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, 2000
--------------
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, 2000
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, 2000: 4,884,304
<PAGE>
TRANSNET CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Accountant's Review Report 1
Consolidated Balance Sheets as of March 31, 2000 and June 30, 1999 2
Consolidated Statements of Operations for the Three and Nine Months Ended
March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis 6
PART II. OTHER INFORMATION 9
- ------- -----------------
<PAGE>
ACCOUNTANT'S REVIEW REPORT
To the Stockholders and Board of Directors of
Transnet Corporation and Subsidiary
Somerville, New Jersey
We have reviewed the accompanying consolidated balance sheet of
Transnet Corporation and Subsidiary as of March 31, 2000, and the related
consolidated statements of operations and cash flows for the three and nine
months ended March 31, 2000. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the accompanying consolidated financial statements in
order for them to be in conformity with generally accepted accounting
principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
May 3, 2000
1
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
March 31, June 30,
--------- --------
2 0 0 0 1 9 9 9
------- -------
[Unaudited]
Assets:
Current Assets:
Cash and Cash Equivalents $7,103,217 $ 7,617,241
Accounts Receivable - Net 8,670,719 6,736,351
Inventories 568,593 886,936
Other Current Assets 80,199 56,030
Income Tax Refund 26,896
Deferred Tax Asset 249,000 249,000
---------- -----------
Total Current Assets 16,698,624 15,545,558
Property and Equipment - Net 539,173 745,703
Mortgage Receivable - Related Party 250,000 250,000
Other Assets 418,170 577,619
---------- -----------
Total Assets $17,905,967 $17,118,880
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $2,749,659 $ 1,160,978
Accrued Expenses 296,588 374,064
Accrued Payroll 224,131 258,858
Floor Plan Payable 1,772,730 1,200,441
Deferred Income 20,290 --
Income Taxes Payable 664,167
Other Current Liabilities -- --
---------- -----------
Total Current Liabilities 5,063,398 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 2,585,220 are in Treasury) 74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 9,222,900 9,252,475
---------- -----------
Totals 19,984,340 20,013,915
Less: Treasury Stock - At Cost (7,152,871) (6,564,643)
---------- -----------
Total Stockholders' Equity 12,831,469 13,449,272
---------- -----------
Total Liabilities and Stockholders' Equity $17,905,967 $17,118,880
=========== ===========
See Notes to Consolidated Financial Statements.
2
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
2 0 0 0 1 9 9 9 2 0 0 0 1 9 9 9
------- ------- ------- -------
Revenue:
Sales $ 8,708,401 $ 6,398,766 $23,448,563 $22,236,819
Service 3,125,419 3,987,713 10,123,649 12,044,238
----------- ----------- ---------- -----------
11,833,820 10,386,479 33,572,212 34,281,057
----------- ----------- ---------- -----------
Cost of Revenue:
Sales 8,295,226 5,941,557 21,827,757 20,752,316
Service 2,416,271 2,396,189 7,627,274 7,134,704
----------- ----------- ---------- -----------
10,711,497 8,337,746 29,455,031 27,887,020
----------- ----------- ---------- -----------
Gross Profit 1,122,323 2,048,733 4,117,181 6,394,037
----------- ----------- ---------- -----------
Expenses:
Selling, General and
Administrative Expenses 1,460,759 1,694,153 4,372,660 5,290,704
Bad Debt Expense 15,000 7,500 45,000 22,500
----------- ----------- ---------- -----------
1,475,759 1,701,653 4,417,660 5,313,204
----------- ----------- ---------- -----------
Operating (Loss) Income (353,436) 347,080 (300,479) 1,080,833
----------- ----------- ---------- -----------
Other Income:
Interest Income 91,034 76,934 253,950 215,556
Interest Income-Related
Party 5,610 3,637 16,954 24,372
----------- ----------- ---------- -----------
Total Other Income - Net 96,644 80,571 270,904 239,928
----------- ----------- ---------- -----------
(Loss) Income Before
Provision
For Income Taxes (256,792) 427,651 (29,575) 1,320,761
Provision (Benefit) for
Income Taxes (80,000) 139,581 -- 432,579
----------- ----------- ---------- -----------
Net (Loss) Income $ (176,792) $ 288,070 $ (29,575) $ 888,182
=========== =========== ========== ===========
Basic Net (Loss) Income
per Common Share $ (0.04) $ 0.06 $ (0.01) $ 0.17
=========== =========== ========== ===========
Diluted Net (Loss) Income
per Common Share $ (0.04) $ 0.06 $ (0.01) $ 0.17
=========== =========== ========== ===========
Weighted Average Common
Shares Outstanding -
Basic 4,900,864 5,216,804 4,900,864 5,216,804
=========== =========== ========== ===========
Weighted Average Common
Shares Outstanding -
Diluted 4,900,864 5,216,804 4,900,864 5,216,804
=========== =========== ========== ===========
See Notes to Consolidated Financial Statements.
