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 March 31, 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 March 31, 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 May 3, 1999: 5,115,804
<PAGE>
TRANSNET CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of March 31, 1999 and June 30, 1998 1
Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 1999 and 1998 2
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Management's Discussion and Analysis 5
PART II. OTHER INFORMATION 8
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- ------------------------------------------------------------------------------
March 31, June 30,
1 9 9 9 1 9 9 8
Assets:
Current Assets:
Cash and Cash Equivalents $6,274,454 $ 5,378,846
Accounts Receivable - Net 7,570,407 6,327,434
Inventories 447,023 1,407,682
Mortgage Receivable 253,637 464,423
Other Current Assets 69,701 136,621
Deferred Tax Asset 177,200 177,200
---------- -----------
Total Current Assets 14,792,422 13,892,206
Property and Equipment - Net 526,395 613,704
Other Assets 842,938 890,608
---------- -----------
Total Assets $16,161,755 $15,396,518
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 566,816 $ 598,008
Accrued Expenses 457,083 614,875
Accrued Payroll 187,254 234,722
Floor Plan Payable 872,578 776,901
Deferred Income -- 100,649
Income Taxes Payable 577,874 210,200
Other Current Liabilities 61,021 156,653
---------- -----------
Total Current Liabilities 2,722,626 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 2,328,720 are in Treasury) 74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 8,968,195 8,080,013
---------- -----------
Totals 19,729,635 18,841,453
Less: Treasury Stock - At Cost (6,371,206) (6,217,643)
---------- -----------
Total Stockholders' Equity 13,358,429 12,623,810
---------- -----------
Total Liabilities and Stockholders' Equity $16,161,755 $15,396,518
=========== ===========
See Notes to Consolidated Financial Statements
1
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8
------- ------- ------- -------
Revenue $10,386,479 $17,564,437 $34,281,057 $57,360,566
Cost of Revenue 8,337,746 15,678,214 27,887,020 51,268,395
----------- ----------- ---------- -----------
Gross Profit 2,048,733 1,886,223 6,394,037 6,092,171
----------- ----------- ---------- -----------
Expenses:
Selling, General and
Administrative Expenses 1,694,153 1,724,406 5,290,704 5,394,782
Bad Debt Expense 7,500 10,000 22,500 27,500
----------- ----------- ---------- -----------
Total Expenses 1,701,653 1,734,406 5,313,204 5,422,282
----------- ----------- ---------- -----------
Operating Income 347,080 151,817 1,080,833 669,889
----------- ----------- ---------- -----------
Other Income (Expense):
Interest Income 80,571 35,892 239,928 105,890
Other Expenses -- (80,708) -- 466,489
----------- ----------- ---------- -----------
Total Other Income
(Expense) - Net 80,571 (44,816) 239,928 491,671
----------- ----------- ---------- -----------
Income Before Provision
for Income Taxes 427,651 107,001 1,320,761 1,161,560
Provision for Income Tax 139,581 25,000 432,579 290,000
----------- ----------- ---------- -----------
Net Income $ 288,070 $ 82,002 $ 888,182 $ 871,560
=========== =========== ========== ===========
Earnings Per Common Share $ 0.06 $ 0.02 $ 0.17 $ 0.17
=========== =========== ========== ===========
See Notes to Consolidated Financial Statements.
2
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
CONSOLIDATED CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------
Nine Months Ended
March 31,
1 9 9 9 1 9 9 8
------- -------
Operating Activities:
Net Income $ 888,182 $ 871,560
---------- -----------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 225,150 232,740
(Gain) Loss On Sale 2,921 (466,489)
Provision For Doubtful Accounts 22,500 27,500
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (1,265,473) (209,997)
Inventory 960,659 226,995
Other Current Assets 66,920 85,086
Other Assets 13,677 (1,610)
Deferred Income Taxes -- 240,000
Increase (Decrease) in:
Accounts Payable and Accrued Expenses (236,452) 3,932,436
Deferred Income (100,649) 153,499
Other Current Liabilities (95,632) 4,134
Income Taxes Payable 367,674 --
---------- -----------
Total Adjustments (38,705) 4,224,294
---------- -----------
Net Cash - Operating Activities 849,477 5,095,854
---------- -----------
Investing Activities:
Mortgage Receivable Related Party 210,786 150,000
Capital Expenditures (106,769) --
---------- -----------
Net Cash - Investing Activities 104,017 150,000
---------- -----------
Financing Activities:
Floor Plan Payable 95,677 (3,366,167)
Purchase of Treasury Stock (153,563) --
---------- -----------
Net Cash - Financing Activities (57,886) (3,366,167)
---------- -----------
Net Increase in Cash and Cash Equivalents 895,608 1,879,687
Cash and Cash Equivalents - Beginning of Periods 5,378,846 3,336,917
---------- -----------
Cash and Cash Equivalents - End of Periods $6,274,454 $ 5,216,604
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods:
Income Taxes $ 96,655 $ 34,072
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 5,215,200
weighted shares outstanding for the period ended March 31, 1999, and 5,216,804
weighted shares outstanding for the period ended March 31, 1998.
