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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 2002 [ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from to
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Commission File Number 0-8693
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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
incorporation or organization) Number)
45 Columbia Road, Branchburg, 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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Securities registered pursuant to Section 12 (b) of the Act: NONE
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Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
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 ninety days.
NO YES X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this From 10-K or in any amendment to
this Form 10-K.
[ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $4,265,364 on September 16,
2002 based upon the closing sales price on the OTC Bulletin Board as of said
date.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares of the registrant's common stock outstanding on September
16, 2002 was 4,774,804 shares (exclusive of Treasury shares).
ITEM 1. BUSINESS
TransNet Corporation ("TransNet" or the "Corporation") was incorporated in
the State of Delaware in 1969. The Corporation is a single-source provider of
information technology products and technology management services designed to
enhance the productivity of the information systems of its customers. Through
its own sales and service departments, TransNet provides information technology
and network solutions for its customers by combining value-added professional
technical services with the sale of PC hardware, network products, computer
peripherals and software. As used herein, the term "Corporation" shall refer to
TransNet and where the context requires, shall include TransNet and its
wholly-owned subsidiary, Century American Corporation. Century American
Corporation, formerly a leasing subsidiary, is currently inactive.
Description of Business
Products, Sources, and Markets: The sale of computer and related equipment
for local area networks ("LAN's") and personal computers ("PC's") accounted for
the significant portion of the Corporation's revenues, accounting for 65% and
75% of sales for fiscal 2002 and 2001, respectively. As part of its single
source approach, the Corporation is a systems integrator, combining hardware and
software products from different manufacturers into working systems. The
Corporation is primarily a value added reseller. During the past year,
management continued to implement its shift in focus for business growth from
hardware sales to marketing a wider array of technical services to its clients
in order to maximize profits. In addition, building on its expertise in network
installation, the Corporation expanded its marketing and sales of IP telephony
products. These products provided for the operation of highly reliable phone
systems over data networks. The resulting economies of installation and
maintenance have generated increased demand for these products.
The equipment sold by the Corporation includes microcomputers,
workstations, servers, monitors, printers and operating systems software. In
addition, the Corporation sells wireless networking products. The principal
markets for the Corporation's products are commercial, governmental, and
educational customers. These markets are reached by direct sales conducted
through the corporate sales department based in Branchburg, New Jersey. The
Corporation's direct sales staff enables TransNet to establish relationships
with major corporate and educational clients through which it markets the
Corporation's technical services.
The Corporation is selective in choosing the products that it markets and
its product mix is geared primarily to the requirements of its business
customers. The products sold by the Corporation include business and personal
desktop computer systems manufactured by International Business Machines
("IBM"), Acer, Apple Computer, Inc. ("Apple"), Nortel Networks, Compaq Computer
Corporation ("Compaq"), NEC Technologies, Inc. ("NEC"), Hewlett-Packard Company
("Hewlett-Packard"), and Toshiba American Information Systems, Inc. ("Toshiba");
related peripheral products such as network products of Compaq, Intel, Novell,
Inc. ("Novell"), 3Com, and Cisco Systems, Inc. ("Cisco"); telephony and wireless
products; selected software products; and supplies produced by other
manufacturers. The Corporation does not manufacture or produce any of the items
it markets.
The Corporation is currently an authorized dealer for Apple, Nortel Networks,
Compaq (including authorization as a Compaq Certified Education Partner),
Hewlett-Packard, IBM, Intel, NEC, and Toshiba, Microsoft Corporation
("Microsoft") as a Microsoft Certified Solutions Provider, Cisco, Novell as a
Platinum Partner, SpecraLink and 3COM. The Corporation also offers a variety of
products manufactured by other companies including Adspace, Citrix, Lexmark,
Okidata, Symantec, Verint, Inc., and Xerox/Tektronix. Occasionally, the
Corporation will order specific products to satisfy a particular customer
requirement. The Corporation evaluates its product line and new products
internally and through discussions with its vendors and customers.
Software sold by the Corporation includes software designed for general business
applications as well as specialized applications such as research,
pharmaceuticals, and education; and integrated packages.
The Corporation maintains an inventory of its product line to provide
shipments to customers or arranges for direct shipment of product to the
customer. In an effort to reduce costs, the Corporation has instituted a direct
shipping program, through which product is shipped directly from the
Corporation's suppliers to the customer. In addition, shipments are made from
the Corporation's warehouse in
2
Branchburg, New Jersey primarily through common carriers. Back orders are
generally immaterial, but manufacturers' product constraints occasionally impact
the Corporation's inventory levels. No such constraints have affected the
Corporation in the past three years, however.
The marketing of computers and peripherals and related technical services
is generally not seasonal in nature.
Technical Support and Service: Service operations have become a
significant source of revenues, comprising 35% of revenues in fiscal 2002, and
25% of revenues in fiscal 2001. As discussed in "Management's Discussion and
Analysis," although hardware sales account for the bulk of the Corporation's
revenues, management's focus emphasizes the provision of sophisticated technical
services. Many businesses do not have computer technicians on their staffs, and
as a result, they "outsource" these services and obtain technical services from
IT solutions providers such as TransNet. The Corporation provides a wide variety
of outsourced network services, personal computer support, repair and standard
equipment maintenance to assist customers in obtaining technology that enhances
the customers' productivity. These services, which are generally performed at
customer sites, include LAN and PC hardware support, systems integration
services, help desk services, asset management, relocation services, and
installation or installation coordination. The Corporation assists its customers
in determining each customer's standard hardware technology, application and
operating system software, and networking platform requirements. The Corporation
employs specially certified and trained technical systems engineers who perform
high-end technology integration services. In addition, the Corporation's staff
of specially trained system engineers and service technicians provide service
and support on an on-call basis for file servers, personal computers, laptop
computers, printers and other peripheral equipment. The Corporation's in-house
technical staff performs system configurations to customize computers to the
customers' specifications. The Corporation also provides authorized warranty
service on the equipment it sells. TransNet is an authorized service and support
dealer for the following manufacturers: by Apple, Cisco, Compaq, Dell, Hewlett
Packard, IBM, Microsoft (as a Certified Solution Provider), NEC, and Novell as a
Platinum Partner.
The Corporation seeks highly qualified personnel and employs experienced
system engineers and technicians to whom it provides authorized manufacturer
training and certification programs on an on- going basis. During fiscal 2002,
the Corporation continued its efforts to expand its technical staff in response
to the increased demand for technical services and the increasing complexity of
network systems. The Corporation competes with other resellers and
manufacturers, as well as some customers, to recruit and retain qualified
employees from a relatively small pool of available candidates.
The Corporation's technical services are available to business and
individual customers. Through a variety of alternatives, the Corporation offers
repair or maintenance services at the customer site or on the Corporation's
premises. Maintenance and service contracts are offered to maintain and/or
repair computer hardware. Technical support and services are performed pursuant
to contracts of specified terms and coverage (hourly rates or fixed price
extended contracts) or on a time and materials basis. Services are available for
a variety of products marketed by the Corporation. In connection with its
"TechNet" program, through which the Corporation stations service personnel at a
customer's location on a full-time basis, the Corporation has entered into
individual agreements with several large corporate customers to provide support
and repair and maintenance services. Most agreements are for twelve months or
less. These agreements contain provisions allowing for termination prior to the
expiration of the agreements. Although the agreements generally contain renewal
terms, there is no assurance that the agreements will be renewed.
In addition to services pursuant to a contract, repair and maintenance
services are also available on a "time and materials" basis. The repair services
usually consist of diagnosing and identifying malfunctions in computer hardware
systems and replacing any defective circuit boards or modules. The defective
items are generally repaired by in-house bench technicians or returned to the
manufacturer for repair or replacement.
To improve its efficiency and facilitate service to its clients, the
Corporation implemented procedures to allow its clients to place service calls
through the Internet, as a supplement to the phone and/or fax service requests.
3
In addition to servicing its own customers within its service area, the
Corporation has entered into arrangements with other service providers outside
the Corporation's service area. Through these arrangements, the Corporation can
provide services in instances in which a customer has locations outside the
Corporation's service areas and can assure its customers quality technical
service at their locations nationwide.
Training: The Corporation's headquarters houses its Training Center, which
provides training for customers. The Corporation also provides training at
customer sites. The Corporation offers comprehensive training on hardware and
software, including a wide variety of DOS, Windows, and Macintosh systems and
network applications, operation, and maintenance. The Corporation's Training
Center has its own dedicated network. The training activities of the Corporation
are not a material source of revenues.
Suppliers: In order to reduce its costs for computer and related
equipment, the Corporation entered into a buying agreement with Ingram Micro,
Inc. Under the agreement, the Corporation is able to purchase equipment of
various manufacturers at discounts currently unavailable to it through other
avenues. The agreement provides that the Corporation may terminate the
arrangement upon sixty days notice. During fiscal 2002, the majority of the
revenues generated by the Corporation from product sales were attributable to
products purchased by the Corporation from Ingram Micro, Inc. pursuant to the
Agreement. The balance of the Corporation's product sales were attributable to
products purchased from a variety of sources on an as needed order basis.
