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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, 1997
[ ] 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
Commission File Number 0-8693
TransNet Corporation
(Exact name of registrant as specified in its charter)
Delaware 22-1892295
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
45 Columbia Road, Branchburg, New Jersey 08876-3576
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 908-253-0500
Securities registered pursuant to Section 12(b) of the Act: NONE
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.
YES X NO
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 $12,594,984 on September 30,
1997 based upon the closing sales price on the NASDAQ System as of said date.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares of the registrant's common stock outstanding on September
30, 1997 was 5,216,804 shares (exclusive of Treasury shares).
PART I
ITEM 1. BUSINESS
TransNet Corporation ("TransNet" or the "Corporation") was incorporated
in the State of Delaware in 1969. TransNet, a computer dealer, is engaged in the
sale and technical support and service of local area networks and personal
computer systems and peripheral equipment, software, and supplies. The sale of
products and the promotion of technical services, the primary focus of the
Corporation, are conducted through its own sales and service departments. 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. 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. In
January 1997, due to intense competition from chain stores and a decline in the
retail store's performance, the Corporation withdrew from the retail market and
closed its TransNet Computer Store located in Lebanon, New Jersey.
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"), Apple Computer, Inc. ("Apple"), Compaq Computer Corporation ("Compaq"),
NEC Technologies, Inc. ("NEC"), AST Research ("AST"), Hewlett-Packard Company
("Hewlett-Packard"), Sun Microsystems, Inc. ("Sun") and Toshiba American
Information Systems, Inc. ("Toshiba"); related peripheral products such as
network products of Compaq, Novell, Inc. ("Novell"), Cisco Systems, Inc.
("Cisco"), and Banyan Systems, Inc. ("Banyan"); selected software products;
wireless communication 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, AST, Compaq
(including authorizations as a Compaq Enterpise Partner and a Compaq Certified
Education Partner), Hewlett-Packard, IBM, NEC, Sun Microsystems, and Toshiba,
Lotus Development Corporation ("Lotus"), Microsoft Corporation ("Microsoft"),
Banyan, Cisco, Novell, and 3COM. The Corporation has received dealer
authorization as an Airdata solutions provider for AT&T wireless services. In
addition, the Corporation has entered into a Consulting Services Agreement with
SAP America, Inc. ("SAP") under which SAP may use the Corporation in SAP's
contracts as subcontractor for SAP related services. The Corporation also offers
a variety of products manufactured by other companies including Okidata, and
Hayes Microcomputer Products, Inc. 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; software for desktop publishing; and integrated
packages.
The Corporation maintains an inventory of its product line to provide
shipments to customers. Back orders are generally immaterial, but manufacturers'
product constraints occasionally impact the Corporation's inventory levels (see
Management's Discussion and Analysis). Shipments are made from the Corporation's
warehouse in Branchburg, New Jersey primarily through common carriers.
The marketing of computers is generally not seasonal in nature.
1
Technical Support and Service: The Corporation provides a wide variety of
network services, personal computer support, repair and standard equipment
maintenance. 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'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. In addition, 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 dealer for the following
manufacturers: Apple, AST, Banyan, Compaq, Dell, Epson, Hewlett Packard, IBM,
NEC, Novell, and Sun.
The Corporation seeks highly qualified personnel and employs experienced
system engineers and technicians to whom it provides authorized manufacturer
training on an on-going basis. During fiscal 1997, the Corporation continued the
rapid expansion of its technical staff in response to the increased volume of
equipment sales and the increasing complexity of the systems to be configured.
The Corporation's technical services are available to business and
individual customers located within 100 miles of the Corporation's Branchburg,
New Jersey headquarters. Through a variety of alternatives, the Corporation
offers repair or maintenance service 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 or on a time and
materials basis and are available for a variety of services related to 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, although some existing
agreements are for terms of one or two years. 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.
In addition to servicing its own customers within its service area, the
Corporation has been selected as a member of the Intelligent Systems Group
("ISG"), a group of dealers selected from Intelligent Electronics dealers. ISG
members provide service to customers of other ISG members in instances in which
a customer has locations outside the dealer's respective service areas, but
within an ISG member's geographic area. Through this arrangement, TransNet can
also assure its customers quality technical service at their locations
nationwide.
Service operations, although not a material source of revenues,
contribute to profits, as discussed in "Management's Discussion and Analysis."
Training: The Corporation's headquarters houses its Training Center,
which provides training to customers at the Center or at the customer site. The
Corporation offers comprehensive training on hardware and software, including a
wide variety of DOS, Windows, Macintosh and UNIX systems and network
applications, operation, and maintenance. The Center has its own dedicated
network and each instructor is certified by the software manufacturer. The
Corporation's Training Center is an Apple Computer authorized training center
and is also authorized for training on all Microsoft, Lotus, Quark, FrameMaker
and Macromind products. The training activities of the Corporation are not a
material source of revenues.
2
Suppliers: In order to reduce its costs for computer and related
equipment, in July 1990, the Corporation entered into a buying agreement with
Connecting Point of America, Inc., a subsidiary of Intelligent Electronics, one
of the largest computer aggregators in the United States. Intelligent
Electronics recently was purchased by Ingram Micro, Inc., which assumed the
earlier agreement. 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 1997, the majority of the
revenues generated by the Corporation from product sales were attributable to
products purchased by the Corporation from Intelligent Electronics and then
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. Management fully anticipates that Ingram Micro,
Inc. will be a major supplier during fiscal 1998.
