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 March 31, 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 08876-3576
(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 share outstanding of each of the issurer's classes of
common stock, as of May 7, 1998: 5,216,804.
<PAGE>
TRANSNET CORPORATION
- ------------------------------------------------------------------------------
INDEX TO FROM 10-Q
- ------------------------------------------------------------------------------
Part I: Financial Information
Item 1: Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and June 30, 1997 [Unaudited]............................... 1......
Consolidated Statements of Operations for the three and nine
months ended March 31, 1998 and 1997 [Unaudited]............ 2......
Consolidated Statements of Cash Flows for nine months ended
March 31, 1998 and 1997 [Unaudited]......................... 3......
Notes to Consolidated Financial Statements [Unaudited]...... 4......5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6......8
Part II: Other Information.......................................... 9......
Signature...........................................................10......
. . . . . . . .
<PAGE>
TRANSNET CORPORATION
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
[UNAUDITED]
- ------------------------------------------------------------------------------
March 31, June 30,
1 9 9 8 1 9 9 7
Assets:
Current Assets:
Cash and Cash Equivalents $ 5,216,604 $ 3,336,917
Accounts Receivable - Net 9,168,815 8,986,318
Inventories 3,047,467 3,274,462
Other Current Assets 239,460 324,546
Deferred Tax Asset 94,700 334,700
Mortgage Receivable 440,000 --
----------- -----------
Total Current Assets 18,207,046 16,256,943
Property and Equipment - Net 719,514 916,254
Other Assets 893,200 1,051,101
----------- -----------
Total Assets $19,819,760 $18,224,298
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 4,896,660 $ 965,340
Accrued Expenses 651,358 650,242
Floor Plan Payable 1,017,873 4,384,040
Deferred Income 316,075 162,576
Other Current Liabilities 268,615 264,481
---------- -----------
Total Current Liabilities 7,150,581 6,426,679
---------- -----------
Deferred Tax Liability 97,700 97,700
---------- -----------
Stockholders' Equity:
Capital Stock - Common $.01 Par Value, Authorized
15,000,000 Shares; Issued 7,469,524 Shares 74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 8,027,682 7,156,122
----------- -----------
Totals 18,789,122 17,917,562
Less: Treasury Stock - At Cost (6,217,643) (6,217,643)
----------- -----------
Total Stockholders' Equity 12,571,479 11,699,919
----------- -----------
Total Liabilities and Stockholders' Equity $19,819,760 $18,224,298
=========== ===========
See Notes to Consolidated Financial Statements.
1
<PAGE>
TRANSNET CORPORATION
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended Nine months ended
March 31, March 31,
--------- ---------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
------- ------- ------- -------
Revenue $17,564,437 $16,123,401 $57,360,566 $52,159,412
Cost of Revenue 15,678,214 14,354,376 51,268,395 46,466,680
---------- ----------- ---------- -----------
Gross Profit 1,886,223 1,769,025 6,092,171 5,692,732
Expenses:
Selling, General and
Administrative Expenses 1,734,406 1,598,060 5,422,282 4,894,545
---------- ----------- ---------- -----------
Operating Income 151,817 170,965 669,889 798,187
---------- ----------- ---------- -----------
Other Income [Expense]:
Interest Income 35,892 34,458 105,890 80,230
Interest Expense -- (4,752) -- (40,735)
Other Income -- -- 466,489 --
Other Expenses (80,708) -- (80,708) --
---------- ----------- ---------- -----------
Other [Expense] Income -
Net (44,816) 29,706 491,671 39,495
---------- ----------- ---------- -----------
Income Before Provision
for Income Taxes 107,001 200,671 1,161,560 837,682
Provision for Income Tax 25,000 -- 290,000 --
---------- ----------- ---------- -----------
Net Income $ 82,001 $ 200,671 $ 871,560 $ 837,682
========== =========== ========== ===========
Earnings Per Common Share $ 0.02 $ 0.04 $ 0.17 $ 0.16
========== =========== ========== ===========
See Notes to Consolidated Financial Statements.
2
<PAGE>
TRANSNET CORPORATION
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Nine months ended
March 31,
1 9 9 8 1 9 9 7
------- -------
Operating Activities:
Net Income $ 871,560 $ 837,682
---------- -----------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 232,740 288,237
Gain on Sale: Land (466,489) --
Deferred Taxes 240,000 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (182,497) (2,750,717)
Inventory 226,995 1,969,192
Other Current Assets 85,086 90,949
Other Assets (1,610) (41,676)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 3,932,436 1,146,341
Deferred Income 153,499 (114,272)
Other Current Liabilities 4,134 (7,425)
---------- -----------
Total Adjustments 4,224,294 580,629
---------- -----------
Net Cash - Operating Activities 5,095,854 1,418,311
---------- -----------
Investing Activities:
Capital Expenditures -- (21,237)
---------- -----------
Financing Activities:
Floor Plan Payable (3,366,167) (671,005)
Mortgage Receivable 150,000 --
---------- -----------
Net Cash - Financing Activities (3,216,167) (671,005)
---------- -----------
Net Increase in Cash and Cash Equivalents 1,879,687 726,069
Cash and Cash Equivalents - Beginning of Periods 3,336,917 2,383,741
---------- -----------
Cash and Cash Equivalents - End of Periods $5,216,604 $ 3,109,810
========== ===========
See Notes to Consolidated Financial Statements.
