ITEM 1. BUSINESS
TransNet Corporation ("TransNet" or the "Corporation") is a single-source provider of unified communication and information technology ("IT") products and solutions, and technology management services designed to enhance clients' return on investment in IT costs through enhancing the productivity and security of their information systems. Through its sales and service departments, TransNet provides IT products, technologies, solutions, and services for its customers throughout the entire "life cycle" of their IT systems by combining a wide array of value-added professional technical services with the sale of voice over internet protocol ("VoIP" or "IP") systems, hardware systems, network products, physical security solutions, wireless networks and communication products, computers, peripherals, and software. TransNet also provides IT staffing services and end-user training. TransNet was incorporated in the State of Delaware in 1969. 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: IT systems are critical to an organization's productivity and ability to compete. As a single-source unified communications and IT provider, the Corporation partners with its clients through all stages of the "life cycle" of the client's information system network, providing the best solution to meet each client's individual needs. Our sales and technical representatives meet with the client to understand the clients' goals and challenges, and perform a needs analysis, then plan, prepare, design, implement, operate, safeguard data, and optimize the networks as the clients needs evolve. The sale of IT equipment and related software for VoIP systems, network products, physical security solutions, wide-area networks ("WANs"), local area network ("LANs"), desktop and laptop computers, and video surveillance products accounted for a significant portion of the Corporation's revenues, accounting for 63% of revenue in fiscal 2009, and 58% and 63% of revenue in fiscal 2008 and fiscal 2007, respectively.
TransNet provides cost-efficient and flexible IT solutions including a variety of networks, including VoIP systems, standard and wireless (indoor and outdoor) WANs and LANs. As part of its single source approach, the Corporation is a systems integrator, combining hardware and software products from different manufacturers into working systems for maximum flexibility. Equipment sold by TransNet includes network electronics, VoIP products, servers, monitors, computer hardware, printers, physical security systems and video surveillance equipment, and operating systems software. Most of the networks sold by TransNet are VoIP systems, which incorporate technological advances in the convergence of voice and data, as well as video and security solutions onto the network. VoIP systems provide great potential for expansion to incorporate various converged technologies to meet clients' IT needs with one network. The resulting efficiencies of operation and inherent ability to expand provide clients with the ability and flexibility to expand systems to meet specific requirements and as time and budgets allow.
Because clients' IT needs and IT solutions are increasingly more sophisticated, and because technology develops at a rapid pace, TransNet keeps pace with these changes to ensure its ability to effectively deliver advanced solutions to our clients. To meet this demand, TransNet maintains strategic alliances with the industry's leading IT manufacturers. TransNet does not manufacture or produce any of the items it markets. We are currently an authorized reseller for Apple Computer, Inc. ("Apple"), Cisco Systems, Inc. ("Cisco") as a Cisco Silver Certified Partner, Dell, Inc., Hewlett-Packard as an HP Gold Provider, a State/Local Government Specialized Partner, Elite Education Partner (K-12 and higher education), IBM, IPcelerate, Inc. ("IPcelerate"), Lenovo, Lexmark International, Inc., McAfee, Inc., Microsoft as a Microsoft Gold Partner, NEC-Mitsubishi Electronic Display of America, Inc. ("NEC"),
Nortel Networks ("Nortel"), Novell, Inc. ("Novell") as a Novell Silver Partner, Smart Technologies, Symantec, Toshiba American Information Systems, Inc. ("Toshiba"), VMware, Inc., Websense, and 3COM. In addition to those manufacturers referenced above, we sell products manufactured by Citrix and Xerox/Tektronix, as well as video surveillance equipment manufactured by Bosch, and 9-1-1 emergency response and system management solutions manufactured by PlantCML. As a result of these alliances, combined with our expertise, we offer our clients a wide range of products and solutions to meet the diverse range of client needs. These alliances are subject to specified qualifications and may be terminated by either party.
In keeping with the critical need for network security, the Corporation markets network management and control software to provide greater security to its clients, allowing them to monitor and control access to their networks with security measures such as user authentication and verification. TransNet offers a full range of security products to provide the required security safeguards, including the technologies described below.
TransNet's strategy is to become a leading provider of advanced technologies. To continue its commitment to provide its clients with cutting-edge technology, and in keeping with this strategy, during fiscal 2009, we enhanced our unified communications offerings, an example of which is the addition of Cisco physical security products. The networks sold by TransNet allow for optimization through addition of new "layers" which incorporate new solutions converged on to an existing network. These layers may be selectively added in increments to existing networks based on specific client needs, budgets, and timeframes. While many of these solutions, such as the ones discussed below, have been evolving over the past few years, it is only recently that these technologies have evolved to the point of integration onto a VoIP system. One example is physical security solution suites for both public and commercial sites. The need and demand for these solutions has increased dramatically in recent years in the aftermath of public violence, and "situational awareness" is key. In addition to tie-ins to fire alarms and smoke detectors, these solutions, through video surveillance cameras, as well as personnel authentication and validations, monitor access to specific physical locations with advanced network-administered security controls focused upon intruder prevention and containment. These physical security solutions not only monitor and control access to locations under specified parameters that may be modified by the client with respect to day of the week and time of day, but because these solutions now operate on the client's VoIP network, they connect with the network's voice, data, and video applications to provide real-time notification of security breaches, and allow for instant messaging of first-responders and/or security forces, and/or to provide automatic physical security modifications in effected areas of a location, for example, restricting entrance or exits from a particular part of a building, or enhanced video surveillance to improve the clarity of videos from monitoring cameras. An added benefit may be obtained through the use of secure virtual private network ("VPN") access, whereby these systems allow monitoring of multiple areas without incurred expenses for multiple security teams. We believe these technologies hold great promise for educational facilities and emergency response clients, as well as having commercial applications.
TransNet has obtained an advanced certification from Cisco to provide solutions specifically geared to emergency communications. These solutions run on a client's IP network and, in the event of an emergency, provide critical services to establish communication between non-interoperable radio systems, or to provide restoration of all telecommunication services in the event of a site evacuation - whether due to a natural or man-made disaster. Another example of TransNet's network optimization is the expansion of unified emergency communications technologies with the 9-1-1 emergency response call center solutions manufactured by PlantCML, which are designed to streamline the emergency response of municipal police departments and public safety provider clients.
Other technologies marketed by TransNet include mesh-networking products which provide the expansion of networks, including wireless networks, into areas in which there is minimal data connectivity. Our product line includes active radio frequency identification ("RFID") products. RFID allows monitoring of specific units for tracking and/or loss prevention. These applications have proven themselves as cost-effective solutions for clients such as hospitals and those with large plants. These are some of the solutions marketed by TransNet that fulfill the promise of converged networks. Because these are emergent technologies, the sales of these new technologies did not account for a material source of revenues during fiscal 2009. We believe that these technologies will assume a greater market share in our performance going forward.
The principal markets for the Corporation's products are commercial clients, including Fortune 500 companies and large to mid-size businesses, as well as federal, state, and local governmental agencies, and educational customers (K-12 through higher education) (collectively "Public Sector" clients). These markets are reached by direct sales conducted through our corporate sales departments based in our Branchburg, New Jersey headquarters. Our clients are located primarily in New Jersey, eastern Pennsylvania, and the New York City metropolitan area. TransNet also serves locations of its customers outside the region. Our sales staff is comprised of experienced sales professionals, who are provided with on-going manufacturer training and certification programs to ensure that our sales staff is technically proficient to meet our clients' demand for advanced technology solutions.
Other than a small inventory of parts and supplies, the Corporation does not maintain a standard inventory, but orders product based upon orders received by its clients. Most products are sold pursuant to purchase orders. Larger orders may be governed by contracts that establish specified prices. 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 utilizes a direct shipping program, through which product is shipped directly to our clients from the Corporation's suppliers. Backlogs of orders are generally immaterial, although the Corporation has experienced an increase in open orders during the first quarter of fiscal 2010.
The marketing of IT products and related technical services is generally not seasonal in nature.
TECHNICAL SUPPORT AND SERVICE: During the past year, our management continued its focus on marketing a wide array of sophisticated technical services in conjunction with equipment sales to its clients in order to maximize profits. Services are available for a variety of products marketed by the Corporation, and include system integration and design, preparing, implementing, testing, operating, supporting, and optimizing the networks we market. In addition, TransNet provides post-installation technical support and network monitoring services, authorized warranty service, help-desk services, call center support, and "break and fix" repair and maintenance services. Service operations are a significant source of revenues, comprising 37% of revenues in fiscal 2009, 42% of revenues in fiscal 2008, and 37% of revenues in fiscal 2007.
TransNet's technical services are delivered by our staff of specially certified and trained systems engineers and technical representatives. Members of our technical staff hold a variety of specialized certifications and all receive on-going training and certification programs to keep pace with the demands of rapid technological development, and to obtain and maintain the requisite qualifications to provide unparalleled levels of service. As referenced above, TransNet maintains strategic alliances with the industry's leading manufacturers and we often work with these partners on specified networks. TransNet is an authorized service and support dealer for the following manufacturers: Apple, Cisco (Silver Certified Partner), Dell Inc., Hewlett Packard (as a Gold Partner), Lenovo, IPcelerate, Lexmark, Microsoft (as a Gold Partner), and Nortel.
As IT systems have evolved, so has the need for sophisticated design and implementation services, as well as post-installation support services. Our clients require the assistance of an experienced, qualified IT solutions provider such as TransNet. Our technical representatives are a vital component of system planning and design, working closely with our sales staff and our clients to ensure the delivery and implementation of a system that addresses all of the clients IT needs, a process that involves determining each customer's standard hardware technology, application, and operating system software, and networking platform requirements. TransNet also offers post-installation training on the new system.
