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 June 30, 2000 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 X No
At August 2, 2000 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
Report of Independent Public Accountants............F-3
Condensed Consolidated Balance Sheets -
June 30, 2000 (Unaudited) and
December 31, 1999...................................F-4
Condensed Consolidated Statements of Income -
Six and Three Months Ended June 30, 2000 and
1999 (Unaudited)....................................F-5 - F-6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and
1999 (Unaudited)....................................F-7
Notes to Condensed Consolidated Financial Statements
June 30, 2000 (Unaudited)...........................F-8 - F-12
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. Submission of Matters to a Vote of Security Holders
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Menlo Acquisition Corporation
We have reviewed the accompanying condensed consolidated
balance sheet of Menlo Acquisition Corporation and
Subsidiaries as of June 30, 2000 and the related condensed
consolidated statements of income and comprehensive income
for the three and six month periods then ended and the
related condensed consolidated statement of cash flows for
the six month period then ended. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information
consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially
less in scope than an audit conducted in accordance with
generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews of the condensed consolidated financial
statements referred to above, we are not aware of any
material modifications that should be made to the
accompanying condensed consolidated interim financial
statements for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet
of Menlo Acquisition Corporation and Subsidiaries as of
December 31, 1999, and the related consolidated statements
of income, statements of comprehensive income (loss),
retained earnings, and cash flows for the year then ended
which are not presented herein; and in our report dated
February 11, 2000, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999, is
fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
The accompanying condensed consolidated statements of income
and comprehensive income for the three and six month periods
ended June 30, 1999 and the statement of cash flows for the
six month period ended June 30, 1999 were not audited or
reviewed by us and, accordingly, we do not express an
opinion or any other form of assurance on them.
J.H. Cohn LLP
Roseland, New Jersey
July 28, 2000
F-3
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
June December
30, 2000 31, 1999
-------- --------
(Unaudited)
(In thousands of dollars)
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,193 $ 1,182
Investments in marketable securities 222 722
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $540 and $614 3,516 3,880
Unbilled receivables 79 65
Affiliates 120 110
Prepaid expenses and other current
assets 79 100
Deferred tax assets 35 34
------ ------
Total current assets 5,244 6,093
Property and equipment,
net of accumulated depreciation of
$1,169 and $965 3,298 1,088
Other assets, net of accumulated amorti-
zation of $7 and $0 68 67
------ ------
Totals $8,610 $7,248
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 23 $ 106
Accounts payable 861 942
Customer deposits 429 445
Accrued expenses and other liabilies 354 444
Income taxes payable 55 -
----- -----
Total current liabilities 1,722 1,937
Long-term debt, net of current
portion - 1,177 168
----- -----
Total liabilities 2,899 2,105
----- -----
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.0001 par value;
2,000,000 shares authorized;
none issued. - -
Common stock, $.0001 par value;
40,000,000 shares authorized;
5,263,348 issued and outstanding 1 1
Additional paid-in capital 4,313 4,313
Retained earnings 1,372 803
Accumulated other comprehensive income
Unrealized holding gains on
marketable securities 25 26
------ ------
Total stockholders' equity 5,711 5,143
------ ------
Totals $8,610 $7,248
====== ======
See Notes to Condensed Consolidated Financial Statements.
F-4
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
Income
------
2000 1999
---- ----
(In thousands of dollars,
except share data)
Gross revenue $7,218 $6,521
Direct project costs and other costs
of operations 2,520 2,562
------- -------
Net revenue 4,698 3,959
------- -------
Expenses:
Labor and related expenses 1,125 981
Selling, general and administrative 2,719 2,372
------ ------
Totals 3,844 3,353
------ ------
Income from operations 854 606
Other income 95 28
------ ------
Income before income taxes 949 634
Provision for income taxes (See Note 5) 380 254
------ ------
Net income $569 $380
====== ======
Basic net income per share
(See Notes 2 and 5) $.11 $.07
====== ======
Basic weighted average common shares
outstanding 5,263,348 5,263,348
========= =========
Comprehensive Income
--------------------
Net income $569 $380
Other comprehensive income (loss), net of taxes
Unrealized holding losses on marketable
securities arising during the period: (1) -
----- ----
Comprehensive income $568 $380
===== ====
See Notes to Condensed Consolidated Financial Statements.
