-----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, PqMcQ2akbgVy9agcLVsfRRhzxq9tcOigG4kemEfDpsKrjO49cYMr9Yi7Kq4bnH8Z S5h0iReXcznKIBj6E4KEVg== 0000930413-04-004547.txt : 20040928 0000930413-04-004547.hdr.sgml : 20040928 20040928123636 ACCESSION NUMBER: 0000930413-04-004547 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040928 DATE AS OF CHANGE: 20040928 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: 041049078 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 c33799_10-k.txt SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended June 30, 2004 ---------------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the Transition period from to ---------------------- ------------------------ 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 whether the registrant [1] has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and [2] has been subject to such filing requirements for the past ninety days. YES _X_ NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this From 10-K or in any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $6,238,275 on September 22, 2004 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 23, 2004 was 4,805,804 shares (exclusive of Treasury shares). ITEM 1. BUSINESS TransNet Corporation ("TransNet" or the "Corporation") was incorporated in the State of Delaware in 1969. The Corporation is a single-source provider of information technology products and technology management services designed to enhance the productivity of the information systems of its customers. Through its own sales and service departments, TransNet provides information technology ("IT") products, technologies, solutions and services for its customers by combining a wide array of value-added professional technical services with the sale of PC hardware, network products, IP telephony products, computer peripherals and software. As used herein, the term "Corporation" shall refer to TransNet and where the context requires, shall include TransNet and its wholly-owned subsidiary, Century American Corporation. Century American Corporation, formerly a leasing subsidiary, is currently inactive. DESCRIPTION OF BUSINESS PRODUCTS, SOURCES, AND MARKETS: The sale of computer and related equipment for local area networks ("LAN's") and personal computers ("PC's") accounted for a significant portion of the Corporation's revenues, accounting for 51% and 49% of sales for fiscal 2004 and 2003, respectively. As part of its single source approach, the Corporation is a systems integrator, combining hardware and software products from different manufacturers into working systems. The Corporation is primarily a value added reseller. During the past year, management continued to implement its focus for business growth on marketing a wide array of technical services in conjunction with equipment sales to its clients in order to maximize profits. In addition, building on its expertise in network installation, the Corporation expanded its marketing and sales of IP telephony and wireless network products and related services. IP Telephony products provide for the operation of highly reliable phone systems over data networks. The resulting economies of installation and maintenance have generated increased demand for these products. The equipment sold by the Corporation includes microcomputers, workstations, servers, monitors, printers and operating systems software. In addition, the Corporation sells wireless networking products. The principal markets for the Corporation's products are commercial, governmental, and educational customers. These markets are reached by direct sales conducted through the corporate sales department based in Branchburg, New Jersey. The Corporation's direct sales staff enables TransNet to establish relationships with major corporate and educational clients through which it markets the Corporation's technical services. The Corporation is selective in choosing the products that it markets and its product mix is geared primarily to the requirements of its business customers. The products sold by the Corporation include desktop computer systems, network hardware and software, IP telephony and wireless products manufactured by the following companies: International Business Machines ("IBM"), Acer, Apple Computer, Inc. ("Apple"), Cisco Systems, Inc. ("Cisco"), Nortel Networks, NEC-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 Premier Partner, Citrix Systems, Inc. ("Citrix") as a Citrix Solutions Partner, Hewlett-Packard as an HP Gold Provider, a State/Local Government Specialized Partner, Certified Education Partner (k-12), 2 and a Certified Education Partner (for higher education), IBM, Lexmark International, Inc., Microsoft as a Microsoft Certified Solutions Partner, NEC, 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. Occasionally, the Corporation will order specific products to satisfy a particular customer requirement. The Corporation evaluates its product line and new products internally and through discussions with its vendors and customers. Software sold by the Corporation includes software designed for general business applications as well as specialized applications such as research, pharmaceuticals, and education; and integrated packages. The Corporation maintains an inventory of its product line to provide shipments to customers or arranges for direct shipment of product to the customer. Shipments are made from the Corporation's warehouse in Branchburg, New Jersey primarily through common carriers. In addition, in an effort to reduce costs, the Corporation has instituted a direct shipping program, through which product is shipped directly from the Corporation's suppliers to customers. Back orders are generally immaterial, but manufacturers' product constraints occasionally impact the Corporation's inventory levels. No such constraints have affected the Corporation in the past three years, however. The marketing of computers and peripherals and related technical services is generally not seasonal in nature. TECHNICAL SUPPORT AND SERVICE: Service operations have become a significant source of revenues, comprising 49% of revenues in fiscal 2004, and 51% of revenues in fiscal 2003. As discussed in "Management's Discussion and Analysis," management's focus emphasizes the provision of sophisticated technical services. Many businesses do not have computer technicians on their staffs, and as a result, they "outsource" these services and obtain technical services from IT solutions providers such as TransNet. The Corporation provides a wide variety of outsourced network services, personal computer support, repair and standard equipment maintenance to assist customers in obtaining technology that enhances the customers' productivity. These services, which are generally performed at customer sites, include LAN and PC hardware support, systems integration services, help desk services, asset management, relocation services, and installation or installation coordination. With the advent of its IP Telephony operations, these services also cover design, installation, and technical support and service of integrated voice-data systems. The Corporation assists its customers in determining each customer's standard hardware technology, application and operating system software, and networking platform requirements. The Corporation employs specially certified and trained technical systems engineers who perform high-end technology integration services. In addition, the Corporation's staff of specially trained system engineers and service technicians provide service and support on an on-call basis for file servers, personal computers, laptop computers, printers and other peripheral equipment. The Corporation's in-house technical staff performs system configurations to customize computers to the customers' specifications. The Corporation also provides authorized warranty service on the equipment it sells. TransNet is an authorized service and support dealer for the following manufacturers: by 3Com, Apple, Cisco (Premier Partner), Citrix, Dell Inc., Hewlett Packard (as a Gold Partner), IBM, Lexmark, Microsoft (as a Certified Solution Partner), 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 