary businesses to reach new customers and technologies. This
acquisition will enable us to expand efforts in United States Air Force Space
Systems activities, and provides us access to new markets including Global
Positioning Systems (GPS) test, integration, and engineering as well as adding
the Space and Missile Command as a new customer. AMCOMP has key operating
locations in Los Angeles, CA, Alamogordo, NM and Colorado Springs, CO.
Pro Forma Information (unaudited)--Pro forma results of operations, as if
the acquisition of AMCOMP occurred as of the beginning of the periods is
presented below. These pro forma results may not be indicative of the actual
results that would have occurred under our ownership and management.
2002 2001
-------- --------
Revenue................... $128,419 $103,059
Net income................ $ 8,626 $ 5,690
Earnings per common share:
Basic.................. $ 0.76 $ 0.58
Diluted................ $ 0.75 $ 0.58
Pro forma adjustments to 2002 and 2001 net income and earnings per common
share include:
. Pro forma adjustment to give effect to a full year of amortization of
intangibles (excluding goodwill) recorded as a result of the acquisition,
which would have resulted in $356 and $474, respectively, of additional
amortization expense in 2002 and 2001.
. Pro forma adjustment to reflect income taxes as if both MTCT and AMCOMP
had been C corporations for the periods presented, at an estimated
combined effective income tax rate of 40%. The pro forma income tax
expense for 2002 and 2001 was $688 and $3,794, respectively.
57
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
. Pro forma adjustment to reflect the elimination of interest income earned
from July 2002 through September 2002 on the $7,343 of funds from our
initial public offering that were used to consummate the acquisition. The
interest rate is estimated at 2% per annum based on the applicable
interest rate being earned on the invested cash as of the date of the
acquisition. The pro forma adjustment to 2002 reduced interest income by
$37.
The revenue of AMCOMP reflected in our 2002 consolidated statement of income
was $3,212.
M. GOODWILL AND INTANGIBLE ASSETS
On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible
Assets, which eliminated the amortization of goodwill and other intangibles
with indefinite useful lives. In the second quarter of fiscal year 2002, we
performed an impairment test of goodwill and determined that no impairment of
the recorded goodwill existed. In accordance with SFAS No. 142, goodwill will
be tested for impairment at least annually and more frequently if an event
occurs which indicates the goodwill may be impaired. On an annual basis, our
impairment testing will be performed during the fourth quarter.
There were no other unamortized intangible assets at December 31, 2001. The
components of other intangibles at December 31, 2002, are as follows:
Accumulated
Cost Amortization
------ ------------
Purchase price allocated to customer contracts $3,000 $116
Non-compete covenants......................... 25 3
------ ----
$3,025 $119
====== ====
Aggregate amortization expense for intangible assets for 2002, 2001 and 2000
were $119, $973, and $433, respectively. Purchased contracts are amortized on a
straight-line basis.
Estimated annual intangible amortization expense for the next 5 years:
Year Ending
December 31,
------------
2003.... $ 474
2004.... 471
2005.... 462
2006.... 462
2007.... 462
------
$2,331
======
The changes in the carrying amount of goodwill for the year ended December
31, 2002 are as follows:
Balance as of December 31, 2001......... $1,558
Goodwill arising from AMCOMP acquisition 5,471
------
$7,029
======
58
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
The table below shows the effect on net income had SFAS No. 142 been adopted
in prior years:
December 31,
-------------
2001 2000
------ ------
Net income.................................. $7,764 $4,310
Goodwill amortization....................... 114 38
------ ------
Adjusted net income...................... $7,878 $4,348
Basic and diluted earnings per common share:
Net income.................................. $ 0.79 $ 0.44
Goodwill amortization....................... $ 0.01 $ --
------ ------
Adjusted net income...................... $ 0.80 $ 0.44
====== ======
N. STOCKHOLDERS' EQUITY
At December 31, 2001, Mr. Rajesh K. Soin, our sole stockholder prior to the
initial public offering, agreed to contribute $2,000 to our wholly-owned
subsidiary, Modern Technologies Corp. We recorded the amount due from
stockholder as a reduction in stockholders' equity with a corresponding
increase to additional paid-in capital. Mr. Soin contributed the $2,000 during
the first quarter of 2002. Upon payment we reduced the amount due from
stockholder.