F-5
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
Income
------
2000 1999
---- ----
(In thousands of dollars,
except share data)
Gross revenue $3,651 $3,274
Direct project costs and other costs of
operations 1,323 1,259
------ ------
Net revenue 2,328 2,015
------- -------
Expenses:
Labor and related expenses 548 483
Selling, general and administrative 1,379 1,228
----- -----
Totals 1,927 1,711
----- ------
Income from operations 401 304
Other income 41 30
----- -----
Income before income taxes 442 334
Provision for income taxes (See Note 5) 177 254
----- -----
Net income $265 $ 80
===== =====
Basic net income per share
(See Notes 2 and 5) $ .05 $.01
===== =====
Basic weighted average common shares
outstanding 5,263,348 5,263,348
========= =========
Comprehensive Income
--------------------
Net income $265 $ 80
Other comprehensive income (loss), net of taxes
Unrealized holding losses on marketable
securities arising during the period: (1) -
----- ----
Comprehensive income $264 $ 80
===== =====
See Notes to Condensed Consolidated Financial Statements.
F-6
<PAGE>
MENLO ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
2000 1999
---- ----
(In thousands of dollars)
Operating activities:
Net income $569 $380
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 211 182
Provision for bad debts - 100
Amortization 7 -
Deferred income taxes (1) -
Loss on sale of fixed asset 1 -
Changes in operating assets and liabilities:
Accounts receivable - trade 364 896
Unbilled receivables (14) (68)
Accounts receivable - affiliates (10) (7)
Prepaid expenses and other current
assets 21 12
Due from affiliate - 27
Other assets (8) 21
Accounts payable (81) 208
Customer deposits (16) (87)
Accrued expenses and other liabilities (90) 310
Income taxes payable 55 254
-- -----
Net cash provided by operating
activities 1,008 2,228
----- -----
Investing activities:
Purchase of fixed assets (1,223) (306)
Proceeds from sale of fixed assets 1 -
Redemption (purchase) of marketable
securities, net 499 (181)
--- -----
Net cash used in investing
activities (723) (487)
------ -----
Financing activities:
Repayment of notes payable - bank - (400)
Repayment of long-term debt - bank (274) (54)
Repayment of advances from stockholder - (55)
------ -----
Net cash used in
financing activities (274) (509)
----- -----
Net increase in cash and cash equivalents 11 1,232
Cash and cash equivalents, beginning of period 1,182 25
----- ------
Cash and cash equivalents, end of period 1,193 $ 1,257
===== =======
Supplemental disclosure of cash flow data:
Interest paid $ 8 $ 21
==== =====
Income taxes paid $377 $ 1
==== ====
Supplemental schedule of noncash investing and financial activities:
During the six months ended June 30, 2000, the Company completed an
acquisition of a building for $1,850, in part with the proceeds of a $1,200
mortgage.
See Notes to Condensed Consolidated Financial Statements.
F-7
<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. Accordingly, certain information and footnotes required by
generally accepted accounting principles for complete financial statements have
been omitted. As used herein, "Company" refers to Menlo and its operating
subsidiaries. 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.
Certain amounts in the 1999 Financial Statements have been reclassified to
conform with the current presentation.
The consolidated results of operations for the six and three month periods ended
June 30, 2000 are not necessarily of the results to be expected for the full
year. The unaudited condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999.
The Company has two operating subsidiaries. One provides environmental
consulting, remedial and disposal services with offices in Parsippany and West
Windsor, New Jersey and in Englewood, Colorado (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, Pennsylvania and Colorado.
