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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, 2003
[ ] 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
incorporation or organization) Number)
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 $6,109,617 on September 23,
2003 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
23, 2003 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, IP telephony
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 a significant portion of the Corporation's revenues, accounting
for 49% and 65% of sales for fiscal 2003 and 2002, 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 focus for business growth on
marketing a wide array of technical services in conjunction with equipment sales
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 and wireless network products and related services. IP
Telephony products provide 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 desktop computer
systems, network hardware and software, IP telephony and wireless products
manufactured by the following companies: International Business Machines
("IBM"), Acer, Apple Computer, Inc. ("Apple"), Cisco Systems, Inc. ("Cisco"),
Nortel Networks, NEC Technologies, Inc. ("NEC"), Hewlett-Packard Company
("Hewlett-Packard"), Toshiba American Information Systems, Inc.
("Toshiba"),Veritas, and 3Com; selected software products including products of
Microsoft Corporation ("Microsoft") and Novell, Inc. ("Novell"); 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 reseller for Apple, Cisco as
a Cisco Premier Partner, Citrix Systems, Inc. ("Citrix") as a Citrix Solutions
Partner, Hewlett-Packard as an HP Gold Provider, a State/Local Government
Specialized Partner, Certified Education Partner (k-12), and a Certified
Education Partner (for higher education), IBM, Lexmark International, Inc.,
Microsoft as a Microsoft Solutions Provider, NEC, Novell as a Novell Gold
Partner, Packeteer, Safari, Smart Technolgies, Symantec, Toshiba, Websense, and
3COM. The Corporation also offers a variety of products manufactured by other
companies including Adspace, Okidata, 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.
2
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. Shipments are made from the Corporation's warehouse in Branchburg, New
Jersey primarily through common carriers. In addition, 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 customers. 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 51% of revenues in fiscal 2003, and
35% of revenues in fiscal 2002. As discussed in "Management's Discussion and
Analysis," 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. With the advent of its IP
Telephony operations, these services also cover design, installation, and
technical support and service of integrated voice-data systems. 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 3Com, Apple, Cisco, Citrix, Dell Inc., Hewlett Packard, IBM,
Lexmark, Microsoft (as a Certified Solution Provider), Novell, Symantec and
Xerox.
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. 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. Services are available for a variety of products marketed by the
Corporation. Through its "TechNet" program the Corporation stations service
personnel at a customer's location on a full-time basis. Under this program, the
Corporation has entered into individual agreements with several large corporate
customers to provide support and repair and maintenance services. 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. Maintenance and service contracts are offered to maintain
and/or repair computer hardware. 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.
3
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.
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,
the TransNet Education 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 2003, 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 2004.
CUSTOMERS: The majority of the Corporation's corporate customers are
commercial users located in the New Jersey - New York City metropolitan area.
During fiscal 2003, one customer, Schering Plough, accounted for
approximately 18% of revenue. 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. 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 2003.
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.
4
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
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, 2003, the Corporation employed 220
full-time employees and 9 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 [7][A] 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.
CALENDAR YEAR CLOSING SALES PRICES
- ------------- --------------------
HIGH LOW
---- ---
2001
Third Quarter $1.70 $1.28
Fourth Quarter 1.82 1.35
2002
First Quarter $1.74 $1.50
Second Quarter 1.58 1.15
Third Quarter 1.17 1.02
Fourth Quarter 1.15 .97
2003
First Quarter $1.25 $1.04
Second Quarter 1.25 1.06
As of September 12, 2003, the number of holders of record of TransNet's
common stock was 2,772. 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.