In April, 2002, MTC Technologies, Inc. (MTCT or the Company) was
incorporated in Delaware. On May 3, 2002, Mr. Soin contributed all of the
issued and outstanding shares of Modern Technologies Corp. (MTC) to the Company
in exchange for 9,887,482 shares (post stock split as discussed below) of MTC
Technologies, Inc. resulting in Mr. Soin owning all of the shares of MTC
Technologies, Inc. and Modern Technologies Corp. becoming a wholly owned
subsidiary of MTC Technologies, Inc. All shares, per share data and other
equity amounts in the accompanying financial statements have been adjusted to
give retroactive effect to the transaction.
On June 11, 2002, our Directors authorized and declared a 2,471.8707-for-1
stock split effected in the form of a dividend of 2,470.8707 shares of the
common stock, par value of $0.001 per share for each one share of common stock.
All shares and per share amounts in these consolidated financial statements
have been adjusted to reflect this stock split. Our directors also increased
the number of authorized shares of $0.001 par value common stock to 50 million
and authorized 5 million shares of $0.001 par value preferred stock, of which
none is outstanding.
On July 3, 2002, we successfully completed our initial public offering of
common stock and received net proceeds of approximately $43,835 from the
offering, after deducting our portion of estimated expenses and the
underwriting discount. The proceeds were used to pay off approximately $21,000
of principal and accrued interest outstanding under our term loan and revolving
credit facility, with the balance invested in short-term investment grade,
interest-bearing securities and guaranteed obligations of the United States and
its agencies. In the fourth quarter of 2002, we used $7,343 of these proceeds
to acquire 100% of the outstanding common stock of AMCOMP Corporation and to
pay acquisition costs. We plan to use the remaining proceeds for working
capital and general corporate purposes, possibly including the acquisitions of
additional complementary businesses.
59
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
O. STOCK-BASED COMPENSATION PLANS
In March, 2002, Mr. Soin, the sole stockholder prior to the initial public
offering, made a binding commitment to award $5,215 in stock-based compensation
to three key members of our senior management, Michael Solley, President and
Chief Executive Officer, David Gutridge, Chief Financial Officer, and Benjamin
Crane, Chief Operating Officer, to reward the executives for their major
contributions to our past profitability, growth and financial strength. The
award in March was to be settled either by delivery to the recipients of a
fixed number of fully vested shares or of a number of fully vested options with
an intrinsic value of approximately $5,215 (the difference between the exercise
price and the estimated fair value of the shares of $16.75 per share). We
recorded the $5,215 expense associated with this stock compensation award in
March, 2002. The liability recorded in March was classified as a current
liability.
In April, 2002, to achieve certain tax benefits for the executives, Mr. Soin
decided to issue stock options to satisfy the $5,215 stock compensation award.
Stock option agreements to purchase 415,273 shares of our common stock at $4.19
per share were entered into with the executives. These options were formalized
on May 3, 2002, when stock option agreements were signed by the grantees, which
established the measurement date. The options were immediately exercisable
after that date. Mr. Solley was awarded an option to purchase up to 346,061
shares. Messrs. Gutridge and Crane each were awarded options to purchase up to
34,606 shares. These options expire ten years from their date of grant. Once
the liability for the stock compensation was settled by the issuance of stock
options the $5,215 liability was reclassified to paid-in capital on our balance
sheet. As of December 31, 2002, 145,273 of these options were exercised.
In May 2002, our board of directors adopted our 2002 Equity and Performance
Incentive Plan with the approval of Mr. Soin. The 2002 Equity and Performance
Incentive Plan provides for the grant of incentive stock options and
nonqualified stock options and the grant or sale of restricted shares of common
stock to our directors, key employees and consultants. The board may provide
for the payment of dividend equivalents, on a current or deferred or contingent
basis, on the options granted under the plan. The board may also authorize
participants in the plan to defer receipt of their common stock upon exercise
of their stock options and may further provide that such deferred issuances
include the payment of dividend equivalents or interest on the deferred
amounts. The board may condition the grant of any award under the plan on a
participant's surrender or deferral of his or her right to receive a cash bonus
or other compensation payable by us. The board can delegate its authority under
the plan to any committee of the board.
