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, 2004
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from to
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Commission File Number 0-8693
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TransNet Corporation
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(Exact name of registrant as specified in its charter)
Delaware 22-1892295
- ------------------------------- -------------------------------
(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 $6,238,275 on September 22,
2004 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, 2004 was 4,805,804 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
("IT") products, technologies, solutions and services for its customers by
combining a wide array of 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 51% and 49%
of sales for fiscal 2004 and 2003, 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-Mitsubishi Electronic Display of America, 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),
2
and a Certified Education Partner (for higher education), IBM, Lexmark
International, Inc., Microsoft as a Microsoft Certified Solutions Partner, NEC,
Novell as a Novell Platinum Partner, Packeteer, Safari, Smart Technologies,
Symantec, Toshiba, Websense, and 3COM. The Corporation also offers a variety of
products manufactured by other companies including 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.
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 49% of revenues in fiscal 2004, and
51% of revenues in fiscal 2003. 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 (Premier Partner), Citrix, Dell Inc.,
Hewlett Packard (as a Gold Partner), IBM, Lexmark, Microsoft (as a Certified
Solution Partner), Novell (Platinum Partner), 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
3
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.
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 2004, 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
4
the Corporation purchases direct. Management anticipates that Ingram Micro, Inc.
will be a major supplier during fiscal 2005.
CUSTOMERS: The majority of the Corporation's corporate customers are
commercial users located in the New Jersey - New York City metropolitan area.
During fiscal 2004, one customer, Schering Plough, accounted for
approximately 22% of revenue. During fiscal 2003, this customer, accounted for
approximately 23% of the Corporation's revenues. The loss of this customer 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 2004.
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 that 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 are numerous, ranging from some of the world's largest corporations,
possessing substantially greater financial resources and substantially larger
staffs, facilities and equipment, including several computer manufacturers who
have begun to deal directly with the end-users. Competitors also include
relatively small and highly specialized firms. 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.
TransNet competes on the basis of technology, performance, price, quality,
reliability, brand, distribution, range of products and services, account
relationships, customer service and support. 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
5
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, 2004, the Corporation employed 192
full-time employees and 11 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 annual rental of $165,719, expires in February
2011. The building is leased from East Coast Property Management, LLC, a related
party. See Item 13. Certain Relationships and Related Transactions.
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 that it
regards as material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
On May 20, 2004, the Corporation held its annual meeting of shareholders
for the purpose of considering and acting upon the election directors and
approval of a proposed amendment to the Corporation's Certificate of
Incorporation to provide for a classified board of directors. At the meeting,
the election of all nominated directors was approved. The proposed amendment to
the Certificate of Incorporation, which provides for classification of the board
into three classes with terms of one, two, and three years, respectively, was
approved.
6
Election of Directors:
Name Shares Voted
---- ------------
For Authority Withheld
--- ------------------
John J. Wilk 3,263,573 845,430
Steven J. Wilk 3,585,523 523,480
Jay A. Smolyn 3,623,348 485,655
Vincent Cusumano 3,629,748 479,255
Earle Kunzig 3,629,748 479,255
Raymond J. Rekuc 3,629,748 479,255
Susan M. Wilk 3,264,623 844,380
Amendment to the Certificate of Incorporation:
For Against Abstain Not Voted
- --- ------- ------- ---------
1,196,675 643,678 167,700 2,100,950
7
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 reported by the National Association of Securities Dealers.
Calendar Year Closing Sales Prices
- ------------- --------------------
High Low
---- ---
2002
- ----
Third Quarter $1.17 $1.02
Fourth Quarter 1.15 .97
2003
- ----
First Quarter $1.25 $1.04
Second Quarter 1.25 1.06
Third Quarter 1.75 1.14844
Fourth Quarter 1.62 1.42
2004
- ----
First Quarter $1.88 $1.58
Second Quarter 1.90 1.51
As of September 15, 2004, the number of holders of record of TransNet's
common stock was 2,675. 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 declared a special dividend of $0.07 per share on April 28, 2004,
payable to shareholders on May 14, 2004. The dividend was paid on June 1, 2004.
This was the first dividend paid by the Corporation. The Board of Directors may
consider future dividends, but no assurance can be given that additional
dividends will be issued.
8
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with, and is qualified in its entirety by, the Company's
consolidated financial statements, related notes and other financial information
included elsewhere in this Annual Report on Form 10-K.
Year Ended June 30,
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2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
STATEMENT OF INCOME DATA
Net Sales
Equipment $ 15,636,812 $ 15,942,197 $ 33,258,828 $ 42,137,322 $ 33,503,234
Services 14,962,852 16,856,823 17,633,266 14,280,047 13,063,267
------------ ------------ ------------ ------------ ------------
30,599,664 32,799,020 50,892,094 56,417,369 46,566,501
------------ ------------ ------------ ------------ ------------
Cost of Sales
Equipment 14,112,956 14,634,965 31,030,909 38,893,267 31,230,050
Services 11,728,379 12,658,163 11,889,348 10,084,170 9,687,659
------------ ------------ ------------ ------------ ------------
25,841,335 27,293,128 42,920,257 48,977,437 40,917,709
------------ ------------ ------------ ------------ ------------
Gross Profit
Equipment 1,523,856 1,307,232 2,227,919 3,244,055 2,273,184
Services 3,234,473 4,198,660 5,743,918 4,195,877 3,375,608
------------ ------------ ------------ ------------ ------------
4,758,329 5,505,892 7,971,837 7,439,932 5,648,792
------------ ------------ ------------ ------------ ------------
Selling, General & Administrative 5,957,851 6,776,975 6,986,974 6,800,202 5,980,830
Income before Income Tax Expense (1,129,549) (1,212,629) 1,055,948 897,012 26,270
Net Income $ -- $ -- $ 670,497 $ 563,012 $ 8,270
Income (Loss) Per Common Share - Basic (0.24) (0.25) 0.14 0.12 --
Income (Loss) Per Common Share - Diluted (0.24) (0.25) 0.14 0.12 --
Weighted average shares outstanding - Basic 4,779,973 4,774,804 4,774,804 4,815,872 4,903,804
Weighted average shares outstanding - Diluted 4,779,973 4,774,804 4,927,225 4,884,853 4,903,804
9
Year Ended June 30,
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2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Working Capital 10,657,957 12,073,122 13,156,891 12,540,263 11,886,844
Total Assets 12,963,609 13,902,650 15,514,596 17,152,151 17,450,367
Long-Term Obligations -- -- -- -- --
Shareholders Equity 11,296,536 12,734,865 13,947,494 13,276,997 12,813,126
10
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, 2004 were $30,599,64 as
compared with $32,799,020 for the fiscal year ended June 30, 2003, and
$50,892,094 for the fiscal year ended June 30, 2002. Revenues decreased in
fiscal 2004 and 2003 as compared to 2002 as a result of decreased hardware
sales. The decrease in revenues in both fiscal 2004 and 2003 was the result of
several factors including the general economic slowdown and cautious IT spending
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. Service revenues for 2004 decreased as a percentage of revenues due
to the general slowdown in IT spending, and increased as a percentage of
revenues in fiscal 2003 as a result of increased demand for the Corporation's
technical services (technical support, repair and maintenance, network
integration and training).
