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, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from to
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0-8693 Commission File Number
TransNet Corporation
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(Exact name of registrant as specified in its charter)
Delaware 22-1892295
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
45 Columbia Road, Branchburg, New Jersey 08876-3576
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 908-253-0500
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Securities registered pursuant to Section 12 (b) of the Act: NONE
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this From 10-K or in any amendment to
this Form 10-K.
[ ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant was approximately $6,691,838 on September 20,
2000 based upon the closing sales price on the OTC Bulletin Board as of said
date.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
The number of shares of the registrant's common stock outstanding on September
20, 2000 was 4,855,305 shares (exclusive of Treasury shares).
<PAGE>
This Annual Report on Form 10-K contains "forward looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934. The statements
appear in a number of places in this report and include statements regarding
intent, belief or current expectations of TransNet Corporation with respect to,
among other things, future business conditions and the outlook for TransNet
including trends affecting the Corporation's business, financial condition and
results of operations. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. These
forward looking statements are subject to risks and uncertainties which could
cause the Corporation's actual results or performance to differ materially from
those expressed in these statements. Wherever possible, the Corporation has
identified forward looking statements by words such as "anticipates", "believes"
"estimates," "expects" and similar terms. The Corporation assumes no obligation
to update publicly any forward looking statements, whether as a result of new
information, future events or otherwise. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
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, accounting for 72% and
64% of sales for fiscal 2000 and 1999, respectively. The Corporation is
primarily a value added reseller. During the past year, management continued to
implement 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. As part of its single source approach, the Corporation is a
systems integrator, combining hardware and software products from different
manufacturers into working systems.
The 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"), Nortel Networks, 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.
<PAGE>
The Corporation is currently an authorized dealer for Apple, Nortel
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") as a Microsoft Certified Solutions
Provider, 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 or arranges for direct shipment of product to the
customer. 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.
The marketing of computers and peripherals is generally not seasonal in
nature.
Technical Support and Service: Service operations have become a significant
source of revenues, comprising 28% of revenues in fiscal 2000, and 36% of
revenues in fiscal 1999. Although hardware sales account for the bulk of the
Corporation's revenues, management's focus has shifted from hardware sales to
the provision of sophisticated technical services, as discussed in "Management's
Discussion and Analysis." Because many businesses do not have their own computer
technicians on staff, they "outsource" these services and obtain technical
services from IT solutions providers such as TransNet. The Corporation provides
a wide variety of outsourced network services, personal computer support, repair
and standard equipment maintenance to assist customers in obtaining technology
that enhances the customers' productivity. These services, which are generally
performed at customer sites, include LAN and PC hardware support, systems
integration services, help desk services, asset management, relocation services,
and installation or installation coordination. The Corporation assists its
customers in determining each customer's standard hardware technology,
application and operating system software, and networking platform requirements.
The Corporation employs specially certified and trained technical systems
engineers who perform high-end technology integration services. In addition, the
Corporation's staff of specially trained system engineers and service
technicians provide service and support on an on- call basis for file servers,
personal computers, laptop computers, printers and other peripheral equipment.
The Corporation's in-house technical staff performs system configurations to
customize computers to the customers' specifications. The Corporation also
provides authorized warranty service on the equipment it sells. TransNet is an
authorized service dealer for the following manufacturers: Apple, Cisco, Compaq,
Dell, Hewlett Packard, IBM, NEC, Microsoft 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 2000, 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.
<PAGE>
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.
In addition to services pursuant to a contract, repair and maintenance
services are also available on a "time and materials" basis. The repair services
usually consist of diagnosing and identifying malfunctions in computer hardware
systems and replacing any defective circuit boards or modules. The defective
items are generally repaired by in-house bench technicians or returned to the
manufacturer for repair or replacement.
To improve its efficiency and facilitate service to its clients, the
Corporation implemented procedures to allow its clients to place service calls
through the Internet, as a supplement to the phone and/or fax service requests.
In addition to servicing its own customers within its service area, the
Corporation has entered into arrangements with other service providers outside
the Corporation's service area. Through these arrangements, the Corporation can
provide services in instances in which a customer has locations outside the
Corporation's service areas and can assure its customers quality technical
service at their locations nationwide.
The Corporation introduced its Y2KNET program in 1998, designed with the
mission to assure the Corporation's clients that their desktop units were Year
2000 compliant. Under this program, which complemented the existing TechNet and
SafetyNet programs, the Corporation's technicians inventoried, examined and, as
necessary, modified all customers' desktop units to certify that the units were
Y2K compliant.
