ITEM 1. BUSINESS
TransNet Corporation ("TransNet" or the "Corporation") was incorporated in the State of Delaware in 1969. The Corporation is a single-source provider of information technology products and technology management services designed to enhance the productivity of the information systems of its customers. Through its own sales and service departments, TransNet provides information technology and network solutions for its customers by combining value-added professional technical services with the sale of PC hardware, network products, IP telephony products, computer peripherals and software. As used herein, the term "Corporation" shall refer to TransNet and where the context requires, shall include TransNet and its wholly-owned subsidiary, Century American Corporation. Century American Corporation, formerly a leasing subsidiary, is currently inactive.
DESCRIPTION OF BUSINESS
PRODUCTS, SOURCES, AND MARKETS: The sale of computer and related equipment for local area networks ("LAN's") and personal computers ("PC's") accounted for a significant portion of the Corporation's revenues, accounting for 49% and 65% of sales for fiscal 2003 and 2002, respectively. As part of its single source approach, the Corporation is a systems integrator, combining hardware and software products from different manufacturers into working systems. The Corporation is primarily a value added reseller. During the past year, management continued to implement its focus for business growth on marketing a wide array of technical services in conjunction with equipment sales to its clients in order to maximize profits. In addition, building on its expertise in network installation, the Corporation expanded its marketing and sales of IP telephony and wireless network products and related services. IP Telephony products provide for the operation of highly reliable phone systems over data networks. The resulting economies of installation and maintenance have generated increased demand for these products.
The equipment sold by the Corporation includes microcomputers, workstations, servers, monitors, printers and operating systems software. In addition, the Corporation sells wireless networking products. The principal markets for the Corporation's products are commercial, governmental, and educational customers. These markets are reached by direct sales conducted through the corporate sales department based in Branchburg, New Jersey. The Corporation's direct sales staff enables TransNet to establish relationships with major corporate and educational clients through which it markets the Corporation's technical services.
The Corporation is selective in choosing the products that it markets and its product mix is geared primarily to the requirements of its business customers. The products sold by the Corporation include desktop computer systems, network hardware and software, IP telephony and wireless products manufactured by the following companies: International Business Machines ("IBM"), Acer, Apple Computer, Inc. ("Apple"), Cisco Systems, Inc. ("Cisco"), Nortel Networks, NEC Technologies, Inc. ("NEC"), Hewlett-Packard Company ("Hewlett-Packard"), Toshiba American Information Systems, Inc. ("Toshiba"),Veritas, and 3Com; selected software products including products of Microsoft Corporation ("Microsoft") and Novell, Inc. ("Novell"); and supplies produced by other manufacturers. The Corporation does not manufacture or produce any of the items it markets.
The Corporation is currently an authorized reseller for Apple, Cisco as a Cisco Premier Partner, Citrix Systems, Inc. ("Citrix") as a Citrix Solutions Partner, Hewlett-Packard as an HP Gold Provider, a State/Local Government Specialized Partner, Certified Education Partner (k-12), and a Certified Education Partner (for higher education), IBM, Lexmark International, Inc., Microsoft as a Microsoft Solutions Provider, NEC, Novell as a Novell Gold Partner, Packeteer, Safari, Smart Technolgies, Symantec, Toshiba, Websense, and 3COM. The Corporation also offers a variety of products manufactured by other companies including Adspace, Okidata, Verint, Inc., and Xerox/Tektronix. Occasionally, the Corporation will order specific products to satisfy a particular customer requirement. The Corporation evaluates its product line and new products internally and through discussions with its vendors and customers.
Software sold by the Corporation includes software designed for general business applications as well as specialized applications such as research, pharmaceuticals, and education; and integrated packages.
The Corporation maintains an inventory of its product line to provide shipments to customers or arranges for direct shipment of product to the customer. Shipments are made from the Corporation's warehouse in Branchburg, New Jersey primarily through common carriers. In addition, in an effort to reduce costs, the Corporation has instituted a direct shipping program, through which product is shipped directly from the Corporation's suppliers to customers. Back orders are generally immaterial, but manufacturers' product constraints occasionally impact the Corporation's inventory levels. No such constraints have affected the Corporation in the past three years, however.
The marketing of computers and peripherals and related technical services is generally not seasonal in nature.
TECHNICAL SUPPORT AND SERVICE: Service operations have become a significant source of revenues, comprising 51% of revenues in fiscal 2003, and 35% of revenues in fiscal 2002. As discussed in "Management's Discussion and Analysis," management's focus emphasizes the provision of sophisticated technical services. Many businesses do not have computer technicians on their staffs, and as a result, they "outsource" these services and obtain technical services from IT solutions providers such as TransNet. The Corporation provides a wide variety of outsourced network services, personal computer support, repair and standard equipment maintenance to assist customers in obtaining technology that enhances the customers' productivity. These services, which are generally performed at customer sites, include LAN and PC hardware support, systems integration services, help desk services, asset management, relocation services, and installation or installation coordination. With the advent of its IP Telephony operations, these services also cover design, installation, and technical support and service of integrated voice-data systems. The Corporation assists its customers in determining each customer's standard hardware technology, application and operating system software, and networking platform requirements. The Corporation employs specially certified and trained technical systems engineers who perform high-end technology integration services. In addition, the Corporation's staff of specially trained system engineers and service technicians provide service and support on an on-call basis for file servers, personal computers, laptop computers, printers and other peripheral equipment. The Corporation's in-house technical staff performs system configurations to customize computers to the customers' specifications. The Corporation also provides authorized warranty service on the equipment it sells. TransNet is an authorized service and support dealer for the following manufacturers: by 3Com, Apple, Cisco, Citrix, Dell Inc., Hewlett Packard, IBM, Lexmark, Microsoft (as a Certified Solution Provider), Novell, Symantec and Xerox.
The Corporation seeks highly qualified personnel and employs experienced system engineers and technicians to whom it provides authorized manufacturer training and certification programs on an on-going basis. The Corporation competes with other resellers and manufacturers, as well as some customers, to recruit and retain qualified employees from a relatively small pool of available candidates.
The Corporation's technical services are available to business and individual customers. Through a variety of alternatives, the Corporation offers repair or maintenance services at the customer site or on the Corporation's premises. Services are available for a variety of products marketed by the Corporation. Through its "TechNet" program the Corporation stations service personnel at a customer's location on a full-time basis. Under this program, the Corporation has entered into individual agreements with several large corporate customers to provide support and repair and maintenance services. Technical support and services are performed pursuant to contracts of specified terms and coverage (hourly rates or fixed price extended contracts) or on a time and materials basis. Maintenance and service contracts are offered to maintain and/or repair computer hardware. Most agreements are for twelve months or less. These agreements contain provisions allowing for termination prior to the expiration of the agreements. Although the agreements generally contain renewal terms, there is no assurance that the agreements will be renewed.
In addition to services pursuant to a contract, repair and maintenance services are also available on a "time and materials" basis. The repair services usually consist of diagnosing and identifying malfunctions in computer hardware systems and replacing any defective circuit boards or modules. The defective items are generally repaired by in-house bench technicians or returned to the manufacturer for repair or replacement.