NOTE 2: EARNINGS PER SHARE
The Company presents "basic" and, if appropriate, "diluted" earnings (loss) per
common share pursuant to the provisions of Statement of Financial Accounting
Standards No. 128, Earnings per Share ("FAS 128").
Basic earnings (loss) per common share is calculated by dividing net income or
loss by the weighted average number of common shares outstanding during the
period. The calculation of diluted earnings (loss) per common share is similar
to that of basic earnings (loss) per common share, except that the denominator
is increased to include the number of additional common shares that would have
been outstanding if all potentially dilutive common shares, principally those
issuable upon the exercise of stock options, were issued during the period.
Diluted earnings per share have not been presented for the six and three months
ended June 30, 2000 because the difference to basic earnings per share was not
material. For the six and three months ended June 30, 1999, the Company had no
potentially dilutive common shares.
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-8
<PAGE>
The Company had a $750,000 revolving line-of-credit facility utilized by its
consulting segment that expired on April 30, 2000. Outstanding borrowings were
secured by substantially all of the Company's assets. At the expiration date,
there were no amounts outstanding under this line of credit.
The Company has received a commitment from another financial institution to
replace its expired line-of-credit. The commitment is for a $1,000,000 revolving
line-of-credit to be used by its operating segments and a $750,000 line to be
utilized by the Company's Lab segment for either the purchase or re-finance of
equipment. The Company anticipates the completion of this refinancing will occur
during the third quarter of 2000.
In addition, the Company, through its Lab segment, has purchased the facility in
which the Lab operates from an unaffiliated third party. The purchase price of
the building was $1,850,000. The Company financed this purchase, in part, with a
mortgage from a financial institution in the amount of $1,200,000. The balance
of the purchase was financed with operating capital of the Company. Commencing
August 1, 2000, the mortgage is payable in monthly installments of $10,605
(based on a twenty year amortization) including interest at 8.75% until July 1,
2005 at which time the outstanding balance is due. Subject to certain
conditions, the mortgage may be extended for an additional five years at an
interest rate of 250 basis points above the Current Index Rate, as defined. For
each of the five years subsequent to June 30, 2000, principal repayments are,
respectively, $23,169, $25,279, $27,582, $30,095 and $32,836. The mortage is
subject to certain financial covenants, as defined, with which the Company is in
compliance at June 30, 2000. It is anticipated that this facility will support
future growth of the Lab segment for at least the next five years.
NOTE 4: BUSINESS SEGMENTS
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.
Additionally, revenue and expenses (primarily legal and accounting) related
directly to Menlo Acquisition Corporation are reported under the heading of
"Holding"
Revenue, income from operations and other related segment information
for the six months ended June 30, 2000 and 1999 follows:
2000 1999
---- ----
(In Thousands of Dollars)
Gross revenue:
Consulting - Third Party $ 4,679 $4,646
Lab - Third Party 2,539 1,875
Lab - Inter-segment 484 445
Holding - Inter-segment 1,013 634
Inter-segment (1,497) (1079)
-------- ------
Totals $7,218 $6,521
====== ======
Direct project costs and other costs of operations:
Consulting $ 1,629 $1,870
Lab 1,375 1,137
Inter-segment (484) (445)
-------- ------
Totals $ 2,520 $2,562
======== ======
Other operating expenses:
Consulting $ 2,892 $2,601