3 programs on an on-going basis. The Corporation competes with other resellers and manufacturers, as well as some customers, to recruit and retain qualified employees from a relatively small pool of available candidates. The Corporation's technical services are available to business and individual customers. Through a variety of alternatives, the Corporation offers repair or maintenance services at the customer site or on the Corporation's premises. Services are available for a variety of products marketed by the Corporation. Through its "TechNet" program the Corporation stations service personnel at a customer's location on a full-time basis. Under this program, the Corporation has entered into individual agreements with several large corporate customers to provide support and repair and maintenance services. Technical support and services are performed pursuant to contracts of specified terms and coverage (hourly rates or fixed price extended contracts) or on a time and materials basis. Maintenance and service contracts are offered to maintain and/or repair computer hardware. Most agreements are for twelve months or less. These agreements contain provisions allowing for termination prior to the expiration of the agreements. Although the agreements generally contain renewal terms, there is no assurance that the agreements will be renewed. In addition to services pursuant to a contract, repair and maintenance services are also available on a "time and materials" basis. The repair services usually consist of diagnosing and identifying malfunctions in computer hardware systems and replacing any defective circuit boards or modules. The defective items are generally repaired by in-house bench technicians or returned to the manufacturer for repair or replacement. To improve its efficiency and facilitate service to its clients, the Corporation implemented procedures to allow its clients to place service calls through the Internet, as a supplement to the phone and/or fax service requests. In addition to servicing its own customers within its service area, the Corporation has entered into arrangements with other service providers outside the Corporation's service area. Through these arrangements, the Corporation can provide services in instances in which a customer has locations outside the Corporation's service areas and can assure its customers quality technical service at their locations nationwide. TRAINING: The Corporation's headquarters houses its training center, the TransNet Education Center, which provides training for customers. The Corporation also provides training at customer sites. The Corporation offers comprehensive training on hardware and software, including a wide variety of DOS, Windows, and Macintosh systems and network applications, operation, and maintenance. The Corporation's Training Center has its own dedicated network. The training activities of the Corporation are not a material source of revenues. SUPPLIERS: In order to reduce its costs for computer and related equipment, the Corporation entered into a buying agreement with Ingram Micro, Inc. Under the agreement, the Corporation is able to purchase equipment of various manufacturers at discounts currently unavailable to it through other avenues. The agreement provides that the Corporation may terminate the arrangement upon sixty days notice. During fiscal 2004, the majority of the revenues generated by the Corporation from product sales were attributable to products purchased by the Corporation from Ingram Micro, Inc. pursuant to the Agreement. The balance of the Corporation's product sales were attributable to products purchased from a variety of sources on an as needed order basis. Alternate suppliers include Tech Data Corp., as well as Compaq and IBM, from whom 4 the Corporation purchases direct. Management anticipates that Ingram Micro, Inc. will be a major supplier during fiscal 2005. CUSTOMERS: The majority of the Corporation's corporate customers are commercial users located in the New Jersey - New York City metropolitan area. During fiscal 2004, one customer, Schering Plough, accounted for approximately 22% of revenue. During fiscal 2003, this customer, accounted for approximately 23% of the Corporation's revenues. The loss of this customer may have a material adverse impact upon the Corporation if the business could not be replaced from alternate customers. No other customer accounted for more than 10% of the Corporation's revenues in fiscal 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 IP telephony 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 have begun to deal directly with the end-users. Competitors also include relatively small and highly specialized firms. With respect to IP telephony products, the Corporation competes with similar businesses as well as directly with several product manufacturers and national telecommunication businesses. During the past few years, the industry has experienced and continues to experience a significant amount of consolidation. In the future, TransNet may face fewer but larger competitors as the result of such consolidation. 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 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 5 Micro, Inc., the Corporation is able to purchase equipment at discounts otherwise unavailable to it, enabling the Corporation to be more price competitive. In a cost-effective marketing approach, the Corporation now targets larger customers with more diversified product needs for its marketing efforts in order to sell a greater number and variety of products and services at one or a limited number of locations, thereby improving its gross profit margins. The Corporation does not believe that it is a significant factor in any of its fields of activity. TRADEMARKS: Other than the trademark of its name, TransNet holds no patents or trademarks. EMPLOYEES: As of September 15, 2004, the Corporation employed 192 full-time employees and 11 part-time employees. None of its employees are subject to collective bargaining agreements. ITEM 2. PROPERTIES The Corporation's executive, administrative, corporate sales offices, and service center are located in Branchburg, New Jersey, where the Corporation leases a building of approximately 21,000 square feet. This "net-net" lease, which currently provides for an annual rental of $165,719, 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 [7][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 On May 20, 2004, the Corporation held its annual meeting of shareholders for the purpose of considering and acting upon the election directors and approval of a proposed amendment to the Corporation's Certificate of Incorporation to provide for a classified board of directors. At the meeting, the election of all nominated directors was approved. The proposed amendment to the Certificate of Incorporation, which provides for classification of the board into three classes with terms of one, two, and three years, respectively, was approved. 6 Election of Directors: Name Shares Voted ---- ------------ For Authority Withheld --- ------------------ John J. Wilk 3,263,573 845,430 Steven J. Wilk 3,585,523 523,480 Jay A. Smolyn 3,623,348 485,655 Vincent Cusumano 3,629,748 479,255 Earle Kunzig 3,629,748 479,255 Raymond J. Rekuc 3,629,748 479,255 Susan M. Wilk 3,264,623 844,380 Amendment to the Certificate of Incorporation: For Against Abstain Not Voted - --- ------- ------- --------- 1,196,675 643,678 167,700 2,100,950 7 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 ---- --- 2002 - ---- Third Quarter $1.17 $1.02 Fourth Quarter 1.15 .97 2003 - ---- First Quarter $1.25 $1.04 Second Quarter 1.25 1.06 Third Quarter 1.75 1.14844 Fourth Quarter 1.62 1.42 2004 - ---- First Quarter $1.88 $1.58 Second Quarter 1.90 1.51 As of September 15, 2004, the number of holders of record of TransNet's common stock was 2,675. 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 special 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. 8 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with, and is qualified in its entirety by, the Company's consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report on Form 10-K.