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 has its own dedicated network. The training activities of the Corporation
are not a material source of revenues.
Suppliers: In order to reduce its costs for computer and related equipment,
the Corporation entered into a buying agreement with Ingram Micro, Inc., 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 2000, the majority of the revenues generated by the
Corporation from product sales were attributable to products purchased by the
Corporation from Ingram Micro, Inc. pursuant to the Agreement. The balance of
the Corporation's product sales were attributable to products purchased from a
variety of sources on an as needed order basis. Alternate suppliers include Tech
Data Corp. and Custom Edge, Inc. (formerly Inacom). Management anticipates that
Ingram Micro, Inc. will be a major supplier during fiscal 2001.
Customers: The majority of the Corporation's corporate customers are
commercial users located in the New Jersey - New York City metropolitan area.
<PAGE>
During fiscal 2000, one customer, Merck/Medco Managed Care, LLC ("Medco"),
accounted for approximately 41% of the Corporation's revenues. During fiscal
1999, Medco accounted for approximately 37% of the Corporation's revenues. Merck
& Co. and its affiliate Medco accounted for approximately 50% and 14%,
respectively, of the Corporation's revenues in fiscal 1998. 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.
No other customer accounted for more than 10% of the Corporation's revenues
in fiscal 2000.
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, including
several computer manufacturers which have begun to deal directly with the
end-users. During the past few years, the industry has experienced and continues
to experience a significant amount of consolidation. In the future, TransNet may
face fewer but larger competitors as the result of such consolidation.
Management believes that commercial customers require significant levels of
sophisticated support services such as those provided by the Corporation.
TransNet's services benefit the customers by providing in-depth product
knowledge and experience, competitive pricing and the high level of technical
services. Management believes that TransNet's ability to combine competitive
pricing with responsive and sophisticated support services allows it to compete
effectively against a wide variety of alternative microcomputer sales and
distribution channels, including independent dealers, direct mail and
telemarketing, superstores and direct sales by manufacturers (including some of
its own suppliers).
Technological advances occur rapidly in computer technology and new
products are often announced prior to availability, sometimes creating demand
exceeding manufacturers' expectations and thereby resulting in product
shortages. When this occurs, resulting product constraints intensify
competition, depress revenues because customers demand the new product, and
increase order backlogs. In the Corporation's experience, these backlogs have
been immaterial.
In the past several years, there have been frequent reductions in the price
of computers. As a result, competition has increased and the Corporation lowered
its prices to remain competitive. In addition, businesses able to purchase in
larger volume than the Corporation have received higher discounts from
manufacturers than the Corporation. These factors have resulted in a lower
profit margin on the Corporation's equipment sales. As a result of its buying
agreement with Ingram Micro, Inc., the Corporation is able to purchase equipment
at discounts otherwise unavailable to it, enabling the Corporation to be more
price competitive. In a cost-effective marketing approach, the Corporation now
targets larger customers with more diversified product needs for its marketing
efforts in order to sell a greater number and variety of products and services
at one or a limited number of locations, thereby improving its gross profit
margins.
The Corporation does not believe that it is a significant factor in any of
its fields of activity.
Trademarks: Other than the trademark of its name, TransNet holds no patents
or trademarks.
Employees: As of September 15, 2000, the Corporation employed 188 full-time
employees and five (5) part-time employees. None of its employees are subject to
collective bargaining agreements.
<PAGE>
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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITYHOLDERS MATTERS
TransNet's common stock is quoted and traded on the OTC Bulletin Board
under the symbol "TRNT." The following table indicates the high and low closing
sales prices for TransNet's common stock for the periods indicated based upon
information supplied by the National Quotation Bureau Incorporated.
Calendar Year Closing Sales Prices
High Low
1998
Third Quarter $1.24 $0.4375
Fourth Quarter 1.50 0.4688
1999
First Quarter $2.0625 $0.9375
Second Quarter 4 1.6875
Third Quarter 4 2.50
Fourth Quarter 3.50 2.1875
2000
First Quarter $2.75 $1.96875
Second Quarter 2.375 1.625
As of September 15, 2000, the number of holders of record of TransNet's
common stock was 2,938. 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 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with, and is qualified in its entirety by, the Company's
consolidated financial statements, related notes and other financial information
included elsewhere in this Annual Report on Form 10-K.