Alternate suppliers include Tech Data Corp., as well as Compaq and IBM, from
whom the Corporation purchases direct. Management anticipates that Ingram Micro,
Inc. will be a major supplier during fiscal 20023
Customers: The majority of the Corporation's corporate customers are
commercial users located in the New Jersey - New York City metropolitan area.
During fiscal 2002, one customer, Merck/Medco Managed Care, LLC ("Medco"),
accounted for approximately 31% of the Corporation's revenues, and another
customer, Schering Plough accounted for 13% of revenues. During fiscal 2001,
Medco accounted for approximately 22% of the Corporation's revenues, and an
affiliate of that customer, Merck & Co. accounted for 16% of the Corporation's
revenues. The loss of these customers may have a material adverse impact upon
the Corporation if the business could not be replaced from alternate customers.
No other customer accounted for more than 10% of the Corporation's
revenues in fiscal 2002.
Competition: The sale and service of personal computer systems is highly
competitive and may be affected by rapid changes in technology and spending
habits in both the business and institutional sectors. The Corporation is in
direct competition with any business which is engaged in information technology
management, specifically the sale and technical support and service of networks,
personal computers and related peripherals, and IP telephony products.
Competitors include larger and longer established companies possessing
substantially greater financial resources and substantially larger staffs,
facilities and equipment, including several computer manufacturers which have
begun to deal directly with the end-users. With respect to IP telephony
products, the Corporation competes with similar businesses as well as directly
with several product manufacturers and national telecommunication businesses.
During the past few years, the industry has experienced and continues to
experience a significant amount of consolidation. In the future, TransNet may
face fewer but larger competitors as the result of such consolidation.
Management believes that commercial customers require significant levels
of sophisticated support services such as those provided by the Corporation.
TransNet's services benefit the customers by providing in-depth product
knowledge and experience, competitive pricing and the high level of technical
services. Management believes that TransNet's ability to combine competitive
pricing with responsive and sophisticated support services allows it to compete
effectively against a wide variety of alternative microcomputer sales and
distribution channels, including independent dealers, direct mail and
telemarketing, superstores and direct sales by manufacturers (including some of
its own suppliers).
Technological advances occur rapidly in computer technology and new
products are often announced prior to availability, sometimes creating demand
exceeding manufacturers' expectations and thereby resulting in product
shortages. When this occurs, resulting product constraints intensify
4
competition, depress revenues because customers demand the new product, and
increase order backlogs. In the Corporation's experience, these backlogs have
been immaterial.
In the past several years, there have been frequent reductions in the
price of computers. As a result, competition has increased and the Corporation
lowered its prices to remain competitive. In addition, businesses able to
purchase in larger volume than the Corporation have received higher discounts
from manufacturers than the Corporation. These factors have resulted in a lower
profit margin on the Corporation's equipment sales. As a result of its buying
agreement with Ingram Micro, Inc., the Corporation is able to purchase equipment
at discounts otherwise unavailable to it, enabling the Corporation to be more
price competitive. In a cost-effective marketing approach, the Corporation now
targets larger customers with more diversified product needs for its marketing
efforts in order to sell a greater number and variety of products and services
at one or a limited number of locations, thereby improving its gross profit
margins.
The Corporation does not believe that it is a significant factor in any of
its fields of activity.
Trademarks: Other than the trademark of its name, TransNet holds no
patents or trademarks.
Employees: As of September 15, 2002, the Corporation employed 228
full-time employees and 7 part-time employees. None of its employees are subject
to collective bargaining agreements.
ITEM 2. PROPERTIES
The Corporation's executive, administrative, corporate sales offices, and
service center are located in Branchburg, New Jersey, where the Corporation
leases a building of approximately 21,000 square feet. This "net-net" lease,
which currently provides for an approximately $13,810 monthly rental, expires in
February 2006. The building is leased from a non-affiliated party.
See Note [8A] of the Notes to Consolidated Financial Statements with
respect to the Corporation's commitments for leased facilities.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is not currently a party to any legal proceeding which it
regards as material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITYHOLDERS MATTERS
TransNet's common stock is quoted and traded on the OTC Bulletin Board
under the symbol "TRNT." The following table indicates the high and low closing
sales prices for TransNet's common stock for the periods indicated based upon
information supplied by Pink Sheets, formerly the National Quotation Bureau
Incorporated.
Calendar Year Closing Sales Prices
High Low
2000
Third Quarter $2.1875 $1.625
Fourth Quarter 2.0625 1
2001
First Quarter $1.6875 $1.0625
Second Quarter 1.92 1.09375
Third Quarter 1.70 1.28
Fourth Quarter 1.82 1.35
2002
First Quarter $1.74 $1.5
Second Quarter 1.58 1.15
As of September 16, 2002, the number of holders of record of TransNet's
common stock was 2,855. Such number of record owners was determined from the
Company's shareholder records and does not include beneficial owners whose
shares are held in nominee accounts with brokers, dealers, banks and clearing
agencies.
TransNet has not paid any dividends on its common stock since its
inception.
6
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with, and is qualified in its entirety by, the Company's
consolidated financial statements, related notes and other financial information
included elsewhere in this Annual Report on Form 10-K.
Year Ended June 30,
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2002 2001 2000 1999 1998
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Statement of Income Data
Net Sales:
Equipment $33,258,828 $42,137,322 $33,503,234$28,231,540 $60,333,109
Services 17,633,266 14,280,047 13,063,267 16,074,600 10,091,700
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50,892,094 56,417,369 46,566,501 44,306,140 70,424,809
----------- ----------- ---------- ----------- -----------
Cost of Sales:
Equipment 31,030,909 38,893,267 31,230,050 25,844,701 55,243,196
Services 11,889,348 10,084,170 9,687,659 9,882,921 7,068,517
----------- ----------- ---------- ----------- -----------
42,920,257 48,977,437 40,917,709 35,727,622 62,311,713
----------- ----------- ---------- ----------- -----------
Gross Profit:
Equipment 2,227,919 3,244,055 2,273,184 2,386,839 5,089,913
Services 5,743,918 4,195,877 3,375,608 6,191,679 3,023,183
----------- ----------- ---------- ----------- -----------
7,971,837 7,439,932 5,648,792 8,578,518 8,113,096
----------- ----------- ---------- ----------- -----------
Selling, General &
Administrative 6,986,974 6,800,202 5,980,830 7,073,487 7,529,093
Income before Income
Tax Expense 1,055,948 897,012 26,270 1,836,052 1,274,791
Net Income 670,497 563,012 8,270 1,172,462 923,891
Income (Loss) Per Common
Share - Basic 0.14 0.12 - 0.23 0.18
Income (Loss) Per Common
Share - Diluted 0.14 0.12 - 0.23 0.18
Weighted average shares
outstanding - Basic 4,774,804 4,815,872 4,903,804 5,183,141 5,216,804
Weighted average shares
outstanding - Diluted 4,927,225 4,884,853 4,903,804 5,183,141 5,216,804
Balance Sheet Data:
Working Capital 13,156,891 12,540,263 11,886,844 11,887,050 11,200,198
Total Assets 16,336,175 17,152,151 17,450,367 17,118,880 15,396,518
Long-Term Obligations - - - - -
Shareholders Equity 13,947,494 13,276,997 12,813,126 13,449,272 12623810
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Revenues for the fiscal year ended June 30, 2002 were $50,892,094 as
compared with $56,417,369 for the fiscal year ended June 30, 2001, and
$46,566,501 for the fiscal year ended June 30, 2000. Revenues decreased in
fiscal 2002 as compared to the prior fiscal year as a result of decreased
hardware sales. In addition, the Corporation arranged for several computer
manufacturers to ship product directly to and direct-bill TransNet customers,
paying TransNet a fee similar to a commission. Although this reduced revenues
from hardware sales, it yielded increased profits. The increase in revenues for
fiscal 2001 as compared to fiscal 2000 was attributable to increases in hardware
sales. Service revenues increased in fiscal 2002 and 2001 as a result of
increased demand for the Corporation's technical services (technical support,
repair and maintenance, network integration and training).
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For fiscal 2002, the Corporation reported net income of $670,497 as
compared with net income of $563,012 for fiscal 2001, and net income of $8,270
for fiscal 2000. The increase in income for fiscal 2002 was due to an increase
in revenues from technical services, which yield a higher profit margin than
hardware sales. The increase in income for fiscal 2001 over the prior year is
the result of increase in hardware sales and the provision of higher-end network
integration and IP telephony services, as well as improved profit margins on
both equipment sales and services. The decrease in income for fiscal 2000 is
attributed to a number of factors, including losses in the second and third
fiscal quarters which resulted from postponements of software implementation and
system upgrade projects by major customers due to their focus on Y2K
remediation; decreased profit margins on hardware sales; decreased margins on
services due in part to increased salaries of technical personnel; and decreased
training revenues resulting from Y2K remediation focus. Service related
revenues, a material segment of revenues, are significant in their contributions
to net income because these operations yield a higher profit margin than
equipment sales. For the fiscal years discussed, revenue from the provision of
service, support, outsourcing and network integration is largely the result of
the Corporation entering into service contracts with a number of corporate
customers to provide service and support for the customer's personal computers,
peripherals and networks. 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.
