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, 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 February 2, 1999: 5,216,804.
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
INDEX TO FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 1998.
- ------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998 [Unaudited]
and June 30, 1998 ............................................... 1.....
Consolidated Statements of Operations for the three and six months
ended December 31, 1998 and 1997 [Unaudited]..................... 2.....
Consolidated Statements of Cash Flows for the six months ended
December 31, 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
- ------------------------------------------------------------------------------
December 31, June 30,
1 9 9 8 1 9 9 8
[Unaudited]
Assets:
Current Assets:
Cash and Cash Equivalents $6,054,098 $ 5,378,846
Accounts Receivable - Net 7,226,075 6,327,434
Inventories 1,045,593 1,407,682
Mortgage Receivable 482,168 464,423
Other Current Assets 133,923 136,621
Deferred Tax Asset 177,200 177,200
---------- -----------
Total Current Assets 15,119,057 13,892,206
Property and Equipment - Net 591,810 613,704
Other Assets 870,110 890,608
---------- -----------
Total Assets $16,580,977 $15,396,518
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $1,217,010 $ 598,008
Accrued Expenses 549,474 614,875
Accrued Payroll 187,254 234,722
Floor Plan Payable 721,095 776,901
Deferred Income 55,000 100,649
Income Taxes Payable 448,915 210,200
Other Current Liabilities 97,602 156,653
---------- -----------
Total Current Liabilities 3,276,350 2,692,008
---------- -----------
Deferred Tax Liability 80,700 80,700
---------- -----------
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 8,680,130 8,080,013
---------- -----------
Totals 19,441,570 18,841,453
Less: Treasury Stock - At Cost (6,217,643) (6,217,643)
---------- -----------
Total Stockholders' Equity 13,223,927 12,623,810
---------- -----------
Total Liabilities and Stockholders' Equity $16,580,977 $15,396,518
=========== ===========
See Notes to Consolidated Financial Statements.
1
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended Six months ended
December 31, December 31,
------------ ------------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
------- ------- ------- -------
Revenue $10,975,140 $20,282,544 $23,894,577 $39,796,129
Cost of Revenue 8,801,416 18,016,064 19,549,273 35,590,181
----------- ----------- ----------- -----------
Gross Profit 2,173,724 2,266,480 4,345,304 4,205,948
----------- ----------- ----------- -----------
Expenses:
Selling, General and
Administrative Expenses 1,784,809 1,996,104 3,596,546 3,670,376
Bad Debt Expense 7,500 10,000 15,000 17,500
----------- ----------- ----------- -----------
Total Expenses 1,792,309 2,006,104 3,611,546 3,687,876
----------- ----------- ----------- -----------
Operating Income 381,415 260,376 733,758 518,072
----------- ----------- ----------- -----------
Other Income [Expense]:
Interest Income 73,014 26,288 159,357 69,998
Other Income -- 466,489 -- 466,489
----------- ----------- ----------- -----------
Total Other Income - Net 73,014 492,777 159,357 536,487
----------- ----------- ----------- -----------
Income Before Provision for
Income Taxes 454,429 753,153 893,115 1,054,559
Provision for Income Tax 153,000 257,000 292,998 265,000
----------- ----------- ----------- -----------
Net Income $ 301,429 $ 496,153 $ 600,117 $ 789,559
=========== =========== =========== ===========
Income Per Common Share $ 0.06 $ 0.10 $ 0.12 $ 0.15
=========== =========== =========== ===========
See Notes to Consolidated Financial Statements.
2
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Six months ended
December 31,
1 9 9 8 1 9 9 7
------- -------
Operating Activities:
Net Income $ 600,117 $ 789,559
----------- -----------
Adjustments to Reconcile Net Income to Net Cash:
Depreciation and Amortization 148,407 155,160
[Gain] Loss on Sale 2,921 (466,489)
Provision for Doubtful Accounts 15,000 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (955,809) (2,423,306)
Inventory 362,089 78,126
Other Current Assets 2,698 27,380
Other Assets (2,167) (96,337)
Mortgage Receivable - Related Party 24,423 --
Deferred Income Taxes -- 240,000
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 553,601 1,255,986
Deferred Income (45,649) 66,244
Other Current Liabilities (106,519) 38,145
Income Taxes Payable 238,715 --
----------- -----------
Total Adjustments 237,710 (1,125,091)
----------- -----------
Net Cash - Operating Activities 837,827 (335,532)
Investing Activities:
Capital Expenditures (106,769) --
Financing Activities:
Floor Plan Payable (55,806) (241,121)
----------- -----------
Net Increase [Decrease] in Cash and Cash Equivalents 675,252 (576,653)
Cash and Cash Equivalents - Beginning of Periods 5,378,846 3,336,917
----------- -----------
Cash and Cash Equivalents - End of Periods $ 6,054,098 $ 2,760,264
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ -- $ --
Income Taxes $ 25,470 $ 8,878
See Notes to Consolidated Financial Statements.
