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, 1998 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, 1998: 5,216,804
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998.
- ------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 [Unaudited]
and June 30, 1998 [Audited]...................................... 1
Consolidated Statements of Operations for the Three Months
Ended September 30, 1998 and 1997 [Unaudited].................... 2
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1998 and 1997 [Unaudited].......................... 3
Notes to Consolidated Financial Statements [Unaudited]........... 4
Item 2. Managements' Discussion and Analysis of the Financial
Condition and Results of Operations........................ 5.....7
PART II: OTHER INFORMATION.......................................... 8
SIGNATURES.......................................................... 9
. . . . . . . . . . .
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
September 30, June 30,
1 9 9 8 1 9 9 8
[Unaudited]
Assets:
Current Assets:
Cash and Cash Equivalents $4,552,278 $ 5,378,846
Accounts Receivable - Net 7,541,298 6,327,434
Inventories - Net 1,109,880 1,407,682
Mortgage Receivable - Related Party 473,295 464,423
Other Current Assets 96,958 136,621
Deferred Tax Asset 177,200 177,200
---------- -----------
Total Current Assets 13,950,909 13,892,206
Property and Equipment - Net 558,377 613,704
Other Assets 880,462 890,608
---------- -----------
Total Assets $15,389,748 $15,396,518
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 922,966 $ 598,008
Accrued Expenses 497,767 614,875
Accrued Payroll 202,413 234,722
Floor Plan Payable 390,155 776,901
Deferred Income -- 100,649
Income Taxes Payable 295,917 210,200
Other Current Liabilities 77,332 156,653
---------- -----------
Total Current Liabilities 2,386,550 2,692,008
---------- -----------
Deferred Tax Liability 80,700 80,700
---------- -----------
Commitments and Contingencies -- --
---------- -----------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value, Authorized
15,000,000 Shares; Issued 7,469,524 Shares in 199
and 1997 [of which 2,252,720 are in Treasury] 74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 8,378,701 8,080,013
---------- -----------
Totals 19,140,141 18,841,453
Less: Treasury Stock - At Cost (6,217,643) (6,217,643)
---------- -----------
Total Stockholders' Equity 12,922,498 12,623,810
---------- -----------
Total Liabilities and Stockholders' Equity $15,389,748 $15,396,518
=========== ===========
See Notes to Consolidated Financial Statements.
1
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended
September 30,
1 9 9 8 1 9 9 7
------- -------
Revenue $12,919,438 $19,513,585
Cost of Revenue 10,747,858 17,574,117
----------- -----------
Gross Profit 2,171,580 1,939,468
----------- -----------
Expenses:
Selling, General and Administrative Expenses 1,811,735 1,674,272
Bad Debt Expense 7,500 7,500
----------- -----------
Total Expenses 1,819,235 1,681,772
----------- -----------
Operating Income 352,345 257,696
Other Income [Expense]:
Interest Income 86,343 43,710
----------- -----------
Income Before Provision for Income Taxes 438,688 301,406
Provision for Income Tax 140,000 8,000
----------- -----------
Net Income $ 298,688 $ 293,406
=========== ===========
Income Per Common Share $ 0.06 $ 0.06
=========== ===========
See Notes to Consolidated Financial Statements.
2
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended
September 30,
1 9 9 8 1 9 9 7
------- -------
Operating Activities:
Net Income $ 298,688 $ 293,406
----------- -----------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 71,661 77,580
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (906,813) (1,473,110)
Inventory 297,802 266,912
Other Current Assets 30,791 46,271
Other Assets (1,187) (979)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 815,621 1,716,074
Deferred Income (100,649) 119,021
Other Current Liabilities 6,395 (54,776)
----------- -----------
Total Adjustments 213,621 696,993
----------- -----------
Net Cash - Operating Activities 512,309 990,399
----------- -----------
Investing Activities:
Capital Expenditures (5,000) --
----------- -----------
Financing Activities:
Floor Plan Payable (1,333,877) (2,188,556)
----------- -----------
Net [Decrease] in Cash and Cash Equivalents (826,568) (1,198,157)
Cash and Cash Equivalents - Beginning of Periods 5,378,846 3,336,917
----------- -----------
Cash and Cash Equivalents - End of Periods $ 4,552,278 $ 2,138,760
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ -- $ --
Income Taxes $ 80,883 $ 18,000
Supplemental Disclosures of Non-Cash Investing Activities:
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 [UNAUDITED]
- ------------------------------------------------------------------------------
[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.
[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, 1998 and 1997.
[2] Income Taxes
The Corporation has a deferred tax asset of $177,200 and a deferred tax
liability of $80,700 based on temporary timing differences including inventory
capitalization, allowance for doubtful accounts, vacation pay accruals and
depreciation.
[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, 1998.
. . . . . . . . . . . . .
4
<PAGE>
Item 2:
TRANSNET CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations
Revenues for the three months ended September 30, 1998 were $12,919,438 as
compared with $19,513,585 for the quarter ended September 30, 1997. For the
quarter ended September 30, 1998 the Corporation reported net income of $298,688
as compared with net income of $293,406 for the corresponding period in 1997.
The decrease in revenues is primarily due to the loss in March 1998 of the
hardware sales contract with the Corporation's major customer, and is also a
result of management's shift in focus from low profit margin hardware sales to
sales of higher profit margin technical and training services. The loss of the
contract has not had any negative impact to date on services or service related
revenues and has reduced the Corporation's hardware-related expenses. Revenues
attributable to service, support and training operations increased by
approximately 100% compared to the same period in the prior year, and profits
from these operations increased by over 200%. This increase more than offset the
effect of the decrease in revenues from hardware sales. Revenues for the quarter
ended September 30, 1998 include a significant and seasonal increase in the sale
of hardware and technical support services to state and local government and
educational institutions in the tri-state area.
