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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,
-----------------------------------