Customers: The majority of the Corporation's corporate customers are
commercial users located in the New Jersey - New York City metropolitan area.
During fiscal 1997, one customer accounted for approximately 58% of the
Corporation's revenues, and an affiliate of the customer accounted for 11% of
the Corporation's revenues. Such customer and its affiliate accounted for
approximately 50% and 19%, respectively of the Corporation's revenues in fiscal
1996, and approximately 34% and 17%, respectively, in fiscal 1995. The loss of
this customer would have a material adverse impact upon the Corporation if
management could not replace the purchases of equipment and technical services
with similar purchases from new accounts. No other customer accounted for more
than 10% of the Corporation's revenues in fiscal 1997.
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 the sale and technical
support and service of networks, personal computers and related peripherals.
Management believes that the increasing complexity of personal computer systems,
the use of personal computers in the workplace and the widespread utilization of
personal computer networks have created an environment in which commercial
customers require significant levels of sophisticated support services such as
those provided by the Corporation. 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). The Corporation competes with numerous
larger and longer established companies possessing substantially greater
financial resources and substantially larger administrative, technical,
marketing and servicing staffs, facilities and equipment.
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
competition, depress revenues because customers demand the new product, and
increase order backlogs. In the Corporation's experience, these backlogs have
been immaterial, although manufacturers' limitations on product availability
impacted the Corporation's revenues for the last quarter of fiscal 1996 (see
Management's Discussion and Analysis).
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.
3
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 26, 1997, the Corporation employed 165
full-time employees and three (3) 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 $15,492 monthly rental, expires in
February 2001. The building is subleased from W Realty, a partnership consisting
of John J. Wilk, Chairman of the Board and Raymond J. Rekuc, a Director, at
terms which management believes are as favorable as available from unaffiliated
third parties.
See Note 7[A] of the Notes to Consolidated Financial Statements with
respect to the Corporation's commitments for leased facilities.
The Corporation owns a 6.7 acre plot in Mountainside, New Jersey, which
was purchased in 1979 to construct a proposed twin building office complex. To
date, no construction activities have taken place and none are currently
planned. Even if construction is undertaken, the Corporation may elect not to
move any of its operations onto the premises but may elect to rent or sell the
developed property. At the present time, there are no plans by the Corporation
to commence construction.
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 SECURITY HOLDERS
There were no matters submitted by the Corporation during the quarter
ended June 30, 1997 to a vote of SECURITY HOLDERS.
4
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDERS MATTERS
TransNet's common stock is quoted and traded in the NASDAQ National Market
System 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 the National Quotation Bureau Incorporated.
On October 17, 1997, the Corporation was informed by NASDAQ that its common
stock will be delisted from the NASDAQ National Market System on October 24,
1997 based on certain deficiencies asserted by the NASDAQ staff. The Corporation
is in the process of requesting a hearing for a review of the staff's findings
and, although no assurances can be given, believes that all of such
"deficiencies" will be corrected prior to such hearing.
Calendar Year Closing Sales Prices
High Low
1995
First Quarter 1 15/16 1 9/16
Second Quarter 3 1/16 1 3/4
Third Quarter 6 3/16 2 7/16
Fourth Quarter 6 3 1/2
1996
First Quarter 4 3/8 2 7/8
Second Quarter 3 3/4 2 15/32
Third Quarter 3 3/8 1 15/16
Fourth Quarter 3 9/16 2 13/16
1997
First Quarter 3 3/8 2 3/8
Second Quarter 3 1/4 2 3/8
As of October 9, 1997, the number of holders on record of TransNet's
common stock was 3,523. 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.
5
ITEM 6. SELECTED FINANCIAL DATA
Y e a r s e n d e d J u n e 3 0,
------------------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5 1 9 9 4 1 9 9 3
------- ------- ------- ------- -------
Revenue $ 68,631,322 $ 64,200,588 $ 56,216,605 $ 40,342,165 $ 28,903,305
Net Income $ 1,032,567 $ 1,001,640 $ 882,466 $ 393,870 $ 264,644
Earnings Per Share $ .20 $ .19 $ .17 $ .08 $ .05
Weighted Average
Number of Shares 5,216,804 5,216,804 5,155,526 5,041,804 5,041,804
Total Assets $ 18,224,298 $ 16,333,275 $ 19,286,712 $ 13,289,915 $ 10,513,428
Working Capital $ 9,830,264 $ 8,506,758 $ 7,554,094 $ 7,225,788 $ 6,845,754
6
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, 1997 were $68,631,322 as
compared with $64,200,588 for the fiscal year ended June 30, 1996, and
$56,216,605 for the fiscal year ended June 30, 1995. Revenues for fiscal 1997,
1996 and 1995 increased as compared to the respective prior year as the result
of increased hardware sales and an increase in revenues from technical services
(such as technical repair and maintenance, support, and network integration) and
training services. Due to management's emphasis on the promotion of technical
service and support operations and agreements with large organizations for
service and support (as discussed below), technical service revenues increased
by approximately 36% in fiscal 1997 as compared to fiscal 1996, and 25% in
fiscal 1996 as compared to fiscal 1995.