Years Ended June 30,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
STATEMENT OF INCOME DATA
Net Sales
Equipment $ 15,942,197 $ 33,258,828 $ 42,137,322 $ 33,503,234 $ 28,231,540
Services 16,856,823 17,633,266 14,280,047 13,063,267 16,074,600
------------ ------------ ------------ ------------ ------------
32,799,020 50,892,094 56,417,369 46,566,501 44,306,140
------------ ------------ ------------ ------------ ------------
Cost of Sales
Equipment 14,634,965 31,030,909 38,893,267 31,230,050 25,844,701
Services 12,658,163 11,889,348 10,084,170 9,687,659 9,882,921
------------ ------------ ------------ ------------ ------------
27,293,128 42,920,257 48,977,437 40,917,709 35,727,622
------------ ------------ ------------ ------------ ------------
Gross Profit
Equipment 1,307,232 2,227,919 3,244,055 2,273,184 2,386,839
Services 4,198,660 5,743,918 4,195,877 3,375,608 6,191,679
------------ ------------ ------------ ------------ ------------
5,505,892 7,971,837 7,439,932 5,648,792 8,578,518
------------ ------------ ------------ ------------ ------------
Selling, General & Administrative 6,776,975 6,986,974 6,800,202 5,980,830 7,073,487
[Loss] Income before Income Tax Expense (1,212,629) 1,055,948 897,012 26,270 1,836,052
Net Income (1,212,629) 670,497 563,012 8,270 1,172,462
(Loss) Income Per Common Share - Basic (0.25) 0.14 0.12 -- 0.23
Income (Loss) Per Common Share - Diluted (0.25) 0.14 0.12 -- 0.23
Weighted average shares outstanding - Basic 4,774,804 4,774,804 4,815,872 4,903,804 5,183,141
Weighted average shares outstanding - Diluted 4,774,804 4,927,225 4,884,853 4,903,804 5,183,141
BALANCE SHEET DATA:
Working Capital 12,133,774 13,156,891 12,540,263 11,886,844 11,887,050
Total Assets 13,963,305 15,514,596 17,152,151 17,450,367 17,118,880
Long-Term Obligations -- -- -- -- -
Shareholders Equity 12,734,865 13,947,494 13,276,997 12,813,126 13,449,272
7
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, 2003 were $32,799,020 as
compared with $50,892,094 for the fiscal year ended June 30, 2002, and
$56,417,369 for the fiscal year ended June 30, 2001. Revenues decreased in
fiscal 2003 and 2002 as compared to the prior fiscal year as a result of
decreased hardware sales. The decrease in revenues for 2003 was the result of
several factors including the general economic slowdown effecting the IT
industry as a whole, the delay in service projects by many clients due to their
internal budgetary constraints, and to a reduction in purchases by a major
customer. In addition, for the years discussed, 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. Service
revenues increased as a percentage of revenues in fiscal 2003 and increased in
both actual figures and as a percentage of revenues in fiscal 2002, as a result
of increased demand for the Corporation's technical services (technical support,
repair and maintenance, network integration and training).
For fiscal 2003, the Corporation reported a net loss of $1,212,629 as
compared with net income of $670,497 for fiscal 2002, and net income of $563,012
for fiscal 2001. The loss in fiscal 2003 was attributable to the reduction in
revenues, as described above. Management believes the Corporation will return to
profitability in early fiscal 2004. The increase in income for fiscal 2002 was
due to an increase in revenues from technical services. 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, as well as the increased 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 approaches 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
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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 2003 and 2002, selling, general and administrative
expenses increased to 21% and 14% of revenues, respectively, as a result of the
decrease in revenues. This compares to 12% of revenue for fiscal 2001.
Management continues its efforts to control expenses, despite increasing
personnel related costs.
Interest income decreased in fiscal 2003 and 2002, respectively, as
compared to prior years, 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 2003 and 2002, as compared to the prior
year, as a result of decreased hardware sales and due to the Corporation's
arrangement with certain manufacturers to ship to and bill customers directly.
Accounts receivable decreased in fiscal 2003 as compared to the prior
year in conjunction with the decreased revenues. Accounts receivable remained
relatively constant from fiscal 2002 to fiscal 2001. Accounts payable similarly
decreased in fiscal 2003 as compared to fiscal 2002, but remained relatively the
same in fiscal 2002 as compared to 2001. Floor planning payables decreased in
2003 and 2002, respectively, in direct correlation to the decrease in inventory
as compared to prior years.
For the fiscal year ended June 30, 2003, as in the fiscal years ended
June 30, 2002 and 2001, 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
-9-
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 pending 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.
-10-
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.
-11-
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) 75 Chairman of the Board and Treasurer
Steven J. Wilk (a) 46 President and Director
Jay A. Smolyn 47 Vice President, Operations and Director
Vincent Cusumano (b)(d) 68 Secretary and Director
Earle Kunzig (b)(e) 64 Director
Raymond J. Rekuc (c) 57 Director
Susan Wilk (a) Director
- ----------
(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
-12-
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 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 2003, 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,
2003, 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, 2003,
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
Long-Term
Annual Compensation 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 2003 $300,000 $0 $0 0 0 $0 0
President and Chief 2002 $300,000 $40,678 $0 0 0 $0 0
Executive Officer 2001 $266,167 $32,880 $0 100,000 0 $0 0
Jay Smolyn 2003 $165,000 $0 $0 0 0 $0 0
Vice President 2002 $165,000 $31,475 $0 0 0 $0 0
Operations 2001 $163,166 $25,645 $0 50,000 0 $0
OPTION GRANTS IN LAST FISCAL YEAR
(individual grants)
No options were granted during fiscal 2003.
-13-
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the Named
Executive Officer concerning the exercise of options during fiscal 2003 and the
number and value of unexercised options held as of the end of fiscal 2003.