Year Ended June 30,
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2 0 0 0 1 9 9 9 1 9 9 8 1 9 9 7 1 9 9 6
------- ------- ------- ------- -------
Statement of Income Data:
Net Sales:
Equipment 33,503,234 28,231,540 60,333,109 61,043,320 59,639,643
Services 13,063,267 16,074,600 10,091,700 7,588,002 4,560,945
46,566,501 44,306,140 70,424,809 68,631,322 64,200,588
Cost of Sales:
Equipment 31,230,050 25,844,701 55,243,196 56,078,869 53,835,480
Services 9,687,659 9,882,921 7,068,517 5,081,596 3,139,377
40,917,709 35,727,622 62,311,713 61,160,465 56,974,857
Gross Profit:
Equipment 2,273,184 2,386,839 5,089,913 4,964,451 5,804,163
Services 3,375,608 6,191,679 3,023,183 2,506,406 1,421,568
5,648,792 8,578,518 8,113,096 7,470,857 7,225,731
Selling, General &
Administrative 5,980,830 7,073,487 7,529,093 6,465,912 6,153,883
Income before Income
Taxes 26,270 1,836,052 1,274,791 1,088,067 964,240
Net Income 8,270 1,172,462 923,891 1,032,567 1,001,640
Income Per Share -
Basic & Diluted -- 0.23 0.18 0.20 0.19
Weighted average shares
outstanding - Basic &
Diluted 4,903,804 5,183,141 5,216,804 5,216,804 5,216,804
Balance Sheet Data:
Working Capital 11,886,844 11,887,050 11,200,198 9,830,264 8,458,008
Total Assets 17,450,367 17,118,880 15,396,518 18,224,298 16,333,275
Long-Term Obligations -- -- -- -- --
Shareholders Equity 12,813,126 13,449,272 12,623,810 11,699,919 10,667,352
<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, 2000 were $46,566,501 as
compared with $44,306,140 for the fiscal year ended June 30, 1999, and
$70,424,809 for the fiscal year ended June 30, 1998. The increase in revenues
for fiscal 2000 as compared to fiscal 1999 was attributable to an increase in
hardware sales. 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, training and network integration) (see Item 1.- Customers
regarding loss of business from a major customer). In addition, several computer
manufacturers shipped product directly 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. Service revenues decreased
approximately 18% in fiscal 2000 compared to the prior year due to the reduction
and/or postponement of projects as a result of clients' focus on Y2K
remediation. Due to management's emphasis on the promotion of technical service
and support operations and agreements with large organizations for service and
support, technical service revenues increased by approximately 59% in fiscal
1999 over fiscal 1998.
For fiscal 2000, the Corporation reported net income of $8,270 as compared
with net income of $1,172,462 for fiscal 1999, and $923,891 for fiscal 1998. The
decrease in income for fiscal 2000 is attributed to a number of factors,
including losses in the second and third fiscal quarters which resulted from
postponements of software implementation and system upgrade projects by major
customers due to their focus on Y2K remediation; decreased profit margins on
hardware sales; decreased margins on services due in part to increased salaries
of technical personnel; and decreased training revenues resulting from Y2K
remediation focus. Based on results from the fourth quarter, management believes
that the postponements which affected the Corporation and other IT companies
have ended and that customers' demand for the Corporation's products and
services is returning to normal levels. The increase in net income in fiscal
1999 as compared to fiscal 1998 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, those revenues yielded higher profits than revenues from
hardware sales. 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. 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. For the fiscal
years ended June 30, 1999 and 1998, 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
initiation of sales by certain manufacturers directly to the end-user and the
entrance of manufacturers into technical services business. Management believes
that the adoption of policies by many larger corporate customers, which limit
the number of vendors permitted to provide goods and services for specified
periods of time, has further increased price competition.
<PAGE>
The Corporation's performance is also impacted by other factors, many of
which are not within its control. These factors include: the short-term nature
of client's commitments; patterns of capital spending by clients; the timing and
size of new projects; pricing changes in response to competitive factors; the
availability and related costs of qualified technical personnel; timing and
customer acceptance of new product and service offerings; trends in IT
outsourcing; product constraints; and industry and general economic conditions.