For fiscal 1997, the Corporation reported net income of $1,032,567, as
compared with net income of $1,001,640 for fiscal 1996, and $882,466 for fiscal
1995. As referenced above, consecutive increases in net income for the years
ended June 30, 1997, 1996 and 1995 is attributable to increased sales volume;
increased technical service and support related revenues; management's
concentration on sales of higher profit margin products such as network and
system integration products; and continued adherence to cost control measures.
Service related revenues, though not a material segment of Corporation revenues,
are significant in their contributions to net income because these operations
yield a higher profit margin than equipment sales. For the fiscal years ended
June 30, 1997, 1996 and 1995, the respective increases in revenues 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. In addition,
manufacturers' shortages of certain products, known as product constraints,
occasionally combine with the price decreases to impact the Corporation's
revenue stream as occurred during the last quarter of fiscal 1996. The product
constraints experienced in that quarter reduced the number of orders received by
the Corporation, with resulting effects on inventory, accounts payable and
receivable and cash levels. Another result of the price decreases has been
intensified competition within the industry, including the consolidation of
businesses through merger or acquisition and the entrance of manufacturers into
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.
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's current marketing strategy is
designed to increase sales of lower revenue/higher profit margin products
related to service and support operations. Management's efforts include
targeting commercial, educational and governmental customers which provide
marketplaces for a wide range of products and services at one time, a
cost-effective approach to sales. Management believes it maximizes profits
through concentration on sales of value-added applications; promotion of the
Corporation's service and support operations; and strict adherence to
cost-cutting controls. In light of the above, management emphasizes and
continues the aggressive pursuit of an increased volume of equipment sales,
technical service and support programs, and promotion of its training services.
In addition, the Corporation's buying agreement with Ingram Micro, Inc. enhances
the Corporation's competitive edge through discounts unavailable through other
sources.
7
Selling, general and administrative expenses were approximately 9% of
revenues for fiscal 1997, and remained constant as a percentage of revenues at
approximately 10% of revenues for both fiscal 1996 and 1995. Management's
adherence to cost control measures maintains the level of such expenditures.
Interest income increased in fiscal 1997 as compared to the prior year
primarily due to a stronger cash position, which allowed the Corporation to
invest larger amounts than in prior years. Interest income increased in fiscal
1996 as compared to fiscal 1995 due to the rise in interest rates. Interest
expense decreased in fiscal 1997 as compared to the prior year, also due to the
improved cash position which limited the amount of financing extended under the
floor planning arrangements described below. Interest expense increased in 1996
over 1995 as a result of financing costs associated with inventory.
Liquidity and Capital Resources
There are no material commitments of the Corporation's capital resources,
other than real estate leases and employment contracts entered into in the
normal course of business.
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 1997 as a result of increased sales,
and decreased in 1996 as compared to 1995 due to manufacturers' product
constraints during the last quarter of fiscal 1996.
Accounts receivable increased in fiscal 1997 over 1996 as a result of
increased sales. Accounts payable decreased due to the improved cash position of
the Corporation. Floor planning payables reflects an increase which is
attributable to the increased volume of hardware sales. Accounts receivable and
payable decreased for the period ended June 30, 1996 as a direct result of a
decrease in revenues for the last quarter of fiscal 1996. The decrease in orders
was attributable to the late spring announcement of new products by equipment
manufacturers, which delayed orders until the new products were available after
July 1996.
For the fiscal year ended June 30, 1997, as in the fiscal years ended
June 30, 1996 and 1995, the internal sources of the Corporation were sufficient
to enable the Corporation to meet its obligations.
Management has recently been 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 consents in certain instances where it
was required.
The Corporation currently intends to (i) take corrective action under the
IRS Walk-in Closing Agreement Program ["CAP"], (ii) apply for a favorable
determination letter with respect to the Plan from the IRS, and (iii) terminate
the Plan. The CAP program provides a correction mechanism for "non-amenders"
such as the Corporation. Under CAP, the Corporation will be subject to a
monetary sanction [which could range from $1,000 to approximately $40,000]. In
addition, the Corporation will be required to correct, retroactively,
operational violations, and to pay any resulting excise taxes and PBGC premiums
and penalties that may be due. Special counsel has advised the Corporation that
although it believes that the Corporation will incur some liability in
connection with the correction of such operational violations, it is not
possible to estimate the potential amount of or the range of liability at this
time. Such counsel has also advised that depending on the corrections required,
such liability could range from an insignificant to a material amount, but that
due to the uncertainties involved, any estimate in dollar terms or the range of
any such liability at this time would be speculative and potentially misleading.
8
ITEM 8. FINANCIAL STATEMENTS
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.
9
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) 69 Chairman of the Board and
Treasurer
Steven J. Wilk (a) 40 President and Director
Jay A. Smolyn 41 Vice President, Operations
and Director
Mark Stanoch (b) 45 Vice President, Sales
Annette Stanoch (b) 44 Vice President, Planning
Vincent Cusumano (c)(e) 62 Secretary and Director
Earle Kunzig (c)(f) 58 Director
Raymond J. Rekuc (d)(e) 52 Director
Susan Wilk-Cort (a) Director
(a) Steven J. Wilk and Susan Wilk-Cort are respectively, the son and
daughter of John J. Wilk.