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.
During fiscal 2002, selling, general and administrative expenses increased
to 14% of revenues as a result of the decrease in revenues. Management continued
its efforts to control expenses, despite increased personnel related costs. This
compares to 12% of revenue for fiscal 2001, a decrease over the prior year's 13%
which resulted from increased revenues.
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Interest income decreased in fiscal 2002 and 2001 as compared to the 2001
and 2000, respectively, due to lower amount of funds invested and lower interest
rates paid on those funds.
Liquidity and Capital Resources
There are no material commitments of the Corporation's capital resources,
other than leases and employment contracts.
The Corporation currently finances the purchases of portions of its
inventory through floor planning arrangements with a third-party lender and a
manufacturer's affiliate under which such inventory secures the financed
purchases. Inventory decreased in fiscal 2002 as a result of decreased hardware
sales and due to the Corporation's arrangement with certain manufacturers to
ship to and bill customers directly. Inventory increased for fiscal 2001 and
2000 as a result of increased sales volume.
Accounts receivable remained relatively constant from fiscal 2002 to
fiscal 2001, and decreased in fiscal 2001 compared to the prior year as a result
of management's efforts to reduce customers' payment cycles. Accounts payable
remained relatively the same in fiscal 2002 as compared to 2001, and decreased
in fiscal 2001 as compared to fiscal 2000 as a result of purchasing cycles at
year end. Floor planning payables decreased in 2002 in direct correlation to the
decrease in inventory, and increased in fiscal 2001 and 2000 as a direct result
of equipment purchases required to meet increased hardware orders.
For the fiscal year ended June 30, 2002, as in the fiscal years ended June
30, 2001 and 2000, the internal capital sources of the Corporation were
sufficient to enable the Corporation to meet its obligations.
In the first quarter of fiscal 1998, management was apprised of an
unasserted possible claim or assessment involving the Corporation's Pension
Plan. The Plan was adopted in 1981 as a defined benefit plan. In 1989, various
actions were taken by the Corporation to terminate the Plan, to convert it to a
defined contribution plan and to freeze benefit accruals. No filing for plan
termination was made with the Pension Benefit Guaranty Corporation (the "PBGC").
Additionally, a final amended and restated plan document incorporating the
foregoing amendments and other required amendments including those required by
the Tax Reform Act of 1986 do not appear to have been properly adopted. In
addition, since 1989, it appears that certain operational violations occurred in
the administration of the Plan including the failure to obtain spousal consent
in certain instances where it was required.
The Corporation decided to (i) take corrective action under the IRS
Walk-in Closing Agreement Program ("CAP"), (ii) apply for a favorable
determination letter with respect to the Plan from the IRS, and (iii) terminate
the Plan. The CAP program provides a correction mechanism for Anon-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. 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 quarter of fiscal 2001, the Corporation finalized a settlement agreement
with the IRS and is awaiting resolution with the PBGC.
INVESTMENT CONSIDERATIONS AND UNCERTAINTIES
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.
9
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosure between
the Corporation and its independent public accountants nor any change in the
Corporation's accountants during the last fiscal year.
10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Corporation are as follows:
Name Age Position
John J. Wilk (a) 74 Chairman of the Board and Treasurer
Steven J. Wilk (a) 45 President and Director
Jay A. Smolyn 46 Vice President, Operations and Director
Vincent Cusumano (b)(d) 67 Secretary and Director
Earle Kunzig (b)(e) 63 Director
Raymond J. Rekuc (c) 56 Director
Susan Wilk (a) Director
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(a) Steven J. Wilk and Susan Wilk are respectively, the son and daughter of John
J. Wilk.
(b) Member of the Audit Committee
(c) Chairman of the Audit Committee.
(d) Member of the Compensation Committee.
(e) Chairman of the Compensation Committee.
The Audit Committee reviews, evaluates and advises the Board of Directors
in matters relating to the Corporation's financial reporting practices, its
application of accounting principles and its internal controls. In addition, the
Audit Committee reviews transactions regarding management remuneration or
benefits.
The Compensation Committee reviews, evaluates and advises the Board of
Directors in matters relating to the Corporation's compensation of and other
employment benefits for executive officers. The Board established its
Compensation Committee in December 1994. Prior to that time compensation
decisions were subject to oversight by the entire Board of Directors.
The Corporation does not have an Executive Committee. The term of office
of each director expires at the next annual meeting of stockholders. The term of
office of each executive officer expires at the next organizational meeting of
the Board of Directors following the next annual meeting of stockholders.
The following is a brief account of the business experience of each
TransNet director during the past five years.
John J. Wilk was president, a director and chief executive officer of
TransNet since its inception in 1969 until May 1986, when he was elected
Chairman of the Board.
Steven J. Wilk was elected a vice president of TransNet in October 1981
and in May 1986 was elected President and Chief Executive Officer. He was
elected a director of TransNet in April 1989.
Jay A. Smolyn has been employed at TransNet since 1976 and in April 1985
became Vice President, Operations. He was elected a director of TransNet in
January 1990.
Vincent Cusumano, who was elected a TransNet director in April 1977, is,
and for the past five years has been, president and chief executive officer of
Cusumano Perma-Rail Corporation of Roselle Park, New Jersey, distributors and
installers of exterior iron railings. Mr. Cusumano is not actively engaged in
the business of the Corporation.
Earle Kunzig, who was elected a TransNet director in November 1976, is
Vice President of Sales and a principal of Hardware Products Sales, Inc., Wayne,
New Jersey, a broker of used computer equipment and provider of computer
maintenance services. He was director of hardware operations for Computer
Maintenance Corporation, a business computer servicing organization in Secaucus,
New Jersey from 1978 through July 1985. Mr. Kunzig is not actively engaged in
the business of the Corporation.
11
Raymond J. Rekuc, who was elected a TransNet director in August 1983, is
currently the principal in Raymond J. Rekuc, Certified Public Accountant, an
accounting firm located in Washington, New Jersey. He was a partner with Hess,
Keeley & Company, Accountants and Auditors, Millburn, New Jersey from October
1980 until September 1986, when he became treasurer of Royalox International,
Inc. of Asbury, New Jersey, an importer of luggage and luggage hardware. Mr.
Rekuc provided financial consulting services to TransNet in 1990 through 1993.
Mr. Rekuc is a member of the American Institute of Certified Public Accountants
and the New Jersey Society of Certified Public Accountants, and is not actively
engaged in the business of the Corporation.
Susan Wilk joined TransNet in November 1987. Prior to that time, she was a
Senior Attorney with the U. S. Securities and Exchange Commission, Washington,
D.C., and then the Office of General Counsel of The Federal Home Loan Bank
Board. She was elected a director of TransNet in January 1990.
None of the Corporation's directors are directors of any other Corporation
with a class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934 or subject to the requirements of Section 15 (d) of that
Act.
Compliance with Section 16(a) of the Exchange Act
Based solely on a review of Forms 3 and 4 and any amendments thereto
furnished to the Corporation pursuant to Rule 16a-3(e) under the Securities
Exchange Act of 1934, or representations that no Forms 5 were required, the
Corporation believes that with respect to fiscal 2002, its officers, directors
and beneficial owners of more than 10% of its equity timely complied with all
applicable Section 16(a) filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid or accrued by the Corporation during the three years ended on June 30,
2002, to its Chief Executive Officer and each of its other executive officers
whose total annual salary and bonus for the fiscal year ended June 30, 2002,
exceeded $100,000. All of the Corporation's group life, health, hospitalization
or medical reimbursement plans, if any, do not discriminate in scope, terms or
operation, in favor of the executive officers or directors of the Corporation
and are generally available to all full-time salaried employees.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
Compensation
--------------------------------- --------------------------------------------
Securities
Year Underlying
Name and Ended Other Annual Options Restricted LTIP All Other
Principal Position June 30, Salary Bonus Compensation SARs Stock Awards Payouts Compensation
- --------------------------- ------ ----- ------------ ---- ------------ --------------------
Steven J. Wilk 2002 $300,000 $40,678 $0 0 0 $0 0
President and Chief 2001 $266,167 $32,880 $0 100,000 0 $0 0
Executive Officer 2000 $250,000 $0 $0 0 0 $0 0
Jay Smolyn 2002 $165,000 $31,475 $0 0 0 $0 0
Vice President 2001 $163,166 $25,645 $0 50,000 0 $0 0
Operations 2000 $148,542 $0 $0 0 0 $0 0
OPTION GRANTS IN LAST FISCAL YEAR
(individual grants)
No options were granted during fiscal 2002.