For fiscal 2004, the Corporation reported a net loss of $1,129,549 as
compared with a net loss of $1,212,629 for fiscal 2003, and net income of
$670,497 for fiscal 2002. The loss in fiscal 2004,as well as in fiscal 2003, was
attributable to the continued reduction in revenues, as described above. 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, in addition to the challenging economic
environment, 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.
-11-
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 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 2004 and 2003 selling, general and administrative expenses
increased to 19% and 21% of revenues, respectively, as a result of the decrease
in revenues. This compares to 14% of revenue for fiscal 2002. Management
continues its efforts to control expenses, despite increasing personnel related
costs, such as health benefits.
Interest income increased in fiscal 2004 as compared to fiscal 2003 due to
larger amounts invested, but decreased in fiscal 2003 as compared to the prior
year 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 increased in fiscal 2004 as compared to fiscal 2003 due to
open orders at the close of the fiscal year, but decreased for 2003 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 for fiscal 2004 and 2003 as compared to the
prior year as a result of a reduction in revenues. Accounts receivable were
relatively constant from 2003 to 2002. Accounts payable remained relatively
constant from fiscal 2004 to fiscal 2003, but decreased in 2003 as compared to
the prior year due to decreases in revenues. Floor planning payables increased
in 2004 due to the open orders at year end, but decreased in 2003 in direct
correlation to the decrease in inventory as compared to prior years.
For the fiscal year ended June 30, 2004, as in the fiscal years ended June
30, 2003 and 2002, the internal capital sources of the Corporation were
sufficient to enable the Corporation to meet its obligations.
-12-
IMPACT OF INFLATION
The effects of inflation on our operations were not significant during the
periods presented.
CONTRACTUAL OBLIGATIONS
Contractual Less than 1-3 3-5 More than
Obligations Total One year Years Years 5 Years
- --------------------- ---------- --------- -------- -------- ---------
Real Estate Lease $1,204,224 -- $523,672 $371,210 $309,342
Office Equipment $23,420 -- $23,420 -- --
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Corporation's financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States. The
methods, estimates, and judgments used in applying these most critical
accounting policies have a significant impact on the results reported in the our
financial statements. The Securities and Exchange Commission has defined
critical accounting policies as policies that involve critical accounting
estimates that require (a) management to make assumptions that are highly
uncertain at the time the estimate is made and (b) different estimates that
could have been reasonably used for the current period, or changes in the
estimates that are reasonably likely to occur from period to period, which would
have a material impact on the presentation of our financial condition, changes
in financial condition or in result of operations. Based on this definition, the
most critical policies include: revenue recognition, allowance for doubtful
accounts, and valuation of deferred tax assets.
REVENUE RECOGNITION
TransNet recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 104. Revenue from sales of hardware is recognized when the rights
and risks of ownership have passed to the customer, which is upon shipment or
receipt by the customer, depending on the terms of the sales contract. Revenue
from services is recognized upon performance and acceptance after consideration
of all the terms and conditions of the customer contract. Service contracts
generally do not extend over one year, and are billed periodically as services
are performed. Shipping and handling costs are included in the cost of sales.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at their outstanding unpaid principal
balances reduced by an allowance for doubtful accounts, based on certain
percentages of aged receivables. We estimate doubtful accounts based on
historical bad debts, factors related to specific customers' ability to pay and
current economic trends.
VALUATION OF DEFERRED TAX ASSETS
At June 30, 2004, we have a valuation allowance of approximately $882,000
primarily to reduce our net operating loss carryforwards of $2,430,000 to an
amount that will more likely than not be realized. These net operating loss
carryforwards have varying carryforward periods and restrictions on usage. The
estimation of future taxable income and our resulting ability to utilize
-13-
net operating loss and tax credit carryforwards can significantly change based
on future events, including our determinations as to the feasibility of certain
tax planning strategies. Thus, recorded valuation allowances may be subject to
material future changes.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
-14-
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.
-15-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Corporation are as follows:
Name Position
---- --------
John J. Wilk Chairman of the Board and Treasurer
Steven J. Wilk President and Director
Jay A. Smolyn Vice President, Operations and Director
Vincent Cusumano (a)(c) Director
Earle Kunzig (a)(d) Director
Raymond J. Rekuc (b) Director
Susan Wilk Secretary and Director
- ----------
(a) Member of the Audit Committee
(b) Chairman of the Audit Committee.
(c) Member of the Compensation Committee.
(d) Chairman of the Compensation Committee.
The Board of Directors has established an audit committee and a
compensation committee. Additional information concerning each of the committees
and the directors serving such committees follows.