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options Options at Fiscal
Number of at Fiscal Year End; Year End ($);
Name of Executive Shares Acquired (Exercisable/ (Exercisable/
Officer On Exercise Value Realized ($) Unexercisable) Unexercisable)
------- ----------- ------------------ -------------- --------------
Steven J. Wilk 0 0 100,000/0 $31,000/0
Jay A. Smolyn 0 0 50,000/0 $15,500/0
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 2003, the Company paid $5,000 in directors' fees to each
of its three outside directors.
-14-
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"), 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, 2003, 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) 487,000 shs (c) 8%
John J. Wilk (b) 225,500 shs (d) 4%
Jay A. Smolyn (b) 133,000 shs (e) 2%
Susan Wilk (b) 108,200 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 890,700 shs 16%
as a group (seven persons)
- ----------
(a) Based on 4,774,804 shares outstanding, which does not include 275,000
shares issuable upon exercise of options.
(b) The address of all directors is 45 Columbia Road, Branchburg, New Jersey
08876.
(c) Includes 100,000 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.
(d) 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.
(e) Includes 50,000 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.
(f) Includes 30,000 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.
-15-
(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 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
None.
-16-
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, 2003 and June 30, 2002.
o Consolidated Statements of Operations for the Years Ended June 30, 2003,
2002 and 2001.
o Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 2003, 2002 and 2001.
o Consolidated Statements of Cash Flows for the Years Ended June 30, 2003,
2002 and 2001.
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
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 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 Form 10-K for year ended June 30,
Corporation 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 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
-17-
March 6, 1990 between TransNet and 8-K for March 6, 1990
Selling Stockholders of Round Valley Computer
Center, Inc.
31.1 Certification pursuant to Section 302 Attached herewith
31.2 Certification pursuant to Section 302 Attached herewith
32 Certifications pursuant to Section 906 Furnished herewith
(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, 2003.
(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
-18-
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 26, 2003 BY /s/ STEVEN J. WILK
-------------------------------------
Steven J. Wilk
Chief Executive Officer
Date: September 26, 2003 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 26, 2003
- --------------------------------------
Steven J. Wilk, Director
BY /s/ JOHN J. WILK Date: September 26, 2003
- --------------------------------------
John J. Wilk, Director
BY /s/ JAY A. SMOLYN Date: September 26, 2003
- --------------------------------------
Jay A. Smolyn, Director
BY /s/ RAYMOND J. REKUC Date: September 26, 2003
- --------------------------------------
Raymond J. Rekuc, Director
BY /s/ VINCENT CUSUMANO Date: September 26, 2003
- --------------------------------------
Vincent Cusumano, Director
BY /s/ EARLE KUNZIG Date: September 26, 2003
- --------------------------------------
Earle Kunzig, Director
BY /s/ SUSAN M. WILK Date: September 26, 2003
- --------------------------------------
Susan M. Wilk, Director
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, 2003 and 2002, 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, 2003. 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, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended June 30, 2003, in conformity with
accounting principles generally accepted in the United States of America.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 8, 2003
F-1
TRANSNET CORPORATION AND SUBSIDIARY
===================================================================================================================
CONSOLIDATED BALANCE SHEETS
===================================================================================================================
JUNE 30,
--------
2 0 0 3 2 0 0 2
------- -------
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 6,935,623 $ 7,035,649
Accounts Receivable - Net 5,669,313 7,553,927
Inventories - Net 392,774 615,646
Other Current Assets 16,572 113,725
Deferred Tax Asset 195,649 195,649
--------------- ----------------
TOTAL CURRENT ASSETS 13,209,931 15,514,596
PROPERTY AND EQUIPMENT - NET 444,969 583,490
OTHER ASSETS 247,750 238,089
--------------- ----------------
TOTAL ASSETS $ 13,902,650 $ 16,336,175
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 382,813 $ 684,823
Accrued Expenses 184,744 419,684
Income Taxes Payable 19,426 228,691
Floor Plan Payable 549,826 1,024,507
--------------- ----------------
TOTAL CURRENT LIABILITIES 1,136,809 2,357,705
--------------- ----------------
DEFERRED TAX LIABILITY 30,976 30,976
--------------- ----------------
COMMITMENTS AND CONTINGENCIES -- --
--------------- ----------------
STOCKHOLDERS' EQUITY:
Capital Stock - Common, $.01 Par Value, Authorized 15,000,000 Shares;
Issued 7,469,524 Shares at June 30, 2003 and 2002 [of which
2,694,720 are in Treasury at June 30, 2003 and 2002] 74,695 74,695
Additional Paid-in Capital 10,686,745 10,686,745
Retained Earnings 9,281,625 10,494,254
