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 March 31, 1999 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 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 May 17, 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 -
March 31, 1999 (Unaudited) and
December 31, 1998........................................ F-3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 1999 and
March 31, 1998 (Unaudited)............................... F-4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and
March 31, 1998 (Unaudited)............................... F-5
Notes to Condensed Consolidated Financial Statements
March 31, 1999 (Unaudited)...........................F-6 - F-8
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. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
March December
31, 1999 31, 1998
-------- --------
(Unaudited) (See Note 1)
ASSETS (In thousands of dollars)
Current assets:
Cash $ 153 $ 25
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $562 and $566 4,800 4,833
Unbilled receivables 199 107
Affiliates 274 285
Prepaid expenses and other current assets 73 82
Due from affiliate 27
----------- ---------
Total current assets 5,499 5,359
Equipment and furnishings, net of accumulated
depreciation of $636 and $550 987 1,020
Other assets 18 38
--------- ---------
Totals $6,504 $6,417
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - bank $ 400
Current portion of long-term debt $ 106 106
Accounts payable 814 610
Customer deposits 484 523
Accrued expenses and other liabilities 302 243
Due stockholder 45 55
--------- ---------
Total current liabilities 1,751 1,937
Long-term debt, net of current portion 248 275
-------- --------
Total liabilities 1,999 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
Retained earnings 300
-------- ---------
Total stockholders' equity 4,505 4,205
------- -------
Totals $6,504 $6,417
====== ======
See Notes to Condensed Consolidated Financial Statements.
F-3
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
------ ------
(In thousands of dollars,
except share data)
Gross revenue $3,247 $2,308
Direct project costs and other costs of
operations 1,303 838
------- --------
Net revenue 1,944 1,470
------- -------
Expenses:
Labor and related expenses 498 432
Selling, general and administrative 1,144 940
Interest 14 24
--------- ---------
Totals 1,656 1,396
------- -------
Income from operations 288 74
Other income 12 26
-------- ---------
Net income (See Notes.) $ 300 $ 100
======= =======
Basic net income per share $.06 $.02
==== ====
Basic weighted average common shares
outstanding 5,263,348 5,263,348
========= =========
See Notes to Condensed Consolidated Financial Statements.
F-4
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Unaudited)
1999 1998
---- ----
(In thousands of dollars)
Operating activities:
Net income $300 $100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 86 74
Changes in operating assets and liabilities:
Accounts receivable - trade 33 (441)
Unbilled receivables (92) 236
Accounts receivable - affiliates 11 (94)
Prepaid expenses and other current assets 9 46
Due from affiliate 27 122
Other assets 20 (188)
Accounts payable 204 183
Customer deposits (39) 29
Accrued expenses and other liabilities 59 87
------ ------
Net cash provided by operating activities 618 154
----- -----
Investing activities - purchase of equipment (53) (75)
------ ------
Financing activities:
Repayment of notes payable - bank (400) (353)
Repayment of long-term debt - bank (27) (50)
Advances from (repayment to) stockholder (10) 390
------ -----
Net cash used in financing activities (437) (13)
----- ------
Net increase in cash 128 66
Cash, beginning of period 25 4
------ ------
Cash, end of period $153 $ 70
==== =====
Supplemental disclosure of cash flow data:
Interest paid $ 14 $ 25
===== =====
Income taxes paid $ 1 $ 61
====== =====
See Notes to Condensed Consolidated Financial Statements.
F-5
<PAGE>
MENLO ACQUISTION CORPORATION
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1999
NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
without audit by Menlo Acquisition Corporation, (the "Company") 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. 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
adjustment 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 (the "8-K/A").
Certain amounts in the 1998 Financial Statements have been reclassified to
conform with the current presentation.
The consolidated results of operations for three months ended March 31, 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
Company operates primarily throughout the tri-state area and eastern
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 for the three months ended
March 31, 1998 have been computed as if the shares outstanding as of March 31,
1999 had been effectively outstanding at January 1, 1998.
For the three months ended March 31, 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.
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-6
<PAGE>
The Company is a guarantor of a $750,000 revolving line-of-credit facility
utilized by its consulting segment. Outstanding borrowings are secured by
substantially all of the segments' 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 March 31, 1999, the segment was in
compliance with all covenants and there were no amounts outstanding under the
line of credit.
