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 December 31, 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 February 5, 1998: 5,216,804.
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
INDEX TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1997.
- ------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997 [Unaudited]
and June 30, 1997 ............................................... 1.....
Consolidated Statements of Operations for the three and six months
ended December 31, 1997 and 1996 [Unaudited]..................... 2.....
Consolidated Statements of Cash Flows for the six months ended
December 31, 1997 and 1996 [Unaudited]........................... 3.....
Notes to Consolidated Financial Statements [Unaudited]........... 4..... 5
Item 2. Managements' Discussion and Analysis of the Financial
Condition and Results of Operations........................ 6..... 7
PART II: OTHER INFORMATION.......................................... 8.....
SIGNATURES.......................................................... 9.....
. . . . . . . . . . .
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
December 31, June 30,
1 9 9 7 1 9 9 7
[Unaudited]
Assets:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $2,760,264 $ 3,336,917
Accounts Receivable - Net 11,409,624 8,986,318
Inventories 3,196,336 3,274,462
Other Current Assets 297,166 324,546
Deferred Tax Asset 94,700 334,700
Mortgage Receivable 590,000 --
---------- -----------
Total Current Assets 18,348,090 16,256,943
Property and Equipment - Net 785,094 916,254
Other Assets 999,927 1,051,101
---------- -----------
Total Assets $20,133,111 $18,224,298
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $2,071,558 $ 965,340
Accrued Expenses 800,010 650,242
Floor Plan Payable 4,142,919 4,384,040
Deferred Income 228,820 162,576
Other Current Liabilities 302,626 264,481
---------- -----------
Total Current Liabilities 7,545,933 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 7,945,681 7,156,122
---------- -----------
Totals 18,707,121 17,917,562
Less: Treasury Stock - At Cost (6,217,643) (6,217,643)
---------- -----------
Total Stockholders' Equity 12,489,478 11,699,919
---------- -----------
Total Liabilities and Stockholders' Equity $20,133,111 $18,224,298
=========== ===========
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
</TABLE>
1
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
<TABLE>
Three months ended Six months ended
December 31, December 31,
------------ ------------
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $20,282,544 $19,496,903 $39,796,129 $36,036,011
Cost of Revenue 18,016,064 17,415,384 35,590,181 32,112,304
----------- ----------- ----------- -----------
Gross Profit 2,266,480 2,081,519 4,205,948 3,923,707
Expenses:
Selling, General and Administrative
Expenses 2,006,104 1,728,848 3,687,876 3,296,485
----------- ----------- ----------- -----------
Operating Income 260,376 352,671 518,072 627,222
----------- ----------- ----------- -----------
Other Income [Expense]:
Interest Income 26,288 17,740 69,998 45,772
Interest Expense -- (30,681) -- (35,983)
Gain on Sale 466,489 -- 466,489 --
----------- ----------- ----------- -----------
Other Income [Expense] - Net 492,777 (12,941) 536,487 9,789
----------- ----------- ----------- -----------
Income Before Provision for Income
Taxes 753,153 339,730 1,054,559 637,011
Provision for Income Taxes 257,000 -- 265,000 --
----------- ----------- ----------- -----------
Net Income $ 496,153 $ 339,730 $ 789,559 $ 637,011
=========== =========== =========== ===========
Income Per Common Share $ .10 $ .07 $ .15 $ .12
=========== =========== =========== ===========
The Accompanying Notes are an Integral Part of these Consolidated Financial Statements.
</TABLE>
2
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Six months ended
December 31,
1 9 9 7 1 9 9 6
------- -------
[Unaudited]
Operating Activities:
<S> <C> <C>
Net Income $ 789,559 $ 637,011
----------- -----------
Adjustments to Reconcile Net Income to Net Cash
Provided by [Used for]
Operating Activities:
Depreciation and Amortization 155,160 177,606
Gain on Sale of Land (466,489) --
Deferred Taxes 240,000 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (2,423,306) (1,888,161)
Inventory 78,126 316,807
Other Current Assets 27,380 310,944
Other Assets (96,337) (43,458)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 1,255,986 (103,266)
Deferred Income 66,244 (165,637)
Other Current Liabilities 38,145 50,782
----------- -----------
Total Adjustments (1,125,091) (1,344,383)
----------- -----------
Net Cash - Operating Activities (335,532) (707,372)
Investing Activities:
Capital Expenditures -- (21,237)
Financing Activities:
Floor Plan Payable (241,121) 446,148
----------- -----------
Net [Decrease] in Cash and Cash Equivalents (576,653) (282,461)
Cash and Cash Equivalents - Beginning of Periods 3,336,917 2,383,741
----------- -----------
Cash and Cash Equivalents - End of Periods $ 2,760,264 $ 2,101,280
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ -- $ 35,983
Income Taxes $ 8,878 $ 7,500
</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.
The Accompanying Notes are an Integral Part of these Consolidated Financial
Statements.
3
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[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 December 31, 1997 and 1996.