As part of the implementation process, TransNet has the capability to provide in-house technical services to stage, configure, integrate, and test the products prior to delivery and installation at the client site. In addition to our project management team, our system engineers are deployed at client sites to implement networks. After installation, our technical representatives perform rigorous testing to ensure functionality.
Post-installation, TransNet offers a variety of support contracts tailored to clients' support requirements to assure prompt response to network problems. Networks have become increasingly complex, the number of wireless networks has expanded, and the need for sophisticated services related to management and security of network operations and proper flow and security of data likewise has increased. In response, TransNet has incorporated network security management into its service offerings. TransNet utilizes an automated remote management system in our Support Center located in Branchburg, New Jersey to provide real-time monitoring of clients' networks, VoIP systems and network infrastructure and immediate detection of, and response to, network problems or failure, or breaches in network security. Detected problems are routed through our Support Center, and a technician is assigned to remedy the situation remotely if possible, or dispatched to the client site, if necessary. Regular diagnostic reports are generated, as well.
Additional post-installation services include troubleshooting, diagnosis, and remedial action performed remotely and/or on-site by skilled system engineers. We offer a range of guaranteed response times, based upon the client's specific response requirements or the nature of the outage. The availability of these services is determined by the client, ranging from 24/7 coverage to next business day response. In addition, our system engineers and service technicians provide service and support on an on-call basis for networks, file servers, personal computers, laptop computers, printers and other peripheral equipment.
Many businesses elect to focus their resources on their respective core business and, accordingly, do not have internal IT 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 cost-effective outsourced network services to assist customers in optimizing technology to enhance their productivity. Many of these services may be performed at the client site or through our Support Center. In addition to those services referenced above, we offer services of skilled technology personnel, including WAN and LAN planning, design, implementation and support, PC hardware support, systems integration services, project management, help desk services, asset management, relocation services, and installation or installation coordination. In addition, the Corporation hosts a call center in its Branchburg, New Jersey location where our technicians provide remote support services, and through our help-desk provide customized end-user support to meet clients' specific requirements.
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 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. These 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. During the past few years, this area of service operations has declined, as many US businesses have moved their support programs outside the United States, a trend which we believe will continue.
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.
As referenced above, TransNet 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.
IT STAFFING: TransNet provides a range of services to recruiting and source technical personnel to meet the specific short-term or long-term interim and permanent staffing needs of our clients. Because of its first-hand knowledge of the industry and the skills and experience required for IT positions, TransNet understands its clients' staffing needs. Recruiters with experience in our industry provide cost-effect services to locate and deliver qualified candidates. Our staffing activities are not a material source of revenues. Although these higher profit margin services increased during fiscal 2008, the economic downturn resulted in a decline in staffing activities during fiscal 2009. We have recently experienced an increase in staffing requests, and anticipate that this trend will continue as the national economy recovers.
TRAINING: TransNet'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 Windows and Macintosh systems and network applications, operation, and maintenance. The training activities of the Corporation are not a material source of revenue.
SUPPLIERS: TransNet purchases product directly from its suppliers. The Corporation reduces its costs for through buying arrangements with Ingram Micro, Inc., its principal supplier, and other industry suppliers. Under these arrangements, the Corporation is able to purchase equipment of various manufacturers at discounts and terms currently unavailable to it through other avenues. During fiscal 2009, the majority of the revenues generated by TransNet from product sales were attributable to products purchased from Ingram Micro, Inc. The balance of the Corporation's product line was purchased from Tech Data Corp., Synnex, and HP, from whom the Corporation purchases direct, as well as a variety of sources used on an as needed order basis. Management anticipates that Ingram Micro, Inc. will be a major supplier during fiscal 2010.
CUSTOMERS: As mentioned above, TransNet's target markets are commercial and Public Sector customers. The majority of the Corporation's corporate customers are commercial users located in the New Jersey - New York City metropolitan area and eastern Pennsylvania.
In both fiscal 2009 and 2008, no customer accounted for 10% or more of the Corporation's revenues. In fiscal 2007, one customer accounted for 10% of the Corporation's revenues.
COMPETITION: The IT markets in which we operate are highly competitive and may be affected by rapid changes in technology and spending habits in both the business and institutional sectors. Technological advances occur rapidly in IT products and this increases the demand upon TransNet to quickly develop expertise in the new products to remain competitive.
The Corporation is in direct competition with any business engaged in information technology management, specifically the sale and technical support and service of VoIP products, networks, personal computers, and related peripherals. Competitors include relatively small and highly specialized firms; businesses similar to TransNet; as well as some of the world's largest national and/or global telecommunication businesses, which possess substantially greater financial resources and substantially larger staffs, facilities and equipment. In addition, several IT manufacturers now sell directly to the end-users. More aggressive competition by these manufacturers could affect TransNet's ability to effectively compete in the market. Due to price reductions of IT products, pricing pressure is a constant competitive factor. The Corporation must lower its prices to remain competitive, resulting in lower profit margins. Businesses able to purchase in larger volume than TransNet have received higher discounts from manufacturers.
TransNet competes on the basis of technical expertise in sales and support services, broad range of product offerings, and flexibility in design of customer specific solutions, performance, price, quality, reliability, brand, distribution, account relationships, customer service and support. Management believes that TransNet's understanding of customers' needs and its ability to combine competitive pricing with responsive and sophisticated support services allow it to compete effectively against a wide variety of alternative sales and distribution channels, including independent dealers, direct mail and telemarketing, superstores and direct sales by manufacturers (including some of its own suppliers). In a cost-effective marketing approach, the Corporation now targets larger customers with more diversified and more highly sophisticated product and technical support 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.
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.
TRADEMARKS: Other than the trademark of its name, TransNet holds no patents or trademarks.
TransNet may copyright its proprietary information such as documents related to network design and implementation.
EMPLOYEES: As of September 15, 2009, the Corporation employed 103 full-time employees and 14 part-time employees. None of its employees are subject to collective bargaining agreements.
INFORMATION: The Corporation files its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934 with the Securities and Exchange Commission. The public may read and copy any material filed with the Commission at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549, on office business days during the hours of 10:00 am to 3:00 pm. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission (http://www.sec.gov). The Corporation's website is http://www.transnet.com.
ITEM 1A.
ITEM 1A. RISK FACTORS
The following are risks related to our business:
OUR OPERATING RESULTS HAVE VARIED, AND MAY CONTINUE TO VARY. WE RECOGNIZED LOSSES FOR THE PAST THREE FISCAL YEARS.
We incurred losses of approximately $2.7 million for fiscal 2009, $2.2 million for fiscal 2008, and $1.5 million for fiscal 2007. Our net losses may continue and our ability to return to profitability will be impacted by:
o the short-term nature of client's commitments because of shorter-term projects rather than long-term contracts
o patterns of capital spending by clients, as the industry continues to experience a sluggish IT spending environment
o general economic conditions
o pricing changes in response to competitive factors, often driving prices and profit margins down
o our revenues may not increase or remain at current levels
o our ability to access sufficient working capital and/or vendor credit to fund sales and operating activities
o timing and customer acceptance of new product and service offerings
o trends in IT outsourcing, as clients reduce the number of vendors
o the availability and related costs of attracting and retaining qualified sales and technical personnel
FAILURE TO COMPETE EFFECTIVELY IN THE MARKETPLACE COULD ADVERSELY AFFECT OUR RESULTS OF OPERATION AND FINANCIAL CONDITION.
We operate in an intensely competitive industry. We compete with small boutique IT firms as well as large, global companies, including manufacturers who now compete against us to sell directly to the customer. Although we feel we offer our clients a wide range of highly sophisticated professional services in conjunction with a select product line, increased competition may create greater pressure to further reduce prices, which could have an adverse effect on our business, results of operations and financial condition.
WE REQUIRE ACCESS TO WORKING CAPITAL AND VENDOR CREDIT TO FUND OUR DAY-TO-DAY OPERATIONS.
We require access to working capital to fund our day-to-day operations, particularly at the end of our fiscal quarters when demand for our products and services increase. Termination of the arrangements or acceleration of payment due under these arrangements would have an adverse impact upon our financial condition.
WE MUST ATTRACT AND RETAIN QUALIFIED SALES AND TECHNICAL PERSONNEL.
We rely upon our ability to find, attract, and retain qualified sales and technical personnel. At present, there is a shortage of qualified personnel and we are in direct competition for these applicants with larger businesses to hire from this limited pool of qualified applicants.
WE DERIVE A SIGNIFICANT AMOUNT OF OUR REVENUE FROM A RELATIVELY SMALL NUMBER OF CLIENTS. IF WE WERE TO LOSE ONE OR MORE OF THESE CLIENTS, AND THE BUSINESS WERE NOT REPLACED, IT COULD HAVE AN ADVERSE IMPACT ON OUR RESULTS OF OPERATIONS AND OUR FINANCIAL CONDITION.
While no customer currently accounts for 10% or more of our revenues, our top ten clients account for a significant amount of our business. Although we anticipate our business to continue with
these clients, the loss of a number of large clients could have an adverse impact on our Corporation's results of operations if that revenue stream was not replaced from alternative sources.
WE MUST MAINTAIN AUTHORIZATIONS FROM MAJOR MANUFACTURERS TO OPERATE AS AN AUTHORIZED RESELLER AND/OR SERVICE PROVIDER TO PROVIDE THE RESPECTIVE MANUFACTURER'S PRODUCTS AND SERVICES.
