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 DECEMBER 31, 2003
-----------------
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 DECEMBER 31, 2003
TRANSNET CORPORATION
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 22-1892295
- -------------------------------- ----------
(State or other jurisdiction of (IRS 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 February 11,
2004: 4,774,804.
TRANSNET CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
December 31, 2003 and June 30, 2003 1
Consolidated Statements of Operations
Three Months Ended December 31, 2003 and 2002 2
Six Months Ended December 31, 2003 and 2002 3
Consolidated Statements of Cash Flows
Six Months Ended December 31, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis 8
Controls and Procedures 9
PART II. OTHER INFORMATION
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 10
i.
TRANSNET CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2003 2003
------------ ------------
(Unaudited)
ASSETS:
CURRENT ASSETS
Cash and Cash Equivalents $ 7,138,408 $ 6,935,623
Accounts Receivable - Net 4,808,798 5,669,313
Inventories 519,360 392,774
Other Current Assets 72,275 16,572
Deferred Tax Asset 256,301 256,301
------------ ------------
TOTAL CURRENT ASSETS $ 12,795,142 $ 13,270,583
PROPERTY AND EQUIPMENT - NET 425,847 444,969
OTHER ASSETS 245,866 247,753
------------ ------------
TOTAL ASSETS $ 13,466,855 $ 13,963,305
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 358,373 $ 382,813
Accrued Expenses 2,494 184,744
Income Taxes Payable 10,499 19,426
Floor Plan Payable 234,660 549,826
------------ ------------
TOTAL CURRENT LIABILITIES $ 606,026 1,136,809
------------ ------------
DEFERRED TAX LIABILITY 91,631 91,631
STOCKHOLDERS' EQUITY:
Capital Stock - Common, $.01 Par Value,
Authorized 15,000,000 Shares; Issued
7,469,524 Shares[of which
2,694,720 are in Treasury]
74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 9,315,958 9,281,625
------------ ------------
Totals 20,077,398 20,043,065
Less: Treasury Stock - At Cost (7,308,200) (7,308,200)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,769,198 12,734,865
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 13,466,855 $ 13,963,305
============ ============
See Notes to Consolidated Financial Statements.
1
TRANSNET CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2003 2002
------------- -------------
REVENUE
Equipment $ 3,492,342 $ 3,383,589
Service 3,894,349 4,234,032
------------- -------------
TOTAL REVENUE 7,386,691 7,617,621
------------- -------------
COST OF REVENUE
Equipment 3,176,402 2,983,010
Service 2,895,565 3,225,379
------------- -------------
TOTAL COST OF REVENUE 6,071,967 6,208,389
------------- -------------
GROSS PROFIT 1,314,724 1,409,232
------------- -------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,327,019 1,636,623
------------- -------------
OPERATING (LOSS) (12,295) (227,391)
------------- -------------
OTHER INCOME
Interest Income 12,638 11,569
TOTAL OTHER INCOME 12,638 11,569
------------- -------------
INCOME BEFORE TAX EXPENSE 343 (215,822)
INCOME TAX (BENEFIT) EXPENSE -- (24,924)
------------- -------------
NET INCOME (LOSS) $ 343 $ (190,898)
============= =============
BASIC NET INCOME PER COMMON SHARE $ -- $ (.04)
============= =============
DILUTED NET INCOME PER COMMON SHARE $ -- $ (.04)
============= =============
Weighted Average Common
Shares Outstanding - Basic 4,774,804 4,774,804
============= =============
Weighted Average Common
Shares Outstanding - Diluted 4,923,646 4,839,084
============= =============
See Notes to Consolidated Financial Statements.