Earnings for the quarter ended September 30, 1998 are attributable to the
significant increase in service, support and training operations, and
management's concentration on sales of network and system integration products
which yield higher profit margins, as well as continued adherence to and
implementation of cost control measures. In addition to the technical service
sales referenced above for the quarter ended September 30, 1998, the increase in
revenues from the provision of service, support, outsourcing and network
integration is largely the result of the Corporation's 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 hardware 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, technical support and training 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 adherence to
cost-cutting controls. In light of the above, management emphasizes and
continues the aggressive pursuit of an increased volume of technical service and
support programs and promotion of its training services.
Selling, general and administrative expenses increased to approximately 14% of
revenue for fiscal 1998 due to increased salary and personnel related expenses
resulting from the expansion of the Corporation's technical staff as well as the
decrease in revenues. Selling, general and administrative expenses were
approximately 9% of revenues for the same quarter in fiscal 1997.
Interest income increased in the 1998 quarter as compared to 1997 primarily due
to a stronger cash position, which allowed the Corporation to invest larger
amounts than in prior years. Interest expense decreased in the quarter ended
September 30, 1998 compared to the same period in the prior year, also due to
the improved cash position which limited the amount of financing extended under
the floor planning arrangements described below.
5
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
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, 1998 as compared to the
corresponding period in 1997 in response to the lower level of hardware sales.
Accounts receivable decreased for the quarter ended September 30, 1998 as
compared to the same period in fiscal 1997 as a direct result of the decrease in
revenues. Accounts payable decreased for the quarter ended September 30, 1998
compared with the same period in 1997 as a result of management's efforts to
shorten payable cycles and thereby avoid floor plan financing costs. Cash levels
increased in the three months ended September 30, 1998 as compared to the
corresponding period in 1997 due to increased sales of higher profit margin
services.
For the fiscal quarter ended September 30, 1998, as in the fiscal quarter ended
September 30, 1997, the internal resources of the Corporation were sufficient to
enable the Corporation to meet its obligations.
In the first quarter of fiscal 1998, management was 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. Management has been advised by counsel that the estimated liabilities are
significantly lower than originally anticipated.
6
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
YEAR 2000
Many existing computer systems, including certain of the Corporation's internal
systems, use only the last two digits to identify years in the date field. As a
result, these computer systems do not properly recognize a year that begins with
"20" instead of the familiar "19," or may not function properly with years later
than 1999. If not corrected, many computer applications could fail or create
erroneous results. This is generally referred to as the "Year 2000" or "Y2K"
issue. Computer systems that are able to deal correctly with dates after 1999
are referred to as "Year 2000 compliant."
With respect to the Corporation's internal systems and operations, its main
internal computer system, which processes information to prepare inventories,
purchase orders, invoices and accounting functions is Y2K compliant. To date,
the Corporation has spent approximately $20,000 to bring its systems into
compliance, and is currently preparing a program to determine whether to update
or replace other internal computer systems to ensure compliance. The costs
involved in such an update and/or replacement have not yet been estimated. As of
the filing of this report, the Corporation has not prepared a contingency plan
and will assess the need for such a plan when sufficient information has been
provided by third parties with whom the Corporation has a material relationship.
The Corporation learned from the product vendors and suppliers with whom it has
a material relationship that they are Y2K compliant. The Corporation is
currently in the process of ascertaining whether its internal systems other than
its computer systems, and other suppliers as well as major customers are Y2K
compliant. Because of the uncertainties involved, pending receipt of this
information, it is not possible to estimate the effect upon the Corporation, for
example, the amount of lost revenues, if its material vendors, suppliers and
customers were not Y2K compliant.
The matters discussed in Management's Discussion and Analysis and that are
forward-looking statements are based on current management expectations that
involve risk and uncertainties. Potential risks and uncertainties include,
without limitation: the impact of economic conditions generally and in the
industry for microcomputer products and services; dependence on key vendors;
continued competitive and pricing pressures in the industry; product supply
shortages; open-sourcing of products of vendors; rapid product improvement and
technological change, short product life cycles and resulting obsolescence
risks; technological developments; capital and financing availability; and other
risks set forth herein.
7
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
PART II - OTHER INFORMATION
- ------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------
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 16, 1998 By: /s/ Steven J. Wilk
---------------------------------
Steven J. Wilk,
President
Date: November 16, 1998 By: /s/ John J. Wilk
---------------------------------
John J. Wilk,
Principal Financial and Accounting Officer
and Chairman of the Board of Directors
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial 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> 6-mos
<FISCAL-YEAR-END> jun-30-1998
<PERIOD-END> Sep-30-1998
<CASH> 4,552,278
<SECURITIES> 0
<RECEIVABLES> 7,541,298
<ALLOWANCES> 0
<INVENTORY> 1,109,880
<CURRENT-ASSETS> 13,950,909
<PP&E> 558,377
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,389,748
<CURRENT-LIABILITIES> 2,386,550
<BONDS> 0
0
0
<COMMON> 74,695
<OTHER-SE> 12,917,803
<TOTAL-LIABILITY-AND-EQUITY> 15,389,748
<SALES> 12,919,438
<TOTAL-REVENUES> 12,919,438
<CGS> 10,747,858
<TOTAL-COSTS> 1,819,235
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 438,688
<INCOME-TAX> 140,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 298,688
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0
</TABLE>