Year Ended June 30, ------------------------------------------------------------------------------ 2004 2003 2002 2001 2000 ------------ ------------ ------------ ------------ ------------ STATEMENT OF INCOME DATA Net Sales Equipment $ 15,636,812 $ 15,942,197 $ 33,258,828 $ 42,137,322 $ 33,503,234 Services 14,962,852 16,856,823 17,633,266 14,280,047 13,063,267 ------------ ------------ ------------ ------------ ------------ 30,599,664 32,799,020 50,892,094 56,417,369 46,566,501 ------------ ------------ ------------ ------------ ------------ Cost of Sales Equipment 14,112,956 14,634,965 31,030,909 38,893,267 31,230,050 Services 11,728,379 12,658,163 11,889,348 10,084,170 9,687,659 ------------ ------------ ------------ ------------ ------------ 25,841,335 27,293,128 42,920,257 48,977,437 40,917,709 ------------ ------------ ------------ ------------ ------------ Gross Profit Equipment 1,523,856 1,307,232 2,227,919 3,244,055 2,273,184 Services 3,234,473 4,198,660 5,743,918 4,195,877 3,375,608 ------------ ------------ ------------ ------------ ------------ 4,758,329 5,505,892 7,971,837 7,439,932 5,648,792 ------------ ------------ ------------ ------------ ------------ Selling, General & Administrative 5,957,851 6,776,975 6,986,974 6,800,202 5,980,830 Income before Income Tax Expense (1,129,549) (1,212,629) 1,055,948 897,012 26,270 Net Income $ -- $ -- $ 670,497 $ 563,012 $ 8,270 Income (Loss) Per Common Share - Basic (0.24) (0.25) 0.14 0.12 -- Income (Loss) Per Common Share - Diluted (0.24) (0.25) 0.14 0.12 -- Weighted average shares outstanding - Basic 4,779,973 4,774,804 4,774,804 4,815,872 4,903,804 Weighted average shares outstanding - Diluted 4,779,973 4,774,804 4,927,225 4,884,853 4,903,804
9
Year Ended June 30, ------------------------------------------------------------------------------ 2004 2003 2002 2001 2000 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA: Working Capital 10,657,957 12,073,122 13,156,891 12,540,263 11,886,844 Total Assets 12,963,609 13,902,650 15,514,596 17,152,151 17,450,367 Long-Term Obligations -- -- -- -- -- Shareholders Equity 11,296,536 12,734,865 13,947,494 13,276,997 12,813,126
10 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, 2004 were $30,599,64 as compared with $32,799,020 for the fiscal year ended June 30, 2003, and $50,892,094 for the fiscal year ended June 30, 2002. Revenues decreased in fiscal 2004 and 2003 as compared to 2002 as a result of decreased hardware sales. The decrease in revenues in both fiscal 2004 and 2003 was the result of several factors including the general economic slowdown and cautious IT spending effecting the IT industry as a whole, the delay in service projects by many clients due to their internal budgetary constraints, and to a reduction in purchases by a major customer. In addition, for the years discussed, the Corporation arranged for several computer manufacturers to ship product directly to and direct-bill TransNet customers, paying TransNet a fee similar to a commission. Service revenues for 2004 decreased as a percentage of revenues due to the general slowdown in IT spending, and increased as a percentage of revenues in fiscal 2003 as a result of increased demand for the Corporation's technical services (technical support, repair and maintenance, network integration and training). For fiscal 2004, the Corporation reported a net loss of $1,129,549 as compared with a net loss of $1,212,629 for fiscal 2003, and net income of $670,497 for fiscal 2002. The loss in fiscal 2004,as well as in fiscal 2003, was attributable to the continued reduction in revenues, as described above. Service related revenues, a material segment of revenues, are significant in their contributions to net income because these operations yield a higher profit margin than equipment sales. For the fiscal years discussed, revenue from the provision of service, support, outsourcing and network integration is largely the result of the Corporation entering into service contracts with a number of corporate customers to provide service and support for the customer's personal computers, peripherals and networks. Most of these contracts are short-term, usually twelve months or less, and contain provisions which permit early termination. Although the contracts generally contain renewal terms, there is no assurance that such renewals will occur. During the fiscal years discussed, in addition to the challenging economic environment, the computer industry has experienced a trend of decreasing prices of computers and related equipment. Management believes that this trend will continue. Industrywide, the result of price erosion has been lower profit margins on sales, which require businesses to sell a greater volume of equipment to maintain past earning levels. Another result of the price decreases has been intensified competition within the industry, including the consolidation of businesses through merger or acquisition, as well as the increased initiation of sales by certain manufacturers directly to the end-user and the entrance of manufacturers into technical services business. Management believes that the adoption of policies by many larger corporate customers, which limit the number of vendors permitted to provide goods and services for specified periods of time, has further increased price competition. The Corporation's performance is also impacted by other factors, many of which are not within its control. These factors include: the short-term nature of client's commitments; patterns of capital spending by clients; the timing and size of new projects; pricing changes in response to competitive factors; the availability and related costs of qualified technical personnel; timing and customer acceptance of new product and service offerings; trends in IT outsourcing; product constraints; and industry and general economic conditions. -11- To meet these competitive challenges and to maximize the Corporation's profit margin, management has modified its marketing strategy during these years and has enforced expense controls. Management also utilizes approaches such as manufacturers' direct shipment and billing of the customers in exchange for payment to the Corporation of an "agency fee" as a means to reduce equipment related costs while increasing profits. Management's current marketing strategy is designed to shift its focus to provision of technical services and to sales of lower revenue/higher profit margin products related to service and support operations. Management's efforts include targeting commercial, educational and governmental customers who provide marketplaces for a wide range of products and services at one time, a cost-effective approach to sales. These customers often do not have their own technical staffs and outsource their computer service requirements to companies such as TransNet. Management believes it maximizes profits through concentration on sales of value-added applications; promotion of the Corporation's service and support operations; and strict adherence to cost cutting controls. In light of the above, management emphasizes and continues the aggressive pursuit of an increased volume of sales of technical service and support programs, and promotion of its training services. In the near term, the Corporation believes that product sales will continue to generate a significant percentage of the Company's revenues. In addition, the Corporation's buying agreement with Ingram Micro, Inc. enhances the Corporation's competitive edge through product discounts unavailable through other sources. During fiscal 2004 and 2003 selling, general and administrative expenses increased to 19% and 21% of revenues, respectively, as a result of the decrease in revenues. This compares to 14% of revenue for fiscal 2002. Management continues its efforts to control expenses, despite