UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1997 Commission File Number 0-8693
TRANSNET CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-1892295
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45 Columbia Road
Somerville, New Jersey 08876-3376
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (908) 253-0500
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 7, 1997: 5,216,804.
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
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INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997.
- ------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997 [Unaudited]
and June 30, 1997 [Audited]...................................... 1..... 2
Consolidated Statements of Operations for the Three Months
Ended September 30, 1997 and 1996 [Unaudited].................... 3.....
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1997 and 1996 [Unaudited].......................... 4.....
Notes to Consolidated Financial Statements [Unaudited]........... 5..... 8
Item 2. Managements' Discussion and Analysis of the Financial
Condition and Results of Operations........................ 9..... 11
PART II: OTHER INFORMATION..........................................12.....
SIGNATURES..........................................................13.....
. . . . . . . . . . . . . . .
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
September 30, June 30,
1 9 9 7 1 9 9 7
Assets:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $2,138,760 $ 3,336,917
Accounts Receivable - Net 10,459,428 8,986,318
Inventories 3,007,550 3,274,462
Land 519,638 --
Deferred Tax Asset 334,700 334,700
Other Current Assets 278,275 324,546
---------- -----------
Total Current Assets 16,738,351 16,256,943
Property and Equipment - Net 850,674 916,254
Other Assets 520,442 1,051,101
---------- -----------
Total Assets $18,109,467 $18,224,298
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $2,592,868 $ 965,340
Accrued Expenses 738,788 650,242
Floor Plan Payable 2,195,484 4,384,040
Deferred Income 281,597 162,576
Other Current Liabilities 209,705 264,481
---------- -----------
Total Current Liabilities 6,018,442 6,426,679
---------- -----------
Deferred Tax Liability 97,700 97,700
---------- -----------
Commitments and Contingencies -- --
---------- -----------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value, Authorized
15,000,000 Shares; Issued 7,469,524 Shares
[of which 2,252,720 are in Treasury] 74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 7,449,528 7,156,122
---------- -----------
Totals 18,210,968 17,917,562
Less: Treasury Stock - At Cost (6,217,643) (6,217,643)
---------- -----------
Total Stockholders' Equity 11,993,325 11,699,919
---------- -----------
Total Liabilities and Stockholders' Equity $18,109,467 $18,224,298
=========== ===========
See Notes to Consolidated Financial Statements.
</TABLE>
1
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF OPERATIONS
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<TABLE>
Three months ended
September 30,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Revenue $19,513,585 $16,539,108
Cost of Revenue 17,574,117 14,696,920
----------- -----------
Gross Profit 1,939,468 1,842,188
----------- -----------
Expenses:
Selling, General and Administrative Expenses 1,674,272 1,560,137
Bad Debt Expense 7,500 7,500
----------- -----------
Total Expenses 1,681,772 1,567,637
----------- -----------
Operating Income 257,696 274,551
----------- -----------
Other Income [Expense]:
Interest Income 43,710 28,032
Interest Expense -- (5,302)
----------- -----------
Other Income - Net 43,710 22,730
----------- -----------
Income Before Provision for Income Taxes 301,406 297,281
Provision for Income Tax 8,000 --
----------- -----------
Net Income $ 293,406 $ 297,281
=========== ===========
Income Per Common Share $ 0.06 $ 0.06
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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<TABLE>
Three months ended
September 30,
1 9 9 7 1 9 9 6
------- -------
Operating Activities:
<S> <C> <C>
Net Income $ 293,406 $ 297,281
----------- -----------
Adjustments to Reconcile Net Income to Net Cash
Provided by [Used for]
Operating Activities:
Depreciation and Amortization 77,580 88,803
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,473,110) (403,789)
Inventory 266,912 501,650
Other Current Assets 46,271 225,597
Other Assets (979) (979)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 1,716,074 (1,016,950)
Deferred Income 119,021 (65,969)
Other Current Liabilities (54,776) (65,375)
----------- -----------
Total Adjustments 696,993 (737,012)
----------- -----------
Net Cash - Operating Activities 990,399 (439,731)
----------- -----------
Investing Activities:
Capital Expenditures -- (21,237)
----------- -----------
Financing Activities:
Floor Plan Payable (2,188,556) (234,690)
----------- -----------
Net [Decrease] in Cash and Cash Equivalents (1,198,157) (695,658)
Cash and Cash Equivalents - Beginning of Periods 3,336,917 2,383,741
----------- -----------
Cash and Cash Equivalents - End of Periods $ 2,138,760 $ 1,688,083
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ -- $ 6,000
Income Taxes $ 18,000 $ 17,000
</TABLE>
Supplemental Disclosures of Non-Cash Investing Activities:
During 1996, $520,790 of other assets were placed into service and classified
as property and equipment.