The audit committee is responsible for review of the Company's auditing,
accounting, financial reporting and internal control functions and for the
selection, approval and recommendation of independent accountants to the Board
of Directors. In addition, the audit committee is expected to monitor the
quality of the Company's accounting principles and financial reporting as well
as the independence of, and the non-audit services provided by, the Company's
independent accountants. The Board of Directors has adopted a written charter
for the audit committee. The audit committee is comprised of Messrs. Rekuc
(Chairman), Cusumano and Kunzig, all of whom are independent directors in
accordance with the definition of "independent director" established by the
corporate governance rules of The Nasdaq National Market. (Although the
Company's Common Stock is not quoted on the Nasdaq National Market, the Company
has used the Nasdaq National Market's independence criteria in making this
judgment in accordance with applicable SEC rules.) The Board has determined that
Mr. Rekuc as its audit committee financial expert.
The compensation committee reviews, evaluates and advises the Board of
Directors in matters relating to the Company's compensation of and other
employment benefits for executive officers. The compensation committee is
comprised of Messrs. Kunzig (Chairman) and Mr. Cusumano.
The Corporation does not have an Executive Committee. As a result of the
approval of the classification of the board, the term of office of the directors
is as follows: John J. Wilk and Vincent Cusumano, each of whom will serve until
the next meeting of stockholders; Earle Kunzig and Jay Smolyn, each of whom will
serve for a two-year term; and Steven J. Wilk, Raymond J. Rekuc and Susan M.
Wilk, each of whom will serve for a three-year term.
Set forth below is biographical information regarding directors and
executive officers of the Company. Unless otherwise noted, each director has
held the indicated position for at least five years.
-16-
JOHN J. WILK*, 76, was the President and Chief Executive Officer of
TransNet since its inception in 1969 until May 1986, when he was elected as
Chairman of the Board of Directors.
STEVEN J. WILK*, 47, has been the President and Chief Executive Officer of
TransNet since May 1986. He was elected as a director of TransNet in April 1989.
JAY A. SMOLYN, 48, has been employed at TransNet since 1976 and in April
1985 became Vice President, Operations. He was elected as a director of TransNet
in March 1990.
VINCENT CUSUMANO, 68, has served as a director of TransNet since 1977. He
is the President and Chief Executive Officer of Cusumano Perma-Rail Corporation
of Roselle Park, New Jersey, distributors and installers of exterior iron
railings.
EARLE KUNZIG, 65, has served as a director of TransNet director since
1976. He 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.
RAYMOND J. REKUC, 58, has served as a director of TransNet since 1983. He
is the principal of Raymond J. Rekuc, Certified Public Accountant, an accounting
firm located in Washington Township, New Jersey. Mr. Rekuc is a member of the
American Institute of Certified Public Accountants and the New Jersey Society of
Certified Public Accountants.
SUSAN M. WILK* joined TransNet in November 1987 as Director of
Administration, and was named Legal Counsel in 1994. She was elected a director
of TransNet in March 1990. Prior to joining TransNet, Ms. Wilk was an attorney
with the U.S. Securities and Exchange Commission and the Federal Home Loan Bank
Board.
* John J. Wilk, Chairman of the Board, is the father of Steven J. Wilk, a
director and the President and Chief Executive Officer of the Company, and Susan
M, Wilk, a director and Legal Counsel of the Company.
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 2004, its officers, directors and
beneficial owners of more than 10% of its equity timely complied with all
applicable Section 16(a) filing requirements.
CODE OF ETHICS
The Corporation adopted a Code of Ethics that applies to the Corporation's
executive offers, chief financial officer, and controller, as well as all its
employees. The Code of Ethics is attached as an exhibit to this Form 10-K. A
copy of the Code of Ethics is available at no cost by writing to:
-17-
TransNet Corporation, Attn: Investor Relations, 45 Columbia Road, Somerville,
New Jersey 08876.
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, 2004, 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, 2004, 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 2004 $300,000 $0 $0 0 0 $0 0
President and Chief 2003 $300,000 $0 $0 0 0 $0 0
Executive Officer 2002 $300,000 $40,678 $0 0 0 $0 0
Jay Smolyn 2004 $180,000 $0 $0 0 0 $0 0
Vice President 2003 $165,000 $0 $0 0 0 $0 0
Operations 2002 $165,000 $31,475 $0 0 0 $0 0
OPTION GRANTS IN LAST FISCAL YEAR
(individual grants)
No options were granted during fiscal 2004.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the Named
Executive Officer concerning the exercise of options during fiscal 2004 and the
number and value of unexercised options held as of the end of fiscal 2004.
Value of
Number of Securities Unexercised
Underlying In-the-Money
Unexercised Options Options at Fiscal
Number of at Fiscal Year End; Year End ($);
Name of Shares Acquired Value (Exercisable/ (Exercisable/
Executive Officer on Exercise Realized ($) Unexercisable) Unexercisable)
- ----------------- --------------- ------------ -------------------- -----------------
Steven J. Wilk 0 0 100,000/0 $97,000/0
Jay A. Smolyn 0 0 50,000/0 $48,500/0
EMPLOYMENT CONTRACTS WITH EXECUTIVE OFFICERS
TransNet has employment contracts in effect with Steven J. Wilk and Jay A.
Smolyn which expire on June 30, 2008. 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
-18-
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
Directors who are salaried employees receive no additional compensation for
services as a director or as a member of any committee of the board of
directors. Directors who are not officers or employees of the Company receive an
annual retainer of $5,000. Such directors do not receive additional fees for
their service on a committee of the board of directors. During fiscal 2004, the
Company paid an annual retainer fee of $5,000 to each of its three outside
directors.
STOCK OPTIONS
The Plan provides for the grant of both Non-qualified Stock Options and
Incentive Stock Options, as the latter is defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), 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.
-19-
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
Name of Beneficial Amount of Shares Percent of
Owner Beneficially Owned Class (a)
- ----- ------------------ ---------
Steven J. Wilk (b) 487,000 (c) 8%
John J. Wilk (b) 225,500 (d) 4%
Jay A. Smolyn (b) 133,000 (e) 2%
Susan M. Wilk (b) 108,200 (f) 2%
Vincent Cusumano (b) 15,000 (g) *
Earle Kunzig (b) 20,000 (h) *
Raymond J. Rekuc (b) 15,000 (i) *
All officers and directors 1,003,700 21%
as a group (seven persons)
- ----------
* Less than 1%.