12
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the Named
Executive Officer concerning the exercise of options during fiscal 2002 and the
number and value of unexercised options held as of the end of fiscal 2002.
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options Options at Fiscal
Number of at Fiscal Year End; Year End ($);
Name of Shares Acquired (Exercisable/ (Exercisable/
Executive Officer on Exercise Value Realized($) Unexercisable) Unexercisable)
------- ----------- ----------------- -------------- --------------
Steven J. Wilk 0 0 50,000/50,000 $14,500/0
Jay A. Smolyn 0 0 25,000/25,000 $7,250/0
Employment Contracts with Executive Officers
TransNet has employment contracts in effect with Steven J. Wilk and Jay A.
Smolyn which expire on June 30, 2005. Pursuant to the employment contracts,
Steven J. Wilk's annual salary is "at least" $300,000 and Mr. Smolyn's salary is
"at least" $165,000 or, in each case, such greater amount as may be approved
from time to time by the Board of Directors. The contracts also provide for
additional incentive bonuses to be paid with respect to each of the
Corporation's fiscal years based upon varying percentages of the Corporation's
consolidated pre-tax income exclusive of extraordinary items (3% of the first
$500,000, 4% of the next $500,000, 5% of the next $4,000,000 and 6% of amounts
in excess of $5,000,000 for Steven J. Wilk, and 2% of pre-tax income in excess
of $100,000 to the first $500,000 and 3% in excess of $500,00 for Mr. Smolyn).
Steven J. Wilk's employment contract provides for a continuation of full amount
of salary payments for 6 months and 50% of the full amount for the remainder of
the term in the event of illness or injury. In addition, the employment
contracts contain terms regarding the event of a hostile change of control of
the Corporation and a resultant termination of the employee's employment prior
to expiration of the employment contract. These terms provide that Mr. Smolyn
would receive a lump sum payment equal to 80% of the greater of his then current
annual salary or his previous calendar year's gross wages including the
additional incentive compensation multiplied by the lesser of five or the number
of years remaining in the contract. In the case of Steven J. Wilk, the contract
provides that in the event of termination of employment due to a hostile change
in control, he may elect to serve as consultant at his current salary and
performance bonus for a period of five years beginning at the date of the change
in control, or he may elect to receive a lump sum payment which would be the
greater of 80% of his then current salary or 80% of his previous year's gross
wages times five. The contract for Mr. Smolyn provides that the Corporation may
terminate his employment, with or without cause. If said termination is without
cause, the Corporation shall pay the Employee an amount equal to compensation
payable for a period of one-half of the contract period remaining, not to exceed
compensation for 18 months. Steven J. Wilk's employment agreement provides that
should the Corporation terminate his employment (other than for the commission
of willful criminal acts), he may elect to continue as a consultant to the
Corporation at his then current compensation level, including the performance
bonus, for the lesser of two (2) years or the remainder of the contract term or
he may elect to receive a lump sum payment equal to eighty percent of his then
current salary plus incentive bonus times the lesser of two (2) years or the
remainder of the contract.
Directors' Compensation
During fiscal 2002, the Company paid $5,000 in directors' fees to each of
its three outside directors.
Stock Options
The Plan provides for the grant of both Non-qualified Stock Options and
Incentive Stock Options, as the latter is defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"),
13
as well as providing for the granting of Restricted Stock and Deferred Stock
Awards, covering, in the aggregate, 500,000 shares of the Company's Common
Stock. The purpose of the Plan is to advance the interests of the Company and
its shareholders by providing additional incentives to the Company's management
and employees, and to reward achievement of corporate goals.
Awards under the Plan may be made or granted to employees, officers,
Directors and consultants, as selected by the Board. The Plan is administered by
the entire Board of Directors. All full-time employees and officers of the
Company are eligible to participate in the Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of August 31, 2002, the number of
shares of TransNet's common stock owned beneficially to the knowledge of the
Corporation, by each beneficial owner of more than 5% of such common stock, by
each director owning shares and by all officers and directors of the Corporation
as a group.
Name of Beneficial Amount of Shares Percent of
Owner Beneficially Owned Class (a)
- ----- ------------------ ---------
Directors
Steven J. Wilk (b) 443,500 shs (c) 9%
John J. Wilk (b) 200,500 shs (d) 4%
Jay A. Smolyn (b) 108,000 shs (e) 2%
Susan Wilk (b) 93,200 shs (f) 2%
Vincent Cusumano (b) 17,000 shs (g) ----
Earle Kunzig (b) 20,000 shs (h) ----
Raymond J. Rekuc (b) 15,000 shs (i) ----
All officers and directors 897,200 shs 17%
as a group (seven persons)
- -----------------------------------------
(a) Based on 4,927,225 shares outstanding.
(b) The address of all directors is 45 Columbia Road, Branchburg, New Jersey
08876.
(c) Includes 50,000 shares that Mr. Wilk is entitled to purchase upon the
exercise of incentive stock options. The options were granted on January
4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price
is $0.88 per share. Does not included 50,000 shares that Mr. Wilk will be
entitled to purchase upon the exercise of similar options which will vest
on January 4, 2003.
(d) Includes 25,000 shares that Mr. Wilk is entitled to purchase upon the
exercise of incentive stock options. The options were granted on January
4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price
is $0.88 per share. Does not included 25,000 shares that Mr. Wilk will be
entitled to purchase upon the exercise of similar options which will vest
on January 4, 2003.
(e) Includes 25,000 shares that Mr. Smolyn is entitled to purchase upon the
exercise of incentive stock options. The options were granted on January
4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price
is $0.88 per share. Does not included 25,000 shares that Mr. Smolyn will
be entitled to purchase upon the exercise of similar options which will
vest on January 4, 2003.
(f) Includes 15,000 shares that Ms. Wilk is entitled to purchase upon the
exercise of incentive stock options. The options were granted on January
4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price
is $0.88 per share. Does not included 15,000 shares that Ms. Wilk will be
entitled to purchase upon the exercise of similar options which will vest
on January 4, 2003.
14
(g) Includes 15,000 shares that Mr. Cusumano is entitled to purchase upon the
exercise of incentive stock options. The options were granted on January
4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price
is $0.88 per share.
(h) Includes 15,000 shares that Mr. Kunzig is entitled to purchase upon the
exercise of incentive stock options. The options were granted on January
4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price
is $0.88 per share.
(i) Includes 15,000 shares that Mr. Rekuc is entitled to purchase upon the
exercise of incentive stock options. The options were granted on January
4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price
is $0.88 per share.
John J. Wilk and Steven J. Wilk, chairman of the board of directors and
president of the Corporation as well as beneficial owners of 4% and 9%
respectively, of TransNet's common stock may each be deemed to be a "parent" of
the Corporation within the meaning of the Securities Act of 1933.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 11, 1998, the Company 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
Company. The purchase price was payable through a credit extended by W Realty as
sub-lessor to the Company as sub-lessee for the $410,000 of rent payable by the
Company over the last two years of its sublease (through February 2001) 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 payment due in November 1998 was paid
with interest. Payment of the $250,000 balance was renegotiated under a revised
Note which provided for payment of the principal June 30, 2002, at an interest
rate of 6.5%. The Note was paid in full during May 2002.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
--------------------
o Independent Auditor's Report.
o Consolidated Balance Sheets as of June 30, 2002 and June 30, 2001.
o Consolidated Statements of Operations for the Years Ended June 30, 2002,
2001 and 2000.
o Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 2002, 2001 and 2000.
o Consolidated Statements of Cash Flows for the Years Ended June 30, 2002,
2001 and 2000.
o Notes to Consolidated Financial Statements
3. Exhibits
Exhibits Incorporated by Reference to
3.1(a) Certificate of Incorporation, Exhibit 3(A) to Registration
as amended Statement on Form S-1 (File No.
2-42279)
3.1(b) October 3, 1977 Amendment Exhibit 3(A) to Registration
to Certificate of Incorporation Statement on Form S-1 (File No.
2-42279)
3.1 (c) March 17, 1993 Amendment
to Certificate of Incorporation
3.2 (a) Amended By-Laws Exhibit 3 to Annual Report on Form
10-K for year ended June 30, 1987
15
3.2(b) Article VII, Section 7 of the Exhibit to Current Report on
By-Laws, as amended Form 8-K for January 25, 1990
4.1 Specimen Common Stock Exhibit 4(A) to Registration
Certificate Statement on Form S-1
(File No. 2-42279)
10.1 March 1, 1991 lease agreement Exhibit 10.1 to Annual Report on
between W. Realty and the Form 10-K for year ended June 30,
Corporation for premises at 1991
45 Columbia Road, Somerville
(Branchburg), New Jersey
10.2 February 1, 1996 amendment to Exhibit 10.2 to Annual Report on
Lease Agreement between W.Realty and Form 10-K for year ended June 30,
the Corporation for premises at 1996
45 Columbia Road, Somerville,
New Jersey
10.3 Employment Agreements expiring Exhibit 10.3 to Annual Report on
on June 30, 2005 with Steven J. Wilk Form 10-K for year ended June 30,
and Jay A. Smolyn 2001
10.4 Form of Rights Agreement dated Exhibit to Current Report on Form
as of February 6, 1990 between 8-K for January 25, 1990
TransNet and The Trust Company of
New Jersey, as Rights Agent
10.5 Acquisition Agreement dated Exhibit to Current Report on Form
March 6, 1990 between TransNet and 8-K for March 6, 1990
Selling Stockholders of Round
Valley Computer Center, Inc.