--------------- ----------------
Totals 20,043,065 21,255,694
Less: Treasury Stock - At Cost (7,308,200) (7,308,200)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 12,734,865 13,947,494
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,902,650 $ 16,336,175
=============== ================
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 3 2 0 0 2 2 0 0 1
------- ------- -------
REVENUE:
Equipment $ 15,942,197 $ 33,258,828 $ 42,137,322
Services 16,856,823 17,633,266 14,280,047
-------------- -------------- ----------------
TOTAL REVENUE 32,799,020 50,892,094 56,417,369
-------------- -------------- ----------------
COST OF REVENUE:
Equipment 14,634,965 31,030,909 38,893,267
Services 12,658,163 11,889,348 10,084,170
-------------- -------------- ----------------
TOTAL COST OF REVENUE 27,293,128 42,920,257 48,977,437
-------------- -------------- ----------------
GROSS PROFIT 5,505,892 7,971,837 7,439,932
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 6,776,975 6,986,974 6,800,202
-------------- -------------- ----------------
OPERATING [LOSS] INCOME (1,271,083) 984,863 639,730
-------------- -------------- ----------------
INTEREST INCOME:
Interest Income 58,454 64,385 234,782
Interest Income - Related Party -- 6,700 22,500
-------------- -------------- ----------------
TOTAL INTEREST INCOME 58,454 71,085 257,282
-------------- -------------- ----------------
[LOSS] INCOME BEFORE INCOME TAX EXPENSE (1,212,629) 1,055,948 897,012
INCOME TAX EXPENSE -- 385,451 334,000
-------------- -------------- ----------------
NET [LOSS] INCOME $ (1,212,629) $ 670,497 $ 563,012
============== ============== ================
BASIC AND DILUTED
NET [LOSS] INCOME PER COMMON SHARE $ (.25) $ .14 $ .12
============== ============== ================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 4,774,804 4,774,804 4,815,872
============== ============== ================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 4,774,804 4,927,225 4,884,853
============== ============== ================
See Notes to Consolidated Financial Statements.
F-3
TRANSNET CORPORATION AND SUBSIDIARY
====================================================================================================================================
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
====================================================================================================================================
COMMON STOCK TREASURY STOCK TOTAL
----------------------- PAID-IN RETAINED ---------------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
----------- ---------- -------------- ------------- ----------- --------------- ------------
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
Net [Loss] -- -- -- (1,212,629) -- -- (1,212,629)
----------- ---------- -------------- ------------- ----------- --------------- ------------
BALANCE - JUNE 30, 2003 7,469,524 $ 74,695 $ 10,686,745 $ 9,281,625 (2,694,720) $ (7,308,200) $ 12,734,865
=========== ========== ============== ============= =========== =============== =============
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 3 2 0 0 2 2 0 0 1
------- ------- -------
OPERATING ACTIVITIES:
Net [Loss] Income $ (1,212,629) $ 670,497 $ 563,012
---------------- --------------- ----------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 194,326 196,111 186,225
Loss on Sale of Equipment -- 8,795 --
Provision for Doubtful Accounts (7,000) (4,272) 40,247
Deferred Income Taxes -- 61,678 (6,000)
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 1,891,614 16,447 1,750,598
Inventories 222,872 1,271,342 (509,259)
Other Current Assets 97,153 11,633 (38,858)
Other Assets (10,661) (16,591) 119,842
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (387,142) (130,069) (1,349,574)
Other Current Liabilities (149,808) (70,743) 44,937
Income Taxes Payable (209,265) (82,288) 310,979
---------------- --------------- ----------------
Total Adjustments 1,642,089 1,262,043 549,137
---------------- --------------- ----------------
NET CASH - OPERATING ACTIVITIES 429,460 1,932,540 1,112,149
---------------- --------------- ----------------
INVESTING ACTIVITIES:
Capital Expenditures (54,805) (243,456) (134,223)
Mortgage Receivable Proceeds - Related Party -- 250,000 --
---------------- --------------- ----------------
NET CASH - INVESTING ACTIVITIES (54,805) 6,544 (134,223)
---------------- --------------- ----------------
FINANCING ACTIVITIES:
Floor Plan Payable - Net (474,681) (1,204,645) 213,867
Treasury Shares Repurchased -- -- (99,141)
---------------- --------------- ----------------
NET CASH - FINANCING ACTIVITIES (474,681) (1,204,645) 114,726
---------------- --------------- ----------------
NET [DECREASE] INCREASE IN CASH AND
CASH EQUIVALENTS (100,026) 734,439 1,092,652
CASH AND CASH EQUIVALENTS - BEGINNING
OF YEARS 7,035,649 6,301,210 5,208,558
---------------- --------------- ----------------
CASH AND CASH EQUIVALENTS - END OF YEARS $ 6,935,623 $ 7,035,649 $ 6,301,210
================ =============== ================
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 3 2 0 0 2 2 0 0 1
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ -- $ -- $ --
Income Taxes $ -- $ 340,000 $ 170,000
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 ["TransNet" or the "Company"] was incorporated in the State
of Delaware in 1969. The Company 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, IP telephony products,
computer peripherals and software. As used herein, the term "Company" 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.
