SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1999 [ ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from to
0-8693 Commission File Number
TransNet Corporation
(Exact name of registrant as specified in its charter)
Delaware 22-1892295
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
45 Columbia Road, Branchburg, New Jersey 08876-3576
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 908-253-0500
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant [1] has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and [2] has been subject to such filing
requirements for the past ninety days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this From 10-K or in any amendment to
this Form 10-K.
[ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $13,274,725 on September 23,
1999 based upon the closing sales price on the OTC Bulletin System as of said
date.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares of the registrant's common stock outstanding on September
23, 1999 was 5,066,804 shares (exclusive of Treasury shares).
<PAGE>
PART I
ITEM 1. BUSINESS
TransNet Corporation ("TransNet" or the "Corporation") was incorporated in
the State of Delaware in 1969. The Corporation is a single-source provider of
information technology products and technology management services designed to
enhance the productivity of the information systems of its customers. Through
its own sales and service departments, TransNet provides information technology
and network solutions for its customers by combining value-added professional
technical services with the sale of PC hardware, network products, computer
peripherals and software. As used herein, the term "Corporation" shall refer to
TransNet and where the context requires, shall include TransNet and its
wholly-owned subsidiary, Century American Corporation. Century American
Corporation, formerly a leasing subsidiary, is currently inactive.
Description of Business
Products, Sources, and Markets: The sale of computer and related equipment
for local area networks ("LAN's") and personal computers ("PC's") accounted for
the significant portion of the Corporation's revenues. During the past year,
management implemented a shift in the Corporation's focus for business growth
from hardware sales to marketing a wider array of technical services to its
clients in order to maximize profits.
The equipment sold by the Corporation includes microcomputers,
workstations, servers, monitors, printers and operating systems software. The
principal markets for the Corporation's products are commercial, governmental,
and educational customers. These markets are reached by direct sales conducted
through the corporate sales department based in Branchburg, New Jersey. The
Corporation's direct sales staff enables TransNet to establish relationships
with major corporation clients through which it markets the Corporation's
technical services.
The Corporation is selective in choosing the products that it markets and
its product mix is geared primarily to the requirements of its business
customers. The products sold by the Corporation include business and personal
desktop computer systems manufactured by International Business Machines
("IBM"), Acer, Apple Computer, Inc. ("Apple"), Bay Networks, a Nortel Networks
business, Compaq Computer Corporation ("Compaq"), NEC Technologies, Inc.
("NEC"), Hewlett-Packard Company ("Hewlett-Packard"), and Toshiba American
Information Systems, Inc. ("Toshiba"); related peripheral products such as
network products of Compaq, Intel, Novell, Inc. ("Novell"), 3Com, and Cisco
Systems, Inc. ("Cisco"); telephony products; selected software products; and
supplies produced by other manufacturers. The Corporation does not manufacture
or produce any of the items it markets.
The Corporation is currently an authorized dealer for Apple, Bay Networks,
Compaq (including authorizations as a Compaq Enterprise Partner and a Compaq
Certified Education Partner), Hewlett- Packard, IBM, Intel, NEC, and Toshiba,
Microsoft Corporation ("Microsoft"), Cisco, Novell, and 3COM. The Corporation
also offers a variety of products manufactured by other companies including
Lexmark, Okidata, and Tektronix. Occasionally, the Corporation will order
specific products to satisfy a particular customer requirement. The Corporation
evaluates its product line and new products internally and through discussions
with its vendors and customers.
Software sold by the Corporation includes software designed for general
business applications as well as specialized applications such as research,
pharmaceuticals, and education; software for desktop publishing; and integrated
packages.
The Corporation maintains an inventory of its product line to provide
shipments to customers. Back orders are generally immaterial, but manufacturers'
product constraints occasionally impact the Corporation's inventory levels. No
such constraints have affected the Corporation in the past three years, however.
In an effort to reduce costs, the Corporation has instituted a direct shipping
program, through which product is shipped directly from the Corporation's
suppliers to the customer. In addition, shipments are made from the
Corporation's warehouse in Branchburg, New Jersey primarily through common
carriers.
<PAGE>
The marketing of computers is generally not seasonal in nature.
Technical Support and Service: Service operations have become a significant
source of revenues, comprising 36% of revenues in fiscal 1999, as compared to
14% of revenues in fiscal 1998. This reflects management's shift in focus from
hardware sales to the provision of sophisticated technical services, as
discussed in "Management's Discussion and Analysis." The Corporation provides a
wide variety of outsourced network services, personal computer support, repair
and standard equipment maintenance to assist customers in obtaining technology
that enhances the customers' productivity. These services, which are generally
performed at customer sites, include LAN and PC hardware support, systems
integration services, help desk services, asset management, relocation services,
and installation or installation coordination. The Corporation assists customers
to determine standard hardware technology, application and operating system
software, and networking platforms. The Corporation employs specially certified
and trained technical systems engineers who perform high-end technology
integration services. In addition, the Corporation's staff of specially trained
system engineers and service technicians provide service and support on an
on-call basis for file servers, personal computers, laptop computers, printers
and other peripheral equipment. The Corporation's in-house technical staff
performs system configurations to customize computers to the customers'
specifications. The Corporation also provides authorized warranty service on the
equipment it sells. TransNet is an authorized service dealer for the following
manufacturers: Apple, Cisco, Compaq, Dell, Epson, Hewlett Packard, IBM, NEC,
3Com, Nortel, and Novell.
The Corporation seeks highly qualified personnel and employs experienced
system engineers and technicians to whom it provides authorized manufacturer
training on an on-going basis. During fiscal 1999, the Corporation continued its
efforts to expand its technical staff in response to the increased demand for
technical services and the increasing complexity of network systems. The
Corporation competes with other resellers and manufacturers, as well as some
customers, to recruit and retain qualified employees from a relatively small
pool of available candidates.
The Corporation's technical services are available to business and
individual customers. Through a variety of alternatives, the Corporation offers
repair or maintenance services at the customer site or on the Corporation's
premises. Maintenance and service contracts are offered to maintain and/or
repair computer hardware. Technical support and services are performed pursuant
to contracts of specified terms and coverage (hourly rates or fixed price
extended contracts) or on a time and materials basis. Services are available for
a variety of products marketed by the Corporation. In connection with its
"TechNet" program, through which the Corporation stations service personnel at a
customer's location on a full-time basis, the Corporation has entered into
individual agreements with several large corporate customers to provide support
and repair and maintenance services. Most agreements are for twelve months or
less. 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.
The Corporation introduced its Y2KNET program in 1998, designed with the
mission to assure the Corporation's clients that their desktop units are Year
2000 compliant. Under this program, which complements the existing TechNet and
SafetyNet programs, the Corporation's technicians inventory, examine, and, as
necessary, modify all customers' desktop units to certify that the units are Y2K
compliant.
In addition to services pursuant to a contract, repair and maintenance
services are also available on a "time and materials" basis. The repair services
usually consist of diagnosing and identifying malfunctions in computer hardware
systems and replacing any defective circuit boards or modules. The defective
items are generally repaired by in-house bench technicians or returned to the
manufacturer for repair or replacement.
In addition to servicing its own customers within its service area, the
Corporation has entered into arrangements with other service providers outside
the Corporation's service area. Through these arrangements, the Corporation can
provide services in instances in which a customer has locations outside the
Corporation's service areas and can assure its customers quality technical
service at their locations nationwide.
<PAGE>
Training: The Corporation's headquarters houses its Training Center, which
provides training for customers. The Corporation also provides training at
customer sites. The Corporation offers comprehensive training on hardware and
software, including a wide variety of DOS, Windows, and Macintosh systems and
network applications, operation, and maintenance. The Corporation's Training
Center, which has its own dedicated network, is an Apple Computer authorized
training center and is also authorized for training on all Microsoft, Lotus,
Quark, and FrameMaker products. The training activities of the Corporation are
not a material source of revenues.
Suppliers: In order to reduce its costs for computer and related equipment,
the Corporation entered into a buying agreement with Ingram Micro, Inc., which
assumed the earlier agreement with Intelligent Electronics. Under the agreement,
the Corporation is able to purchase equipment of various manufacturers at
discounts currently unavailable to it through other avenues. The agreement
provides that the Corporation may terminate the arrangement upon sixty days
notice. During fiscal 1999, the majority of the revenues generated by the
Corporation from product sales were attributable to products purchased by the
Corporation from Ingram Micro, Inc. pursuant to the Agreement. The balance of
the Corporation's product sales were attributable to products purchased from a
variety of sources on an as needed order basis. Management anticipates that
Ingram Micro, Inc. will be a major supplier during fiscal 2000.
Customers: The majority of the Corporation's corporate customers are
commercial users located in the New Jersey - New York City metropolitan area.