(b) Mark Stanoch and Annette Stanoch are husband and wife.
(c) Member of the Audit Committee.
(d) Chairman of the Audit Committee.
(e) Member of the Compensation Committee.
(f) 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 items
reviewed by the Compensation Committee are disclosed in Item 11, "Executive
Compensation."
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.
10
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.
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-Cort 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.
The two executive officers of the Corporation who are not directors, Mark
Stanoch and Annette Stanoch, were the founders of Round Valley Computer Center,
Inc. ("RVCC") in 1984. RVCC was engaged in marketing personal computers of
several manufacturers including IBM, Apple and Hewlett Packard, and providing
support and service from its two facilities at Branchburg and Lebanon, New
Jersey, at the time of its acquisition by TransNet on March 6, 1990. At the time
of the acquisition, Mark Stanoch and Annette Stanoch were respectively elected
Vice President, Sales and Vice President, Planning of TransNet.
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 1997, its officers, directors
and beneficial owners of more than 10% of its equity timely complied with all
applicable Section 16(a) filing requirements.
11
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid or accrued by the Company during the three years ended on June 30, 1997, 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, 1997, exceeded
$100,000. All of the Company'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 Company and are generally
available to all full-time salaried employees.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
---------- ------------------------------ ----------------------------- -------------
Name and Year Ended Other Annual Options Restricted LTIP All Other
Principal Position June 30, Salary Bonus Compensation SARs Stock AwardsPayouts(a)Compensation
- ---------------------------- ---------------- ------------- ----------------------------- -------------
Steven J. Wilk 1997 $250,000 $46,644 $0 0 0 $0 0
President and Chief1996 $240,833 $47,560 $0 0 0 $0 0
Executive Officer 1995 $195,000 $25,400 $0 0 0 $0 0
Mark Stanoch 1997 $135,000 $30,822 $0 0 0 $0 0
Vice President 1996 $130,833 $36,600 $0 0 0 $0 0
Sales 1995(b) $110,000 $15,200 $0 0 0 $31,200 0
Annette Stanoch 1997 $135,000 $ 30,822 $0 0 0 $0 0
Vice President 1996 $130,833 $36,600 $0 0 0 $0 0
Planning 1995(b) $110,000 $15,200 $0 0 0 $31,200 0
Jay Smolyn 1997 $135,000 $ 30,822 $0 0 0 $0 0
---- ----------------- --- - - --- -
Vice President 1996 $130,833 $36,600 $0 0 0 $0 0
- ---------------- ---- ----------------- --- - - --- -
Operations 1995 $110,000 $15,200 $0 0 0 $0 0
- -------------- ---- ----------------- -- - - --- -
(a) On March 6, 1990, in connection with its acquisition of all of the
issued and outstanding capital stock of Round Valley Computer Center, Inc.
("RVCC") from RVCC's sole stockholders, Mark Stanoch, Annette Stanoch and a
third individual, the Corporation agreed pursuant to the Acquisition Agreement
to pay the three RVCC stockholders a percentage of TransNet's consolidated
pre-tax profits (including RVCC's) varying from 10% to 12% in the aggregate with
respect to each fiscal year from 1990 through 1995.
(b) With respect to the incentive bonus paid to Mr. and Mrs. Stanoch,
respectively, for the fiscal year ended June 30, 1995, payment of $12,667 of the
bonus was paid in fiscal 1996.
Employment Agreements with Executive Officers
TransNet has employment contracts in effect with Steven J. Wilk, Jay A.
Smolyn, Mark Stanoch and Annette Stanoch which expire on June 30, 2000.
Pursuant to the employment contracts, Steven J. Wilk's annual salary is
"at least" $250,000 and Mr. Smolyn's, Mr. Stanoch's and Mrs. Stanoch's salary is
"at least" $135,000 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,
Mr. Stanoch and Mrs. Stanoch). Steven J. Wilk's employment contract provides
for a continuation of full amount of salary payments for 6 months and 50% of the
12
full amount for the remainder of the term in the event of illness or injury. In
addition, the employment contracts contain provisions providing in 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 agreement, Mr.
Smolyn, Mr. Stanoch and Mrs. Stanoch would each receive a lump sum payment equal
to 80% of the greater of his/her then current annual salary or his/her 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
agreement. 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
contracts for Mr. Smolyn, Mr. Stanoch and Mrs. Stanoch provide that the
Corporation may terminate his/her 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
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.
Director's Compensation
During fiscal 1997, the Company paid $5,000 in directors' fees to each of
its three outside directors.
Stock Options
No options to acquire TransNet Corporation stock were held by the
Corporation's executive officers at June 30, 1997.
13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of August 31, 1997 , 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
Directors
Steven J. Wilk (a) 393,500 shs 8%
John J. Wilk (a) 196,550 shs 4%
Jay A. Smolyn (a) 85,000 shs 2%
Susan Wilk-Cort (a) 85,500 shs 2%
Vincent Cusumano (a) 0 shs ----
Earle Kunzig (a) 1,600 shs ----
Raymond J. Rekuc (a) 0 shs ----
All officers and directors 929,150 shs (b) 18%
as a group (nine persons)
(a) The address of all directors is 45 Columbia Road, Branchburg, New
Jersey 08876.