We must maintain our authorized status as an authorized reseller or authorized service provider in order to market the products of most major manufacturers. Such authorizations are conditioned upon our continued ability to meet specified requirements, usually related to technical skill levels of our personnel. Although we do not foresee any problem in maintaining our authorizations or obtaining future authorizations, without these authorizations or suitable replacements, we would not be able to offer our clients the products we currently market.
WE PURCHASE PRODUCT FROM A SMALL NUMBER OF SUPPLIERS.
The majority of our purchases are made from a single supplier who provides us with discounted prices. Although the product purchased from that supplier is available from other sources, if that supplier relationship were terminated, we may not be able to obtain the products at the same discounted pricing, and that may have an adverse impact on our ability to compete and our profit margins.
A PORTION OF OUR REVENUE COMES FROM GOVERNMENTAL CLIENTS.
A portion of our revenue is derived from contracts with state and local governments and governmental agencies. Future statutes and/or regulations, and/or changes in purchasing methods or purchasing levels by these entities may affect future revenues and/or profitability of these contracts.
OUR INDUSTRY IS SUBJECT TO PRICING PRESSURES.
Although we believe our pricing is competitive, certain of our competitors may offer more aggressive pricing to their customers, particularly in the current economic downturn. As we have previously reported, the IT industry is subject to price reductions, and we believe that the current economic conditions may intensify pricing pressure. As a result, we may have to lower prices to remain competitive, and reduced prices would require us to sell a higher volume of sales and services, and may have a negative effect upon our gross profit margins.
THERE HAS BEEN SIGNIFICANT VOLATILITY IN OUR STOCK PRICE.
The market for our common stock has a limited daily trading volume, and therefore even moderate selling pressure could have a depressive effect on our stock price. Price volatility may continue. The stock price is affected by revenue, earning results, and general economic conditions.
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 annual rental of $185,605, 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.
The Corporation terminated its lease for shared office space from an unaffiliated third party in the suburban Philadelphia, Pennsylvania area during fiscal 2009.
See Note [6][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 that it regards as material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
On June 19, 2009, the Corporation held its annual meeting of shareholders for the purpose of considering and acting upon the election of two directors. At the meeting, the election of the nominated directors was approved.
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 reported by the National Association of Securities Dealers.
Calendar Year Closing Sales Prices - ------------- -------------------- High Low ----- -----
Third Quarter 1.30 1.10 Fourth Quarter 1.29 1.08
First Quarter $1.19 $0.79 Second Quarter 0.85 0.60 Third Quarter 0.60 0.29 Fourth Quarter 0.36 0.14
First Quarter $0.26 $0.13 Second Quarter 0.22 0.14
As of September 10, 2009, the number of shareholders of record of TransNet's common stock was 2,160. 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 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. No other dividends have been declared.
PERFORMANCE GRAPH
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among TransNet Corporation, The Russell 2000 Index And The RDG Technology Composite Index
[THE DATA BELOW REPRESENTS A GRAPH IN THE PRINTED REPORT]
- -------------------------------------------------------------------------------- 6/04 6/05 6/06 6/07 6/08 6/09 - -------------------------------------------------------------------------------- TransNet Corporation 100.00 95.48 80.65 83.87 38.71 14.19 Russell 2000 100.00 109.45 125.40 146.01 122.36 91.76 RDG Technology Composite 100.00 96.22 101.42 125.45 113.19 92.48
* $100 invested on 6/30/04 in stock or index, including reinvestment of dividends. Fiscal year ending June 30.
- -------------------------------------------------------------------------------- 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 Corporation'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, 2009 were $24,142,487, as compared to $27,407,428 for fiscal 2008, and $31,565,332 for the fiscal year ended June 30, 2007. Revenues from both equipment sales and the provision of technical services decreased in fiscal 2009 primarily due to the slowdown resulting from the national recession. Revenues declined in fiscal 2008 and 2007 as a result of an overall decrease in business, primarily from Public Sector clients.
Revenues from equipment sales in fiscal 2009 period decreased slightly as compared to the same periods in fiscal 2008 as a result of a slowdown in overall business. Equipment sales during fiscal 2009 included a lower amount of higher profit equipment, such as VoIP systems, resulting from the restriction on capital expenditures by many clients. This negatively impacted profit margins. Uncertainty of our Public Sector clients regarding the proposed federal stimulus package added to the slowdown while their projects were on hold pending funding parameters. Once fully implemented, the stimulus package is expected to provide an influx of capital for these clients to use for programs such as security and first-responder technology. In addition to the economic downturn, delays in orders were attributed to prolonged negotiations in connection with recent changes instituted by the State of New Jersey to modify the channels through which the State purchases IT equipment and services. As previously disclosed, in anticipation of these changes and their implementation, the State's purchasing during late fiscal 2008 and throughout fiscal 2009 was significantly reduced as extended process of negotiation of new contracts between the State and major IT manufacturers took place. During the third quarter of fiscal 2009, these contracts were finalized and executed. TransNet has been named by these manufacturers as an approved vendor for a significant number of IT, communication, and security products pursuant to these contracts. While no assurances can be given, management believes that the Corporation is well positioned for growth of its business under these contracts and that sales under these contracts will have a significant and positive impact on results during the first half of calendar 2010.
Service revenues (technical support, repair and maintenance, network design and implementation, and training) were reduced in fiscal 2009 as the result of an overall slowdown in new orders, the recession-related "on hold" status of several projects pending third party progress on the projects, and the resulting downtime of some technical personnel. Construction related delays are typical in a number of projects because the Corporation's portion of the project cannot be performed until a specified amount of the construction has been completed and/or certain determinations made as to specifics of the project due to customer-originated change orders. These gaps are generally offset by new business, but in the current economic environment these offsets were significantly reduced due to delays and client budget constraints. As a result, the Corporation absorbed expenses related to under-utilization of its technical staff, particularly related to more highly compensation higher-skilled technical engineers. In addition, management notes that the Corporation's higher profit margin staffing services, although not a material source of revenues, were also adversely impacted by the economic slowdown as hiring on either a permanent or temporary basis virtually ground to a halt.
Revenues for fiscal year 2008 decreased as compared to fiscal 2007 as a result of an overall slowdown in business. Revenues from equipment sales decreased, while service related revenues remained relatively constant. During fiscal 2007, the Corporation was impacted by erosion in business related to Fortune 500 customers as those customers enter into and/or expand business relationships with large global partners and transfer this business to overseas service providers, such as those in India.
Management believes that projects awarded to the Corporation replaced much of the reduced business, and believes its focus on higher margin services related to VoIP/IP Telephony and security will lead to continued growth and opportunities.
For fiscal 2009, the Corporation reported a net loss of $2,735,097, as compared to a loss of $2,213,045 in 2008, and a net loss of $1,546,454 for fiscal 2007. The loss in 2009 was primarily due to the slowdown in business and delays in projects as a result of the economic downturn, combined with lower profit margin equipment sales and technical services. Management notes during the first quarter of fiscal 2010, the Corporation has an increased backlog of open orders as compared to the same period in the prior year. Although no assurance can be given, based upon the number of open sales orders, management believes that will return to profitability for the first two quarters of fiscal 2010.
The loss in 2008 was attributable to decreased revenues and increased expenses, including selling, general and administrative expenses incurred to expand its sales force and the expertise of its technical staff. In additional to a material reduction in demand for the Corporation's legacy services during fiscal 2007, non-recurring expenses of $186,046 related to elimination of goodwill and deferred tax asset negatively affected earnings.
During the fiscal years discussed, the Corporation performed under contract awards for VoIP products and services, the performance of which extended over several quarters, pending construction of the sites into which the systems will be installed and implemented. Management notes that some of these projects were affected by construction delays beyond the Corporation's control, and these delays resulted in some order backlogs. None of these delays had any significant impact upon the operations of the Corporation. During the fiscal years discussed, and particularly in fiscal 2009, the Corporation's clients continued to be conservative in their IT budgetary spending and to scrutinize budgets and returns on investments. As a result, management refocused its attention on utilization rates of its service technicians and monitoring selling and administrative expenses in an effort to contain expenses as much as possible.
Management believes that future spending will be subject to specific criteria, but also believes that as single source provider, the Corporation is in a better position to satisfy client demands for cost-effectiveness and a suitable return on investment. The VoIP systems and solutions marketed by TransNet are designed with the capacity for "optimization" through the subsequent addition of layers of solutions, for example, security solutions, as discussed in Item 1, paving the way to future business from existing customers. We are confident that our strategy of being an advanced solutions provider will result in future revenues from clients' optimization of already installed networks, providing clients with greater operating efficiencies.
Service related revenues, a material portion of revenues, are significant in their contributions to net income because these operations yield a higher profit margin than equipment sales. Services during the past three fiscal years have been comprised primarily of services including planning, design, configuration, installation and implementation, testing, and optimization, often related to the sale and implementation of VoIP networks. As previously reported, due to industry changes over the past few years, project work became the major source of service revenue generation, as legacy services diminished. The transition to project work is complete and the lower level of legacy services had no impact on the results of operations during the fiscal 2009 periods as compared to the prior years. Revenues are also generated by a variety of support contracts for these networks which provide service and support for the customer's personal computers, peripherals, and networks. These contracts are short-term, and contain provisions which permit early termination. Although the contracts generally contain renewal terms, there is no assurance that such renewals will occur. Under these agreements, TransNet's Support Center provides troubleshooting, diagnosis, and remedial services performed remotely by skilled system engineers, who will be dispatched to perform on-site repairs, if necessary. The agreements are for
twelve months or less. In addition, our system engineers and service technicians provide service and support on an on-call basis. Revenue resulting from contracts with corporate clients for the provision of service, support, outsourcing, and network integration has decreased in conjunction with the erosion of demand for these services as those services are moved offshore.
