MTC TECHNOLOGIES INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

	For the Quarterly Period Ended March 31, 2003

OR

o	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

MTC TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware		02-0593816

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4032 Linden Avenue, Dayton, Ohio		45432

(Address of principal executive offices)		(Zip Code)

(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 x

No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No x

The number of shares of Common Stock, $0.001 par value, of the registrant outstanding as of May 8, 2003 was 13,110,146.

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Index

			Page Number

Part I	Financial Information

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002	3

		Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and March 31, 2002	4

		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and March 31, 2002	5

		Notes to Condensed Consolidated Financial Statements	6-10

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

	Item 4.	Controls and Procedures	20

Part II	Other Information

	Item 1.	Legal Proceedings	20

	Item 2.	Changes in Securities and Use of Proceeds	20-21

	Item 6.	Exhibits and Reports on Form 8-K	21

Signatures			22

Certifications			23-24

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Dollars in Thousands Except Per Share Data)

	March 31, 2003			December 31, 2002

Assets
Current assets:
Cash and cash equivalents	$	19,896		$	21,950
Restricted cash		2,500			2,503
Accounts receivable, net		32,064			30,638
Costs and estimated earnings in excess of amounts billed on uncompleted contracts		4,475			2,171
Prepaid expenses and other current assets		1,195			1,343

Total current assets		60,130			58,605
Property, plant and equipment, net		1,650			1,652
Goodwill, net		7,029			7,029
Intangible assets, net		2,787			2,906
Other assets		1,297			1,296

	$	72,893		$	71,488

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	11,449		$	12,445
Restricted funds payable to government		2,500			2,503
Compensation and related items		6,600			6,500
Billings in excess of costs and estimated earnings on uncompleted contracts		199			262

Total current liabilities		20,748			21,710
Commitments and contingencies (Note I)
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 12,947,797 and 12,890,237 shares issued and outstanding, at March 31, 2003 and December 31, 2002, respectively		13			13
Paid-in capital		50,255			49,834
Retained earnings		2,698			343
Treasury stock		(821	)		(412	)

Total stockholders’ equity		52,145			49,778

	$	72,893		$	71,488

See accompanying Notes to Condensed Consolidated Financial Statements.

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Share and Per Share Data)

	Three months ended March 31,

	2003		2002

Revenue	$	36,109	$	23,857
Cost of revenue		29,766		19,782

Gross profit		6,343		4,075
General and administrative expenses:
General and administrative expenses, excluding stock compensation expense		2,404		2,096
Stock compensation expense (Note D)		—		5,215

Total general and administrative expenses		2,404		7,311
Intangible asset amortization		119		—

Operating income (loss)		3,820		(3,236	)
Interest income (expense):
Interest income		75		17
Interest expense		—		(185	)

Net interest income (expense)		75		(168	)
Income (loss) before income tax expense		3,895		(3,404	)
Income tax expense (Note A)		1,540		—

Net income (loss)	$	2,355	$	(3,404	)

Basic and diluted earnings (loss) per share	$	0.18	$	(0.34	)

Weighted average common shares outstanding:
Basic		12,914,781		9,887,482
Diluted		13,095,552		9,887,482

See accompanying Notes to Condensed Consolidated Financial Statements.

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Item 1. Financial Statements
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)

	Three months ended March 31,

	2003			2002

Cash flows from operating activities:
Net income (loss)	$	2,355		$	(3,404	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Stock compensation expense		—			5,215
Depreciation and amortization		219			131
Gains on marketable equity securities		—			(13	)
Changes in operating assets and liabilities:
Accounts receivable		(1,426	)		(2,539	)
Costs and estimated earnings in excess of billings on uncompleted contracts		(2,304	)		(33	)
Prepaid expenses and other assets		148			8
Accounts payable		(996	)		427
Compensation and related items		100			(332	)
Billings in excess of costs and estimated earnings on uncompleted contracts		(63	)		(29	)
Other current liabilities		—			(18	)

Net cash used in operating activities		(1,967	)		(587	)

Cash flows from investing activities:
Proceeds from the sale of marketable equity securities		—			180
Purchase of property and equipment		(99	)		(97	)
Increase in advances to affiliates		—			(748	)

Net cash used by investing activities		(99	)		(665	)

Cash flows from financing activities:
Net borrowings on the revolving credit facility		—			1,986
Proceeds from exercise of stock options		421			—
Capital contribution		—			2,000
Repurchase of common stock		(409	)		—
Capital distribution to stockholder		—			(2,734	)

Net cash provided by financing activities		12			1,252

Net decrease in cash		(2,054	)		—
Cash and cash equivalents at beginning of period		21,950			60

Cash and cash equivalents at end of period	$	19,896		$	60

See accompanying Notes to Condensed Consolidated Financial Statements.

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

ITEM 1. Financial Statements
Notes to Condensed Consolidated Financial Statements
(dollars amounts in thousands, except share and per share data)

A. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Interim financial information—The consolidated financial statements as of March 31, 2003 and for the three month periods ended March 31, 2003 and 2002 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, necessary to present fairly the periods indicated. Results of operations for the interim periods ended March 31, 2003 and 2002 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. During the third quarter of 2002, we began recording a provision for federal and state income taxes.

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

B. BUSINESS SEGMENT

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

C. RELATED PARTY TRANSACTIONS

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

	Three months ended March 31,

	2003		2002

Included in general and administrative expenses:
Shared services paid to related parties (Soin International)	$	—	$	584
Shared services charged to related parties		—		(28	)
Aircraft usage charges paid to Soin International		—		23
Rent paid to related parties		118

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