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 8%
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
See Item 2 herein as to the subleasing by the Corporation of its principal
facility in Branchburg, New Jersey from a partnership consisting of its Chairman
of the Board and an outside Director.
14
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, 1997 and June 30,1996.
o Consolidated Statements of Operations for the Years Ended
June 30, 1997, 1996 and 1995.
o Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1997, 1996 and 1995.
o Consolidated Statements of Cash Flows for the Years Ended June
30, 1997, 1996 and 1995.
o Notes to Consolidated Financial Statements
(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, 1997.
(c) 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
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
Exhibits Incorporated by Reference to
4.1 Specimen Common Stock Exhibit 4(A) to Registration Statement
Certificate 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 Corporation Form 10-K for year ended June 30, 1991
for premises at 45 Columbia 1991 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 the Form 10-K for year ended June 30, the
Corporation for premises at 45 Columbia
Road, Somerville, New Jersey
10.3 Employment Agreements effective Exhibit 10.3 to Annual Report on
July 1, 1995 with Steven J. Wilk, Jay A. Form 10-K for year ended June 30,
Smolyn, Annette Stanoch and Mark Stanoch 1996
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
15
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.
(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
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
TransNet Corporation
Somerville, New Jersey
We have audited the accompanying consolidated balance sheets of
TransNet Corporation and its subsidiary as of June 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three fiscal years in the period ended June 30, 1997.
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 generally accepted
auditing standards. 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 its subsidiary as of June 30, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended June 30, 1997, in conformity
with generally accepted accounting principles.
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
September 19, 1997
F-1
TRANSNET CORPORATION AND SUBSIDIARY
- ----------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------
June 30,
1 9 9 7 1 9 9 6
Assets:
Current Assets:
Cash and Cash Equivalents $ 3,336,917 $ 2,383,741
Accounts Receivable - Net 8,986,318 7,366,019
Inventories 3,274,462 3,642,228
Other Current Assets 324,546 465,943
Deferred Tax Asset 334,700 314,750
------------ ------------
Total Current Assets 16,256,943 14,172,681
Property and Equipment - Net 916,254 1,158,083
Other Assets 1,051,101 1,051,261
------------ ------------
Total Assets $ 18,224,298 $ 16,382,025
============ ============
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 965,340 $ 1,739,706
Accrued Expenses 650,242 539,104
Floor Plan Payable 4,384,040 2,852,328
Deferred Income 162,576 319,284
Other Current Liabilities 264,481 215,501
------------ ------------
Total Current Liabilities 6,426,679 5,665,923
------------ ------------
Deferred Tax Liability 97,700 48,750
------------ ------------
Commitments and Contingencies -- --
------------ ------------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value, Authorized
15,000,000 Shares; Issued 7,469,524 Shares in 1997
and 1996 [of which 2,252,720 are in Treasury] 74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 7,156,122 6,123,555
------------ ------------
Totals 17,917,562 16,884,995
Less: Treasury Stock - At Cost (6,217,643) (6,217,643)
------------ ------------
Total Stockholders' Equity 11,699,919 10,667,352
------------ ------------
Total Liabilities and Stockholders' Equity $ 18,224,298 $ 16,382,025
============ ============
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,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Revenue $ 68,631,322 $ 64,200,588 $ 56,216,605
Cost of Revenue 61,160,465 56,974,857 49,762,601
------------- ------------- ------------
Gross Profit 7,470,857 7,225,731 6,454,004
Selling, General and Administrative Expenses 6,465,912 6,153,883 5,697,915
------------- ------------- ------------
Operating Income 1,004,945 1,071,848 756,089
------------- ------------- ------------
Other Income [Expense]:
Interest Income 124,065 67,123 53,775
Interest Expense (40,943) (174,731) (117,587)
------------- ------------- ------------
Other Income [Expense] - Net 83,122 (107,608) (63,812)
------------- ------------- ------------
Income Before Income Tax Expense 1,088,067 964,240 692,277
Income Tax Expense [Benefit] 55,500 (37,400) (190,189)
------------- ------------- ------------
Net Income $ 1,032,567 $ 1,001,640 $ 882,466
============= ============= ============
Income Per Common Share $ .20 $ .19 $ .17
============= ============= ============
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, 1994 7,294,524 $ 72,945 $ 10,513,495 $ 4,239,449 (2,252,720) $ (6,217,643) $ 8,608,246
Exercise of Options 175,000 1,750 173,250 -- -- -- 175,000
Net Income -- -- -- 882,466 -- -- 882,466
------------- ------------ ------------ ------------ ------------ ------------ -----------
Balance - June 30, 1995 7,469,524 74,695 10,686,745 5,121,915 (2,252,720) (6,217,643) 9,665,712
Net Income -- -- -- 1,001,640 -- -- 1,001,640
------------- ------------ ------------ ------------ ------------ ------------ -----------
Balance - June 30, 1996 7,469,524 74,695 10,686,745 6,123,555 (2,252,720) (6,217,643) 10,667,352