3
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[Information as of December 31, 1998 and 1997 Is 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.
[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 periods ended December 31, 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 upon temporary timing differences including inventory
capitalization, allowance for doubtful accounts, vacation pay accruals and
depreciation.
[3] Reclassification
Certain items from the 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] Related Party Transaction
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 $150,000 payment due in February 1998 has
been paid and $190,000 of the payment due in November 1998 has been paid with
interest. As of the date of this filing, the balance of $250,000 is overdue.
. . . . . . . . . .
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 December 31, 1998 were $10,975,140 as
compared with $20,282,544 for the quarter ended December 31, 1997. For the
quarter ended December 31, 1998 the Corporation reported net income of $301,429
as compared with net income of $496,153 for the similar period in the prior
fiscal year. Operating income totaled $381,415 in the more recent quarter as
compared to $260,376 in the similar period in fiscal 1998. For the six months
ended December 31, 1998, revenues were $ 23,894,577, as compared to $39,796,129
reported for the similar period in the prior fiscal year, with net income of
$600,117 for the period ended December 31, 1998, compared with net income of
$789,559 for the same period in the prior fiscal year. Operating income in the
six months ended December 31, 1998 was $733,758 compared to $518,072 in the
similar period in fiscal 1998. The net income for the periods in the prior
fiscal year was affected by the non-recurring gain from the sale of certain real
property owned by the Corporation. 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 80% compared to the same periods
in the prior year. This increase offset the effect of the decrease in revenues
from hardware sales.
Earnings for the quarter and six-month period ended December 31, 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. Service and training
related revenues are significant in their contributions to earnings because
these operations yield a higher profit margin than equipment sales. In addition
to the technical service sales referenced above, for the quarter and six-month
period ended December 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. 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.
5
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations [Continued]
Selling, general and administrative expenses increased to approximately 15% of
revenue for both the quarter and six months ended December 31, 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 periods in fiscal 1998.
Interest income increased in the quarter and six-month period ended December 31,
1998, as compared to similar periods in the prior fiscal year primarily due to a
stronger cash position, which allowed the Corporation to invest larger amounts
than in prior years.
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 periods ended December 31, 1998
as compared to the corresponding period in the prior fiscal year in response to
the lower level of hardware sales.
Accounts receivable decreased for the quarter and six-month period ended
December 31, 1998 as compared to the same periods in the prior fiscal year as a
direct result of the decrease in revenues. Accounts payable decreased for the
quarter and six-month period ended December 31, 1998 compared with the same
periods in the prior fiscal year as a result of management's efforts to shorten
payable cycles and thereby avoid floor plan financing costs, as well as the
reduced inventories. Cash levels increased in the three and six month periods
ended December 31, 1998 as compared to the corresponding periods in fiscal 1998
due to increased sales of higher profit margin services.
For the fiscal quarter and six months ended December 31, 1998, as in the similar
periods in the prior year, 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 apprized 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 has determined 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. In December 1998 the Corporation submitted the
appropriate Plan documents and related data to the IRS and PBGC. These matters
are presently under consideration by these agencies. 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.
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
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Item 5. 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: February 9, 1999 By: /s/ Steven J. Wilk
---------------------------------
Steven J. Wilk,
President
Date: February 9, 1999 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> Dec-31-1998
<CASH> 6,054,098
<SECURITIES> 0
<RECEIVABLES> 7,226,075
<ALLOWANCES> 0
<INVENTORY> 1,045,593
<CURRENT-ASSETS> 15,119,057
<PP&E> 591,810
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,580,977
<CURRENT-LIABILITIES> 3,276,350
<BONDS> 0
0
0
<COMMON> 74,695
<OTHER-SE> 13,149,232
<TOTAL-LIABILITY-AND-EQUITY> 13,223,927
<SALES> 23,894,577
<TOTAL-REVENUES> 23,894,577
<CGS> 19,549,273
<TOTAL-COSTS> 3,611,546
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 893,115
<INCOME-TAX> 292,998
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 292,998
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