During 1997, the Company disposed of $138,126 of fully depreciated property
and equipment.
See Notes to Consolidated Financial Statements.
3
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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[1] Summary of Significant Accounting Policies
[A] Consolidation - The consolidated financial statements include the accounts
of the Corporation and its wholly-owned subsidiary, Century American
Corporation. Intercompany transactions and accounts have been eliminated in
consolidation. During the prior year, the Corporation liquidated four inactive
subsidiaries whose activities were previously merged with the Corporation.
[B] Inventory - Inventory consists of finished goods. The Corporation's
inventory is valued at the lower of cost [determined on the average cost basis]
or market.
[C] Cash and Cash Equivalents - For the purposes of the statement of cash flows,
the Corporation considers highly liquid debt instruments, purchased with a
maturity of three months or less, to be cash equivalents.
[D] Earnings Per Share - Earnings per common share are based on 5,216,804
weighted shares outstanding for the period ended September 30, 1997 and 1996.
[2] Income Taxes
The Corporation has a deferred tax asset of $334,700 based primarily on net
operating loss carryforwards of approximately $650,000. A valuation allowance of
$372,000 has been provided against this deferred asset. Realization of the tax
asset is dependent upon future events effecting utilization of the net operating
loss carryforwards ("NOL's"). NOL's expire in the years 2005 and 2006.
Current tax expense of $117,000 has been offset by the net operating loss
carryforward benefit of $117,000.
[3] Reclassification
Certain items from prior year's financial statements have been reclassified to
conform to the current year's presentation.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments consisting only of normal recurring
adjustments necessary to present fairly the financial position, the results of
operations and cash flows for the periods presented.
These statements should be read in conjunction with the summary of significant
accounting policies and notes contained in the Corporation's annual report on
Form 10-K for the year ended June 30, 1997.
4
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
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[4] Subsequent Events
[A] On October 31, 1997, the Corporation executed an Asset Purchase Agreement
providing for the sale for a maximum $20.5 million cash purchase price of
substantially all of its operating assets, subject to certain liabilities, to a
wholly-owned subsidiary of GE Capital Information Technology Solutions, Inc.
["GEITS"]. GEITS is an affiliate of GE Capital Services which in turn is a
wholly-owned subsidiary of General Electric Company. The sale is subject to the
approval of TranNet's stockholders at a stockholder meeting anticipated in the
first quarter of calendar 1998, as well as the occurrence of certain other
conditions.
[B] On November 11,1997, the Corporation executed an agreement to sell
approximately 6.32 acres of unimproved real property in Mountainside, New Jersey
[the "real property"] to W Realty LLC ["W Realty] for the appraised value of
$1,000,000. W Realty is a partnership consisting of John J. Wilk, Chairman of
the Board, and Raymond J. Rekuc, a Director of the Corporation. The purchase
price is payable through a credit extended by W Realty as sub-lessor to the
Corporation as sub-lessee for the $410,000 of rent payable by the Corporation
over the last two years of its sublease for its principal facility in
Somerville, New Jersey and a $590,000 promissory note executed by W Realty
payable in installments of $150,000 in February 1998 and $440,000 in November
1998. The note bears interest at the rate of 8% per annum and is secured by a
mortgage on the Real Property. The Real Property was specifically excluded from
the assets which the Corporation agreed, subject to stockholder approval, to
sell to GEITS [See Note 4A].