During fiscal 1999, one customer, Medco, accounted for approximately 37% of
the Corporation's revenues. During fiscal 1998, one customer, Merck & Co., Inc.
accounted for approximately 50% of the Corporation's revenues, and an affiliate,
Medco, accounted for approximately 14% of the Corporation's revenues. Merck &
Co. and its affiliate accounted for approximately 58% and 11%, respectively, of
the Corporation's revenues in fiscal 1997. In March 1998, the Corporation
received notification that Merck & Co. intended to enter into arrangements with
a vendor other than TransNet with respect to a substantial portion of the
business that Merck & Co. previously conducted with TransNet. The loss of the
contract has not had any negative impact on services or service related revenues
and has reduced the Corporation's hardware-related expenses. Although the loss
of the contract reduced revenues from hardware sales, management notes that the
sales pursuant to this contract were conducted at low profit margins of
approximately 4.7%. The loss of this customer could have a material adverse
impact upon the Corporation if management does not replace the sales of
equipment and technical services with similar sales to new accounts.
No other customer accounted for more than 10% of the Corporation's revenues
in fiscal 1999.
Competition: The sale and service of personal computer systems is highly
competitive and may be affected by rapid changes in technology and spending
habits in both the business and institutional sectors. The Corporation is in
direct competition with any business which is engaged in information technology
management, specifically the sale and technical support and service of networks,
personal computers and related peripherals. Competitors include larger and
longer established companies possessing substantially greater financial
resources and substantially larger staffs, facilities and equipment. 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. In addition, several
computer manufacturers have stated their intentions to deal directly with the
end-users.
Management believes that commercial customers require significant levels of
sophisticated support services such as those provided by the Corporation.
TransNet's services benefit the customers by providing in-depth product
knowledge and experience, competitive pricing and the high level of technical
services. Management believes that TransNet's ability to combine competitive
pricing with responsive and sophisticated support services allows it to compete
effectively against a wide variety of alternative microcomputer sales and
distribution channels, including independent dealers, direct mail and
telemarketing, superstores and direct sales by manufacturers (including some of
its own suppliers).
<PAGE>
Technological advances occur rapidly in computer technology and new
products are often announced prior to availability, sometimes creating demand
exceeding manufacturers' expectations and thereby resulting in product
shortages. When this occurs, resulting product constraints intensify
competition, depress revenues because customers demand the new product, and
increase order backlogs.
In the Corporation's experience, these backlogs have been immaterial.
In the past several years, there have been frequent reductions in the price
of computers. As a result, competition has increased and the Corporation lowered
its prices to remain competitive. In addition, businesses able to purchase in
larger volume than the Corporation have received higher discounts from
manufacturers than the Corporation. These factors have resulted in a lower
profit margin on the Corporation's equipment sales. As a result of its buying
agreement with Ingram Micro, Inc., the Corporation is able to purchase equipment
at discounts otherwise unavailable to it, enabling the Corporation to be more
price competitive. In a cost-effective marketing approach, the Corporation now
targets larger customers with more diversified product needs for its marketing
efforts in order to sell a greater number and variety of products and services
at one or a limited number of locations, thereby improving its gross profit
margins.
The Corporation does not believe that it is a significant factor in any of
its fields of activity.
Trademarks: Other than the trademark of its name, TransNet holds no patents
or trademarks.
Employees: As of September 15, 1999, the Corporation employed 191 full-time
employees and nine (9) part-time employees. None of its employees are subject to
collective bargaining agreements.
ITEM 2. PROPERTIES
The Corporation's executive, administrative, corporate sales offices, and
service center are located in Branchburg, New Jersey, where the Corporation
leases a building of approximately 21,000 square feet. This "net-net" lease,
which currently provides for an approximately $16,820 monthly rental, expires in
February 2001. The building is subleased from W Realty, a partnership consisting
of John J. Wilk, Chairman of the Board and Raymond J. Rekuc, a Director, at
terms which management believes are as favorable as available from unaffiliated
third parties. See Item 13. Certain Relationships and Related Transaction, for a
description of the sale of certain real estate owned by the Corporation to W
Realty. Pursuant to the terms of that sale, the Corporation is not required to
pay rent for the sublease of its Branchburg offices for the last two (2) years
of the lease. As a result, the Corporation has not paid rent since February
1999.
See Note [8A] of the Notes to Consolidated Financial Statements with
respect to the Corporation's commitments for leased facilities.
ITEM 3. LEGAL PROCEEDINGS
The Corporation is not currently a party to any legal proceeding which it
regards as material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITYHOLDERS MATTERS
TransNet's common stock is quoted and traded in the OTC Bulletin Board
under the symbol "TRNT." Prior to February 4, 1998, the stock was quoted and
traded in the NASDAQ National Market System. The following table indicates the
high and low closing sales prices for TransNet's common stock for the periods
indicated based upon information supplied by the National Quotation Bureau
Incorporated.
On February 3, 1998, the Corporation was informed by NASDAQ that its common
stock would be delisted from the NASDAQ National Market System on February 4,
1998 based on certain deficiencies asserted by the NASDAQ staff. The Corporation
appealed the staff's findings based, among other items, upon the position that
the Corporation had cured the deficiencies, but the appeal was unsuccessful. The
Corporation appealed NASDAQ's decision to the Securities and Exchange
Commission, but that appeal was unsuccessful. The Corporation is exploring
listing alternatives for its common stock.
Calendar Year Closing Sales Prices
High Low
1997
Third Quarter 3 3/4 2 3/4
Fourth Quarter 3 1/2 2
1998
First Quarter 2 5/8 3/4
Second Quarter 1 3/32 5/8
Third Quarter 1 3/8 7/16
Fourth Quarter 1 1/2 15/32
1999
First Quarter 2 1/16 15/16
Second Quarter 4 1 11/16
As of September 21, 1999, the number of holders of record of TransNet's
common stock was 3,066. Such number of record owners was determined from the
Company's shareholder records and does not include beneficial owners whose
shares are held in nominee accounts with brokers, dealers, banks and clearing
agencies.
TransNet has not paid any dividends on its common stock since its
inception.
<PAGE>
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, 1999 were $44,306,140 as
compared with $70,424,809 for the fiscal year ended June 30, 1998, and
$68,631,322 for the fiscal year ended June 30, 1997. The decrease in revenues
for fiscal 1999 as compared to fiscal 1998 is primarily attributable to the loss
of a hardware sales contract from a major customer, although the effects of this
reduction were offset by the increase in technical service revenues (such as
technical repair and maintenance, support, and network integration) (see Item
1.- Customers regarding loss of business from the Corporation's major customer).
In addition, several computer manufacturers directly shipped product to and
direct billed TransNet customers, paying TransNet a fee similar to a commission.
Although this reduced revenues from hardware sales, it yielded increased
profits. The increase in revenues for fiscal 1998 as compared to fiscal 1997 was
the result of an increase in revenues from technical services and training
services, although revenue from hardware sales decreased. Due to management's
emphasis on the promotion of technical service and support operations and
agreements with large organizations for service and support (as discussed
below), technical service revenues increased by approximately 59% in fiscal 1999
over fiscal 1998, and 30% in fiscal 1998 over fiscal 1997.
For fiscal 1999, the Corporation reported net income of $1,172,462 as
compared with net income of $923,891 for fiscal 1998, and $1,032,567 for fiscal
1997. The increase in net income in fiscal 1999 was directly related to
increased technical service and support related revenues; management's
concentration on sales of higher profit margin products such as network and
system integration products; and continued adherence to cost control measures.
Although the dollar amount of revenues was lower in fiscal 1999, those revenues
yielded higher profits than revenues from hardware sales. Net income for fiscal
1998 included a non-recurring gain of $466,489 attributable to the sale of
certain unimproved real property owned by the Corporation in the second quarter.
Operating income in fiscal 1999 was $1,505,031 as compared to $584,003 in fiscal
1998, and $1,004,945 in fiscal 1997. The decrease in operating income in fiscal
1998 was a result of decreased profit margins on hardware sales, a decrease in
the volume of hardware sales and increased expenses related to the expansion of
the Corporation's technical staff. Service related revenues, a material segment
of revenues, are significant in their contributions to net income because these
operations yield a higher profit margin than equipment sales. For the fiscal
years ended June 30, 1999, 1998 and 1997, the increase in revenues from the
provision of service, support, outsourcing and network integration is largely
the result of the Corporation entering into service contracts with a number of
corporate customers to provide service and support for the customer's personal
computers, peripherals and networks. Most of these contracts are short-term,
usually twelve months or less, and contain provisions which permit early
termination. Although the contracts generally contain renewal terms, there is no
assurance that such renewals will occur.