Shares Reserved; Plan Limits. We have reserved a total of 474,599 shares of
our common stock for issuance under the 2002 Equity and Performance Incentive
Plan, subject to adjustment in the event of forfeitures, transfers of common
stock to us in payment of the exercise price or withholding amounts or changes
in our capital structure. The number of shares that may be issued upon the
exercise of incentive stock options will not exceed 474,599 shares. No
participant may be granted options for more than 24,718 shares during any
calendar year, and no non-employee director will be granted awards under the
plan for more than 24,718 shares during any fiscal year. The number of shares
issued as restricted shares will not exceed 74,156 common shares. As of
December 31, 2002, 74,720 options were awarded under this plan.
60
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
Prior to 2002, we did not have stock-based compensation plans. The following
table summarizes activity in our stock-based compensation plans for the year
ended December 31, 2002:
Weighted
Average
Exercise
Shares Price
-------- --------
Outstanding at beginning of year -- $ --
Granted......................... 489,993 6.14
Exercised....................... (145,273) 4.19
Forfeited....................... -- --
--------
Outstanding at end of year...... 344,720 $6.96
========
Exercisable at end of year...... 270,000
========
The following table summarizes certain information for options currently
outstanding and exercisable at December 31, 2002.
Options outstanding Options exercisable
---------------------------- --------------------
Weighted Weighted
Remaining Average Average
Contractual Exercise Number Exercise
Shares Life Price Exercisable Price
------- ----------- -------- ----------- --------
$ 4.19 270,000 9 years $ 4.19 270,000 $4.19
$16-17 74,720 10 years $16.96 -- --
------- -------
344,720 270,000
======= =======
Pro Forma Disclosures
We apply APB 25 and related interpretations in accounting for our stock
option plans. Accordingly, no compensation cost has been recognized for the
stock options issued under the 2002 Equity and Performance Incentive Plan
because the options were granted with an exercise price equal to the stock
price on the date of grant. Compensation expense was recognized on the options
that were granted in May, 2002, to the extent that the estimated fair value of
the options exceeded the option price. Had compensation costs been determined
based on the fair value of the options on the grant dates consistent with the
methodology prescribed by SFAS No. 123, our net income and earnings per share
would have been reduced to the pro forma amounts indicated below. Because
future stock option awards may be granted and because it is unlikely that
actual events will ever exactly match the assumptions used in making these
calculations, the pro forma impacts shown below are not necessarily indicative
of the impact in future years.
Year ended
December 31,
2002
------------
Net income
As reported............... $7,686
Pro forma................. $7,379
Diluted earnings per common share
As reported............... $ 0.67
Pro forma................. $ 0.64
61
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
The fair value of the options granted (which is amortized over the option
vesting period in determining the pro forma impact), is estimated on the date
of grant using the Black-Scholes multiple option-pricing model with the
following weighted average assumptions:
Year ended
December 31,
2002
------------
Expected life of options.... 3 years
Risk-free interest rate..... 4.03%
Expected volatility of stock 43.0%
Expected dividend yield..... 0.0%
The weighted average fair value of options granted during the year ended
December 31, 2002 was $12.20 per share.
P. INCOME TAXES
On June 28, 2002, we changed our S corporation status to C corporation
status under Internal Revenue Service regulations. As a result of this change,
we were required under Statement of Financial Accounting Standard (SFAS) No.
109, Accounting for Income Taxes, to establish deferred tax balances. In June,
2002, we recognized a deferred income tax benefit of $2,644 on our income
statement and a current deferred income tax asset of $610, included in prepaid
expenses and other current assets on our balance sheet, and a non-current
deferred income tax asset of $2,034, included in other assets on our balance
sheet, primarily for timing differences between book and tax reporting
associated with accrued compensation items. For the six months ended December
31, 2002, we recorded a provision for domestic federal and state income taxes.
Prior to June 28, 2002, under our S corporation election, all items of
income and expense were "passed through" and taxed at the stockholder level.
Therefore, we were not required to record a provision for federal and state
income taxes.
