Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to _________________
For Quarter Ended September 30, 1999
TRANSNET CORPORATION
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-1892295
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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
- ------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last Report
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 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, 1999: 4,957,804.
<PAGE>
TRANSNET CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1999 and
June 30, 1999 1
Consolidated Statements of Operations for the Three Months Ended
September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Management's Discussion and Analysis 5 - 7
PART II. OTHER INFORMATION 8
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
September 30, June 30,
1 9 9 9 1 9 9 9
------- -------
[Unaudited]
Assets:
Current Assets:
Cash and Cash Equivalents $6,394,160 $7,617,241
Accounts Receivable - Net 7,991,518 6,736,351
Inventories 906,294 886,936
Other Current Assets 83,817 56,030
Deferred Tax Asset 249,000 249,000
---------- ----------
Total Current Assets 15,624,789 15,545,558
Property and Equipment - Net 684,573 745,703
Mortgage Receivable - Related Party 250,000 250,000
Other Assets 524,647 577,619
---------- ----------
Total Assets $17,084,009 $17,118,880
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $1,949,831 $1,160,978
Accrued Expenses 354,496 374,064
Accrued Payroll 219,941 258,858
Floor Plan Payable 836,083 1,200,441
Deferred Income 60,869 --
Income Taxes Payable 244,140 664,167
Other Current Liabilities -- --
---------- ----------
Total Current Liabilities 3,665,360 3,658,508
---------- ----------
Deferred Tax Liability 11,100 11,100
---------- ----------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value, Authorized
15,000,000 Shares; Issued 7,469,524 Shares
[of which 2,511,720 are in Treasury] 74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 9,583,627 9,252,475
---------- ----------
Totals 20,345,067 20,013,915
Less: Treasury Stock - At Cost (6,937,518) (6,564,643)
---------- ----------
Total Stockholders' Equity 13,407,549 13,449,272
---------- ----------
Total Liabilities and Stockholders' Equity $17,084,009 $17,118,880
=========== ===========
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 9 1 9 9 8
------- -------
Revenue $11,254,860 $12,919,438
Cost of Revenue 9,391,958 10,747,858
---------- ----------
Gross Profit 1,862,902 2,171,580
---------- ----------
Expenses:
Selling, General and Administrative Expenses 1,440,021 1,811,735
Bad Debt Expense 15,000 7,500
---------- ----------
Total Expenses 1,455,021 1,819,235
---------- ----------
Operating Income 407,881 352,345
---------- ----------
Other Income:
Interest Income 88,511 77,471
Interest Income - Related Party 5,672 8,872
---------- ----------
Total Other Income 94,183 86,343
---------- ----------
Income Before Provision for Income Taxes 502,064 438,688
Provision for Income Tax 170,912 140,000
---------- ----------
Net Income $ 331,152 $ 298,688
========== ==========
Income Per Common Share $ 0.07 $ 0.06
========== ==========
See Notes to Consolidated Financial Statements.
2
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
- ------------------------------------------------------------------------------
Three months ended
September 30,
1 9 9 9 1 9 9 8
------- -------
Operating Activities:
Net Income $ 331,152 $ 298,688
---------- ----------
Adjustments to Reconcile Net Income
to Net Cash:
Depreciation and Amortization 61,130 71,661
Provision for Bad Debts 15,000 7,500
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,270,167) (914,313)
Inventory (19,358) 297,802
Other Current Assets (27,787) 30,791
Other Assets 52,972 (1,187)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 310,341 815,621
Deferred Income 60,869 (100,649)
Other Current Liabilities -- 6,395
---------- ----------
Total Adjustments (817,000) 213,621
---------- ----------
Net Cash - Operating Activities (485,848) 512,309
---------- ----------
Investing Activities -- --
---------- ----------
Financing Activities:
Floor Plan Payable - Net (364,358) (1,333,877)
Treasury Stock Repurchased (372,875) (5,000)
---------- ----------
Net Cash - Financing Activities (737,233) (1,338,877)
---------- ----------
Net [Decrease] in Cash and Cash Equivalents (1,223,081) (826,568)
Cash and Cash Equivalents - Beginning of Periods 7,617,241 5,378,846
---------- ----------
Cash and Cash Equivalents - End of Periods $6,394,160 $4,552,278
========== ==========
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 5,002,163
weighted shares outstanding for the period ended September 30, 1999 and on
5,216,804 weighted shares outstanding for the period ended September 30, 1998.
[2] Income Taxes
The Corporation has a deferred tax asset of $249,000 and a deferred tax
liability of $11,100 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, 1999.
. . . . . . . . . . .
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations
Revenues for the quarter ended September 30, 1999 were $11,254,860 as compared
with $12,919,438 for the quarter ended September 30, 1998. For the quarter ended
September 30, 1999 the Corporation reported net income of $331,152 as compared
with net income of $298,688 for the corresponding period in 1998. The decrease
in revenues is primarily due to a decrease in hardware sales, which is turn is
due to the Corporation's agency model. Under this program, computer
manufacturers ship products to and bill the Corporation's clients directly, and
pay the Corporation a fee of approximately 5% of the aggregate amount billed.