(a) Based on 4,805,804 shares of the Company's Common Stock outstanding, plus
275,000 shares of Common Stock issuable upon exercise of outstanding
options exercisable within 60 days.
(b) The address of all officers and directors is 45 Columbia Road, Somerville,
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 March 4,
2001 under the Company'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 March 4,
2001 under the Company'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 March 4,
2001 under the Company'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 March 4,
2001 under the Corporation's 2000 Stock Option Plan. The exercise price is
$0.88 per share.
(g) Includes 15,000 shares that Mr. Cusumano is entitled to purchase upon the
exercise of incentive stock options. The options were granted on March 4,
2001 under the Company'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 March 4,
2001 under the Company'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 March 4,
2001 under the Company's 2000 Stock Option Plan. The exercise price is
$0.88 per share.
-20-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 2003, East Coast Property Management, LLC, ("East Coast"), a limited
liability corporation owned by Steven J. Wilk and Jay A. Smolyn, officers and
directors of the Corporation, purchased the property occupied by the Corporation
and assumed the "net-net" lease held by the former owner. In May 2004, a new
lease was executed by East Coast and the Corporation. The annual rental payment
to be made by the Corportion to East Coast in 2004 will be $165,719. See
Footnote 7[A] to the Consolidated Financial Statements for additional
information.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table shows the fees paid or accrued by the Company for the
audit and other services provided by Moore Stephens for fiscal 2003 and 2002.
Fees for fiscal 2004 were not yet finalized and therefore not available.
2003 2002
------- -------
AUDIT FEES $59,300 $59,075
AUDIT RELATED FEES $7,500 $2,000
TAX FEES $7,116 $9,000
ALL OTHER FEES 0 0
TOTAL $73,916 $70,075
The audit committee pre-approves all audit and permissible non-audit
services provided to the Corporation by Moore Stephens. The non-audit services
include audit-related services, tax services and other services.
-21-
PART IV
ITEM 15. 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, 2004 and June 30, 2003.
o Consolidated Statements of Operations for the Years Ended June 30,
2004, 2003 and 2002.
o Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2004, 2003 and 2002.
o Consolidated Statements of Cash Flows for the Years Ended June 30,
2004, 2003 and 2002.
o Notes to Consolidated Financial Statements
3. EXHIBITS
o 10.6 Lease between TransNet Corporation and East Coast Management,
LLC
o 14 Code of Ethics
o 31.1 Certification pursuant to Section 302
o 31.2 Certification pursuant to Section 302
o 32 Certifications pursuant to Section 906
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
Certificate Statement on Form S-1
(File No. 2-42279)
10.1 March 1, 1991 lease agreement Exhibit 10.1 to Annual Report on
between W. Realty and the Form 10-K for year ended
Corporation for premises at June 30, 1991
45 Columbia Road, Somerville
(Branchburg), New Jersey
10.2 February 1, 1996 amendment to Exhibit 10.2 to Annual Report on
Lease Agreement between W. Realty Form 10-K for year ended
and the Corporation for premises at June 30, 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
and Jay A. Smolyn June 30, 2001
-22-
10.4 Form of Rights Agreement dated Exhibit to Current Report on Form
as of February 6, 1990 between 8-K for January 25, 1990
TransNet and The Trust Company of
New Jersey, as Rights Agent
10.5 Acquisition Agreement dated Exhibit to Current Report on Form
March 6, 1990 between TransNet and 8-K for March 6, 1990
Selling Stockholders of Round Valley
Computer Center, Inc.
(b) REPORTS ON FORM 8-K
On April 28, 2004, TransNet Corporation filed a Form 8-K on Item 9 to
report that it issued a press release announcing the declaration of a
special dividend to shareholders.
On May 13, 2004 the Corporation filed Form 8-K on Item 9, to report that
it issued a press release announcing the results of the third quarter and
nine-month results for the period ended March 31, 2004.
(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
-23-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
REGISTRANT: TRANSNET CORPORATION
Date: September 27, 2004 By /s/ Steven J. Wilk
---------------------------------------
Steven J. Wilk
Chief Executive Officer
Date: September 27, 2004 By /s/ John J. Wilk
---------------------------------------
John J. Wilk
Chief Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
By /s/ Steven J. Wilk Date: September 27, 2004
- ----------------------------------------------
Steven J. Wilk, Director
By /s/ John J. Wilk Date: September 27, 2004
- ----------------------------------------------
John J. Wilk, Director
By /s/ Jay A. Smolyn Date: September 27, 2004
- ----------------------------------------------
Jay A. Smolyn, Director
By /s/ Raymond J. Rekuc Date: September 27, 2004
- ----------------------------------------------
Raymond J. Rekuc, Director
By /s/ Vincent Cusumano Date: September 27, 2004
- ----------------------------------------------
Vincent Cusumano, Director
By /s/ Earle Kunzig Date: September 27, 2004
- ----------------------------------------------
Earle Kunzig, Director
By /s/ Susan M. Wilk Date: September 27, 2004
- ----------------------------------------------
Susan M. Wilk, Director
-24-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TransNet Corporation and Subsidiary
Somerville, New Jersey
We have audited the accompanying consolidated balance sheets of TransNet
Corporation and Subsidiary as of June 30, 2004 and 2003, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board [United States]. 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, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended June 30, 2004, in conformity with U.S.
generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 4, 2004
F-1
TRANSNET CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JUNE 30,
--------
2 0 0 4 2 0 0 3
------- -------
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 7,064,644 $ 6,935,623
Accounts Receivable - Net 3,902,458 5,669,313
Inventories - Net 1,131,503 392,774
Other Current Assets -- 16,572
Deferred Tax Asset 195,649 195,649
------------ ------------
TOTAL CURRENT ASSETS 12,294,254 13,209,931
PROPERTY AND EQUIPMENT - NET 438,251 444,969
OTHER ASSETS 231,104 247,750
------------ ------------
TOTAL ASSETS $ 12,963,609 $ 13,902,650
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 364,228 $ 382,813
Accrued Expenses 210,022 184,744
Income Taxes Payable 9,826 19,426
Floor Plan Payable 1,052,021 549,826
------------ ------------
TOTAL CURRENT LIABILITIES 1,636,297 1,136,809
------------ ------------
DEFERRED TAX LIABILITY 30,976 30,976
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY:
Capital Stock - Common, $.01 Par Value, Authorized
15,000,000 Shares; Issued 7,391,074 Shares at June 30, 2004
and 7,469,524 at June 30, 2003 [of which 2,585,220 and
2,694,720 are in Treasury at June 30, 2004 and 2003] 73,910 74,695
Additional Paid-in Capital 10,559,445 10,686,745
Retained Earnings 7,816,016 9,281,625
------------ ------------
Totals 18,449,371 20,043,065
Less: Treasury Stock - At Cost (7,152,835) (7,308,200)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 11,296,536 12,734,865
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,963,609 $ 13,902,650
============ ============
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 4 2 0 0 3 2 0 0 2
------- ------- -------
REVENUE:
Equipment $15,636,812 $15,942,197 $ 33,258,828
Services 14,962,852 16,856,823 17,633,266
----------- ----------- -------------
TOTAL REVENUE 30,599,664 32,799,020 50,892,094
----------- ----------- -------------
COST OF REVENUE:
Equipment 14,112,956 14,634,965 31,030,909
Services 11,728,379 12,658,163 11,889,348
----------- ----------- -------------
TOTAL COST OF REVENUE 25,841,335 27,293,128 42,920,257
----------- ----------- -------------
GROSS PROFIT 4,758,329 5,505,892 7,971,837
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 5,957,851 6,776,975 6,986,974
----------- ----------- -------------
OPERATING [LOSS] INCOME (1,199,522) (1,271,083) 984,863
----------- ----------- -------------
INTEREST INCOME:
Interest Income 69,973 58,454 64,385
Interest Income - Related Party -- -- 6,700
----------- ----------- -------------
TOTAL INTEREST INCOME 69,973 58,454 71,085
----------- ----------- -------------
[LOSS] INCOME BEFORE INCOME TAX EXPENSE (1,129,549) (1,212,629) 1,055,948
INCOME TAX EXPENSE -- -- 385,451
----------- ----------- -------------
NET [LOSS] INCOME $(1,129,549) $(1,212,629) $ 670,497
=========== =========== =============
BASIC AND DILUTED
NET [LOSS] INCOME PER COMMON SHARE $ (.24) $ (.25) $ .14
=========== ========== =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 4,779,973 4,774,804 4,774,804
=========== =========== =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 4,779,973 4,774,804 4,927,225
=========== =========== =============
See Notes to Consolidated Financial Statements.
F-3
TRANSNET CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
TOTAL
COMMON STOCK PAID-IN RETAINED TREASURY STOCK STOCKHOLDERS'
------------ ------- -------- -------------- -------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------ ------ ------- -------- ------ ------ ------
BALANCE - JUNE 30, 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
Common Stock Options Exercised 31,000 310 26,970 -- -- -- 27,280
Cash Dividends Declared -- -- -- (336,060) -- -- (336,060)
Treasury Shares Retired (109,500) (1,095) (154,270) -- 109,500 155,365 --
Net [Loss] -- -- -- (1,129,549) -- -- (1,129,549)
------------ ------------ ------------ ------------ ----------- ------------ ------------
BALANCE - JUNE 30, 2004 7,391,024 $ 73,910 $ 10,559,445 $ 7,816,016 (2,585,220) $(7,152,835) $ 11,296,536
============ ============ ============ ============ =========== ============ ============
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 4 2 0 0 3 2 0 0 2
------- ------- -------
OPERATING ACTIVITIES:
Net [Loss] Income $ (1,129,549) $ (1,212,629) $ 670,497
------------ ------------ ------------
Adjustments to Reconcile Net [Loss] Income
to Net Cash Provided by Operating Activities:
Depreciation and Amortization 164,352 194,326 196,111
Loss on Sale of Equipment -- -- 8,795
Provision for Doubtful Accounts 5,000 (7,000) (4,272)
Deferred Income Taxes -- -- 61,678
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 1,761,855 1,891,614 16,447
Inventories (738,729) 222,872 1,271,342
Other Current Assets 16,572 97,153 11,633
Other Assets 15,646 (10,661) (16,591)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 6,693 (387,142) (130,069)
Other Current Liabilities -- (149,808) (70,743)
Income Taxes Payable (9,600) (209,265) (82,288)
------------ ------------ ------------
Total Adjustments 1,221,789 1,642,089 1,262,043
------------ ------------ ------------
NET CASH - OPERATING ACTIVITIES 92,240 429,460 1,932,540
------------ ------------ ------------
INVESTING ACTIVITIES:
Capital Expenditures (156,634) (54,805) (243,456)
Mortgage Receivable Proceeds - Related Party -- -- 250,000
------------ ------------ ------------
NET CASH - INVESTING ACTIVITIES (156,634) (54,805) 6,544
------------ ------------ ------------
FINANCING ACTIVITIES:
Floor Plan Payable - Net 502,195 (474,681) (1,204,645)
Stock Options Exercised 27,280 -- --
Dividends Paid (336,060) -- --
------------ ------------ ------------
NET CASH - FINANCING ACTIVITIES 193,415 (474,681) (1,204,645)
------------ ------------ ------------
NET [DECREASE] INCREASE IN CASH AND
CASH EQUIVALENTS 129,021 (100,026) 734,439
CASH AND CASH EQUIVALENTS - BEGINNING
OF YEARS 6,935,623 7,035,649 6,301,210
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEARS $ 7,064,644 $ 6,935,623 $ 7,035,649
============ ============ ============
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 4 2 0 0 3 2 0 0 2
------- ------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ -- $ -- $ --
Income Taxes $ -- $ -- $ 340,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During fiscal 2004, the Company retired 109,500 shares of common stock held
in treasury with a cost basis of $155,366. In addition, the Company traded-in an
automobile with no book value on a new auto purchase for $25,000.