As disclosed in the 8-K/A, the Company entered into employment agreements with
two employees, (its President and General Counsel and its Chairman and Chief
Operating Officer.) The agreements have an initial term of five years and may be
renewed for one year periods thereafter.
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 provision 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 in Note 1 above.
Revenue, income from operations and other related segment information
for the three months ended March 31, 1999 and 1998 follows:
1999 1998
---- ----
(In Thousand of Dollars)
Gross revenue:
Consulting $ 2,413 $1,631
Lab 1,085 800
Inter-segment (251) (123)
-------- ------
Totals $ 3,247 $2,308
======== ======
Direct project costs and other
costs of operations:
Consulting $ 1,023 $ 546
Lab 531 415
Inter-segment (251) (123)
-------- ------
Totals $ 1,303 $ 838
======== ======
Other operating expenses:
Consulting $ 1,303 $1,115
Lab 474 311
Inter-segment (121) (30)
-------- ------
Totals $ 1,656 $1,396
======== ======
Income (loss) from operations:
Consulting $ 87 $ (30)
Lab 80 74
Inter-segment 121 30
-------- ------
Totals $ 288 $ 74
======== ======
F-7
<PAGE>
NOTE 4: BUSINESS SEGMENTS (CONTINUED):
Other income (expense):
Consulting $ 132 $ 55
Lab 1 1
Inter-segment (121) (30)
------- -------
Totals $ 12 $ 26
======= =====
Income (loss) before taxes:
Consulting $ 219 $ 25
Lab 81 75
Inter-segment - -
------- ------
Totals $ 300 $ 100
======= =======
There have been no significant changes in the assets of the Company between
March 31, 1999 and the last fiscal year end (December 31, 1998). Accordingly,
the assets of the individual segments are not materially different than those
shown in the 8-K/A.
NOTE 5: INCOME TAXES:
Prior to the acquisition of the two operating subsidiaries by the Company (Refer
to the 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 has
been recorded in the accompanying historical condensed consolidated financial
statements attributable to these limited liability companies. The unaudited
Proforma Basic net income per share data shown below is computed as if the
Company acquired the subsidiaries effective January 1, 1998 and was subject to
Corporate Income Tax:
1999 1998
---- ----
(In thousands of dollars,
except share data)
Historical income before income taxes $ 300 $100
Proforma:
Provision for income taxes 120 40
Net income 180 60
Basic net income per share $.03 $.01
Basic weighted average
common shares outstanding 5,263,348 5,263,348
F-8
<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 table sets forth, for the periods indicated: i) the percentage
that certain items in the condensed consolidated statements of income of the
Company bear to net revenues, and ii) the percentage increase (decrease) in
dollar amounts of such items from year to year.
Percentage
Increase
(Decrease)
Three
Months
Percentage Ended
of Gross Revenue 3/31/99
Three Months Ended vs.
3/31/99 3/31/98 3/31/98
------- ------- -------
Gross revenue 100.0% 100.0% 40.7%
Direct project costs and other
costs of operations 40.1 36.3 55.5%
------ ------ -----
Net revenue 59.9 63.7 32.2%
------ ------ -----
Expenses:
Labor and related expenses 15.3 18.7 15.3%
Selling, general and 35.2 40.7 21.7%
administrative
Interest .5 1.1 (41.7)%
------ ------ -------
Totals 51.0 60.5 18.6%
------ ------ ------
Income from operations 8.9 3.2 289.2%
Other Income .3 1.1 (53.8)%
------- ------- -------
Net income 9.2 4.3 200.0%
===== ==== =======
<PAGE>
First Quarter Comparison for Years 1999 and 1998
Gross revenue for the quarter ended March 31, 1999 totaled $3,247, an
increase of 40.7% from gross revenue of $2,308 for the first quarter of 1998.
Significant revenue increases were realized in both the Consulting and Lab
segments. Net of the rise in inter-segment billing, Lab revenues increased $157
and Consulting increased $782. The increases in the Consulting segment were
primarily attributable to an upswing in the real estate sector and partially due
to an upward adjustment in the billing rates of professional personnel. The Lab
segment revenue increase was due to a higher demand for the Lab services
attributable to an increase in the direct sales force.