The sale and service of IT 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 $100,000 and $107,000 as of June 30, 2003
and 2002, 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. Inventory has been
reduced by an allowance of $45,000 and $60,000 at June 30, 2003 and 2002,
respectively. The inventory secures borrowings under a floor plan financing
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] GOODWILL - Effective July 1, 2002, the Company evaluates the recoverability
and measures the possible impairment of its goodwill under SFAS 142, "Goodwill
and Other Intangible Assets." The impairment test is a two-step process that
begins with the estimation of the fair value of the reporting unit. The first
step screens for potential impairment and the second step measures the amount of
the impairment, if any. Management's estimate of fair value considers publicly
available information regarding the market capitalization of the Company as well
as (i) publicly available information regarding comparable publicly-traded
companies in the computer sales and service industry, (ii) the financial
projections and future prospects of the Company's business, including its growth
opportunities and likely operational improvements, and (iii) comparable sales
prices, if available. As part of the first step to assess potential impairment,
management compares the estimate of fair value for the Company to the book value
of the Company's consolidated net assets. If the book value of the consolidated
net assets is greater than the estimate of fair value, the Company would then
proceed to the second step to measure the impairment, if any. The second step
compares the implied fair value of goodwill with its carrying value.
F-7
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2
================================================================================
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
[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 11 may be potentially dilutive
in the future.
[I] CREDIT RISK - Financial instruments that potentially subject the Company to
concentrations of credit risk are cash and cash equivalents and accounts
receivable arising from its normal business activities. 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 places its cash with high credit financial institutions. The amount on
deposit in any one institution that exceeds federally insured limits is subject
to credit risks. As of June 30, 2003, the Company had approximately $447,000
which is subject to such risk. 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, Hewlett Packard, IBM, Intel, NEC, Nortel, Novell
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, 2003, 2002 and 2001, the Company incurred
additional advertising expense of $16,031, $9,034 and $73,113, 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 2003 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.
F-8
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3
================================================================================
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
[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.
[P] IMPAIRMENT - Certain long-term assets of the Company are reviewed quarterly
as to whether their carrying value has become impaired, pursuant to guidance
established in Statement of Financial Accounting Standards ["SFAS"] No. 144,
"Accounting for the Impairment or disposal of Long-Lived Assets." Management
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations [undiscounted and without interest
charges]. If impairment is deemed to exist, the assets will be written down to
fair value. Management also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised estimates
of useful lives.
[3] REPURCHASE AGREEMENTS
Repurchase agreements included in cash equivalents as of June 30, 2003 and 2002
consisted of:
COST FAIR VALUE
---- ----------
June 30, 2003:
Repo .60%, Due July 1, 2003 $ 1,510,171 $ 1,510,228
This security is backed by $1,480,000 of F.H.R. bonds maturing June 18, 2028
with an interest rate of 5.00%.
COST FAIR VALUE
---- ----------
June 30, 2002:
Repo .60%, Due July 1, 2002 $ 5,048,766 $ 5,048,815
This security is backed by $1,480,000 of F.H.R. bonds maturing June 18, 2028
with an interest rate of 5.00%.
[4] INVENTORIES
Inventories consist of the following at June 30, 2003 and 2002:
JUNE 30,
--------
2 0 0 3 2 0 0 2
------- -------
Product Inventory $ 239,359 399,355
Service Parts 153,415 216,291
---------------- ---------------
TOTALS $ 392,774 $ 615,646
------ ================ ===============
F-9
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4
================================================================================
[5] PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment and accumulated depreciation and amortization as of June
30, 2003 and 2002 are as follows:
JUNE 30,
--------
2 0 0 3 2 0 0 2
------- -------
Automobiles $ 253,574 $ 253,574
Office Equipment 1,816,159 1,761,354
Furniture and Fixtures 321,161 321,161
Leasehold Improvements 273,102 273,102
--------------- --------------
Totals 2,663,996 2,609,191
Less: Accumulated Depreciation
and Amortization 2,219,027 2,025,701
--------------- --------------
PROPERTY AND EQUIPMENT - NET $ 444,969 $ 583,490
---------------------------- =============== ==============
Total depreciation and amortization expense amounted to $193,326, $182,140,
$172,254 for the years ended June 30, 2003, 2002 and 2001, respectively.