increasing personnel related costs, such as health benefits. Interest income increased in fiscal 2004 as compared to fiscal 2003 due to larger amounts invested, but decreased in fiscal 2003 as compared to the prior year due to lower amount of funds invested and lower interest rates paid on those funds. LIQUIDITY AND CAPITAL RESOURCES There are no material commitments of the Corporation's capital resources, other than leases and employment contracts. The Corporation currently finances the purchases of portions of its inventory through floor planning arrangements with a third-party lender and a manufacturer's affiliate under which such inventory secures the financed purchases. Inventory increased in fiscal 2004 as compared to fiscal 2003 due to open orders at the close of the fiscal year, but decreased for 2003 compared to the prior year as a result of decreased hardware sales and due to the Corporation's arrangement with certain manufacturers to ship to and bill customers directly. Accounts receivable decreased for fiscal 2004 and 2003 as compared to the prior year as a result of a reduction in revenues. Accounts receivable were relatively constant from 2003 to 2002. Accounts payable remained relatively constant from fiscal 2004 to fiscal 2003, but decreased in 2003 as compared to the prior year due to decreases in revenues. Floor planning payables increased in 2004 due to the open orders at year end, but decreased in 2003 in direct correlation to the decrease in inventory as compared to prior years. For the fiscal year ended June 30, 2004, as in the fiscal years ended June 30, 2003 and 2002, the internal capital sources of the Corporation were sufficient to enable the Corporation to meet its obligations. -12- IMPACT OF INFLATION The effects of inflation on our operations were not significant during the periods presented. CONTRACTUAL OBLIGATIONS Contractual Less than 1-3 3-5 More than Obligations Total One year Years Years 5 Years - --------------------- ---------- --------- -------- -------- --------- Real Estate Lease $1,204,224 -- $523,672 $371,210 $309,342 Office Equipment $23,420 -- $23,420 -- -- 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 our 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 TransNet recognizes revenue in accordance with SEC Staff Accounting Bulletin No. 104. Revenue from sales of hardware is recognized when the rights and risks of ownership have passed to the customer, which is upon shipment or receipt by the customer, depending on the terms of the sales contract. Revenue from services is recognized upon performance and acceptance after consideration of all the terms and conditions of the customer contract. Service contracts generally do not extend over one year, and are billed periodically as services are performed. Shipping and handling costs are included in the cost of sales. 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, 2004, we have a valuation allowance of approximately $882,000 primarily to reduce our net operating loss carryforwards of $2,430,000 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 -13- 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. -14- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no disagreements on accounting and financial disclosure between the Corporation and its independent public accountants nor any change in the Corporation's accountants during the last fiscal year. -15- 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 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 Secretary and Director - ---------- (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. The Corporation does not have an Executive Committee. As a result of the approval of the classification of the board, the term of office of the directors is as follows: John J. Wilk and Vincent Cusumano, each of whom will serve until the next meeting of stockholders; Earle Kunzig and Jay Smolyn, each of whom will serve for a two-year term; and Steven J. Wilk, Raymond J. Rekuc and Susan M. Wilk, each of whom will serve for a three-year term. 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. -16- JOHN J. WILK*, 76, 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*, 47, 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, 48, has been employed at TransNet since 1976 and in April 1985 became Vice President, Operations. He was elected as a director of TransNet in March 1990. VINCENT CUSUMANO, 68, 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, 65, 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, 58, 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 2004, 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 is attached as an exhibit to this Form 10-K. A copy of the Code of Ethics is available at no cost by writing to: -17- TransNet Corporation, Attn: Investor Relations, 45 Columbia Road, Somerville, New Jersey 08876. 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, 2004, 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, 2004, 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
Long-Term Annual Compensation 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 2004 $300,000 $0 $0 0 0 $0 0 President and Chief 2003 $300,000 $0 $0 0 0 $0 0 Executive Officer 2002 $300,000 $40,678 $0 0 0 $0 0 Jay Smolyn 2004 $180,000 $0 $0 0 0 $0 0 Vice President 2003 $165,000 $0 $0 0 0 $0 0 Operations 2002 $165,000 $31,475 $0 0 0 $0 0
OPTION GRANTS IN LAST FISCAL YEAR (individual grants) No options were granted during fiscal 2004. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to the Named Executive Officer concerning the exercise of options during fiscal 2004 and the number and value of unexercised options held as of the end of fiscal 2004.
Value of Number of Securities Unexercised Underlying In-the-Money Unexercised Options Options at Fiscal Number of at Fiscal Year End; Year End ($); Name of Shares Acquired Value (Exercisable/ (Exercisable/ Executive Officer on Exercise Realized ($) Unexercisable) Unexercisable) - ----------------- --------------- ------------ -------------------- ----------------- Steven J. Wilk 0 0 100,000/0 $97,000/0 Jay A. Smolyn 0 0 50,000/0 $48,500/0
EMPLOYMENT CONTRACTS WITH EXECUTIVE OFFICERS TransNet has employment contracts in effect with Steven J. Wilk and Jay A. Smolyn which 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 -18- greater amount as may be approved from time to time by the Board of Directors. The contracts also provide for additional incentive bonuses to be paid with respect to each of the Corporation's fiscal years based upon varying percentages of the Corporation's consolidated pre-tax income exclusive of extraordinary items (3% of the first $500,000, 4% of the next $500,000, 5% of the next $4,000,000 and 6% of amounts in excess of $5,000,000 for Steven J. Wilk, and 2% of pre-tax income in excess of $100,000 to the first $500,000 and 3% in excess of $500,00 for Mr. Smolyn). Steven J. Wilk's employment contract provides for a continuation of full amount of salary payments for 6 months and 50% of the full amount for the remainder of the term in the event of illness or injury. In addition, the employment contracts contain terms regarding the event of a hostile change of control of the Corporation and a resultant termination of the employee's employment prior to expiration of the employment contract. These terms provide that Mr. Smolyn would receive a lump sum payment equal to 80% of the greater of his then current annual salary or his previous calendar year's gross wages including the additional incentive compensation multiplied by the lesser of five or the number of years remaining in the contract. In the case of Steven J. Wilk, the contract provides that in the event of termination of employment due to a hostile change in control, he may elect to serve as consultant at his current salary