Deferred tax assets (liabilities) are comprised of the following:
December 31,
2002
------------
Deferred tax assets related to:
Stock option compensation.......................... $1,322
Bad debt reserves.................................. 40
Intangible amortization............................ 26
Other accruals..................................... 498
Other.............................................. 78
------
Total deferred tax assets...................... 1,964
------
Deferred tax liabilities related to:
Depreciation....................................... $ (126)
Earnings recognized under percentage of completion. (314)
Goodwill........................................... (71)
------
Total deferred tax liabilities................. (511)
------
Total net deferred tax asset.......................... 1,453
Current portion included in prepaid expenses and other 301
------
Long-term portion included in other assets............ $1,152
======
62
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
Income tax expense included in the income statement is as follows:
Year Ended
December 31,
2002
------------
Current income tax expense:
U. S. Federal............................. $ 1,708
State and local........................... 402
-------
Total current income tax expense...... 2,110
-------
Deferred income tax expense:
U. S. Federal............................. 911
State and local........................... 279
Conversion from S to C corporation........ (2,644)
-------
Total deferred income tax expense..... (1,454)
-------
Total income tax expense..................... $ 656
=======
The effective tax rates differ from the U.S. Federal income tax rate for the
following reasons:
Year Ended
December 31,
2002
------------
Income tax expense at the U.S. statutory rate $ 2,836
Conversion from S to C corporation........... (2,644)
State and local taxes........................ 405
Other........................................ 59
-------
Income tax expense........................... $ 656
=======
Q. CONTINGENCIES
We are a defendant in a lawsuit filed by Bear Stearns Merchant Fund Corp.
for breach of contract and other matters in connection with their proposal to
purchase Modern Technologies Corp. The suit asks for damages in an amount of at
least $2,000. Our outside counsel has advised us that at this stage in the
proceedings he cannot offer an opinion as to the probable outcome. We believe
that the suit is completely without merit and intend to vigorously defend our
position.
63
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands, except share and per share amounts)
R. QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited quarterly financial data for the years ended December 31, 2002 and
2001 are as follows:
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
For the quarter ended 2001 2001 2001 2001 2002 2002 2002 2002
--------------------- -------- -------- --------- -------- -------- -------- --------- --------
Income statement data:
Revenue.................. $20,630 $24,225 $22,919 $24,816 $23,857 $27,134 $30,939 $36,610
Gross profit............. 3,599 4,819 4,139 4,785 4,075 5,365 5,857 6,887
Operating income
(loss)................. 1,544 2,828 1,948 2,467 (3,236) 3,536 3,834 4,425
Income (loss) from
continuing operations
before income taxes.... 1,327 2,664 1,827 2,399 (3,404) 3,287 3,942 4,517
Income tax expense
(benefit).............. -- -- -- -- -- (2,644) 1,577 1,723
Income (loss) from
continuing
operations............. 1,327 2,664 1,827 2,399 (3,404) 5,931 2,365 2,794
Net income (loss) from
discontinued
operations............. (209) (151) (218) 125 -- -- -- --
Net income (loss)........ $ 1,118 $ 2,513 $ 1,609 $ 2,524 $(3,404) $ 5,931 $ 2,365 $ 2,794
Basic earnings (loss) per
share.................. $ 0.11 $ 0.25 $ 0.16 $ 0.26 $ (0.34) $ 0.59 $ 0.18 $ 0.22
Diluted earnings (loss)
per share.............. $ 0.11 $ 0.25 $ 0.16 $ 0.26 $ (0.34) $ 0.58 $ 0.18 $ 0.21
The principal unusual items which affected the quarterly results for the
years ended December 31, 2002 and 2001 include the following pre-tax items:
.. All quarters in 2001
The Company was an S corporation for all of 2001 and as such paid no federal
and minimal state income taxes.
.. Quarter ended March 31, 2002
Operating loss includes $5,215 of non-cash stock compensation expense.
Additionally, the Company was not required to pay federal or most state
income taxes, by virtue of its S corporation status.
.. Quarter ended June 30, 2002
Income tax benefit of $2,644 was recognized upon conversion from an S
corporation to a C corporation under Internal Revenue Service regulations,
however, no other federal and minimal state income tax expenses were
recognized by the Company due to the Company's status as an S corporation
prior to June 28, 2002.
******
64
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
(dollar amounts in thousands, except share and per share amounts)
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
This information was previously reported on a Current Report on Form 8-K
filed on January 24, 2003.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding Directors of the Company, as required by Part III,
Item 10, is incorporated herein by reference to information that will be
contained in the Company's definitive proxy statement for its 2003 Annual
Meeting of Stockholders under the headings "Election of Directors (Proposal No.
1)" and "Section 16(a) Beneficial Ownership Reporting Compliance." Information
regarding the executive officers of the Company is included in this Annual
Report on Form 10-K in Part I, Item 1, under the heading "Executive Officers of
the Registrant."