3
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
CONSOLIDATED CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------
Nine Months Ended
March 31,
2 0 0 0 1 9 9 9
------- -------
Operating Activities:
Net Income $ (29,575) $ 888,182
---------- -----------
Adjustments to Reconcile Net Income to Net Cash:
Depreciation and Amortization 206,530 225,150
Loss On Sale -- 2,921
Provision for Doubtful Accounts 12,699 22,500
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (1,947,067) (1,265,473)
Inventory 318,343 960,659
Other Current Assets (24,169) 66,920
Other Assets 159,449 13,674
Mortgage Receivable-Related Party -- 210,786
Increase (Decrease) in:
Accounts Payable and Accrued Expenses 1,476,478 (236,452)
Deferred Income 20,290 (100,649)
Other Current Liabilities -- (95,632)
Income Taxes Payable (691,063) 367,677
---------- -----------
Total Adjustments (468,510) 172,081
---------- -----------
Net Cash - Operating Activities (498,085) 1,060,263
---------- -----------
Investing Activities:
Treasury Stock Purchases (588,228) (153,563)
Capital Expenditures -- (106,769)
---------- -----------
Net Cash - Investing Activities (588,228) (260,332)
---------- -----------
Financing Activities:
Floor Plan Payable 572,289 95,677
---------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents (514,024) 895,608
Cash and Cash Equivalents - Beginning of Periods 7,617,241 5,378,846
---------- -----------
Cash and Cash Equivalents - End of Periods $7,103,217 $ 6,274,454
========== ===========
See Notes to Consolidated Financial Statements.
4
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of March 31, 2000 and 1999 is 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 - Basic earnings per share is based on the weighted
average number of common shares outstanding without consideration of common
stock equivalents. Diluted earnings per share is based on the weighted average
number of common and common equivalent shares outstanding. Diluted earnings per
share takes into account the shares that may be issued upon exercise of stock
options, reduced by the shares that may be purchased with the funds received
from the exercise, based on the average price during the year. Prior periods
earnings per share data have been recalculated and no adjustment was necessary.
(2) Income Taxes
The Corporation has a deferred tax asset of $249,000 and a deferred tax
liability of $11,000 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.
. . . . . . . . .
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations
Revenues for the three months ended March 31, 2000 were $11,833,820 as compared
with $10,386,479 for the quarter ended March 31, 1999. For the quarter ended
March 31, 2000 the Corporation reported a net loss of $176,792 as compared with
net income of $288,070 for the similar period in the prior fiscal year. For the
nine months ended March 31, 2000, revenues were $33,572,212, as compared to
$34,281,057 reported for the similar period in the prior fiscal year, with a net
loss of $29,575 for the period ended March 31, 2000, compared with net income of
$888,182 for the same period in the prior fiscal year. The increase in revenues
for the quarter ended March 31, 2000 is attributable to increased hardware
sales. The decrease in revenues for the nine-month period ended March 31, 2000,
was primarily attributable to deferrals by major clients of initiating technical
service projects due to their concerns with potential Y2K problems. Management
believes that this type of deferral was widespread and affected the industry as
a whole. Based on recent indications, management believes that demand for
services is beginning to return to normal levels.
The net loss for the quarter and the nine-month period ended March 31, 2000 were
the result of the deferrals of technical service, technical support and training
services, combined with the associated under- utilization of technical
personnel, as well as decreased margins on hardware sales. Results were also
negatively impacted by the increased cost of technical services, including
increased labor costs and increased costs of parts. Service and training related
revenues are significant in their contributions to earnings because these
operations yield a higher profit margin than equipment sales. Earnings for the
quarter and nine-month period ended March 31, 1999 are attributable to an
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. For the nine-month period ended March 31, 2000, revenues
from the provision of service, support, outsourcing and network integration were
largely the result of the Corporation renewing and/or entering into service
contracts with a number of large corporate clients. 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.