In addition to the challenging economic environment, the IT industry experiences a continuing trend of decreasing prices of equipment. Management believes that this trend will continue. Industry-wide, 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.
To meet these competitive challenges and to maximize the Corporation's profit margin, management has modified its marketing strategy and has taken steps to reduce expenses. Management also utilizes approaches such as manufacturers' direct shipment as a means to reduce equipment related overhead costs which increases 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 and public sector 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. In light of the above, management emphasizes and continues the aggressive pursuit of an increased volume of sales of VoIP systems, and related technical service and support programs, and has introduced new technical support programs offering a wide variety of alternatives of remote and on-site network support and monitoring. Management believes that product sales will continue to generate a significant percentage of the Company's revenues.
The Corporation's performance is also impacted by other factors, many of which are not within its control. These factors include: general economic conditions; availability of credit; 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 conditions.
During the fiscal year ended June 30, 2009, selling, general and administrative expenses, despite an actual decrease remained at 24% of revenues as a result of lower revenues. During the second half of fiscal 2009, management aggressively increased its efforts to reduce expenses and adjusted the allocation of personnel to increase the number of employees providing billable services. During fiscal 2008, selling, general and administrative expenses were 24% of revenues, in part due to the reduction in overall revenues, but primarily due to increased expenses related to the expansion of the Corporation's sales force and technical support staff to strengthen the expertise of its sales and support teams, their certifications, and improve corporate infrastructure. Management incurred these expenses as investments required to meet the demands of the current IT environment, and to lead to sustainable growth for the Corporation. Selling, general and administrative expenses were 20% of revenues in fiscal 2007. Management continues its efforts to control expenses, despite escalating personnel related costs, such as health benefits.
Interest income for fiscal 2009 and 2008 decreased as compared to the respective prior years as a result of lower amounts invested and lower interest rates available.
LIQUIDITY AND CAPITAL RESOURCES
There are no material commitments of the Corporation's capital resources, other than leases and employment contracts.
Cash and cash equivalents increased in fiscal 2009, due in part to decreased selling, general and administrative expenses. Despite the increase, cash levels continue to be impacted by the slow payment cycles of Public Sector clients and extended payment cycles from some commercial clients as a result of the economic downturn. The Corporation has entered into vendor credit arrangements to assist in purchasing inventory and provide more flexibility with respect to cash. A portion of the vendor credit is secured by certain of the Corporation's assets.
The amount of cash received from or used by operating activities will vary based on a number of business factors which may vary at different times, including terms of available financing from vendors, and slowdowns or upturns in our business or that of our customers. A decline in service revenues and/or a change in the proportion of service revenues to total revenues may impact operating cash flow as the bulk of the Corporation's service revenues are derived from billing of our technical staff's services. The cash outlay for the labor/payroll underlying these services is incurred on a semi-monthly basis. Billing is determined by timeframes set by our clients. Additionally, as referenced above, during fiscal 2009, the Corporation absorbed costs related to downtime of a portion of our technical staff which resulted from the slowdown of new business in conjunction with completion of existing projects.
Accounts receivable decreased for fiscal 2009 due to reduced revenues and was offset by extended payment cycles of certain customers. Although the Corporation continues to be impacted by the extended and slower payment cycles of commercial customers and governmental agencies, management has initiated vigorous efforts to expedite payments from the governmental bodies and is working to implement more favorable payment schedules where possible. Management notes that payment terms with governmental clients are usually dictated by the client.
Inventories remained relatively constant in fiscal 2009 as compared to fiscal 2008. The increase in accounts payable at the close of fiscal 2009 is attributable to the product orders placed near the end of the year and purchases made using vendor credit, which replaced lines of credit used in prior years.
We require access to working capital from a third party line of credit and vendor credit to fund our day-to-day operations, particularly at the end of our fiscal quarters when demand for our products and services increase. We have made a concerted effort to improve our working capital position and implemented measures to reduce headcount, streamline operations, and manage costs in response to the impact of the recession. In conjunction with the tightening of credit in the US economy, which has negatively impacted our access to credit, management has reviewed the Corporation's line of credit and available vendor credit and has taken steps to obtain the most favorable credit arrangements available. The Corporation previously financed inventory purchases through a credit line with a finance company, with a maximum credit line of $2,500,000, which was terminated by the Corporation in fiscal 2009 because the modified terms were unfavorable. Another line of credit expired in the third quarter of fiscal 2009 and was not renewed. In their place, management utilizes various vendor credit options, all of which provide the Corporation with more favorable payment terms than those available under the prior credit line. Management believes that its currently available credit will be sufficient to meets its requirements going forward. The unavailability of such credit going forward may have an adverse impact upon the operations of the Corporation.
For the fiscal year ended June 30, 2009, as in the prior years, the internal resources of the Corporation were sufficient to enable the Corporation to meet its obligations, including obligations under the above referenced credit facilities.
IMPACT OF INFLATION
The effects of inflation on our operations were not significant during the periods presented.
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 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
The Corporation's revenues are derived from both the sale of equipment and services provided to our customers. Revenues related to our equipment sales are recognized when evidence of an arrangement exists, delivery has occurred, the sales price is both fixed and determinable, and collectability is reasonably assured, in accordance with SEC Staff Accounting Bulletin No. 104 Topic 13.
Revenues related to services provided are recognized ratably over the term of the underlying customer contract or at the end of the contract when obligations have been satisfied, in accordance with SEC Staff Accounting Bulletin No. 104 Topic 13. For service performed on a time and materials basis, revenue is recognized upon performance.
The Corporation enters into revenue arrangements in which customers may purchase a combination of equipment and services (multiple-element arrangements). When vendor-specific objective evidence ("VSOE") of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately. For services, VSOE of fair value is established by the rates charged when they are sold separately. For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.
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.
INCOME TAX ACCOUNTING
The Corporation determines its provision for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax effects of temporary differences of existing assets and liabilities and their respective tax bases. Future tax benefits of tax loss and credit carryforwards also are recognized as deferred tax assets. When necessary, deferred tax assets are reduced by a valuation allowance to the extent the Corporation concludes there is uncertainty as to their ultimate realization. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that the change is enacted.
For the fiscal years ended June 30, 2009 and June 30, 2008, the Corporation had no current or deferred income tax provision. Deferred taxes are based upon differences between the financial statement and tax basis of assets and liabilities and available net operating loss carryforwards. A full valuation allowance has been established due to the uncertainty about the realization of the deferred tax asset.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached.
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 consolidated balance sheets of TransNet Corporation and Subsidiary as of June 30, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2009, in conformity with U.S. generally accepted accounting principles.
MSPC Certified Public Accountants and Advisors, A Professional Corporation
Cranford, New Jersey September 28, 2009
TRANSNET CORPORATION AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
JUNE 30, ----------------------------- 2009 2008 ------------- ------------- ASSETS: CURRENT ASSETS: Cash and Cash Equivalents $ 1,654,366 $ 314,618
Restricted Cash 863,621 837,010
Accounts Receivable - Net 4,392,995 6,477,948
Inventories - Net 261,456 265,977
Other Current Assets 11,152 17,974 ------------- ------------
TOTAL CURRENT ASSETS 7,183,590 7,913,527
PROPERTY AND EQUIPMENT - NET 120,690 271,695
OTHER ASSETS 216,755 204,162 ------------- ------------
TOTAL ASSETS $ 7,521,035 $ 8,389,384 ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 3,481,381 $ 845,579
Accrued Expenses 403,181 353,443
Unearned Revenue 365,442 57,286
Lines of Credit 828,094 1,955,042 ------------- ------------
TOTAL CURRENT LIABILITIES 5,078,098 3,211,350 ------------- ------------
STOCKHOLDERS' EQUITY:
Capital Stock - Common, $.01 Par Value, Authorized 15,000,000 Shares; Issued 7,408,524 Shares at June 30, 2009 and 7,408,524 at June 30, 2008 [of which 2,585,220 are in Treasury at June 30, 2009 and 2008] 74,085 74,085
Additional Paid-in Capital 10,574,670 10,574,670
[Accumulated Deficit] Retained Earnings (1,052,983) 1,682,114 ------------- ------------
Totals 9,595,772 12,330,869
Less: Treasury Stock - At Cost (7,152,835) (7,152,835) ------------- ------------
TOTAL STOCKHOLDERS' EQUITY 2,442,937 5,178,034 ------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,521,035 $ 8,389,384 ============= ============
See Notes to Consolidated Financial Statements.
TRANSNET CORPORATION AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
TRANSNET CORPORATION AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
TRANSNET CORPORATION AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
TRANSNET CORPORATION AND SUBSIDIARY - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the fiscal year ended June 30, 2009, the Company traded-in an automobile with a book value of $24,488 in exchange for a trade-in value of approximately $26,000.
See Notes to Consolidated Financial Statements.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
[1] NATURE OF OPERATIONS
TransNet Corporation ("TransNet" or the "Corporation") is a single-source provider of unified communication and information technology ("IT") products and solutions, and technology management services designed to enhance clients' return on investment in IT costs through enhancing the productivity and security of their information systems. Through its sales and service departments, TransNet provides IT products, technologies, solutions, and services for its customers throughout the entire "life cycle" of their IT systems by combining a wide array of value-added professional technical services with the sale of VoIP systems, hardware systems, network products, wireless networks and communication products, computer peripherals, and software. TransNet was incorporated in the State of Delaware in 1969. 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.
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.
Certain reclassifications have been made to prior period financial statements to conform to the current year presentation.