During the fiscal years discussed, the computer industry has experienced a
trend of decreasing prices of computers and related equipment. Management
believes that this trend will continue. Industrywide, the result of price
erosion has been lower profit margins on sales, which require businesses to sell
a greater volume of equipment to maintain past earning levels. Another result of
the price decreases has been intensified competition within the industry,
including the consolidation of businesses through merger or acquisition, the
stated intention of certain manufacturers to sell 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.
<PAGE>
To meet these competitive challenges and to maximize the Corporation's
profit margin, management has modified its marketing strategy during these years
and has enforced expense controls. Management also utilizes new trends such as
manufacturers' direct shipment and billing of the customers in exchange for
payment to the Corporation of an "agency fee" as a means to reduce equipment
related costs while increasing profits. Management's current marketing strategy
is designed to shift its focus to provision of technical services and to sales
of lower revenue/higher profit margin products related to service and support
operations. Management's efforts include targeting commercial, educational and
governmental customers who provide marketplaces for a wide range of products and
services at one time, a cost-effective approach to sales. Management believes it
maximizes profits through concentration on sales of value-added applications;
promotion of the Corporation's service and support operations; and strict
adherence to cost-cutting controls. In light of the above, management emphasizes
and continues the aggressive pursuit of an increased volume of sales of
technical service and support programs, and promotion of its training services.
In addition, the Corporation's buying agreement with Ingram Micro, Inc. enhances
the Corporation's competitive edge through product discounts unavailable through
other sources.
During fiscal 1999, actual selling, general and administrative expenses
decreased slightly due to a reduced number of employees, but increased as a
percentage of revenues to 16% as a result of the decrease in revenues. Selling,
general and administrative expenses increased to approximately 11% of revenue
for fiscal 1998 due to increased salary and personnel related expenses resulting
from the expansion of the Corporation's technical staff as compared to
approximately 9% of revenues for fiscal 1997. Management's adherence to cost
controls has generally maintained the level of such expenditures.
Interest income increased in fiscal 1999, 1998 and 1997, respectively, as
compared to the prior year primarily due to stronger cash positions, which
allowed the Corporation to invest larger amounts than in prior years. Interest
expense was eliminated in fiscal 1999 because the Corporation did not require
use of its credit line. Interest expense decreased in both fiscal 1998 and 1997
as compared to the respective prior year, also due to the improved cash position
which limited the amount of financing extended under the floor planning
arrangements described below.
Liquidity and Capital Resources
There are no material commitments of the Corporation's capital resources,
other than employment contracts entered into in the normal course of business.
The Corporation currently finances the purchases of portions of its
inventory through floor planning arrangements with a third-party lender and a
manufacturer's affiliate under which such inventory secures the financed
purchases. Inventory decreased in fiscal 1999 as a result of decreased sales and
management's implementation of a "direct-ship" program to ship product from the
vendor to the customer, thereby reducing the Corporation's required inventory
levels
Accounts receivable increased in fiscal 1999 compared to fiscal 1998 as a
result of increased past due amounts from certain customers. These past due
amounts were significantly reduced after June 30, 1999. Accounts receivable
decreased in fiscal 1998 as compared to 1997 in direct response to decreased
volume of hardware sales. Accounts payable increased for the 1999 fiscal year
compared to fiscal 1998 due to the purchase of equipment in late June 1999 to
satisfy a customer order. Accounts payable decreased in 1998 and 1997 due to the
improved cash position of the Corporation. Floor planning payables increased in
1999 as a direct result of the above-referenced equipment purchase in June 1999.
The figures reflect a decrease in 1998 that is attributable to the decreased
volume of hardware sales. The converse was true in fiscal 1997, as a direct
result of an increase in product sales.
For the fiscal year ended June 30, 1999, as in the fiscal years ended June
30, 1998 and 1997, the internal capital sources of the Corporation were
sufficient to enable the Corporation to meet its obligations.
<PAGE>
In the first quarter of fiscal 1998, management was apprised of an
unasserted possible claim or assessment involving the Corporation's Pension
Plan. The Plan was adopted in 1981 as a defined benefit plan. In 1989, various
actions were taken by the Corporation to terminate the Plan, to convert it to a
defined contribution plan and to freeze benefit accruals. No filing for plan
termination was made with the Pension Benefit Guaranty Corporation (the "PBGC").
Additionally, a final amended and restated plan document incorporating the
foregoing amendments and other required amendments including those required by
the Tax Reform Act of 1986 do not appear to have been properly adopted. In
addition, since 1989, it appears that certain operational violations occurred in
the administration of the Plan including the failure to obtain spousal consent
in certain instances where it was required.
The Corporation decided to (i) take corrective action under the IRS Walk-in
Closing Agreement Program ("CAP"), (ii) apply for a favorable determination
letter with respect to the Plan from the IRS, and (iii) terminate the Plan. The
CAP program provides a correction mechanism for "non-amenders" such as the
Corporation. Under CAP, the Corporation will be subject to a monetary sanction
(which could range from $1,000 to approximately $40,000). In addition, the
Corporation will be required to correct, retroactively, operational violations,
and to pay any resulting excise taxes and PBGC premiums and penalties that may
be due. Special counsel has advised the Corporation that although it believes
that the Corporation will incur some liability in connection with the correction
of such operational violations, any estimate in dollar terms of the range of
such liability at this time would be speculative and potentially misleading.
However, management has been advised by counsel that the estimated liabilities
are significantly lower than originally anticipated. See Note [12] of the Notes
to Consolidated Financial Statements with respect to this contingency.
YEAR 2000
The Corporation began preparing its computer-based systems for year 2000
("Y2K") computer software compliance issues in 1998. Many existing computer
systems, including certain of the Corporation's internal systems, use only the
last two digits to identify years in the date field. As a result, these computer
systems do not properly recognize a year that begins with "20" instead of the
familiar "19," or may not function properly with years later than 1999. If not
corrected, many computer applications could fail or create erroneous results.
This is generally referred to as the "Year 2000" or "Y2K" issue. Computer
systems that are able to deal correctly with dates after 1999 are referred to as
"Year 2000 compliant." The Corporation's Y2K project covers both traditional
computer systems and infrastructure ("IT Systems") and computer-based hardware
and software, facilities and equipment ("Non-IT Systems"), such as its telephone
system. The Corporation's Y2K project has the following phases: inventory;
assessment of action required to assure Y2K compliance; upgrading or
replacement; testing; and contingency planning.
The Corporation completed the inventory and assessment of its critical IT
systems and it expects that by the end of September 1999, its main internal
computer system, which processes information to prepare inventories, purchase
orders, invoices and accounting functions shall be Y2K compliant. The
Corporation expects to upgrade or replace any non-compliant IT Systems by the
end of October 1999, with testing and implementation completed by the end of
November 1999, although it is possible that testing will continue through the
end of calendar 1999. The Corporation has also completed an inventory and
assessment of its Non-IT Systems. The Corporation expects to replace any
non-compliant systems by the end of the October 1999, with testing and
implementation completed by the end of November 1999.
The Corporation's Y2K project also considers the readiness of significant
customers and vendors. Although significant vendors have indicated to the
Corporation that they expect to be Y2K compliant, non-compliance of such vendors
could impair the ability of the Corporation to obtain necessary products or to
sell or provide services to its customers. Disruptions of the computer systems
of the Corporation's vendors could have a material adverse effect on the
Corporation's financial conditions and results of operations for the period of
such disruption. Because of the uncertainties involved, pending receipt of this
information, it is not possible to estimate the effect upon the Corporation, for
example, the amount of lost revenues, if its material vendors, suppliers and
customers were not Y2K compliant.
<PAGE>
The Corporation believes that the most reasonably likely worst case Y2K
scenario is that a small number of vendors may be delayed in supplying
components for a short time after January 1, 2000, with a resulting disruption
of product shipments and services to the Corporation's customers. As part of its
Y2K process, the Corporation plans to develop contingency plans with respect to
such scenario and the vendors who are either unable or unwilling to develop
remediation plans to become Y2K compliant. The Corporation is currently
developing these plans. The Corporation's contingency plans will include a
combination of actions including preparations to allow the Corporation to
selectively purchase from Y2K compliant vendors.
The Corporation has incurred approximately $30,000 of Y2K project expenses
as of June 30, 1999. Future expenses are estimated to include approximately
$20,000 of additional costs. Such cost estimates are based upon presently
available information and may change as the Corporation continues with its Y2K
project.