[6] INTANGIBLE ASSETS
The following intangible assets and accumulated amortization as of June 30, 2003
and 2002 are included in other assets:
JUNE 30, 2003: WEIGHTED
AVERAGE NET OF
AMORTIZATION ACCUMULATED ACCUMULATED
INTANGIBLE ASSETS PERIOD YEARS COST AMORTIZATION AMORTIZATION
- ----------------- ------------ ---- ------------ ------------
Licenses 20 $ 20,000 $ 14,833 $ 5,167
Goodwill -- 259,422 159,976 99,446
------------- ----------------- ----------------
TOTALS 20 $ 279,422 $ 174,809 $ 104,613
------ ============= ================= ================
JUNE 30, 2002: WEIGHTED
AVERAGE NET OF
AMORTIZATION ACCUMULATED ACCUMULATED
INTANGIBLE ASSETS PERIOD YEARS COST AMORTIZATION AMORTIZATION
- ----------------- ------------ ---- ------------ ------------
Licenses 20 $ 20,000 $ 13,833 $ 6,167
Goodwill -- 259,422 159,976 99,446
------------- ----------------- ----------------
TOTALS 20 $ 279,422 $ 173,809 $ 105,613
------ ========== ================= ================
F-10
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5
================================================================================
[6] INTANGIBLE ASSETS [CONTINUED]
The estimated amortization expense related to intangible assets for each of the
five succeeding fiscal years and thereafter as of June 30, 2003 is a follows:
YEAR ENDED
JUNE 30,
- ----------
2004 $ 1,000
2005 1,000
2006 1,000
2007 1,000
2008 1,000
Thereafter 167
-----------
TOTAL $ 5,167
----- ===========
For the years ended June 30, 2003, 2002 and 2001, amortization expense of
intangible assets were $1,000, $13,971 and $13,971, respectively.
[7] COMMITMENTS AND RELATED PARTY TRANSACTIONS
[A] LEASING AGREEMENTS - In January 2001, the Company renewed its real estate
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 real estate lease
requires the Company to pay for certain contingent expenses such as building
maintenance, insurance and real estate taxes. Total contingent lease expenses
were $133,856, $121,918 and $77,008 for the years ended June 30, 2003, 2002 and
2001, respectively.
The Company maintains two operating leases for several pieces of office
equipment that expire in 2005 and 2007. Office equipment lease expense,
including contingent usage charges, was $12,977, $11,740 and $14,697 for the
years ended June 30, 2003, 2002 and 2001, respectively.
The fixed annual base rent [exclusive of an annual cost of living adjustment and
contingent usage charges] of the office, warehouse and equipment leases for the
next five (5) years are as follows:
REAL OFFICE
ESTATE EQUIPMENT
------ ---------
2004 165,718 10,860
2005 165,718 10,860
2006 110,472 7,010
2007 -- 5,550
2008 -- --
-------------- --------------
TOTALS $ 441,908 $ 34,280
------ ============== ==============
Total rent expense was $178,691, $179,482 and $200,352 for the years ended June
30, 2003, 2002 and 2001, respectively.
F-11
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6
================================================================================
[7] COMMITMENTS AND RELATED PARTY TRANSACTIONS [CONTINUED]
[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 $-0-, $72,000 and $50,000 for the years ended June
30, 2003, 2002 and 2001, 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, 2003, the Company had a
maximum credit line of $4,500,000, of which $3,950,174 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, 2003 and 2002 was
$549,826 and $1,024,507, 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 2003, 2002 and 2001. Accordingly, no interest
expense has been incurred for the years ended June 30, 2003, 2002 and 2001. The
prime rate and the weighted average interest rate were approximately 4.00%,
4.75% and 9.50%, respectively at June 30, 2003, 2002 and 2001.
[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,
-------------------------------------------------
2 0 0 3 2 0 0 2 2 0 0 1
------- ------- -------
Federal:
Current $ -- $ 257,636 $ 271,000
Deferred -- 52,635 (4,900)
-------------- -------------- ----------------
Federal Provision -- 310,271 266,100
-------------- -------------- ----------------
State:
Current -- 65,891 69,000
Deferred -- 9,289 (1,100)
-------------- -------------- ----------------
State Provision -- 75,180 67,900
-------------- -------------- ----------------
INCOME TAX EXPENSE $ -- $ 385,451 $ 334,000
------------------ ============== ============== ================
Deferred income taxes arise from temporary differences including depreciation,
inventory reserves, allowance for doubtful accounts and expense accruals.