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K with respect to or
during the quarter ended June 30, 2000.
(22) Subsidiaries - The following table indicates the sole wholly-owned
active subsidiary of TransNet Corporation and its state of incorporation.
Name State of Incorporation
Century American Corporation Delaware
16
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Registrant: TransNet Corporation
Date: September 27, 2002 By /s/ Steven J. Wilk
------------------------------------
Steven J. Wilk
Chief Executive Officer
Date: September 27, 2002 By /s/ John J. Wilk
------------------------------------
John J. Wilk
Chief Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
By /s/ Steven J. Wilk Date: September 27, 2002
- ------------------------------------
Steven J. Wilk, Director
By /s/ John J. Wilk Date: September 27, 2002
- ------------------------------------
John J. Wilk, Director
By /s/ Jay A. Smolyn Date: September 27, 2002
- ------------------------------------
Jay A. Smolyn, Director
By /s/ Raymond J. Rekuc Date: September 27, 2002
- ------------------------------------
Raymond J. Rekuc, Director
By /s/ Vincent Cusumano Date: September 27, 2002
- ------------------------------------
Vincent Cusumano, Director
By /s/ Earle Kunzig Date: September 27, 2002
- ------------------------------------
Earle Kunzig, Director
By /s/ Susan M. Wilk Date: September 27, 2002
- ------------------------------------
Susan M. Wilk, Director
17
CERTIFICATION
I, Steven J. Wilk, certify that:
1. I have reviewed this annual report on Form 10-K of TransNet Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant' ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
5. The registrant's other certifying offers and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: September 27, 2002 /s/ Steven J. Wilk
----------------------------------
President and Chief Executive Officer
18
CERTIFICATION
I, John J. Wilk, certify that:
1. I have reviewed this annual report on Form 10-K of TransNet Corporation.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant' ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
5. The registrant's other certifying offers and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: September 27, 2002 /s/ John J. Wilk
----------------------------------
Chief Financial Officer
19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Transnet Corporation and Subsidiary
Branchburg, New Jersey
We have audited the accompanying consolidated balance sheets of Transnet
Corporation and Subsidiary as of June 30, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three fiscal years in the period ended June 30, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Transnet Corporation and Subsidiary as of June 30, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended June 30, 2002, in conformity with
accounting principles generally accepted in the United States of America.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 21, 2002
F-1
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
June 30,
--------
2 0 0 2 2 0 0 1
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 7,035,649 $6,301,210
Accounts Receivable - Net 7,553,927 7,566,102
Inventories - Net 615,646 1,886,988
Mortgage Receivable - Related Party -- 250,000
Other Current Assets 113,725 125,358
Deferred Tax Asset 195,649 256,055
----------- ----------
Total Current Assets 15,514,596 16,385,713
Property and Equipment - Net 583,490 530,969
Other Assets 238,089 235,469
----------- ----------
Total Assets $16,336,175 $17,152,151
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 684,823 $ 674,896
Accrued Expenses 419,684 630,423
Income Taxes Payable 228,691 310,979
Floor Plan Payable 1,024,507 2,229,152
----------- ----------
Total Current Liabilities 2,357,705 3,845,450
----------- ----------
Deferred Tax Liability 30,976 29,704
----------- ----------
Commitments and Contingencies -- --
----------- ----------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value, Authorized
15,000,000 Shares; Issued 7,469,524 Shares at June 30,
2002 and 2001 [of which 2,694,720 are in Treasury
at June 30, 2002 and 2001] 74,695 74,695
Additional Paid-in Capital 10,686,745 10,686,745
Retained Earnings 10,494,254 9,823,757
----------- ----------
Totals 21,255,694 20,585,197
Less: Treasury Stock - At Cost (7,308,200) (7,308,200)
----------- ----------
Total Stockholders' Equity 13,947,494 13,276,997
----------- ----------
Total Liabilities and Stockholders' Equity $16,336,175 $17,152,151
=========== ===========
See Notes to Consolidated Financial Statements.
F-2
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
----------------------------------
J u n e 3 0,
----------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
------- ------- -------
Revenue:
Equipment $33,258,828 $ 42,137,322 $33,503,234
Services 17,633,266 14,280,047 13,063,267
----------- ------------ -----------
Total Revenue 50,892,094 56,417,369 46,566,501
----------- ------------ -----------
Cost of Revenue:
Equipment 31,030,909 38,893,267 31,230,050
Services 11,889,348 10,084,170 9,687,659
----------- ------------ -----------
Total Cost of Revenue 42,920,257 48,977,437 40,917,709
----------- ------------ -----------
Gross Profit 7,971,837 7,439,932 5,648,792
Selling, General and Administrative
Expenses 6,986,974 6,800,202 5,980,830
----------- ------------ -----------
Operating Income [Loss] 984,863 639,730 (332,038)
----------- ------------ -----------
Interest Income:
Interest Income 64,385 234,782 333,908
Interest Income - Related Party 6,700 22,500 24,400
----------- ------------ -----------
Total Interest Income 71,085 257,282 358,308
----------- ------------ -----------
Income Before Income Tax Expense 1,055,948 897,012 26,270
Income Tax Expense 385,451 334,000 18,000
----------- ------------ -----------
Net Income $ 670,497 $ 563,012 $ 8,270
=========== ============ ===========
Basic Net Income Per Common Share $ .14 $ .12 $ --
=========== ============ ===========
Diluted Net Income Per Common Share $ .14 $ .12 $ --
=========== ============ ===========
Weighted Average Common Shares
Outstanding - Basic 4,774,804 4,815,872 4,903,804
=========== ============ ===========
Weighted Average Common Shares
Outstanding - Diluted 4,927,225 4,884,853 4,903,804
=========== ============ ===========
See Notes to Consolidated Financial Statements.
F-3
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Total
Common Stock Paid-in Retained Treasury Stock Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
Balance - June 30, 1999 7,469,524 $ 74,695 $10,686,745 $9,252,475 (2,402,720)$(6,564,643) $13,449,272
Treasury Shares Purchased -- -- -- -- (211,500) (644,416) (644,416)
Net Income -- -- -- 8,270 -- -- 8,270
---------- ---------- ---------- ---------- ----------- ----------- ----------
Balance - June 30, 2000 7,469,524 74,695 10,686,745 9,260,745 (2,614,220) (7,209,059) 12,813,126
Treasury Shares Purchased -- -- -- -- (80,500) (99,141) (99,141)
Net Income -- -- -- 563,012 -- -- 563,012
---------- ---------- ---------- ---------- ----------- ----------- ----------
Balance - June 30, 2001 7,469,524 74,695 10,686,745 9,823,757 (2,694,720) (7,308,200) 13,276,997
Net Income -- -- -- 670,497 -- -- 670,497
---------- ---------- ---------- ---------- ----------- ----------- ----------
Balance - June 30, 2002 7,469,524 $ 74,695 $10,686,745 $10,494,254 (2,694,720)$(7,308,200) $13,947,494
========== ========== =========== ====================== =========== ===========
See Notes to Consolidated Financial Statements.
F-4
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
----------------------------------
J u n e 3 0,
----------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
------- ------- -------
Operating Activities:
Net Income $ 670,497 $ 563,012 $ 8,270
---------- ---------- ----------
Adjustments to Reconcile Net Income to Net Cash
Provided by [Used for] Operating Activities:
Depreciation and Amortization 196,111 186,225 324,787
Loss on Sale of Equipment 8,795 -- --
Provision for Doubtful Accounts (4,272) 40,247 35,000
Discounting of Deferred Charges -- -- 64,000
Deferred Income Taxes 61,678 (6,000) 18,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 16,447 1,750,598 (2,656,047)
Inventories 1,271,342 (509,259) (490,793)
Other Current Assets 11,633 (38,858) (30,470)
Other Assets (16,591) 119,842 130,366
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (130,069) (1,349,574) 816,056
Other Current Liabilities (70,743) 44,937 --
Income Taxes Payable (82,288) 310,979 (664,161)
---------- ---------- ----------
Total Adjustments 1,262,043 549,137 (2,453,262)
---------- ---------- ----------
Net Cash - Operating Activities 1,932,540 1,112,149 (2,444,992)
---------- ---------- ----------
Investing Activities:
Capital Expenditures (243,456) (134,223) (134,117)
Mortgage Receivable Proceeds - Related Party 250,000 -- --
-------- ---------- ----------
Net Cash - Investing Activities 6,544 (134,223) (134,117)
---------- ---------- ----------
Financing Activities:
Floor Plan Payable - Net (1,204,645) 213,867 814,842
Treasury Shares Repurchased -- (99,141) (644,416)
---------- ---------- ----------
Net Cash - Financing Activities (1,204,645) 114,726 170,426
---------- ---------- ----------
Net Increase [Decrease] in Cash and
Cash Equivalents 734,439 1,092,652 (2,408,683)
Cash and Cash Equivalents - Beginning
of Years 6,301,210 5,208,558 7,617,241
---------- ---------- ----------
Cash and Cash Equivalents - End of Years $7,035,649 $6,301,210 $5,208,558
========== ========== ==========
See Notes to Consolidated Financial Statements.