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; continued competitive and pricing pressures in the
industry; product supply shortages; open- sourcing of products of vendors; rapid
product improvement and technological change, short product life cycles and
resulting obsolescence risks; technological developments; capital and financing
availability; and other risks set forth herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no disagreements on accounting and financial disclosure between
the Corporation and its independent public accountants nor any change in the
Corporation's accountants during the last fiscal year.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Corporation are as follows:
Name Age Position
John J. Wilk (a) 71 Chairman of the Board and Treasurer
Steven J. Wilk (a) 42 President and Director
Jay A. Smolyn 43 Vice President, Operations and Director
Vincent Cusumano (b)(d) 64 Secretary and Director
Earle Kunzig (b)(e) 60 Director
Raymond J. Rekuc (c) 54 Director
Susan Wilk-Cort (a) Director
- --------------------------
(a) Steven J. Wilk and Susan Wilk-Cort are respectively, the son and
daughter of John J. Wilk.
(b) Member of the Audit Committee
(c) Chairman of the Audit Committee.
(d) Member of the Compensation Committee.
(e) Chairman of the Compensation Committee.
The Audit Committee reviews, evaluates and advises the Board of Directors
in matters relating to the Corporation's financial reporting practices, its
application of accounting principles and its internal controls. In addition, the
Audit Committee reviews transactions regarding management remuneration or
benefits.
The Compensation Committee reviews, evaluates and advises the Board of
Directors in matters relating to the Corporation's compensation of and other
employment benefits for executive officers. The Board established its
Compensation Committee in December 1994. Prior to that time compensation
decisions were subject to oversight by the entire Board of Directors.
The Corporation does not have an Executive Committee. The term of office of
each director expires at the next annual meeting of stockholders. The term of
office of each executive officer expires at the next organizational meeting of
the Board of Directors following the next annual meeting of stockholders.
The following is a brief account of the business experience of each
TransNet director during the past five years.
John J. Wilk was president, a director and chief executive officer of
TransNet since its inception in 1969 until May 1986, when he was elected
Chairman of the Board.
Steven J. Wilk was elected a vice president of TransNet in October 1981 and
in May 1986 was elected President and Chief Executive Officer. He was elected a
director of TransNet in April 1989.
Jay A. Smolyn has been employed at TransNet since 1976 and in April 1985
became Vice President, Operations. He was elected a director of TransNet in
January 1990.
Vincent Cusumano, who was elected a TransNet director in April 1977, is,
and for the past five years has been, president and chief executive officer of
Cusumano Perma-Rail Corporation of Roselle Park, New Jersey, distributors and
installers of exterior iron railings. Mr. Cusumano is not actively engaged in
the business of the Corporation.
<PAGE>
Earle Kunzig, who was elected a TransNet director in November 1976, is Vice
President of Sales and a principal of Hardware Products Sales, Inc., Wayne, New
Jersey, a broker of used computer equipment and provider of computer maintenance
services. He was director of hardware operations for Computer Maintenance
Corporation, a business computer servicing organization in Secaucus, New Jersey
from 1978 through July 1985. Mr. Kunzig is not actively engaged in the business
of the Corporation.
Raymond J. Rekuc, who was elected a TransNet director in August 1983, is
currently the principal in Raymond J. Rekuc, Certified Public Accountant, an
accounting firm located in Washington, New Jersey. He was a partner with Hess,
Keeley & Company, Accountants and Auditors, Millburn, New Jersey from October
1980 until September 1986, when he became treasurer of Royalox International,
Inc. of Asbury, New Jersey, an importer of luggage and luggage hardware. Mr.
Rekuc provided financial consulting services to TransNet in 1990 through 1993.
Mr. Rekuc is a member of the American Institute of Certified Public Accountants
and the New Jersey Society of Certified Public Accountants, and is not actively
engaged in the business of the Corporation.
Susan Wilk-Cort joined TransNet in November 1987. Prior to that time, she
was a Senior Attorney with the U. S. Securities and Exchange Commission,
Washington, D.C., and then the Office of General Counsel of The Federal Home
Loan Bank Board. She was elected a director of TransNet in January 1990.
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 1999, its officers, directors
and beneficial owners of more than 10% of its equity timely complied with all
applicable Section 16(a) filing requirements.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued by the Corporation during the three years ended on June 30, 1999, to
its Chief Executive Officer and each of its other executive officers whose total
annual salary and bonus for the fiscal year ended June 30, 1999, exceeded
$100,000. All of the Corporation's group life, health, hospitalization or
medical reimbursement plans, if any, do not discriminate in scope, terms or
operation, in favor of the executive officers or directors of the Corporation
and are generally available to all full-time salaried employees.
SUMMARY COMPENSATION TABLE
<TABLE>
Annual Compensation Long-Term Compensation
Name and Year Ended Other Annual Options Restricted LTIP All Other
Principal Position June 30, Salary Bonus Compensation SARs Stock Awards Payouts Compensation
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven J. Wilk 1998 $250,000 $82,603 $0 0 0 $0 0
President and Chief 1997 $250,000 $46,644 $0 0 0 $0 0
Executive Officer 1996 $240,833 $47,560 $0 0 0 $0 0
Jay Smolyn 1998 $135,000 $59,822 $0 0 0 $0 0
Vice President 1997 $135,000 $30,822 $0 0 0 $0 0
Operations 1996 $130,833 $36,600 $0 0 0 $0 0
</TABLE>
- -------------------------
Employment Contracts with Executive Officers
TransNet has employment contracts in effect with Steven J. Wilk and Jay A.
Smolyn which expire on June 30, 2000. Pursuant to the employment contracts,
Steven J. Wilk's annual salary is "at least" $250,000 and Mr. Smolyn's salary is
"at least" $135,000 or, in each case, such greater amount as may be approved
from time to time by the Board of Directors. The contracts also provide for
additional incentive bonuses to be paid with respect to each of the
Corporation's fiscal years based upon varying percentages of the Corporation's
consolidated pre-tax income exclusive of extraordinary items (3% of the first
$500,000, 4% of the next $500,000, 5% of the next $4,000,000 and 6% of amounts
in excess of $5,000,000 for Steven J. Wilk, and 2% of pre-tax income in excess
of $100,000 to the first $500,000 and 3% in excess of $500,00 for Mr. Smolyn).
Steven J. Wilk's employment contract provides for a continuation of full amount
of salary payments for 6 months and 50% of the full amount for the remainder of
the term in the event of illness or injury. In addition, the employment
contracts contain terms regarding the event of a hostile change of control of
the Corporation and a resultant termination of the employee's employment prior
to expiration of the employment contract. These terms provide that Mr. Smolyn
would receive a lump sum payment equal to 80% of the greater of his then current
annual salary or his previous calendar year's gross wages including the
additional incentive compensation multiplied by the lesser of five or the number
of years remaining in the contract. In the case of Steven J. Wilk, the contract
provides that in the event of termination of employment due to a hostile change
in control, he may elect to serve as consultant at his current salary and
performance bonus for a period of five years beginning at the date of the change
in control, or he may elect to receive a lump sum payment which would be the
greater of 80% of his then current salary or 80% of his previous year's gross
wages times five. The contract for Mr. Smolyn provides that the Corporation may
terminate his employment, with or without cause. If said termination is without
cause, the Corporation shall pay the Employee an amount equal to compensation
payable for a period of one-half of the contract period remaining, not to exceed
compensation for 18 months. Steven J. Wilk's employment agreement provides that
should the Corporation terminate his employment (other than for the commission
of willful criminal acts), he may elect to continue as a consultant to the
Corporation at his then current compensation level, including the performance
bonus, for the lesser of two (2) years or the remainder of the contract term or
he may elect to receive a lump sum payment equal to eighty percent of his then
current salary plus incentive bonus times the lesser of two (2) years or the
remainder of the contract.
<PAGE>
Director's Compensation
During fiscal 1999, the Company paid $5,000 in directors' fees to each of
its three outside directors.
Stock Options
No options to acquire TransNet Corporation stock were held by the
Corporation's executive officers at June 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of August 31, 1999, the number of shares
of TransNet's common stock owned beneficially to the knowledge of the
Corporation, by each beneficial owner of more than 5% of such common stock, by
each director owning shares and by all officers and directors of the Corporation
as a group.
Name of Beneficial Amount of Shares Percent of
Owner Beneficially Owned Class
Directors
Steven J. Wilk (a) 393,500 shs 8%
John J. Wilk (a) 175,500 shs 3%
Jay A. Smolyn (a) 85,000 shs 2%
Susan Wilk-Cort (a) 78,200 shs 1%
Vincent Cusumano (a) 0 shs ----
Earle Kunzig (a) 0 shs ----
Raymond J. Rekuc (a) 0 shs ----
All officers and directors 732,200 shs 14%
as a group (seven persons)
- -----------------------------------------
(a) The address of all directors is 45 Columbia Road, Branchburg, New Jersey
08876.