F-12
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7
================================================================================
[8] INCOME TAXES [CONTINUED]
The deferred tax asset and liability in the accompanying consolidated balance
sheets include the following components:
JUNE 30,
2 0 0 3 2 0 0 2
------- -------
Net Operating Carry Forwards $ 551,638 $ --
Accounts Receivable Allowance 40,000 64,000
Inventory Allowance 18,000 24,000
Accrued Expenses 10,500 58,900
Other Temporary Differences 54,717 48,749
--------------- ---------------
Deferred Tax Assets 674,855 195,649
Valuation Allowance (479,206) --
Deferred Tax Liabilities -
Depreciation and Amortization 30,976 30,976
--------------- ---------------
NET DEFERRED TAX ASSET $ 164,673 $ 164,673
---------------------- =============== ===============
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 3 2 0 0 2 2 0 0 1
------- ------- -------
U.S. Statutory Rate Applied to Pretax Income $ -- $ 334,200 $ 283,900
State Taxes -- 56,000 47,800
Other Permanent Differences -- (4,749) 2,300
-------------- -------------- ----------------
INCOME TAX EXPENSE $ -- $ 385,451 $ 334,000
------------------ ============== ============== ================
[9] EARNINGS PER SHARE
The following table reconciles the denominator of the diluted earnings per share
computation as shown in the consolidated statement of operations.
Y E A R S E N D E D
J U N E 3 0,
------------------------------------------------
2 0 0 3 2 0 0 2 2 0 0 1
------- ------- -------
Diluted EPS Calculation:
Basic Common Shares Outstanding 4,774,804 4,774,804 4,815,872
Effect of Common Stock Options -- 152,421 68,981
------------- -------------- ----------------
DILUTED COMMON AND COMMON EQUIVALENT SHARES 4,774,804 4,927,225 4,884,853
------------------------------------------- ============= ============== ================
Diluted EPS presented for the year ended June 30, 2003 does not include the
effect of common stock options because the result would be anti-dilutive.
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.
F-13
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8
================================================================================
[9] EARNINGS PER SHARE [CONTINUED]
As of July 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," earlier than required. In accordance with the provisions of
SFAS No. 142, the Company discontinued the periodic amortization of goodwill,
but is now required to annually review the goodwill for potential impairment.
Had SFAS No. 142 been effective in the comparative prior periods, the following
adjusted results of operations would have been achieved.
YEARS ENDED JUNE 30,
--------------------------------------------------
2 0 0 3 2 0 0 2 2 0 0 1
------- ------- -------
Net Income:
Reported Net [Loss] Income $ (1,212,629) $ 670,497 $ 563,012
Add Back: Goodwill Amortization -- 12,971 12,971
--------------- -------------- -----------------
Adjusted Net [Loss] Income $ (1,212,629) $ 683,468 $ 575,983
=============== ============== =================
Basic Earnings Per Share:
Reported Net [Loss] Income $ (.25) $ .14 $ .12
Goodwill Amortization -- -- --
---------------- ------------- ----------------
Adjusted Net [Loss] Income $ (.25) $ .14 $ .12
================ ============= ================
Dilute Earnings Per Share:
Reported Net [Loss] Income $ (.25) $ .14 $ .12
Goodwill Amortization -- -- --
---------------- ------------- ----------------
ADJUSTMENT NET [LOSS] INCOME $ (.25) $ .14 $ .12
---------------------------- ================ ============= ================
[10] 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, 2003, 2002 and 2001 was $46,140, $47,856 and $44,363, respectively.
[11] 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. No options were outstanding under the Stockholders Rights Plan
as of June 30, 2003.
F-14
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9
================================================================================
[11] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN [CONTINUED]
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. In January 2001, the Company granted 362,000 stock
options under the Plan to various employees. 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. No options were issued under the Plan during the years ended June 30,
2003 and 2002.