[B] CASH AND CASH EQUIVALENTS - Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased.
[C] ACCOUNTS RECEIVABLE - Accounts receivable have been reduced by an allowance for doubtful accounts of $120,000 and $115,000 as of June 30, 2009 and 2008, respectively.
[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 $3,000 and $7,000 at June 30, 2009 and 2008, respectively.
[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 - The Corporation's revenues are derived from both the sale of equipment and services provided to customers. Revenues related to equipment sales are recognized when evidence of an arrangement exists, delivery has occurred, the sales price is both fixed and determinable, and collectability is reasonably assured, in accordance with SEC Staff Accounting Bulletin No. 104 Topic 13.
Revenues related to services provided are recognized ratably over the term of the underlying customer contract or at the end of the contract when obligations have been satisfied, in accordance with SEC Staff Accounting Bulletin No. 104 Topic 13. For service performed on a time and materials basis, revenue is recognized upon performance.
The Corporation also enters into revenue arrangements in which customers may purchase a combination of equipment and services (multiple-element arrangements). When vendor-specific objective evidence ("VSOE") of fair value exists for all elements, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately. For services, VSOE of fair value is established by the amounts charged when they are sold separately. For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.
[H] EARNINGS PER SHARE - We have adopted the provisions of SFAS No. 128. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. SFAS No. 128 also requires a dual presentation of basic and diluted earnings per share on the face of the statement of operations for all companies with complex capital structures. Diluted earnings per share reflects the amount of earnings for the period available to each share of common stock outstanding during the reporting period, such as common shares that could result from the potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an antidilutive effect on per share amounts [i.e., increasing earnings per share or reducing loss per share]. The dilutive effect of outstanding options and warrants and their equivalents are reflected in dilutive earnings per share by the application of the treasury stock method which recognized the use of proceeds that could be obtained upon exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. Options and warrants will have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants. Equity instruments that may dilute earnings per share in the future are listed in Note 10.
[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, 2009, the Company had approximately $2,107,721 which is subject to such risk. The Company does not require collateral or other security to support financial instruments subject to credit risk.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3 - --------------------------------------------------------------------------------
[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
[J] BUSINESS CONCENTRATIONS - The Company is engaged in the sale of and technical support, service, and technology management service of unified communication and information technology ["IT"] products and solutions, including Voice over IP ["VoIP"] systems, hardware systems, network products, physical security solutions, wireless networks and communication products, computers, printers, peripherals, and software, to commercial and public sector clients located primarily in the New Jersey, Eastern Pennsylvania, and the New York City Metropolitan area. The Company is currently an authorized dealer for several IT manufacturers including Apple, Cisco, Dell, Inc., Hewlett-Packard, IBM, Lenovo, Microsoft, NEC, Novell, Symantec, Toshiba, VMware, and Websense. 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] 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.
[L] STOCK OPTIONS ISSUED TO EMPLOYEES - On July 1, 2005, we adopted the fair value recognitions provisions of SFAS No. 123 R, "Share-Based Payments", under the modified prospective transition method. Prior to July 1, 2005, we applied the Accounting Principles Board (APB) Opinion No. 25 intrinsic value accounting method for its stock incentive plans. Under the modified prospective transition method, the fair value recognition provisions apply only to new awards or awards modified after July 1, 2005. Additionally, the fair value of existing unvested awards at the date of adoption is recorded in compensation expense over the remaining requisite service period.
[M] DEFERRED INCOME TAXES - Pursuant to SFAS No. 109, "Accounting for Income Taxes," income tax expense [or benefit] for the year is the sum of deferred tax expense [or benefit] and income taxes currently payable [or refundable]. Deferred tax expense [or benefit] is the change during the year in a company's deferred tax liabilities and assets. Deferred tax liabilities and assets are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
[N] IMPAIRMENT OF LONG LIVED ASSETS - 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. For the three years ended June 30, 2009, the Company has not recognized an impairment of a long-lived asset.
[3] INVENTORIES
Inventories consist of the following at June 30, 2009 and 2008:
June 30, ------------------------ 2009 2008 ---------- -----------
Product Inventory $ 262,118 $ 261,885 Service Parts 2,338 11,092 Obsolescence Reserve (3,000) (7,000) ---------- -----------
TOTALS $ 261,456 $ 265,977 ========== ===========
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4 - --------------------------------------------------------------------------------
[4] PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION
Property and equipment and accumulated depreciation and amortization as of June 30, 2009 and 2008 are as follows:
June 30, ------------------------ 2009 2008 ---------- ----------- Automobiles $ 174,937 $ 272,366 Office Equipment 2,263,950 2,251,769 Furniture and Fixtures 344,009 344,009 Leasehold Improvements 273,102 273,102 Computer Software 234,321 234,321 ------------ ------------
Totals 3,290,319 3,375,567 Less: Accumulated Depreciation and Amortization 3,169,629 3,103,872 ------------ ------------
PROPERTY AND EQUIPMENT - NET $ 120,690 $ 271,695 ============ ============
Total depreciation and amortization expense amounted to $148,454, $233,252 and $222,105 for the years ended June 30, 2009, 2008 and 2007, respectively.
[5] INTANGIBLE ASSETS AND GOODWILL
In accordance with SFAS 142, we test, at least annually, our intangible assets and goodwill for impairment by comparing fair value to the carrying value. We determined that as of June 30, 2007 the carrying value of goodwill exceeded fair value by a total of $99,446, and that total was recorded as impairment. No impairment was computed for other intangible assets. The cost of the impairment is recorded within "Impairment of Goodwill" on the Consolidated Statement of Operations. No goodwill remains subsequent to the impairment.
The following intangible assets and accumulated amortization as of June 30, 2009 and 2008 are included in other assets:
JUNE 30, 2009:
Weighted Average Net of Amortization Accumulated Accumulated Intangible Assets Period [Years] Cost Amortization Amortization - ------------------- -------------- --------- ------------ ------------
Licenses 20 $ 20,000 $ 20,000 $ -- ========= ============ ============
JUNE 30, 2008:
Weighted Average Net of Amortization Accumulated Accumulated Intangible Assets Period [Years] Cost Amortization Amortization - ------------------- -------------- --------- ------------ ------------
Licenses 20 $ 20,000 $ 19,833 $ 167 ========= ============ ============
For the years ended June 30, 2009, 2008 and 2007, amortization expense of intangible assets were $167, $1,000 and $1,000, respectively.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5 - --------------------------------------------------------------------------------
[6] 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 minimum rent payments of $165,719 per annum for the first two years of the agreement, and $185,605 per annum for the remaining five 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 $120,177, $94,952 and $82,879 and for the years ended June 30, 2009, 2008 and 2007, respectively.
The Company maintains an operating lease for two pieces of office equipment that expires during 2011. Office equipment lease expense was $10,031, $12,885 and $17,304 for the years ended June 30, 2009, 2008 and 2007, respectively. In February 2009, the Company entered into an operating lease for an automobile used the President and Chief Executive Officer of the Corporation which expires during 2011. Automobile lease expense was $3,481 for the year ended June 30, 2009.
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 Automobile - ---------- ---------- --------- ----------
2010 $ 185,605 $ 10,437 $ 8,354 2011 123,737 6,787 8,354 2012 -- -- 4,873 2013 -- -- -- 2014 -- -- -- Thereafter -- -- -- ---------- --------- ----------
TOTALS $ 309,342 $ 17,224 $ 21,581 ========== ========= ==========
Total rent expense was $185,605, $185,605 and $185,608 for the years ended June 30, 2009, 2008 and 2007, respectively.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6 - --------------------------------------------------------------------------------
[6] COMMITMENTS AND RELATED PARTY TRANSACTIONS [CONTINUED]
[B] EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements with two officers of the Company which provide for salaries of $165,000 and $300,000 per annum, and expire in June 2013. The agreements provide for a "Performance Bonus" based on percentages from two (2) percent to six (6) percent applied to specified levels of the Company's pre-tax profits. No bonuses were paid for each of the three years ended June 30, 2009. During fiscal 2009, both officers voluntarily reduced current salary levels. Salary commitments under employment agreements for the next five fiscal years are as follows:
Years ended June 30, - -----------
2010 $ 465,000 2011 465,000 2012 465,000 2013 465,000 2014 -- Thereafter -- ------------
TOTAL $ 1,860,000 ============
In addition the employment agreements contain provisions providing that in the event of a hostile change of control of the company and resulting termination of the employees' employment prior to expiration of the agreement, the employees would be entitled to receive certain lump sum payments equal to the greater of 80% of the officer's then current salary or 80% of the prior year's gross wages including any performance bonus times the remaining years of the agreement.
[C] LINES OF CREDIT - The Company previously financed inventory purchases through a credit line with a finance company, which is secured by substantially all assets of the Company. During December 2008, the Corporation terminated this credit line; the outstanding borrowing under the credit line at June 30, 2008 was $1,074,055. The Company incurred $25,245 and $66,357 of interest expense related to the line of credit during the years ended June 30, 2009 and 2008, respectively.