To meet these competitive challenges and to maximize the Corporation's
profit margin, management has modified its marketing strategy during these years
and has enforced expense controls. Management also utilizes 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. These customers often
do not have their own technical staffs and outsource their computer service
requirements to companies such as TransNet. Management believes it maximizes
profits through concentration on sales of value-added applications; promotion of
the Corporation's service and support operations; and strict adherence to cost
cutting controls. In light of the above, management emphasizes and continues the
aggressive pursuit of an increased volume of sales of technical service and
support programs, and promotion of its training services. In the near term, the
Corporation believes that product sales will continue to generate a significant
percentage of the Company's revenues. In addition, the Corporation's buying
agreement with Ingram Micro, Inc. enhances the Corporation's competitive edge
through product discounts unavailable through other sources.
During fiscal 2000, selling, general and administrative expenses decreased
to 13% of revenue, due to several factors, including a restructured commission
plan, and reduced administrative expenses, such as personnel related expenses,
as well as reduced shipping costs due to the direct-ship program. This compares
to selling, general and administrative expenses at 16% of revenue in fiscal
1999, when actual expenses decreased slightly due to a reduced number of
employees, but increased as a percentage of revenues as a result of the decrease
in revenues. In fiscal 1998, selling, general and administrative expenses were
approximately 11% of revenue.
Interest income increased in fiscal 2000, 1999, and 1998, respectively, as
compared to the prior year primarily due to higher interest rates and 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.
Liquidity and Capital Resources
There are no material commitments of the Corporation's capital resources.
The Corporation currently finances the purchases of portions of its
inventory through floor planning arrangements with a third-party lender and a
manufacturer's affiliate under which such inventory secures the financed
purchases. Inventory increased for fiscal 2000 as a result of higher inventory
levels at fiscal year-end which were required to meet a large equipment order.
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 2000 and 1999, in each case,
compared to the prior year as a result of large fiscal year-end hardware orders
from customers and increased past due amounts from certain customers. Slower
payment cycles from certain customers had a negative impact on receivables, and
the Corporation is aggressively pursuing the collections. Accounts payable
increased for the both fiscal 2000 and 1999, in each case, compared to the prior
year due to the purchase of equipment in late June of each year related to the
above referenced customer orders. Floor planning payables increased in fiscal
2000 and 1999 as a direct result of the above-referenced equipment purchases in
June 2000 and 1999.
<PAGE>
For the fiscal year ended June 30, 2000, as in the fiscal years ended June
30, 1999 and 1998, the internal capital sources of the Corporation were
sufficient to enable the Corporation to meet its obligations.
In the first quarter of fiscal 1998, management was apprised of an
unasserted possible claim or assessment involving the Corporation's Pension
Plan. The Plan was adopted in 1981 as a defined benefit plan. In 1989, various
actions were taken by the Corporation to terminate the Plan, to convert it to a
defined contribution plan and to freeze benefit accruals. No filing for plan
termination was made with the Pension Benefit Guaranty Corporation (the "PBGC").
Additionally, a final amended and restated plan document incorporating the
foregoing amendments and other required amendments including those required by
the Tax Reform Act of 1986 do not appear to have been properly adopted. In
addition, since 1989, it appears that certain operational violations occurred in
the administration of the Plan including the failure to obtain spousal consent
in certain instances where it was required.
The Corporation decided to (i) take corrective action under the IRS Walk-in
Closing Agreement Program ("CAP"), (ii) apply for a favorable determination
letter with respect to the Plan from the IRS, and (iii) terminate the Plan. The
CAP program provides a correction mechanism for "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 covered 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 had the following phases: inventory;
assessment of action required to assure Y2K compliance; upgrading or
replacement; testing; and contingency planning.
Since December 31, 1999, the Corporation has not experienced any significant Y2K
related problems in its own operations or those of any material supplier or
client.
The Corporation completed the inventory and assessment of its critical IT
systems and by the end of November 1999, its main internal computer system,
which processes information to prepare inventories, purchase orders, invoices
and accounting functions was Y2K compliant. The Corporation upgraded or replaced
any non-compliant IT Systems and testing and implementation completed by the end
of November 1999, although it continued testing through the end of calendar
1999. The Corporation also completed an inventory and assessment of its Non-IT
Systems and replaced non-compliant systems by the end of November 1999. The
Corporation incurred approximately $50,000 of Y2K project expenses.
<PAGE>
INVESTMENT CONSIDERATIONS AND UNCERTAINTIES
The matters discussed in Management's Discussion and Analysis and throughout
this report that are forward-looking statements are based on current management
expectations that involve risk and uncertainties. Potential risks and
uncertainties include, without limitation: the impact of economic conditions
generally and in the industry for microcomputer products and services;
dependence on key vendors and customers; continued competitive and pricing
pressures in the industry; product supply shortages; open-sourcing of products
of vendors, including direct sales by manufacturers; rapid product improvement
and technological change, short product life cycles and resulting obsolescence
risks; technological developments; capital and financing availability; and other
risks set forth herein.