Lab 1,199 1,006
Holding 80 -
Inter-segment (327) (254)
-------- -------
Totals $ 3,844 $3,353
======== ======
F-9
<PAGE>
NOTE 4: BUSINESS SEGMENTS (CONTINUED):
Income from operations:
Consulting $158 $ 175
Lab 449 177
Holding 933 634
Inter-segment (686) (380)
--------- --------
Totals $ 854 $ 606
======== =====
Other income (expense):
Consulting $ 410 $ 276
Lab (4) 6
Holding 16 -
Inter-segment (327) (254)
-------- --------
Totals $ 95 $ 28
======= =====
Income before taxes:
Consulting $ 568 $ 451
Lab 445 183
Holding 949 634
Inter-segment (1,013) (634)
-------- -----
Totals $ 949 $ 634
======== =======
Provision for income taxes:
Consulting $ - $ -
Lab - -
Holding 380 254
--- ---
Totals $ 380 $ 254
======== =====
Net Income:
Consulting $ 568 $ 451
Lab 445 183
Holding 569 380
Inter-segment (1,013) (634)
-------- -----
Totals $ 569 $ 380
======== =======
Revenue, income from operations and other related segment
information for the the three months ended June 30, 2000 and 1999 follows:
2000 1999
---- ----
(In Thousands of Dollars)
Gross revenue:
Consulting - Third Party $ 2,317 $2,233
Lab - Third Party 1,334 1,041
Lab - Inter-segment 241 194
Holding - Inter-segment 480 334
Inter-segment (721) (528)
-------- -----
Totals $3,651 $3,274
====== ======
Direct project costs and other costs of operations:
Consulting $ 890 $847
Lab 674 606
Inter-segment (241) (194)
-------- --------
Totals $ 1,323 $1,259
======== ======
F-10
<PAGE>
NOTE 4: BUSINESS SEGMENTS (CONTINUED):
Other operating expenses:
Consulting $ 1,421 $1,305
Lab 625 539
Holding 51 -
Inter-segment (170) (133)
-------- -------
Totals $ 1,927 $1,711
======== ======
Income from operations:
Consulting $ 6 $ 81
Lab 276 90
Holding 429 334
Inter-segment (310) (201)
--------- -------
Totals $ 401 $ 304
======== ======
Other income (expense):
Consulting $ 201 $ 151
Lab (3) 12
Holding 13 -
Inter-segment (170) (133)
-------- --------
Totals $ 41 $ 30
======= =====
Income before taxes:
Consulting $ 207 $ 232
Lab 273 102
Holding 442 334
Inter-segment (480) (334)
-------- -----
Totals 442 $ 334
======== =======
Provision for income taxes:
Consulting $ - $ -
Lab - -
Holding 177 254
--- ---
Totals $ 177 $ 254
======== =====
Net Income:
Consulting $ 207 $ 232
Lab 273 102
Holding 265 80
Inter-segment (480) (334)
-------- -----
Totals $ 265 $ 80
======== ======
Assets by segment as of June 30, 2000 and 1999 follow:
2000 1999
----- ----
(In Thousands of Dollars)
Cash and investments in marketable securities:
Consulting $ 162 $ 1,246
Lab 81 192
Holding 1,172 -
----- ---
Totals $ 1,415 $ 1,438
======== ========
F-11
<PAGE>
NOTE 4: BUSINESS SEGMENTS (CONCLUDED):
Accounts receivable, net:
Consulting $ 2,719 $ 3,346
Lab 956 1,153
Holding 40 -
Inter-segment - (195)
-------- -----
Totals $ 3,715 $ 4,304
======= =========
Equipment and furnishings, net:
Consulting $ 438 $ 443
Lab 2,860 701
-------- ----
Totals $ 3,298 $ 1,144
======== ========
Other assets:
Consulting $ 97 $ 72
Lab 3 15
Holding 82 -
-- ---
Totals $ 182 $ 87
======= ======
Total assets $ 8,610 $ 6,973
======= =======
NOTE 5: INCOME TAXES:
Prior to the acquisition of the two operating subsidiaries by the Company on
March 10, 1999, 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 accompanying condensed consolidated statements of income
and comprehensive income attributable to these limited liability companies for
the quarter ended March 31, 1999. However, during the quarter ended June 30,
1999, a provision for income tax was recorded for all income attributable to
these limited liability companies for the first six months of 1999. Therefore,
the net income and basic net income per share data shown in the accompanying
condensed consolidated statements of income and comprehensive income is computed
as if the Company acquired the subsidiaries effective January 1, 1999 and was
subject to Corporate Income Tax.