On May 6, 2008 the Company entered into a discretionary inventory line of credit with a third party. This line of credit had a term of one year and was not renewed during 2009. Provisions in the agreement provide that the lender may at its sole discretion determine the maximum amount of financing which it elects to extend. The outstanding borrowing under the agreement at June 30, 2008 was $397,513. Payments on the line of credit are due currently and are interest free for a 60 day period. If not repaid in full, interest on the outstanding balance is calculated based on the actual number of days elapsed on the basis of a year consisting of 360 days at the per annum rate equal to the Prime Rate plus 2%. The Company has incurred no interest expense related to the line of credit during the fiscal year ended June 30, 2009 and 2008. The Prime Rate interest rate was 5.00% at June 30, 2008.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7 - --------------------------------------------------------------------------------
[6] COMMITMENTS AND RELATED PARTY TRANSACTIONS [CONTINUED]
[C] LOANS PAYABLE [CONTINUED] - On June 18, 2008 the Company entered into a line of credit with a third party, which is secured by the Company's certificate of deposit listed as restricted cash. As of June 30, 2009, the Company had a maximum credit line of $825,000, of which $0 was unused. The outstanding borrowing under the agreement at June 30, 2009 was $825,000. Payments on the line of credit are due upon the lender's demand, and the Company will pay regular monthly payments of all accrued unpaid interest due as of each payment date, beginning July 18, 2008. Interest shall be calculated from the date of each advance until repayment of each advance at a rate of 5.13% per annum. The Company has incurred $23,876 and $1,585 of interest expense related to this line of credit during the fiscal year ended June 30, 2009 and 2008, respectively.
[7] INCOME TAXES
The provision for income taxes is summarized as follows:
Years ended ---------------------------- June 30, ---------------------------- 2009 2008 2007 ------- ------- -------- Current: Federal $ -- $ -- $ --
State -- -- -- ------- ------- --------
Current Provision -- -- -- ------- ------- -------- Deferred: Federal -- -- 73,610
State -- -- 12,990 ------- ------- --------
Deferred Provision -- -- 86,600 ------- ------- --------
INCOME TAX [BENEFIT] $ -- $ -- $ 86,600 ======= ======= ========
The deferred tax asset and liability in the accompanying consolidated balance sheets include the following components:
June 30, ------------------------ 2009 2008 ---------- -----------
Net Operating Loss ["NOL"] Carry Forwards $ 3,851,981 $ 2,740,830 Accounts Receivable Allowance 48,000 43,844 Inventory Allowance 6,347 6,552 Inventory Capitalization 1,200 2,454 Depreciation and Amortization 3,260 439 Other Temporary Differences 6,762 6,762 ----------- ---------- Deferred Tax Assets - Current Portion 3,917,550 2,800,881 Valuation Allowance (3,917,550) (2,800,881) ----------- ----------- NET DEFERRED TAX ASSET $ -- $ -- =========== =========== Deferred Tax Liabilities - Net of Current Portion: Depreciation and Amortization $ -- $ -- =========== ===========
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8 - --------------------------------------------------------------------------------
[7] INCOME TAXES [CONTINUED]
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 the total deferred tax asset as it may not be realized.
At June 30, 2009, the Company had approximately $9,555,000 of federal and state net operating losses with the following fiscal year expiration dates.
Year Ended June 30, - ---------- 2024 $ 780,000 2025 1,670,000 2026 915,000 2027 1,490,000 2028 2,025,000 2029 2,675,000 ------------
TOTAL $ 9,555,000 ============
For the years ended June 30, 2009 and 2008, the Company increased the valuation allowance on the deferred tax asset by $1,116,669 and $686,275, respectively.
The following is a reconciliation of income taxes at the U.S. statutory tax rate to the Company's effective income tax rate is as follows:
Years ended ----------------------------- June 30, ----------------------------- 2009 2008 2007 ------- ------- -------
U.S. Statutory Rate Applied to Pretax Income (35.0)% (35.0)% (35.0)%
State Taxes - Net of Federal Income Tax Benefit (6.0) (6.0) (6.0)
Effect of Valuation Allowance Change 41.0 41.0 47.4 ------- ------- -------
INCOME TAX [BENEFIT] EXPENSE --% --% 6.4% ======= ======= =======
[8] EARNINGS PER SHARE
For each of the three years ended June 30, 2009, all common stock equivalents were considered anti-dilutive and not included in diluted earnings per share.
[9] DEFINED CONTRIBUTION PLANS
The Company adopted a defined contribution [401(k)] plan ["the 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, 2009, 2008 and 2007 was $31,862, $60,655 and $73,832, respectively.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9 - --------------------------------------------------------------------------------
[10] 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 Plan initially expired in February 2000, but was extended to February 2010. No rights were outstanding under the Stockholders Rights Plan as of June 30, 2008.
Under terms of the Company's 2000 Stock Option Plan [the "Option 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 Option 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 Option Plan. In January 2001, the Company granted 362,000 stock options under the Option Plan to various employees. Shares of common stock under the Option Plan may consist, in whole or in part, of authorized and unissued treasury stock.
Information related to stock options granted in connection with the Option Plan is as follows:
Option Plan --------------------------- Weighted Number of Average Shares Exercise Price --------- --------------
Outstanding - July 1, 2006 298,500 .88
Granted -- -- Exercised -- -- Forfeited/Canceled (1,000) 1.41 --------- --------------
Outstanding - June 30, 2007 297,500 .88
Granted -- -- Exercised -- -- Forfeited/Canceled -- -- --------- --------------
Outstanding - June 30, 2008 297,500 .88
Granted -- -- Exercised -- -- Forfeited/Canceled -- -- --------- --------------
OUTSTANDING - JUNE 30, 2009 297,500 $ .88 ========= ==============
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #10 - --------------------------------------------------------------------------------
[10] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN [CONTINUED]
The following table summarizes information about stock options outstanding at June 30, 2009:
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].
[11] CONTINGENCIES
The Company may from time to time become involved in various legal proceedings in the ordinary course of its business. The Company is not currently a party to any legal proceeding that it deems to be material.
[12] SIGNIFICANT CUSTOMERS
During the years ended June 30, 2009 and 2008, no customers accounted for 10% or more of our revenue. During the year ended June 30, 2007, one customer accounted for 10% of our revenues.
We derive a significant amount of our revenue from a relatively small number of clients. If we were to lose one or more of these clients, and the business were not replaced, it could have an adverse impact on our results of operations and our financial condition.
While no one customer currently accounts for 10% or more of our revenues, our top ten clients also account for a significant amount of our business. Although we anticipate our business to continue with these clients, the loss of any large client could have an adverse impact on the Company's results of operations if that revenue stream was not replaced from alternative sources.
[13] BUYING AGREEMENT
During the year ended June 30, 2009, 2008 and 2007, the Company purchased approximately $8,900,000, $11,700,000 and $14,200,000 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.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11 - --------------------------------------------------------------------------------
[14] FAIR VALUE OF FINANCIAL INSTRUMENTS
We adopted SFAS No. 157 on July 1, 2008 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
SFAS No. 157 defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk.
In addition to defining fair value, SFAS No. 157 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
LEVEL 1 - inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
LEVEL 2 - inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
LEVEL 3 - inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
Restricted cash represents the Company's certificate of deposit as discussed in Note [6][C].
The following table presents assets that are measured and recognized at fair value on a recurring basis.
Description Level 1 Level 2 Level 3 June 30, 2009 ----------- ------- ------- ------- -------------
Restricted Cash $ 863,621 $ -- $ -- $ 863,621
[15] NEW AUTHORITATIVE PRONOUNCEMENTS
In May 2009, the FASB issued SFAS No. 165, SUBSEQUENT EVENTS, which establishes accounting standards for recognition and disclosure of events that occur after the balance sheet date but before financial statements are issued. These standards are essentially similar to current accounting principles with few exceptions that do not result in a change in general practice. This SFAS is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12 - --------------------------------------------------------------------------------
[15] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED]
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, RECOGNITION AND PRESENTATION OF OTHER-THAN-TEMPORARY IMPAIRMENTS. This FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, INTERIM DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. This FSP amends FASB Statement No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, INTERIM FINANCIAL REPORTING, to require those disclosures in summarized financial information at interim reporting periods. This FSP shall be effective for interim reporting periods ending after June 15, 2009.
In April 2009, the FASB issued FSP No. FAS 157-4, DETERMINING FAIR VALUE WHEN THE VOLUME AND LEVEL OF ACTIVITY FOR THE ASSET AND LIABILITY HAVE SIGNIFICANTLY DECREASED AND IDENTIFYING TRANSACTIONS THAT ARE NOT ORDERLY. This FSP amends FASB Statement No. 157, FAIR VALUE MEASUREMENTS to provide additional guidance on estimating fair value when the volume and level of transaction activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability. The FSP also provides additional guidance on circumstances that may indicate that a transaction is not orderly. This FSP supersedes FSP No. FAS 157-3, DETERMINING THE FAIR VALUE OF A FINANCIAL ASSET WHEN THE MARKET FOR THAT ASSET IS NOT ACTIVE and requires additional disclosures about fair value measurements in annual and interim reporting periods. FSP No. FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009.
In April 2009, the SEC released Staff Accounting Bulletin No. 111 ("SAB 111"), which amends SAB Topic 5-M. SAB 111 notes that FSP No. 115-2 and FAS 124-2 were scoped to debt securities only, and the FSP referred readers to SEC SAB Topic 5-M for factors to consider with respect to other-than-temporary impairments for equity securities. With the amendments in SAB 111, debt securities are excluded from the scope of Topic 5-M, but the SEC staff's views on equity securities are still included within the topic.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, "The FASB Accounting Standards Codification(TM) and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS 168"). SFAS 168 establishes the FASB Accounting Standards Codification(TM) ("Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparing financial statements in conformity with generally accepted accounting principles in the United States. Once effective, all guidance in the Codification will carry the same level of authority, and all future changes or additions to U.S. generally accepted accounting principles will be issued as Accounting Standards Updates. SFAS 168 does not make any changes to existing accounting guidance that will impact the Company's accounting and financial reporting. It is effective for financial statements issued for interim and annual periods ending after September 15, 2009.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12 - --------------------------------------------------------------------------------
[15] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED]
The Public Company Accounting Oversight Board voted on July 28, 2009 to adopt Auditing Standard No. 7, "Engagement Quality Review" ("EQR"), and to issue a Concept Release on requiring the engagement partner to sign the audit report. The EQR standard provides a framework for the engagement quality reviewer to objectively evaluate the significant judgments made and related conclusions reached by the engagement team in forming an overall conclusion about the engagement.