This accounted for the 13% decrease in revenue, while also resulting in a
reduction in our SG&A expense by approximately $372,000 or 21%. Revenues
attributable to service, support and training operations increased by
approximately 48% compared to the same period in the prior year. 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.
The increase in earnings for the quarter ended September 30, 1999 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 ended September
30, 1999, 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 for
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 during these years and
has enforced expense controls. Management also utilizes new trends such as
manufacturers' direct shipment and billing of the customers in exchange for
payment to the Corporation of an "agency fee" as a means to reduce equipment
related costs while increasing profits. Management's current marketing strategy
is designed to shift its focus to provision of technical services and to 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 sales of
technical service and support programs, and promotion of its training services.
In addition, the Corporation's buying agreement with Ingram Micro, Inc. enhances
the Corporation's competitive edge through product discounts unavailable through
other sources.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations [Continued]
Selling, general and administrative expenses decreased to approximately 13% of
revenue for the first quarter of fiscal 2000 due to the decrease in revenues
from hardware sales and the related agency model, as discussed above. Selling,
general and administrative expenses were approximately 14% of revenues for the
same quarter in fiscal 1999.
Interest income increased in the 1999 quarter as compared to 1998 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 ended September 30, 1999 as compared to the
corresponding period in 1998 in response to the lower level of hardware sales.
Accounts receivable decreased for the quarter ended September 30, 1999 as
compared to the same period in 1998 as a direct result of the decrease in
revenues. Accounts payable decreased for the quarter ended September 30, 1999
compared with the same period in 1998 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, 1999 as compared to the
corresponding period in 1998 due to increased sales of higher profit margin
services.
For the fiscal quarter ended September 30, 1999, as in the fiscal quarter ended
September 30, 1998, 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 decided 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, any estimate in dollar terms of the range of
such liability at this time would be speculative and potentially misleading.
However, management has been advised by counsel that the estimated liabilities
are significantly lower than originally anticipated.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Year 2000
The Corporation began preparing its computer-based systems for year 2000 ["Y2K"]
computer software compliance issues in 1998. 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." The Corporation's Y2K project covers both traditional computer
systems and infrastructure ["IT Systems"] and computer-based hardware and
software, facilities and equipment ["Non-IT Systems"], such as its telephone
system. The Corporation's Y2K project has the following phases: inventory;
assessment of action required to assure Y2K compliance; upgrading or
replacement; testing; and contingency planning.
The Corporation completed the inventory and assessment of its critical IT
systems and it expects that by the end of November 1999, its main internal
computer system, which processes information to prepare inventories, purchase
orders, invoices and accounting functions shall be Y2K compliant. The
Corporation has upgraded or replaced any non-compliant IT Systems, with testing
and implementation to be completed by the end of November 1999, although it is
possible that testing will continue through the end of calendar 1999. The
Corporation has also completed an inventory and assessment of its Non-IT
Systems. The Corporation has replaced non-compliant systems, with testing and
implementation expected to be completed by the end of November 1999.
The Corporation's Y2K project also considers the readiness of significant
customers and vendors. Although significant vendors have indicated to the
Corporation that they expect to be Y2K compliant, non-compliance of such vendors
could impair the ability of the Corporation to obtain necessary products or to
sell or provide services to its customers. Disruptions of the computer systems
of the Corporation's vendors could have a material adverse effect on the
Corporation's financial condition and results of operations for the period of
such disruption. 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 Corporation believes that the most reasonably likely worst case Y2K scenario
is that a small number of vendors may be delayed in supplying components for a
short time after January 1, 2000, with a resulting disruption of product
shipments and services to the Corporation's customers. As part of its Y2K
process, the Corporation plans to develop contingency plans with respect to such
scenario and the vendors who are either unable or unwilling to develop
remediation plans to become Y2K compliant. The Corporation is currently
developing these plans. The Corporation's contingency plans will include a
combination of actions including preparations to allow the Corporation to
selectively purchase from Y2K compliant vendors.
The Corporation has incurred approximately $30,000 of Y2K project expenses as of
June 30, 1999. Future expenses are estimated to include approximately $20,000 of
additional costs. Such cost estimates are based upon presently available
information and may change as the Corporation continues with its Y2K project.
The matters discussed in Management's Discussion and Analysis and throughout
this report 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>
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 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
[Registrant]
/s/ Steven J. Wilk
------------------
Steven J. Wilk, President
/s/ John J. Wilk
------------------
John J. Wilk,
Principal Financial and Accounting Officer
and Chairman of the Board of Directors
DATE: November 12, 1999
9
<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> 6-mos
<FISCAL-YEAR-END> jun-30-2000
<PERIOD-END> Sep-30-1999
<CASH> 6,394,160
<SECURITIES> 0
<RECEIVABLES> 7,991,518
<ALLOWANCES> 0
<INVENTORY> 906,294
<CURRENT-ASSETS> 15,624,789
<PP&E> 684,573
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,084,009
<CURRENT-LIABILITIES> 3,665,360
<BONDS> 0
0
0
<COMMON> 74,695
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 13,407,549
<SALES> 11,254,860
<TOTAL-REVENUES> 11,254,860
<CGS> 9,391,958
<TOTAL-COSTS> 9,391,958
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 502,064
<INCOME-TAX> 170,912
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 331,152
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