NOTE 6: PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (In thousands of dollars):
Range of
Estimated June December
Useful Lives 30, 2000 31, 1999
------------ -------- --------
Land - $ 158 $ -
Building 39 Years 1,722 -
Equipment 3-7 Years 2,066 1,603
Furniture and fixtures 7 Years 164 164
Vehicles 5 Years 202 131
Leasehold improvements 7 Years 155 155
------ ------
4,467 2,053
Less accumulated depreciation 1,169 965
------ ------
Totals $3,298 $1,088
====== ======
F-12
<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 and the possibility of the
Company making acquisitions during the next 12 to 18 months. 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 and
comprehensive income of the Company bear to gross revenues, and ii) the
percentage increase (decrease) in dollar amounts of such items from period to
period.
Six Month Comparison for Years 2000 and 1999
Percentage
Increase
(Decrease)
Six
Months
Percentage Ended
of Gross Revenue 6/30/00
Six Months Ended vs.
---------------- ---
6/30/00 6/30/99 6/30/99
------- ------- -------
Gross revenue 100.0% 100.0% 10.7%
Direct project costs and other costs
of operations 34.9 39.3 (1.6)%
------ ------ ------
Net revenue 65.1 60.7 18.7%
------ ------ ------
Expenses:
Labor and related expenses 15.6 15.0 14.7%
Selling, general and
administrative 37.7 36.4 14.6%
---- ---- -----
Totals 53.3 51.4 14.6%
------ ------ -------
Income from operations 11.8 9.3 40.9%
Other income 1.5 0.4 239.3%
------ ----- ------
Income before income taxes 13.3 9.7 49.7%
==== ==== ======
<PAGE>
Gross revenues for the six months ended June 30, 2000 were $7,218 versus $6,521
for the first six months of 1999, an increase of 10.7%. The increase occurred
primarily in the Lab segment. Lab revenues increased $664 (not including
inter-segment billing) while Consulting revenues increased slightly by $33. The
significant increase in the revenue of the Lab segment was a continuing result
of effective direct sales efforts, strong demand for analytical services from
the environmental sector, higher utilization of equipment used in performing Lab
services and increased sales from the broadening of the customer base into the
pharmaceutical industry. Consulting revenue is composed of both hours billed by
the professional staff (the more profitable component) and pass-through billing
of sub-contractor costs associated with client projects. While overall
consulting revenue only increased slightly, the hours billed component increased
by $313. A decrease of $280 occurred in the pass-through component due to less
reliance on sub-contractors in performing client services.
Income from operations was $854 in the first six months of 2000 as opposed to
$606 for the same period in 1999. This represents an increase of 40.9%.
Operating margins rose to 11.8% for the current period from 9.3% for the first
six months of 1999. The increase in operating income and margin was due to the
significant increase in the Lab segment profitability. This was due to the
increased sales volume, which resulted in a higher profit percentage due to the
relatively low marginal costs associated with additional analytical testing as
equipment usage approaches capacity. Related lab segment operating expenses
remained relatively constant. The higher lab income was partially offset by
slightly reduced operating income from the consulting segment due to higher
expenses in that segment.
Labor and related expenses increased 14.7% 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 in order to retain
and attract qualified personnel.
Selling, general and administrative expenses increased 14.6% compared to the
corresponding period in the prior year primarily due to additional costs
associated with the Colorado office, which was opened in January 2000, and
increased administrative staffing costs in the Lab segment needed to handle the
volume growth.
Other income increased 239.3% in the first six months of 2000 as compared to the
first six months of 1999. This was due to increased interest income from
invested cash and a corresponding decrease in interest expense due to having
little or no debt.