To improve its efficiency and facilitate service to its clients, the Corporation implemented procedures to allow its clients to place service calls through the Internet, as a supplement to the phone and/or fax service requests.
In addition to servicing its own customers within its service area, the Corporation has entered into arrangements with other service providers outside the Corporation's service area. Through these arrangements, the Corporation can provide services in instances in which a customer has locations outside the Corporation's service areas and can assure its customers quality technical service at their locations nationwide.
TRAINING: The Corporation's headquarters houses its training center, the TransNet Education Center, which provides training for customers. The Corporation also provides training at customer sites. The Corporation offers comprehensive training on hardware and software, including a wide variety of DOS, Windows, and Macintosh systems and network applications, operation, and maintenance. The Corporation's Training Center has its own dedicated network. The training activities of the Corporation are not a material source of revenues.
SUPPLIERS: In order to reduce its costs for computer and related equipment, the Corporation entered into a buying agreement with Ingram Micro, Inc. Under the agreement, the Corporation is able to purchase equipment of various manufacturers at discounts currently unavailable to it through other avenues. The agreement provides that the Corporation may terminate the arrangement upon sixty days notice. During fiscal 2003, the majority of the revenues generated by the Corporation from product sales were attributable to products purchased by the Corporation from Ingram Micro, Inc. pursuant to the Agreement. The balance of the Corporation's product sales were attributable to products purchased from a variety of sources on an as needed order basis. Alternate suppliers include Tech Data Corp., as well as Compaq and IBM, from whom the Corporation purchases direct. Management anticipates that Ingram Micro, Inc. will be a major supplier during fiscal 2004.
CUSTOMERS: The majority of the Corporation's corporate customers are commercial users located in the New Jersey - New York City metropolitan area.
During fiscal 2003, one customer, Schering Plough, accounted for approximately 18% of revenue. During fiscal 2002, one customer, Merck/Medco Managed Care, LLC ("Medco"), accounted for approximately 31% of the Corporation's revenues, and another customer, Schering Plough accounted for 13% of revenues. The loss of these customers may have a material adverse impact upon the Corporation if the business could not be replaced from alternate customers.
No other customer accounted for more than 10% of the Corporation's revenues in fiscal 2003.
COMPETITION: The sale and service of personal computer systems is highly competitive and may be affected by rapid changes in technology and spending habits in both the business and institutional sectors. The Corporation is in direct competition with any business which is engaged in information technology management, specifically the sale and technical support and service of networks, personal computers and related peripherals, and IP telephony products. Competitors include larger and longer established companies possessing substantially greater financial resources and substantially larger staffs, facilities and equipment, including several computer manufacturers which have begun to deal directly with the end-users. With respect to IP telephony products, the Corporation competes with similar businesses as well as directly with several product manufacturers and national telecommunication businesses. During the past few years, the industry has experienced and continues to experience a significant amount of consolidation. In the future, TransNet may face fewer but larger competitors as the result of such consolidation.
Management believes that commercial customers require significant levels of sophisticated support services such as those provided by the Corporation. TransNet's services benefit the customers by providing in-depth product knowledge and experience, competitive pricing and the high level of technical services. Management believes that TransNet's ability to combine competitive pricing with responsive and sophisticated support services allows it to compete effectively against a wide variety of alternative microcomputer sales and distribution channels, including independent dealers, direct mail and telemarketing, superstores and direct sales by manufacturers (including some of its own suppliers).
Technological advances occur rapidly in computer technology and new products are often announced prior to availability, sometimes creating demand exceeding manufacturers' expectations and thereby resulting in product shortages. When this occurs, resulting product constraints intensify competition, depress revenues because customers demand the new product, and increase order backlogs. In the Corporation's experience, these backlogs have been immaterial.
In the past several years, there have been frequent reductions in the price of computers. As a result, competition has increased and the Corporation lowered its prices to remain competitive. In addition, businesses able to purchase in larger volume than the Corporation have received higher discounts from manufacturers than the Corporation. These factors have resulted in a lower profit margin on the Corporation's equipment sales. As a result of its buying agreement with Ingram Micro, Inc., the Corporation is able to purchase equipment at discounts otherwise unavailable to it, enabling the Corporation to be more price competitive. In a cost-effective marketing approach, the Corporation now targets larger customers with more diversified product needs for its marketing efforts in order to sell a greater number and variety of products and services at one or a limited number of locations, thereby improving its gross profit margins.
The Corporation does not believe that it is a significant factor in any of its fields of activity.
TRADEMARKS: Other than the trademark of its name, TransNet holds no patents or trademarks.
EMPLOYEES: As of September 15, 2003, the Corporation employed 220 full-time employees and 9 part-time employees. None of its employees are subject to collective bargaining agreements.
ITEM 2.
ITEM 2. PROPERTIES
The Corporation's executive, administrative, corporate sales offices, and service center are located in Branchburg, New Jersey, where the Corporation leases a building of approximately 21,000 square feet. This "net-net" lease, which currently provides for an approximately $13,810 monthly rental, expires in February 2006. The building is leased from a non-affiliated party.
See Note [7][A] of the Notes to Consolidated Financial Statements with respect to the Corporation's commitments for leased facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is not currently a party to any legal proceeding which it regards as material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITYHOLDERS MATTERS
TransNet's common stock is quoted and traded on the OTC Bulletin Board under the symbol "TRNT." The following table indicates the high and low closing sales prices for TransNet's common stock for the periods indicated based upon information supplied by Pink Sheets.
CALENDAR YEAR CLOSING SALES PRICES - ------------- -------------------- HIGH LOW ---- --- Third Quarter $1.70 $1.28 Fourth Quarter 1.82 1.35
First Quarter $1.74 $1.50 Second Quarter 1.58 1.15 Third Quarter 1.17 1.02 Fourth Quarter 1.15 .97
First Quarter $1.25 $1.04 Second Quarter 1.25 1.06
As of September 12, 2003, the number of holders of record of TransNet's common stock was 2,772. Such number of record owners was determined from the Company's shareholder records and does not include beneficial owners whose shares are held in nominee accounts with brokers, dealers, banks and clearing agencies.
TransNet has not paid any dividends on its common stock since its inception.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in conjunction with, and is qualified in its entirety by, the Company's consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report on Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the fiscal year ended June 30, 2003 were $32,799,020 as compared with $50,892,094 for the fiscal year ended June 30, 2002, and $56,417,369 for the fiscal year ended June 30, 2001. Revenues decreased in fiscal 2003 and 2002 as compared to the prior fiscal year as a result of decreased hardware sales. The decrease in revenues for 2003 was the result of several factors including the general economic slowdown effecting the IT industry as a whole, the delay in service projects by many clients due to their internal budgetary constraints, and to a reduction in purchases by a major customer. In addition, for the years discussed, the Corporation arranged for several computer manufacturers to ship product directly to and direct-bill TransNet customers, paying TransNet a fee similar to a commission. Although this reduced revenues from hardware sales, it yielded increased profits. Service revenues increased as a percentage of revenues in fiscal 2003 and increased in both actual figures and as a percentage of revenues in fiscal 2002, as a result of increased demand for the Corporation's technical services (technical support, repair and maintenance, network integration and training).