ITEM 8. 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) 72 Chairman of the Board and Treasurer
Steven J. Wilk (a) 43 President and Director
Jay A. Smolyn 44 Vice President, Operations and Director
Vincent Cusumano (b)(d) 65 Secretary and Director
Earle Kunzig (b)(e) 61 Director
Raymond J. Rekuc (c) 55 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.
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.
<PAGE>
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.
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, 2000, 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, 2000, 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 2000 $250,000 $0 $0 0 0 $0 0
President and Chief 1999 $250,000 $82,603 $0 0 0 $0 0
Executive Officer 1998 $250,000 $46,644 $0 0 0 $0 0
Jay Smolyn 2000 $148,542 $0 $0 0 0 $0 0
Vice President 1999 $135,000 $59,822 $0 0 0 $0 0
Operations 1998 $135,000 $30,822 $0 0 0 $0 0
</TABLE>
<PAGE>
Employment Contracts with Executive Officers
TransNet had employment contracts in effect with Steven J. Wilk and Jay A.
Smolyn which expired on June 30, 2000. The Corporation is in the process of
renegotiating new contracts and expects them to be in place within the next
quarter. 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.
Directors' Compensation
During fiscal 2000, 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, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of August 31, 2000, 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.
<PAGE>
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) 180,550 shs 4%
Jay A. Smolyn (a) 83,000 shs 2%
Susan Wilk-Cort (a) 78,200 shs 1%
Vincent Cusumano (a) 2,000 shs ----
Earle Kunzig (a) 0 shs ----
Raymond J. Rekuc (a) 0 shs ----
All officers and directors 737,250 shs 15%
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 4% and 8%
respectively, of TransNet's common stock may each be deemed to be a "parent" of
the Corporation within the meaning of the Securities Act of 1933.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 Exhibit to Current Report on
the 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, 1991
Corporation for premises at 45
Columbia Road, Somerville
(Branchburg), New Jersey
10.2 February 1, 1996 amendment to Exhibit 10.2 to Annual Report on
Lease Agreement between W.Realty 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 28, 2000 By /s/ Steven J. Wilk
---------------------
Steven J. Wilk
Chief Executive Officer
Date: September 28, 2000 By /s/ John J. Wilk
-------------------
John J. Wilk
Chief Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
By /s/ Steven J. Wilk Date: September 28, 2000
------------------------------------
Steven J. Wilk, Director
By /s/ John J. Wilk Date: September 28, 2000
------------------------------------
John J. Wilk, Director
By /s/ Jay A. Smolyn Date: September 28, 2000
------------------------------------
Jay A. Smolyn, Director
By /s/ Raymond J. Rekuc Date: September 28, 2000
------------------------------------
Raymond J. Rekuc, Director
By /s/ Vincent Cusumano Date: September 28, 2000
------------------------------------
Vincent Cusumano
By /s/ Earle Kunzig Date: September 28, 2000
------------------------------------
Earle Kunzig
By /s/ Susan M. Wilk-Cort Date: September 28, 2000
------------------------------------
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, 2000 and 1999, 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, 2000.
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, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended June 30, 2000, in conformity
with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
August 31, 2000
F-1
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------
June 30,
--------
2 0 0 0 1 9 9 9
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 5,208,558 $7,617,241
Accounts Receivable - Net 9,357,398 6,736,351
Inventories 1,377,729 886,936
Mortgage Receivable - Related Party 250,000 --
Other Current Assets 86,500 56,030
Deferred Tax Asset 231,900 249,000
----------- ----------
Total Current Assets 16,512,085 15,545,558
Property and Equipment - Net 569,000 745,703
Mortgage Receivable - Related Party -- 250,000
Other Assets 369,282 577,619
----------- ----------
Total Assets $17,450,367 $17,118,880
=========== ===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 2,055,484 $1,160,978
Accrued Expenses 378,858 374,064
Accrued Payroll 175,614 258,856
Floor Plan Payable 2,015,285 1,200,443
Income Taxes Payable -- 664,167
----------- ----------
Total Current Liabilities 4,625,241 3,658,508
----------- ----------
Deferred Tax Liability 12,000 11,100
----------- ----------
Commitments and Contingencies -- --
----------- ----------
Stockholders' Equity:
Capital Stock - Common, $.01 Par Value,
Authorized 15,000,000 Shares; Issued
7,469,524 Shares in 2000 and 1999 [of which
2,614,220 are in Treasury in 2000
and 2,402,720 in 1999] 74,695 74,695
Paid-in Capital 10,686,745 10,686,745
Retained Earnings 9,260,745 9,252,475
----------- ----------
Totals 20,022,185 20,013,915
Less: Treasury Stock - At Cost (7,209,059) (6,564,643)
----------- ----------
Total Stockholders' Equity 12,813,126 13,449,272
----------- ----------
Total Liabilities and Stockholders' Equity $17,450,367 $17,118,880
=========== ===========
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,
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Revenue:
Equipment $33,503,234 $28,231,540 $60,333,109
Services 13,063,267 16,074,600 10,091,700
---------- ---------- ----------
Total Revenue 46,566,501 44,306,140 70,424,809
---------- ---------- ----------
Cost of Revenue:
Equipment 31,230,050 25,844,701 55,243,196
Services 9,687,659 9,882,921 7,068,517
---------- ---------- ----------
Total Cost of Revenue 40,917,709 35,727,622 62,311,713
---------- ---------- ----------
Gross Profit 5,648,792 8,578,518 8,113,096
Selling, General and Administrative Expenses 5,980,830 7,073,487 7,529,093
---------- ---------- ----------
Operating [Loss] Income (332,038) 1,505,031 584,003
---------- ---------- ----------
Other Income [Expense]:
Interest Income 333,908 296,310 149,535
Interest Income - Related Party 24,400 33,000 47,000
Interest Expense -- -- (209)
Other Income -- 1,711 494,462
---------- ---------- ----------
Other Income - Net 358,308 331,021 690,788
---------- ---------- ----------
Income Before Income Tax Expense 26,270 1,836,052 1,274,791
Income Tax Expense 18,000 663,590 350,900
---------- ---------- ----------
Net Income $ 8,270 $1,172,462 $ 923,891
========== ========== ==========
Basic Net Income Per Common Share $ -- $ .23 $ .18
========== ========== ==========
Diluted Net Income Per Common Share $ -- $ .23 $ .18
========== ========== ==========
Weighted Average Common Shares
Outstanding - Basic 4,903,804 5,183,141 5,216,804
========== ========== ==========
Weighted Average Common Shares
Outstanding - Diluted 4,903,804 5,183,141 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, 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
Net Income -- -- -- 8,270 -- -- 8,270
Treasury Shares Purchased -- -- -- -- (211,500) (644,416) (644,416)
---------- ---------- ---------- ---------- ----------- ----------- ----------
Balance - June 30, 2000 7,469,524 $ 74,695 $10,686,745 $9,260,745 (2,614,220)$(7,209,059) $12,813,126
========== ========== =========== ========== =========== =========== ===========
</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,
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Operating Activities:
Net Income $ 8,270 $1,172,462 $ 923,891
---------- ---------- ----------
Adjustments to Reconcile Net Income
to Net Cash Provided by [Used for]
Operating Activities:
Depreciation and Amortization 324,787 375,702 361,323
Loss [Gain] on Sale of Equipment -- 2,517 (482,608)
Provision for Doubtful Accounts 35,000 30,000 10,000
Discounting of Deferred Charges 64,000 64,000 15,000
Deferred Income Taxes 18,000 (141,000) 140,500
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (2,656,047) (438,917) 2,648,885
Inventories (490,793) 520,746 1,866,780
Other Current Assets (30,470) 80,591 187,925
Other Assets 130,366 (5,473) (9,472)
Mortgage Receivable - Related Party -- 24,429 (24,423)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 816,056 346,295 (167,977)
Other Current Liabilities -- (156,653) (107,828)
Deferred Income -- (100,649) (61,927)
Income Taxes Payable (664,161) 453,955 210,200
---------- ---------- ----------
Total Adjustments (2,453,262) 1,055,543 4,586,378
---------- ---------- ----------
Net Cash - Operating Activities (2,444,992) 2,228,005 5,510,269
---------- ---------- ----------
Investing Activities:
Capital Expenditures (134,117) (256,152) (14,444)
Proceeds from Sale of Equipment -- -- 3,243
Mortgage Receivable Proceeds - Related Party -- 190,000 150,000
-------- ---------- ----------
Net Cash - Investing Activities (134,117) (66,152) 138,799
---------- ---------- ----------
Financing Activities:
Floor Plan Payable - Net 814,842 423,542 (3,607,139)
Treasury Shares Repurchased (644,416) (347,000) --
---------- ---------- ----------
Net Cash - Financing Activities 170,426 76,542 (3,607,139)
---------- ---------- ----------
Net [Decrease] Increase in Cash and
Cash Equivalents (2,408,683) 2,238,395 2,041,929
Cash and Cash Equivalents - Beginning
of Years 7,617,241 5,378,846 3,336,917
---------- ---------- ----------
Cash and Cash Equivalents - End of Years $5,208,558 $7,617,241 $5,378,846
========== ========== ==========
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,
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ -- $ -- $ 209
Income Taxes $ -- $ 384,019 $ 17,767
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 $150,000 and $115,000 as of June 30, 2000 and 1999,
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. Licenses 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 - 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. 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, 2000 and 1999, the Company
maintained cash balances [excluding repurchase agreements discussed in Note 3]
in excess of FDIC insured limits of approximately $226,000 and $157,000,
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, 2000, 1999 and 1998, the Company incurred
additional advertising expense of $80,526, $4,987 and $1,939, respectively.
Advertising costs are expensed as incurred.
[L] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
[3] Repurchase Agreements
Repurchase agreements included in cash equivalents as of June 30, 2000 and 1999
consisted of:
Cost Fair Value
June 30, 2000:
Repo 5.35%, Due July 1, 2000 $ 4,397,070 $ 4,397,070
This security is backed by $4,761,655 of F.N.M.A. bonds maturing June 18, 2028
with an interest rate of 6.5%.
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.
F-8
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
------------------------------------------------------------------------------
[4] Inventories
Inventories consist of:
June 30,
--------
2 0 0 0 1 9 9 9
------- -------
Product Inventory $1,027,271 $ 580,223
Service Parts 350,458 306,713
---------- ---------
Totals $1,377,729 $ 886,936
------ ========== =========
[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, 2000
and 1999, the Company received approximately $24,400 and $33,000 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, 2000 and 1999 are as follows:
June 30,
--------
2 0 0 0 1 9 9 9
------- -------
Automobiles $ 230,598 $ 195,669
Office Equipment 1,526,181 1,452,106
Furniture and Fixtures 316,976 316,976
Leasehold Improvements 273,102 273,102
---------- ---------
Totals 2,346,857 2,237,853
Less: Accumulated Depreciation and Amortization 1,777,857 1,492,150
---------- ---------
Property and Equipment - Net $ 569,000 $ 745,703
---------------------------- ========== =========
Total depreciation and amortization expense amounted to $310,816, $361,731 and
$347,352 for the years ended June 30, 2000, 1999 and 1998, 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, 2000 and 1999 are
as follows:
June 30,
--------
2 0 0 0 1 9 9 9
------- -------
Licenses $ 20,000 $ 20,000
Goodwill 259,422 259,422
---------- ----------
Totals 279,422 279,422
Less: Accumulated Amortization 145,867 131,896
---------- ----------
Intangible Assets - Net $ 133,555 $ 147,526
----------------------- ========== ==========
Intangible assets are included in other assets for financial reporting purposes.
Amortization expense for fiscal 2000, 1999 and 1998 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 $92,161, $63,911 and
$50,294 for the years ended June 30, 2000, 1999 and 1998, respectively.
Total rent expense was $203,960, $201,840 and $188,381 for the years ended June
30, 2000, 1999 and 1998, respectively.
The following is a summary of rental commitments:
2001 $ 138,807
Thereafter --
-----------
Total $ 138,807
----- ===========
Included in other assets at June 30, 2000 and 1999, the Company had prepaid rent
of approximately $123,800 and $330,000, 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 two
[2] 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 $-0-, $125,000 and $107,000 for the years ended June 30, 2000,
1999 and 1998, respectively. As of June 30, 2000, both employment agreements
expired.
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, 2000 and 1999 was
approximately $2,050,340 and $1,200,000, 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, 2000 or 1999. 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 9.50% and 7.5%, respectively at June 30, 2000, were
8.50% and 7.50%, respectively at June 30, 1999, and 8.50% and 7.25%,
respectively at June 30, 1998.
[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,
-------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Federal:
Current $ -- $ 680,590 $ 454,000
Deferred 13,500 (120,000) 104,000
--------- --------- ----------
Totals 13,500 560,590 558,000
Less: Net Operating Loss Carryforward Benefit -- -- (316,500)
------- --------- ----------
Federal Provision 13,500 560,590 241,500
--------- --------- ----------
State:
Current -- 124,000 109,400
Deferred 4,500 (21,000) 30,500
--------- --------- ----------
Totals 4,500 103,000 139,900
Less: Net Operating Loss Carryforward Benefit -- -- (30,500)
------- --------- ----------
State Provision 4,500 103,000 109,400
--------- --------- ----------
Income Tax Expense $ 18,000 $ 663,590 $ 350,900
------------------ ========= ========= ==========
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 deferred tax asset and liability in the accompanying consolidated balance
sheets include the following components:
June 30,
--------
2 0 0 0 1 9 9 9
------- -------
Accounts Receivable Allowance $ 60,000 $ 46,000
Inventory Allowance 28,000 32,800
Accrued Expenses 111,300 149,500
Other Temporary Differences 32,600 20,700
----------- -----------
Deferred Tax Assets 231,900 249,000
Deferred Tax Liabilities - Depreciation and
Amortization 12,000 11,100
------ -----------
Net Deferred Tax Asset $ 219,900 $ 237,900
---------------------- =========== ===========
The following is a reconciliation of income taxes at the U.S. statutory tax rate
to the taxes actually provided:
Y e a r s e n d e d
-----------------------------
J u n e 3 0,
-------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
U.S. Statutory Rate Applied to Pretax Income $ 9,000 $ 624,000 $ 433,500
State Taxes 1,800 132,000 92,000
Net Operating Loss Carryforward -- -- (160,800)
Other 7,200 (92,410) (13,800)
--------- --------- ----------
Income Tax Expense $ 18,000 $ 663,590 $ 350,900
------------------ ========= ========= ==========
[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, 2000, 1999 and 1998.
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, 2000, 1999 and 1998 was
$44,978, $34,625 and $28,335, 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.
The Rights Plan was extended to 2010.
[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 monetary
sanctions. 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 estimated that the Company
will be required to make a plan contribution of approximately $133,000, which
includes interest to plan participants. In addition, the Company will be subject
to IRS sanctions aggregating $9,000. An additional liability may exist in
connection with the settlement with the PBGC. However, it is not possible at
this time to estimate the amount of liability or the range of this liability
under current circumstances. The Company has accrued a $142,000 liability at
June 30, 2000, including a $27,000 current period charge.
The Company from time to time becomes involved in various routine legal
proceedings in the ordinary course of its business. Management of the Company,
believes that except for the legal matters disclosed, the outcome of remaining
pending legal proceedings and unasserted claims in the aggregate will not have a
material effect on its consolidated statement of operations, consolidated
balance sheet, or liquidity.
[13] Significant Customer
During the year ended June 30, 1998, the Company derived approximately
$35,200,000 of its revenue from one major customer. For the years ended June 30,
2000 and 1999, the Company derived less than 10% of its annual revenue from this
customer. During the years ended June 30, 2000, 1999 and 1998, the Company
derived $19,000,000, $16,400,000 and $9,900,000, respectively, of its revenue
from a significant customer.
F-13
<PAGE>
TRANSNET CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
------------------------------------------------------------------------------
[13] Significant Customer [Continued]
At June 30, 2000, 1999 and 1998, one customer and its affiliate accounted for
approximately $4,850,000, $2,100,000 and $2,600,000, respectively, of accounts
receivable.
[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.
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] New Authoritative Pronouncements
In June 1998, the Financial Accounting Standards Board ["FASB"] issued SFAS No.
133, "Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is effective for all quarters of fiscal years beginning after
June 15, 1999. In July 1999, the FASB issues SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB No. 133," which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company does not
expect the adoption of this standard to have a material effect on the Company's
results of consolidated operations, financial position, or cash flows.
In December 1999, the Securities and Exchange Commission ["SEC"] issued Staff
Accounting Bulletin ["SAB"] 101, "Revenue Recognition in Financial Statements,"
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 was effective the first fiscal
quarter of fiscal years beginning after December 15, 1999 and requires companies
to report any changes in revenue recognition as cumulative change in accounting
principle at the time of implementation in accordance with Accounting Principles
Board Opinion 20, "Accounting Changes." The SEC has issued SAB 101B, "Amendment:
Revenue Recognition in Financial Statements," which delays implementation of SAB
101 until the Company's second quarter of 2001. The Company will adopt SAB 101
and is currently in the process of evaluating the impact, if any, SAB 101 will
have on its financial position or results of operations.
. . . . . . . . . . .
F-14