[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 Transaction
In November 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, which at the time of sale consisted of John J. Wilk,
Chairman of the Board, and Raymond J. Rekuc, a Director of the Corporation. The
purchase price was 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 was at an interest rate of 8% per annum and was secured by a
mortgage on the Real Property. The $150,000 payment due in February 1998 was
paid and $190,000 of the $440,000 payment due in November 1998 was paid with
interest through January 1999. Payment of the remaining $250,000 balance was
renegotiated under a new Note which provides for payment of the principal on
November 1, 2000 (unless demanded at an earlier date), and bears interest at the
rate of 9% per annum, payable monthly beginning February 1, 1999. At the time of
issuance of the new Note, the Corporation released its mortgage lien on the Real
Property in order to permit W Realty, which now includes an unaffiliated third
partner, to lease the Real Property to another third party. In place of the
mortgage lien, the new Note is secured by the partnership interests of W Realty
owned by Messrs. Wilk and Rekuc. The credit of rental payments is still in
effect.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations
Revenues for the three months ended March 31, 1999 were $10,386,479 as compared
with $17,564,437 for the quarter ended March 31, 1998. For the quarter ended
March 31, 1999 the Corporation reported net income of $288,070 as compared with
net income of $82,002 for the similar period in the prior fiscal year. Operating
income totaled $347,080 in the 1999 quarter as compared to $151,817 in the
similar period in fiscal 1998. For the nine months ended March 31, 1999,
revenues were $34,281,057, as compared to $57,360,566 reported for the similar
period in the prior fiscal year, with net income of $888,182 for the period
ended March 31, 1999, compared with net income of $871,560 for the same period
in the prior fiscal year. Operating income in the nine months ended March 31,
1999 was $1,080,833 compared to $669,889 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 nine-month period ended March 31, 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 and nine-month
period ended March 31, 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 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, manufacturers selling
directly to the end-user, and the entrance of manufacturers into the 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations (Continued)
Selling, general and administrative expenses increased to approximately 16% of
revenue for both the quarter and nine months ended March 31, 1999 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 nine-month period ended March 31,
1999, 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 nine-month periods ended March 31, 1999
as compared to the corresponding periods in the prior fiscal year in response to
the lower level of hardware sales.
Accounts receivable decreased for the quarter and nine-month period ended March
31, 1999 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 nine-month period ended March 31, 1999 compared with the same periods in the
prior fiscal year as a result of the reduced inventories, as well as
management's efforts to shorten payable cycles and thereby avoid floor plan
financing costs. Cash levels increased in the three and nine month periods ended
March 31, 1999 as compared to the corresponding periods in fiscal 1998 due to
increased sales of higher profit margin services.
For the fiscal quarter and nine months ended March 31, 1999, 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 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 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 March 1999 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>
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 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 4. Submission of Matters to a Vote of Security Holders
The Corporation's Annual Meeting of Stockholders was held on March 26,
1999.
At the meeting, the following seven individuals were elected by the
following vote to serve as directors of the Corporation, each to serve until the
next annual meeting of stockholders and until his successor is duly elected and
qualifies.
Name Shares Voted
For Authority Withheld
John J. Wilk 4,112,471 72,602
Steven J. Wilk 4,112,566 72,507
Jay A. Smolyn 4,137,466 47,607
Vincent Cusumano 4,129,596 55,477
Earle Kunzig 4,135,646 49,427
Raymond J. Rekuc 4,133,066 52,007
Susan M. Wilk-Cort 4,115,316 69,757
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: May 12, 1999
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> 9-mos
<FISCAL-YEAR-END> jun-30-1998
<PERIOD-END> mar-31-1999
<CASH> 6,274,454
<SECURITIES> 0
<RECEIVABLES> 7,570,407
<ALLOWANCES> 0
<INVENTORY> 447,023
<CURRENT-ASSETS> 14,792,422
<PP&E> 526,395
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,161,755
<CURRENT-LIABILITIES> 2,722,626
<BONDS> 0
0
0
<COMMON> 74,695
<OTHER-SE> 13,283,734
<TOTAL-LIABILITY-AND-EQUITY> 16,161,755
<SALES> 34,281,057
<TOTAL-REVENUES> 34,281,057
<CGS> 27,887,020
<TOTAL-COSTS> 33,200,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,320,761
<INCOME-TAX> 432,579
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 888,182
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