F-5
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
----------------------------------
J u n e 3 0,
----------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
------- ------- -------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ -- $ -- $ --
Income Taxes $ 340,000 $ 17,000 $ --
Supplemental Disclosures of Non-Cash Investing Activities:
During fiscal 2002, the Company traded-in automobiles with a book value of
$33,790 in exchange for a trade-in value of approximately $25,000.
During fiscal 2001, the Company disposed of approximately $38,500 of fully
depreciated property and equipment.
See Notes to Consolidated Financial Statements.
F-6
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Nature of Operations
TransNet Corporation [the "Company"] was incorporated in the State of Delaware
in 1969 and is engaged in the sale and service of personal computer systems and
peripheral equipment, software, and supplies primarily in the New Jersey - New
York City Metropolitan area. The sale of products and the promotion of technical
services, including outsourcing, are conducted through the Company's sales and
service departments.
The Company is an IT support organization for corporate and educational clients,
providing sophisticated solutions, including system design and integration,
help-desk support services and end-user training. Its clients include Fortune
100 organizations, primarily in the pharmaceutical, oil and gas, finance and
communications industries, as well as educational and governmental institutions.
The sale and service of personal computer systems is highly competitive and may
be affected by rapid changes in technology and spending habits in both the
business and institutional sectors.
[2] Summary of Significant Accounting Policies
[A] Consolidation - The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Century American Corporation.
Intercompany transactions and accounts have been eliminated in consolidation.
[B] Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased [See
Note 3].
[C] Accounts Receivable - Accounts receivable have been reduced by an allowance
for doubtful accounts of approximately $107,000 and $191,000 as of June 30, 2002
and 2001, respectively. The receivables secure a floor plan agreement [See Note
8C].
[D] Inventories - The Company's inventory is valued at the lower of cost
[determined on the moving average-cost basis] or market. Inventory has been
reduced by an allowance of $60,000 at June 30, 2002 and 2001. The inventory
secures borrowings under a floor plan financing agreement [See Note 8C].
[E] Property and Equipment, Depreciation and Amortization - Property and
equipment are stated at cost. Depreciation and amortization are computed by use
of the straight-line method over the estimated useful lives of the various
assets ranging from five to ten years. Leasehold improvements are amortized over
the shorter of the life of the lease including renewal option periods, or their
estimated useful life.
[F] Intangible Assets - Goodwill representing the excess of the purchase price
over the fair value of identifiable net assets acquired is being amortized over
20 years by using the straight-line method. Licenses and other intangible assets
are amortized using the straight-line method over their estimated useful lives
ranging from five to twenty years. The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
[G] Revenue Recognition - Revenue is recognized at time of shipment for
equipment sold directly to customers. Revenues from non-contracted customer
support services are recognized as services are provided. The Company offers
contracted support service agreements to its customers. Services under support
contracts, are generally provided ratably over the term of the customer support
contracts and are included in services revenue in the accompanying statements of
operations.
[H] 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. The calculation of
common equivalent shares issued 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. Certain rights and options listed in Note 10 and 12 may be potentially
dilutive in the future.
F-7
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[I] Concentrations of Credit Risk - At June 30, 2002 and 2001, the Company
maintained cash balances [excluding repurchase agreements discussed in Note 3]
in excess of FDIC insured limits of approximately $398,000 and $350,000,
respectively.
The Company routinely assesses the financial strength of its customers and based
upon factors surrounding the credit risk of its customers establishes an
allowance for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowances is not
significant. The Company does not require collateral or other security to
support financial instruments subject to credit risk.
[J] Business Concentrations - The Company is engaged in the sale and technical
support and service of local area networks, personal computer systems, and
peripheral equipment, software, and supplies to companies and organizations
located primarily in the New Jersey - New York City Metropolitan area and is
currently an authorized dealer for several computer products manufacturers,
including 3 Com, Apple, Cisco, Compaq, Hewlett Packard, IBM, Intel, NEC, Nortel,
Novell, Toshiba and Microsoft Corporation. If the Company were to lose any of
its dealer authorizations or if it were to experience significant delays,
interruptions or reductions in its supply of hardware and software, the
Company's revenues and profits could be adversely affected.
[K] Advertising Costs - The Company participates in cooperative advertising
programs with its vendors, whereby the vendors absorb the costs of advertising.
During the years ended June 30, 2002, 2001 and 2000, the Company incurred
additional advertising expense of $9,034, $73,113 and $80,526, respectively.
Advertising costs are expensed as incurred.
[L] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
[M] Reclassification - Certain prior year amounts have been reclassified to
conform to the 2002 presentation
[N] Stock Options Issued to Employees - The Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," for financial note disclosure purposes and continues to apply the
intrinsic value method of Accounting Principles Board ["APB"] Opinion No. 25,
"Accounting for Stock Issued to Employees," for financial reporting purposes.
[O] Deferred Income Taxes - Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax basis
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
F-8
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[3] Repurchase Agreements
Repurchase agreements included in cash equivalents as of June 30, 2002 and 2001
consisted of:
Cost Fair Value
June 30, 2002:
Repo .95%, Due July 1, 2002 $ 5,048,766 $ 5,048,815
This security is backed by $4,925,000 of F.H.R. bonds maturing June 18, 2028
with an interest rate of 5.00%.
Cost Fair Value
June 30, 2001:
Repo 3.0%, Due July 1, 2001 $ 5,677,017 $ 5,790,557
This security is backed by $5,729,365 of G.N.M.A. bonds maturing May 16, 2016
with a variable interest rate of 6.50%.
[4] Inventories
Inventories consist of the following at June 30, 2002 and 2001:
June 30,
--------
2 0 0 2 2 0 0 1
------- -------
Product Inventory $ 399,355 $1,631,182
Service Parts 216,291 255,806
---------- ----------
Totals $ 615,646 $1,886,988
------ ========== ==========
[5] Mortgage Receivable - Related Party
In November 1998, the Company sold 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 partially
owned by an officer and a director of the Company. The original purchase price
was payable through a $410,000 credit extended by W. Realty as lessor to the
Company covering the last two years of its lease and a $590,000 promissory note
payable.
In February 1999, the remaining $250,000 principal balance owed on the mortgage
was refinanced. Repayment terms under the refinanced note payable included
monthly interest only payments and full principal balance due November 2000 at
an interest rate of 9.0% per annum. Under an agreement entered into in fiscal
2001, the repayment of $250,000 in principal had been extended until June 2002
at an interest rate of 6.5% per annum. In May 2002, the Company received
repayment of all principal and accrued interest. During the years ended June 30,
2002, 2001 and 2000, the Company recorded approximately $6,700, $22,500 and
$24,400 of interest income on the mortgage receivable obligation, respectively.
F-9
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[6] Property, Equipment, Depreciation and Amortization
Property and equipment and accumulated depreciation and amortization as of June
30, 2001 and 2000 are as follows:
June 30,
--------
2 0 0 2 2 0 0 1
------- -------
Automobiles $ 253,574 $ 211,622
Office Equipment 1,761,354 1,636,619
Furniture and Fixtures 321,161 321,161
Leasehold Improvements 273,102 273,102
---------- ---------
Totals 2,609,191 2,442,504
Less: Accumulated Depreciation and Amortization 2,025,701 1,911,535
---------- ---------
Property and Equipment - Net $ 583,490 $ 530,969
---------------------------- ========== =========
Total depreciation and amortization expense amounted to $182,140, $172,254,
$310,816 for the years ended June 30, 2002, 2001 and 2000, respectively.
[7] Intangible Assets
Intangible assets and accumulated amortization as of June 30, 2002 and 2001 are
as follows:
Licenses Goodwill Total
June 30, 2002:
Cost $ 20,000 $ 259,422 $279,422
Less: Accumulated Amortization 13,833 159,976 173,809
---------- ---------- --------
Intangible Assets - Net $ 6,167 $ 99,446 $105,613
----------------------- ========== ========== ========
June 30, 2001:
Cost $ 20,000 $ 259,422 $279,422
Less: Accumulated Amortization 12,833 147,005 159,838
---------- ---------- --------
Intangible Assets - Net $ 7,167 $ 112,417 $119,584
----------------------- ========== ========== ========
Intangible assets are included in other assets for financial reporting purposes.