For fiscal 2003, the Corporation reported a net loss of $1,212,629 as compared with net income of $670,497 for fiscal 2002, and net income of $563,012 for fiscal 2001. The loss in fiscal 2003 was attributable to the reduction in revenues, as described above. Management believes the Corporation will return to profitability in early fiscal 2004. The increase in income for fiscal 2002 was due to an increase in revenues from technical services. Service related revenues, a material segment of revenues, are significant in their contributions to net income because these operations yield a higher profit margin than equipment sales. For the fiscal years discussed, revenue from the provision of service, support, outsourcing and network integration is largely the result of the Corporation entering into service contracts with a number of corporate customers to provide service and support for the customer's personal computers, peripherals and networks. Most of these contracts are short-term, usually twelve months or less, and contain provisions which permit early termination. Although the contracts generally contain renewal terms, there is no assurance that such renewals will occur.
During the fiscal years discussed, the computer industry has experienced a trend of decreasing prices of computers and related equipment. Management believes that this trend will continue. Industrywide, the result of price erosion has been lower profit margins on sales, which require businesses to sell a greater volume of equipment to maintain past earning levels. Another result of the price decreases has been intensified competition within the industry, including the consolidation of businesses through merger or acquisition, as well as the increased initiation of sales by certain manufacturers directly to the end-user and the entrance of manufacturers into technical services business. Management believes that the adoption of policies by many larger corporate customers, which limit the number of vendors permitted to provide goods and services for specified periods of time, has further increased price competition.
The Corporation's performance is also impacted by other factors, many of which are not within its control. These factors include: the short-term nature of client's commitments; patterns of capital spending by clients; the timing and size of new projects; pricing changes in response to competitive factors; the availability and related costs of qualified technical personnel; timing and customer acceptance of new product and service offerings; trends in IT outsourcing; product constraints; and industry and general economic conditions.
To meet these competitive challenges and to maximize the Corporation's profit margin, management has modified its marketing strategy during these years and has enforced expense controls. Management also utilizes approaches such as manufacturers' direct shipment and billing of the customers in exchange for payment to the Corporation of an "agency fee" as a means to reduce equipment related costs while increasing profits. Management's current marketing strategy is designed to shift its focus to provision of technical services and to sales of lower revenue/higher profit margin products related to service and support operations. Management's efforts include targeting commercial, educational and governmental customers who provide marketplaces for a wide range of products and services at one time, a cost-effective approach to sales. These
customers often do not have their own technical staffs and outsource their computer service requirements to companies such as TransNet. Management believes it maximizes profits through concentration on sales of value-added applications; promotion of the Corporation's service and support operations; and strict adherence to cost cutting controls. In light of the above, management emphasizes and continues the aggressive pursuit of an increased volume of sales of technical service and support programs, and promotion of its training services. In the near term, the Corporation believes that product sales will continue to generate a significant percentage of the Company's revenues. In addition, the Corporation's buying agreement with Ingram Micro, Inc. enhances the Corporation's competitive edge through product discounts unavailable through other sources.
During fiscal 2003 and 2002, selling, general and administrative expenses increased to 21% and 14% of revenues, respectively, as a result of the decrease in revenues. This compares to 12% of revenue for fiscal 2001. Management continues its efforts to control expenses, despite increasing personnel related costs.
Interest income decreased in fiscal 2003 and 2002, respectively, as compared to prior years, due to lower amount of funds invested and lower interest rates paid on those funds.
LIQUIDITY AND CAPITAL RESOURCES
There are no material commitments of the Corporation's capital resources, other than leases and employment contracts.
The Corporation currently finances the purchases of portions of its inventory through floor planning arrangements with a third-party lender and a manufacturer's affiliate under which such inventory secures the financed purchases. Inventory decreased in fiscal 2003 and 2002, as compared to the prior year, as a result of decreased hardware sales and due to the Corporation's arrangement with certain manufacturers to ship to and bill customers directly.
Accounts receivable decreased in fiscal 2003 as compared to the prior year in conjunction with the decreased revenues. Accounts receivable remained relatively constant from fiscal 2002 to fiscal 2001. Accounts payable similarly decreased in fiscal 2003 as compared to fiscal 2002, but remained relatively the same in fiscal 2002 as compared to 2001. Floor planning payables decreased in 2003 and 2002, respectively, in direct correlation to the decrease in inventory as compared to prior years.
For the fiscal year ended June 30, 2003, as in the fiscal years ended June 30, 2002 and 2001, the internal capital sources of the Corporation were sufficient to enable the Corporation to meet its obligations.
In the first quarter of fiscal 1998, management was apprised of an unasserted possible claim or assessment involving the Corporation's Pension Plan. The Plan was adopted in 1981 as a defined benefit plan. In 1989, various actions were taken by the Corporation to terminate the Plan, to convert it to a defined contribution plan and to freeze benefit accruals. No filing for plan termination was made with the Pension Benefit Guaranty Corporation (the "PBGC"). Additionally, a final amended and restated plan document incorporating the foregoing amendments and other required amendments including those required by the Tax Reform Act of 1986 do not appear to have been properly adopted. In addition, since 1989, it appears that certain operational violations occurred in the administration of the Plan including the failure to obtain spousal consent in certain instances where it was required.
The Corporation decided to (i) take corrective action under the IRS Walk-in Closing Agreement Program ("CAP"), (ii) apply for a favorable determination letter with respect to the Plan from the IRS, and (iii) terminate the Plan. The CAP program provides a correction mechanism for Anon-amenders@ such as the Corporation. Under CAP, the Corporation will be subject to a monetary sanction (which could range from $1,000 to approximately $40,000). In addition, the Corporation will be required to correct, retroactively, operational violations, and to pay any resulting excise taxes and PBGC premiums and penalties that may be due. In this regard, in connection with settlement negotiations with the IRS, during the December 2000 quarter the
Corporation made a contribution to the Plan and made payment of specified sanctions. During the March quarter of fiscal 2001, the Corporation finalized a settlement agreement with the IRS and is pending resolution with the PBGC.
INVESTMENT CONSIDERATIONS AND UNCERTAINTIES THE MATTERS DISCUSSED IN MANAGEMENT'S DISCUSSION AND ANALYSIS AND THROUGHOUT THIS REPORT THAT ARE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT MANAGEMENT EXPECTATIONS THAT INVOLVE RISK AND UNCERTAINTIES. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION: THE IMPACT OF ECONOMIC CONDITIONS GENERALLY AND IN THE INDUSTRY FOR MICROCOMPUTER PRODUCTS AND SERVICES; DEPENDENCE ON KEY VENDORS AND CUSTOMERS; CONTINUED COMPETITIVE AND PRICING PRESSURES IN THE INDUSTRY; PRODUCT SUPPLY SHORTAGES; OPEN-SOURCING OF PRODUCTS OF VENDORS, INCLUDING DIRECT SALES BY MANUFACTURERS; RAPID PRODUCT IMPROVEMENT AND TECHNOLOGICAL CHANGE, SHORT PRODUCT LIFE CYCLES AND RESULTING OBSOLESCENCE RISKS; TECHNOLOGICAL DEVELOPMENTS; CAPITAL AND FINANCING AVAILABILITY; AND OTHER RISKS SET FORTH HEREIN.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached.