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.
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 $105,000 and $100,000 as of June 30, 2004
and 2003, 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 $30,000 and $45,000 at June 30, 2004 and 2003,
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, 2004, the Company had approximately $502,000
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, 2004, 2003 and 2002, the Company incurred
additional advertising expense of $-0-, $16,031 and $9,034, 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 2004 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, 2004 and 2003
consisted of:
Cost Fair Value
---- ----------
June 30, 2004:
Repo .60%, Due July 1, 2004 $ 1,446,885 $ 1,449,296
This security is backed by $1,480,000 of F.H.R. bonds maturing June 18, 2028
with an interest rate of 5.00%.
Repurchase agreements included in cash equivalents as of June 30, 2004 and 2003
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%.
[4] INVENTORIES
Inventories consist of the following at June 30, 2004 and 2003:
June 30,
--------
2 0 0 4 2 0 0 3
------- -------
Product Inventory $ 1,068,813 $ 239,359
Service Parts 62,690 153,415
------------ ------------
TOTALS $ 1,131,503 $ 392,774
------ ============ ============
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, 2004 and 2003 are as follows:
June 30,
--------
2 0 0 4 2 0 0 3
------- -------
Automobiles $ 267,602 $ 253,574
Office Equipment 1,888,502 1,816,159
Furniture and Fixtures 321,161 321,161
Leasehold Improvements 273,102 273,102
------------- ------------
Totals 2,750,367 2,663,996
Less: Accumulated Depreciation and Amortization 2,312,116 2,219,027
------------- ------------
PROPERTY AND EQUIPMENT - NET $ 438,251 $ 444,969
---------------------------- ============= ============
Total depreciation and amortization expense amounted to $160,961, $193,326 and
$182,140 for the years ended June 30, 2004, 2003 and 2002, respectively.
[6] INTANGIBLE ASSETS
The following intangible assets and accumulated amortization as of June 30, 2004
and 2003 are included in other assets:
JUNE 30, 2004: WEIGHTED
AVERAGE NET OF
AMORTIZATION ACCUMULATED ACCUMULATED
INTANGIBLE ASSETS PERIOD YEARS COST AMORTIZATION AMORTIZATION
- ----------------- ------------ ---- ------------ ------------
Licenses 20 $ 20,000 $ 15,833 $ 4,167
Goodwill -- 259,422 159,976 99,446
---------- ------------ ------------
TOTALS 20 $ 279,422 $ 175,809 $ 103,613
------ ========== ============ ============
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
------ ========== ============ ============
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, 2004 is a follows:
YEAR ENDED
JUNE 30,
- ----------
2005 $ 1,000
2006 1,000
2007 1,000
2008 1,000
2009 167
Thereafter --
-----------
TOTAL $ 4,167
----- ===========
For the years ended June 30, 2004, 2003 and 2002, amortization expense of
intangible assets were $1,000, $1,000 and $13,971, respectively.
[7] COMMITMENTS AND RELATED PARTY TRANSACTIONS
[A] LEASING AGREEMENTS - In April 2004, the Company terminated its prior lease
and entered into a new leasing agreement with East Coast Property Management,
LLC, a related party, to lease its office and warehouse space through February
2011. East Coast Property Management is owned by the President and
Vice-President of the Company. Terms of this operating lease agreement were
similar to the prior lease and provide for rent payments of $165,719 per annum
for the first two years of the agreement, and $185,605 per annum for the
remaining 5 years.
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 $155,620, $133,856 and $121,918 for the years ended June 30, 2004, 2003 and
2002, 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 $13,517, $12,977 and $11,740 for the
years ended June 30, 2004, 2003 and 2002, 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:
YEAR ENDED REAL OFFICE
JUNE 30, ESTATE EQUIPMENT
-------- ------ ---------
2005 $ 165,719 $ 10,860
2006 172,348 7,010
2007 185,605 5,550
2008 185,605 --
2009 185,605 --
Thereafter 309,342 --
------------ ------------
TOTALS $ 1,204,224 $ 23,420
------ ============ ============
Total rent expense was $179,233, $178,691 and $179,482 for the years ended June
30, 2004, 2003 and 2002, 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-, $-0- and $72,000 for the years ended June 30,
2004, 2003 and 2002, respectively. In November 2003, the Company executed an
addendum to the employment agreements which extend the provisions of the
agreement through June 2008.
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, 2004, the Company had a
maximum credit line of $4,500,000, of which $3,447,979 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, 2004 and 2003 was
$1,052,021 and $549,826, 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 2004, 2003 and 2002. Accordingly, no interest
expense has been incurred for the years ended June 30, 2004, 2003 and 2002. The
prime rate and the weighted average interest rate were approximately 4.25%,
4.00% and 4.75%, respectively at June 30, 2004, 2003 and 2002.
[8] INCOME TAXES
The provision for income taxes is summarized as follows:
Years ended
June 30,
--------
2 0 0 2
-------
Federal:
Current $ 257,636
Deferred 52,635
------------
Federal Provision 310,271
------------
State:
Current 65,891
Deferred 9,289
------------
State Provision 75,180
------------
INCOME TAX EXPENSE $ 385,451
------------------ ============
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 4 2 0 0 3
------- -------
Net Operating Loss [NOL] Carry Forwards $ 972,020 $ 551,638
Accounts Receivable Allowance 42,000 40,000
Inventory Allowance 12,000 18,000
Accrued Expenses 27,876 10,500
Other Temporary Differences 23,270 54,717
------------- -------------
Deferred Tax Assets [Current] 1,077,166 674,855
Valuation Allowance (881,517) (479,206)
------------- -------------
NET DEFERRED TAX ASSET $ 195,649 $ 195,649
---------------------- ============= =============
Deferred Tax Liabilities [Non-Current]:
Depreciation and Amortization $ 30,976 $ 30,976
============= =============
The future realization of the deferred tax assets related to federal and state
NOL carryforwards is contingent upon the Company's future results of operations.
The Company performs an analysis each year to determine if future income will
more likely than not be sufficient to realize the recorded deferred tax asset.
