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, 2000
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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, 2000
TRANSNET CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 22-1892295
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
45 Columbia Road, Somerville, New Jersey 08876-3576
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:908-253-0500
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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 _____
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 7, 2000: 4,855,304.
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TRANSNET CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
September 30, 2000 and June 30, 2000 1
Consolidated Statements of Operations
Three Months Ended September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows
Three Months Ended September 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Management's Discussion and Analysis 5
PART II. OTHER INFORMATION 8
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TRANSNET CORPORATION AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
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September 30, June 30,
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2 0 0 0 2 0 0 0
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[Unaudited]
Assets:
Current Assets:
Cash and Cash Equivalents $3,858,213 $5,208,558
Accounts Receivable - Net 9,561,621 9,357,398
Inventories 1,782,232 1,377,729
Mortgage Receivable - Related Party 250,000 250,000
Other Current Assets 128,504 86,500
Deferred Tax Asset 189,164 231,900
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Total Current Assets 15,769,734 16,512,085
Property and Equipment - Net 572,771 569,000
Other Assets 314,715 369,282
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Total Assets $16,657,220 $17,450,367
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $2,328,864 $2,055,484
Accrued Expenses 263,101 378,858
Accrued Payroll 176,627 175,614
Floor Plan Payable 966,236 2,015,285
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Total Current Liabilities 3,734,828 4,625,241
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Deferred Tax Liability 12,000 12,000
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Stockholders' Equity:
Capital Stock - Common, $.01 Par Value, Authorized
15,000,000 Shares; Issued 7,469,524 Shares
[of which 2,614,220 are in Treasury] 74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 9,358,011 9,260,745
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Totals 20,119,451 20,022,185
Less: Treasury Stock - At Cost (7,209,059) (7,209,059)
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Total Stockholders' Equity 12,910,392 12,813,126
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Total Liabilities and Stockholders' Equity $16,657,220 $17,450,367
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See Notes to Consolidated Financial Statements.
1
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TRANSNET CORPORATION AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months ended
September 30,
2 0 0 0 1 9 9 9
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Revenue:
Equipment $10,150,601 $7,425,692
Services 3,514,398 3,829,168
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Total Revenue 13,664,999 11,254,860
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Cost of Revenue:
Equipment 9,462,289 6,761,216
Services 2,521,772 2,630,742
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Total Cost Revenue 11,984,061 9,391,958
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Gross Profit 1,680,938 1,862,902
Selling, General and Administrative Expenses 1,608,097 1,455,021
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Operating Income 72,841 407,881
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Other Income:
Interest Income 67,753 88,511
Interest Income - Related Party 5,672 5,672
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Total Other Income - Net 73,425 94,183
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Income Before Tax Expense 146,266 502,064
Income Tax Expense 49,000 170,912
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Net Income $ 97,266 $ 331,152
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Basic Net Income Per Common Share $ 0.02 $ 0.07
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Diluted Net Income Per Common Share $ 0.02 $ 0.07
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Weighted Average Common shares Outstanding - Basic 4,855,304 5,002,163
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Weighted Average Common shares Outstanding - Diluted 4,855,304 5,002,163
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See Notes to Consolidated Financial Statements.
2
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TRANSNET CORPORATION AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months ended
September 30,
2 0 0 0 1 9 9 9
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Operating Activities:
Net Income $ 97,266 $ 331,152
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Adjustments to Reconcile Net Income to Net Cash:
Depreciation and Amortization 39,753 61,130
Provision for Doubtful Accounts 30,000 15,000
Discounting of Deferred Charges 52,052 50,459
Deferred Income Taxes 42,736 --
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts Receivable (234,223) (1,270,167)
Inventory (404,503) (19,358)
Other Current Assets (42,004) (27,787)
Other Assets (978) 2,513
Increase (Decrease) in:
Accounts Payable and Accrued Expenses 158,636 310,341
Deferred Income -- 60,869
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Total Adjustments (358,531) (817,000)
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Net Cash - Operating Activities (261,265) (485,848)
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Investing Activities:
Capital Expenditures (40,031) --
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Financing Activities:
Floor Plan Payable-Net (1,049,049) (364,358)
Treasury Shares Repurchased -- (372,875)
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Net Cash - Financing Activities (1,049,049) (737,233)
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Net (Decrease) Increase in Cash and Cash Equivalents (1,350,345) (1,223,081)
Cash and Cash Equivalents - Beginning of Periods 5,208,558 7,617,241
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Cash and Cash Equivalents - End of Periods $3,858,213 $6,394,160
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Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ -- $ --
Income Taxes $ 6,265 $ 341,027
Supplemental Disclosure of Non-Cash Investing Activities:
See Notes to Consolidated Financial Statements.