and performance bonus for a period of five years beginning at the date of the change in control, or he may elect to receive a lump sum payment which would be the greater of 80% of his then current salary or 80% of his previous year's gross wages times five. The contract for Mr. Smolyn provides that the Corporation may terminate his employment, with or without cause. If said termination is without cause, the Corporation shall pay the Employee an amount equal to compensation payable for a period of one-half of the contract period remaining, not to exceed compensation for 18 months. Steven J. Wilk's employment agreement provides that should the Corporation terminate his employment (other than for the commission of willful criminal acts), he may elect to continue as a consultant to the Corporation at his then current compensation level, including the performance bonus, for the lesser of two (2) years or the remainder of the contract term or he may elect to receive a lump sum payment equal to eighty percent of his then current salary plus incentive bonus times the lesser of two (2) years or the remainder of the contract. DIRECTORS' COMPENSATION 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 2004, 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. -19- Awards under the Plan may be made or granted to employees, officers, directors and consultants, as selected by the Board. The Plan is administered by the entire Board of Directors. All full-time employees and officers of the Company are eligible to participate in the Plan. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Name of Beneficial Amount of Shares Percent of Owner Beneficially Owned Class (a) - ----- ------------------ --------- Steven J. Wilk (b) 487,000 (c) 8% John J. Wilk (b) 225,500 (d) 4% Jay A. Smolyn (b) 133,000 (e) 2% Susan M. Wilk (b) 108,200 (f) 2% Vincent Cusumano (b) 15,000 (g) * Earle Kunzig (b) 20,000 (h) * Raymond J. Rekuc (b) 15,000 (i) * All officers and directors 1,003,700 21% as a group (seven persons) - ---------- * Less than 1%. (a) Based on 4,805,804 shares of the Company's Common Stock outstanding, plus 275,000 shares of Common Stock issuable upon exercise of outstanding options exercisable within 60 days. (b) The address of all officers and directors is 45 Columbia Road, Somerville, New Jersey 08876. (c) Includes 100,000 shares that Mr. Wilk is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Company's 2000 Stock Option Plan. The exercise price is $0.88 per share. (d) Includes 50,000 shares that Mr. Wilk is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Company's 2000 Stock Option Plan. The exercise price is $0.88 per share. (e) Includes 50,000 shares that Mr. Smolyn is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Company's 2000 Stock Option Plan. The exercise price is $0.88 per share. (f) Includes 30,000 shares that Ms. Wilk is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Corporation's 2000 Stock Option Plan. The exercise price is $0.88 per share. (g) Includes 15,000 shares that Mr. Cusumano is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Company's 2000 Stock Option Plan. The exercise price is $0.88 per share. (h) Includes 15,000 shares that Mr. Kunzig is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Company's 2000 Stock Option Plan. The exercise price is $0.88 per share. (i) Includes 15,000 shares that Mr. Rekuc is entitled to purchase upon the exercise of incentive stock options. The options were granted on March 4, 2001 under the Company's 2000 Stock Option Plan. The exercise price is $0.88 per share. -20- 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, 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 May 2004, a new lease was executed by East Coast and the Corporation. The annual rental payment to be made by the Corportion to East Coast in 2004 will be $165,719. See Footnote 7[A] to the Consolidated Financial Statements for additional information. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The following table shows the fees paid or accrued by the Company for the audit and other services provided by Moore Stephens for fiscal 2003 and 2002. Fees for fiscal 2004 were not yet finalized and therefore not available. 2003 2002 ------- ------- AUDIT FEES $59,300 $59,075 AUDIT RELATED FEES $7,500 $2,000 TAX FEES $7,116 $9,000 ALL OTHER FEES 0 0 TOTAL $73,916 $70,075 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. -21- 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, 2004 and June 30, 2003. o Consolidated Statements of Operations for the Years Ended June 30, 2004, 2003 and 2002. o Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2004, 2003 and 2002. o Consolidated Statements of Cash Flows for the Years Ended June 30, 2004, 2003 and 2002. o Notes to Consolidated Financial Statements 3. EXHIBITS o 10.6 Lease between TransNet Corporation and East Coast Management, LLC o 14 Code of Ethics 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 Corporation for premises at June 30, 1991 45 Columbia Road, Somerville (Branchburg), New Jersey 10.2 February 1, 1996 amendment to Exhibit 10.2 to Annual Report on Lease Agreement between W. Realty Form 10-K for year ended and the Corporation for premises at June 30, 1996 45 Columbia Road, Somerville, New Jersey 10.3 Employment Agreements expiring Exhibit 10.3 to Annual Report on on June 30, 2005 with Steven J. Wilk Form 10-K for year ended and Jay A. Smolyn June 30, 2001 -22- 10.4 Form of Rights Agreement dated Exhibit to Current Report on Form as of February 6, 1990 between 8-K for January 25, 1990 TransNet and The Trust Company of New Jersey, as Rights Agent 10.5 Acquisition Agreement dated Exhibit to Current Report on Form March 6, 1990 between TransNet and 8-K for March 6, 1990 Selling Stockholders of Round Valley Computer Center, Inc. (b) REPORTS ON FORM 8-K On April 28, 2004, TransNet Corporation filed a Form 8-K on Item 9 to report that it issued a press release announcing the declaration of a special dividend to shareholders. On May 13, 2004 the Corporation filed 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, 2004. (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 -23- 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, 2004 By /s/ Steven J. Wilk --------------------------------------- Steven J. Wilk Chief Executive Officer Date: September 27, 2004 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, 2004 - ---------------------------------------------- Steven J. Wilk, Director By /s/ John J. Wilk Date: September 27, 2004 - ---------------------------------------------- John J. Wilk, Director By /s/ Jay A. Smolyn Date: September 27, 2004 - ---------------------------------------------- Jay A. Smolyn, Director By /s/ Raymond J. Rekuc Date: September 27, 2004 - ---------------------------------------------- Raymond J. Rekuc, Director By /s/ Vincent Cusumano Date: September 27, 2004 - ---------------------------------------------- Vincent Cusumano, Director By /s/ Earle Kunzig Date: September 27, 2004 - ---------------------------------------------- Earle Kunzig, Director By /s/ Susan M. Wilk Date: September 27, 2004 - ---------------------------------------------- Susan M. Wilk, Director -24- 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, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three fiscal years in the period ended June 30, 2004. 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, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 2004, in conformity with U.S. generally accepted accounting principles. MOORE STEPHENS, P. C. Certified Public Accountants. Cranford, New Jersey August 4, 2004 F-1 TRANSNET CORPORATION AND SUBSIDIARY - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