Management has established a deferred tax valuation on a portion of the deferred
tax asset which may not be realized. The amount of the deferred tax asset
considered realizable. Could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
At June 30, 2004, the Company had approximately $2,430,000 of federal and state
net operating losses with the following fiscal year expiration dates.
YEAR ENDED
JUNE 30,
- ----------
2023 $ 1,379,000
2024 1,051,000
------------
TOTAL $ 2,430,000
----- ============
For the years ended June 30, 2004 and 2003, the Company increased the valuation
allowance on the deferred tax asset by $402,311 and $479,206, respectively.
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 4 2 0 0 3 2 0 0 2
------- ------- -------
U.S. Statutory Rate Applied to Pretax Income (35.0)% (35.0)% 32.0%
State Taxes -- -- 5.3
Other Permanent Differences -- -- (1.0)
Effect of Valuation Allowance 35.0 35.0 (1.0)
----------- ----------- ----------
INCOME TAX EXPENSE --% -- 36.3%
------------------ =========== =========== ==========
F-13
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8
- --------------------------------------------------------------------------------
[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.
YEARS ENDED JUNE 30,
------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2
------- ------- -------
Diluted EPS Calculation:
Weighted Average Basic Common Shares Outstanding 4,779,973 4,774,804 4,774,804
Weighted Average Effect of Common Stock Options -- -- 152,421
------------- ------------- -------------
WEIGHTED AVERAGE DILUTED COMMON AND
COMMON EQUIVALENT SHARES 4,779,973 4,774,804 4,927,225
------------------------ ============= ============= =============
Diluted EPS presented for the years ended June 30, 2004 and 2003 does not
include the effect of common stock options because the result would be
anti-dilutive.
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 4 2 0 0 3 2 0 0 2
------- ------- -------
Net Income:
Reported Net [Loss] Income $(1,129,549) $ (1,212,629) $ 670,497
Add Back: Goodwill Amortization -- -- 12,971
----------- ------------ ------------
Adjusted Net [Loss] Income $(1,129,549) $ (1,212,629) $ 683,468
=========== ============ ============
Basic Earnings Per Share:
Reported Net [Loss] Income $ (.24) $ (.25) $ .14
Goodwill Amortization -- -- --
------------ ------------ ------------
Adjusted Net [Loss] Income $ (.24) $ (.25) $ .14
=========== ============ ============
Dilute Earnings Per Share:
Reported Net [Loss] Income $ (.24) $ (.25) $ .14
Goodwill Amortization -- -- --
------------ ------------ ------------
ADJUSTMENT NET [LOSS] INCOME $ (.24) $ (.25) $ .14
=========== ============ ============
[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, 2004, 2003 and 2002 was $71,211, $46,140 and $47,856, respectively.
F-14
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9
- --------------------------------------------------------------------------------
[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 rights were outstanding under the Stockholders Rights Plan
as of June 30, 2004.
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.
Information related to stock options granted in connection with 2000 Stock
Option Plan is as follows:
2000 P L A N
---------------------------------
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding - June 30, 2001 362,000 $ .88
Granted -- --
Exercised -- --
Forfeited/Canceled -- --
------------- --------------
Outstanding - June 30, 2002 362,000 .88
Granted -- --
Exercised -- --
Forfeited/Canceled (8,500) .88
------------- --------------
Outstanding - June 30, 2003 353,500 .88
Granted -- --
Exercised (31,000) .88
Forfeited/Canceled -- --
------------- --------------
OUTSTANDING - JUNE 30, 2004 322,500 $ .88
--------------------------- ============= ==============
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 is a transaction summary on non-incentive stock options granted to
non-employees at fair market value of the common stock at date of grant:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding - June 30, 2001 75,000 $ 1.59
Granted -- --
Exercised -- --
Forfeited/Canceled -- --
------------- --------------
Outstanding - June 30, 2002 75,000 1.59
Granted -- --
Exercised -- --
Forfeited/Canceled -- --
------------- --------------
Outstanding - June 30, 2003 75,000 1.59
Granted -- --
Exercised -- --
Forfeited/Canceled -- --
------------- --------------
OUTSTANDING - JUNE 30, 2004 75,000 $ 1.59
- --------------------------- ============= ==============
The following table summarizes information about stock options outstanding at
June 30, 2004:
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
--------------- ---------- ---- ----- ---------- -----
$.88 322,500 6.5 $.88 225,750 $.88
$1.59 75,000 6.5 $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 4 2 0 0 3 2 0 0 2
------- ------- -------
Expected Option Term (Years) -- -- --
Risk-Free Interest Rate (%) -- -- --
Expected Volatility (%) -- -- --
Dividend Yield (%) -- -- --
Weighted Average Fair Value of Options Granted $ -- $ -- $ --
F-16
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11
- --------------------------------------------------------------------------------
[11] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN [CONTINUED]
The Company applies APB Opinion No. 25 and the related Interpretations for stock
options issued employees. Accordingly, no compensation cost has been recognized
for option grants. Had compensation cost for these awards been determined based
on the fair value at the grant dates consistent with the method prescribed by
SFAS No. 123, the Company's net income would have been adjusted to the pro forma
amounts indicated below:
2 0 0 4 2 0 0 3 2 0 0 2
------- ------- -------
Net [Loss] Income:
As Reported $ (1,129,549) $ (1,212,629) $ 670,497
Compensation Expense for Stock Options -- -- --
------------- ------------- ------------
Pro Forma Net [Loss] Income $ (1,129,549) $ (1,212,629) $ 670,497
============= ============= ============
Basic [Loss] Earnings Per Share as Reported $ (.24) $ (.25) $ .14
Pro Forma Basic [Loss] Earnings Per Share $ (.24) $ (.25) $ .14
Diluted [Loss] Earnings Per Share as Reported $ (.24) $ (.25) $ .14
Pro Forma Diluted [Loss] Earnings Per Share $ (.24) $ (.25) $ .14
[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. In
addition, the Company will be required to correct, retroactively, operational
violations, and to pay any resulting excise taxes and PBGC premiums and
penalties that may be due. In December 2000, the Company made a contribution to
the Plan along with payments of specified sanctions in connection with the IRS
settlement. The Company is awaiting resolution with the PBGC.