The Sarbanes-Oxley Act of 2002 directs the Board to include in its auditing standards a requirement that each registered public accounting firm "provide a concurring or second partner review and approval of [each] audit report (and other related information), and concurring approval in its issuance, by a qualified person (as prescribed by the Board) associated with the public accounting firm, other than the person in charge of the audit, or by an independent reviewer (as prescribed by the Board)."The Board initially proposed the auditing standard on February 26, 2008, and re-proposed it on March 4, 2009.
Auditing Standard No. 7 applies to all audit engagements, and engagements to review interim financial information, conducted pursuant to the standards of the PCAOB. The standard supersedes the Board's quality control standard, SECPS Requirements of Membership, Section 1000.08(f); 1000.39, Appendix E. The standard, if approved by the U.S. Securities and Exchange Commission (SEC), will become effective for both the EQR of audits and the EQR of interim reviews for fiscal years beginning on or after December 15, 2009.
Separately, the Board also is seeking comment on a Concept Release to consider the effects of a potential requirement for the engagement partner to sign the audit report. Any such requirement would be in addition to the existing requirement for the audit firm to sign its name on the audit report. The Board is seeking comment on the Concept Release for a 45-day period.
[16] SUBSEQUENT EVENTS
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" (SFAS 165), which establishes accounting standards for recognition and disclosure of events that occur after the balance sheet date but before financial statements are issued. These standards are essentially similar to current accounting principles with few exceptions that do not result in a change in general practice. This SFAS is effective on a prospective basis for interim or annual financial periods ending after June 15, 2009. We adopted this pronouncement effective June 30, 2009, and the adoption of this new standard did not have a material effect on our consolidated financial position, results of operations or cash flows. We have evaluated subsequent events through September 28, 2009, the date the consolidated financial statements were issued.
TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13 - --------------------------------------------------------------------------------
[17] SELECTED QUARTERLY FINANCIAL DATA [UNAUDITED]
. . . . . . . . . . .
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. 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.
MSPC Certified Public Accountants and Advisors, A Professional Corporation
Cranford, New Jersey September 28, 2009
TRANSNET CORPORATION AND SUBSIDIARY - --------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2009, 2008 AND 2007 - --------------------------------------------------------------------------------
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.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer of the Corporation have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of the end of the period covered by this annual report. Based on its evaluation, the Corporation's Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2009, such controls and procedures were not effective.
In making this evaluation, management considered, among other matters, the material weaknesses in the Corporation's internal control over financial reporting that have been identified. See "Management's Report on Internal Control over Financial Reporting" below.
There were no significant changes in the Corporation's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation.
ITEM 9A (T) CONTROLS AND PROCEDURES
The Corporation's management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of June 30, 2009. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Corporation's system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Corporation's assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of the Corporation's management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation's assets that could have a material effect on its financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management performed an assessment of the effectiveness of the Corporation's internal control over financial reporting as of June 30, 2009 based upon criteria in Internal Control - Integrated Framework issued by COSO. Based on that assessment, management has concluded that its internal control over financial reporting was not effective as of June 30, 2009 based on the criteria in Internal Control - Integrated Framework issued by COSO.
The Corporation's management identified the following deficiencies that would be considered a material weakness in our internal control over financial reporting as of June 30, 2009. A material weakness is a deficiency, or combination of deficiencies, that results in more than a reasonable possibility that a material misstatement in the Corporation's annual or interim financial statements will not be prevented or detected on a timely basis:
(i) the Corporation did not maintain an effective control environment due to the lack of documented formal policies and procedures; and
(ii) the Corporation did not maintain effective internal control over the financial closing and reporting process.
In light of this conclusion, the Corporation has initiated documentation of its policies and procedures, and will institute compensating procedures and processes as necessary to ensure the reliability of its financial reporting to include the development of a standard closing checklist with specific assignment of duties, responsibilities, and timetable for completions of assigned tasks.
Management intends to remediate weaknesses in the control environment and financial reporting through specific process improvements that have been identified. The Corporation will develop new processes in its accounting department. Each new process will be evaluated to ensure it is supported by effectively designed level of controls and procedures to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Corporation plans to devote additional resources to its internal controls, and is currently engaged in discussions with third parties regarding improvements. In addition, additional resources will be devoted to developing and communicating its policies, including policies regarding internal controls and related policies and procedures to its employees and management. This shall include development and enforcement of compliance programs. The compliance program shall also include communication to set and reinforce the right tone from the top.
These remediation efforts, primarily associated with financial reporting, will require significant ongoing effort and investment. Management, with the oversight of the audit committee and internal audit staff, will continue to identify and take steps to remedy known deficiencies as expeditiously as possible and enhance the overall design and capability of the control environment. The Corporation intends to further expand its accounting policy and controls capabilities by providing additional resources where deemed necessary and to enhance training of exiting staff in such matters. Management believes that the foregoing actions will continue to improve the Corporation's internal control over financial reporting, as well as its disclosure controls and procedures.
This annual report does not include an attestation report of the Corporation's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Corporation's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this annual report.
There has been no change in the Corporation's internal control over financial reports during the last fiscal quarter of 2009 that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.
ITEM 9 B.
ITEM 9 B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The executive officers and directors of the Corporation are as follows:
Name Position ------------ --------------- John J. Wilk Chairman of the Board and Chief Financial Officer Steven J. Wilk President, Chief Executive Officer, 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 Director and Secretary
- ---------- (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 Corporation'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 Corporation's accounting principles and financial reporting as well as the independence of, and the non-audit services provided by, the Corporation'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 Corporation's Common Stock is not quoted on the NASDAQ National Market, the Corporation 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 is its audit committee financial expert.
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 compensation committee is comprised of Messrs. Kunzig (Chairman) and Mr. Cusumano.
Set forth below is biographical information regarding directors and executive officers of the Corporation. Unless otherwise noted, each director has held the indicated position for at least five years.
JOHN J. WILK*, 81, 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*, 52, 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, 53, 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, 73, 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, 70, has served as a director of TransNet director since 1976. He was 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, 63, 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 Old Tappan, 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 Corporation.
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 2009, 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 officers, chief financial officer, and controller, as well as all its employees. The Code of Ethics was attached as an exhibit to the Form 10-K for the fiscal year ended June 30, 2004. A copy of the Code of Ethics is available at no cost by writing to: TransNet Corporation, Attn: Investor Relations, 45 Columbia Road, Somerville, New Jersey 08876.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
PHILOSOPHY
The Compensation Committee of our Board of Directors is responsible for establishing and evaluation our policies governing the compensation of our executive officers. The Compensation Committee ensures that the total compensation paid to our executive officers is fair, reasonable, and competitive. The Committee's members are independent directors. The Chief Executive Officer may make recommendations with respect to those executives whose compensation is determined by the Committee. The Compensation Committee recommends any modification of compensation to the Board of Directors, which must approve any such modification
The Corporation's executive compensation philosophy is to attract and retain executive officers and to align interests of our executive officers with those of our shareholders and the Corporation's business strategy and results. Accordingly, compensation is linked to individual and corporate performance. Our executive compensation program provides annual cash compensation, in the form of a competitive base salary and inventive bonuses to motivate our executives to deliver on business performance goals.
BASE SALARY
The base salary is designed to attract and retain experienced executive officers who will establish corporate strategy and goals. While the initial base salary was determined by an assessment of competitive market levels at comparable companies and is included in the employment agreement for each of our named executive officers, the factors used in determining increases in base salary which individual performance, change in role and/or responsibility, and changes in the competitive market environment. The Compensation Committee reviews base salary on an annual basis, and considers certain quantitative factors, including the Corporation's financial, strategic, and operating performance for the year. The qualitative criteria include leadership qualities and management skills, as exhibited by each executive officer's respective innovations, time and effort devoted to the Corporation, and other general considerations. The Compensation Committee of the Board of Directors also takes notice of comparable remuneration of other CEO's at similar companies.
The amount of base salary paid to the named executive officers during fiscal 2009 and 2008 is shown in the Summary Compensation Table below.
INCENTIVE BONUS
The annual cash incentive bonus is designed to reward the executive officers for the achievement of performance objectives and corporate profits. The amounts of the bonus are determined by formulas set forth in the executive's employment agreement tied to the pre-tax profits of the Corporation.
No bonuses were paid for fiscal 2009 or 2008.
OTHER BENEFITS
TransNet maintains a 401(k) plan in which all full-time employees, including our named executive officers, who are at least 21 years of age and have at least three months of service, are eligible to participate. In 2009 and 2008, the Corporation contributed the amounts indicated in the Summary Compensation Table below, based upon formulas applicable to all participating employees. During fiscal 2009, the Corporation suspended its contributions to the plan.
HEALTH AND WELFARE BENEFITS
All full-time employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental and vision care coverage, term life and disability
insurance. None of the Corporation's group life, health, dental, and medical reimbursement plans discriminates in scope, terms of operation, in favor of the executive officers or directors of the Corporation and the plans are generally available to all full-time employees.