Amortization expense for fiscal 2002, 2001 and 2000 was $13,971.
[8] Commitments
[A] Leasing Agreements - In January 2001, the Company renewed its leases of
office and warehouse space under this operating lease agreement through February
2006. Terms of the agreement provide for annual base rent of $165,718 which is
adjusted annually based on a cost of living calculation.
In addition to the annual base rent, the office and warehouse lease requires the
Company to pay for certain contingent expenses such as building maintenance,
insurance and real estate taxes. Total contingent lease expenses were $121,918,
$77,008 and $92,161 for the years ended June 30, 2002, 2001 and 2000,
respectively.
The Company maintains two operating leases for several pieces of office
equipment that expire in 2003 and 2005. Terms of the leases provide for combined
annual payments of $13,764.
F-10
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[8] Commitments and Related Party Transactions [Continued]
[A] Leasing Agreements [Continued] - The fixed annual base rent [exclusive of an
annual cost of living adjustment] of the office and warehouse lease and
equipment leases for the next five (5) years are as follows:
Office
Rent Equipment
2003 $ 165,718 $ 10,576
2004 165,718 4,200
2005 165,718 4,200
2006 110,472 350
2007 -- --
---------- ----------
Totals $ 607,626 $ 19,326
------ ========== ==========
Total rent expense was $179,482, $200,352 and $203,960 for the years ended June
30, 2002, 2001 and 2000, respectively.
[B] Employment Agreements - Effective July 1995, the Company entered into five
[5] year employment agreements with two officers of the Company which provide
for salaries of $135,000 and $250,000. In January 2001, these two employment
agreements were renewed for an additional five [5] year period through June
2005. Provisions of the renewed agreements provide for annual salaries of
$165,000 and $300,000. In addition, the renewed agreements continue to provide
for a "Performance Bonus" based on percentages of two (2) to six (6) percent
applied to certain levels of the Company pre-tax profits. The bonus expense
recorded was approximately $72,000, $50,000 and $-0- for the years ended June
30, 2002, 2001 and 2000, respectively.
In addition, the employment agreements contain provisions providing that in the
event of a hostile change of control of the Company and a resultant termination
of the employees' employment prior to expiration of the agreement, the employees
would be entitled to receive certain lump sum payments ranging from 80% of the
officers current salary to 80% of the prior year's salary times the remaining
years of the related employment agreement.
[C] Floor Plan Payable - The Company finances inventory purchases through a
floor plan wholesale credit line with a finance company, which is secured by
substantially all assets of the Company. At June 30, 2002, the Company had a
maximum credit line of $4,500,000, of which $3,475,493 was unused. Provisions of
the floor plan agreement provide that the lender may at its sole discretion from
time to time determine the maximum amount of financing which it elects to extend
based on certain eligible inventory and accounts receivable balances. The
outstanding borrowing under the credit line at June 30, 2002 and 2001 was
approximately $1,025,000 and $2,229,000, respectively. Payments on the credit
line are due currently and are interest free for a 30 day period. If not repaid
in full, interest is calculated based on the average daily outstanding balance
under the line of credit at a rate of the greater of 6% or the prime rate.
Purchases made under the credit lines were repaid in full within the 30 day
interest free repayment period during fiscal 2002, 2001 and 2000. Accordingly,
no interest expense has been incurred for the years ended June 30, 2002, 2001
and 2000. The prime rate and the weighted average interest rate were 4.75%,
9.50% and 7.5%, respectively at June 30, 2002, 2001 and 2000.
F-11
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[9] Income Taxes
The provision for income taxes is summarized as follows:
Y e a r s e n d e d
---------------------------------
J u n e 3 0,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
------- ------- -------
Federal:
Current $ 257,636 $ 271,000 $ --
Deferred 52,635 (4,900) 13,500
--------- --------- ----------
Federal Provision 310,271 266,100 13,500
--------- --------- ----------
State:
Current 65,891 69,000 --
Deferred 9,289 (1,100) 4,500
--------- --------- ----------
State Provision 75,180 67,900 4,500
--------- --------- ----------
Income Tax Expense $ 385,451 $ 334,000 $ 18,000
------------------ ========= ========= ==========
Deferred income taxes arise from temporary differences including depreciation,
inventory reserves, allowance for doubtful accounts and expense accruals.
The deferred tax asset and liability in the accompanying consolidated balance
sheets include the following components:
June 30,
--------
2 0 0 2 2 0 0 1
------- -------
Accounts Receivable Allowance $ 64,000 $ 76,400
Inventory Allowance 24,000 32,000
Accrued Expenses 58,900 115,355
Other Temporary Differences 48,749 32,300
----------- -----------
Deferred Tax Assets 195,649 256,055
Deferred Tax Liabilities - Depreciation
and Amortization 30,976 29,704
--------- -----------
Net Deferred Tax Asset $ 164,673 $ 226,351
---------------------- =========== ===========
The following is a reconciliation of income taxes at the U.S. statutory tax rate
to the taxes actually provided:
Y e a r s e n d e d
---------------------------------
J u n e 3 0,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
------- ------- -------
U.S. Statutory Rate Applied to Pretax Income $ 334,200 $ 283,900 $ 9,000
State Taxes 56,000 47,800 1,800
Other Permanent Differences (4,749) 2,300 7,200
--------- --------- ----------
Income Tax Expense $ 385,451 $ 334,000 $ 18,000
------------------ ========= ========= ==========
F-12
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[10] Earnings Per Share
The following table reconciles the denominator of the diluted earnings per share
computation as shown in the consolidated statement of operations.
Years ended June 30,
---------------------------------
2 0 0 2 2 0 0 1 2 0 0 0
------- ------- -------
Diluted EPS Calculation:
Basic Common Shares Outstanding 4,774,804 4,815,872 4,903,804
Effect of Common Stock Options 152,421 68,981 --
--------- ---------- -----------
Diluted Common and Common Equivalent Shares 4,927,225 4,884,853 4,903,804
------------------------------------------- ========= ========== ===========
Options to purchase 75,000 shares of the Company's common stock were outstanding
during the year ended June 30, 2002 but were not included in the computation of
diluted EPS because the exercise price of the options was greater than the
average market price of the common stock for the periods reported.
[11] Defined Contribution Plans
The Company adopted a defined contribution [401(k)] plan covering all eligible
employees. Under the terms of the Plan, participating employees elect to
contribute a portion of their salaries to the Plan. The Company matches up to a
certain percentage of the employees' contribution. Expense for the years ended
June 30, 2002, 2001 and 2000 was $47,856, $44,363 and $44,978, respectively.
[12] Stockholders' Rights Plan and 2000 Stock Option Plan
On February 6, 1990, the Board of Directors adopted a Stockholders' Rights Plan,
which entitles the Right holder, upon the occurrence of specified triggering
events, i.e., the acquisition by a person or group of beneficial ownership of
20% or more of outstanding shares; the commencement of a tender offer for 20% or
more of outstanding shares [unless an offer is made for all outstanding shares
at a price deemed by the Continuing Board to be fair and in the best interest of
stockholders] and the determination by the Board that a person is an "Adverse
Person," as defined in the Rights Agreement to purchase one share of common
stock at an exercise price of $7.50 per share, or in certain "take over"
situations, common stock equal in value to two times the exercise price.
Subsequent to a triggering event, if the Company is acquired in a merger or
other business transaction in which the Company is not the surviving corporation
[unless Board approved], or 50% or more of the Company's assets or earning power
is sold or transferred, each holder of a Right shall have the right to receive
upon exercise, common stock of the acquiring company having a value equal to two
times the exercise price of the Right. The Rights may be redeemed by the Company
for $.01 per Right at any time prior to the determination of the Board that a
person is an Adverse Person or ten days following a public announcement of the
acquisition of, or commencement of a tender offer for, 20% of the outstanding
common stock. The Rights initially expired in February 2000, but were extended
to February 2010.
Under terms of the Company's 2000 Stock Option Plan ["the Plan"], employees,
directors, and consultants may be granted incentive stock options to purchase
the Company's common stock at no less than 100% of the market price on the date
the option is granted [110% of fair market value for incentive stock options
granted to holders of more than 10% of the voting stock of the Company]. The
Plan also provides for non-qualified stock options to be issued with an exercise
price of not less than 85% of the fair market value of the common stock. The
Company has reserved 500,000 shares of the Company's common stock for
distribution under the Plan. Shares of common stock under the Plan may consist,
in whole or in part, of authorized and unissued treasury stock. Options vest
over a 5 year period and are exercisable over a 10 year period.
