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Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended June 30, 2002

OR

For the transition period from                 to                

Commission file number 000-49890

(Exact name of registrant as specified in its charter)

(937) 252-9199
(Registrant’s telephone number, including area code)

_________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

             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.
Yes o No x

             The number of shares of Common Stock, $0.001 par value, of the registrant outstanding as of August 9, 2002 was 12,843,149.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Index
Page 1

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(Dollars in Thousands Except Per Share Data)
Page 2

See accompanying Notes to Condensed Consolidated Financial Statements.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Share and Per Share Data)
Page 3

See accompanying Notes to Condensed Consolidated Financial Statements.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Six Months Ended June 30, 2002
(Dollars in Thousands Except Share Data)
Page 4

See accompanying Notes to Condensed Consolidated Financial Statements.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)
Page 5

See accompanying Notes to Condensed Consolidated Financial Statements.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
Page 6

A.     SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Interim financial information —The consolidated financial statements as of June 30, 2002 and for the three and six month periods ended June 30, 2002 and 2001 are unaudited and have been prepared on the same basis as our audited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring items (except for transactions associated with our initial public offering of common stock), necessary to present fairly the periods indicated. Results of operations for the interim periods ended June 30, 2002 and 2001 are not necessarily indicative of the results for the full year.

Income taxes— On June 28, 2002, we changed our S Corporation status to C Corporation status under Internal Revenue Service regulations. As a result of this change, we were required under Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes , to establish deferred tax balances. In June 2002, we recognized a deferred income tax benefit of $2,644 on our income statement and a current deferred income tax asset of $610, included in prepaid expenses and other current assets on our balance sheet, and a non-current deferred income tax asset of $2,034, included in other assets on our balance sheet, primarily for timing differences between book and tax reporting associated with accrued compensation items.

Prior to June 28, 2002, under our S Corporation election, all items of income and expense were “passed through” and taxed at the shareholder level. Therefore, we were not required to record a provision for federal and state income taxes.

Reclassifications —Certain amounts in the 2001 consolidated financial statements have been reclassified to conform to the 2002 presentation.

B.     STOCKHOLDER’S EQUITY

At December 31, 2001, Mr. Rajesh K. Soin, our sole stockholder prior to the initial public offering, agreed to contribute $2,000 to our wholly-owned subsidiary, Modern Technologies Corp. We recorded the amount due from stockholder as a reduction in stockholder’s equity with a corresponding increase to additional paid-in capital. Mr. Soin contributed the $2,000 during the first quarter of 2002. Upon payment we reduced the amount due from stockholder.

In April 2002, MTC Technologies, Inc. was incorporated in Delaware. On May 3, 2002, Mr. Soin contributed all of the issued and outstanding shares of Modern Technologies Corp. to the Company in exchange for 9,887,482 shares (post stock split as discussed below) of MTC Technologies, Inc. resulting in Mr. Soin owning all of the shares of MTC Technologies, Inc. and Modern Technologies Corp. becoming a wholly owned subsidiary of MTC Technologies, Inc. All shares, per share data and other equity amounts in the accompanying financial statements have been adjusted to give retroactive effect to the transaction.

In May 2002, the Directors approved the 2002 Equity and Performance Incentive Plan. In June 2002, 71,000 options were awarded under this plan.

On June 11, 2002, our Directors authorized and declared a 2,471.8707-for-1 stock split effected in the form of a dividend of 2,470.8707 shares of the common stock, par value of $0.001 per share for each one share of common stock. All shares and per share amounts in these consolidated financial statements have been adjusted to reflect this stock split. Our directors also increased the number of authorized shares to 50 million.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
Page 7

On June 27, 2002, our registration statement relating to the initial public offering of 5,000,000 shares of our common stock was declared effective by the Securities and Exchange Commission and we, Mr. Soin and the underwriters signed an underwriting agreement pursuant to which we and Mr. Soin agreed to sell shares covered by the registration statement to the underwriters at $15.81 per share. We agreed to sell 2,500,000 of these shares and Mr. Soin agreed to sell 2,500,000 shares. The underwriters offered these shares to the public at $17.00 per share. We did not receive any of the proceeds from the sale of shares by Mr. Soin. The initial public offering was consummated on July 3, 2002. On June 30, 2002, we recorded an amount due from underwriters of $39,525 for the proceeds from the initial public offering, less our portion of the underwriting discount. The amount due from underwriters was received on July 3, 2002. We also recorded a net increase in common stock of approximately $2, and paid-in capital of approximately $38,128 to record the proceeds from the initial public offering, net of our portion of the underwriters’ discount and other expenses associated with the offering.

