-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PRVmWMEiYNv6J6SNGQcSZKbBVWiTur6jIk08KWLe9WEGPbWuYqeyY2cfbIQfyVry Etc87vwej2s217PJzJTz6Q== 0000930413-06-006991.txt : 20060928 0000930413-06-006991.hdr.sgml : 20060928 20060928160209 ACCESSION NUMBER: 0000930413-06-006991 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060928 DATE AS OF CHANGE: 20060928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSNET CORP CENTRAL INDEX KEY: 0000099313 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-COMPUTER & PERIPHERAL EQUIPMENT & SOFTWARE [5045] IRS NUMBER: 221892295 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08693 FILM NUMBER: 061114080 BUSINESS ADDRESS: STREET 1: 45 COLUMBIA RD CITY: SOMERVILLE STATE: NJ ZIP: 08876-3576 BUSINESS PHONE: 9082530500 MAIL ADDRESS: STREET 1: 45 COLUMBIA RD CITY: SOMERVILLE STATE: NJ ZIP: 08876 10-K 1 c44426_10-k.txt UNITED STATES 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 For the fiscal year ended June 30, 2006 ---------------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to ---------------------- ------------------------ Commission File Number 0-8693 ------ 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act ___ Yes _X_ No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.___ Yes _X_ No 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. [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act) Large Accelerated Filer __ Accelerated Filer ___ Non-accelerated Filer _X_ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) ___ Yes _X_ No The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $5,610,141 on September 22, 2006 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 22, 2006 was 4,823,304 shares (exclusive of Treasury shares). TABLE OF CONTENTS PAGE ---- PART I Item 1. Business 1 Item 1A. Risk Factors 5 Item 2. Properties 6 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 7 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 13 Item 8. Financial Statements and Supplementary Data 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 Item 9A. Controls and Procedures 14 Item 9B. Other Information 14 PART III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 17 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 19 Item 13. Certain Relationships and Related Transactions 20 Item 14. Principal Accountant Fees and Services 20 PART IV Item 15. Exhibits and Financial Statement Schedules 21 Signatures 23 DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS Statements included in this Report that do not relate to present or historical conditions are "forward-looking statements" within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in such forward-looking statements. Forward-looking statements may include, without limitation, statements relating to the corporation's plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements made in the Form 10-K generally are based on our best estimates of future results, performances or achievements, predicated upon current conditions and the most recent results of our business and industry. Words such as "believes," "forecasts," "intends," "possible," "expects," "estimates," "anticipates," or "plans" and similar expressions are intended to identify forward-looking statements. Among the important factors on which such statements are based are assumptions concerning the anticipated growth of the information technology industry, the continued need of current and prospective clients for the Corporation's products and services, the availability of qualified professional staff, and general economic conditions. 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 ("IT") products and technology management services designed to enhance the productivity and security of the information systems of its customers. Through its own sales and service departments, TransNet provides IT products, technologies, solutions, and services for its customers by combining a wide array of value-added professional technical services with the sale of hardware systems, network products, voice over internet protocol ("VoIP"), wireless and communication 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: As a single source IT provider, the Corporation partners with its clients through all stages of the "life cycle" of the client's information system network. The Corporation will perform an analysis of the individual client's needs, plan and prepare a system - whether it be a wide area network ("WAN"), a local area network ("LAN") or a VoIP system - - to meet those needs, design the system and procure the equipment, implement the system, ensure its proper operation, and assist the client in optimization of the system to best serve the client's information requirements. The sale of IT equipment and related software for WANs, LANs, VoIP systems, and desktop and laptop computers accounted for a significant portion of the Corporation's revenues, accounting for 59%, 53%, and 51%, of sales for fiscal 2006, 2005, and 2004, respectively. As part of its single source approach, the Corporation is a systems integrator, combining hardware and software products from different manufacturers into working systems. During the past year, management continued to implement its focus for business growth on marketing a wide array of technical services in conjunction with equipment sales to its clients in order to maximize profits. In addition, building on its expertise, the Corporation expanded its marketing and sales of VoIP and wireless network products and related services. VoIP products provide for the operation of highly reliable phone systems over the same networks with data. The resulting economies of installation and maintenance have continued to generate increased demand for these products. The equipment sold by the Corporation includes computer hardware, network electronics, VoIP products, servers, monitors, printers, video surveillance equipment, and operating systems software. The Corporation's sales of wireless networking products has expanded significantly in keeping with industry developments, and includes wireless WANs. Because wireless networks provide for network access without traditional connections, the need for security of the data in these networks has dramatically increased. In keeping with the critical need for network security, the Corporation markets network management and control software to provide greater security to its clients, allowing them to allow or restrict access to their networks as their businesses require, and also offers products for video surveillance. The principal markets for the Corporation's products are commercial, governmental, and educational customers. These markets are reached by direct sales conducted through the corporate sales department based in Branchburg, New Jersey. The Corporation's direct sales staff enables TransNet to establish relationships with major corporate and educational clients through which it markets the Corporation's technical services. The Corporation provides its sales staff with ongoing manufacturer training and certification programs to provide its clients with technically skilled representatives. 1 The Corporation is selective in choosing the products that it markets and its product mix is geared primarily to the requirements of its business customers. The products sold by the Corporation include desktop and laptop computers, network hardware and software, VoIP and wireless products manufactured by the following companies: Lenovo/IBM, Apple Computer, Inc. ("Apple"), Cisco Systems, Inc. ("Cisco"), Nortel Networks ("Nortel"), NEC-Mitsubishi Electronic Display of America, Inc. ("NEC"), Hewlett-Packard Company ("Hewlett-Packard"), Toshiba American Information Systems, Inc. ("Toshiba"),Veritas, and 3Com; selected software products including products of Microsoft Corporation ("Microsoft") and Novell, Inc. ("Novell"); and supplies produced by other manufacturers. The Corporation does not manufacture or produce any of the items it markets. The Corporation is currently an authorized reseller for Apple, Cisco as a Cisco Silver Certified Partner, Citrix Systems, Inc. ("Citrix") as a Citrix Silver Certified Solutions Partner and Access Partner, Hewlett-Packard as an HP Gold Provider, a State/Local Government Specialized Partner, Certified Education Partner (k-12), and a Certified Education Partner (for higher education), IBM, IPcelerate, Inc. ("IPcelerate"), Lenovo, Lexmark International, Inc., Microsoft as a Microsoft Certified Solutions Partner, NEC, Nortel, Novell as a Novell Platinum Partner, Packeteer, Safari, Smart Technologies, Symantec, Toshiba, Websense, and 3COM. The Corporation also offers a variety of products manufactured by other companies including Okidata, Verint, Inc., and Xerox/Tektronix, as well as fingerprint scanning equipment by Zvetco Biometrics. Occasionally, the Corporation will order specific products to satisfy a particular customer requirement. The Corporation evaluates its product line and new products internally and through discussions with its vendors and customers. Software sold by the Corporation includes software designed for general business applications as well as specialized applications such as research, pharmaceuticals, and education; and integrated packages. The Corporation maintains an inventory of its product line to provide shipments to customers or arranges for direct shipment of product to the customer. Shipments are made from the Corporation's warehouse in Branchburg, New Jersey primarily through common carriers. In addition, in an effort to reduce costs, the Corporation has instituted a direct shipping program, through which product is shipped directly from the Corporation's suppliers to customers. Back orders are generally immaterial, but manufacturers' product constraints occasionally impact the Corporation's inventory levels. No such constraints have affected the Corporation in the past three years, however. The marketing of IT products and related technical services is generally not seasonal in nature. TECHNICAL SUPPORT AND SERVICE: Service operations are a significant source of revenues, comprising 41% of revenues in fiscal 2006, 47% of revenues in fiscal 2005, and 49% of revenues in fiscal 2004. Management emphasizes the provision of sophisticated technical services with the sale of its equipment. Many businesses do not have computer technicians on their staffs, and as a result, they "outsource" these services and obtain technical services from IT solutions providers such as TransNet. The Corporation provides a wide variety of cost-effective outsourced network services, personal computer support, repair and standard equipment maintenance to assist customers in obtaining and optimizing technology that enhances the customers' productivity. These services are delivered by skilled technology personnel, are generally performed at customer sites, and include WAN and LAN planning, design, implementation and support, and PC hardware support, systems integration services, help desk services, asset management, relocation services, and installation or installation coordination. In addition, the Corporation hosts a call center in its Branchburg location. System implementations involve project management by skilled engineers. With respect to VoIP operations, these services also cover the design, installation, and technical support and service of integrated voice-data systems. 2 As networks became increasingly complex, and as the number of wireless networks expanded, the need for sophisticated services related to management and security of network operations and proper flow and security of data likewise increased. Accordingly, the Corporation has incorporated network security management into its service offerings, as well as into its product line, as referenced above. The Corporation performs network management and monitoring services to provide clients with immediate detection of network problems or failure, or breaches in network security. These services can be performed remotely through its Support Center. 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 equipment to the customers' specifications. The Corporation also provides authorized warranty service on the equipment it sells. TransNet is an authorized service and support dealer for the following manufacturers: by 3Com, Apple, Cisco (Silver Certified Partner), Citrix, Dell Inc., Hewlett Packard (as a Gold Partner), Lenovo/IBM, IPcelerate, Lexmark, Microsoft (as a Certified Solution Partner), Nortel, Novell (Platinum Partner), Symantec and Xerox. The Corporation seeks highly qualified personnel and employs experienced system engineers and technicians to whom it provides authorized manufacturer training and certification programs on an on-going basis. The Corporation competes with other resellers and manufacturers, as well as some customers, to recruit and retain qualified employees. The Corporation's technical services are available to business and individual customers. Through a variety of alternatives, the Corporation offers repair or maintenance services at the customer site or on the Corporation's premises. Services are available for a variety of products marketed by the Corporation. The Corporation offers a variety of technical support agreements that assure customers prompt response times to network problems, for example, through troubleshooting, diagnosis, and remedial action performed remotely by skilled system engineers. Through its "TechNet" program the Corporation stations service personnel at a customer's location on a full-time basis. Under this program, the Corporation has entered into individual agreements with several large corporate customers to provide support and repair and maintenance services. Technical support and services are performed pursuant to contracts of specified terms and coverage (hourly rates or fixed price extended contracts) or on a time and materials basis. Maintenance and service contracts are offered to maintain and/or repair computer hardware. These agreements are for twelve months or less. These agreements contain provisions allowing for termination prior to the expiration of the agreements. Although the agreements generally contain renewal terms, there is no assurance that the agreements will be renewed. 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 may enter 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 3 the Corporation's service areas and can assure its customers quality technical service at their locations nationwide. TRAINING: The Corporation's headquarters houses its training center, the TransNet Education Center, which provides training for customers. The Corporation also provides training at customer sites. The Corporation offers comprehensive training on hardware and software, including a wide variety of Windows and Macintosh systems and network applications, operation, and maintenance. The Corporation's Training Center has its own dedicated network. The training activities of the Corporation are not a material source of revenues. SUPPLIERS: In order to reduce its costs for computer and related equipment, the Corporation entered into a buying agreement with Ingram Micro, Inc. Under the agreement, the Corporation is able to purchase equipment of various manufacturers at discounts currently unavailable to it through other avenues. The agreement provides that the Corporation may terminate the arrangement upon sixty days notice. During fiscal 2006, the majority of the revenues generated by the Corporation from product sales were attributable to products purchased by the Corporation from Ingram Micro, Inc. pursuant to the Agreement. The balance of the Corporation's product sales were attributable to products purchased from a variety of sources on an as needed order basis. Alternate suppliers include Tech Data Corp., as well as Synnex, HP and IBM, from whom the Corporation purchases direct. Management anticipates that Ingram Micro, Inc. will be a major supplier during fiscal 2007. CUSTOMERS: The majority of the Corporation's corporate customers are commercial users located in the New Jersey - New York City metropolitan area. During fiscal 2006, no customer accounted for 10% or more of the Corporation's revenues. During fiscal 2005, one customer, Schering Plough, accounted for approximately 18% of revenue, and during fiscal 2004 this customer accounted for approximately 22% of the Corporation's revenues. The loss of revenues from this customer may have a material adverse impact upon the Corporation if the business could not be replaced from alternate customers. See Item 7. Management's Discussion and Analysis. No other customer accounted for more than 10% of the Corporation's revenues in fiscal 2005 and 2004. COMPETITION: The sale and service of personal computer systems is highly competitive and may be affected by rapid changes in technology and spending habits in both the business and institutional sectors. The Corporation is in direct competition with any business that is engaged in information technology management, specifically the sale and technical support and service of networks, personal computers and related peripherals, and VoIP products. Competitors are numerous, ranging from some of the world's largest corporations, possessing substantially greater financial resources and substantially larger staffs, facilities and equipment, including several computer manufacturers who now deal directly with the end-users. Competitors also include relatively small and highly specialized firms. With respect to VoIP products, the Corporation competes with similar businesses as well as directly with several product manufacturers and national and/or global telecommunication businesses. During the past few years, the industry has experienced and continues to experience a significant amount of consolidation. In the future, TransNet may face fewer but larger competitors as the result of such consolidation. TransNet competes on the basis of technology, performance, price, quality, reliability, brand, distribution, range of products and services, account relationships, customer service and support. Management believes that commercial customers require significant levels of sophisticated support services such as those provided by the Corporation. TransNet's services benefit the customers by 4 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 August 31, 2006, the Corporation employed 125 full-time employees and 5 part-time employees. None of its employees are subject to collective bargaining agreements. ITEM 1A. RISK FACTORS The following are risks related to our business: OUR OPERATING RESULTS HAVE VARIED, AND MAY CONTINUE TO VARY. WE RECOGNIZED LOSSES FOR THE PAST THREE FISCAL YEARS. We incurred a loss of approximated $1 million for fiscal 2006, for fiscal 2005 a loss of approximately $1.4 million, and for fiscal 2004, we incurred a loss of $1.1 million. Our net losses may continue and our ability to sustain profitability will be impacted by: o the short-term nature of client's commitments because of shorter-term projects rather than long-term contracts o patterns of capital spending by clients, as the industry continues to experience a sluggish IT spending environment o pricing changes in response to competitive factors, often driving prices and profit margins down o timing and customer acceptance of new product and service offerings o trends in IT outsourcing, as clients reduce the number of vendors o the availability and related costs of attracting and retaining qualified sales and technical personnel o general economic conditions 5 FAILURE TO COMPETE EFFECTIVELY IN THE MARKETPLACE COULD ADVERSELY AFFECT OUR RESULTS OF OPERATION AND FINANCIAL CONDITION. We operate in an intensely competitive industry. We compete with small boutique IT firms as well as large, global companies, including manufacturers who now compete against us to sell directly to the customer. Although we feel we offer our clients a wide range of highly sophisticated professional services in conjunction with a select product line, increased competition may create greater pressure to further reduce prices, which could have an adverse effect on our business, results of operations and financial condition. WE MUST ATTRACT AND RETAIN QUALIFIED SALES AND TECHNICAL PERSONNEL. We rely upon our ability to find, attract, and retain qualified sales and technical personnel. At present, there is a shortage of qualified personnel and we are in direct competition for these applicants with larger businesses to hire from this limited pool of qualified applicants. WE DERIVE A SIGNIFICANT AMOUNT OF OUR REVENUE FROM A RELATIVELY SMALL NUMBER OF CLIENTS. IF WE WERE TO LOSE ONE OR MORE OF THESE CLIENTS, AND THE BUSINESS WERE NOT REPLACED, IT COULD HAVE AN ADVERSE IMPACT ON OUR RESULTS OF OPERATIONS AND OUR FINANCIAL CONDITION. While no customer currently accounts for 10% or more of our revenues, our top ten clients account for a significant amount of our business. Although we anticipate our business to continue with these clients, the loss of any large client could have an adverse impact on our Corporation's results of operations if that revenue stream was not replaced from alternative sources. ITEM 2. PROPERTIES The Corporation's executive, administrative, corporate sales offices, and service center are located in Branchburg, New Jersey, where the Corporation leases a building of approximately 21,000 square feet. This "net-net" lease, which currently provides for an annual rental of $185,605, expires in February 2011. The building is leased from East Coast Property Management, LLC, a related party. See Item 13. Certain Relationships and Related Transactions. See Note [6][A] of the Notes to Consolidated Financial Statements with respect to the Corporation's commitments for leased facilities. ITEM 3. LEGAL PROCEEDINGS The Corporation is not currently a party to any legal proceeding that it regards as material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS None 6 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITYHOLDERS MATTERS TransNet's common stock is quoted and traded on the OTC Bulletin Board under the symbol "TRNT." The following table indicates the high and low closing sales prices for TransNet's common stock for the periods indicated based upon information reported by the National Association of Securities Dealers. Calendar Year Closing Sales Prices - ------------- ------------------------ High Low ---- --- 2004 - ---- Third Quarter 1.63 1.38 Fourth Quarter 1.63 1.45 2005 - ---- First Quarter $1.60 $1.44 Second Quarter 1.53 1.39 Third Quarter 1.52 1.33 Fourth Quarter 1.39 1.22 2006 - ---- First Quarter $1.39 $1.24 Second Quarter 1.40 1.24 As of September 22, 2006, the number of holders of record of TransNet's common stock was 2,231. Such number of record owners was determined from the Company's shareholder records and does not include beneficial owners whose shares are held in nominee accounts with brokers, dealers, banks and clearing agencies. TransNet declared a dividend of $0.07 per share on April 28, 2004, payable to shareholders on May 14, 2004. The dividend was paid on June 1, 2004. This was the first dividend paid by the Corporation. The Board of Directors may consider future dividends, but no assurance can be given that additional dividends will be issued. No additional dividends have been declared. 7 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with, and is qualified in its entirety by, the Corporation's consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report on Form 10-K.
YEAR ENDED JUNE 30 2006 2005 2004 2003 2002 ------------ ------------ ------------ ------------ ------------ Revenue Equipment $ 21,024,838 $ 18,209,885 $ 15,636,812 $ 15,942,197 $ 33,258,828 Services 14,390,324 15,831,106 14,962,852 16,856,823 17,633,266 ------------ ------------ ------------ ------------ ------------ 35,415,162 34,040,991 30,599,664 32,799,020 50,892,094 ------------ ------------ ------------ ------------ ------------ Cost of Revenue Equipment 19,083,778 16,948,499 14,112,956 14,634,965 31,030,909 Services 10,358,780 12,161,808 11,728,379 12,658,163 11,889,348 ------------ ------------ ------------ ------------ ------------ 29,442,558 29,110,307 25,841,335 27,293,128 42,920,257 ------------ ------------ ------------ ------------ ------------ Gross Profit Equipment 1,941,060 1,261,386 1,523,856 1,307,232 2,227,919 Services 4,031,544 3,669,298 3,234,473 4,198,660 5,743,918 ------------ ------------ ------------ ------------ ------------ 5,972,604 4,930,684 4,758,329 5,505,892 7,971,837 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Selling, General & Administrative 7,033,558 6,788,239 5,957,851 6,776,975 6,986,974 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Operating Income (Loss) (1,060,954) (1,857,555) (1,199,522) (1,271,083) 984,863 ------------ ------------ ------------ ------------ ------------ Other Income (Loss) Interest Income 47,605 52,074 69,973 58,454 71,085 Gain (Loss) on Disposal of Asset 15,224 (2,584) 0 0 0 ------------ ------------ ------------ ------------ ------------ Total Other Income (Loss) 62,829 49,490 69,973 58,454 71,085 Income (Loss) Before Income Tax (Benefit) (998,125) (1,808,065) (1,129,549) (1,212,629) 1,055,948 ------------ ------------ ------------ ------------ ------------ Income Tax Benefit (Expense) 0 (431,787) 0 0 385,451 ------------ ------------ ------------ ------------ ------------ Net Income (Loss) $ (998,125) $ (1,376,278) $ (1,129,549) $ (1,212,629) $ 670,497 Dividends Paid -- -- (336, 060) -- -- ============ ============ ============ ============ ============ Income (Loss) Per Common Share - Basic (0.21) (0.29) (0.24) (0.25) 0.14 ============ ============ ============ ============ ============ Income (Loss) Per Common Share - Diluted (0.21) (0.29) (0.24) (0.25) 0.14 ============ ============ ============ ============ ============ Weighted average shares outstanding - Basic 4,823,304 4,818,304 4,779,973 4,774,804 4,774,804 ============ ============ ============ ============ ============ Weighted average shares outstanding - Diluted 4,823,304 4,818,304 4,779,973 4,774,804 4,927,225 ============ ============ ============ ============ ============ BALANCE SHEET DATA: Working Capital 8,105,669 8,983,510 10,657,957 12,073,122 13,156,891 Total Assets 9,986,492 12,009,100 12,963,609 13,902,650 15,514,596 Long-Term Obligations -- -- -- -- -- Shareholders Equity 8,937,533 9,935,658 11,296,536 12,734,865 13,947,494
8 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, 2006 were $35,415,161 as compared with $34,040,991 for the fiscal year ended June 30, 2005, and $30,599,644 for the fiscal year ended June 30, 2004. Revenues increased in both fiscal 2006 as compared to fiscal 2005, and fiscal 2005 as compared to fiscal 2004 as a result of increased hardware sales, attributable to the increase in Voice over Internet Protocol technology ("VoIP" or "IP telephony") business and an increase in demand from the educational market. Service revenues (technical support, repair and maintenance, network integration and training) for fiscal 2006 decreased as compared to fiscal 2005 as a result of decreased demand for certain of the Corporation's legacy technical services and decreased service revenues from a major customer, as discussed below. Service revenues for fiscal 2005 and 2004 decreased as a percentage of revenues due to the general slowdown in IT spending. For fiscal 2006, the Corporation reported a net loss of $998,152 as compared with a net loss of $1,376,278 for fiscal 2005, and net loss of $1,129,549 for fiscal 2004. The net loss for fiscal 2006 was attributable to the Corporation's decrease in profit margins and decrease in service revenues during the fourth quarter of fiscal 2006. These results outweighed the profitable results of the first three quarters. During the fourth quarter, the decrease in the Corporation's profit margins was the result of several factors including the timing of certain projects which involved the sale of equipment with lower than normal profit margins, and the slow down of New Jersey state and municipal customers due to the impending shutdown of the State government in conjunction with its budgetary crisis. The net loss for the 2005 fiscal year was primarily attributable to increased selling, general and administrative expenses, which offset the increase in revenues and profit margins. These expenses increased primarily as a result of the Corporation's expansion of its sales and engineering staffs based upon its anticipated growth in the Internet telephony marketplace. The net loss for the year includes a tax benefit of approximately $431,787. The income tax benefit was primarily derived from the Corporation decreasing the deferred tax asset valuation allowance recorded at June 30, 2004. The decrease in the deferred tax asset valuation allowance was recorded in proportion to those existing net operating losses that the Corporation has realized in connection with certain IRS carry back provisions. During the fiscal years discussed, several factors including the general economic slowdown and cautious IT spending effected the IT industry as a whole. The Corporation and other industry businesses were impacted by the delay in service projects by many clients due to their internal budgetary constraints. In addition, for the years discussed, the Corporation arranged for several computer manufacturers to ship product directly to and direct-bill TransNet customers, paying TransNet an "agency fee" similar to a commission. During fiscal 2006 and 2005, the Corporation received contract awards for VoIP products and services, the performance of which will extend over several quarters. Management notes that some of these projects have been affected by construction delays beyond the Corporation's control, and these delays have resulted in some order backlogs. None of these delays have had any significant impact upon the operations of the Corporation. During fiscal 2005 and 2004, the Corporation's clients continued to be conservative in their IT budgetary spending. As a result, management refocused its attention on utilization rates of its service technicians and selling and administrative expenses to reduce expenses. As part of the industry competition pressures discussed herein, management continues to see certain erosion in business related to Fortune 500 customers as those customers enter into and/or expand -9- business relationships with large global partners. As part of this erosion, the Corporation's largest customer, a Fortune 500 company (See Item 1. Customers, above), signed an agreement with a global support organization that encompasses some lower margin work previously awarded to TransNet. While the Corporation still has a presence at this client's locations, overall service billing to this client will be reduced. The overall reduction and resulting effects on the Corporation's operations were unclear for much of fiscal 2006 because of the Corporation's continued significant presence at the client's locations. By the close of fiscal 2006, however, the amount of business from this client was materially reduced. Although management believes that projects performed during 2006 replaced much of the reduced business, and believes its focus on higher margin services related to VoIP/IP Telephony and security will lead to continued growth and opportunities that will help compensate for this reduction, no assurances can be given that the Corporation will be able to replace the loss of a significant amount of business from this customer, or that such operations will not be adversely effected. During the fiscal years discussed, the IT industry as a whole was negatively impacted by a significant slowdown in client spending. Clients have begun to scrutinize their IT spending and the related returns on investments before incurring new expenses. Management believes that future spending will be subject to specific criteria, but also believes that as single source provider, the Corporation will be in a better position to satisfy client demands for cost-effectiveness and a suitable return on investment. Service related revenues, a material segment of revenues, are significant in their contributions to net income because these operations yield a higher profit margin than equipment sales. For the fiscal years discussed, revenue from the provision of service, support, outsourcing and network integration was largely the result of the Corporation's service contracts with a number of corporate customers to provide service and support for the customer's personal computers, peripherals and networks. These contracts are short-term, and contain provisions which permit early termination. Although the contracts generally contain renewal terms, there is no assurance that such renewals will occur. With respect to certain support services, Management has noted a transition to project-based business, in which services are rendered for a specific project, such as a VoIP installation, rather than contract based business, in which technical services are rendered for a specific period of time. Accordingly, the Corporation must rely more upon projects as a source of revenues. Industry changes have also diminished the demand for certain legacy support services, such as help desk, as demand for services such as those related to VoIP systems and call centers has increased. The Corporation has modified its service offerings in response to these industry fluctuations, and has recruited experienced systems engineers and project managers to respond to increased VoIP projects. The Corporation has modified its service offerings, and is marketing service contracts to provide remote monitoring services, and contracts which allow for remote as well as on-site services. Remote monitoring and remedial services allow for greater utilization of the Corporation's technical staff. In addition, the Corporation has established a Support Call Center operating from its Branchburg, New Jersey headquarters. In addition to the challenging economic environment, the computer industry has experienced a continuing trend of decreasing prices of computers and related equipment. Management believes that this trend will continue. Industrywide, the result of price erosion has been lower profit margins on sales, which require businesses to sell a greater volume of equipment to maintain past earning levels. Another result of the price decreases has been intensified competition within the industry, including the consolidation of businesses through merger or acquisition, as well as the increased initiation of sales by certain manufacturers directly to the end-user and the entrance of manufacturers into technical services business. Management believes that the adoption of policies by many larger corporate customers, which limit the number of vendors permitted to provide goods and services for specified periods of time, has further increased price competition. -10- To meet these competitive challenges and to maximize the Corporation's profit margin, management has modified its marketing strategy during these years and has enforced expense controls. Management also utilizes approaches such as manufacturers' direct shipment and billing of the customers in exchange for payment to the Corporation of an "agency fee" as a means to reduce equipment related costs while increasing profits. These direct ship sales supplement sales through traditional channels, and are not material. 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 has introduced new technical support programs offering a wide variety of alternatives of remote and on-site network support. 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. Although there is uncertainty as to the economic future, management is cautiously optimistic, particularly with respect to education sales and expansion of its sales of IP telephony products, and anticipates a return to profitability in the first quarter of fiscal 2007. 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. During fiscal 2006, selling, general and administrative expenses remained at approximately 20% of revenues. In fiscal 2005 selling, general and administrative expenses increased to 20% of revenues from 19% of revenues for fiscal 2004. This increase in expenses was the result of the management's decision to achieve increased revenues and profit margins by significantly investing in the expertise of its sales and support teams, their certifications, and corporate infrastructure. Management incurred these expenses as investments required to meet the demands of the current IT environment, and to lead to sustainable growth for the Corporation. Management continues its efforts to control expenses within these growth parameters, despite increasing personnel related costs, such as health benefits. Interest income decreased in fiscal 2006 and 2005, respectively as compared to the prior year as a result of lower amounts invested. LIQUIDITY AND CAPITAL RESOURCES There are no material commitments of the Corporation's capital resources, other than leases and employment contracts. Cash and cash equivalents decreased in fiscal 2006 as compared to 2005, and fiscal 2005 as compared to fiscal 2004, as cash was utilized to fund operations and increased selling, general and administrative expenses. Accounts receivable remained relatively constant in fiscal 2006 as compared to -11- the prior fiscal year. Accounts receivable for fiscal 2005 decreased as compared to fiscal 2004 as a result of faster customer payments. Accounts payable decreased in fiscal 2006 from fiscal 2005 due to payments made at the end of the fiscal year. Accounts payable increased in fiscal 2005 over the prior year in direct response to increased customer orders and inventory purchases necessary to fill those orders. Floor planning payables decreased in fiscal 2006 as compared to fiscal 2005 as a result of payments made during the fourth quarter. Floor planning payables increased in 2005 due to the open orders at year ends. 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 slightly in fiscal 2006, as compared to the prior year due to hardware sales during the fourth quarter. Inventory increased in fiscal 2005 as compared to the prior year, due to open orders at the close of the fiscal year. For the fiscal year ended June 30, 2006, as in the fiscal years ended June 30, 2005 and 2004, the internal capital sources of the Corporation were sufficient to enable the Corporation to meet its obligations. IMPACT OF INFLATION The effects of inflation on our operations were not significant during the periods presented. CONTRACTUAL OBLIGATIONS
Contractual Obligations Total Less than 1-3 4-5 More than - ----------------------- ----- One year Years Years 5 Years -------- ----- ----- ------- Real Estate Lease $866,157 $185,605 $371,210 $309,342 -- Office Equipment $5,550 $5,550 -- -- --
CRITICAL ACCOUNTING POLICIES The Corporation's financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The methods, estimates, and judgments used in applying these most critical accounting policies have a significant impact on the results reported in the financial statements. The Securities and Exchange Commission has defined critical accounting policies as policies that involve critical accounting estimates that require (a) management to make assumptions that are highly uncertain at the time the estimate is made and (b) different estimates that could have been reasonably used for the current period, or changes in the estimates that are reasonably likely to occur from period to period, which would have a material impact on the presentation of our financial condition, changes in financial condition or in result of operations. Based on this definition, the most critical policies include: revenue recognition, allowance for doubtful accounts, and valuation of deferred tax assets. Revenue Recognition Revenues related to our equipment sales are recognized when evidence of an arrangement exists, delivery of equipment has occurred, the sales price of the equipment being sold to our customers is both fixed and -12- determinable and collectability of the accounts receivable related to the equipment sale is reasonably assured in accordance with SEC Staff Accounting Bulletin No. 104 Topic 13. Revenues related to our services are recognized as the service is performed using the percentage of completion method of accounting under which the total contract revenue during the term of an agreement is recognized on the basis of the percentage that each contract's proportional performance to date bears to the total completion of performance. Estimates of proportional performance are continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as the contract progresses. Accounts Receivable - ------------------- Accounts receivable are reported at their outstanding unpaid principal balances reduced by an allowance for doubtful accounts, based on certain percentages of aged receivables. We estimate doubtful accounts based on historical bad debts, factors related to specific customers' ability to pay and current economic trends. Valuation of Deferred Tax Assets - -------------------------------- At June 30, 2006, we have a valuation allowance of approximately $1,334,998 primarily to reduce our net operating loss carryforwards of $3,425,000 to an amount that will more likely than not be realized. These net operating loss carryforwards have varying carryforward periods and restrictions on usage. The estimation of future taxable income and our resulting ability to utilize net operating loss and tax credit carryforwards can significantly change based on future events, including our determinations as to the feasibility of certain tax planning strategies. Thus, recorded valuation allowances may be subject to material future changes. INVESTMENT CONSIDERATIONS AND UNCERTAINTIES THE MATTERS DISCUSSED IN MANAGEMENT'S DISCUSSION AND ANALYSIS AND THROUGHOUT THIS REPORT THAT ARE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT MANAGEMENT EXPECTATIONS THAT INVOLVE RISK AND UNCERTAINTIES. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION: THE IMPACT OF ECONOMIC CONDITIONS GENERALLY AND IN THE INDUSTRY FOR MICROCOMPUTER PRODUCTS AND SERVICES; DEPENDENCE ON KEY VENDORS AND CUSTOMERS; CONTINUED COMPETITIVE AND PRICING PRESSURES IN THE INDUSTRY; PRODUCT SUPPLY SHORTAGES; OPEN-SOURCING OF PRODUCTS OF VENDORS, INCLUDING DIRECT SALES BY MANUFACTURERS; RAPID PRODUCT IMPROVEMENT AND TECHNOLOGICAL CHANGE, SHORT PRODUCT LIFE CYCLES AND RESULTING OBSOLESCENCE RISKS; TECHNOLOGICAL DEVELOPMENTS; CAPITAL AND FINANCING AVAILABILITY; AND OTHER RISKS SET FORTH HEREIN. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached. -13- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of TransNet Corporation and Subsidiary Somerville, New Jersey We have audited the accompanying consolidated balance sheets of TransNet Corporation and Subsidiary as of June 30, 2006 and 2005, 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, 2006. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board [United States]. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TransNet Corporation and Subsidiary as of June 30, 2006 and 2005, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 2006, in conformity with U.S. generally accepted accounting principles. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey September 15, 2006 F-1 TRANSNET CORPORATION AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
JUNE 30, -------- 2 0 0 6 2 0 0 5 ------- ------- ASSETS: CURRENT ASSETS: Cash and Cash Equivalents $ 4,034,495 $ 5,752,404 Accounts Receivable - Net 3,438,526 3,522,831 Inventories - Net 1,501,695 1,579,353 Other Current Assets 70,013 92,469 Deferred Tax Asset 133,941 98,183 ------------- ------------- TOTAL CURRENT ASSETS 9,178,670 11,045,240 PROPERTY AND EQUIPMENT - NET 563,543 701,563 OTHER ASSETS 280,035 262,297 ------------- ------------- TOTAL ASSETS $ 10,022,248 $ 12,009,100 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts Payable $ 89,465 $ 465,656 Accrued Expenses 316,662 291,177 Income Taxes Payable 9,611 19,992 Floor Plan Payable 621,507 1,284,905 ------------- ------------- TOTAL CURRENT LIABILITIES 1,037,245 2,061,730 ------------- ------------- DEFERRED TAX LIABILITY 47,470 11,712 ------------- ------------- COMMITMENTS AND CONTINGENCIES -- -- ------------- ------------- STOCKHOLDERS' EQUITY: Capital Stock - Common, $.01 Par Value, Authorized 15,000,000 Shares; Issued 7,408,524 Shares at June 30, 2006 and 7,408,524 at June 30, 2005 [of which 2,585,220 are in Treasury at June 30, 2006 and 2005] 74,085 74,085 Additional Paid-in Capital 10,574,670 10,574,670 Retained Earnings 5,441,613 6,439,738 ------------- ------------- Totals 16,090,368 17,088,493 Less: Treasury Stock - At Cost (7,152,835) (7,152,835) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 8,937,533 9,935,658 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,022,248 $ 12,009,100 ============= =============
See Notes to Consolidated Financial Statements. F-2 TRANSNET CORPORATION AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
Y E A R S E N D E D -------------------------------------------- J U N E 3 0, -------------------------------------------- 2 0 0 6 2 0 0 5 2 0 0 4 ------- ------- ------- REVENUE: Equipment $ 21,024,838 $ 18,209,885 $ 15,636,812 Services 14,390,324 15,831,106 14,962,852 ------------ ------------ ------------- TOTAL REVENUE 35,415,162 34,040,991 30,599,664 ------------ ------------ ------------- COST OF REVENUE: Equipment 19,083,778 16,948,499 14,112,956 Services 10,358,780 12,161,808 11,728,379 ------------ ------------ ------------- TOTAL COST OF REVENUE 29,442,558 29,110,307 25,841,335 ------------ ------------ ------------- GROSS PROFIT 5,972,604 4,930,684 4,758,329 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,033,558 6,788,239 5,957,851 ------------ ------------ ------------- OPERATING [LOSS] (1,060,954) (1,857,555) (1,199,522) OTHER INCOME [LOSS]: Interest Income 47,605 52,074 69,973 Gain [Loss] on Disposal of Asset 15,224 (2,584) -- ------------ ------------ ------------- [LOSS] BEFORE INCOME TAX [BENEFIT] (998,125) (1,808,065) (1,129,549) INCOME TAX [BENEFIT] -- (431,787) -- ------------ ------------ ------------- NET [LOSS] $ (998,125) $ (1,376,278) $ (1,129,549) ============ ============ ============= BASIC AND DILUTED NET [LOSS] PER COMMON SHARE $ (.21) $ (.29) $ (.24) ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 4,823,304 4,818,304 4,779,973 ============ ============ ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 4,823,304 4,818,304 4,779,973 ============ ============ =============
See Notes to Consolidated Financial Statements. F-3 TRANSNET CORPORATION AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
TOTAL ----- COMMON STOCK PAID-IN RETAINED TREASURY STOCK STOCKHOLDERS' ----------------------- ------- -------- ---------------------- ------------- SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY ------ ------ ------- -------- ------ ------ ------ BALANCE - JULY 1, 2003 7,469,524 $ 74,695 $ 10,686,745 $ 9,281,625 (2,694,720) $(7,308,200) $ 12,734,865 Common Stock Options Exercised 31,000 310 26,970 -- -- -- 27,280 Cash Dividends Paid -- -- -- (336,060) -- -- (336,060) Treasury Shares Retired (109,500) (1,095) (154,270) -- 109,500 155,365 -- Net [Loss] -- -- -- (1,129,549) -- -- (1,129,549) ----------- ---------- ------------ ----------- ---------- ---------- ------------ BALANCE - JUNE 30, 2004 7,391,024 73,910 10,559,445 7,816,016 (2,585,220) (7,152,835) 11,296,536 Common Stock Options Exercised 17,500 175 15,225 -- -- -- 15,400 Net [Loss] -- -- -- (1,376,278) -- -- (1,376,278) ----------- ---------- ------------ ----------- ---------- ---------- ------------ BALANCE - JUNE 30, 2005 7,408,524 74,085 10,574,670 6,439,738 (2,585,220) (7,152,835) 9,935,658 Net [Loss] -- -- -- (998,125) -- -- (998,125) ----------- ---------- ------------ ----------- ---------- ---------- ------------ BALANCE - JUNE 30, 2006 7,408,524 $ 74,085 $ 10,574,670 $ 5,441,613 (2,585,220) (7,152,835) $ 8,937,533 =========== ========== ============ =========== ========== ========== ============
See Notes to Consolidated Financial Statements. F-4 TRANSNET CORPORATION AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Y E A R S E N D E D ----------------------------------------- J U N E 3 0, ----------------------------------------- 2 0 0 6 2 0 0 5 2 0 0 4 ------- ------- ------- OPERATING ACTIVITIES: Net [Loss] $ (998,125) $ (1,376,278) $(1,129,549) ------------ ------------- ----------- Adjustments to Reconcile Net [Loss] to Net Cash Provided by Operating Activities: Depreciation and Amortization 250,847 186,370 164,352 Loss [Gain] on Sale of Equipment (15,224) 2,584 -- Provision for Doubtful Accounts 48,977 24,495 5,000 Deferred Income Taxes -- 78,202 -- Inventory Reserve Adjustment -- (10,000) -- Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable 35,328 355,132 1,761,855 Inventories 77,658 (437,850) (738,729) Other Current Assets 16,375 (92,469) 16,572 Other Assets (18,734) (31,193) 15,646 Increase [Decrease] in: Accounts Payable and Accrued Expenses (344,625) 182,583 6,693 Income Taxes Payable (10,381) 10,166 (9,600) ------------ ------------- ----------- Total Adjustments 40,221 268,020 1,221,789 ------------ ------------- ----------- NET CASH - OPERATING ACTIVITIES (957,904) (1,108,258) 92,240 ------------ ------------- ----------- INVESTING ACTIVITIES: Capital Expenditures (137,607) (452,266) (156,634) Proceeds from Sale of Asset 41,000 -- -- ------------ ------------- ------------- NET CASH - INVESTING ACTIVITIES (96,607) -- -- ------------ ------------- ------------- FINANCING ACTIVITIES: Floor Plan Payable - Net (663,398) 232,884 502,195 Stock Options Exercised -- 15,400 27,280 Dividends Paid -- -- (336,060) ------------ ------------- ------------- NET CASH - FINANCING ACTIVITIES (663,398) 248,284 193,415 ------------ ------------- ------------- NET [DECREASE] INCREASE IN CASH AND CASH EQUIVALENTS (1,717,909) (1,312,240) 129,021 CASH AND CASH EQUIVALENTS - BEGINNING OF YEARS 5,752,404 7,064,644 6,935,623 ------------ ------------- ------------- CASH AND CASH EQUIVALENTS - END OF YEARS $ 4,034,495 $ 5,752,404 $ 7,064,644 ============ ============= =============
See Notes to Consolidated Financial Statements. F-5 TRANSNET CORPORATION AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
Y E A R S E N D E D ----------------------------------------- J U N E 3 0, ----------------------------------------- 2 0 0 6 2 0 0 5 2 0 0 4 ------- ------- ------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the years for: Interest $ -- $ -- $ -- Income Taxes $ -- $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During the fiscal year ended June 30, 2006, the Company traded-in an automobile with a book value of $25,776 in exchange for a trade-in value of approximately $41,000. During the fiscal year ended June 30, 2005, the Company traded-in automobiles with a book value of $12,584 in exchange for a trade-in value of approximately $10,000. During the fiscal year ended June 30, 2004, the Company retired 109,500 shares of common stock held in treasury with a cost basis of $155,366. See Notes to Consolidated Financial Statements. F-6 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- [1] NATURE OF OPERATIONS TransNet Corporation ["TransNet" or the "Company"] was incorporated in the State of Delaware in 1969. The Company is a single-source provider of information technology products and technology management services designed to enhance the productivity of the information systems of its customers. Our customers are located primarily in the New Jersey - New York Metropolitan area. Through its own sales and service departments, TransNet provides information technology and network solutions for its customers by combining value-added professional technical services with the sale of PC hardware, network products, IP telephony products, computer peripherals and software. As used herein, the term "Company" shall refer to TransNet and where the context requires, shall include TransNet and its wholly-owned subsidiary, Century American Corporation. Century American Corporation, formerly a leasing subsidiary, is currently inactive. The sale and service of IT is highly competitive and may be affected by rapid changes in technology and spending habits in both the business and institutional sectors. [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [A] CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Century American Corporation. Intercompany transactions and accounts have been eliminated in consolidation. [B] CASH AND CASH EQUIVALENTS - Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased [See Note 3]. [C] ACCOUNTS RECEIVABLE - Accounts receivable have been reduced by an allowance for doubtful accounts of $178,472 and $129,500 as of June 30, 2006 and 2005, respectively. The receivables secure borrowings under a floor plan financing agreement [See Note 7C]. [D] INVENTORIES - The Company's inventory is valued at the lower of cost [determined on the moving average-cost basis] or market. Inventory has been reduced by an allowance of $68,000 and $20,000 at June 30, 2006 and 2005, respectively. The inventory secures borrowings under a floor plan financing agreement [See Note 7C]. [E] PROPERTY AND EQUIPMENT, DEPRECIATION AND AMORTIZATION - Property and equipment are stated at cost. Depreciation and amortization are computed by use of the straight-line method over the estimated useful lives of the various assets ranging from five to ten years. Leasehold improvements are amortized over the shorter of the life of the lease including renewal option periods, or their estimated useful life. [F] GOODWILL - Effective July 1, 2002, the Company evaluates the recoverability and measures the possible impairment of its goodwill under SFAS 142, "Goodwill and Other Intangible Assets." The impairment test is a two-step process that begins with the estimation of the fair value of the reporting unit. The first step screens for potential impairment and the second step measures the amount of the impairment, if any. Management's estimate of fair value considers publicly available information regarding the market capitalization of the Company as well as (i) publicly available information regarding comparable publicly-traded companies in the computer sales and service industry, (ii) the financial projections and future prospects of the Company's business, including its growth opportunities and likely operational improvements, and (iii) comparable sales prices, if available. As part of the first step to assess potential impairment, management compares the estimate of fair value for the Company to the book value of the Company's consolidated net assets. If the book value of the consolidated net assets is greater than the estimate of fair value, the Company would then proceed to the second step to measure the impairment, if any. The second step compares the implied fair value of goodwill with its carrying value. F-7 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #2 - -------------------------------------------------------------------------------- [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] [G] REVENUE RECOGNITION - Revenues related to our equipment sales are recognized when evidence of an arrangement exists, delivery of equipment has occurred, the sales price of the equipment being sold to our customers is both fixed and determinable and collectability of the accounts receivable related to the equipment sale is reasonably assured in accordance with SEC Staff Accounting Bulletin No. 104 Topic 13. Revenues related to our services are recognized as the service is performed using the percentage of completion method of accounting under which the total contract revenue during the term of an agreement is recognized on the basis of the percentage that each contract's proportional performance to date bears to the total completion of performance. Estimates of proportional performance are continuously monitored during the term of the contract, and recorded revenues and costs are subject to revision as the contract progresses. [H] EARNINGS PER SHARE - We have adopted the provisions of SFAS No. 128. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. SFAS No. 128 also requires a dual presentation of basic and diluted earnings per share on the face of the statement of operations for all companies with complex capital structures. Diluted earnings per share reflects the amount of earnings for the period available to each share of common stock outstanding during the reporting period, such as common shares that could result from the potential exercise or conversion of securities into common stock. The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an antidilutive effect on per share amounts [i.e., increasing earnings per share or reducing loss per share]. The dilutive effect of outstanding options and warrants and their equivalents are reflected in dilutive earnings per share by the application of the treasury stock method which recognized the use of proceeds that could be obtained upon exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. Options and warrants will have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants. Equity instruments that may dilute earnings per share in the future are listed in Note 11. [I] CREDIT RISK - Financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents and accounts receivable arising from its normal business activities. The Company routinely assesses the financial strength of its customers and based upon factors surrounding the credit risk of its customers establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowances is not significant. The Company places its cash with high credit financial institutions. The amount on deposit in any one institution that exceeds federally insured limits is subject to credit risks. As of June 30, 2006, the Company had approximately $1,106,724 which is subject to such risk. The Company does not require collateral or other security to support financial instruments subject to credit risk. F-8 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3 - -------------------------------------------------------------------------------- [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] [J] BUSINESS CONCENTRATIONS - The Company is engaged in the sale and technical support and service of local area networks, personal computer systems, and peripheral equipment, software, and supplies to companies and organizations located primarily in the New Jersey - New York City Metropolitan area and is currently an authorized dealer for several computer products manufacturers, including 3 Com, Apple, Cisco, Hewlett Packard, IBM, Intel, NEC, Nortel, Novell and Microsoft Corporation. If the Company were to lose any of its dealer authorizations or if it were to experience significant delays, interruptions or reductions in its supply of hardware and software, the Company's revenues and profits could be adversely affected. [K] USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. [L] STOCK OPTIONS ISSUED TO EMPLOYEES - On July 1, 2005, we adopted the fair value recognitions provisions of SFAS No. 123 R, "Share-Based Payments", under the modified prospective transition method. Prior to July 1, 2005, we applied the Accounting Principles Board (APB) Opinion No. 25 intrinsic value accounting method for its stock incentive plans. Under the modified prospective transition method, the fair value recognition provisions apply only to new awards or awards modified after July 1, 2005. Additionally, the fair value of existing unvested awards at the date of adoption is recorded in compensation expense over the remaining requisite service period. [M] DEFERRED INCOME TAXES - Pursuant to SFAS No. 109, "Accounting for Income Taxes," income tax expense [or benefit] for the year is the sum of deferred tax expense [or benefit] and income taxes currently payable [or refundable]. Deferred tax expense [or benefit] is the change during the year in a company's deferred tax liabilities and assets. Deferred tax liabilities and assets are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. [N] IMPAIRMENT OF LONG LIVED ASSETS - Certain long-term assets of the Company are reviewed quarterly as to whether their carrying value has become impaired, pursuant to guidance established in Statement of Financial Accounting Standards ["SFAS"] No. 144, "Accounting for the Impairment or disposal of Long-Lived Assets." Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations [undiscounted and without interest charges]. If impairment is deemed to exist, the assets will be written down to fair value. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. For the three year period ended June 30, 2006, the Company had not recognized an impairment of a long-lived asset. [3] INVENTORIES Inventories consist of the following at June 30, 2006 and 2005: June 30, -------- 2 0 0 6 2 0 0 5 ------- ------- Product Inventory $ 1,340,488 $ 1,571,111 Service Parts 181,207 28,242 Obsolesce Reserve (20,000) (20,000) ------------ ------------- TOTALS $ 1,501,695 $ 1,579,353 ------ ============ ============= F-9 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4 [4] PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION Property and equipment and accumulated depreciation and amortization as of June 30, 2006 and 2005 are as follows: June 30, -------- 2 0 0 6 2 0 0 5 ------- ------- Automobiles $ 291,967 $ 290,105 Office Equipment 2,122,980 2,074,724 Furniture and Fixtures 344,009 344,009 Leasehold Improvements 273,102 273,102 Computer Software 201,600 187,755 ------------ ------------ Totals 3,233,657 3,169,695 Less: Accumulated Depreciation and Amortization 2,670,115 2,468,132 ------------ ------------ PROPERTY AND EQUIPMENT - NET $ 563,543 $ 701,563 ---------------------------- ============ ============ Total depreciation and amortization expense amounted to $249,851, $185,378 and $160,961 for the years ended June 30, 2006, 2005 and 2004, respectively. [5] INTANGIBLE ASSETS The following intangible assets and accumulated amortization as of June 30, 2006 and 2005 are included in other assets:
JUNE 30, 2006: WEIGHTED AVERAGE NET OF AMORTIZATION ACCUMULATED ACCUMULATED INTANGIBLE ASSETS PERIOD [YEARS] COST AMORTIZATION AMORTIZATION - ----------------- -------------- ---- ------------ ------------ Licenses 20 $ 20,000 $ 17,833 $ 2,167 Goodwill -- 259,422 159,976 99,446 ----------- ------------- ------------- TOTALS 20 $ 279,422 $ 177,809 $ 101,613 ------ ========== ============= =============
JUNE 30, 2005: WEIGHTED AVERAGE NET OF AMORTIZATION ACCUMULATED ACCUMULATED INTANGIBLE ASSETS PERIOD [YEARS] COST AMORTIZATION AMORTIZATION - ----------------- -------------- ---- ------------ ------------ Licenses 20 $ 20,000 $ 16,833 $ 3,167 Goodwill -- 259,422 159,976 99,446 ----------- ------------- ------------- TOTALS 20 $ 279,422 $ 176,809 $ 102,613 ------ ========== ============= =============
F-10 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5 - -------------------------------------------------------------------------------- [5] INTANGIBLE ASSETS [CONTINUED] The estimated amortization expense related to intangible assets for each of the five succeeding fiscal years and thereafter as of June 30, 2006 is a follows: Year ended June 30, 2007 $ 1,000 2008 1,000 2009 167 2010 -- 2011 -- Thereafter -- --------- TOTAL $ 2,167 ----- ========= For the years ended June 30, 2006, 2005 and 2004, amortization expense of intangible assets were $1,000, $1,000 and $1,000, respectively. [6] COMMITMENTS AND RELATED PARTY TRANSACTIONS [A] LEASING AGREEMENTS - In April 2004, the Company terminated its prior lease and entered into a new leasing agreement with East Coast Property Management, LLC, a related party, to lease its office and warehouse space through February 2011. East Coast Property Management is owned by the President and Vice-President of the Company. Terms of this operating lease agreement were similar to the prior lease and provide for minimum rent payments of $165,719 per annum for the first two years of the agreement, and $185,605 per annum for the remaining five years. In addition to the annual base rent, the office and warehouse real estate lease requires the Company to pay for certain contingent expenses such as building maintenance, insurance and real estate taxes. Total contingent lease expenses were $109,704, $151,858 and $155,620 for the years ended June 30, 2006, 2005 and 2004, respectively. The Company maintains an operating lease for one piece of office equipment that expires in 2007. Office equipment lease expense, including contingent usage charges, was $15,808, $13,540 and $13,517 for the years ended June 30, 2006, 2005 and 2004, respectively. The fixed annual base rent [exclusive of an annual cost of living adjustment and contingent usage charges] of the office, warehouse and equipment leases for the next five (5) years are as follows: YEAR ENDED REAL OFFICE JUNE 30, ESTATE EQUIPMENT - -------- ------ --------- 2007 $ 185,605 $ 5,550 2008 185,605 -- 2009 185,605 -- 2010 185,605 -- 2011 123,737 -- Thereafter -- -- ------------ ----------- TOTALS $ 866,157 $ 5,550 ------ ============ =========== Total rent expense was $175,510, $179,259 and $179,233 for the years ended June 30, 2006, 2005 and 2004, respectively. F-11 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6 - -------------------------------------------------------------------------------- [6] COMMITMENTS AND RELATED PARTY TRANSACTIONS [CONTINUED] [B] EMPLOYMENT AGREEMENTS - The Company has entered into employment agreements with two officers of the Company which provide for salaries of $180,000 and $300,000 per annum. In addition, the agreements provide for a "Performance Bonus" based on percentages of two (2) to six (6) percent applied to certain levels of the Company pre-tax profits. There were no bonuses paid for each of the three years ending June 30, 2006. The Company executed an addendum to the original employment agreements which extend the provisions of the agreement through June 2008. Salary commitments under employment contracts for the next five fiscal years are as follows: Years ended June 30, 2 0 0 6 ------- 2007 $ 480,000 2008 480,000 2009 -- 2010 -- 2011 -- Thereafter -- ------------ TOTAL $ 960,000 ----- ============ [B] EMPLOYMENT AGREEMENTS [CONTINUED] - In addition, the employment agreements contain provisions providing that in the event of a hostile change of control of the Company and a resultant termination of the employees' employment prior to expiration of the agreement, the employees would be entitled to receive certain lump sum payments ranging from 80% of the officers current salary to 80% of the prior year's salary times the remaining years of the related employment agreement. [C] FLOOR PLAN PAYABLE - The Company finances inventory purchases through a floor plan wholesale credit line with a finance company, which is secured by substantially all assets of the Company. At June 30, 2006, the Company had a maximum credit line of $2,500,000, of which $1,878,493 was unused. Provisions of the floor plan agreement provide that the lender may at its sole discretion from time to time determine the maximum amount of financing which it elects to extend based on certain eligible inventory and accounts receivable balances. The outstanding borrowing under the credit line at June 30, 2006 and 2005 was $621,507 and $1,284,905, respectively. Payments on the credit line are due currently and are interest free for a 30 day period. If not repaid in full, interest is calculated based on the average daily outstanding balance under the line of credit at a rate of the greater of 6% or the prime rate. Purchases made under the credit lines were repaid in full within the 30 day interest free repayment period during fiscal 2006, 2005 and 2004. Accordingly, no interest expense has been incurred for the years ended June 30, 2006, 2005 and 2004. The prime rate and the weighted average interest rate were approximately 8.00%, 6.00% and 4.25%, respectively at June 30, 2006, 2005 and 2004. F-12 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7 - -------------------------------------------------------------------------------- [7] 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 30, ---------------------------------------- 2 0 0 6 2 0 0 5 2 0 0 4 ------- ------- ------- Current: Federal $ -- $ (509,989) $ -- State -- -- -- ----------- ------------ ----------- Current Provision -- (509,989) -- ----------- ------------ ----------- Deferred: Federal -- 66,472 -- State -- 11,730 -- ----------- ------------ ------------- Deferred Provision -- 78,202 -- ----------- ------------ ------------- INCOME TAX [BENEFIT] $ -- $ (431,787)$ -- -------------------- =========== ============ ============= In fiscal 2005, the Company elected to carryback certain federal and state net operating losses. As a result, the Company received refunds of $509,090 on taxes paid in prior years. The deferred tax asset and liability in the accompanying consolidated balance sheets include the following components: June 30, -------- 2 0 0 6 2 0 0 5 ------- ------- Net Operating Loss [NOL] Carry Forwards $ 1,370,002 $ 808,918 Accounts Receivable Allowance 71,389 51,798 Inventory Allowance 8,000 8,000 Inventory Capitalization 36,521 38,385 Depreciation and Amortization (23,735) -- Other Temporary Differences 6,762 -- ------------ ------------- Deferred Tax Assets [Current] 1,468,939 907,101 Valuation Allowance (1,334,998) (808,918) ------------ ------------- NET DEFERRED TAX ASSET $ 133,941 $ 98,183 ---------------------- ============ ============= Deferred Tax Liabilities [Non-Current]: Depreciation and Amortization $ 47,470 $ 11,712 ============ ============= The future realization of the deferred tax assets related to federal and state NOL carryforwards is contingent upon the Company's future results of operations. The Company performs an analysis each year to determine if future income will more likely than not be sufficient to realize the recorded deferred tax asset. Management has established a deferred tax valuation on a portion of the deferred tax asset which may not be realized. The amount of the net deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. F-13 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8 - -------------------------------------------------------------------------------- [7] INCOME TAXES [CONTINUED] At June 30, 2006, the Company had approximately $3,425,000 of federal and state net operating losses with the following fiscal year expiration dates. Year Ended June 30, 2024 $ 780,000 2025 1,670,000 2026 975,000 ------------ TOTAL $ 3,425,000 ----- ============ For the years ended June 30, 2006 and 2005, the Company increased [decreased] the valuation allowance on the deferred tax asset by $526,080 and $(72,599), respectively. The following is a reconciliation of income taxes at the U.S. statutory tax rate to the Company's effective income tax rate is as follows:
Y e a r s e n d e d ---------------------------------------- J u n e 30, ---------------------------------------- 2 0 0 6 2 0 0 5 2 0 0 4 ------- ------- ------- U.S. Statutory Rate Applied to Pretax Income (35.0)% (35.0)% (35.0)% State Taxes - Net of Federal Income Tax Benefit (6.0) (6.0) (6.0) Effect of Valuation Allowance Change 41.0 45.0 41.0 Utilization of Net Operating Loss Carryback -- (28.0) -- --------- --------- -------- INCOME TAX [BENEFIT] EXPENSE --% (24.0)% --% ---------------------------- ========= ========= ========
[8] EARNINGS PER SHARE The following table reconciles the denominator of the diluted earnings per share computation as shown in the consolidated statement of operations.
Years ended June 30, ------------------------------------- 2 0 0 6 2 0 0 5 2 0 0 4 ------- ------- ------- Diluted EPS Calculation: Weighted Average Basic Common Shares Outstanding 4,823,304 4,818,304 4,779,973 Weighted Average Effect of Common Stock Equivalents -- -- -- ----- ----- ---- WEIGHTED AVERAGE DILUTED COMMON AND COMMON EQUIVALENT SHARES 4,823,304 4,818,304 4,779,973 ------------------------ =========== =========== =============
For each of the three years ended June 30, 2006, all common stock equivalents were considered anti-dilutive and not included in diluted earnings per share. [9] DEFINED CONTRIBUTION PLANS The Company adopted a defined contribution [401(k)] plan 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, 2006, 2005 and 2004 was $98,997, $77,569 and $71,211, respectively. F-14 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9 - -------------------------------------------------------------------------------- [10] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN On February 6, 1990, the Board of Directors adopted a Stockholders' Rights Plan, which entitles the Right holder, upon the occurrence of specified triggering events, i.e., the acquisition by a person or group of beneficial ownership of 20% or more of outstanding shares; the commencement of a tender offer for 20% or more of outstanding shares [unless an offer is made for all outstanding shares at a price deemed by the Continuing Board to be fair and in the best interest of stockholders] and the determination by the Board that a person is an "Adverse Person," as defined in the Rights Agreement to purchase one share of common stock at an exercise price of $7.50 per share, or in certain "take over" situations, common stock equal in value to two times the exercise price. Subsequent to a triggering event, if the Company is acquired in a merger or other business transaction in which the Company is not the surviving corporation [unless Board approved], or 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right shall have the right to receive upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. The Rights may be redeemed by the Company for $.01 per Right at any time prior to the determination of the Board that a person is an Adverse Person or ten days following a public announcement of the acquisition of, or commencement of a tender offer for, 20% of the outstanding common stock. The Plan initially expired in February 2000, but was extended to February 2010. No rights were outstanding under the Stockholders Rights Plan as of June 30, 2006. Under terms of the Company's 2000 Stock Option Plan ["the Plan"], employees, directors, and consultants may be granted incentive stock options to purchase the Company's common stock at no less than 100% of the market price on the date the option is granted [110% of fair market value for incentive stock options granted to holders of more than 10% of the voting stock of the Company]. The Plan also provides for non-qualified stock options to be issued with an exercise price of not less than 85% of the fair market value of the common stock. The Company has reserved 500,000 shares of the Company's common stock for distribution under the Plan. In January 2001, the Company granted 362,000 stock options under the Plan to various employees. Shares of common stock under the Plan may consist, in whole or in part, of authorized and unissued treasury stock. Information related to stock options granted in connection with 2000 Stock Option Plan is as follows: 2000 P l a n ---------------------------- Weighted Number of Average Shares Exercise Price ------ -------------- Outstanding - June 30, 2003 353,500 $ .88 Granted -- -- Exercised (31,000) .88 Forfeited/Canceled -- -- ----------- ----------- Outstanding - June 30, 2004 322,500 .88 Granted 20,000 1.54 Exercised (17,500) .88 Forfeited/Canceled (1,500) -- ----------- ----------- Outstanding - June 30, 2005 323,500 .92 Granted -- -- Exercised -- -- Forfeited/Canceled (25,000) 1.41 ----------- ----------- OUTSTANDING - JUNE 30, 2006 298,500 $ .88 --------------------------- =========== =========== F-15 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #10 - -------------------------------------------------------------------------------- [10] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN [CONTINUED] The following is a transaction summary on non-incentive stock options granted to non-employees at fair market value of the common stock at date of grant: WEIGHTED NUMBER OF AVERAGE SHARES EXERCISE PRICE ------ -------------- Outstanding - June 30, 2003 75,000 $ 1.59 Granted -- -- Exercised -- -- Forfeited/Canceled -- -- ----------- ----------- Outstanding - June 30, 2004 75,000 1.59 Granted -- -- Exercised -- -- Forfeited/Canceled (75,000) (1.59) ----------- ----------- Outstanding - June 30, 2005 -- -- Granted -- -- Exercised -- -- Forfeited/Canceled -- -- ----------- ----------- OUTSTANDING - JUNE 30, 2006 -- $ -- - --------------------------- =========== =========== The following table summarizes information about stock options outstanding at June 30, 2006: OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------- ----------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OF OPTIONS LIFE PRICE OF OPTIONS PRICE - --------------- ---------- ---- ----- ---------- ----- $.88 298,500 4.5 $.88 298,500 $.88 The exercise price for each of the above grants was determined by the Board of Directors of the Company to be equal to the fair market value of the common stock on the day of grant [110% of the fair market value for incentive stock option grants to holders of more than 10% of the voting stock of the Company]. Pursuant to the required pro forma disclosure under the fair value method of estimating compensation cost, the Company has estimated the fair value of its stock option grants by using the Black-Scholes option pricing method with the following weighted-average assumptions: 2006 ---- Expected Option Term (Years) 2.0 Years Risk-Free Interest Rate (%) 3.50% Expected Volatility (%) 47% Expected Dividend None F-16 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11 - -------------------------------------------------------------------------------- [10] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN [CONTINUED] The following table shows the pro forma net income and earnings per share that we would have recorded if compensation expense was determined using SFAS No. 123R for these periods. The 2005 pro forma information is provided because we did not adopt SFAS No. 123R unit July 1, 2005. 2 0 0 5 2 0 0 4 ------- ------- Net [Loss]: As Reported $ (1,376,278) $ (1,129,549) Compensation Expense for Stock Options (7,929) -- ------------- ------------- Pro Forma Net [Loss] $ (1,384,207) $ (1,129,549) ============= ============= Basic [Loss] Per Share as Reported $ (.29) $ (.24) Pro Forma Basic [Loss] Per Share $ (.29) $ (.24) Diluted [Loss] Per Share as Reported $ (.29) $ (.24) Pro Forma Diluted [Loss] Per Share $ (.29) $ (.24) [11] CONTINGENCIES The Company may from time to time become involved in various legal proceedings in the ordinary course of its business. The Company is not currently a party to any legal proceeding that it deems to be material. In 1998, management was notified of an unasserted possible claim or assessment involving the pension plan adopted by the Company in 1981 and its termination and conversion to a defined contribution plan in 1989. The possible claim concerned the improper filings and technical administration violations. The Company took corrective action with the Internal Revenue Service and applied for a favorable determination letter with the IRS. In December 2000, the Company made a contribution to the plan and payments of specified sanctions in connection with its IRS settlement. Resolution of the matter with the Pension Benefit Guaranty Corporation took place in March 2005. [12] CAPITAL TRANSACTIONS In April 2004, the Board of Directors approved a cash dividend of $.07 per share payable on June 1, 2004 to all stockholders of record as of May 14, 2004. Based on the number of share outstanding as of May 14, 2004, the cash dividend amount to approximately $336,060. The cash dividend was recorded as a reduction of the Company's retained earnings. No cash dividends were declared or paid on the treasury stock. During the fourth quarter of fiscal 2004, the Company recorded the constructive retirement of 109,500 shares of treasury stock. The treasury stock retired had a cost basis of $155,365. F-17 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12 - -------------------------------------------------------------------------------- [13] SIGNIFICANT CUSTOMERS During 2006, no customer accounted for 10% or more of our revenues. During 2005, one customer, accounted for approximately 18% of revenue, and during 2004 this customer accounted for approximately 22% of our revenues. We derive a significant amount of our revenue from a relatively small number of clients. If we were to lose one or more of these clients , and the business were not replaced, it could have an adverse impact on our results of operations and our financial condition. While no customer currently accounts for 10% or more of our revenues, our top ten clients account for a significant amount of our business. Although we anticipate our business to continue with these clients, the loss of any large client could have an adverse impact on our Corporation's results of operations if that revenue stream was not replaced from alternative sources. [14] BUYING AGREEMENT During the year ended June 30, 2006 and 2005, the Company purchased approximately $13,000,000 and $9,500,000 of hardware from one vendor at discounted prices under a buying agreement. Should the buying agreement be terminated, the Company may not be able to obtain purchases from another supplier at comparable terms. [15] FAIR VALUE OF FINANCIAL INSTRUMENTS The Company adopted Statement of Financial Accounting Standards ["SFAS'] No. 107, "Disclosure About Fair Value of Financial Instruments" which requires disclosing fair value to the extent practicable for financial instruments which are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. In assessing the fair value of financial instruments, the Company used the following methods and assumptions, which were based on estimates of market conditions and risks existing at that time. For certain instruments, including cash and cash equivalents, trade payables, mortgage receivable and floor plan payable it was estimated that the carrying amount approximated fair value for these instruments because of their short maturities. [16] NEW AUTHORITATIVE PRONOUNCEMENTS In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs - an amendment to ARB No. 43." This statement provides guidance to clarify the accounting for abnormal amounts of idle facility expense, freight handling costs, and wasted material (spoilage), among other production costs. Provisions of ARB No. 43 stated that under some circumstances, items such as idle facility expense, excessive spoilage and other costs may be so abnormal as to require treatment as current period charges. This statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of "so abnormal." In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of this statement is required for fiscal years beginning after June 15, 2005. Adoption of the Statement is not expected to have a material impact on the financial statements of the Company. F-18 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13 - -------------------------------------------------------------------------------- [16] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED] In November 2004, the FASB issued SFAS No. 152 "Accounting for Real Estate Time-Sharing Transactions - An amendment of SFAS No. 66 and 67. This Statement amends SFAS No. 66. "Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This Statement also amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects," to state the guidance for (a) incidental costs and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to guidance in SOP 04-2, effective for financial statements with fiscal years beginning after June 15, 2005. Adoption of this Statement is not expected to have a material impact on the financial statements of the Company. In November 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - - an amendment to APB No. 29." This Statement amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of this statement is required for fiscal years beginning after June 15, 2005. Adoption of this statement is not expected to have a material impact on the financial statements of the Company. In December 2004, the FASB issued SFAS No. 123 (Revised 2005), "Share-Based Payment." The statement requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instrument issued. The statement covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company was required to adopt SFAS 123 (R) as of July 1, 2005. In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections". This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. Adoption of this statement is required for fiscal years starting after December 15, 2005. The adoption of this statement is not expected to have a material impact on the consolidated financial statements of the Company. F-19 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13 - -------------------------------------------------------------------------------- [17] SELECTED QUARTERLY FINANCIAL DATA [UNAUDITED]
Three Months Ended ---------------------------------------------------------- September 30, December 31, March 31, June 30, Fiscal Year 2 0 0 5 2 0 0 5 2 0 0 6 2 0 0 6 2 0 0 6 ------- ------- ------- ------- ------- Net Revenues $11,081,859 $ 8,504,034 $ 8,343,058 $ 7,486,211 $ 35,415,162 Gross Profit $ 1,865,016 $ 1,753,017 $ 1,767,148 $ 587,423 $ 5,972,604 Net Income [Loss] $ 78,481 $ 52,298 $ 27,881 $ (1,156,785) $ (998,125) Net Income [Loss] per Common Share: Basic & Diluted $ 0.02 $ 0.01 $ 0.01 $ (0.26) $ (0.21) Three Months Ended ---------------------------------------------------------- September 30, December 31, March 31, June 30, Fiscal Year 2 0 0 4 2 0 0 4 2 0 0 5 2 0 0 5 2 0 0 5 ------- ------- ------- ------- ------- Net Revenues $ 10,693,227 $ 7,663,278 $ 7,414,897 $ 8,269,589 $ 34,040,991 Gross Profit $ 1,745,220 $ 1,346,148 $ 1,193,334 $ 645,982 $ 4,930,684 Net Income [Loss] $ 164,400 $ (141,212) $ (420,279) $ (979,187) $ (1,376,278) Net Income [Loss] Per Common Share: Basic and Diluted $ .03 $ (.03) $ (.09) $ (.20) $ (.29) Three Months Ended ---------------------------------------------------------- September 30, December 31, March 31, June 30, Fiscal Year 2 0 0 3 2 0 0 3 2 0 0 4 2 0 0 4 2 0 0 4 ------- ------- ------- ------- ------- Net Revenues $ 9,634,231 $ 7,386,691 $ 6,855,853 $ 6,722,889 $ 30,599,664 Gross Profit $ 1,588,206 $ 1,314,724 $ 1,040,413 $ 814,986 $ 4,758,329 Net Income [Loss] $ 33,990 $ 342 $ (444,830) $ (719,051) $ (1,129,549) Net Income [Loss] Per Common Share: Basic and Diluted $ .01 $ -- $ (.09) $ (.16) $ (.24)
. . . . . . . . . . . F-20 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of TransNet Corporation and Subsidiary Somerville, New Jersey Our report on our audit of the basic financial statements of TransNet Corporation and subsidiary appears on page F-1. That audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule II is presented for purposes of complying with the Securities and Exchange Commissions Rules and Regulations under the Securities Exchange Act of 1934 and is not otherwise a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey September 15, 2006 F-21 TRANSNET CORPORATION AND SUBSIDIARY - -------------------------------------------------------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004. - --------------------------------------------------------------------------------
(A) (B) (C) (D) (E) BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING COST AND TO VALUATION AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS OF PERIOD ----------- --------- -------- -------- --------- Year Ended June 30, 2006 Allowance for Doubtful Accounts $ 129,500 $ 60,000 $ (11,028) $ 178,472 Deferred Tax Asset Valuation Allowance 808,918 526,080 -- 1,334,998 Inventory Reserve 20,000 -- -- 20,000 ------------- ------------- -------------- ------------- TOTALS $ 958,418 $ 586,080 $ (11,028) $ 1,533,470 ------ ============= ============= ============== ============= Year Ended June 30, 2005 Allowance for Doubtful Accounts $ 105,000 $ 24,500 $ -- $ 129,500 Deferred Tax Asset Valuation Allowance 881,517 -- (72,599) 808,918 Inventory Reserve 30,000 -- (10,000) 20,000 ------------- ------------- -------------- ------------- TOTALS $ 1,016,517 $ 24,500 $ (82,599) $ 958,418 ------ ============= ============= ============== ============= Year Ended June 30, 2004 Allowance for Doubtful Accounts $ 100,000 $ 5,000 $ -- $ 105,000 Deferred Tax Asset Valuation Allowance 479,206 402,311 -- 881,517 Inventory Reserve 45,000 -- (15,000) 30,000 ------------- ------------- -------------- ------------- TOTALS $ 624,206 $ 407,311 $ (15,000) $ 1,016,517 ------ ============= ============= ============== =============
F-22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements on accounting and financial disclosure between the Corporation and its independent public accountants nor any change in the Corporation's accountants during the last fiscal year. ITEM 9A. CONTROLS AND PROCEDURES The Chief Executive Officer and Chief Financial Officer of the Corporation have concluded, based on their evaluation as of June 30, 2006, that the Corporation's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Corporation in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Corporation in such reports is accumulated and communicated to the Corporation's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in the Corporation's internal controls or in other factors that could significantly affect these controls subsequent to the date of such evaluation. ITEM 9B. OTHER INFORMATION. None. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of the Corporation are as follows: Name Position ---- -------- John J. Wilk Chairman of the Board and Treasurer Steven J. Wilk President, Chief Executive Officer, and Director Jay A. Smolyn Vice President, Operations and Director Vincent Cusumano (a)(c) Director Earle Kunzig (a)(d) Director Raymond J. Rekuc (b) Director Susan Wilk Director and Secretary - -------------------------- (a) Member of the Audit Committee (b) Chairman of the Audit Committee. (c) Member of the Compensation Committee. (d) Chairman of the Compensation Committee. The Board of Directors has established an audit committee and a compensation committee. Additional information concerning each of the committees and the directors serving such committees follows. The audit committee is responsible for review of the Company's auditing, accounting, financial reporting and internal control functions and for the selection, approval and recommendation of independent accountants to the Board of Directors. In addition, the audit committee is expected to monitor the quality of the Company's accounting principles and financial reporting as well as the independence of, and the non-audit services provided by, the Company's independent accountants. The Board of Directors has adopted a written charter for the audit committee. The audit committee is comprised of Messrs. Rekuc (Chairman), Cusumano and Kunzig, all of whom are independent directors in accordance with the definition of "independent director" established by the corporate governance rules of The NASDAQ National Market. (Although the Company's Common Stock is not quoted on the NASDAQ National Market, the Company has used the NASDAQ National Market's independence criteria in making this judgment in accordance with applicable SEC rules.) The Board has determined that Mr. Rekuc as its audit committee financial expert. The compensation committee reviews, evaluates and advises the Board of Directors in matters relating to the Company's compensation of and other employment benefits for executive officers. The compensation committee is comprised of Messrs. Kunzig (Chairman) and Mr. Cusumano. Set forth below is biographical information regarding directors and executive officers of the Company. Unless otherwise noted, each director has held the indicated position for at least five years. JOHN J. WILK*, 78, was the President and Chief Executive Officer of TransNet since its inception in 1969 until May 1986, when he was elected as Chairman of the Board of Directors. STEVEN J. WILK*, 49, has been the President and Chief Executive Officer of TransNet since May 1986. He was elected as a director of TransNet in April 1989. JAY A. SMOLYN, 50, has been employed at TransNet since 1976 and in April 1985 became Vice President, Operations. He was elected as a director of TransNet in March 1990. 15 VINCENT CUSUMANO, 70, has served as a director of TransNet since 1977. He is the President and Chief Executive Officer of Cusumano Perma-Rail Corporation of Roselle Park, New Jersey, distributors and installers of exterior iron railings. EARLE KUNZIG, 67, has served as a director of TransNet director since 1976. He is Vice President of Sales and a principal of Hardware Products Sales, Inc., Wayne, New Jersey, a broker of used computer equipment and provider of computer maintenance services. RAYMOND J. REKUC, 60, has served as a director of TransNet since 1983. He is the principal of Raymond J. Rekuc, Certified Public Accountant, an accounting firm located in Washington Township, New Jersey. Mr. Rekuc is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. SUSAN M. WILK* joined TransNet in November 1987 as Director of Administration, and was named Legal Counsel in 1994. She was elected a director of TransNet in March 1990. Prior to joining TransNet, Ms. Wilk was an attorney with the U.S. Securities and Exchange Commission and the Federal Home Loan Bank Board. * John J. Wilk, Chairman of the Board, is the father of Steven J. Wilk, a director and the President and Chief Executive Officer of the Company, and Susan M, Wilk, a director and Legal Counsel of the Company. None of the Corporation's directors are directors of any other Corporation with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15 (d) of that Act. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Based solely on a review of Forms 3 and 4 and any amendments thereto furnished to the Corporation pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934, or representations that no Forms 5 were required, the Corporation believes that with respect to fiscal 2006, its officers, directors and beneficial owners of more than 10% of its equity timely complied with all applicable Section 16(a) filing requirements. CODE OF ETHICS The Corporation adopted a Code of Ethics that applies to the Corporation's executive offers, chief financial officer, and controller, as well as all its employees. The Code of Ethics was attached as an exhibit to the Form 10-K for the fiscal year ended June 30, 2004. A copy of the Code of Ethics is available at no cost by writing to: TransNet Corporation, Attn: Investor Relations, 45 Columbia Road, Somerville, New Jersey 08876. 16 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, 2006, 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, 2006 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
Annual Compensation Long-Term Compensation -------------------------------------- -------------------------------------------- Securities Year Underlying Name and Ended Other Annual Options Restricted LTIP All Other Principal Position June 30, Salary Bonus Compensation SARs Stock Awards Payouts Compensation - ----------------------------------------------------------------------------------------------------------- Steven J. Wilk 2006 $300,000 $0 $0 0 0 $0 0 President and Chief 2005 $300,000 $0 $0 0 0 $0 0 Executive Officer 2004 $300,000 $0 $0 0 0 $0 0 Jay Smolyn 2006 $180,000 $0 $0 0 0 $0 0 Vice President 2005 $180,000 $0 $0 0 0 $0 0 Operations 2004 $180,000 $0 $0 0 0 $0 0
OPTION GRANTS IN LAST FISCAL YEAR (individual grants) No options were granted during fiscal 2006. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to the Named Executive Officer concerning the exercise of options during fiscal 2006 and the number and value of unexercised options held as of the end of fiscal 2006.
Value of Number of Securities Unexercised Underlying In-the-Money Unexercised Options Options at Fiscal Number of at Fiscal Year End; Year End ($); Name of Executive Shares Acquired (Exercisable/ (Exercisable/ Officer on Exercise Value Realized ($) Unexercisable) Unexercisable) ------- ----------- ------------------ -------------- -------------- Steven J. Wilk 0 0 100,000/0 $45,000/0 Jay A. Smolyn 0 0 50,000/0 $22,500/0
EMPLOYMENT CONTRACTS WITH EXECUTIVE OFFICERS TransNet has employment contracts in effect with Steven J. Wilk and Jay A. Smolyn that expire on June 30, 2008. Pursuant to the employment contracts, Steven J. Wilk's annual salary is "at least" $300,000 and Mr. Smolyn's salary is "at least" $165,000 or, in each case, such 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 17 $5,000,000 for Steven J. Wilk, and 2% of pre-tax income in excess of $100,000 to the first $500,000 and 3% in excess of $500,00 for Mr. Smolyn). Steven J. Wilk's employment contract provides for a continuation of full amount of salary payments for 6 months and 50% of the full amount for the remainder of the term in the event of illness or injury. In addition, the employment contracts contain terms regarding the event of a hostile change of control of the Corporation and a resultant termination of the employee's employment prior to expiration of the employment contract. These terms provide that Mr. Smolyn would receive a lump sum payment equal to 80% of the greater of his then current annual salary or his previous calendar year's gross wages including the additional incentive compensation multiplied by the lesser of five or the number of years remaining in the contract. In the case of Steven J. Wilk, the contract provides that in the event of termination of employment due to a hostile change in control, he may elect to serve as consultant at his current salary and performance bonus for a period of five years beginning at the date of the change in control, or he may elect to receive a lump sum payment which would be the greater of 80% of his then current salary or 80% of his previous year's gross wages times five. The contract for Mr. Smolyn provides that the Corporation may terminate his employment, with or without cause. If said termination is without cause, the Corporation shall pay the Employee an amount equal to compensation payable for a period of one-half of the contract period remaining, not to exceed compensation for 18 months. Steven J. Wilk's employment agreement provides that should the Corporation terminate his employment (other than for the commission of willful criminal acts), he may elect to continue as a consultant to the Corporation at his then current compensation level, including the performance bonus, for the lesser of two (2) years or the remainder of the contract term or he may elect to receive a lump sum payment equal to eighty percent of his then current salary plus incentive bonus times the lesser of two (2) years or the remainder of the contract. DIRECTORS' COMPENSATION Directors who are salaried employees receive no additional compensation for services as a director or as a member of any committee of the board of directors. Directors who are not officers or employees of the Company receive an annual retainer of $5,000. Such directors do not receive additional fees for their service on a committee of the board of directors. During fiscal 2006, the Company paid an annual retainer fee of $5,000 to each of its three outside directors. STOCK OPTIONS The Plan provides for the grant of both Non-qualified Stock Options and Incentive Stock Options, as the latter is defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), as well as providing for the granting of Restricted Stock and Deferred Stock Awards, covering, in the aggregate, 500,000 shares of the Company's Common Stock. The purpose of the Plan is to advance the interests of the Company and its shareholders by providing additional incentives to the Company's management and employees, and to reward achievement of corporate goals. Awards under the Plan may be made or granted to employees, officers, directors and consultants, as selected by the Board. The Plan is administered by the entire Board of Directors. All full-time employees and officers of the Company are eligible to participate in the Plan. 18 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of June 30, 2006, by (i) each holder known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, (ii) each of the Company's directors and named executed officers individually, and (iii) all directors and officers of the Company as a group. The amounts and percentages of Common Stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of such security, or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities. Name of Beneficial Amount of Shares Percent of Owner Beneficially Owned Class - ----- ------------------ ------ Anthony Chiarenza (a) 348,000 (b) 7% (c) Steven J. Wilk (d) 456,500 (f) 9% (e) John J. Wilk (d) 225,500 (g) 4% (e) Jay A. Smolyn (d) 133,000 (h) 3% (e) Susan M. Wilk (d) 108,200 (i) 2% (e) Vincent Cusumano (d) 15,000 (j) * (e) Earle Kunzig (d) 20,000 (k) * (e) Raymond J. Rekuc (d) 2,500 (l) * (e) All officers and directors 960,700 18% (d) as a group (seven persons) - ----------------------------------------- (a) Based upon a Schedule 13G/A filed by Anthony Chiarenza and Key Equity Investors, Inc. on January 3, 2006. The address for both is 63-54 82nd Place, Middle Village, New York 11379. (b) Includes 313,00 shares of the Corporation's Common Stock held by Mr. Chiarenza, and 35,000 shares held by Key Equity Investors, Inc., of which Mr. Chiarenza is President, Chairman, and Chief Executive Officer. As a result of his positions, Mr. Chiarenza is deemed to have beneficial ownership of shares held by Key Equity Investors, Inc. (c) Based on 4,823,304 shares of the Corporation's Common Stock outstanding as of June 30, 2006. (d) The address of all officers and directors is 45 Columbia Road, Somerville, New Jersey 08876. (e) Based on 4,823,304 shares of the Corporation's Common Stock outstanding, plus 262,500 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days. (f) Includes 100,000 shares that Mr. Wilk is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share. (g) Includes 50,000 shares that Mr. Wilk is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share. 19 (h) Includes 50,000 shares that Mr. Smolyn is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share. (i) Includes 30,000 shares that Ms. Wilk is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share. (j) Includes 15,000 shares that Mr. Cusumano is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share. (k) Includes 15,000 shares that Mr. Kunzig is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share. (l) Includes 2,500 shares that Mr. Rekuc is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share. * Less than 1%. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In December 2003, East Coast Property Management, LLC, ("East Coast"), a limited liability corporation owned by Steven J. Wilk and Jay A. Smolyn, executive officers and directors of the Corporation, purchased the property occupied by the Corporation and assumed the "net-net" lease held by the former owner. In April 2004, a lease was executed by East Coast and the Corporation. The rental payment to be made by the Corporation to East Coast in fiscal 2006 was $172,348, and in fiscal 2007 will be $185,605. See Footnote [6][A] to the Consolidated Financial Statements for additional information. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following table sets forth the aggregate fees billed to the Corporation by Moore Stephens during fiscal 2006 and 2005. 2006 2005 ---- ---- Audit Fees $54,500 $52,000 ---------- Audit Related Fees $13,500 $7,500 ------------------ Tax Fees $8,250 $7,830 -------- All Other Fees 0 0 -------------- Total $76,250 $67,330 ----- The audit committee pre-approves all audit and permissible non-audit services provided to the Corporation by Moore Stephens. The non-audit services include audit-related services, tax services and other services. 20 PART IV ITEM 15. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS o Independent Auditor's Report. o Consolidated Balance Sheets as of June 30, 2006 and June 30, 2005. o Consolidated Statements of Operations for the Years Ended June 30, 2006, 2005 and 2004. o Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2006, 2005 and 2004. o Consolidated Statements of Cash Flows for the Years Ended June 30, 2006, 2005 and 2004. o Notes to Consolidated Financial Statements 3. EXHIBITS o 31.1 Certification pursuant to Section 302 o 31.2 Certification pursuant to Section 302 o 32 Certifications pursuant to Section 906 EXHIBITS INCORPORATED BY REFERENCE TO 3.1(a) Certificate of Incorporation, Exhibit 3(A) to Registration as amended Statement on Form S-1 (File No. 2-42279) 3.1(b) October 3, 1977 Amendment Exhibit 3(A) to Registration to Certificate of Incorporation Statement on Form S-1 (File No. 2-42279) 3.1 (c) March 17, 1993 Amendment to Certificate of Incorporation 3.2 (a) Amended By-Laws Exhibit 3 to Annual Report on Form 10-K for year ended June 30, 1987 3.2 (b) Article VII, Section 7 of the Exhibit to Current Report on By-Laws, as amended Form 8-K for January 25, 1990 4.1 Specimen Common Stock Exhibit 4(A) to Registration Certificate Statement on Form S-1 (File No. 2-42279) 10.1 March 1, 1991 lease agreement Exhibit 10.1 to Annual Report on between W. Realty and the Form 10-K for year ended June Corporation for premises at 45 Columbia 30, 1991 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 the Corporation for premises at 30, 1996 45 Columbia Road, Somerville, New Jersey 10.3 Employment Agreements extended Exhibit 10.3 to Annual Report on to June 30, 2008 with Steven J. Wilk Form 10-K for year ended June and Jay A. Smolyn 30, 2001 10.4 Form of Rights Agreement dated Exhibit to Current Report on as of February 6, 1990 between Form 8-K for January 25, 1990 TransNet and The Trust Company of New Jersey, as Rights Agent 21 10.5 Acquisition Agreement dated Exhibit to Current Report on March 6, 1990 between TransNet and Form 8-K for March 6, 1990 Selling Stockholders of Round Valley Computer Center, Inc. 10.6 Lease between TransNet Corporation Exhibit 10.6 to Annual Report and East Coast Management, LLC on Form 10-K for year ended June 30, 2004 14 Code of Ethics Exhibit 14 to Annual Report on Form 10-K for year ended June 30, 2004 (b) REPORTS ON FORM 8-K On May 16, 2005, TransNet Corporation filed a Form 8-K on Item 9 to report that it issued a press release announcing the results of the third quarter and nine-month results for the period ended March 31, 2005. (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 22 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: TRANSNET CORPORATION Date: September 27, 2006 By /s/ Steven J. Wilk ----------------------------------------- Steven J. Wilk Chief Executive Officer Date: September 27, 2006 By /s/ John J. Wilk ----------------------------------------- John J. Wilk Chief Financial and Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. By /s/ Steven J. Wilk Date: September 27, 2006 - --------------------------------- Steven J. Wilk, Director By /s/ John J. Wilk Date: September 27, 2006 - --------------------------------- John J. Wilk, Director By /s/ Jay A. Smolyn Date: September 27, 2006 - --------------------------------- Jay A. Smolyn, Director By /s/ Raymond J. Rekuc Date: September 27, 2006 - --------------------------------- Raymond J. Rekuc, Director By /s/ Vincent Cusumano Date: September 27, 2006 - --------------------------------- Vincent Cusumano, Director By /s/ Earle Kunzig Date: September 27, 2006 - --------------------------------- Earle Kunzig, Director By /s/ Susan M. Wilk Date: September 27, 2006 - -------------------------------- Susan M. Wilk, Director 23 EX-31.1 2 c44426_ex31-1.txt EXHIBIT 31.1 I, Steven J. Wilk, certify that: 1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended June 30, 2006 of TransNet Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 27, 2006 /s/ Steven J. Wilk - -------------------------------- Steven J. Wilk Chief Executive Officer EX-31.2 3 c44426_ex31-2.txt EXHIBIT 31.2 I, John J. Wilk, certify that: 1. I have reviewed this Annual Report on Form 10-K for the fiscal year ended June 30, 2006 of TransNet Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 27, 2006 /s/ John J. Wilk - --------------------------------- John J. Wilk Chief Financial Officer EX-32 4 c44426_ex32.txt EXHIBIT 32 Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of TransNet Corporation (the "Company") hereby certify to such officer's knowledge that: 1) The Annual Report on Form 10-K of the Company for the fiscal year ended June 30, 2005, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Form 10-K fairly presents, in all material respects, the financial conditions and results of operations of the Company. /s/ Steven J. Wilk ------------------------------- Steven J. Wilk Chief Executive Officer Date: September 27, 2006 /s/ John J, Wilk ------------------------------- John J. Wilk Chief Financial Officer Date: September 27, 2006 -----END PRIVACY-ENHANCED MESSAGE-----