F-13
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[12] Stockholders' Rights Plan and Incentive Stock Option Plan [Continued]
Information related to all stock options granted by the Company is as follows:
Weighted Average
Weighted Exercise Price
Number of Average Options of Options
Shares Exercise Price Exercisable Exercisable
Outstanding - June 30, 1999 -- $ -- -- $ --
Granted -- -- -- --
Exercised -- -- --
Forfeited/Canceled -- -- -- --
--------- --------- --------- --------
Outstanding - June 30, 2000 -- -- -- --
Granted 437,000 1.01 246,750 1.09
Exercised -- -- --
Forfeited/Canceled -- -- -- --
--------- --------- --------- --------
Outstanding - June 30, 2001 437,000 1.01 246,750 1.09
Granted -- -- -- --
Exercised -- -- --
Forfeited/Canceled -- -- -- --
--------- --------- --------- --------
Outstanding - June 30, 2002 437,000 $ 1.01 246,750 $ 1.09
--------------------------- ========= ========= ========= ========
The following table summarizes information about stock options outstanding at
June 30, 2002:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number ContractualExercise Number Exercise
Exercise Prices of Options Life Price of Options Price
$.88 362,000 3.6 $.88 171,750 $.88
$1.59 75,000 3.6 $1.59 75,000 $1.59
The exercise price for each of the above grants was determined by the Board of
Directors of the Company to be equal to the fair market value of the common
stock on the day of grant [110% of the fair market value for incentive stock
option grants to holders of more than 10% of the voting stock of the Company].
Pursuant to the required pro forma disclosure under the fair value method of
estimating compensation cost, the Company has estimated the fair value of its
stock option grants by using the Black-Scholes option pricing method with the
following weighted-average assumptions:
2 0 0 2 2 0 0 1 2 0 0 0
------- ------- -------
Expected Option Term (Years) -- 5 years --
Risk-Free Interest Rate (%) -- 6.0% --
Expected Volatility (%) -- 64% --
Dividend Yield (%) -- 0% --
Weighted Average Fair Value of Options Granted $ -- $ .52 $ --
F-14
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[12] Stockholders' Rights Plan and Incentive Stock Option Plan [Continued]
The Company applies APB Opinion No. 25 and the related Interpretations for stock
options issued employees. Accordingly, no compensation cost has been recognized
for option grants. Had compensation cost for these awards been determined based
on the fair value at the grant dates consistent with the method prescribed by
SFAS No. 123, the Company's net income would have been adjusted to the pro forma
amounts indicated below:
2 0 0 2 2 0 0 1 2 0 0 0
------- ------- -------
Net Income:
As Reported $ 670,497 $ 563,012 $ 8,270
Compensation Expense for Stock Options -- (189,267) --
------------ ---------- ----------
Pro Forma Net Income $ 670,497 $ 373,745 $ 8,270
============ ========== ==========
Basic Earnings Per Share as Reported $ -- $ .12 $ --
Pro Forma Basic Earnings Per Share $ -- $ .08 $ --
Diluted Earnings Per Share as Reported $ -- $ .12 $ --
Pro Forma Diluted Earnings Per Share $ -- $ .08 $ --
[13] Contingencies
Management has been notified of an unasserted possible claim or assessment
involving the Company's pension plan. The pension plan was adopted in 1981 as a
defined benefit plan. In 1989, various actions were taken by the Company to
terminate the pension plan, to convert it to a defined contribution plan and to
freeze benefit accruals. However, 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
have not 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 consents in certain instances where it was required.
The Company 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 Company. Under
CAP, the Company may be subject to monetary sanctions ranging from $1,000 to
$40,000. In addition, the Company will be required to correct, retroactively,
operational violations, and to pay any resulting excise taxes and PBGC premiums
and penalties that may be due. In December 2000, the Company made a contribution
to the Plan along with payments of specified sanctions in connection with the
IRS settlement. The Company is awaiting resolution with the PBGC.
The Company from time to time becomes involved in various routine legal
proceedings in the ordinary course of its business. Management of the Company
believes that the legal matters mentioned above and the outcome of remaining
pending legal proceedings and unasserted claims in the aggregate will not have a
material effect on its consolidated statement of operations, consolidated
balance sheet, or liquidity.
F-15
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[14] Significant Customers
There were two significant customers who each accounted for more than 10% of
total revenues during fiscal 2002, 2001 and 2000 as follows:
Years ended
------------------------------------
June 30,
------------------------------------
Customer 2 0 0 2 2 0 0 1 2 0 0 0
- -------- ------- ------- -------
A $16,000,000 $23,000,000 $19,000,000
B 6,500,000 -- --
----------- ----------- -----------
$22,500,000 $23,000,000 $19,000,000
There were three significant customers who each accounted for more than 10% of
accounts receivable at June 30, 2002 and 2001 as follows:
June 30,
Customer 2 0 0 2 2 0 0 1
- -------- ------- -------
A $ 600,000 $ 3,500,000
B 1,350,000 --
C 900,000 --
D 750,000 --
----------- -----------
$ 3,600,000 $ 3,500,000
[15] Buying Agreement
During the year ended June 30, 2002, the Company purchased approximately
$14,800,000 of hardware from one vendor at discounted prices under a buying
agreement. Should the buying agreement be terminated, the Company may not be
able to obtain purchases from another supplier at comparable terms.
[16] Fair Value of Financial Instruments
The Company adopted Statement of Financial Accounting Standards ["SFAS'] No.
107, "Disclosure About Fair Value of Financial Instruments" which requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company used the
following methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, trade payables, mortgage receivable and floor plan
payable it was estimated that the carrying amount approximated fair value for
these instruments because of their short maturities.
F-16
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[17] New Authoritative Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS 142 prohibits the amortization of goodwill and indefinite-lived
intangible assets and requires that they be tested annually for impairment or on
an interim basis if indications of a possible impairment arise. In addition,
SFAS 142 requires that reporting units be identified for purposes of assessing
potential future impairments of goodwill, and removes the 40 year limitation on
the amortization period of intangible assets that have finite lives. The
provisions for SFAS 142 is required to be adopted starting with fiscal years
beginning after December 15, 2001. The company is still assessing the impact of
the adoption of this new standard, although it does not expect it to affect the
consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
retirement costs. This statement is effective for fiscal years beginning after
June 15, 2002. The Company is currently assessing the impact of the adoption of
this new standard, although it does not expect it to affect its consolidated
financial statements.
In June 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long- Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. The provisions of this statement provide a single
accounting model for impairment of long-lived assets. The Company is currently
assessing the impact of the adoption of this new standard, although it does not
expect it to affect its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and
64, Amendment of SFAS 13, and Technical Corrections." Under the current rules,
SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt" requires
that all gains and losses from the extinguishment of debt be classified as
extraordinary on the company's consolidated statements of earnings net of
applicable taxes. SFAS No. 145 rescinds the automatic classification as
extraordinary and requires that the company evaluate whether the gains or losses
qualify as extraordinary under Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS 145 also amends SFAS 13 to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
The provisions related to the rescission of SFAS No. 4 shall be applied in
fiscal years beginning after May 15, 2002. The provisions related to SFAS No. 13
shall be effective for transactions occurring after May 15, 2002. All other
provisions shall be effective for financial statements issued on or after May
15, 2002. The company has adopted these provision and they had no material
effect to the consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." The new rules amend existing accounting for these costs by
requiring that a liability be recorded at fair value when incurred. The
liability would be reviewed regularly for changes in fair value with adjustments
recorded in the consolidated financial statements. Previous rules permitted
certain types of costs to be recognized when future settlement was probable.
SFAS No. 146 also provides specific guidance for lease termination costs and
one-time employee termination benefits when incurred as part of an exit or
disposal activity. The provisions for SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The company is
still assessing the impact of the adoption of this new standard, although it
does not expect it to affect the consolidated financial statements.
F-17
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[18] Selected Quarterly Financial Data [Unaudited]
Three Months Ended
September 30, December 31, March 31, June 30, Fiscal Year
2 0 0 1 2 0 0 1 2 0 0 2 2 0 0 2 2 0 0 2
------- ------- ------- ------- -------
Net Revenues $17,076,390 $14,438,077 $9,607,548 $9,770,080 $50,892,095
Gross Profit $1,972,427 $2,084,809 $2,012,241 $1,901,672 $ 7,971,837
Net Income $ 225,960 $ 176,023 $ 132,625 $ 134,969 $ 670,497
Net Income Per Common Share:
Basic $ 0.05 $ 0.04 $ 0.03 $ 0.02 $ 0.14
Diluted $ 0.05 $ 0.04 $ 0.03 $ 0.02 $ 0.14
Three Months Ended
September 30, December 31, March 31, June 30, Fiscal Year
2 0 0 0 2 0 0 0 2 0 0 1 2 0 0 1 2 0 0 1
------- ------- ------- ------- -------
Net Revenues $13,664,999 $13,113,298 $15,348,438 $14,290,634 $56,417,369
Gross Profit $1,680,938 $1,732,003 $1,885,460 $2,141,531 $ 7,439,932
Net Income $ 97,266 $ 119,062 $ 127,398 $ 219,286 $ 563,012
Net Income Per Common Share:
Basic $ 0.02 $ 0.03 $ 0.03 $ 0.04 $ 0.12
Diluted $ 0.02 $ 0.02 $ 0.03 $ 0.05 $ 0.12
. . . . . . . . . . .
F-18