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, 2001 -- $ -- -- $ --
Granted 437,000 1.01 246,750 1.09
Exercised -- -- --
Forfeited/Canceled -- -- -- --
------------- -------------- ------------- ------------
Outstanding - June 30, 2002 437,000 1.01 246,750 1.09
Granted -- -- -- --
Exercised -- -- --
Forfeited/Canceled -- -- -- --
------------- -------------- ------------- ------------
Outstanding - June 30, 2003 437,000 1.01 246,750 1.09
Granted -- -- -- --
Exercised -- -- --
Forfeited/Canceled (8,500) .88 (8,500) .88
------------- -------------- ------------- ------------
OUTSTANDING - JUNE 30, 2003 428,500 $ 1.01 238,250 $ 1.09
--------------------------- ============= ============== ============= ============
F-15
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #10
================================================================================
[11] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN [CONTINUED]
The following table summarizes information about stock options outstanding at
June 30, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF OPTIONS LIFE PRICE OF OPTIONS PRICE
--------------- ---------- ---- ----- ---------- -----
$.88 353,500 2.6 $.88 163,250 $.88
$1.59 75,000 2.6 $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 3 2 0 0 2 2 0 0 1
------- ------- -------
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
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 3 2 0 0 2 2 0 0 1
------- ------- -------
Net [Loss] Income:
As Reported $ (1,212,629) $ 670,497 $ 563,012
Compensation Expense for Stock Options -- -- (189,267)
---------------- --------------- ----------------
Pro Forma Net [Loss] Income $ (1,212,629) $ 670,497 $ 373,745
================ =============== ================
Basic [Loss] Earnings Per Share as Reported $ (.25) $ .14 $ .12
Pro Forma Basic [Loss] Earnings Per Share $ (.25) $ .14 $ .08
Diluted [Loss] Earnings Per Share as Reported $ (.25) $ .14 $ .12
Pro Forma Diluted [Loss] Earnings Per Share $ (.25) $ .14 $ .08
F-16
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11
================================================================================
[12] 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.
[13] SIGNIFICANT CUSTOMERS
There were three significant customers who on an individual basis accounted for
more than 10% of total revenues during fiscal 2003, 2002 and 2001 as follows:
YEARS ENDED
JUNE 30,
------------------------------------------------------
CUSTOMER 2 0 0 3 2 0 0 2 2 0 0 1
- -------- ------- ------- -------
A $ -- $ -- $ 23,000,000
B 7,500,000 6,500,000 --
C -- 16,000,000 --
----------------- --------------- ---------------
$ 7,500,000 $ 22,500,000 $ 23,000,000
================= =============== ===============
There were five significant customers who on an individual basis accounted for
more than 10% of accounts receivable at June 30, 2003 and 2002 as follows:
JUNE 30,
-----------------------------------
CUSTOMER 2 0 0 3 2 0 0 2
- -------- ------- -------
A $ -- $ 600,000
B 1,415,000 1,350,000
C 515,000 900,000
D -- 750,000
E 545,000 --
----------------- ---------------
$ 2,475,000 $ 3,600,000
================= ===============
F-17
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12
================================================================================
[14] BUYING AGREEMENT
During the year ended June 30, 2003, the Company purchased approximately
$6,250,000 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.
[15] 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.
[16] NEW AUTHORITATIVE PRONOUNCEMENTS
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.
In December 2002, FASB Statement No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure" was issued as an amendment of FASB
Statement No. 123. Provisions of Statement No. 148 provide for alternate methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition Statement No. 148
amends the disclosure requirements of Statement No. 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reporting results. Statement No. 148 is effective for entities with a
fiscal year ending after December 15, 2002. Certain disclosure requirement under
Statement No. 148 are effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149. "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities un
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities.: SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003 and ford hedging relationships designated after June 30,
2003.
The Company expects that the adoption of these standards will not have a
significant impact on its financial statements.
F-18
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13
================================================================================
[16] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED]
In May 2003, the Financial Accounting Standards Board (FASB) has issued
Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. The Statement improves the
accounting for certain financial instruments that under previous guidance,
issuers could account for as equity. The new Statement requires that those
instruments be classified as liabilities in statements of financial position.
Statement 150 affects the issuer's accounting for three types of freestanding
financial instruments. One type is mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets. A
second type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are
liabilities under this Statement is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers'
shares. Most of the guidance in Statement 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003.
[17] SELECTED QUARTERLY FINANCIAL DATA [UNAUDITED]
THREE MONTHS ENDED
-------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, FISCAL YEAR
2 0 0 2 2 0 0 2 2 0 0 3 2 0 0 3 2 0 0 3
------- ------- ------- ------- -------
Net Revenues $ 9,848,432 $ 7,617,621 $ 7,596,887 $ 7,736,080 $ 32,799,020
Gross Profit $ 1,794,509 $ 1,409,232 $ 1,261,068 $ 1,041,083 $ 5,505,892
Net Income [Loss] $ 37,909 $ (190,898) $ (450,029) $ (609,611) $ (1,212,629)
Net Income [Loss] Per
Common Share:
Basic and Diluted $ .01 $ (.04) $ (.09) $ (.13) $ (.25)
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 and Diluted $ .05 $ .04 $ .03 $ .02 $ .14
F-19
EXHIBIT INDEX
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
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 Form 10-K for year ended June 30,
Corporation 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 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.
31.1 Certification pursuant to Section 302 Attached herewith
31.2 Certification pursuant to Section 302 Attached herewith
32 Certifications pursuant to Section 906 Furnished herewith