Net Income -- -- -- 1,032,567 -- -- 1,032,567
------------- ------------ ------------ ------------ ------------ ------------ -----------
Balance - June 30, 1997 7,469,524 $ 74,695 $ 10,686,745 $ 7,156,122 (2,252,720) $ (6,217,643) $11,699,919
============= ============ ============ ============ ============ ============ ===========
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,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Operating Activities:
Net Income $ 1,032,567 $ 1,001,640 $ 882,466
------------- ------------- ------------
Adjustments to Reconcile Net Income to Net Cash
[Used for] Provided by
Operating Activities:
Depreciation and Amortization 340,723 275,131 172,612
Loss on Sale of Equipment -- 6,360 1,054
Deferred Income Taxes 29,000 (70,000) (196,000)
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,620,299) 2,835,025 (4,004,954)
Inventories 367,766 1,369,563 (1,547,138)
Other Current Assets 141,397 (318,890) (181,694)
Other Assets (45,167) 56,147 (675,448)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (663,228) 616,059 1,045,850
Other Current Liabilities 48,980 (98,238) 129,570
Deferred Income (156,708) (8,816) (200,057)
------------- ------------- ------------
Total Adjustments (1,557,536) 4,662,341 (5,456,205)
------------- ------------- ------------
Net Cash - Operating Activities (524,969) 5,663,981 (4,573,739)
------------- ------------- ------------
Investing Activities:
Capital Expenditures (53,567) (366,214) (31,378)
Proceeds from Sale of Equipment -- 850 --
------------- ------------- ------------
Net Cash - Investing Activities (53,567) (365,364) (31,378)
------------- ------------- ------------
Financing Activities:
Floor Plan Payable 1,531,712 (4,464,082) 3,963,968
Issuance of Common Stock -- -- 175,000
------------- ------------- ------------
Net Cash - Financing Activities 1,531,712 (4,464,082) 4,138,968
------------- ------------- ------------
Net Increase [Decrease] in Cash and Cash Equivalents 953,176 834,535 (466,149)
Cash and Cash Equivalents - Beginning of Years 2,383,741 1,549,206 2,015,355
------------- ------------- ------------
Cash and Cash Equivalents - End of Years $ 3,336,917 $ 2,383,741 $ 1,549,206
============= ============= ============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 44,000 $ 182,000 $ 105,000
Income Taxes $ 27,000 $ 32,000 $ 6,400
Supplemental Disclosures of Non-Cash Investing Activities:
During 1996, $520,790 of other assets were placed into service and classified
as property and equipment.
During 1997, the Company disposed of $138,126 of fully depreciated property
and equipment.
See Notes to Consolidated Financial Statements.
F-5
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 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 $40,000 and $39,838 as of June 30, 1997 and 1996,
respectively. The receivables secure a floor plan agreement [See Note 7C].
[D] Inventories - The Company's inventory is valued at the lower of cost
[determined on the moving average-cost basis] or market. The inventory secures a
floor plan agreement [See Note 7C].
[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 is being amortized over 20 years by using the
straight-line method. Licences 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 and Deferred Income - Revenue is recognized at time of
shipment for equipment sold directly to customers. Deferred income consists of
prepaid maintenance service contracts. Revenue on the contracts is recognized by
using the straight-line method over the term of the contract which range from
three months to one year.
[H] Earnings Per Share - Earnings per common share are based on 5,216,804
weighted outstanding average shares for fiscal 1997 and 1996, and 5,155,526 for
fiscal 1995. Common stock equivalents are included if dilutive.
F-6
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[I] Concentrations of Credit Risk - The Company currently maintains cash
accounts of approximately $435,000 in a financial institution which is subject
to credit risk beyond FDIC insured limits.
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 many of the largest computer products
suppliers in the world, including Apple, Compaq, Hewlett Packard, IBM, Lotus
Development Corporation, 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.
For the year ended June 30, 1997, the Company had net sales to a customer that
generated approximately 58% of total net sales and net sales to an affiliate of
this customer that generated net sales of approximately 11% of total net sales.
The loss of this customer and/or the loss of the affiliated customer could have
a material effect on the Company.
[K] Advertising Costs - The Company participates in cooperative advertising
programs with its vendors, whereby the vendors absorb the costs of advertising.
During the year ended June 30, 1997, 1996 and 1995, the Company incurred
additional advertising expense of $2,209, $33,700 and $-0-, respectively.
Adverting 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.
[3] Repurchase Agreements
Repurchase agreements included in cash equivalents as of June 30, 1997 and 1996
consisted of:
Cost Fair Value
June 30, 1997:
Repo 6%, Due July 1, 1997 $ 3,100,816 $ 3,100,816
This security is backed by $3,108,241 of G.N.M.A. bonds maturing April 20, 2023
with a variable interest rate.
Cost Fair Value
June 30, 1996:
Repo 6%, Due July 1, 1996 $ 1,686,930 $ 1,686,930
F-7
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[3] Repurchase Agreements [Continued]
This security is backed by $1,726,642 of Federal Home Loan Mortgage Corporation
Bonds maturing in May 1, 1998 with an interest rate of 6%.