JUNE 30, -------- 2 0 0 4 2 0 0 3 ------- ------- ASSETS: CURRENT ASSETS: Cash and Cash Equivalents $ 7,064,644 $ 6,935,623 Accounts Receivable - Net 3,902,458 5,669,313 Inventories - Net 1,131,503 392,774 Other Current Assets -- 16,572 Deferred Tax Asset 195,649 195,649 ------------ ------------ TOTAL CURRENT ASSETS 12,294,254 13,209,931 PROPERTY AND EQUIPMENT - NET 438,251 444,969 OTHER ASSETS 231,104 247,750 ------------ ------------ TOTAL ASSETS $ 12,963,609 $ 13,902,650 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts Payable $ 364,228 $ 382,813 Accrued Expenses 210,022 184,744 Income Taxes Payable 9,826 19,426 Floor Plan Payable 1,052,021 549,826 ------------ ------------ TOTAL CURRENT LIABILITIES 1,636,297 1,136,809 ------------ ------------ DEFERRED TAX LIABILITY 30,976 30,976 ------------ ------------ COMMITMENTS AND CONTINGENCIES -- -- ------------ ------------ STOCKHOLDERS' EQUITY: Capital Stock - Common, $.01 Par Value, Authorized 15,000,000 Shares; Issued 7,391,074 Shares at June 30, 2004 and 7,469,524 at June 30, 2003 [of which 2,585,220 and 2,694,720 are in Treasury at June 30, 2004 and 2003] 73,910 74,695 Additional Paid-in Capital 10,559,445 10,686,745 Retained Earnings 7,816,016 9,281,625 ------------ ------------ Totals 18,449,371 20,043,065 Less: Treasury Stock - At Cost (7,152,835) (7,308,200) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 11,296,536 12,734,865 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,963,609 $ 13,902,650 ============ ============
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 4 2 0 0 3 2 0 0 2 ------- ------- ------- REVENUE: Equipment $15,636,812 $15,942,197 $ 33,258,828 Services 14,962,852 16,856,823 17,633,266 ----------- ----------- ------------- TOTAL REVENUE 30,599,664 32,799,020 50,892,094 ----------- ----------- ------------- COST OF REVENUE: Equipment 14,112,956 14,634,965 31,030,909 Services 11,728,379 12,658,163 11,889,348 ----------- ----------- ------------- TOTAL COST OF REVENUE 25,841,335 27,293,128 42,920,257 ----------- ----------- ------------- GROSS PROFIT 4,758,329 5,505,892 7,971,837 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,957,851 6,776,975 6,986,974 ----------- ----------- ------------- OPERATING [LOSS] INCOME (1,199,522) (1,271,083) 984,863 ----------- ----------- ------------- INTEREST INCOME: Interest Income 69,973 58,454 64,385 Interest Income - Related Party -- -- 6,700 ----------- ----------- ------------- TOTAL INTEREST INCOME 69,973 58,454 71,085 ----------- ----------- ------------- [LOSS] INCOME BEFORE INCOME TAX EXPENSE (1,129,549) (1,212,629) 1,055,948 INCOME TAX EXPENSE -- -- 385,451 ----------- ----------- ------------- NET [LOSS] INCOME $(1,129,549) $(1,212,629) $ 670,497 =========== =========== ============= BASIC AND DILUTED NET [LOSS] INCOME PER COMMON SHARE $ (.24) $ (.25) $ .14 =========== ========== ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC 4,779,973 4,774,804 4,774,804 =========== =========== ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED 4,779,973 4,774,804 4,927,225 =========== =========== =============
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 - JUNE 30, 2001 7,469,524 $ 74,695 $ 10,686,745 $ 9,823,757 (2,694,720) $(7,308,200) $ 13,276,997 Net Income -- -- -- 670,497 -- -- 670,497 ------------ ------------ ------------ ------------ ----------- ------------ ------------ BALANCE - JUNE 30, 2002 7,469,524 74,695 10,686,745 10,494,254 (2,694,720) (7,308,200) 13,947,494 Net [Loss] -- -- -- (1,212,629) -- -- (1,212,629) ------------ ------------ ------------ ------------ ----------- ------------ ------------ BALANCE - JUNE 30, 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 Declared -- -- -- (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 ============ ============ ============ ============ =========== ============ ============
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 4 2 0 0 3 2 0 0 2 ------- ------- ------- OPERATING ACTIVITIES: Net [Loss] Income $ (1,129,549) $ (1,212,629) $ 670,497 ------------ ------------ ------------ Adjustments to Reconcile Net [Loss] Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 164,352 194,326 196,111 Loss on Sale of Equipment -- -- 8,795 Provision for Doubtful Accounts 5,000 (7,000) (4,272) Deferred Income Taxes -- -- 61,678 Changes in Assets and Liabilities: [Increase] Decrease in: Accounts Receivable 1,761,855 1,891,614 16,447 Inventories (738,729) 222,872 1,271,342 Other Current Assets 16,572 97,153 11,633 Other Assets 15,646 (10,661) (16,591) Increase [Decrease] in: Accounts Payable and Accrued Expenses 6,693 (387,142) (130,069) Other Current Liabilities -- (149,808) (70,743) Income Taxes Payable (9,600) (209,265) (82,288) ------------ ------------ ------------ Total Adjustments 1,221,789 1,642,089 1,262,043 ------------ ------------ ------------ NET CASH - OPERATING ACTIVITIES 92,240 429,460 1,932,540 ------------ ------------ ------------ INVESTING ACTIVITIES: Capital Expenditures (156,634) (54,805) (243,456) Mortgage Receivable Proceeds - Related Party -- -- 250,000 ------------ ------------ ------------ NET CASH - INVESTING ACTIVITIES (156,634) (54,805) 6,544 ------------ ------------ ------------ FINANCING ACTIVITIES: Floor Plan Payable - Net 502,195 (474,681) (1,204,645) Stock Options Exercised 27,280 -- -- Dividends Paid (336,060) -- -- ------------ ------------ ------------ NET CASH - FINANCING ACTIVITIES 193,415 (474,681) (1,204,645) ------------ ------------ ------------ NET [DECREASE] INCREASE IN CASH AND CASH EQUIVALENTS 129,021 (100,026) 734,439 CASH AND CASH EQUIVALENTS - BEGINNING OF YEARS 6,935,623 7,035,649 6,301,210 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS - END OF YEARS $ 7,064,644 $ 6,935,623 $ 7,035,649 ============ ============ ============
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 4 2 0 0 3 2 0 0 2 ------- ------- ------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the years for: Interest $ -- $ -- $ -- Income Taxes $ -- $ -- $ 340,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: During fiscal 2004, the Company retired 109,500 shares of common stock held in treasury with a cost basis of $155,366. In addition, the Company traded-in an automobile with no book value on a new auto purchase for $25,000. During fiscal 2002, the Company traded-in automobiles with a book value of $33,790 in exchange for a trade-in value of approximately $25,000. 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. Through its own sales and service departments, TransNet provides information technology and network solutions for its customers by combining value-added professional technical services with the sale of PC hardware, network products, IP telephony products, computer peripherals and software. As used herein, the term "Company" shall refer to TransNet and where the context requires, shall include TransNet and its wholly-owned subsidiary, Century American Corporation. Century American Corporation, formerly a leasing subsidiary, is currently inactive. The sale and service of IT is highly competitive and may be affected by rapid changes in technology and spending habits in both the business and institutional sectors. [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [A] CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Century American Corporation. Intercompany transactions and accounts have been eliminated in consolidation. [B] CASH AND CASH EQUIVALENTS - Cash equivalents are comprised of certain highly liquid investments with a maturity of three months or less when purchased [See Note 3]. [C] ACCOUNTS RECEIVABLE - Accounts receivable have been reduced by an allowance for doubtful accounts of approximately $105,000 and $100,000 as of June 30, 2004 and 2003, respectively. The receivables secure a floor plan agreement [See Note 7C]. [D] INVENTORIES - The Company's inventory is valued at the lower of cost [determined on the moving average-cost basis] or