EMPLOYMENT CONTRACTS WITH EXECUTIVE OFFICERS
TransNet has employment contracts in effect with Steven J. Wilk and Jay A. Smolyn that expire on June 30, 2013. 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 Compensation Committee annually reviews the base salary of each executive officer, and determines whether to recommend an increase to 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 provisions are summarized in the "Potential Payments upon Termination or Change in Control" section below.
During fiscal 2009, Messrs. Wilk and Smolyn voluntarily lowered their cash compensation levels to assist the Corporation in cost reduction.
PERQUISITES
Pursuant to their employment agreements, Steven J. Wilk and Jay A. Smolyn are each provided with the use of a company car for business purposes.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our Compensation committee is or was an officer of TransNet, nor had any relationship requiring disclosure under Item 13 of this Annual Report on Form 10-K. In addition, during fiscal 2009, there were no compensation committee interlocks.
COMPENSATION COMMITTEE REPORT
The compensation committee of our Board of Directors has reviewed and discussed the "Compensation Discussion and Analysis" required by Item 402(b) of Regulation S-K with management, and, based upon such review and discussion, the Compensation Committee recommended to our Board of Directors that the "Compensation Discussion and Analysis" be included in this Annual Report on Form 10-K.
Earle Kunzig, Chairman Vincent Cusumano
SUMMARY COMPENSATION TABLE
(a) Amounts in this column represent gross salary earned for the fiscal year ended June 30, 2009.
(b) Amounts in this column include payments made to the named officer's 401(k) plan, and expenses of the Corporation related to the use of the company car.
(c) Payments in this column include payment of $1,260 and $2,088 made to Mr. Wilk's 401(k) plan for the fiscal years 2009 and 2008, respectively. In fiscal 2009, the cost to the Corporation for Mr. Wilk's use of a Company car pursuant to his employment agreement did not exceed $10,000. In fiscal 2008, the cost of the use of a company car was $15,101, and was based upon the Corporation's depreciation cost of the car.
(d) This amount represents the Corporation's contribution to Mr. Smolyn's 401(k) plan for the years indicated. Other compensation/benefits did not exceed $10,000.
STOCK OPTIONS
TransNet's Stock Option 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 directors and officers of the Company are eligible to participate in the Plan.
No options were granted during fiscal 2009. None of our named executive officers exercised any stock options during the fiscal year ended June 30, 2009.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
As stated above, the employment contracts for Messrs. S. Wilk and Smolyn 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 the greater of 80% of his then current annual salary or 80% of 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 Mr. 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 the lesser of five or the number of years remaining in the contract. 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. No payment would be made if either named officer resigned.
The payments that would be made to these officers if termination had occurred at June 30, 2009 would be as follows:
Steven J. Wilk:
o hostile change of control - election to either serve as a consultant for five years at $300,000 per year; or to elect a lump-sum payment of $960,000
o termination by the Corporation of employment (other than for willful commission of criminal acts): election by Mr. Wilk to either serve as a consultant for two years at a salary of $300,000 per year; or elect a lump-sum payment of $480,000
Jay A. Smolyn:
o hostile change of control - a lump-sum payment of $576,000
o termination by the Corporation without cause: $247,500
o termination by the Corporation with cause: $0
Continuation of health benefits would be available under COBRA.
DIRECTOR 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 2009, the Company paid an annual retainer fee of $5,000 to each of its three outside directors.
DIRECTOR COMPENSATION
Fees Earned of Paid in Name Cash All Other Compensation Total - ---- ---------------------- ---------------------- ------ Vincent Cusumano $5,000 $0 $5,000 Earle Kunzig 5,000 $0 5,000 Raymond J. Rekuc 5,000 $0 5,000 John J. Wilk $ 0 $0 $ 0 Steven J. Wilk $ 0 $0 $ 0 Jay A. Smolyn $ 0 $0 $ 0 Susan M. Wilk $ 0 $0 $ 0
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH RELATED PERSONS
Other than continuing the lease referenced below, during fiscal 2009, the Corporation did not enter into any transaction with related persons that would be required to be disclosed under this caption pursuant to Item 404(a) of Regulation S-K. See Item 13 for discussion of the lease by of the Corporation of its premises from an entity controlled by two officers and directors.
REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PERSONS
The Corporation's independent directors, who comprise its Audit Committee, are required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K).
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS AND STOCKHOLDINGS OF MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of September 15, 2009 by (i) each holder known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, (ii) each of the Company's directors and named executed officers individually, and (iii) all directors and officers of the Company as a group.
The amounts and percentages of Common Stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of such security, or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities.
Name of Beneficial Amount of Shares Percent of Owner Beneficially Owned Class - -------------------------- ------------------ -----------
Anthony Chiarenza (a) 440,350(b) 9.1%(c) Kasaken Capital, LLC (d) 250,000 5.2%(c)
Steven J. Wilk (e) 496,350(g) 9.7%(f) John J. Wilk (e) 255,000(h) 5%(f) Jay A. Smolyn (e) 133,000(i) 3%(f) Susan M. Wilk (e) 108,200(j) 2%(f) Vincent Cusumano (e) 15,000(k) *(f) Earle Kunzig (e) 20,000(l) *(f) Raymond J. Rekuc (e) 2,500(m) *(f)
All officers and directors 1,030,050 20.3%(f) as a group (seven persons)
- ---------- (a) Based upon a Schedule 13G/A filed by Anthony Chiarenza and Key Equity Investors, Inc. on January 2, 2009. The address for both is P.O. Box 604579, Bayside, New York 11360-4579.
(b) Includes 353,200 shares of the Corporation's Common Stock held by Mr. Chiarenza, and 87,150 shares held by Key Equity Investors, Inc., of which Mr. Chiarenza is President, Chairman, and Chief Executive Officer. As a result of his positions, Mr. Chiarenza is deemed to have beneficial ownership of shares held by Key Equity Investors, Inc.
(c) Based on 4,823,304 shares of the Corporation's Common Stock outstanding as of June 30, 2009.
(d) Based on a Schedule 13G filed by Kasaken Capital, LLC on March 13, 2009. The address for Kasaken Capital, LLC is 55 Union Place, Summit, New Jersey 07901.
(e) The address of all officers and directors is 45 Columbia Road, Somerville, New Jersey 08876.
(f) Based on 4,823,304 shares of the Corporation's Common Stock outstanding, plus 262,500 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days.
(g) 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 Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(h) 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 Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(i) 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 Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(j) 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.
(k) 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 Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(l) 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 Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
(m) Includes 2,500 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 Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share.
* Less than 1%.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In December 2003, East Coast Property Management, LLC, ("East Coast"), a limited liability corporation owned by Steven J. Wilk and Jay A. Smolyn, executive 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 April 2004, a lease was executed by East Coast and the Corporation. The annual rental payment made by the Corporation to East Coast in fiscal 2009 was $180,605, and will be $185,605 in 2010. See Footnote [6][A] to the Consolidated Financial Statements for additional information.
During fiscal 2009, the Corporation did not enter into any transaction with related persons that would be required to be disclosed under this caption pursuant to Item 404(a) of Regulation S-K. It is the practice of the Corporation that its independent directors, who comprise its Audit Committee, are required to review and approve any transactions with related parties (as such term is defined in Item 404 of Regulation S-K). The transaction must then be approved by the disinterested members of the Board of Directors.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to the Corporation by MSPC during fiscal 2009 and 2008.
2009 2008 -------- --------
Audit Fees $ 62,000 $ 60,000 Audit Related Fees 22,500 22,500 Tax Fees 13,000 12,000 All Other Fees 11,500 9,000
Total $109,000 $103,500
The audit committee pre-approves all audit and permissible non-audit services provided to the Corporation by MSPC. The non-audit services include audit-related services, tax services and other services.
PART IV
ITEM 15.
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, 2009 and June 30, 2008.
o Consolidated Statements of Operations for the Years Ended June 30, 2009, 2008 and 2007.
o Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2009, 2008 and 2007.
o Consolidated Statements of Cash Flows for the Years Ended June 30, 2009, 2008 and 2007.
o Notes to Consolidated Financial Statements
3. EXHIBITS
o 23.1 Consent of Independent Public Accountant
o 31.1 Certification pursuant to Section 302
o 31.2 Certification pursuant to Section 302
o 32 Certifications pursuant to Section 906
(b) REPORTS ON FORM 8-K
On May 18, 2009, TransNet Corporation filed a Form 8-K on Item 7 to report that it issued a press release announcing the results of the third quarter and nine-month period ended March 31, 2009.
On June 11, 2009, TransNet Corporation filed a Form 8-K on Item 7 to announce the Corporation's stock repurchase plan.
On June 18, 2009, TransNet Corporation filed a Form 8-K on Item 7 to announce its forecast for the first half of fiscal 2010.
(22) Subsidiaries - The following table indicates the sole wholly-owned inactive 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 28, 2009 By /s/ Steven J. Wilk --------------------------------------- Steven J. Wilk Chief Executive Officer
Date: September 28, 2009 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 28, 2009 - ------------------------------------- Steven J. Wilk, Director
By /s/ John J. Wilk Date: September 28, 2009 - ------------------------------------- John J. Wilk, Director
By /s/ Jay A. Smolyn Date: September 28, 2009 - ------------------------------------- Jay A. Smolyn, Director
By /s/ Raymond J. Rekuc Date: September 28, 2009 - ------------------------------------- Raymond J. Rekuc, Director
By /s/ Vincent Cusumano Date: September 28, 2009 - ------------------------------------- Vincent Cusumano, Director
By /s/ Earle Kunzig Date: September 28, 2009 - ------------------------------------- Earle Kunzig, Director
By /s/ Susan M. Wilk Date: September 28, 2009 - ------------------------------------- Susan M. Wilk, Director