. . . . . . . . . . . . . . . . .
5
<PAGE>
Item 2:
TRANSNET CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Results of Operations
Revenues for the three months ended September 30, 1997 were $19,513,585 as
compared with $16,539,108 for the quarter ended September 30, 1996. For the
quarter ended September 30, 1997 the Corporation reported net income of $293,406
as compared with net income of $297,281 for the corresponding period in 1996.
The increase in revenues is due to increases in hardware sales as well as
increased sales of the Corporation's technical services (hardware service
contracts, technical support contracts and training).
Earnings for the quarter ended September 30, 1997 are attributable to increased
revenues, including a significant increase in sales of hardware and technical
services to governmental and educational institutions, which in turn is
attributable to the seasonal nature of their budgets; and management's
concentration on sales of network and system integration products which yield
higher profit margins, continued growth of the Corporation's technical service
and support programs, and continued adherence to cost control measures. Service
related revenues, though not a material source of the Corporation's revenues,
are significant in their contributions to earnings because these operations
yield a higher profit margin than equipment sales. In addition to the technical
services sales referenced above, for the quarter ended September 30, 1997, the
increase in revenues from the provision of service, support, outsourcing and
network integration is largely the result of the Corporation renewing and/or
entering into service contracts with a number of large corporate customers. Most
of these contracts are short-term, usually twelve months or less, and contain
provisions which permit early termination. Although the contracts generally
contain renewal terms, there is no assurance that such renewals will occur.
The computer industry continually faces a trend of decreasing prices of
computers and related equipment. Management believes that this trend will
continue. Industrywide, the result of price erosion has been lower profit
margins on sales, which require businesses to sell a greater volume of equipment
to maintain past earning levels. Another result of the price decreases has been
intensified competition within the industry, including the consolidation of
businesses through merger or acquisition and the entrance of manufacturers into
technical services business. Management believes that the adoption of policies
by many larger corporate customers to limit the number of vendors permitted to
provide goods and services for specified periods of time has further increased
price competition. To meet these competitive challenges and to maximize the
Corporation's profit margin, management has modified its marketing strategy and
has enforced expense controls. Management's current marketing strategy is
designed to increase sales of lower revenue/higher profit margin products
related to service and support operations. Management's efforts include
targeting commercial, educational and governmental customers which provide
marketplaces for a wide range of products and services at one time, a
cost-effective approach to sales. Management believes it maximizes profits
through concentration on sales of value-added applications; promotion of the
Corporation's service and support operations; and strict adherence to
cost-cutting controls. In light of the above, management emphasizes and
continues the aggressive pursuit of an increased volume of equipment sales,
technical service and support programs, and promotion of its training services.
Interest income for the quarter increased as compared to the corresponding
period in the prior year because of the increase in the amount of funds invested
and higher yields. Interest expense decreased in the quarter ended September 30,
1997 compared to the same period in 1996 as a result of management's efforts to
shorten the collection cycles of accounts receivables and payables, with a
resulting reduction in related financing costs.
Selling, general and administrative expenses remained relatively constant at
approximately 9% of revenues for the quarter ended September 30, in both fiscal
1997 and 1996 periods, due to management's strict adherence to cost-control
measures.
6
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Liquidity and Capital Resources
There are no material commitments of the Corporation's capital resources.
The Corporation currently finances a portion of its accounts receivable and
finances purchases of portions of its inventory through floor-planning
arrangements under which such inventory secures the amount outstanding.
Inventory decreased in the quarter ended September 30, 1997 as compared to the
corresponding period in 1996 in response to increased inventory turns related to
the higher volume of sales. Management shall continue its efforts to increase
turnover and to provide the Corporation with protection against inventory
obsolescence resulting from the rapid technological advances of the computer
industry.