Item 11. Executive Compensation
Information regarding Executive Compensation, as required by Part III, Item
11, is incorporated herein by reference to information that will be contained
in the Company's definitive proxy statement for its 2003 Annual Meeting of
Stockholders under the headings "Director Compensation," "Compensation of
Executive Officers" and "Compensation Committee Interlocks and Insider
Participation."
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information regarding Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters, as required by Part III, Item 12,
is incorporated herein by reference to information that will be contained in
the Company's definitive proxy statement for its 2003 Annual Meeting of
Stockholders under the headings "Security Ownership of Management and Certain
Beneficial Owners" and "Approval of the Adoption of the MTC Technologies, Inc.
2002 Equity and Performance Incentive Plan (Proposal No. 2)--Equity
Compensation Plan Information Table."
Item 13. Certain Relationships and Related Party Transactions
Information regarding Certain Relationships and Related Party Transactions,
as required by Part III, Item 13, is incorporated herein by reference to
information that will be contained in the Company's definitive proxy statement
for its 2003 Annual Meeting of Stockholders under the heading "Certain
Relationships and Related Party Transactions."
Item 14. Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Within the 90-day period
prior to the filing of this report, an evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures are effective.
Subsequent to the date of evaluation, there have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect these controls.
65
MTC TECHNOLOGIES, INC. AND SUBSIDIARIES
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
1. Financial Statements:
Page
----
Independent Auditors' Report.................................................................. 43
Consolidated Balance Sheets as of December 31, 2002 and 2001.................................. 44
Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000........ 45
Consolidated Statements of Stockholders' Equity (Deficiency in Net Assets) for the years ended
December 31, 2002, 2001 and 2000............................................................ 46
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000.... 47
Notes to the Consolidated Financial Statements................................................ 48
2. Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits
The exhibits listed on the accompanying Exhibit Index are filed as part of
this Report.
4. Reports on Form 8-K
On October 18, 2002, a Current Report on Form 8-K was filed under Items 2
and 7 to announce that the Company signed a stock purchase agreement to acquire
AMCOMP Corporation.
On December 13, 2002, a Current Report on Form 8-K/A was filed under Items 2
and 7. This Form 8-K/A amended Item 7 on the 8-K filed on October 18, 2002, to
include the historical financial statements of AMCOMP Corporation and the pro
forma information as required by Item 7.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MTC TECHNOLOGIES, INC.
By: /s/ DAVID S. GUTRIDGE
-----------------------------
David S. Gutridge Chief
Financial Officer
Dated: March 19, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ RAJESH K. SOIN Chairman of the Board March 19, 2003
- -----------------------------
Rajesh K. Soin
/s/ MICHAEL W. SOLLEY President, Chief Executive March 19, 2003
- ----------------------------- Officer and Director
Michael W. Solley (Principal Executive Officer)
/s/ DAVID S. GUTRIDGE Executive Vice President, Chief March 19, 2003
- ----------------------------- Financial Officer, Secretary,
David S. Gutridge Treasurer, and Director
(Principal Financial
and Accounting Officer)
* Director March 19, 2003
- -----------------------------
Don R. Graber
* Director March 19, 2003
- -----------------------------
William E. MacDonald, III
* Director March 19, 2003
- -----------------------------
Lawrence A. Skantze
* Director March 19, 2003
- -----------------------------
Kenneth A. Minihan
* The undersigned, by signing his name hereto, does sign and execute this
Annual Report on Form 10-K for the above-named directors of the registrant as
indicated pursuant to the powers of attorney executed by such directors that
are filed with the Securities and Exchange Commission on behalf of such
directors as Exhibit 24.1 to this Annual Report on Form 10-K.
By: /s/ DAVID S. GUTRIDGE
-------------------------------
David S.
Gutridge Attorney-in-Fact March
19, 2003
67
CERTIFICATIONS
I, Michael W. Solley, certify that:
1. I have reviewed this annual report on Form 10-K of MTC Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 19, 2003
/s/ MICHAEL W. SOLLEY
-----------------------------
Michael W. Solley Chief
Executive Officer
68
CERTIFICATIONS
I, David S. Gutridge, certify that:
1. I have reviewed this annual report on Form 10-K of MTC Technologies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 19, 2003
/s/ DAVID S. GUTRIDGE
-----------------------------
David S. Gutridge Chief
Financial Officer
69
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Stock Purchase Agreement, dated October 17, 2002, by and among Modern Technologies Corp.,
MTC Technologies, Inc. and the Shareholders of AMCOMP Corporation (incorporated by
reference to Exhibit 2.1 to MTC Technologies, Inc.'s Current Report on Form 8-K
(Commission No. 000-49890), filed on October 18, 2002).