market. Inventory has been reduced by an allowance of $30,000 and $45,000 at June 30, 2004 and 2003, 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 - Revenue is recognized at time of shipment for equipment sold directly to customers. Revenues from non-contracted customer support services are recognized as services are provided. The Company offers contracted support service agreements to its customers. Services under support contracts, are generally provided ratably over the term of the customer support contracts and are included in services revenue in the accompanying statements of operations. [H] EARNINGS PER SHARE - Basic earnings per share is based on the weighted average number of common shares outstanding without consideration of common stock equivalents. Diluted earnings per share is based on the weighted average number of common and common equivalent shares outstanding. The calculation of common equivalent shares issued takes into account the shares that may be issued upon exercise of stock options, reduced by the shares that may be purchased with the funds received from the exercise, based on the average price during the year. Certain rights and options listed in Note 11 may be potentially dilutive in the future. [I] CREDIT RISK - Financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents and accounts receivable arising from its normal business activities. The Company routinely assesses the financial strength of its customers and based upon factors surrounding the credit risk of its customers establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowances is not significant. The Company places its cash with high credit financial institutions. The amount on deposit in any one institution that exceeds federally insured limits is subject to credit risks. As of June 30, 2004, the Company had approximately $502,000 which is subject to such risk. The Company does not require collateral or other security to support financial instruments subject to credit risk. [J] BUSINESS CONCENTRATIONS - The Company is engaged in the sale and technical support and service of local area networks, personal computer systems, and peripheral equipment, software, and supplies to companies and organizations located primarily in the New Jersey - New York City Metropolitan area and is currently an authorized dealer for several computer products manufacturers, including 3 Com, Apple, Cisco, Hewlett Packard, IBM, Intel, NEC, Nortel, Novell and Microsoft Corporation. If the Company were to lose any of its dealer authorizations or if it were to experience significant delays, interruptions or reductions in its supply of hardware and software, the Company's revenues and profits could be adversely affected. [K] ADVERTISING COSTS - The Company participates in cooperative advertising programs with its vendors, whereby the vendors absorb the costs of advertising. During the years ended June 30, 2004, 2003 and 2002, the Company incurred additional advertising expense of $-0-, $16,031 and $9,034, respectively. Advertising costs are expensed as incurred. [L] USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. [M] RECLASSIFICATION - Certain prior year amounts have been reclassified to conform to the 2004 presentation. [N] STOCK OPTIONS ISSUED TO EMPLOYEES - The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," for financial note disclosure purposes and continues to apply the intrinsic value method of Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees," for financial reporting purposes. F-8 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3 - -------------------------------------------------------------------------------- [2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED] [O] DEFERRED INCOME TAXES - Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. [P] IMPAIRMENT - Certain long-term assets of the Company are reviewed quarterly as to whether their carrying value has become impaired, pursuant to guidance established in Statement of Financial Accounting Standards ["SFAS"] No. 144, "Accounting for the Impairment or disposal of Long-Lived Assets." Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations [undiscounted and without interest charges]. If impairment is deemed to exist, the assets will be written down to fair value. Management also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. [3] REPURCHASE AGREEMENTS Repurchase agreements included in cash equivalents as of June 30, 2004 and 2003 consisted of: Cost Fair Value ---- ---------- June 30, 2004: Repo .60%, Due July 1, 2004 $ 1,446,885 $ 1,449,296 This security is backed by $1,480,000 of F.H.R. bonds maturing June 18, 2028 with an interest rate of 5.00%. Repurchase agreements included in cash equivalents as of June 30, 2004 and 2003 consisted of: Cost Fair Value ---- ---------- June 30, 2003: Repo .60%, Due July 1, 2003 $ 1,510,171 $ 1,510,228 This security is backed by $1,480,000 of F.H.R. bonds maturing June 18, 2028 with an interest rate of 5.00%. [4] INVENTORIES Inventories consist of the following at June 30, 2004 and 2003: June 30, -------- 2 0 0 4 2 0 0 3 ------- ------- Product Inventory $ 1,068,813 $ 239,359 Service Parts 62,690 153,415 ------------ ------------ TOTALS $ 1,131,503 $ 392,774 ------ ============ ============ F-9 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4 - -------------------------------------------------------------------------------- [5] PROPERTY, EQUIPMENT, DEPRECIATION AND AMORTIZATION Property and equipment and accumulated depreciation and amortization as of June 30, 2004 and 2003 are as follows: June 30, -------- 2 0 0 4 2 0 0 3 ------- ------- Automobiles $ 267,602 $ 253,574 Office Equipment 1,888,502 1,816,159 Furniture and Fixtures 321,161 321,161 Leasehold Improvements 273,102 273,102 ------------- ------------ Totals 2,750,367 2,663,996 Less: Accumulated Depreciation and Amortization 2,312,116 2,219,027 ------------- ------------ PROPERTY AND EQUIPMENT - NET $ 438,251 $ 444,969 ---------------------------- ============= ============ Total depreciation and amortization expense amounted to $160,961, $193,326 and $182,140 for the years ended June 30, 2004, 2003 and 2002, respectively. [6] INTANGIBLE ASSETS The following intangible assets and accumulated amortization as of June 30, 2004 and 2003 are included in other assets:
JUNE 30, 2004: WEIGHTED AVERAGE NET OF AMORTIZATION ACCUMULATED ACCUMULATED INTANGIBLE ASSETS PERIOD YEARS COST AMORTIZATION AMORTIZATION - ----------------- ------------ ---- ------------ ------------ Licenses 20 $ 20,000 $ 15,833 $ 4,167 Goodwill -- 259,422 159,976 99,446 ---------- ------------ ------------ TOTALS 20 $ 279,422 $ 175,809 $ 103,613 ------ ========== ============ ============ JUNE 30, 2003: WEIGHTED AVERAGE NET OF AMORTIZATION ACCUMULATED ACCUMULATED INTANGIBLE ASSETS PERIOD YEARS COST AMORTIZATION AMORTIZATION - ----------------- ------------ ---- ------------ ------------ Licenses 20 $ 20,000 $ 14,833 $ 5,167 Goodwill -- 259,422 159,976 99,446 ---------- ------------ ------------ TOTALS 20 $ 279,422 $ 174,809 $ 104,613 ------ ========== ============ ============