Accounts receivable increased for the quarter ended September 30, 1997 as
compared to the same period in fiscal 1997 as a direct result of the increase in
revenues. Accounts payable decreased for the quarter ended September 30, 1997
compared with the same period in 1996 as a result of management's efforts to
shorten payables cycles and thereby avoid floor plan financing costs. Cash
levels decreased in the three months ended September 30, 1997 as compared to the
corresponding period in 1996. The decrease is due to scheduled payment
requirements under the floor planning arrangements.
For the fiscal quarter ended September 30, 1997, as in the fiscal quarter ended
September 30, 1996, the internal resources of the Corporation were sufficient to
enable the Corporation to meet its obligations.
Management has recently been apprised of an unasserted possible claim or
assessment involving the Corporation's Pension Plan. The Plan was adopted in
1981 as a defined benefit plan. In 1989, various actions were taken by the
Corporation to terminate the Plan, to convert it to a defined contribution plan
and to freeze benefit accruals. No filing for plan termination was made with the
Pension Benefit Guaranty Corporation (the "PBGC"). Additionally, a final amended
and restated plan document incorporating the foregoing amendments and other
required amendments including those required by the Tax Reform Act of 1986 do
not appear to have been properly adopted. In addition, since 1989, it appears
that certain operational violations occurred in the administration of the Plan
including the failure to obtain spousal consent in certain instances where it
was required.
The Corporation currently intends to (i) take corrective action under the IRS
Walk-in Closing Agreement Program ("CAP"), (ii) apply for a favorable
determination letter with respect to the Plan from the IRS, and (iii) terminate
the Plan. The CAP program provides a correction mechanism for "non amenders"
such as the Corporation. Under CAP, the Corporation will be subject to a
monetary sanction (which could range from $1,000 to approximately $40,000). In
addition, the Corporation will be required to correct, retroactively,
operational violations, and to pay any resulting excise taxes and PBGC premiums
and penalties that may be due. Special counsel has advised the Corporation that
although it believes that the Corporation will incur some liability in
connection with the correction of such operational violations, it is not
possible to estimate the potential amount of or the range of liability at this
time. Such counsel has also advised that depending on the corrections required,
such liability could range from an insignificant to a material amount, but that
due to the uncertainties involved, any estimate in dollar terms of the range of
any such liability at this time would be speculative and potentially misleading.
7
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
PART II - OTHER INFORMATION
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Item 6:Exhibits and Reports on Form 8-K
A. Exhibits - None required to be filed for Part II of this report.
B. Reports on Form 8-K - None filed during the quarter for which this
report is submitted.
8
<PAGE>
SIGNATURES
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Pursuant to the requirements of Section 13 or 15(d) 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.
TransNet Corporation
Date: November 18, 1997 By:
Steven J. Wilk,
Chief Executive Officer
Date: November 18, 1997 By:
John J. Wilk,
Chief Financial and Accounting Officer
9
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the consolidated
balance sheet and the consolidated statement of operations and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> jun-30-1997
<PERIOD-END> sep-30-1997
<CASH> 2,130,760
<SECURITIES> 0
<RECEIVABLES> 10,459,428
<ALLOWANCES> 0
<INVENTORY> 3,007,550
<CURRENT-ASSETS> 16,738,351
<PP&E> 850,674
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,109,467
<CURRENT-LIABILITIES> 6,018,442
<BONDS> 0
0
0
<COMMON> 74,695
<OTHER-SE> 11,918,630
<TOTAL-LIABILITY-AND-EQUITY> 18,109,467
<SALES> 19,513,585
<TOTAL-REVENUES> 19,513,585
<CGS> 17,574,117
<TOTAL-COSTS> (43,710)
<OTHER-EXPENSES> (43,710)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 301,406
<INCOME-TAX> 8,000
<INCOME-CONTINUING> 293,406
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293,406
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