[4] Inventories
Inventories consist of:
June 30,
1 9 9 7 1 9 9 6
Product Inventory $ 2,871,173 $ 3,243,574
Service Parts 403,289 398,654
------------ ------------
Totals $ 3,274,462 $ 3,642,228
------ ============ ============
[5] Property, Equipment, Depreciation and Amortization
Property and equipment and accumulated depreciation as of June 30, 1997 and 1996
are as follows:
June 30,
1 9 9 7 1 9 9 6
Machinery and Equipment $ 1,210,761 $ 1,205,567
Furniture and Fixtures 391,405 419,264
Leasehold Improvements 273,102 334,996
------------ ------------
Totals 1,875,268 1,959,827
Less: Accumulated Depreciation and Amortization 959,014 801,744
Property and Equipment - Net $ 916,254 $ 1,158,083
---------------------------- ============ ============
Total depreciation expense amounted to $295,396, $250,807 and $130,741 for the
years ended June 30, 1997, 1996 and 1995, respectively.
[6] Intangible Assets
Intangible assets and accumulated amortization as of June 30, 1997 and 1996 are
as follows:
June 30,
1 9 9 7 1 9 9 6
Licenses $ 333,560 $ 292,060
Goodwill 259,422 259,422
------------ ------------
Totals 592,982 551,482
Less: Accumulated Amortization 145,663 100,336
------------ ------------
Intangible Assets - Net $ 447,319 $ 451,146
----------------------- ============ ============
Intangible assets are included in other assets for financial reporting purposes.
Amortization expense for fiscal 1997, 1996 and 1995 was $45,327, $24,324 and
$41,871, respectively.
F-8
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[7] Commitments and Related Party Transactions
[A] Leasing Agreements - The Company leases office and warehouse space under an
operating lease with a related party, which expires in 2001. During fiscal 1991,
the Company entered into a five year lease with three five year renewal options
with W. Realty, an affiliate of the Chairman of the Board and a director, for
its primary office and warehouse facility. In March 1996, the Company exercised
the renewal option.
Total rent expense was $215,710, $242,260 and $244,511 for the years ended June
30, 1997, 1996 and 1995, respectively.
The following is a summary of rental commitments:
1998 $ 184,903
1999 193,339
2000 201,837
2001 208,211
Thereafter --
------------
Total $ 788,290
----- ============
At June 30, 1997, the Company had prepaid rent of approximately $15,500.
[B] Employment Agreements - Effective July 1, 1995, the Company entered into
four [4] employment agreements with officers of the Company. The term of each
agreement is for five [5] years with annual salaries ranging from $135,000 to
$250,000. A "Performance Bonus," based on the Company's consolidated pre-tax
profits, is also included in each of the agreements at rates of two to six
percent based on certain achieved profit levels. The bonus accrual was
approximately $119,000 and $83,000 as of June 30, 1997 and 1996, 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.
[C] Floor Plan Payable - The Company finances its inventory through a floor
planning arrangement with a finance company, whereby the Company's inventories
and accounts receivable have been pledged as collateral against the outstanding
loan balances. The Company has an inventory credit line up to a maximum of
$8,000,000 based on eligible inventory purchases. The outstanding balance for
the inventory credit line at June 30, 1997 and 1996 was approximately $4,400,000
and $2,900,000, respectively. The Company also has an accounts receivable credit
line based upon eligible accounts receivable up to a maximum of $4,500,000. The
Company did not have an outstanding balance on its accounts receivable credit
line at June 30, 1997 or 1996. Payments on both credit lines are due currently.
Interest is applied to the average daily outstanding balance under the lines of
credit at a rate of the greater of 6% or the daily prime rate per annum. The
prime rate and the weighted average interest rate were 8.50% and 8.25%,
respectively at June 30, 1997 and were 8.25% and 7.875%, respectively at June
30, 1996 and 7.50% for both prime and weighted average interest at June 30,
1995.
F-9
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ----------------------------------------------------------------------------------------------
[8] 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,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Federal:
Current $ 335,625 $ 287,000 $ 208,050
Deferred 38,000 (62,400) (151,900)
------------ ------------ -------------
Totals 373,625 224,600 56,150
Less: Net Operating Loss Carryforward Benefit (319,625) (272,000) (208,050)
------------ ------------ -------------
Federal Provision $ 54,000 $ (47,400)$ (151,900)
----------------- ============ ============ =============
State:
Current $ 99,000 $ 72,000 $ 61,311
Deferred (9,000) (7,600) (44,100)
------------ ------------ -------------
Totals 90,000 64,400 17,211
Less: Net Operating Loss Carryforward Benefit (88,500) (54,400) (55,500)
------------ ------------ -------------
State Provision $ 1,500 $ 10,000 $ (38,289)
--------------- ============ ============ =============
Income Tax Expense [Benefit] $ 55,500 $ (37,400)$ (190,189)
---------------------------- ============ ============ =============
Deferred income taxes arise from the Company's temporary differences including
depreciation, inventory capitalization, allowance for doubtful accounts,
vacation pay accruals, and net operating loss carryforwards.
The Company has a deferred tax asset of $334,700 at June 30, 1997 based
primarily on net operating loss carryforwards of approximately $948,000.
Realization of the tax asset is dependent upon future events effecting
utilization of the net operating loss carryforwards. A valuation allowance has
been provided against this deferred asset. The valuation allowance decreased by
approximately $386,800 from the prior period.