ITEM 9.
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.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Corporation are as follows:
NAME AGE POSITION ---- --- -------- John J. Wilk (a) 75 Chairman of the Board and Treasurer Steven J. Wilk (a) 46 President and Director Jay A. Smolyn 47 Vice President, Operations and Director Vincent Cusumano (b)(d) 68 Secretary and Director Earle Kunzig (b)(e) 64 Director Raymond J. Rekuc (c) 57 Director Susan Wilk (a) Director
- ---------- (a) Steven J. Wilk and Susan Wilk are respectively, the son and daughter of John J. Wilk. (b) Member of the Audit Committee (c) Chairman of the Audit Committee. (d) Member of the Compensation Committee. (e) Chairman of the Compensation Committee.
The Audit Committee reviews, evaluates and advises the Board of Directors in matters relating to the Corporation's financial reporting practices, its application of accounting principles and its internal controls. In addition, the Audit Committee reviews transactions regarding management remuneration or benefits.
The Compensation Committee reviews, evaluates and advises the Board of Directors in matters relating to the Corporation's compensation of and other employment benefits for executive officers. The Board established its Compensation Committee in December 1994. Prior to that time compensation decisions were subject to oversight by the entire Board of Directors.
The Corporation does not have an Executive Committee. The term of office of each director expires at the next annual meeting of stockholders. The term of office of each executive officer expires at the next organizational meeting of the Board of Directors following the next annual meeting of stockholders.
The following is a brief account of the business experience of each TransNet director during the past five years.
John J. Wilk was president, a director and chief executive officer of TransNet since its inception in 1969 until May 1986, when he was elected Chairman of the Board.
Steven J. Wilk was elected a vice president of TransNet in October 1981 and in May 1986 was elected President and Chief Executive Officer. He was elected a director of TransNet in April 1989.
Jay A. Smolyn has been employed at TransNet since 1976 and in April 1985 became Vice President, Operations. He was elected a director of TransNet in January 1990.
Vincent Cusumano, who was elected a TransNet director in April 1977, is, and for the past five years has been, president and chief executive officer of Cusumano Perma-Rail Corporation of Roselle Park, New Jersey, distributors and installers of exterior iron railings. Mr. Cusumano is not actively engaged in the business of the Corporation.
Earle Kunzig, who was elected a TransNet director in November 1976, is Vice President of Sales and a principal of Hardware Products Sales, Inc., Wayne, New Jersey, a broker of used computer equipment and provider of computer maintenance services. He was director of hardware
operations for Computer Maintenance Corporation, a business computer servicing organization in Secaucus, New Jersey from 1978 through July 1985. Mr. Kunzig is not actively engaged in the business of the Corporation.
Raymond J. Rekuc, who was elected a TransNet director in August 1983, is currently the principal in Raymond J. Rekuc, Certified Public Accountant, an accounting firm located in Washington, New Jersey. He was a partner with Hess, Keeley & Company, Accountants and Auditors, Millburn, New Jersey from October 1980 until September 1986, when he became treasurer of Royalox International, Inc. of Asbury, New Jersey, an importer of luggage and luggage hardware. Mr. Rekuc provided financial consulting services to TransNet in 1990 through 1993. Mr. Rekuc is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants, and is not actively engaged in the business of the Corporation.
Susan Wilk joined TransNet in November 1987. Prior to that time, she was a Senior Attorney with the U. S. Securities and Exchange Commission, Washington, D.C., and then the Office of General Counsel of The Federal Home Loan Bank Board. She was elected a director of TransNet in January 1990.
None of the Corporation's directors are directors of any other Corporation with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15 (d) of that Act.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely on a review of Forms 3 and 4 and any amendments thereto furnished to the Corporation pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934, or representations that no Forms 5 were required, the Corporation believes that with respect to fiscal 2003, its officers, directors and beneficial owners of more than 10% of its equity timely complied with all applicable Section 16(a) filing requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid or accrued by the Corporation during the three years ended on June 30, 2003, to its Chief Executive Officer and each of its other executive officers whose total annual salary and bonus for the fiscal year ended June 30, 2003, exceeded $100,000. All of the Corporation's group life, health, hospitalization or medical reimbursement plans, if any, do not discriminate in scope, terms or operation, in favor of the executive officers or directors of the Corporation and are generally available to all full-time salaried employees.
OPTION GRANTS IN LAST FISCAL YEAR (individual grants)
No options were granted during fiscal 2003.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the Named Executive Officer concerning the exercise of options during fiscal 2003 and the number and value of unexercised options held as of the end of fiscal 2003.
EMPLOYMENT CONTRACTS WITH EXECUTIVE OFFICERS
TransNet has employment contracts in effect with Steven J. Wilk and Jay A. Smolyn which expire on June 30, 2005. Pursuant to the employment contracts, Steven J. Wilk's annual salary is "at least" $300,000 and Mr. Smolyn's salary is "at least" $165,000 or, in each case, such greater amount as may be approved from time to time by the Board of Directors. The contracts also provide for additional incentive bonuses to be paid with respect to each of the Corporation's fiscal years based upon varying percentages of the Corporation's consolidated pre-tax income exclusive of extraordinary items (3% of the first $500,000, 4% of the next $500,000, 5% of the next $4,000,000 and 6% of amounts in excess of $5,000,000 for Steven J. Wilk, and 2% of pre-tax income in excess of $100,000 to the first $500,000 and 3% in excess of $500,00 for Mr. Smolyn). Steven J. Wilk's employment contract provides for a continuation of full amount of salary payments for 6 months and 50% of the full amount for the remainder of the term in the event of illness or injury. In addition, the employment contracts contain terms regarding the event of a hostile change of control of the Corporation and a resultant termination of the employee's employment prior to expiration of the employment contract. These terms provide that Mr. Smolyn would receive a lump sum payment equal to 80% of the greater of his then current annual salary or his previous calendar year's gross wages including the additional incentive compensation multiplied by the lesser of five or the number of years remaining in the contract. In the case of Steven J. Wilk, the contract provides that in the event of termination of employment due to a hostile change in control, he may elect to serve as consultant at his current salary and performance bonus for a period of five years beginning at the date of the change in control, or he may elect to receive a lump sum payment which would be the greater of 80% of his then current salary or 80% of his previous year's gross wages times five. The contract for Mr. Smolyn provides that the Corporation may terminate his employment, with or without cause. If said termination is without cause, the Corporation shall pay the Employee an amount equal to compensation payable for a period of one-half of the contract period remaining, not to exceed compensation for 18 months. Steven J. Wilk's employment agreement provides that should the Corporation terminate his employment (other than for the commission of willful criminal acts), he may elect to continue as a consultant to the Corporation at his then current compensation level, including the performance bonus, for the lesser of two (2) years or the remainder of the contract term or he may elect to receive a lump sum payment equal to eighty percent of his then current salary plus incentive bonus times the lesser of two (2) years or the remainder of the contract.