2
TRANSNET CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
----------------------------
2003 2002
------------ ------------
REVENUE
Equipment $ 8,831,877 $ 9,000,638
Service 8,189,045 8,465,415
------------ ------------
TOTAL REVENUE 17,020,922 17,466,053
------------ ------------
COST OF REVENUE
Equipment 7,928,905 8,089,588
Service 6,189,087 6,172,724
------------ ------------
TOTAL COST OF REVENUE 14,117,992 14,262,312
------------ ------------
GROSS PROFIT 2,902,930 3,203,741
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,904,928 3,382,004
------------ ------------
OPERATING (LOSS) (1,998) (178,263)
------------ ------------
OTHER INCOME
Interest Income 36,331 25,274
TOTAL OTHER INCOME 36,331 25,274
------------ ------------
INCOME BEFORE TAX EXPENSE 34,333 (152,989)
INCOME TAX (BENEFIT) EXPENSE -- --
------------ ------------
NET INCOME (LOSS) $ 34,333 $ (152,989)
============ ============
BASIC NET INCOME PER COMMON SHARE $ .01 $ (.03)
============ ============
DILUTED NET INCOME PER COMMON SHARE $ .01 $ (.03)
============ ============
Weighted Average Common Shares
Outstanding - Basic 4,774,804 4,774,804
============ ============
Weighted Average Common Shares
Outstanding - Diluted 4,912,276 4,884,547
============ ============
See Notes to Consolidated Financial Statements.
3
TRANSNET CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net Income $ 34,333 $ (152,989)
------------ ------------
Adjustments to Reconcile Net Income
to Net Cash:
Depreciation and Amortization $ 78,135 $ 102,100
Provision for Doubtful Accounts (10,000) (7,000)
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable 870,515 2,064,577
Inventory (126,586) (208,237)
Other Current Assets (55,703) (14,840)
Other Assets 1,887 (980)
Increase (Decrease) in:
Accounts Payable and Accrued Expenses (206,690) (740,874)
Other Current Liabilities -- (204,428)
Income Tax Payable (8,927) --
------------ ------------
Total Adjustments $ 542,631 $ 990,318
------------ ------------
NET CASH - OPERATING ACTIVITIES - FORWARD $ 576,964 $ 837,329
------------ ------------
INVESTING ACTIVITIES:
Capital Expenditures $ (59,013) $ (32,174)
------------ ------------
NET CASH - INVESTING ACTIVITIES $ (59,013) $ (32,174)
------------ ------------
FINANCING ACTIVITIES -
Floor Plan Payable- Net $ (315,166) $ (638,867)
NET CASH - FINANCING ACTIVITIES $ (315,166) $ (638,867)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 202,785 $ 166,288
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIODS $ 6,935,623 $ 7,035,649
============ ============
CASH AND CASH EQUIVALENTS AT END OF PERIODS $ 7,138,408 $ 7,201,936
============ ============
See Notes to Consolidated Financial Statements.
4
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of December 31, 2003 and 2002 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: Earnings per common share - basic are based on
4,774,804 weighted shares outstanding for the six-month period ended
December 31, 2003 and on 4,774,804 weighted shares outstanding for the
six-month period ended December 31, 2002. Earnings per common share -
diluted are based on 4,912,276 weighted shares outstanding for the
six-month period ended December 31, 2003 and on 4,884,547 weighted shares
outstanding for the six-month period ended December 31, 2002.
(2.) INCOME TAXES
The Corporation has a deferred tax asset of $256,301 and a deferred tax
liability of $91,631 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, 2003.
(4) RELATED PARTY TRANSACTION
On December 8, 2003, East Coast Property Management, LLC, ("East Coast")
a limited liability corporation comprised of Steven J. Wilk and Jay A.
Smolyn, both officers and directors of the Corporation, purchased the
property occupied by the Corporation and assumed the Lease held by the
former owner, under the same terms and conditions agreed by the
Corporation and the former owner, an unaffiliated third party. For the
relevant portion of the month of December 2003, East Coast received
$9,355 in rental payments from the Corporation.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the three months ended December 31, 2003 were $7,386,691 as
compared with $7,617,621 for the quarter ended December 31, 2002. For the
quarter ended December 31, 2002 the Corporation reported earnings of $343 as
compared with a net loss of $190,898 for the similar period in the prior fiscal
year. For the six months ended December 31, 2003 revenues were $17,020,922, as
compared to $17,466,053 reported for the similar period in the prior fiscal
year, with net income of $34,333 for the six-month period ended December 31,
2003, compared with a net loss of $152,989 for the same period in the prior
fiscal year. Despite a sluggish IT environment, the Corporation was able to
maintain revenue levels in fiscal 2004 as compared to fiscal 2003.