John J. Wilk and Steven J. Wilk, chairman of the board of directors and
president of the Corporation as well as beneficial owners of 3% and 8%
respectively, of TransNet's common stock may each be deemed to be a "parent" of
the Corporation within the meaning of the Securities Act of 1933.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 2 herein as to the subleasing by the Corporation of its principal
facility in Branchburg, New Jersey from a partnership consisting of its Chairman
of the Board and an outside Director.
On November 11, 1998, the Corporation executed an agreement to sell
approximately 6.32 acres of unimproved real property in Mountainside, New Jersey
(the "Real Property") to W Realty LLC ("W Realty") for the appraised value of
$1,000,000. W Realty is a partnership, which at the time of sale consisted of
John J. Wilk, Chairman of the Board, and Raymond J. Rekuc, a Director of the
Corporation. The purchase price was payable through a credit extended by W
Realty as sub-lessor to the Corporation as sub-lessee for the $410,000 of rent
payable by the Corporation over the last two years of its sublease for its
principal facility in Somerville, New Jersey and a $590,000 promissory note
executed by W Realty payable in installments of $150,000 in February 1998 and
$440,000 in November 1998. The note was at an interest rate of 8% per annum and
was secured by a mortgage on the Real Property. The $150,000 payment due in
February 1998 was paid and $190,000 of the payment due in November 1998 was paid
with interest through January 1999. Payment of the $250,000 balance was
renegotiated under a new Note which provides for payment of the principal on
November 1, 2000 (unless demanded at an earlier date), and bears interest at the
rate of 9% per annum, payable monthly beginning February 1, 1999. At the time of
issuance of the new Note, the Corporation released its mortgage lien on the Real
Property in order to permit W Realty, which now includes an unaffiliated third
partner, to lease the Real Property to another third party. In place of the
mortgage lien, the new Note is secured by the partnership interests of W Realty
owned by Messrs. Wilk and Rekuc. The credit of rental payments is in effect.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
o Independent Auditor's Report.
o Consolidated Balance Sheets as of June 30, 1999 and June 30, 1998.
o Consolidated Statements of Operations for the Years Ended June 30,
1999, 1998 and 1997.
o Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1999, 1998 and 1997.
o Consolidated Statements of Cash Flows for the Years Ended June 30,
1999, 1998 and 1997.
o Notes to Consolidated Financial Statements
(b) Reports on Form 8-K
The Corporation did not file any reports on Form 8-K with respect to or
during the quarter ended June 30, 1999.
(c) Exhibits Incorporated by Reference to
3.1(a) Certificate of Incorporation, Exhibit 3(A) to Registration
as amended Statement on Form S-1 (File No.
2-42279)
3.1(b) October 3, 1977 Amendment Exhibit 3(A) to Registration
to Certificate of Incorporation Statement on Form S-1 (File No.
2-42279)
3.1 (c) March 17, 1993 Amendment
to Certificate of Incorporation
3.2 (a)Amended By-Laws Exhibit 3 to Annual Report on Form
10-K for year ended June 30, 1987
3.2(b) Article VII, Section 7 of the Exhibit to Current Report on
By-Laws, as amended Form 8-K for January 25, 1990
Exhibits Incorporated by Reference to
4.1 Specimen Common Stock Exhibit 4(A) to Registration Statement
Certificate on Form S-1 (File No. 2-42279)
10.1 March 1, 1991 lease agreement Exhibit 10.1 to Annual Report on
between W. Realty and the Form 10-K for year ended June 30,
Corporation for premises at 45 1991
Columbia Road, Somerville
(Branchburg), New Jersey
10.2 February 1, 1996 amendment to Exhibit 10.2 to Annual Report on
Lease Agreement between W.Realty and Form 10-K for year ended June 30, 1996
the Corporation for premises at 45
Columbia Road, Somerville, New Jersey
10.3 Employment Agreements effective Exhibit 10.3 to Annual Report on
July 1, 1995 with Steven J. Wilk and Form 10-K for year ended June 30, 1996
Jay A. Smolyn
<PAGE>
10.4 Form of Rights Agreement dated Exhibit to Current Report on Form
as of February 6, 1990 between 8-K for January 25, 1990
TransNet and The Trust Company of
New Jersey, as Rights Agent
10.5 Acquisition Agreement dated Exhibit to Current Report on Form
March 6, 1990 between TransNet and 8-K for March 6, 1990
Selling Stockholders of
Round Valley Computer Center, Inc.
(22) Subsidiaries - The following table indicates the sole wholly-owned
active subsidiary of TransNet Corporation and its state of incorporation.
Name State of Incorporation
Century American Corporation Delaware
<PAGE>
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 , 1999 By /s/ Steven J. Wilk
-----------------------------
Steven J. Wilk
Chief Executive Officer
Date: September , 1998 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 , 1999
- ------------------------------------
Steven J. Wilk, Director
By /s/ John J. Wilk Date: September , 1999
- ------------------------------------
John J. Wilk, Director
By /s/ Jay A. Smolyn Date: September , 1999
- ------------------------------------
Jay A. Smolyn, Director
By /s/ Raymond J. Rekuc Date: September, 1999
- ------------------------------------
Raymond J. Rekuc, Director
By /s/ Vincent Cusumano Date: September 1999
- ------------------------------------
Vincent Cusumano
By /s/ Earle Kunzig Date: September , 1999
- ------------------------------------
Earle Kunzig
By /s/ Susan M. Wilk-Cort Date: September, 1999
- ------------------------------------
Susan M. Wilk-Cort, Director
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of
TransNet Corporation
Somerville, New Jersey
We have audited the accompanying consolidated balance sheets of
TransNet Corporation and its subsidiary as of June 30, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three fiscal years in the period ended June 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of TransNet Corporation and its subsidiary as of June 30, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended June 30, 1999, in conformity
with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 16, 1999
F-1
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
June 30,
1 9 9 9 1 9 9 8
Assets:
Current Assets:
Cash and Cash Equivalents $7,617,241 $ 5,378,846
Accounts Receivable - Net 6,736,351 6,327,434
Inventories 886,936 1,407,682
Mortgage Receivable - Related Party -- 464,423
Other Current Assets 56,030 136,621
Deferred Tax Asset 249,000 177,200
---------- -----------
Total Current Assets 15,545,558 13,892,206
Property and Equipment - Net 745,703 854,199
Mortgage Receivable - Related Party 250,000 --
Other Assets 577,619 650,113
---------- -----------
Total Assets $17,118,880 $15,396,518
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $1,160,978 $ 598,008
Accrued Expenses 374,064 614,875
Accrued Payroll 258,858 234,722
Floor Plan Payable 1,200,443 776,901
Deferred Income -- 100,649
Income Taxes Payable 664,167 210,200
Other Current Liabilities -- 156,653
---------- -----------
Total Current Liabilities 3,658,510 2,692,008
---------- -----------
Deferred Tax Liability 11,100 80,700
---------- -----------
Commitments and Contingencies -- --
---------- -----------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value,
Authorized 15,000,000 Shares; Issued
7,469,524 Shares in 1999 and 1998 [of which
2,402,720 are in Treasury in 1999
and 2,252,720 in 1998] 74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 9,252,475 8,080,013
---------- -----------
Totals 20,013,915 18,841,453
Less: Treasury Stock - At Cost (6,564,643) (6,217,643)
---------- -----------
Total Stockholders' Equity 13,449,272 12,623,810
---------- -----------
Total Liabilities and Stockholders' Equity $17,118,880 $15,396,518
=========== ===========
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
J u n e 3 0,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Revenue:
Equipment $28,231,540 $60,333,109 $61,043,320
Services 16,074,600 10,091,700 7,788,002
----------- ----------- -----------
Total Revenue 44,306,140 70,424,809 68,631,322
----------- ----------- -----------
Cost of Revenue:
Equipment 25,844,701 55,243,196 56,078,869
Services 9,882,921 15,181,613 5,081,596
----------- ----------- -----------
Total Cost of Revenue 35,727,622 62,311,713 61,160,465
----------- ----------- -----------
Gross Profit 8,578,518 8,113,096 7,470,857
Selling, General and Administrative
Expenses 7,073,487 7,529,093 6,465,912
----------- ----------- -----------
Operating Income 1,505,031 584,003 1,004,945
----------- ----------- -----------
Other Income [Expense]:
Interest Income 296,310 149,535 124,065
Interest Income - Related Party 33,000 47,000 --
Interest Expense -- (209) (40,943)
Other Income 1,711 494,462 --
----------- ----------- -----------
Other Income - Net 331,021 690,788 83,122
----------- ----------- -----------
Income Before Income Tax Expense 1,836,052 1,274,791 1,088,067
Income Tax Expense 663,590 350,900 55,500
----------- ----------- -----------
Net Income $ 1,172,462 $ 923,891 $ 1,032,567
=========== =========== ===========
Basic Net Income Per Common Share $ .23 $ .18 $ .20
=========== =========== ===========
Diluted Net Income Per Common Share $ .23 $ .18 $ .20
=========== =========== ===========
Weighted Average Common Shares
Outstanding - Basic 5,183,141 5,216,804 5,216,804
=========== =========== ===========