DIRECTORS' COMPENSATION
During fiscal 2003, the Company paid $5,000 in directors' fees to each of its three outside directors.
STOCK OPTIONS
The Plan provides for the grant of both Non-qualified Stock Options and Incentive Stock Options, as the latter is defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as providing for the granting of Restricted Stock and Deferred Stock Awards, covering, in the aggregate, 500,000 shares of the Company's Common Stock. The purpose of the Plan is to advance the interests of the Company and its shareholders by providing additional incentives to the Company's management and employees, and to reward achievement of corporate goals.
Awards under the Plan may be made or granted to employees, officers, Directors and consultants, as selected by the Board. The Plan is administered by the entire Board of Directors. All full-time employees and officers of the Company are eligible to participate in the Plan.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of August 31, 2003, the number of shares of TransNet's common stock owned beneficially to the knowledge of the Corporation, by each beneficial owner of more than 5% of such common stock, by each director owning shares and by all officers and directors of the Corporation as a group.
NAME OF BENEFICIAL AMOUNT OF SHARES PERCENT OF OWNER BENEFICIALLY OWNED CLASS (a) - ----- ------------------ ---------
DIRECTORS Steven J. Wilk (b) 487,000 shs (c) 8% John J. Wilk (b) 225,500 shs (d) 4% Jay A. Smolyn (b) 133,000 shs (e) 2% Susan Wilk (b) 108,200 shs (f) 2% Vincent Cusumano (b) 17,000 shs (g) ---- Earle Kunzig (b) 20,000 shs (h) ---- Raymond J. Rekuc (b) 15,000 shs (i) ----
All officers and directors 890,700 shs 16% as a group (seven persons)
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(a) Based on 4,774,804 shares outstanding, which does not include 275,000 shares issuable upon exercise of options.
(b) The address of all directors is 45 Columbia Road, Branchburg, New Jersey 08876.
(c) Includes 100,000 shares that Mr. Wilk is entitled to purchase upon the exercise of incentive stock options. The options were granted on January 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(d) Includes 50,000 shares that Mr. Wilk is entitled to purchase upon the exercise of incentive stock options. The options were granted on January 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(e) Includes 50,000 shares that Mr. Smolyn is entitled to purchase upon the exercise of incentive stock options. The options were granted on January 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(f) Includes 30,000 shares that Ms. Wilk is entitled to purchase upon the exercise of incentive stock options. The options were granted on January 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(g) Includes 15,000 shares that Mr. Cusumano is entitled to purchase upon the exercise of incentive stock options. The options were granted on January 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(h) Includes 15,000 shares that Mr. Kunzig is entitled to purchase upon the exercise of incentive stock options. The options were granted on January 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(i) Includes 15,000 shares that Mr. Rekuc is entitled to purchase upon the exercise of incentive stock options. The options were granted on January 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
John J. Wilk and Steven J. Wilk, chairman of the board of directors and president of the Corporation as well as beneficial owners of 4% and 8% respectively, of TransNet's common stock may each be deemed to be a "parent" of the Corporation within the meaning of the Securities Act of 1933.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
o Independent Auditor's Report.
o Consolidated Balance Sheets as of June 30, 2003 and June 30, 2002.
o Consolidated Statements of Operations for the Years Ended June 30, 2003, 2002 and 2001.
o Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2003, 2002 and 2001.
o Consolidated Statements of Cash Flows for the Years Ended June 30, 2003, 2002 and 2001.
o Notes to Consolidated Financial Statements
(b) REPORTS ON FORM 8-K ------------------- The Corporation did not file any reports on Form 8-K with respect to or during the quarter ended June 30, 2003.
(22) Subsidiaries - The following table indicates the sole wholly-owned active subsidiary of TransNet Corporation and its state of incorporation.
NAME STATE OF INCORPORATION ---- ---------------------- Century American Corporation Delaware
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
REGISTRANT: TRANSNET CORPORATION
Date: September 26, 2003 BY /s/ STEVEN J. WILK ------------------------------------- Steven J. Wilk Chief Executive Officer
Date: September 26, 2003 BY /s/ JOHN J. WILK -------------------------------------- John J. Wilk Chief Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
BY /s/ STEVEN J. WILK Date: September 26, 2003 - -------------------------------------- Steven J. Wilk, Director
BY /s/ JOHN J. WILK Date: September 26, 2003 - -------------------------------------- John J. Wilk, Director
BY /s/ JAY A. SMOLYN Date: September 26, 2003 - -------------------------------------- Jay A. Smolyn, Director
BY /s/ RAYMOND J. REKUC Date: September 26, 2003 - -------------------------------------- Raymond J. Rekuc, Director
BY /s/ VINCENT CUSUMANO Date: September 26, 2003 - -------------------------------------- Vincent Cusumano, Director
BY /s/ EARLE KUNZIG Date: September 26, 2003 - -------------------------------------- Earle Kunzig, Director
BY /s/ SUSAN M. WILK Date: September 26, 2003 - -------------------------------------- Susan M. Wilk, Director
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of TransNet Corporation and Subsidiary Branchburg, New Jersey
We have audited the accompanying consolidated balance sheets of TransNet Corporation and Subsidiary as of June 30, 2003 and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three fiscal years in the period ended June 30, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TransNet Corporation and Subsidiary as of June 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.
MOORE STEPHENS, P. C. Certified Public Accountants.
Cranford, New Jersey August 8, 2003
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING ACTIVITIES:
During fiscal 2002, the Company traded-in automobiles with a book value of $33,790 in exchange for a trade-in value of approximately $25,000.
During fiscal 2001, the Company disposed of approximately $38,500 of fully depreciated property and equipment.
See Notes to Consolidated Financial Statements.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================
[1] NATURE OF OPERATIONS
TransNet Corporation ["TransNet" or the "Company"] was incorporated in the State of Delaware in 1969. The Company is a single-source provider of information technology products and technology management services designed to enhance the productivity of the information systems of its customers. Through its own sales and service departments, TransNet provides information technology and network solutions for its customers by combining value-added professional technical services with the sale of PC hardware, network products, IP telephony products, computer peripherals and software. As used herein, the term "Company" shall refer to TransNet and where the context requires, shall include TransNet and its wholly-owned subsidiary, Century American Corporation. Century American Corporation, formerly a leasing subsidiary, is currently inactive.
The sale and service of IT is highly competitive and may be affected by rapid changes in technology and spending habits in both the business and institutional sectors.
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[A] CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Century American Corporation. Intercompany transactions and accounts have been eliminated in consolidation.
[B] CASH AND CASH EQUIVALENTS - Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased [See Note 3].
[C] ACCOUNTS RECEIVABLE - Accounts receivable have been reduced by an allowance for doubtful accounts of approximately $100,000 and $107,000 as of June 30, 2003 and 2002, respectively. The receivables secure a floor plan agreement [See Note 7C].
[D] INVENTORIES - The Company's inventory is valued at the lower of cost [determined on the moving average-cost basis] or market. Inventory has been reduced by an allowance of $45,000 and $60,000 at June 30, 2003 and 2002, respectively. The inventory secures borrowings under a floor plan financing agreement [See Note 7C].