3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to
Amendment No. 1 to MTC Technologies, Inc.'s Registration Statement on Form S-1
(Commission No. 333-87590), filed on June 12, 2002).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to
MTC Technologies, Inc.'s Registration Statement on Form S-1 (Commission No. 333-87590),
filed on June 12, 2002).
4.1 Specimen certificate for shares of common stock (incorporated by reference to Exhibit 4.1 to
Amendment No. 2 to MTC Technologies, Inc.'s Registration Statement on Form S-1
(Commission No. 333-87590), filed on June 24, 2002).
4.2* Registration Rights Agreement, dated as of June 11, 2002, by and between MTC Technologies,
Inc. and Rajesh K. Soin (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to MTC
Technologies, Inc.'s Registration Statement on Form S-1 (Commission No. 333-87590), filed
on June 12, 2002).
10.1 Credit and Security Agreement, dated January 31, 2003, by and among MTC Technologies, Inc.,
Modern Technologies Corp., National City Bank, for itself and as Agent, Keybank National
Association, Fifth Third Bank, and Branch Banking and Trust Company.
10.2* MTC Technologies, Inc. 2002 Equity and Performance Incentive Plan (incorporated by reference
to Exhibit 10.3 to Amendment No. 1 to MTC Technologies, Inc.'s Registration Statement on
Form S-1 (Commission No. 333-87590), filed on June 12, 2002).
10.3* Form of Directors and Officers Indemnification Agreement (incorporated by reference to Exhibit
10.4 to Amendment No. 1 to MTC Technologies, Inc.'s Registration Statement on Form S-1
(Commission No. 333-87590), filed on June 12, 2002).
10.4* Tax Indemnification Agreement, dated as of June 10, 2002, by and between MTC Technologies,
Inc. and Rajesh K. Soin (incorporated by reference to Exhibit 10.5 to Amendment No. 1 to
MTC Technologies, Inc.'s Registration Statement on Form S-1 (Commission No. 333-87590),
filed on June 12, 2002).
10.5* Retention Agreement, dated as of June 11, 2002, by and among Modern Technologies Corp., MTC
Technologies, Inc. and Michael W. Solley (incorporated by reference to Exhibit 10.6 to
Amendment No. 1 to MTC Technologies, Inc.'s Registration Statement on Form S-1
(Commission No. 333-87590), filed on June 12, 2002).
10.6* Nonqualified Stock Option Agreement, dated as of May 3, 2002, by and between MTC
Technologies, Inc. and Michael W. Solley (incorporated by reference to Exhibit 10.7 to
Amendment No. 1 to MTC Technologies, Inc.'s Registration Statement on Form S-1
(Commission No. 333-87590), filed on June 12, 2002).
70
Exhibit No. Description
- ----------- ----------------------------------------------------------------------------------------------
10.7* Nonqualified Stock Option Agreement, dated as of May 3, 2002, by and between MTC
Technologies, Inc. and David Gutridge (incorporated by reference to Exhibit 10.8 to
Amendment No. 1 to MTC Technologies, Inc.'s Registration Statement on Form S-1
(Commission No. 333-87590), filed on June 12, 2002).
10.8* Nonqualified Stock Option Agreement, dated as of May 3, 2002, by and between MTC
Technologies, Inc. and Benjamin Crane (incorporated by reference to Exhibit 10.9 to
Amendment No. 1 to MTC Technologies, Inc.'s Registration Statement on Form S-1
(Commission No. 333-87590), filed on June 12, 2002).
16.1 Letter from Deloitte & Touche LLP regarding change in certifying accountant, dated January 24,
2003 (incorporated by reference to Exhibit 16 to MTC Technologies, Inc.'s Current Report on
Form 8-K (Commission No. 000-49890) filed on January 24, 2003).
21.1 Subsidiaries of MTC Technologies, Inc.
24.1 Powers of Attorney.
99.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------
* Indicates management contracts or compensatory plans or arrangements required
to be filed as exhibits to this Form 10-K pursuant to Item 14(c).
71