The net deferred tax asset in the accompanying consolidated balance sheets
include the following components:
June 30,
1 9 9 7 1 9 9 6
Deferred Tax Asset - Net Operating Loss $ 650,000 $ 1,120,000
Valuation Allowance (489,200) (876,000)
Other 173,900 70,750
------------ -------------
Deferred Tax Assets 334,700 314,750
Deferred Tax Liabilities - Depreciation (97,700) (48,750)
------------ -------------
Net Deferred Tax Asset $ 237,000 $ 266,000
---------------------- ============ =============
F-10
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[8] Income Taxes [Continued]
Unused net operating loss carryforwards at June 30, 1997 are as follows:
Year of
Expiration Amount
2005 $ 185,000
2006 763,000
------------
Total $ 948,000
----- ============
The following is a reconciliation of income taxes [benefit] 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,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
U.S. Statutory Rate Applied to Pretax Income $ 380,823 $ 337,500 $ 235,375
State Taxes 58,500 72,000 61,311
Net Operating Loss Carryforward (408,125) (326,400) (263,550)
Decrease in Valuation Allowance -- (115,505) (237,561)
Other 24,302 (4,995) 14,236
------------ ------------ -------------
Income Tax Expense [Benefit] $ 55,500 $ (37,400)$ (190,189)
---------------------------- ============ ============ =============
[9] Defined Contribution Plans
The Company maintains a defined contribution pension plan which covers
substantially all of the Company's employees. The contribution amount is
determined at the discretion of management. There was no expense for the plan
for the years ended June 30, 1997, 1996 and 1995.
Effective January 1, 1995, the Company adopted another defined contribution
[401(k)] plan covering all eligible employees. Under the terms of the Plan,
participating employees deposit a percentage of their salaries in the Plan. The
Company matches up to a certain percentage of the employees' contribution.
Expense for the years ended June 30, 1997, 1996 and 1995 was $23,410, $16,882
and $5,285, respectively.
[10] Stockholders' Rights 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 expire on February 6, 2000, unless earlier redeemed.
F-11
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[11] Contingencies
Management has recently been apprised 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"] and
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 consents
in certain instances where it was required.
The Company currently intends 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 will be subject to a monetary
sanction which could range from $1,000 to approximately $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. Special counsel has advised the Company that although it believes that
the Company will incur some liability in connection with the correction of such
operational violations, it is not possible to estimate the potential amount of
or the range of liability at this time. Such counsel has also advised that
depending on the corrections required, such liability could range from an
insignificant to a material amount, but that due to the uncertainties involved,
any estimate in dollar terms or the range of any such liability at this time
would be speculative and potentially misleading.
[12] Stock Options
During the year ended June 30, 1995, options to purchase an aggregate 175,000
shares of the company's stock were exercised at $1.00 per share by three
employees, two of whom are currently officers.
[13] Significant Customer
During the years ended June 30, 1997, 1996 and 1995, the Company derived 58%,
50% and 34%, respectively of its revenue for each year from one major customer.
Additionally, during the years ended June 30, 1997, 1996 and 1995, the Company
derived 11%, 19% and 17%, respectively, of its revenue from an affiliate of the
significant customer [See Note 2J].
[14] Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing fair value to the
extent practicable for financial instruments which are recognized or
unrecognized in the balance sheet. For certain instruments, including cash and
cash equivalents, trade receivables, trade payables, and the floor plan payable
it was concluded that the carrying amount approximated fair value for these
instruments because of their short maturities.
[15] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 128, "Earnings per Share," and SFAS
No. 129, "Disclosure of Information about Capital Structure." Both are effective
for financial statements issued for periods ending after December 15, 1997.
F-12
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[15] New Authoritative Pronouncements [Continued]
SFAS No. 128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. When adopted, SFAS No.
128 will require restatement of all prior-period EPS data presented; however,
the Company has not sufficiently analyzed SFAS No. 128 to determine what effect
SFAS No. 128 will have on its historically reported EPS amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. Earlier
application is permitted. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. SFAS No. 130 is not
expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. SFAS No. 131 is not expected to have a
material impact on the Company.
. . . . . . . . . . . . . . . .
F-13
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: October 21, 1997 By /s/ Steven J. Wilk
---------------------
Steven J. Wilk
Chief Executive Officer
Date: October 21, 1997 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: October 21 , 1997
- --------------------------------------------
Steven J. Wilk, Director
By /s/ John J. Wilk Date: October 21 , 1997
- --------------------------------------------
John J. Wilk, Director
By /s/ Jay A. Smolyn Date: October 21 , 1997
- --------------------------------------------
Jay A. Smolyn, Director
By /s/ Raymond J. Rekuc Date: October 21 , 1997
- --------------------------------------------
Raymond J. Rekuc, Director
By /s/ Vincent Cusumano Date: October 21 , 1997
- --------------------------------------------
Vincent Cusumano
By /s/ Earle Kunzig Date: October 21 , 1997
- --------------------------------------------
Earle Kunzig
By /s/ Susan M. Wilk-Cort Date: October 21 , 1997
- --------------------------------------------
Susan M. Wilk-Cort, Director
14