3
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
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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 March 31, 1998 and 1997.
[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] 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. On March 26, 1998, the
Corporation announced that the Asset Purchase Agreement had terminated because a
condition of the Agreement was not met.
4
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
- ------------------------------------------------------------------------------
[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>
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 March 31, 1998 were $17,564,437 as compared
with $16,123,401 for the quarter ended March 31, 1997. For the quarter ended
March 31, 1998 the Corporation reported net income of $82,001 as compared with
net income of $200,671 for the similar period in 1997. For the nine months ended
March 31, 1998, revenues were $57,360,566, as compared to $52,159,412 reported
for the similar period in 1997, with net earnings of $871,560 for the period
ended March 31, 1998, compared with net earnings of $837,682 for the same period
in 1997. 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 integration, network design and
installation, and training), and to a lesser extent to an increased volume of
hardware sales. Operating income for the quarter ended March 31, 1998 increased
as a result of cost controls imposed by management. The decrease in operating
income for the nine-month period is the result of continued price decreases of
computer hardware and the increase in salary related expenses incurred in
connection with the expansion of the Corporation's technical service staff
during the first half of the fiscal year.
Net income for the quarter ended March 31, 1998 is attributable to increased
service revenues and management's concentration on sales of network and system
integration products which yield higher profit margins. Earnings for the quarter
were negatively impacted by non-recurring expenses of approximately $81,000
associated with the proposed sale of assets by the Corporation to a subsidiary
of General Electric Capital Information Technology Solutions, Inc. ("GECITS").
As discussed below, the Asset Purchase Agreement was terminated when a condition
to the sale of assets was not met.
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
March 31, 1998, 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 for
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 who 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, in
particular network and system integration products, 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 nine-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 for the quarter and
nine-month period decreased as compared to the corresponding periods in fiscal
1997 as a result of management's efforts to shorten the collection cycles of
account receivables, with a resulting reduction in related financing costs.
Although actual expenses increased in fiscal 1998 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 10% of revenues for the quarter and approximately 9% for the
nine-months ended March 31, 1998 and 1997, due to management's strict adherence
to cost-control measures.
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 increased to normal in the quarter and nine-month period ended March
31, 1998 as compared to the lower than normal inventory in the corresponding
periods in 1997, which was lower 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 to minimize floor plan financing.
Accounts receivable decreased for the quarter and nine-month periods ended March
31, 1998 compared with the same periods in fiscal 1997 due to management's
efforts to shorten collection cycles. Accounts payable increased for the quarter
and nine-month period ended March 31, 1998 compared with the same periods in
1997 as a result of the increased volume of sales. Cash levels increased in the
nine-month period ended March 31, 1998 as compared to the corresponding period
in 1997 due to variations in scheduled payment requirements.
For the fiscal quarter and nine months ended March 31, 1998, as in the periods
ended March 31, 1997 the internal resources of the Corporation were sufficient
to enable the Corporation to meet its obligations.
On March 26, 1998, the Corporation announced that the Asset Purchase Agreement
with a subsidiary of GECITS had terminated because a condition of the Agreement
was not met when it was informed that TransNet's major customer, Merck & Co.,
intended to enter into arrangements with a vendor other than TransNet or GECITS
or its subsidiaries with respect to a substantial portion of the business that
the major customer previously conducted with TransNet. This will have a
significant impact upon the Corporation's revenues, and the loss of this
customer would have a material adverse impact upon the Corporation if management
does not replace the purchases of equipment and technical services with similar
purchases from new accounts. Although the Corporation is aggressively pursuing
new accounts and expansion of existing business, no assurance can be given that
the Corporation will be able to replace the business from its major customer.
7
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Liquidity and Capital Resources [Continued]
Management has 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.
The matters discussed in this report that are forward-looking statements are
based on current management expectations that involve risk and uncertainties,
which include: the impact of economic conditions generally and in the industry
for microcomputer products and services; 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; and other risks set forth in the
Corporation's other filings with the Securities and Exchange Commission.
8
<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.
9
<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: May 14, 1998 By: /s/ Steven J. Wilk
-------------------
Steven J. Wilk,
Chief Executive Officer
Date: May 14, 1998 By: /s/ John J. Wilk
John J. Wilk,
Chief Financial and Accounting Officer
10
<PAGE>
<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> 9-mos
<FISCAL-YEAR-END> jun-30-1998
<PERIOD-END> mar-31-1998
<CASH> 5,216,604
<SECURITIES> 0
<RECEIVABLES> 9,168,815
<ALLOWANCES> 0
<INVENTORY> 3,047,467
<CURRENT-ASSETS> 18,207,046
<PP&E> 719,514
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,819,760
<CURRENT-LIABILITIES> 7,150,581
<BONDS> 0
0
0
<COMMON> 74,695
<OTHER-SE> 12,496,784
<TOTAL-LIABILITY-AND-EQUITY> 19,819,760
<SALES> 57,360,566
<TOTAL-REVENUES> 57,360,566
<CGS> 51,268,395
<TOTAL-COSTS> 5,422,282
<OTHER-EXPENSES> 385,781
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,890
<INCOME-PRETAX> 1,161,560
<INCOME-TAX> 290,000
<INCOME-CONTINUING> 871,560
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 871,560
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