Income before taxes for the period was $949 compared with $634 in the first six
months of 1999, an increase of 49.7%. This increase was due to the factors
discussed above. Tax provisions were recorded at an effective rate of 40% for
the first six months of 2000 and the Basic net income per share was $.11. In the
corresponding period of 1999, the tax provision was also calculated using an
effective rate of 40% and the Basic net income per share was $.07. The Company
had 5,263,348 shares outstanding at June 30, 2000 and diluted earnings per share
would also be $.11 for the quarter then ended as noted in Note 2 in the Notes to
Condensed Consolidated Financial Statements. For the six months ended June 30,
1999, the Company had no potentially dilutive common shares.
<PAGE>
Second Quarter Comparison for Years 2000 and 1999
Percentage
Increase
(Decrease)
Three
Months
Percentage Ended
of Gross Revenue 6/30/00
Three Months Ended vs.
------------------ ---
6/30/00 6/30/99 6/30/99
------- ------- -------
Gross revenue 100.0% 100.0% 11.5%
Direct project costs and other costs
of operations 36.2 38.5 5.1%
------ ------ ------
Net revenue 63.8 61.5 15.5%
------ ------ ------
Expenses:
Labor and related expenses 15.0 14.8 13.5%
Selling, general and administrative 37.8 37.5 12.3%
---- ---- -----
Totals 52.8 52.3 12.6%
------ ------ ------
Income from operations 11.0 9.2 31.9%
Other income 1.1 1.0 36.7%
------ ---- -----
Income before income taxes 12.1 10.2 32.3%
==== ==== ======
Gross revenues for the three months ended June 30, 2000 were $3,651 versus
$3,274 for the same period in 1999, an increase of 11.5%. Again, the increase
occurred primarily in the Lab segment. Lab revenues grew $293 (net of
inter-segment billing) while Consulting revenues increased by $84. Lab revenues
continue to grow significantly over prior periods due to the reasons outlined in
the discussion above. Consulting professional staff billing increased by $88
while there was a decrease of $4 in the pass-through component of consulting
revenue.
Income from operations was $401 in the second quarter of 2000 as opposed to $304
for the same period in 1999. This represents an increase of 31.9%. Operating
margins rose to 11.0% for the current period from 9.2% for the second quarter
1999. The change in operating income and margin was again due to the increase in
the Lab segment profitability. Reasons for this increase are discussed in the
six-month comparison above. This was also partially offset by reduced second
quarter operating income from the consulting segment as compared to the prior
year six-month period.
Labor and related expenses increased 13.5% compared to the corresponding period
in the prior year due to the reasons explained in the six-month comparison.
Selling, general and administrative expenses increased 12.3% compared to the
corresponding period in the prior year due to additional costs in the consulting
segment associated with the Colorado office, which was opened in January 2000.
Other income increased 36.7% in the second three months of 2000 as compared to
the second three months of 1999. Again, this was due to increased income from
invested cash and a corresponding reduction in interest expense compared to the
prior year period.
<PAGE>
Income before taxes for the period was $442 compared with $334 in the second
quarter of 1999, an increase of 32.3%. This increase was due to the factors
discussed above. Tax provisions were recorded at an effective rate of 40% for
the second quarter 2000 and the Basic net income per share was $.05. Although no
tax provision was recorded in the first quarter of 1999 (see Note 5 in the Notes
to Condensed Consolidated Financial Statements), the second quarter provision
was made for income related to the first six months of 1999, not just the second
quarter. This resulted in an effective rate of 76% of second quarter 1999 income
and the corresponding Basic net income per share was $.01. The Company had
5,263,348 shares outstanding at June 30, 2000 and diluted earnings per share
would also be $.05 for the quarter then ended. The Company had no potentially
dilutive common shares for the quarter ended June 30, 1999.
Liquidity and Capital Resources
Net cash provided by operations for the six months ended June 30, 2000 was
$1,008 as compared to $2,228 for the first six months of the prior year. The
amount of cash provided by operations in the prior period was due primarily to
faster collection of accounts receivable as the effects of a newly implemented
billing system were being realized. Additionally, a concentrated effort was
successfully made to improve the turnover of accounts receivable and reduce
their overall level. In comparison, during the 2000 period, the Company utilized
its increased cash flow from accounts receivable to more timely satisfy its
operating liabilities. The cash provided in the current period is a result of
continued success in the reduction of accounts receivable levels and a
significant increase in net income in comparison to the prior year.