Income from operations was $288 in the first quarter of 1999, an
increase of 289.2% from $74 for the same period in 1998. The operating margin
rose to 8.9% in the current quarter from 3.2% in the first quarter 1998. The
increase in operating income and margin was primarily due to the higher gross
revenue discussed above, partially offset by increases in operating expenses as
described below:
Labor and related expenses increased 15.3% compared to the
corresponding period in the prior year due to increases in the size of the
Consulting segments' technical staff and increases in compensation rates.
Selling, general and administrative expenses increased 21.7% compared
to the corresponding period in the prior year primarily due to the increase in
the direct sales force and their associated direct selling expenses.
Interest expense decreased 41.7% in the first quarter 1999 as compared
to the first quarter 1998. This decrease was substantially due to the reduction
in the amount outstanding on the revolving line-of-credit from $600 at March 31,
1998 to $0 at March 31, 1999.
Net income for the quarter was $300 compared with $100 in the first
quarter of 1998, an increase of 200%. Basic quarterly net income per share was
$.06 in 1999 versus $.02 in 1998. The Company had 5,263,348 shares outstanding
at March 31, 1999 and the March 31, 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 March 31, 1999 or March 31,
1998, therefore no dilutive earnings per share were calculated.
<PAGE>
Liquidity and Capital Resources
Net cash provided by operations for the three months ended March 31,
1999 was $618 as compared to $154 for the first three months of the prior year.
The increase in cash provided by operations was substantially due to a decrease
in days sales outstanding in the Company's receivables in the current year first
quarter compared to the prior year first quarter. The decrease in days sales
outstanding was primarily due to the implementation of a new project accounting
software system in the Consulting segment, enabling more timely billing of the
Company's services and resulting in quicker conversion of accounts receivable to
cash.
The Company made net capital expenditures of $53 in the first three
months of 1999 compared to net capital expenditures of $75 in the first three
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.
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 March 31, 1999, the Company had cash on hand and cash equivalents of
$153. The Company has a $750 revolving credit line agreement that expires in
July, 1999. Management forsees no difficulties in the renewal or replacement of
this agreement. At March 31, 1999, borrowings under the line were $0 leaving
$750 available to the Company compared to $600 outstanding at March 31, 1998.
Borrowings were available to the Company at an interest rate of 8.50% at March
31, 1999 and 8.75% at March 31, 1998. The Company is in compliance with all
covenants pertaining to the credit line agreement.
The Company believes that its available cash and cash equivalents, 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.
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
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
quarter 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. Contingency plans will be developed as appropriate to address any
potential problems that may be identified.
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 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 March 31, 1999:
Exhibit No. 27
b. Reports on Form 8-K
During the quarter ended March 31, 1999, the Company filed a Current
Report on Form 8-K, dated March 10, 1999, describing the completion of
the purchase of Environmental Waste Management Associates, L..L..C.,
Environmental Waste Management Associates, Inc. , Integrated Analytical
Laboratories, L.L.C., and Integrated Analytical Laboratories, Inc., and
subsequently filed a Current Report on Form 8-K/A, dated May 10, 1999
providing historical and pro-forma financial information of the
acquired entities.
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
/s/Frank Russomanno
Date: May 17, 1999 -----------------------------
Frank Russomanno
Chief Financial Officer
<PAGE>
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<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-1999
<CASH> 153
<SECURITIES> 0
<RECEIVABLES> 5835
<ALLOWANCES> 562
<INVENTORY> 0
<CURRENT-ASSETS> 5499
<PP&E> 1623
<DEPRECIATION> 636
<TOTAL-ASSETS> 6504
<CURRENT-LIABILITIES> 1751
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 4504
<TOTAL-LIABILITY-AND-EQUITY> 6504
<SALES> 0
<TOTAL-REVENUES> 3247
<CGS> 0
<TOTAL-COSTS> 1303
<OTHER-EXPENSES> 1642
<LOSS-PROVISION> 0
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<INCOME-TAX> 0
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