Weighted Average Common Shares
Outstanding - Diluted 5,183,141 5,216,804 5,216,804
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
Total
Common Stock Paid-in Retained Treasury Stock Stockholders'
Shares Amount Capital Earnings Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - June 30, 1996 7,469,524 $ 74,695 $10,686,745 $6,123,555 (2,252,720)$(6,217,643) $10,667,352
Net Income -- -- -- 1,032,567 -- -- 1,032,567
---------- --------- ---------- ---------- ----------- ----------- ----------
Balance - June 30, 1997 7,469,524 74,695 10,686,745 7,156,122 (2,252,720) (6,217,643) 11,699,919
Net Income -- -- -- 923,891 -- -- 923,891
---------- --------- ---------- ---------- ----------- ----------- ----------
Balance - June 30, 1998 7,469,524 74,695 10,686,745 8,080,013 (2,252,720) (6,217,643) 12,623,810
Net Income -- -- -- 1,172,462 -- -- 1,172,462
Treasury Shares Purchased -- -- -- -- (150,000) (347,000) (347,000)
---------- --------- ---------- ---------- ----------- ----------- ----------
Balance - June 30, 1999 7,469,524 $ 74,695 $10,686,745 $9,252,475 (2,402,720)$(6,564,643) $13,449,272
========== ========= =========== ========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
J u n e 3 0,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Operating Activities:
Net Income $ 1,172,462 $ 923,891 $ 1,032,567
----------- ----------- -----------
Adjustments to Reconcile Net Income
to Net Cash Provided by [Used for]
Operating Activities:
Depreciation and Amortization 375,702 361,323 340,723
Loss [Gain] on Sale of Equipment 2,517 (482,608) --
Provision for Doubtful Accounts 30,000 10,000 --
Discounting of Deferred Charges 64,000 15,000 --
Deferred Income Taxes (141,000) 140,500 29,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (438,917) 2,648,885 (1,620,299)
Inventories 520,746 1,866,780 367,766
Other Current Assets 80,591 187,925 141,397
Other Assets (5,473) (9,472) (45,167)
Mortgage Receivable - Related Party 24,429 (24,423) --
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 346,295 (167,977) (663,228)
Other Current Liabilities (156,653) (107,828) 48,980
Deferred Income (100,649) (61,927) (156,708)
Income Taxes Payable 453,955 210,200 --
----------- ----------- -----------
Total Adjustments 1,055,543 4,586,378 (1,557,536)
----------- ----------- -----------
Net Cash - Operating Activities 2,228,005 5,510,269 (524,969)
----------- ----------- -----------
Investing Activities:
Capital Expenditures (256,152) (14,444) (53,567)
Proceeds from Sale of Equipment -- 3,243 --
Mortgage Receivable Proceeds - Related
Party 190,000 150,000 --
----------- ----------- -----------
Net Cash - Investing Activities (66,152) 138,799 (53,567)
----------- ----------- -----------
Financing Activities:
Floor Plan Payable - Net 423,542 (3,607,139) 1,531,712
Treasury Shares Repurchased (347,000) -- --
----------- ----------- -----------
Net Cash - Financing Activities 76,542 (3,607,139) 1,531,712
----------- ----------- -----------
Net Increase in Cash and Cash Equivalents 2,238,395 2,041,929 953,176
Cash and Cash Equivalents - Beginning of
Years 5,378,846 3,336,917 2,383,741
----------- ----------- -----------
Cash and Cash Equivalents - End of Years $ 7,617,241 $ 5,378,846 $ 3,336,917
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
Y e a r s e n d e d
J u n e 3 0,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ -- $ 209 $ 44,000
Income Taxes $ 384,019 $ 17,767 $ 27,000
Supplemental Disclosures of Non-Cash Investing Activities:
During 1998, the Company disposed of $74,429 of fully depreciated property and
equipment.
During 1998, the Company sold land for $1,000,000 to a related party
consisting of a mortgage receivable of $590,000 and a credit of $410,000 towards
future lease commitments [See Note 5].
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Nature of Operations
TransNet Corporation [the "Company"] was incorporated in the State of Delaware
in 1969 and is engaged in the sale and service of personal computer systems and
peripheral equipment, software, and supplies primarily in the New Jersey - New
York City Metropolitan area. The sale of products and the promotion of technical
services, including outsourcing, are conducted through the Company's sales and
service departments.
The sale and service of personal computer systems is highly competitive and may
be affected by rapid changes in technology and spending habits in both the
business and institutional sectors.
[2] Summary of Significant Accounting Policies
[A] Consolidation - The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Century American Corporation.
Intercompany transactions and accounts have been eliminated in consolidation.
[B] Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased [See
Note 3].
[C] Accounts Receivable - Accounts receivable have been reduced by an allowance
for doubtful accounts of $115,000 and $50,000 as of June 30, 1999 and 1998,
respectively. The receivables secure a floor plan agreement [See Note 8C].
[D] Inventories - The Company's inventory is valued at the lower of cost
[determined on the moving average-cost basis] or market. The inventory secures a
floor plan agreement [See Note 8C].
[E] Property and Equipment, Depreciation and Amortization - Property and
equipment are stated at cost. Depreciation and amortization are computed by use
of the straight-line method over the estimated useful lives of the various
assets ranging from five to ten years. Leasehold improvements are amortized over
the shorter of the life of the lease including renewal option periods, or their
estimated useful life.
[F] Intangible Assets - Goodwill representing the excess of the purchase price
over the fair value of identifiable net assets acquired is being amortized over
20 years by using the straight-line method. Licences and other intangible assets
are amortized using the straight-line method over their estimated useful lives
ranging from five to twenty years. The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
[G] Revenue Recognition - Revenue is recognized at time of shipment for
equipment sold directly to customers. Revenues from non-contracted customer
support services are recognized as services are provided. The Company offers
contracted support service agreements to its customers. Services under support
contracts, are generally provided ratably over the term of the customer support
contracts and are included in services revenue in the accompanying statements of
operations.
[H] Earnings Per Share - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings per
Share"; which is effective for financial statements issued for periods ending
after December 15, 1997. Basic earnings per share is based on the weighted
average number of common shares outstanding without consideration of common
stock equivalents. Diluted earnings per share is based on the weighted average
number of common and common equivalent shares outstanding. The calculation takes
into account the shares that may be issued upon exercise of stock options,
reduced by the shares that may be purchased with the funds received from the
exercise, based on the average price during the year. Prior periods earnings per
share data have been recalculated and no adjustment was necessary. For fiscal
years presented, diluted net income per common share is the same as basic net
income per common share. Rights listed in Note 11 may be potentially dilutive in
the future.
F-7
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies [Continued]
[I] Concentrations of Credit Risk - At June 30, 1999 and 1998, the Company
maintained cash balances [excluding repurchase agreements discussed in footnote
3] in excess of FDIC insured limits of approximately $157,000 and $323,000,
respectively.
The Company routinely assesses the financial strength of its customers and based
upon factors surrounding the credit risk of its customers establishes an
allowance for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowances is not
significant. The Company does not require collateral or other security to
support financial instruments subject to credit risk.
[J] Business Concentrations - The Company is engaged in the sale and technical
support and service of local area networks, personal computer systems, and
peripheral equipment, software, and supplies to companies and organizations
located primarily in the New Jersey - New York City Metropolitan area and is
currently an authorized dealer for many of the largest computer products
suppliers in the world, including Apple, Compaq, Hewlett Packard, IBM, Lotus
Development Corporation, and Microsoft Corporation. If the Company were to lose
any of its dealer authorizations or if it were to experience significant delays,
interruptions or reductions in its supply of hardware and software, the
Company's revenues and profits could be adversely affected.
[K] Advertising Costs - The Company participates in cooperative advertising
programs with its vendors, whereby the vendors absorb the costs of advertising.
During the year ended June 30, 1999, 1998 and 1997, the Company incurred
additional advertising expense of $4,987, $1,939 and $2,209, respectively.
Adverting costs are expensed as incurred.
[L] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.
Actual results could differ from those estimates.
[M] Reclassification - Certain items from the prior year's financial statements
have been reclassified to conform to the current year's presentation.