[E] PROPERTY AND EQUIPMENT, DEPRECIATION AND AMORTIZATION - Property and equipment are stated at cost. Depreciation and amortization are computed by use of the straight-line method over the estimated useful lives of the various assets ranging from five to ten years. Leasehold improvements are amortized over the shorter of the life of the lease including renewal option periods, or their estimated useful life.
[F] GOODWILL - Effective July 1, 2002, the Company evaluates the recoverability and measures the possible impairment of its goodwill under SFAS 142, "Goodwill and Other Intangible Assets." The impairment test is a two-step process that begins with the estimation of the fair value of the reporting unit. The first step screens for potential impairment and the second step measures the amount of the impairment, if any. Management's estimate of fair value considers publicly available information regarding the market capitalization of the Company as well as (i) publicly available information regarding comparable publicly-traded companies in the computer sales and service industry, (ii) the financial projections and future prospects of the Company's business, including its growth opportunities and likely operational improvements, and (iii) comparable sales prices, if available. As part of the first step to assess potential impairment, management compares the estimate of fair value for the Company to the book value of the Company's consolidated net assets. If the book value of the consolidated net assets is greater than the estimate of fair value, the Company would then proceed to the second step to measure the impairment, if any. The second step compares the implied fair value of goodwill with its carrying value.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2 ================================================================================
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
[G] REVENUE RECOGNITION - Revenue is recognized at time of shipment for equipment sold directly to customers. Revenues from non-contracted customer support services are recognized as services are provided. The Company offers contracted support service agreements to its customers. Services under support contracts, are generally provided ratably over the term of the customer support contracts and are included in services revenue in the accompanying statements of operations.
[H] EARNINGS PER SHARE - Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share is based on the weighted average number of common and common equivalent shares outstanding. The calculation of common equivalent shares issued takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be purchased with the funds received from the exercise, based on the average price during the year. Certain rights and options listed in Note 11 may be potentially dilutive in the future.
[I] CREDIT RISK - Financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents and accounts receivable arising from its normal business activities. The Company routinely assesses the financial strength of its customers and based upon factors surrounding the credit risk of its customers establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowances is not significant. The Company places its cash with high credit financial institutions. The amount on deposit in any one institution that exceeds federally insured limits is subject to credit risks. As of June 30, 2003, the Company had approximately $447,000 which is subject to such risk. The Company does not require collateral or other security to support financial instruments subject to credit risk.
[J] BUSINESS CONCENTRATIONS - The Company is engaged in the sale and technical support and service of local area networks, personal computer systems, and peripheral equipment, software, and supplies to companies and organizations located primarily in the New Jersey - New York City Metropolitan area and is currently an authorized dealer for several computer products manufacturers, including 3 Com, Apple, Cisco, Hewlett Packard, IBM, Intel, NEC, Nortel, Novell and Microsoft Corporation. If the Company were to lose any of its dealer authorizations or if it were to experience significant delays, interruptions or reductions in its supply of hardware and software, the Company's revenues and profits could be adversely affected.
[K] ADVERTISING COSTS - The Company participates in cooperative advertising programs with its vendors, whereby the vendors absorb the costs of advertising. During the years ended June 30, 2003, 2002 and 2001, the Company incurred additional advertising expense of $16,031, $9,034 and $73,113, respectively. Advertising costs are expensed as incurred.
[L] USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
[M] RECLASSIFICATION - Certain prior year amounts have been reclassified to conform to the 2003 presentation.
[N] STOCK OPTIONS ISSUED TO EMPLOYEES - The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," for financial note disclosure purposes and continues to apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees," for financial reporting purposes.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3 ================================================================================
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
[O] DEFERRED INCOME TAXES - Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
[P] IMPAIRMENT - Certain long-term assets of the Company are reviewed quarterly as to whether their carrying value has become impaired, pursuant to guidance established in Statement of Financial Accounting Standards ["SFAS"] No. 144, "Accounting for the Impairment or disposal of Long-Lived Assets." Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations [undiscounted and without interest charges]. If impairment is deemed to exist, the assets will be written down to fair value. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives.
[3] REPURCHASE AGREEMENTS
Repurchase agreements included in cash equivalents as of June 30, 2003 and 2002 consisted of:
COST FAIR VALUE ---- ---------- June 30, 2003: Repo .60%, Due July 1, 2003 $ 1,510,171 $ 1,510,228
This security is backed by $1,480,000 of F.H.R. bonds maturing June 18, 2028 with an interest rate of 5.00%.
COST FAIR VALUE ---- ---------- June 30, 2002: Repo .60%, Due July 1, 2002 $ 5,048,766 $ 5,048,815
This security is backed by $1,480,000 of F.H.R. bonds maturing June 18, 2028 with an interest rate of 5.00%.
[4] INVENTORIES
Inventories consist of the following at June 30, 2003 and 2002:
JUNE 30, -------- 2 0 0 3 2 0 0 2 ------- -------
Product Inventory $ 239,359 399,355 Service Parts 153,415 216,291 ---------------- ---------------
TOTALS $ 392,774 $ 615,646 ------ ================ ===============
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4 ================================================================================
[5] PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment and accumulated depreciation and amortization as of June 30, 2003 and 2002 are as follows:
JUNE 30, -------- 2 0 0 3 2 0 0 2 ------- -------
Automobiles $ 253,574 $ 253,574 Office Equipment 1,816,159 1,761,354 Furniture and Fixtures 321,161 321,161 Leasehold Improvements 273,102 273,102 --------------- --------------
Totals 2,663,996 2,609,191 Less: Accumulated Depreciation and Amortization 2,219,027 2,025,701 --------------- --------------
PROPERTY AND EQUIPMENT - NET $ 444,969 $ 583,490 ---------------------------- =============== ==============
Total depreciation and amortization expense amounted to $193,326, $182,140, $172,254 for the years ended June 30, 2003, 2002 and 2001, respectively.
[6] INTANGIBLE ASSETS
The following intangible assets and accumulated amortization as of June 30, 2003 and 2002 are included in other assets:
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5 ================================================================================
[6] INTANGIBLE ASSETS [CONTINUED]
The estimated amortization expense related to intangible assets for each of the five succeeding fiscal years and thereafter as of June 30, 2003 is a follows:
YEAR ENDED JUNE 30, - ---------- 2004 $ 1,000 2005 1,000 2006 1,000 2007 1,000 2008 1,000 Thereafter 167 -----------
TOTAL $ 5,167 ----- ===========
For the years ended June 30, 2003, 2002 and 2001, amortization expense of intangible assets were $1,000, $13,971 and $13,971, respectively.
[7] COMMITMENTS AND RELATED PARTY TRANSACTIONS
[A] LEASING AGREEMENTS - In January 2001, the Company renewed its real estate leases of office and warehouse space under this operating lease agreement through February 2006. Terms of the agreement provide for annual base rent of $165,718 which is adjusted annually based on a cost of living calculation.