The Company made capital expenditures on fixed assets of $1,223 in the first six
months of 2000 compared to capital expenditures of $306 in the first six months
of the prior year. The most significant expenditure was the purchase of the Lab
segment's operating facility for approximately $1,850. This purchase was
financed with a $1,200 mortgage loan and approximately $650 of Company working
capital. Additionally, expenditures were made to maintain and enhance the
technology within the Lab segment. The Company anticipates that its capital
expenditures, excluding possible acquisitions and the building purchase, for the
current year will be higher by approximately $200 to those incurred in the prior
year. The Company redeemed a net of $499 of marketable securities in the first
six months of 2000 whereas net purchases of $181 were made in the first six
months of 1999.
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 June 30, 2000, the Company had cash and cash equivalents on hand of $1,193
and working capital of $3,522. The Company has a commitment for a $1,000
revolving line-of-credit facility to be utilized by its operating segments.
Additionally, the Company has a commitment for a $750 line that can be utilized
for purchase or re-finance of equipment used by its Lab segment. Any portion of
the $750 equipment line, if utilized, will convert into a term loan with a
maximum five-year amortization. These commitments replaced a previous $750
revolving credit line agreement that expired on April 30, 2000. In conjunction
with that expiration, the Company paid off, in full, its long-term debt in the
amount of $248, the outstanding balance on April 30, 2000. This transaction left
the Company with no remaining bank debt, exclusive of the $1,200 mortgage
discussed above. At June 30, 2000, there were no other borrowings outstanding
leaving the full amounts of both the revolving line-of-credit and the equipment
line available to the Company as soon as the commitment is finalized (expected
to be completed in the third quarter 2000). At June 30, 1999, there were no
amounts outstanding on the credit line then available. The Company is in
compliance with all covenants pertaining to the future credit line agreements.
<PAGE>
The Company believes that its available cash, as well as cash generated from
operations and its committed credit lines, will be sufficient to meet the
Company's cash requirements for the balance of the fiscal year. Additionally,
the Company intends to continue 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. Other than previously disclosed, there is no present
agreement, understanding or other arrangement with respect to any acquisition or
investment. However, future agreements concerning acquisitions may require the
Company to obtain additional financing.
Inflation has not had a material effect on the revenues or the income from
operations of the Company for the past two years. Inflation is not expected to
have a material future effect.
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. Meeting
The annual meeting of shareholders was held on June 7, 2000:
b. Directors Elected
The following individuals were elected directors at the annual meeting:
Richard S. Greenberg, Ph.D
Lawrence B. Seidman
George Greenberg
c. Matters Voted
I. Election of Directors:
Richard S. Greenberg, Ph.D For: 5,221,049 Withheld: 2,964
Lawrence B. Seidman For: 5,221,049 Withheld: 2,964
George Greenberg For: 5,221,049 Withheld: 2,964
II. Approval of the Menlo Acquisition Corporation 1999 Stock Option Plan:
For: 5,055,558 Against: 3,227 Abstain: 1,281 Not Voted: 163,947
III. Appointment of J.H. Cohn LLP as independent auditors for
the fiscal year ending December 31, 2000:
For: 5,220,733 Against: 2,063 Abstain: 1,217
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 June 30, 2000:
Exhibit No. 27 - Financial Data Schedule
b. Reports on Form 8-K
During the quarter ended June 30, 2000, the Company filed a Current
Report on Form 8-K, dated June 13, 2000 providing information
concerning the purchase of the facility in which the Lab segment
operates.
<PAGE>
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
/ss/Frank Russomanno
Date: August 2, 2000 ---------------------------------
Frank Russomanno
Chief Financial Officer