[3] Repurchase Agreements
Repurchase agreements included in cash equivalents as of June 30, 1999 and 1998
consisted of:
Cost Fair Value
June 30, 1999:
Repo 4.8%, Due July 1, 1999 $ 7,279,144 $ 7,279,144
This security is backed by $7,426,645 of G.N.M.A. bonds maturing March 25, 2022
with a variable interest rate.
Cost Fair Value
June 30, 1998:
Repo 5.35%, Due July 1, 1998 $ 5,624,933 $ 5,624,933
This security is backed by $5,754,913 of F.N.M.A. bonds maturing June 18, 2022
with an interest rate of 6.5%.
F-8
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[4] Inventories
Inventories consist of:
June 30,
1 9 9 9 1 9 9 8
Product Inventory $ 580,223 $1,070,337
Service Parts 306,713 337,345
---------- ---------
Totals $ 886,936 $1,407,682
------ ========== ==========
[5] Mortgage Receivable - Related Party
In November 1997, the Company sold approximately 6.32 acres of unimproved real
property in Mountainside, New Jersey [the "real property"] to W. Realty LLC, ["W
Realty"] for the appraised value of $1,000,000. W. Realty is partially owned by
an officer and a director of the Company. The original purchase price is payable
through a $410,000 credit extended by W. Realty as lessor to the Company
covering the last two years of its lease [See Note 8A] and a $590,000 promissory
note payable.
In February 1999, the remaining $250,000 principal balance owed on the mortgage
was refinanced. Repayment terms under the refinanced note payable include
monthly interest only payments and full principal balance due November 2000.
Interest is charged at a rate of 9.0% per annum. The note is secured by an
interest in the partnership of W. Realty. During the years ended June 30, 1999
and 1998, the Company received approximately $33,000 and $47,000 of interest on
the mortgage receivable obligation, respectively.
[6] Property, Equipment, Depreciation and Amortization
Property and equipment and accumulated depreciation and amortization as of June
30, 1999 and 1998 are as follows:
June 30,
1 9 9 9 1 9 9 8
Automobiles $ 195,669 $ 179,049
Office Equipment 1,452,106 1,297,718
Furniture and Fixtures 316,976 316,976
Leasehold Improvements 273,102 273,102
---------- ---------
Totals 2,237,853 2,066,845
Less: Accumulated Depreciation and Amortization 1,492,150 1,212,646
---------- ---------
Property and Equipment - Net $ 745,703 $ 854,199
---------------------------- ========== ==========
Total depreciation and amortization expense amounted to $361,731, $347,351 and
$326,752 for the years ended June 30, 1999, 1998 and 1997, respectively.
F-9
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[7] Intangible Assets
Intangible assets and accumulated amortization as of June 30, 1999 and 1998 are
as follows:
June 30,
1 9 9 9 1 9 9 8
Licenses $ 20,000 $ 20,000
Goodwill 259,422 259,422
--------- ----------
Totals 279,422 279,422
Less: Accumulated Amortization 131,896 117,924
--------- ----------
Intangible Assets - Net $ 147,526 $ 161,498
----------------------- ========= ==========
Intangible assets are included in other assets for financial reporting purposes.
Amortization expense for fiscal 1999, 1998 and 1997 was $13,971, $13,971 and
$13,971, respectively.
[8] Commitments and Related Party Transactions
[A] Leasing Agreements - The Company leases office and warehouse space under an
operating lease with a related party, which expires in 2001.
During fiscal 1991, the Company entered into a five year lease with three five
year renewal options with W. Realty, an affiliate of the Chairman of the Board
and a director, for its primary office and warehouse facility. In March 1996,
the Company exercised the renewal option.
The lease requires the Company to pay for building maintenance, insurance and
real estate taxes. Total contingent rental payments were $63,911, $50,294 and
$62,863 for the years ended June 30, 1999, 1998 and 1997, respectively.
Total rent expense was $201,840, $188,381 and $215,710 for the years ended June
30, 1999, 1998 and 1997, respectively.
The following is a summary of rental commitments:
2000 $ 203,962
2001 138,807
Thereafter --
-----------
Total $ 342,769
----- ===========
Included in other assets at June 30, 1999 and 1998, the Company had prepaid rent
of approximately $330,000 and $394,000, respectively, which represents the
discounted present value of the last 24 months of the above commitment pursuant
to the sale of land [See Note 5].
F-10
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[8] Commitments and Related Party Transactions [Continued]
[B] Employment Agreements - Effective July 1995, the Company entered into four
[4] employment agreements with officers of the Company. The term of each
agreement is for five [5] years with annual salaries ranging from $135,000 to
$250,000. A "Performance Bonus," based on the Company's consolidated pre-tax
profits, is also included in each of the agreements at rates of two to six
percent based on certain achieved profit levels. The bonus expense recorded was
approximately $125,000, $107,000 and $119,000 for the years ended June 30, 1999,
1998 and 1997, respectively. As of June 30, 1999, two [2] employment agreements
were still in effect which provide for base annual salaries of $135,000 and
$250,000 through June 2000.
In addition, the employment agreements contain provisions providing that in the
event of a hostile change of control of the Company and a resultant termination
of the employees' employment prior to expiration of the agreement, the employees
would be entitled to receive certain lump sum payments ranging from 80% of the
officers current salary to 80% of the prior year's salary times the remaining
years of the related employment agreement.
[C] Floor Plan Payable - The Company finances a portion of its inventory through
a floor planning arrangement with a finance company, whereby the Company's
inventories and accounts receivable have been pledged as collateral against the
outstanding loan balances. The Company has an inventory credit line up to a
maximum of $7,750,000 based on eligible inventory purchases. The outstanding
balance for the inventory credit line at June 30, 1999 and 1998 was
approximately $1,200,000 and $800,000, respectively. The Company also has an
accounts receivable credit line based upon eligible accounts receivable up to a
maximum of $4,500,000. The Company did not have an outstanding balance on its
accounts receivable credit line at June 30, 1999 or 1998. Payments on both
credit lines are due currently. Purchases made under the credit lines are
interest free for a 30 day period. If not repaid in full, interest is calculated
based on the average daily outstanding balance under the lines of credit at a
rate of the greater of 6% or the prime rate. The prime rate and the weighted
average interest rate were 8.50% and 7.5%, respectively at June 30, 1999, were
8.50% and 7.25%, respectively at June 30, 1998, and 8.50% and 8.25%,
respectively at June 30, 1997.
[9] Income Taxes
The provision for income taxes is summarized as follows:
Y e a r s e n d e d
J u n e 3 0,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Federal:
Current $ 680,590 $ 454,000 $ 335,625
Deferred (120,000) 104,000 38,000
---------- --------- ----------
Totals 560,590 558,000 373,625
Less: Net Operating Loss Carryforward
Benefit -- (316,500) (319,625)
---------- --------- ----------
Federal Provision $ 560,590 $ 241,500 $ 54,000
----------------- ========== ========= ==========
State:
Current $ 124,000 $ 109,400 $ 99,000
Deferred (21,000) 30,500 (9,000)
---------- --------- ----------
Totals 103,000 139,900 90,000
Less: Net Operating Loss Carryforward
Benefit -- (30,500) (88,500)
---------- --------- ----------
State Provision $ 103,000 $ 109,400 $ 1,500
--------------- ========== ========= ==========
Income Tax Expense $ 663,590 $ 350,900 $ 55,500
------------------ ========== ========= ==========
F-11
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[9] Income Taxes [Continued]
Deferred income taxes arise from temporary differences including depreciation,
inventory reserves, allowance for doubtful accounts and expense accruals. The
Company fully utilized its federal and state net operating loss carryforwards as
of June 30, 1998.
The deferred tax asset and liability in the accompanying consolidated balance
sheets include the following components:
June 30,
1 9 9 9 1 9 9 8
Accounts Receivable Allowance $ 46,000 $ 20,000
Inventory Allowance 32,800 93,000
Accrued Expenses 149,500 60,000
Other Temporary Differences 20,700 4,200
----------- -----------
Deferred Tax Assets 249,000 177,200
Deferred Tax Liabilities - Depreciation and
Amortization 11,100 80,700
----------- -----------
Net Deferred Tax Asset $ 237,900 $ 96,500
---------------------- =========== ===========
The following is a reconciliation of income taxes at the U.S. statutory tax rate
to the taxes actually provided:
Y e a r s e n d e d
J u n e 3 0,
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
U.S. Statutory Rate Applied to Pretax Income $ 624,000 $ 433,500 $ 380,823
State Taxes 132,000 92,000 58,500
Net Operating Loss Carryforward -- (160,800) (408,125)
Other (92,410) (13,800) 24,302
---------- --------- ----------
Income Tax Expense $ 663,590 $ 350,900 $ 55,500
------------------ ========== ========= ==========
[10] Defined Contribution Plans
The Company maintains a defined contribution pension plan which covers
substantially all of the Company's employees. The contribution amount is
determined at the discretion of management. There was no expense for the plan
for the years ended June 30, 1999, 1998 and 1997.