In addition to the annual base rent, the office and warehouse real estate lease requires the Company to pay for certain contingent expenses such as building maintenance, insurance and real estate taxes. Total contingent lease expenses were $133,856, $121,918 and $77,008 for the years ended June 30, 2003, 2002 and 2001, respectively.
The Company maintains two operating leases for several pieces of office equipment that expire in 2005 and 2007. Office equipment lease expense, including contingent usage charges, was $12,977, $11,740 and $14,697 for the years ended June 30, 2003, 2002 and 2001, respectively.
The fixed annual base rent [exclusive of an annual cost of living adjustment and contingent usage charges] of the office, warehouse and equipment leases for the next five (5) years are as follows:
REAL OFFICE ESTATE EQUIPMENT ------ ---------
2004 165,718 10,860 2005 165,718 10,860 2006 110,472 7,010 2007 -- 5,550 2008 -- -- -------------- --------------
TOTALS $ 441,908 $ 34,280 ------ ============== ==============
Total rent expense was $178,691, $179,482 and $200,352 for the years ended June 30, 2003, 2002 and 2001, respectively.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6 ================================================================================
[7] COMMITMENTS AND RELATED PARTY TRANSACTIONS [CONTINUED]
[B] EMPLOYMENT AGREEMENTS - Effective July 1995, the Company entered into five [5] year employment agreements with two officers of the Company which provide for salaries of $135,000 and $250,000. In January 2001, these two employment agreements were renewed for an additional five [5] year period through June 2005. Provisions of the renewed agreements provide for annual salaries of $165,000 and $300,000. In addition, the renewed agreements continue to provide for a "Performance Bonus" based on percentages of two (2) to six (6) percent applied to certain levels of the Company pre-tax profits. The bonus expense recorded was approximately $-0-, $72,000 and $50,000 for the years ended June 30, 2003, 2002 and 2001, respectively.
In addition, the employment agreements contain provisions providing that in the event of a hostile change of control of the Company and a resultant termination of the employees' employment prior to expiration of the agreement, the employees would be entitled to receive certain lump sum payments ranging from 80% of the officers current salary to 80% of the prior year's salary times the remaining years of the related employment agreement.
[C] FLOOR PLAN PAYABLE - The Company finances inventory purchases through a floor plan wholesale credit line with a finance company, which is secured by substantially all assets of the Company. At June 30, 2003, the Company had a maximum credit line of $4,500,000, of which $3,950,174 was unused. Provisions of the floor plan agreement provide that the lender may at its sole discretion from time to time determine the maximum amount of financing which it elects to extend based on certain eligible inventory and accounts receivable balances. The outstanding borrowing under the credit line at June 30, 2003 and 2002 was $549,826 and $1,024,507, respectively. Payments on the credit line are due currently and are interest free for a 30 day period. If not repaid in full, interest is calculated based on the average daily outstanding balance under the line of credit at a rate of the greater of 6% or the prime rate. Purchases made under the credit lines were repaid in full within the 30 day interest free repayment period during fiscal 2003, 2002 and 2001. Accordingly, no interest expense has been incurred for the years ended June 30, 2003, 2002 and 2001. The prime rate and the weighted average interest rate were approximately 4.00%, 4.75% and 9.50%, respectively at June 30, 2003, 2002 and 2001.
[8] INCOME TAXES
The provision for income taxes is summarized as follows:
Y E A R S E N D E D J U N E 3 0, ------------------------------------------------- 2 0 0 3 2 0 0 2 2 0 0 1 ------- ------- ------- Federal: Current $ -- $ 257,636 $ 271,000 Deferred -- 52,635 (4,900) -------------- -------------- ----------------
Federal Provision -- 310,271 266,100 -------------- -------------- ----------------
State: Current -- 65,891 69,000 Deferred -- 9,289 (1,100) -------------- -------------- ----------------
State Provision -- 75,180 67,900 -------------- -------------- ----------------
INCOME TAX EXPENSE $ -- $ 385,451 $ 334,000 ------------------ ============== ============== ================
Deferred income taxes arise from temporary differences including depreciation, inventory reserves, allowance for doubtful accounts and expense accruals.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7 ================================================================================
[8] INCOME TAXES [CONTINUED]
The deferred tax asset and liability in the accompanying consolidated balance sheets include the following components:
JUNE 30, 2 0 0 3 2 0 0 2 ------- -------
Net Operating Carry Forwards $ 551,638 $ -- Accounts Receivable Allowance 40,000 64,000 Inventory Allowance 18,000 24,000 Accrued Expenses 10,500 58,900 Other Temporary Differences 54,717 48,749 --------------- ---------------
Deferred Tax Assets 674,855 195,649 Valuation Allowance (479,206) -- Deferred Tax Liabilities - Depreciation and Amortization 30,976 30,976 --------------- ---------------
NET DEFERRED TAX ASSET $ 164,673 $ 164,673 ---------------------- =============== ===============
The following is a reconciliation of income taxes at the U.S. statutory tax rate to the taxes actually provided:
[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.
Diluted EPS presented for the year ended June 30, 2003 does not include the effect of common stock options because the result would be anti-dilutive.
Options to purchase 75,000 shares of the Company's common stock were outstanding during the year ended June 30, 2002 but were not included in the computation of diluted EPS because the exercise price of the options was greater than the average market price of the common stock for the periods reported.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8 ================================================================================
[9] EARNINGS PER SHARE [CONTINUED]
As of July 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," earlier than required. In accordance with the provisions of SFAS No. 142, the Company discontinued the periodic amortization of goodwill, but is now required to annually review the goodwill for potential impairment. Had SFAS No. 142 been effective in the comparative prior periods, the following adjusted results of operations would have been achieved.
[10] DEFINED CONTRIBUTION PLANS
The Company adopted a defined contribution [401(k)] plan covering all eligible employees. Under the terms of the Plan, participating employees elect to contribute a portion of their salaries to the Plan. The Company matches up to a certain percentage of the employees' contribution. Expense for the years ended June 30, 2003, 2002 and 2001 was $46,140, $47,856 and $44,363, respectively.
[11] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN
On February 6, 1990, the Board of Directors adopted a Stockholders' Rights Plan, which entitles the Right holder, upon the occurrence of specified triggering events, i.e., the acquisition by a person or group of beneficial ownership of 20% or more of outstanding shares; the commencement of a tender offer for 20% or more of outstanding shares [unless an offer is made for all outstanding shares at a price deemed by the Continuing Board to be fair and in the best interest of stockholders] and the determination by the Board that a person is an "Adverse Person," as defined in the Rights Agreement to purchase one share of common stock at an exercise price of $7.50 per share, or in certain "take over" situations, common stock equal in value to two times the exercise price. Subsequent to a triggering event, if the Company is acquired in a merger or other business transaction in which the Company is not the surviving corporation [unless Board approved], or 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right shall have the right to receive upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. The Rights may be redeemed by the Company for $.01 per Right at any time prior to the determination of the Board that a person is an Adverse Person or ten days following a public announcement of the acquisition of, or commencement of a tender offer for, 20% of the outstanding common stock. The Rights initially expired in February 2000, but were extended to February 2010. No options were outstanding under the Stockholders Rights Plan as of June 30, 2003.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9 ================================================================================
[11] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN [CONTINUED]
Under terms of the Company's 2000 Stock Option Plan ["the Plan"], employees, directors, and consultants may be granted incentive stock options to purchase the Company's common stock at no less than 100% of the market price on the date the option is granted [110% of fair market value for incentive stock options granted to holders of more than 10% of the voting stock of the Company]. The Plan also provides for non-qualified stock options to be issued with an exercise price of not less than 85% of the fair market value of the common stock. The Company has reserved 500,000 shares of the Company's common stock for distribution under the Plan. In January 2001, the Company granted 362,000 stock options under the Plan to various employees. Shares of common stock under the Plan may consist, in whole or in part, of authorized and unissued treasury stock. Options vest over a 5 year period and are exercisable over a 10 year period. No options were issued under the Plan during the years ended June 30, 2003 and 2002.