Although service revenues decreased for the quarter and nine-month period of
fiscal 2000, hardware sales increased due to increased order volume, despite the
Corporation's shift in focus to technical services. Management continues its
concentration on sales of network and system integration products which yield
higher profit margins, and continues adherence to and implementation of cost
control measures
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 the technical services business. Management believes that the
adoption of policies by many larger corporate clients to limit the number of
vendors permitted to provide goods and services for specified periods of time
has further increased price competition.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Results of Operations (Continued)
To meet these competitive challenges and to maximize the Corporation's profit
margins, 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 clients which provide marketplaces for
a wide range of products and services at one time, a cost-effective approach to
sales. With respect to hardware sales, the Corporation has adopted its "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. In addition, 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.
Selling, general and administrative expenses decreased to approximately 13% of
revenue for both the quarter and nine months ended March 31, 2000, due to
management's efforts to control and reduce administrative expenses, which
included reduction in items such as personnel related costs and distribution
expenses. Selling, general and administrative expenses were approximately 16% of
revenues for the same periods in fiscal 1999.
Interest income increased in the quarter and nine-month period ended March 31,
2000, as compared to similar periods in the prior fiscal year due to higher
interest rates.
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. The
amount due under this financing arrangement increased for the quarter ended
March 31, 2000 due to the increase in hardware sales during the month of March
and related payment timing issues. Inventory decreased in the quarter and
nine-month periods ended March 31, 2000 as compared to the corresponding periods
in the prior fiscal year in response to the Corporation's increased volume of
sales at the end of the current quarter.
Accounts receivable increased for the quarter and nine-month period ended March
31, 2000, as compared to the same periods in the prior fiscal year primarily as
a result of increased hardware sales at the end of the quarter. The increase in
accounts receivable was also due to slower payable cycles from certain
customers. Accounts payable increased for the quarter and nine-month period
ended March 31, 2000, compared with the same periods in the prior fiscal year as
a result of increased hardware sales volume at the end of the March 2000
quarter. Although cash levels remained relatively constant during most of the
comparative three and nine-month periods, costs associated with recent hardware
orders at the end of March 2000 caused a decrease in cash for the three and
nine-month periods ended March 31, 2000.
For the fiscal quarter and nine months ended March 31, 2000, 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.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
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.
Year 2000
Since December 31, 1999, the Corporation has not experienced any significant Y2K
related problems in its own operations or those of any material supplier or
client.
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 have failed or created 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 covered 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 had the following phases: inventory;
assessment of action required to assure Y2K compliance; upgrading or
replacement; testing; and contingency planning.
Prior to December 31, 1999, the Corporation completed the assessment of its
critical IT systems and its main internal computer system in order to determine
whether its systems were Y2K compliant. By January 1, 2000, the Corporation
upgraded or replaced any non-compliant systems. The Corporation incurred
approximately $50,000 of Y2K project expenses.
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.
8
<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 February
28, 2000.
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 3,561,214 37,220
Steven J. Wilk 3,561,419 37,020
Jay A. Smolyn 3,565,919 32,520
Vincent Cusumano 3,565,169 33,270
Earle Kunzig 3,563,269 35,170
Raymond J. Rekuc 3,562,969 35,470
Susan M. Wilk-Cort 3,561,419 37,020
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits - None required to be filed for Part II of this report.
B. Reports on Form 8-K - None filed during the quarter for which this
report is submitted.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of 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, 2000
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> jun-30-2000
<PERIOD-END> mar-31-2000
<CASH> 7,103,217
<SECURITIES> 0
<RECEIVABLES> 8,670,719
<ALLOWANCES> 0
<INVENTORY> 568,593
<CURRENT-ASSETS> 16,698,624
<PP&E> 539,173
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,905,967
<CURRENT-LIABILITIES> 5,063,398
<BONDS> 0
0
0
<COMMON> 74,695
<OTHER-SE> 10,686,745
<TOTAL-LIABILITY-AND-EQUITY> 17,905,967
<SALES> 33,572,212
<TOTAL-REVENUES> 33,572,212
<CGS> 29,455,031
<TOTAL-COSTS> 4,417,660
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (29,575)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,575)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