The net income for the quarter and six-month period ended December 31, 2003 is
attributable to the management's focus on reducing selling and general
administrative expenses, particularly personnel related expenses. During the
referenced periods, the Corporation's clients were conservative in their IT
budgetary spending. During the December 2003 quarter, service revenues were
negatively impacted by budgetary restraints implemented by a major customer, and
project delays. As a result, management refocused its attention on utilization
rates of its service technicians and selling and administrative expenses to
reduce expenses. Because project delays are client-based, management cannot
determine in which quarters services will be provided, nor can management give
assurances that delays will not be longer than expected or that orders will be
given. Indications of interest, however, have been received by customers with
respect to IP telephony and security technology, areas which management has
targeted as growth areas for the Corporation. Management concentrates it efforts
on technical service and support, and on sales of network and system integration
products that 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. For the six-month periods
ended December 31, 2003 and 2002, respectively, 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.
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 many 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
6
and customer acceptance of new product and service offerings; trends in IT
outsourcing; product constraints; and industry and general economic conditions.
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 believes that this approach,
although it may impact revenues, insulates the corporation from challenges that
may accompany sudden price decreases, hardware obsolescence and delays
collection of receivables.
Management's current marketing strategy is designed to emphasize provision of
technical services and sales of lower revenue/higher profit margin products
related to service and support operations. In this regard, management continues
its concentration on sales of network and system integration products that yield
higher profit margins. 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. Although there is
uncertainty as to the economic future, management is cautiously optimistic,
particularly with respect to education 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 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.
With respect to selling, general and administrative expenses, expenses decreased
as a result of management's cost control measures, which include reduced
personnel costs, to approximately 18% of revenue for the quarter and 17% for the
six month period ended December 31, 2003. Selling, general and administrative
expenses were approximately 19% of revenues for the same time periods in fiscal
2003. Management continues its efforts to control and reduce administrative and
personal related costs.
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 decreased for the quarter and six months ended
December 31, 2003 due to the purchase of equipment from sources outside the
floor planning. Inventory increased in the quarter and six-month periods due to
orders received at the end of the periods ended December 31, 2003 as compared to
the corresponding periods in the prior fiscal year.
Accounts receivable and payable decreased for the quarter and six months ended
December31, 2003 as compared to the same periods in 2002 as a direct result of
the decrease in revenues and, with respect to payables, due to payments made
during the quarter. Cash levels increased in the
7
three and six-months ended December 31, 2003 as compared to the corresponding
periods in 2003 as a result of decreased financing for equipment. Interest
income increased in the 2003 quarter and six month period due to larger amounts
invested, as compared to the same periods in 2002.
For the fiscal quarter and six months ended December 31, 2003, 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 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) 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 was subject to a monetary sanction. In
addition, the Corporation was required to correct, retroactively, operational
violations, and to pay any resulting excise taxes and PBGC premiums and
penalties that may be due. In this regard, in connection with settlement
negotiations with the IRS, during the December 2000 quarter the Corporation made
a contribution to the Plan and made payment of specified sanctions. During the
March 2001 quarter, the Corporation finalized a settlement agreement with the
IRS and is awaiting resolution with the PBGC.
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.
8
ITEM 4. CONTROL AND PROCEDURES
The Chief Executive Officer of the Corporation has concluded, based on his
evaluation as of a date within 90 days prior to the date of the filing of this
Report, that the Corporation's disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Corporation in the
reports filed or submitted by it under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and include
controls and procedures designed to ensure that information required to be
disclosed by the Corporation in such reports is accumulated and communicated to
the Corporation's management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Corporation's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of such evaluation.
9
PART II.
OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits -
31.1 Certification required by Section 302
31.2 Certification required by Section 302
32 Certification required by Section 906
B. Reports on Form 8-K -
On November 12, 2003, TransNet Corporation filed a Form 8-K under
Item 9.
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
Chief Executive Officer
/S/ JOHN J. WILK
---------------------------------------
John J. Wilk,
Principal Financial and Accounting Officer
and Chairman of the Board of Directors
DATE: February 13, 2004
10