[2] Income Taxes
The Corporation has a deferred tax asset of $94,700 based on temporary timing
differences including inventory capitalization, allowance for doubtful accounts,
vacation pay accruals and net operating loss carryforwards.
The Company anticipates fully utilizing its net operating loss carryforward of
approximately $948,000 during the current year.
[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
- ------------------------------------------------------------------------------
[4] Asset Purchase Agreement
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.
[5] Sale of Land
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
4].
. . . . . . . . . . . . .
5
<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 December 31, 1997 were $20,282,544 as
compared with $19,496,903 for the quarter ended December 31, 1996. For the
quarter ended December 31, 1997 the Corporation reported net income of $496,153
as compared with net income of $339,730 for the similar period in 1996.
Operating income totaled $260,376 in the more recent quarter as compared to
$352,671 in the similar period in 1996. For the six months ended December 31,
1997, revenues were $39,796,129, as compared to $36,036,011 reported for the
similar period in 1996, with net income of $789,559 for the period ended
December 31, 1997, compared with net earnings of $637,011 for the same period in
1996. Operating income in the six months ended December 31, 1997 was $518,072
compared to $627,222 in the prior year's corresponding period. The increase in
revenues is primarily due to increases in the sale of the Corporation's
technical services (such as technical support, technical repair and maintenance
services, system integrations, network design and installation, and training),
and to a lesser extent to an increased volumes of hardware sales. The portion of
revenues attributed to equipment sales remained relatively constant compared to
prior periods due to the impact of decreases in the prices of computer
equipment.
Net income for the quarter ended December 31, 1997 are attributable to increased
service revenues, management's concentration on sales of network and system
integration products which yield higher profit margins, and to a non-recurring
profit of $466,489 from the sale during the quarter of certain unimproved real
property. 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. The
Corporation continued to increase its technical staff in response to the demand
for its services, encountering an industry-wide shortage of qualified technical
personnel, resulting in a high level of competition to hire and retain technical
staffs. Management anticipates these trends to continue. For the quarter ended
December 31, 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. The majority 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.
6
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations [Continued]
Interest income for the quarter and six month period increased as compared to
the corresponding periods in the prior year because of the increase in the
amount of funds invested and higher yields. Interest expense was eliminated in
the quarter and six-month period ended December 31, 1997 as compared to the same
periods 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.
Although actual expenses increased in 1997 due to the expenses related to the
significant increase in the Corporation's technical staff (discussed above),
selling, general and administrative expenses remained relatively constant at
approximately 9% of revenues for the quarter and six-months ended December 31,
1997 and 1996, due to management's strict adherence to cost-control measures,
although the expenses were slightly elevated in the 1997 quarter due to
professional expenses related to matters discussed below.
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 and six-month period ended December 31, 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, as well as minimize floor plan financing.
Accounts receivable and payable increased for the quarter and six-month period
ended December 31, 1997 compared with the same periods in 1996 as a result of
increased sales. Cash levels decreased in the six month period ended December
31, 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 and six months ended December 31, 1997, as in the periods
ended December 31, 1996 the internal resources of the Corporation were
sufficient to enable the Corporation to meet its obligations.
Management has recently been appraised 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
- ------------------------------------------------------------------------------
Item 5:Other Information
Pursuant to the decision of a NASDAQ Listing Qualifications Panel, the
Company's common stock was deleted from the NASDAQ Stock Market on
February 4, 1998. The cited cause of the delisting was the Company's
failure to hold its shareholder meeting (currently called for March 1998)
prior to January 31, 1998. The Company believes there were justifiable
reasons for the delay in holding the meeting attributable to negotiations
in connection with the Company's proposed transaction with an affiliate
of GE Capital, and has appealed the decision to the NASDAQ Listing
Council. Pending determination of the appeal, the common stock will trade
on the OTC Bulletin Board under the symbol "TRNT."
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: February 13, 1998 By: /s/ Steven J. Wilk
-------------------
Steven J. Wilk,
Chief Executive Officer
Date: February 13, 1998 By: /s/ John J. Wilk
-------------------
John J. Wilk,
Chief Financial and Accounting Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to said statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Dec-31-1997
<CASH> 2,760,264
<SECURITIES> 0
<RECEIVABLES> 11,409,624
<ALLOWANCES> 0
<INVENTORY> 3,196,336
<CURRENT-ASSETS> 18,348,090
<PP&E> 78,094
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,133,111
<CURRENT-LIABILITIES> 7,545,933
<BONDS> 0
0
0
<COMMON> 74,695
<OTHER-SE> 12,414,783
<TOTAL-LIABILITY-AND-EQUITY> 20,133,111
<SALES> 39,796,129
<TOTAL-REVENUES> 39,796,129
<CGS> 35,590,181
<TOTAL-COSTS> 3,687,876
<OTHER-EXPENSES> (536,487)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,054,559
<INCOME-TAX> 265,000
<INCOME-CONTINUING> 789,559
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 789,559
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