Information related to all stock options granted by the Company is as follows:
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #10 ================================================================================
[11] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN [CONTINUED]
The following table summarizes information about stock options outstanding at June 30, 2003:
The exercise price for each of the above grants was determined by the Board of Directors of the Company to be equal to the fair market value of the common stock on the day of grant [110% of the fair market value for incentive stock option grants to holders of more than 10% of the voting stock of the Company]. Pursuant to the required pro forma disclosure under the fair value method of estimating compensation cost, the Company has estimated the fair value of its stock option grants by using the Black-Scholes option pricing method with the following weighted-average assumptions:
2 0 0 3 2 0 0 2 2 0 0 1 ------- ------- -------
Expected Option Term (Years) -- -- 5 years Risk-Free Interest Rate (%) -- -- 6.0% Expected Volatility (%) -- -- 64% Dividend Yield (%) -- -- 0% Weighted Average Fair Value of Options Granted $ -- $ -- $ .52
The Company applies APB Opinion No. 25 and the related Interpretations for stock options issued employees. Accordingly, no compensation cost has been recognized for option grants. Had compensation cost for these awards been determined based on the fair value at the grant dates consistent with the method prescribed by SFAS No. 123, the Company's net income would have been adjusted to the pro forma amounts indicated below:
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11 ================================================================================
[12] CONTINGENCIES
Management has been notified of an unasserted possible claim or assessment involving the Company's pension plan. The pension plan was adopted in 1981 as a defined benefit plan. In 1989, various actions were taken by the Company to terminate the pension plan, to convert it to a defined contribution plan and to freeze benefit accruals. However, no filing for plan termination was made with the Pension Benefit Guaranty Corporation [the "PBGC"]. Additionally, a final amended and restated plan document incorporating the foregoing amendments and other required amendments including those required by the Tax Reform Act of 1986 have not been properly adopted. In addition, since 1989, it appears that certain operational violations occurred in the administration of the Plan including the failure to obtain spousal consents in certain instances where it was required.
The Company decided to (i) take corrective action under the IRS Walk-in Closing Agreement Program ["CAP"], (ii) apply for a favorable determination letter with respect to the Plan from the IRS, and (iii) terminate the Plan. The CAP program provides a correction mechanism for "non-amenders" such as the Company. Under CAP, the Company may be subject to monetary sanctions ranging from $1,000 to $40,000. In addition, the Company will be required to correct, retroactively, operational violations, and to pay any resulting excise taxes and PBGC premiums and penalties that may be due. In December 2000, the Company made a contribution to the Plan along with payments of specified sanctions in connection with the IRS settlement. The Company is awaiting resolution with the PBGC.
The Company from time to time becomes involved in various routine legal proceedings in the ordinary course of its business. Management of the Company believes that the legal matters mentioned above and the outcome of remaining pending legal proceedings and unasserted claims in the aggregate will not have a material effect on its consolidated statement of operations, consolidated balance sheet, or liquidity.
[13] SIGNIFICANT CUSTOMERS
There were three significant customers who on an individual basis accounted for more than 10% of total revenues during fiscal 2003, 2002 and 2001 as follows:
YEARS ENDED JUNE 30, ------------------------------------------------------ CUSTOMER 2 0 0 3 2 0 0 2 2 0 0 1 - -------- ------- ------- -------
A $ -- $ -- $ 23,000,000 B 7,500,000 6,500,000 -- C -- 16,000,000 -- ----------------- --------------- ---------------
$ 7,500,000 $ 22,500,000 $ 23,000,000 ================= =============== ===============
There were five significant customers who on an individual basis accounted for more than 10% of accounts receivable at June 30, 2003 and 2002 as follows:
JUNE 30, ----------------------------------- CUSTOMER 2 0 0 3 2 0 0 2 - -------- ------- -------
A $ -- $ 600,000 B 1,415,000 1,350,000 C 515,000 900,000 D -- 750,000 E 545,000 -- ----------------- ---------------
$ 2,475,000 $ 3,600,000 ================= ===============
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12 ================================================================================
[14] BUYING AGREEMENT
During the year ended June 30, 2003, the Company purchased approximately $6,250,000 of hardware from one vendor at discounted prices under a buying agreement. Should the buying agreement be terminated, the Company may not be able to obtain purchases from another supplier at comparable terms.
[15] FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted Statement of Financial Accounting Standards ["SFAS'] No. 107, "Disclosure About Fair Value of Financial Instruments" which requires disclosing fair value to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
In assessing the fair value of financial instruments, the Company used the following methods and assumptions, which were based on estimates of market conditions and risks existing at that time. For certain instruments, including cash and cash equivalents, trade payables, mortgage receivable and floor plan payable it was estimated that the carrying amount approximated fair value for these instruments because of their short maturities.
[16] NEW AUTHORITATIVE PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities." The new rules amend existing accounting for these costs by requiring that a liability be recorded at fair value when incurred. The liability would be reviewed regularly for changes in fair value with adjustments recorded in the consolidated financial statements. Previous rules permitted certain types of costs to be recognized when future settlement was probable. SFAS No. 146 also provides specific guidance for lease termination costs and one-time employee termination benefits when incurred as part of an exit or disposal activity. The provisions for SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The company is still assessing the impact of the adoption of this new standard, although it does not expect it to affect the consolidated financial statements.
In December 2002, FASB Statement No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure" was issued as an amendment of FASB Statement No. 123. Provisions of Statement No. 148 provide for alternate methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition Statement No. 148 amends the disclosure requirements of Statement No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. Statement No. 148 is effective for entities with a fiscal year ending after December 15, 2002. Certain disclosure requirement under Statement No. 148 are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002.
In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149. "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities un FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities.: SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and ford hedging relationships designated after June 30, 2003.
The Company expects that the adoption of these standards will not have a significant impact on its financial statements.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13 ================================================================================
[16] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED]
In May 2003, the Financial Accounting Standards Board (FASB) has issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement improves the accounting for certain financial instruments that under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position.
Statement 150 affects the issuer's accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type, which includes put options and forward purchase contracts, involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this Statement is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers' shares. Most of the guidance in Statement 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.
[17] SELECTED QUARTERLY FINANCIAL DATA [UNAUDITED]
EXHIBIT INDEX