Effective January 1, 1995, the Company adopted another defined contribution
[401(k)] plan covering all eligible employees. Under the terms of the Plan,
participating employees 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, 1999, 1998 and 1997 was
$34,625, $28,335 and $23,410, respectively.
F-12
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[11] Stockholders' Rights Plan
On February 6, 1990, the Board of Directors adopted a Stockholders' Rights Plan,
which entitles the Right holder, upon the occurrence of specified triggering
events, i.e., the acquisition by a person or group of beneficial ownership of
20% or more of outstanding shares; the commencement of a tender offer for 20% or
more of outstanding shares [unless an offer is made for all outstanding shares
at a price deemed by the Continuing Board to be fair and in the best interest of
stockholders] and the determination by the Board that a person is an "Adverse
Person," as defined in the Rights Agreement to purchase one share of common
stock at an exercise price of $7.50 per share, or in certain "take over"
situations, common stock equal in value to two times the exercise price.
Subsequent to a triggering event, if the Company is acquired in a merger or
other business transaction in which the Company is not the surviving corporation
[unless Board approved], or 50% or more of the Company's assets or earning power
is sold or transferred, each holder of a Right shall have the right to receive
upon exercise, common stock of the acquiring company having a value equal to two
times the exercise price of the Right. The Rights may be redeemed by the Company
for $.01 per Right at any time prior to the determination of the Board that a
person is an Adverse Person or ten days following a public announcement of the
acquisition of, or commencement of a tender offer for, 20% of the outstanding
common stock. The Rights expire on February 6, 2000, unless earlier redeemed.
[12] Contingencies
Management has been notified of an unasserted possible claim or assessment
involving the Company's pension plan. The pension plan was adopted in 1981 as a
defined benefit plan. In 1989, various actions were taken by the Company to
terminate the pension plan, to convert it to a defined contribution plan and to
freeze benefit accruals. However, no filing for plan termination was made with
the Pension Benefit Guaranty Corporation [the "PBGC"] and additionally, a final
amended and restated plan document incorporating the foregoing amendments and
other required amendments including those required by the Tax Reform Act of 1986
do not appear to have been properly adopted. In addition, since 1989, it appears
that certain operational violations occurred in the administration of the Plan
including the failure to obtain spousal consents in certain instances where it
was required.
The Company currently intends to (i) take corrective action under the IRS
Walk-in Closing Agreement Program ["CAP"], (ii) apply for a favorable
determination letter with respect to the Plan from the IRS, and (iii) terminate
the Plan. The CAP program provides a correction mechanism for "non-amenders"
such as the Company. Under CAP, the Company will be subject to a monetary
sanction which could range from $1,000 to approximately $40,000. In addition,
the Company will be required to correct, retroactively, operational violations,
and to pay any resulting excise taxes and PBGC premiums and penalties that may
be due. Special counsel has advised the Company that the liability could range
from $116,000 [the current estimate by the Company's actuary of additional
required funding] to a more material amount. However, due to the inherent
uncertainties involved, any estimate, in dollar terms, of the range of any such
liability would be speculative and potentially misleading. The Company has
accrued $116,000.
[13] Significant Customer
During the years ended June 30, 1998 and 1997, the Company derived approximately
$35,200,000 and $39,800,000, respectively, of its revenue for each year from one
major customer. During the year ended June 30, 1999, the Company derived less
than 10% of its annual revenue from this customer. Additionally, during the
years ended June 30, 1999, 1998 and 1997, the Company derived $16,400,000,
$9,900,000, and $7,500,000, respectively, of its revenue from an affiliate of
the significant customer [See Note 2J].
At June 30, 1999, 1998 and 1997, one customer and its affiliate accounted for
approximately $2,100,000, $2,600,000 and $3,700,000, respectively, of accounts
receivable.
F-13
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[14] Fair Value of Financial Instruments
The Company adopted Statement of Financial Accounting Standards ["SFAS'] No.
107, "Disclosure About Fair Value of Financial Instruments" which requires
disclosing fair value to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement. The following table
summarizes financial instruments by individual balance sheet classifications as
of June 30, 1999:
Carrying Fair
Amount Value
Mortgage Receivable - Related Party $ 250,000 $ 250,000
Due from Related Party $ 330,000 $ 330,000
In assessing the fair value of financial instruments, the Company used the
following methods and assumptions, which were based on estimates of market
conditions and risks existing at that time. The fair value of the Due from
Related Party was estimated by discounting at an interest rate considered the
current market rate. For certain instruments, including cash and cash
equivalents, related party and trade payables, mortgage receivable and floor
plan payable it was estimated that the carrying amount approximated fair value
for the majority of these instruments because of their short maturities.
[15] Segment Reporting
During the year ended June 30, 1999, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" [SFAS No. 131]. SFAS No. 131 establishes standards for
reporting information about operating segments in annual financial statements.
It also establishes standards for related disclosures about products and
services, and geographic areas. Operating segments are defined as components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing performance. Based
on provisions of SFAS No. 131, the Company is operating under one segment. The
Company's revenues are derived from domestic customers principally located in
the New York metropolitan area
[16] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods.
F-14
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[16] New Authoritative Pronouncements [Continued]
The Company does not currently have any derivative instruments and is not
currently engaged in any hedging activities.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprises." SFAS No. 134 is not expected to have a material
impact on the Company.
In February 1999, the FASB issued SFAS No. 135, which is a recission of SFAS No.
75 "Deferral of the Effective Date of Certain Accounting Requirements for
Pension Plans of State and Local Government Units." SFAS No. 135 is not expected
to have a material impact on the Company.
The FASB has had on its agenda a project to address certain practice issues
regarding Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for
Stock Issued to Employees." The FASB plans on issuing various interpretations of
APB Opinion No. 25 to address these practice issues. The proposed effective date
of these interpretations would be the issuance date of the final Interpretation,
which is expected to be in September 1999. If adopted, the Interpretation would
be applied prospectively but would be applied to plan modification and grants
that occur after December 15, 1998. The FASB's tentative interpretations are as
follows:
* APB Opinion No. 25 has been applied in practice to include in its
definition of employees, outside members of the board or directors and
independent contractors. The FASB's interpretation of APB Opinion No. 25
will limit the definition of an employee to individuals who meet the common
law definition of an employee [which also is the basis for the distinction
between employees and nonemployees in the current U.S. tax code]. Outside
members of the board of directors and independent contractors would be
excluded from the scope of APB Opinion No. 25 unless they qualify as
employees under common law. Accordingly, the cost of issuing stock options
to board members and independent contractors not meeting the common law
definition of an employee will have to be determined in accordance with
FASB Statement No. 123, "Accounting for Stock-Based Compensation," and
usually recorded as an expense in the period of the grant [the service
period could be prospective, however, depending on the terms of the
options].
* Options [or other equity instruments] of a parent company issued to
employees of a subsidiary should be considered options, etc. issued by the
employer corporation in the consolidated financial statements, and,
accordingly, APB Opinion No. 25 should continue to be applied in such
situations. This interpretation would apply to subsidiary companies only;
it would not apply to equity method investees or joint ventures.
* If the terms of an option [originally accounted for as a fixed option] are
modified during the option term to directly change the exercise price, the
modified option should be accounted for as a variable option. Variable
grant accounting should be applied to the modified option from the date of
the modification until the date of exercise. Consequently, the final
measurement of compensation expense would occur at the date of exercise.
The cancellation of an option and the issuance of a new option with a lower
exercise price shortly thereafter [for example, within six months] to the
same individual should be considered in substance a modified [variable]
option.
* Additional interpretations will address how to measure compensation expense
when a new measurement date is required.
. . . . . . . . . . .
F-15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> jun-30-1999
<PERIOD-END> jun-30-1999
<CASH> 7,617,241
<SECURITIES> 0
<RECEIVABLES> 6,736,351
<ALLOWANCES> 0
<INVENTORY> 886,936
<CURRENT-ASSETS> 15,545,558
<PP&E> 2,237,853
<DEPRECIATION> 1,492,150
<TOTAL-ASSETS> 17,118,880
<CURRENT-LIABILITIES> 3,658,510
<BONDS> 0
0
0
<COMMON> 74,695
<OTHER-SE> 13,374,577
<TOTAL-LIABILITY-AND-EQUITY> 17,118,880
<SALES> 44,306,140
<TOTAL-REVENUES> 44,306,140
<CGS> 35,727,622
<TOTAL-COSTS> 42,801,109
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,836,052
<INCOME-TAX> 663,590
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,172,462
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
</TABLE>