The Company from time to time becomes involved in various routine legal
proceedings in the ordinary course of its business. Management of the Company
believes that the legal matters mentioned above and the outcome of remaining
pending legal proceedings and unasserted claims in the aggregate will not have a
material effect on its consolidated statement of operations, consolidated
balance sheet, or liquidity.
F-17
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12
- --------------------------------------------------------------------------------
[13] CAPITAL TRANSACTIONS
In April 2004, the Board of Directors approved a cash dividend of $.07 per share
payable on June 1, 2004 to all stockholders of record as of May 14, 2004. Based
on the number of share outstanding as of May 14, 2004, the cash dividend amount
to approximately $336,060. The cash dividend was recorded as a reduction of the
Company's retained earnings. No cash dividends were declared or paid on the
treasury stock.
During the fourth quarter of fiscal 2004, the Company recorded the constructive
retirement of 109,500 shares of treasury stock. The treasury stock retired had a
cost basis of $155,365.
[14] SIGNIFICANT CUSTOMERS
Significant customers who on an individual basis accounted for more than 10% of
total revenues during fiscal 2004, 2003 and 2002 were as follows:
YEARS ENDED
--------------------------------------------------
JUNE 30,
--------------------------------------------------
CUSTOMER 2 0 0 4 2 0 0 3 2 0 0 2
- -------- ------- ------- -------
A $ 6,732,000 $ 7,500,000 $ 6,500,000
B -- -- 16,000,000
--------------- ------------- -------------
$ 6,732,000 $ 7,500,000 $ 22,500,000
=============== ============= =============
Significant customers who on an dividual basis accounted for more than 10% of
accounts receivable at June 30, 24 and 2003 were as follows:
JUNE 30,
--------
Customer 2 0 0 4 2 0 0 3
- -------- ------- -------
A $ 1,066,000 $ 1,415,000
B -- 515,000
C -- 545,000
--------------- -------------
$ 1,066,000 $ 2,475,000
=============== =============
[15] BUYING AGREEMENT
During the year ended June 30, 2004 and 2003, the Company purchased
approximately $6,000,000 and $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.
F-18
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13
- --------------------------------------------------------------------------------
[16] FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted Statement of Financial Accounting Standards ["SFAS'] No.
107, "Disclosure About Fair Value of Financial Instruments" which requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company used the
following methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. For certain instruments, including
cash and cash equivalents, trade payables, mortgage receivable and floor plan
payable it was estimated that the carrying amount approximated fair value for
these instruments because of their short maturities.
[17] NEW AUTHORITATIVE PRONOUNCEMENTS
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 No. 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 No. 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. The adoption of this standard did not have a
material impact on the Company's results of operations or financial position.
F-19
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #14
- --------------------------------------------------------------------------------
[18] SELECTED QUARTERLY FINANCIAL DATA [UNAUDITED]
THREE MONTHS ENDED
-------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, FISCAL YEAR
------------- ------------ --------- -------- -----------
2 0 0 3 2 0 0 3 2 0 0 4 2 0 0 4 2 0 0 4
------- ------- ------- ------- -------
Net Revenues $ 9,848,432 $ 7,617,621 $ 7,596,887 $ 5,536,724 $ 30,599,664
Gross Profit $ 1,794,509 $ 1,409,232 $ 1,261,068 $ 293,520 $ 4,758,329
Net Income [Loss] $ 37,909 $ (190,898) $ (450,029) $ (526,531) $ (1,129,549)
Net Income [Loss] Per
Common Share:
Basic and Diluted $ .01 $ (.04) $ (.09) $ (.12) $ (.24)
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 $ 9,634,231 $ 7,386,691 $ 6,855,853 $ 7,736,080 $ 32,799,020
Gross Profit $ 1,588,206 $ 1,314,724 $ 1,040,413 $ 1,041,083 $ 5,505,892
Net Income [Loss] $ 33,990 $ 343 $ (444,830) $ (609,611) $ (1,212,629)
Net Income [Loss] Per
Common Share:
Basic and Diluted $ .01 $ -- $ (.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-20
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
TransNet Corporation and Subsidiary
Somerville, New Jersey
Our report on our audit of the basic financial statements of TransNet
Corporation and subsidiary appears on page F-1. That audit was conducted for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The supplemental schedule II is presented for purposes of complying with
the Securities and Exchange Commissions Rules and Regulations under the
Securities Exchange Act of 1934 and is not otherwise a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements, and in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 4, 2004
F-21
TRANSNET CORPORATION AND SUBSIDIARY
- --------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30,
2004, 2003 AND 2002.
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COST AND TO VALUATION AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS OF PERIOD
----------- --------- -------- -------- ---------
Year Ended June 30, 2004
Allowance for Doubtful Accounts $ 100,000 $ 5,000 $ -- $ 105,000
Deferred Tax Asset Valuation
Allowance 479,206 402,311 -- 881,517
Inventory Reserve 45,000 -- (15,000) 30,000
------------ ------------ ------------ ------------
TOTALS $ 624,206 $ 407,311 $ (15,000) $ 1,016,517
------ ============ ============ ============ ============
Year Ended June 30, 2003
Allowance for Doubtful Accounts $ 107,000 $ -- $ (7,000) $ 100,000
Deferred Tax Asset Valuation
Allowance -- 479,206 -- 479,206
Inventory Reserve 60,000 -- (15,000) 45,000
------------ ------------ ------------ ------------
TOTALS $ 167,000 $ 479,206 $ (22,000) $ 624,206
------ ============ ============ ============ ============
Year Ended June 30, 2002
Allowance for Doubtful Accounts $ 102,728 $ 4,272 $ -- $ 107,000
Deferred Tax Asset Valuation
Allowance -- -- -- --
Inventory Reserve 60,000 -- -- 60,000
------------ ------------ ------------ ------------
TOTALS $ 162,728 $ 4,272 $ -- $ 167,000
------ ============ ============ ============ ============
F-22