C.     LONG-TERM DEBT

Our borrowing limit at June 30, 2002, under the revolving credit agreement, was $15,000, subject to borrowing base requirements and customary loan covenants. Borrowings were collateralized by accounts receivable and certain property and equipment. On July 3, 2002 we paid all debt outstanding under the term loan and the revolving credit facility with the proceeds from our initial public offering.

The revolving credit and term loan agreements contain various loan covenants, which include among others, restrictions on stockholder distributions. We were in violation of certain covenants at June 30, 2002, for which a waiver was received from the banks that waives these covenants through December 31, 2002. The majority stockholder personally guaranteed all long-term debt through July 3, 2002.

D.     BUSINESS SEGMENT

We operate as one segment, delivering a broad array of services primarily to the federal government in four areas which are offered separately or in combination across our customer base. These services are Systems Engineering, Information Technology, Intelligence Operations and Program Management. Although we offer the services referred to above, we review revenue internally primarily on a contract basis. Therefore, it would be impracticable to determine revenue by services offered. In addition, there were no sales to any foreign customers.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
Page 8

E.     RELATED PARTY TRANSACTIONS

We subcontract to, purchase services from, and rent a portion of our facilities from various entities that are controlled by Mr. Soin, our majority stockholder and Chairman of the Board of Directors. Following is a summary of transactions with related parties:

We received administrative services from Soin International, which is wholly owned by an entity related to Mr. Soin prior to March 31, 2002. The charges for these services generally reflected the marginal cost of the service provided, plus a pro-rata share of the associated fixed costs. In addition, we lease our administrative and some operational facilities from entities related to Mr. Soin.

We believe that our subcontracting, lease, and other agreements with each of the related parties identified above reflect prevailing market conditions at the time they were entered into and contain substantially similar terms to those that might be negotiated by independent parties on an arm’s-length basis.

At June 30, 2002 and December 31, 2001, amounts due from related parties were $430 and $600, respectively.

In the second quarter of 2002, we purchased at fair value a 90% ownership interest in an airplane owned by an entity related to Mr. Soin for approximately $405.

At June 30, 2002 there were approximately $294 of notes receivable from officers for withholding taxes payable on stock options exercised. These notes were paid in full subsequent to June 30, 2002.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
Page 9

F. STOCK COMPENSATION

In March 2002, the sole stockholder made a binding commitment to award $5,215 in stock-based compensation to three key members of our senior management, Michael Solley, President and Chief Executive Officer, David Gutridge, Chief Financial Officer, and Benjamin Crane, Chief Operating Officer, to reward the executives for their major contributions to our past profitability, growth and financial strength. The award in March was to be settled either by delivery to the recipients of a fixed number of fully vested shares or of a number of fully vested options with an intrinsic value of approximately $5,215 (the difference between the exercise price and the estimated fair value of the shares of $16.75 per share). We recorded the $5,215 expense associated with this stock compensation award in March 2002. The liability recorded in March was classified as a current liability.

In April 2002, to achieve certain tax benefits for the executives, the sole stockholder decided to issue stock options to satisfy the $5,215 stock compensation award. Stock option agreements to purchase 415,273 shares of our common stock at $4.19 per share were entered into with the executives. These options were formalized on May 3, 2002, when stock option agreements were signed by the grantees, which established the measurement date. The options were immediately exercisable after that date. Mr. Solley was awarded an option to purchase up to 346,061 shares. Messrs. Gutridge and Crane each were awarded options to purchase up to 34,606 shares. These options expire ten years from their date of grant. Once the liability for the stock compensation was settled by the issuance of stock options the $5,215 liability was reclassified to paid-in capital on our balance sheet. In June 2002, 80,667 of these options were exercised.

G.     EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share were computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period, and shares reacquired, if any, during the period are weighted for the portion of the period that they were outstanding. Diluted earnings (loss) per share and basic earnings (loss) per share for the three and six months ended June 30, 2001 were equal because there are no common stock equivalents outstanding during any of these periods. The weighted average shares for the three and six months ended June 30, 2002 were as follows:

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Dollars in Thousands Except Per Share Data)
Page 10

H.     ACCOUNTING CHANGES

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill’s impairment and that intangible assets other than goodwill be amortized over their useful lives. This statement requires that goodwill be tested for impairment initially as of January 1, 2002, and thereafter at least annually. We adopted SFAS No. 142 on January 1, 2002. We have performed the first step of the goodwill impairment test and have concluded that goodwill is not impaired. The table below shows the effect on net income had SFAS No. 142 been adopted in prior periods: