SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
Commission file number 0-22136
MENLO ACQUISITION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 77-0332937
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Misty Lane
Parsippany, NJ 07054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 560-1400
Indicate by check mark whether the registrant (1) has filed all reports required
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 No X
At November 12, 1999 the registrant had issued and outstanding an aggregate of
5,263,348 shares of its common stock.
<PAGE>
INDEX
MENLO ACQUISITION CORPORATION
AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1999 (Unaudited) and
December 31, 1998...................................F-3
Condensed Consolidated Statements of Income and
Comprehensive Income - Nine and Three Months Ended
September 30, 1999 and September 30, 1998
(Unaudited).........................................F-4 - F-5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999
and September 30, 1998 (Unaudited)..................F-6
Notes to Condensed Consolidated Financial Statements
September 30, 1999 (Unaudited)......................F-7 - F-11
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
PART II. OTHER INFORMATION
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
F-2
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
September December
30, 1999 31, 1998
-------- --------
(Unaudited) (See Note 1)
ASSETS (In thousands of dollars)
------
Current assets:
Cash $ 1,108 $ 25
Marketable securities, at market 218 -
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $607 and $566 3,788 4,833
Unbilled receivables 195 107
Affiliates 383 285
Prepaid expenses and other current assets 75 82
Due from affiliate - 27
--------- ---------
Total current assets 5,767 5,359
Equipment and furnishings, net of accumulated
depreciation of $837 and $550 1,084 1,020
Other assets 14 38
--------- ---------
Totals $6,865 $6,417
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable - bank $ - $ 400
Current portion of long-term debt 106 106
Accounts payable 635 610
Customer deposits 493 523
Accrued expenses and other liabilities 548 243
Income taxes payable 66 -
Due stockholder - 55
-------- --------
Total current liabilities 1,848 1,937
Deferred taxes 15 -
Long-term debt, net of current portion 195 275
-------- --------
Total liabilities 2,058 2,212
------- -------
Stockholders' equity:
Common stock, $.0001 par value; 40,000,000
shares authorized; 5,263,348 issued and
outstanding 1 1
Additional paid-in capital 4,204 4,204
Accumulated other comprehensive income 22 -
Retained earnings 580 -
-------- --------
Total stockholders' equity 4,807 4,205
------- -------
Totals $6,865 $6,417
====== ======
See Notes to Condensed Consolidated Financial Statements.
F-3
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
Income
------
1999 1998
------ ------
(In thousands of dollars,
except share data)
Gross revenue $9,959 $9,154
Direct project costs and other costs of
operations 3,959 4,246
------- -------
Net revenue 6,000 4,908
------- -------
Expenses:
Labor and related expenses 1,368 1,335
Selling, general and administrative 3,724 3,204
Interest 28 67
------- -------
Totals 5,120 4,606
------- -------
Income from operations 880 302
Other income 88 65
------- -------
Income before income taxes 968 367
Provision for income taxes 388 147
(See Note 5) ------ -------
Net income $ 580 $ 220
======= =======
Basic net income per share $.11 $.04
==== ====
Basic weighted average common shares
outstanding 5,263,348 5,263,348
========= =========
Comprehensive Income
--------------------
Net income $580 $220
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising
during the year: 22 -
----- ----
Comprehensive income $602 $220
===== ====
See Notes to Condensed Consolidated Financial Statements.
F-4
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
Income
------
1999 1998
------ ------
(In thousands of dollars,
except share data)
Gross revenue $3,438 $4,451
Direct project costs and other costs of
operations 1,397 2,284
------- -------
Net revenue 2,041 2,167
------- -------
Expenses:
Labor and related expenses 387 434
Selling, general and administrative 1,352 1,089
Interest 7 25
------- -------
Totals 1,746 1,548
------- -------
Income from operations 295 619
Other income 39 16
------- -------
Income before income taxes 334 635
Provision for income taxes 134 254
(See Note 5) ------ -------
Net income $ 200 $ 381
======= =======
Basic net income per share $.04 $.07
==== ====
Basic weighted average common shares
outstanding 5,263,348 5,263,348
========= =========
Comprehensive Income
--------------------
Net income $200 $381
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during
the year: 22 -
----- ----
Comprehensive income $222 $381
===== ====
See Notes to Condensed Consolidated Financial Statements.
F-5
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
1999 1998
---- ----
(In thousands of dollars)
Operating activities:
Net income $580 $220
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 287 261
Provision for bad debts 100 90
Changes in operating assets and liabilities:
Accounts receivable - trade 945 (1,471)
Unbilled receivables (88) (179)
Accounts receivable - affiliates (98) (287)
Prepaid expenses and other current assets 7 (86)
Due from affiliate 27 122
Other assets 24 -
Accounts payable 25 1,280
Customer deposits (30) 184
Accrued expenses and other liabilities 305 161
Income Taxes payable 66 147
------ ------
Net cash provided by operating activities 2,150 442
------ ------
Investing activities:
Purchase of equipment (351) (460)
Purchase of marketable securities (181) -
------ ------
Net cash used in investing activities (532) (460)
------ ------
Financing activities:
Repayment of notes payable - bank (400) (367)
Repayment of long-term debt - bank (80) (50)
Advances from (repayment to) stockholder (55) 689
------ ------
Net cash (used in) provided by
financing activities (535) 272
----- ------
Net increase in cash 1,083 254
Cash, beginning of period 25 4
------ ------
Cash, end of period $1,108 $ 258
====== ======
Supplemental disclosure of cash flow data:
Interest paid $ 28 $ 67
===== =====
Income taxes paid $ 322 $ 61
===== =====
See Notes to Condensed Consolidated Financial Statements.
F-6
<PAGE>
MENLO ACQUISTION CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
without audit by Menlo Acquisition Corporation, ( "Menlo") in accordance with
generally accepted accounting principles for interim financial statements and
pursuant to the rules of the Securities and Exchange Commission (the "SEC") for
Form 10-QSB. As used herein, "Company" refers to Menlo and its operating
subsidiaries. Certain information and footnotes required by generally accepted
accounting principles for complete financial statements have been omitted. It is
the opinion of management that all adjustments considered necessary for a fair
presentation have been included, and that all such adjustments are of a normal
and recurring nature. Further information can be obtained by referring to the
Company's Form 8-K filed with the SEC on March 10, 1999 and to the audited
financial statements and footnotes included in the Company's Form 8-K/A filed
May 10, 1999.
Certain amounts in the 1998 Financial Statements have been reclassified to
conform with the current presentation.
The consolidated results of operations for the nine months ended September 30,
1999 are not necessarily indicative of the results to be expected for the full
year.
The Company has two operating subsidiaries. One provides environmental
consulting, remedial and disposal services with offices in Parsippany and West
Windsor, New Jersey (Consulting). The other conducts testing of soil and water
for environmental hazards with an office in Randolph, New Jersey (Lab). The
subsidiaries operate primarily throughout New Jersey, New York, Connecticut and
Pennsylvania.
NOTE 2: EARNINGS PER SHARE
Effective January 1, 1999, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, Earnings per Share ("FAS 128") which
requires the presentation of "basic" and, if appropriate, "diluted" earnings
(loss) per common share. The calculation of the basic net income per share and
the basic weighted average common shares outstanding shown in the accompanying
unaudited Condensed Consolidated Statements of Income and Comprehensive Income
for the nine and three months ended September 30, 1998 have been computed as if
the shares outstanding as of September 30, 1999 had been effectively outstanding
at January 1, 1998.
For the nine and three months ended September 30, 1999 and 1998, the Company had
no common stock equivalents and, accordingly, diluted earnings per share amounts
have not been presented in the accompanying unaudited Condensed Consolidated
Statements of Income and Comprehensive Income.
NOTE 3: COMMITMENTS AND CONTINGENCIES
The Company is currently subject to certain claims and lawsuits arising in the
ordinary course of its business. In the opinion of management, adequate
provision has been made for all known liabilities that are currently expected to
result from these claims and lawsuits, and in the aggregate such claims are not
expected to have a material effect on the financial position of the Company. The
estimates used in establishing these provisions could differ from actual
results. Should these provisions change significantly, the effect on operations
for any quarterly or annual reporting period could be material.
F-7
<PAGE>
The Company has a $750,000 revolving line-of-credit facility utilized by its
consulting segment. Outstanding borrowings are secured by substantially all of
the Company's assets. The line of credit contains certain covenants, the most
restrictive of which includes the maintenance of a maximum capital funds ratio,
as defined. As of September 30, 1999, the Company was in compliance with all
covenants and there were no amounts outstanding under the line of credit.
NOTE 4: BUSINESS SEGMENTS
The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "Disclosures about Segments of an Enterprise and Related Information," at
the beginning of 1998. Following the provisions of SFAS 131, the Company is
reporting segment revenue and income from operations in the same format reviewed
by the Company's management (the "management approach"). The Company has two
reportable segments as described previously in Note 1.
Revenue, income from operations and other related segment information for the
nine months ended September 30, 1999 and 1998 follows:
1999 1998
----- -----
(In Thousands of Dollars)
Gross revenue:
Consulting $ 6,861 $6,716
Lab 3,696 2,988
Inter-segment (598) (550)
-------- -------
Totals $ 9,959 $9,154
======== =======
Direct project costs and other costs
of operations:
Consulting $ 2,790 $3,341
Lab 1,767 1,455
Inter-segment (598) (550)
-------- -------
Totals $ 3,959 $4,246
======== =======
Other operating expenses:
Consulting $ 3,871 $3,556
Lab 1,648 1,152
Inter-segment (399) (102)
-------- -------
Totals $ 5,120 $4,606
======== =======
Income (loss) from operations:
Consulting $ 200 $ (181)
Lab 281 381
Inter-segment 399 102
-------- -------
Totals $ 880 $ 302
======== =======
Other income (expense):
Consulting $ 452 $ 164
Lab 35 3
Inter-segment (399) (102)
-------- -------
Totals $ 88 $ 65
======== =======
F-8
<PAGE>
NOTE 4: BUSINESS SEGMENTS (CONTINUED):
Income (loss) before taxes:
Consulting $ 652 $ (17)
Lab 316 384
-------- --------
Totals $ 968 $ 367
======== ========
Provision (credit) for income taxes:
Consulting $ 262 $ (7)
Lab 126 154
-------- --------
Totals $ 388 $ 147
======== ========
Net Income (loss):
Consulting $ 390 $ (10)
Lab 190 230
-------- --------
Totals $ 580 $ 220
======== ========
Revenue, income from operations and other related segment information for the
three months ended September 30, 1999 and 1998 follows:
1999 1998
----- -----
(In Thousands of Dollars)
Gross revenue:
Consulting $ 2,215 $ 3,521
Lab 1,376 1,243
Inter-segment (153) (313)
-------- --------
Totals $ 3,438 $ 4,451
======== ========
Direct project costs and other
costs of operations:
Consulting $ 919 $ 2,064
Lab 631 533
Inter-segment (153) (313)
-------- --------
Totals $ 1,397 $ 2,284
======== =======
Other operating expenses:
Consulting $ 1,263 $ 1,167
Lab 628 421
Inter-segment (145) (40)
-------- -------
Totals $ 1,746 $ 1,548
======== =======
Income from operations:
Consulting $ 33 $ 290
Lab 117 289
Inter-segment 145 40
------- -------
Totals $ 295 $ 619
======== =======
F-9
<PAGE>
NOTE 4: BUSINESS SEGMENTS (CONTINUED):
Other income (expense):
Consulting $ 169 $ 54
Lab 15 2
Inter-segment (145) (40)
-------- -------
Totals $ 39 $ 16
======== =======
Income before taxes:
Consulting $ 202 $ 344
Lab 132 291
-------- -------
Totals $ 334 $ 635
======== =======
Provision for income taxes:
Consulting $ 81 $ 137
Lab 53 117
-------- -------
Totals $ 134 $ 254
======== ========
Net Income:
Consulting $ 121 $ 207
Lab 79 174
-------- -------
Totals $ 200 $ 381
======== =======
Assets by segment as of September 30, 1999
and 1998 follow:
1999 1998
---- ----
(In Thousands of Dollars)
Cash and marketable securities,
at market:
Consulting $ 876 $ 195
Lab 450 63
-------- -------
Totals $ 1,326 $ 258
======== =======
Accounts receivable, net:
Consulting $ 3,210 $ 5,500
Lab 1,156 1,994
Inter-segment - (808)
-------- -------
Totals $ 4,366 $ 6,686
======== =======
Equipment and furnishings,net:
Consulting $ 418 $ 464
Lab 666 648
-------- -------
Totals $ 1,084 $ 1,112
======== =======
F-10
<PAGE>
NOTE 4: BUSINESS SEGMENTS (CONTINUED):
Other assets:
Consulting $ 72 $ 608
Lab 17 109
-------- -------
Totals $ 89 $ 717
======== =======
Total assets $ 6,865 $ 8,773
======== ========
NOTE 5: INCOME TAXES:
Prior to the acquisition of the two operating subsidiaries by the Company (Refer
to the Form 8-K/A), the subsidiaries were Limited Liability Companies and, as
such, were treated as partnerships for Federal and State income tax purposes. A
partnership is not a tax paying entity for Federal or State income tax purposes.
Income or loss of a limited liability company is reported in the individual
member's income tax returns and accordingly, no provision for income tax had
been recorded in the historical condensed consolidated financial statements
attributable to these limited liability companies included with the Form 8-K/A.
The unaudited basic net income per share data as shown on the Condensed
Consolidated Statements of Income and Comprehensive Income for the nine and
three months ended September 30, 1998 is computed as if the Company acquired the
subsidiaries effective January 1, 1998 and was subject to Corporate Income Tax.
NOTE 6: COMPREHENSIVE INCOME:
Effective January 1, 1999, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("FAS
130") which establishes new rules for the reporting and display of comprehensive
income and its components. The Company owns marketable securities as shown in
the accompanying Condensed Consolidated Balance Sheets which are classified as
available for sale. These securities are recorded at fair value and unrealized
gains and losses, net of tax, are reported as accumulated other comprehensive
income within stockholders' equity. The adoption had no impact on prior year
financial statements.
F-11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward Looking Statements
The statements in this report that are forward-looking are based on current
expectations, and actual results may differ materially. The forward-looking
statements include those regarding the level of future purchases of fixed
assets, the possible impact of current and future claims against the Company
based upon negligence and other theories of liability, the possibility of the
Company making acquisitions during the next 12 to 18 months and the impact of
becoming Year 2000 compliant. Forward-looking statements involve numerous risks
and uncertainties that could cause actual results to differ materially,
including, but not limited to, the possibilities that the demand for the
Company's services may decline as a result of possible changes in general and
industry specific economic conditions and the effects of competitive services
and pricing; one or more current or future claims made against the Company may
result in substantial liabilities; and such other risks and uncertainties as are
described in reports and other documents filed by the Company from time to time
with the Securities and Exchange Commission.
Results of Operations
(In thousands of dollars, except share data)
The following tables set forth, for the periods indicated: i) the percentage
that certain items in the condensed consolidated statements of income and
comprehensive income of the Company bear to gross revenues, and ii) the
percentage increase (decrease) in dollar amounts of such items from year to
year.
Nine Month Comparison for Years 1999 and 1998
Percentage
Increase
(Decrease)
Nine
Months
Percentage Ended
of Gross Revenue 9/30/99
Nine Months Ended vs.
---------------- --
9/30/99 9/30/98 9/30/98
------ ------- -------
Gross revenue 100.0% 100.0% 8.8%
Direct project costs and other costs
of operations 39.8 46.4 (6.8)%
------ ------ -----
Net revenue 60.2 53.6 22.2%
------ ------ -----
Expenses:
Labor and related expenses 13.7 14.6 2.5%
Selling, general and
administrative 37.4 35.0 16.2%
Interest 0.3 0.7 (58.2)%
------ ------ ------
Totals 51.4 50.3 11.2%
------ ------ ------
Income from operations 8.8 3.3 191.4%
Other income 0.9 0.7 35.4%
------ ------ ------
Income before income taxes 9.7 4.0 163.8%
====== ====== ======
<PAGE>
Gross revenues for the nine months ended September 30, 1999 were $9,959 versus
$9,154 for the first nine months of 1998, an increase of 8.8%. Increases
occurred in both the Consulting and Lab segments. Lab revenues increased $660
(net of inter-segment billing) and Consulting increased $145. Consulting revenue
increased primarily due to continued strength in the real estate sector and
increased hours billed from the professional staff. The significant increase in
the revenue of the Lab segment was a result of effective direct sales efforts
from a larger sales force, higher utilization of equipment used in performing
Lab services and broadening of the customer base into the pharmaceutical
industry.
Income from operations was $880 in the first nine months of 1999 as opposed to
$302 for the same period in 1998. This represents an increase of 191.4%.
Operating margins rose to 8.8% for the current period from 3.3% for the first
nine months of 1998. The increase in operating income and margin was due to a
significant reduction in the direct project costs incurred in the Consulting
segment. This resulted in a higher percentage of net revenue. A larger portion
of revenues was generated from professional services in 1999 as compared to more
pass-through billing of reimbursable expenses in 1998.
Labor and related expenses increased 2.5% compared to the corresponding period
in the prior year primarily due to increases in the number of technical staff in
the Consulting segment and increases in compensation rates.
Selling, general and administrative expenses increased 16.2% compared to the
corresponding period in the prior year primarily due to the increase in the Lab
segment direct sales force and their associated direct selling expenses.
Interest expense decreased 58.2% in the first nine months of 1999 as compared to
the first nine months of 1998. This decrease was due to limited use of the
revolving line of credit in 1999. There have been no amounts outstanding on the
line since early March 1999 whereas there was significant usage of the facility
during 1998.
Income before taxes for the period was $968 compared with $367 in the first nine
months of 1998, an increase of 163.8%. Tax provisions were recorded at an
effective rate of 40% for both 1999 and 1998 (see Note 5 in the Notes to
Condensed Consolidated Financial Statements). Basic net income per share was
$.11 in 1999 versus $.04 in 1998. The Company had 5,263,348 shares outstanding
at September 30, 1999 and the September 30, 1998 per share amount was calculated
assuming the same number of shares were also effectively outstanding at that
date. The Company had no common stock equivalents at September 30, 1999 or
September 30, 1998, therefore no dilutive earnings per share were calculated.
Third Quarter Comparison for Years 1999 and 1998
Percentage
Increase
(Decrease)
Three
Months
Percentage Ended
of Gross Revenue 9/30/99
Three Months Ended vs.
------------------ --
9/30/99 9/30/98 9/30/98
------- ------- -------
Gross revenue 100.0% 100.0% (22.8)%
Direct project costs and other costs
of operations 40.6 51.3 (38.8)%
------ ------ ------
Net revenue 59.4 48.7 (5.8)%
------ ------ ------
<PAGE>
Expenses:
Labor and related expenses 11.3 9.7 (10.8)%
Selling, general and
administrative 39.3 24.5 24.2%
Interest 0.2 0.6 (72.0)%
------ ------ ------
Totals 50.8 34.8 12.8%
------ ------ ------
Income from operations 8.6 13.9 (52.3)%
------
Other income 1.1 0.4 143.8%
------ ------ ------
Income before income taxes 9.7 14.3 (47.4)%
====== ====== ======
Gross revenue for the quarter ended September 30, 1999 totaled $3,438, a
decrease of 22.8% from gross revenue of $4,451 for the third quarter of 1998.
There was a significant increase in the Lab segment of $293 (net of intercompany
billing) due to the items discussed in the nine-month comparison. In the
Consulting segment, the high level of 1998 third quarter revenue was a result of
the correction of the billing problems that occurred in the second quarter of
1998. Please refer to the previous 10-QSB for a more detailed discussion of this
issue. Third quarter 1999 revenue of the Consulting segment is consistent with
the previous two quarters of 1999.
Income from operations was $295 in the third quarter of 1999, compared with $619
for the same period in 1998. The operating margin fell to 8.6% in the current
quarter from 13.9% in the third quarter 1998. Again, the margin for the third
quarter 1999 is consistent with previous quarters of the year. The unusually
high operating margin shown in the prior year is due to the large revenue amount
as explained above.
Labor and related expenses were not substantially different in comparing the
results of the two quarters.
The percentage of selling, general and administrative expenses increased this
quarter as compared to the same quarter last year. The percentage shown in the
third quarter 1998 is reduced due to the higher revenue base in that quarter.
Interest expense decreased 72.0% in the third quarter 1999 as compared to the
third quarter 1998. This decrease was due to the fact that the Company had no
amounts outstanding on the revolving line-of-credit during the entire third
quarter of 1999, while outstanding amounts in the third quarter of 1998 averaged
approximately $520.
Income before taxes for the current quarter was $334 compared with $635 in the
third quarter of 1998. Tax provisions were recorded at an effective rate of 40%
for both 1999 and 1998 (see Note 5 in the Notes to Condensed Consolidated
Financial Statements). Basic net income per share was $.04 in 1999 versus $.07
in 1998 and was calculated as described previously. Again, the Company had no
common stock equivalents at September 30, 1999 or September 30, 1998, therefore
no dilutive earnings per share were calculated.
Liquidity and Capital Resources
Net cash provided by operations for the nine months ended September 30, 1999 was
$2,150 as compared to $442 for the first nine months of the prior year. The
increase in cash provided by operations was due to implementation of a new
project accounting software system in the Consulting segment, enabling more
timely billing of the Company's services and resulting in improved monitoring of
accounts receivable and quicker conversion to cash. Additionally, net income
increased substantially from the prior year and more stringent cash management
policies have been implemented.
<PAGE>
The Company made net capital expenditures of $351 in the first nine months of
1999 compared to net capital expenditures of $460 in the first nine months of
the prior year. The Company anticipates that its capital expenditures, excluding
acquisitions, for the current year will be approximately the same as those
incurred in the prior year. Additionally, the Company purchased $181 of
marketable securities in the first nine months of 1999. No such purchases were
made in the first nine months of 1998.
The Company, in the normal course of business, encounters potential liability,
including claims for errors and omissions, resulting from the performance of its
services. The Company is party to lawsuits and is aware of potential exposure
related to certain claims. In the opinion of management, adequate provision has
been made for all known liabilities that are currently expected to result from
these matters, and in the aggregate, such claims are not expected to have a
material impact on the financial position and liquidity of the Company.
Currently, the Company is provided a $5 million per occurrence, $10 million
aggregate professional services insurance policy through an unrelated, rated
carrier. The Company also maintains a general liability insurance policy with an
unrelated, rated carrier.
At September 30, 1999, the Company had cash on hand of $1,108. The Company has a
$750 revolving credit line agreement that expired on October 31, 1999.
Management is in the process of renewing this agreement and forsees no
difficulties in the renewal. The lender has informed management that the current
agreement will be extended and remain in effect until such time as the renewal
agreement is finalized. At September 30, 1999, borrowings under the line were $0
leaving $750 available to the Company compared to $530 outstanding at September
30, 1998. Borrowings were available to the Company at an interest rate of 9% at
September 30, 1999 and 8.75% at September 30, 1998. The Company is in compliance
with all covenants pertaining to the credit line agreement.
The Company believes that its available cash, as well as cash generated from
operations and its available credit line, will be sufficient to meet the
Company's cash requirements for the balance of the fiscal year. The Company
intends to actively search for acquisitions to expand its geographical
representation and enhance its technical capabilities. The Company expects to
utilize a portion of its liquidity over the next 12 to 18 months for capital
expenditures, including acquisitions and investments in aligned businesses.