3
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TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 2000 and 1999 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 - Basic and Diluted: Earnings per common share are based
on 4,855,304 weighted shares outstanding for the period ended September 30, 2000
and on 5,002,163 weighted shares outstanding for the period ended September 30,
1999.
(2) Income Taxes
The Corporation has a deferred tax asset of approximately $189,000 and a
deferred tax liability of $12,000 based upon temporary timing differences
including inventory capitalization, allowance for doubtful accounts, vacation
pay accruals and depreciation.
(3)Basis of Reporting
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, 2000. The results of operations for the
three months ended September 30, 2000 are not necessarily indicative of the
results for the entire fiscal year ending June 30, 2001.
4
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the quarter ended September 30, 2000 were $13,664,999 as compared
with $11,254,860 for the quarter ended September 30, 1999. For the quarter ended
September 30, 2000 the Corporation reported net income of $97,266 as compared
with net income of $331,152 for the corresponding period in 1999. The increase
in revenues is primarily due to an increase in hardware sales. Revenues
attributable to service, support and training operations decreased slightly
compared to the same period in the prior year due to termination of certain
projects. Revenues for the quarter ended September 30, 2000 include a 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 decrease in earnings for the quarter ended September 30, 2000 is
attributable to the decrease in gross profit margins on hardware sales and
technical services, which in turn is due to competitive pressures for reduced
prices for both equipment and services. Management concentrates it efforts on
technical service and support, and training operations, and on sales of network
and system integration products which yield higher profit margins, and continues
its 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.
During the fiscal years discussed, the computer industry has experienced a trend
of decreasing prices of computers and related equipment. Management believes
that this trend will continue. Industrywide, the result of price erosion has
been lower profit margins on sales, which require businesses to sell a greater
volume of equipment to maintain past earning levels. Another result of the price
decreases has been intensified competition within the industry, including the
consolidation of businesses through merger or acquisition, the initiation of
sales by certain manufacturers directly to the end-user and the entrance of
manufacturers into technical services business. Management believes that the
adoption of policies by many larger corporate customers, which limit the number
of vendors permitted to provide goods and services for specified periods of
time, has further increased price competition.
The Corporation's performance is also impacted by other factors, many of which
are not within its control. These factors include: the short-term nature of
client's commitments; patterns of capital spending by clients; the timing and
size of new projects; pricing changes in response to competitive factors; the
availability and related costs of qualified technical personnel; timing and
customer acceptance of new product and service offerings; trends in IT
outsourcing; product constraints; and industry and general economic conditions.
5
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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. These customers often
do not have their own technical staffs and outsource their computer service
requirements to companies such as TransNet. 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 the near term, the
Corporation believes that product sales will continue to generate a significant
percentage of the Company's revenues. In addition, the Corporation's buying
agreement with Ingram Micro, Inc. enhances the Corporation's competitive edge
through product discounts unavailable through other sources.
Although actual expenses increased due to increased personnel costs, selling,
general and administrative expenses decreased to approximately 12% of revenue
for the first quarter of fiscal 2001 as a result of the increase in revenues.
Selling, general and administrative expenses were approximately 13% of revenues
for the same quarter in fiscal 2000.
Interest income decreased in the 2000 quarter as compared to 1999 primarily due
to the lower amount of cash invested.
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. Floor
planning payables decreased in the 2000 period compared to the same period in
1999 as the result of payment made by the Corporation. Inventory increased in
the quarter ended September 30, 2000 as compared to the corresponding period in
1999 in response to the increased hardware sales.
Accounts receivable and payable increased for the quarter ended September 30,
2000 as compared to the same period in 1999 as a direct result of the increase
in revenues. Cash levels decreased in the three months ended September 30, 2000
as compared to the corresponding period in 1999 as a result of expenses required
to increase inventories to cover the increased hardware sales.
For the fiscal quarter ended September 30, 2000, as in the fiscal quarter ended
September 30, 1999, 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.
6
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The Corporation decided to (i) take corrective action under the IRS Walk-in
Closing Agreement Program ("CAP"), (ii) applied 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.
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 and customers; continued competitive and pricing
pressures in the industry; product supply shortages; open-sourcing of products
of vendors, including direct sales by manufacturers; 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
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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
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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
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Steven J. Wilk, President
/s/ John J. Wilk
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John J. Wilk,
Principal Financial and Accounting Officer
and Chairman of the Board of Directors
DATE: November 14, 2000
9
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