There are no present agreements, understandings or other arrangements with
respect to any acquisition or investment.
Year 2000 Compliance
Overview
Computer systems and software have historically been coded to accept only two
digit entries for the year. Consequently, on January 1, 2000, as well as on
other significant dates, errors may occur. If computers cannot properly
distinguish between the years 1900 and 2000, computers may shutdown or perform
incorrect calculations.
Scope & Status
The Company has taken seriously the potential risks of the Year 2000 issue and
has devoted resources to address the issue. The Company has established a Year
2000 oversight committee. The committee was assigned to address the following
key components related to the Year 2000 issue:
- Information applications, including the Company's project management and
accounting systems
- Computer hardware, software, operating systems and network
infrastructure including telecommunications systems
- Facility and administrative systems
- Major suppliers and customers' systems
<PAGE>
During the fourth quarter of 1998, the Company implemented a new information
technology system (a project management and accounting system). This system is
warranted as Year 2000 compliant. The Company has performed specific Year 2000
compliance testing of this system as well as others in use during the first nine
months of 1999.
The Company has also conducted an inventory and assessment of its hardware and
software for Year 2000 compliance. Any non-compliant components identified
(hardware or software) have been made compliant or replaced with compliant
versions. Facility and administrative systems that support the Company (such as
telephone, security systems, etc.) have also been assessed for Year 2000
compliance and required upgrades to such hardware and software have been
completed.
The Company has undertaken an analysis of its vendors and suppliers to determine
potential areas of risk with regard to their failure to achieve Year 2000
compliance. To-date, no such risks have been identified. Contingency plans will
be developed as appropriate to address any potential problems that may be
identified in the near future.
Costs
The costs associated with Year 2000 compliance have not been material and
generally fall within normally anticipated operating and capital spending. The
costs of becoming Year 2000 compliant have not been material to the financial
position of the Company. Although the Company has not currently found the costs
of Year 2000 compliance to be material, it cannot ensure Year 2000 compliance by
third parties.
Risks
The conversion of the Company's project management and accounting systems to a
Year 2000 compliant system mitigates the risk that the Company would be unable
to maintain accurate client records and billings.
The Company cannot predict with accuracy the extent to which its vendors and
clients will become compliant. The resulting effects on the Company's financial
position could be adversely affected if major vendors or clients do not operate
into and beyond the change in the millennium. The Company believes that the
completion of its Year 2000 Project significantly reduces the possibility of
major interruptions to its normal business operations; however, no assurances
can be given.
<PAGE>
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company has been advised that the staff of the National
Association of Securities Dealers, Inc. ("NASD") has determined that
shares of its common stock are no longer eligible for quotation in the
OTC Bulletin Board service. The staff claims that the Company does not
satisfy the eligibility requirement of being "current" in its
reporting obligations under the Securities Exchange Act of 1934. The
Company strongly disputes that claim and believes that it has filed
all reports required to be filed, based upon a "no action" letter
received by its predecessor from the Division of Corporation Finance
of the Securities and Exchange Commission and informal advice it
received from the accounting staff of that Division. The Company has
retained counsel to pursue available appeal/review procedures within
the NASD.
There can be no assurance that the Company's shares will continue to
be quoted on the OTC Bulletin Board. If the Company's shares are no
longer eligible for such quotation, the Company will seek to have its
shares quoted on the "pink sheets." As a consequence, present and
prospective investors may experience some difficulties in buying and
selling the Company's shares or in obtaining the benefits of a more
established trading market for such shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The following exhibits are furnished along with this Form 10-QSB
Quarterly Report for the period ended September 30, 1999:
Exhibit No. 27 - Financial Data Schedule
b. Reports on Form 8-K
During the quarter ended September 30, 1999, the Company did not file
any Current Reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MENLO ACQUISITION CORPORATION
Date: November 12, 1999 /ss/Frank Russomanno
--------------------------
Frank Russomanno
Chief Financial Officer
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