F-10 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5 - -------------------------------------------------------------------------------- [6] INTANGIBLE ASSETS [CONTINUED] The estimated amortization expense related to intangible assets for each of the five succeeding fiscal years and thereafter as of June 30, 2004 is a follows: YEAR ENDED JUNE 30, - ---------- 2005 $ 1,000 2006 1,000 2007 1,000 2008 1,000 2009 167 Thereafter -- ----------- TOTAL $ 4,167 ----- =========== For the years ended June 30, 2004, 2003 and 2002, amortization expense of intangible assets were $1,000, $1,000 and $13,971, respectively. [7] 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 rent payments of $165,719 per annum for the first two years of the agreement, and $185,605 per annum for the remaining 5 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 $155,620, $133,856 and $121,918 for the years ended June 30, 2004, 2003 and 2002, respectively. The Company maintains two operating leases for several pieces of office equipment that expire in 2005 and 2007. Office equipment lease expense, including contingent usage charges, was $13,517, $12,977 and $11,740 for the years ended June 30, 2004, 2003 and 2002, 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 -------- ------ --------- 2005 $ 165,719 $ 10,860 2006 172,348 7,010 2007 185,605 5,550 2008 185,605 -- 2009 185,605 -- Thereafter 309,342 -- ------------ ------------ TOTALS $ 1,204,224 $ 23,420 ------ ============ ============ Total rent expense was $179,233, $178,691 and $179,482 for the years ended June 30, 2004, 2003 and 2002, respectively. F-11 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6 - -------------------------------------------------------------------------------- [7] COMMITMENTS AND RELATED PARTY TRANSACTIONS [CONTINUED] [B] EMPLOYMENT AGREEMENTS - Effective July 1995, the Company entered into five [5] year employment agreements with two officers of the Company which provide for salaries of $135,000 and $250,000. In January 2001, these two employment agreements were renewed for an additional five [5] year period through June 2005. Provisions of the renewed agreements provide for annual salaries of $165,000 and $300,000. In addition, the renewed agreements continue to provide for a "Performance Bonus" based on percentages of two (2) to six (6) percent applied to certain levels of the Company pre-tax profits. The bonus expense recorded was approximately $-0-, $-0- and $72,000 for the years ended June 30, 2004, 2003 and 2002, respectively. In November 2003, the Company executed an addendum to the employment agreements which extend the provisions of the agreement through June 2008. 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, 2004, the Company had a maximum credit line of $4,500,000, of which $3,447,979 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, 2004 and 2003 was $1,052,021 and $549,826, 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 2004, 2003 and 2002. Accordingly, no interest expense has been incurred for the years ended June 30, 2004, 2003 and 2002. The prime rate and the weighted average interest rate were approximately 4.25%, 4.00% and 4.75%, respectively at June 30, 2004, 2003 and 2002. [8] INCOME TAXES The provision for income taxes is summarized as follows: Years ended June 30, -------- 2 0 0 2 ------- Federal: Current $ 257,636 Deferred 52,635 ------------ Federal Provision 310,271 ------------ State: Current 65,891 Deferred 9,289 ------------ State Provision 75,180 ------------ INCOME TAX EXPENSE $ 385,451 ------------------ ============ Deferred income taxes arise from temporary differences including depreciation, inventory reserves, allowance for doubtful accounts and expense accruals. F-12 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7 - -------------------------------------------------------------------------------- [8] INCOME TAXES [CONTINUED] The deferred tax asset and liability in the accompanying consolidated balance sheets include the following components: JUNE 30, -------- 2 0 0 4 2 0 0 3 ------- ------- Net Operating Loss [NOL] Carry Forwards $ 972,020 $ 551,638 Accounts Receivable Allowance 42,000 40,000 Inventory Allowance 12,000 18,000 Accrued Expenses 27,876 10,500 Other Temporary Differences 23,270 54,717 ------------- ------------- Deferred Tax Assets [Current] 1,077,166 674,855 Valuation Allowance (881,517) (479,206) ------------- ------------- NET DEFERRED TAX ASSET $ 195,649 $ 195,649 ---------------------- ============= ============= Deferred Tax Liabilities [Non-Current]: Depreciation and Amortization $ 30,976 $ 30,976 ============= ============= 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 deferred tax asset considered realizable. Could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. At June 30, 2004, the Company had approximately $2,430,000 of federal and state net operating losses with the following fiscal year expiration dates. YEAR ENDED JUNE 30, - ---------- 2023 $ 1,379,000 2024 1,051,000 ------------ TOTAL $ 2,430,000 ----- ============ For the years ended June 30, 2004 and 2003, the Company increased the valuation allowance on the deferred tax asset by $402,311 and $479,206, respectively. The following is a reconciliation of income taxes at the U.S. statutory tax rate to the taxes actually provided:
Y e a r s e n d e d ---------------------------------------- J u n e 3 0, ---------------------------------------- 2 0 0 4 2 0 0 3 2 0 0 2 ------- ------- ------- U.S. Statutory Rate Applied to Pretax Income (35.0)% (35.0)% 32.0% State Taxes -- -- 5.3 Other Permanent Differences -- -- (1.0) Effect of Valuation Allowance 35.0 35.0 (1.0) ----------- ----------- ---------- INCOME TAX EXPENSE --% -- 36.3% ------------------ =========== =========== ==========
F-13 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8 - -------------------------------------------------------------------------------- [9] EARNINGS PER SHARE The following table reconciles the denominator of the diluted earnings per share computation as shown in the consolidated statement of operations.
YEARS ENDED JUNE 30, ------------------------------------------------ 2 0 0 4 2 0 0 3 2 0 0 2 ------- ------- ------- Diluted EPS Calculation: Weighted Average Basic Common Shares Outstanding 4,779,973 4,774,804 4,774,804 Weighted Average Effect of Common Stock Options -- -- 152,421 ------------- ------------- ------------- WEIGHTED AVERAGE DILUTED COMMON AND COMMON EQUIVALENT SHARES 4,779,973 4,774,804 4,927,225 ------------------------ ============= ============= =============
Diluted EPS presented for the years ended June 30, 2004 and 2003 does not include the effect of common stock options because the result would be anti-dilutive. As of July 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," earlier than required. In accordance with the provisions of SFAS No. 142, the Company discontinued the periodic amortization of goodwill, but is now required to annually review the goodwill for potential impairment. Had SFAS No. 142 been effective in the comparative prior periods, the following adjusted results of operations would have been achieved.
YEARS ENDED JUNE 30, ------------------------------------------ 2 0 0 4 2 0 0 3 2 0 0 2 ------- ------- ------- Net Income: Reported Net [Loss] Income $(1,129,549) $ (1,212,629) $ 670,497 Add Back: Goodwill Amortization -- -- 12,971 ----------- ------------ ------------ Adjusted Net [Loss] Income $(1,129,549) $ (1,212,629) $ 683,468 =========== ============ ============ Basic Earnings Per Share: Reported Net [Loss] Income $ (.24) $ (.25) $ .14 Goodwill Amortization -- -- -- ------------ ------------ ------------ Adjusted Net [Loss] Income $ (.24) $ (.25) $ .14 =========== ============ ============ Dilute Earnings Per Share: Reported Net [Loss] Income $ (.24) $ (.25) $ .14 Goodwill Amortization -- -- -- ------------ ------------ ------------ ADJUSTMENT NET [LOSS] INCOME $ (.24) $ (.25) $ .14 =========== ============ ============
[10] DEFINED CONTRIBUTION PLANS The Company adopted a defined contribution [401(k)] plan covering all eligible employees. Under the terms of the Plan, participating employees elect to contribute a portion of their salaries to the Plan. The Company matches up to a certain percentage of the employees' contribution. Expense for the years ended June 30, 2004, 2003 and 2002 was $71,211, $46,140 and $47,856, respectively. F-14 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9 - -------------------------------------------------------------------------------- [11] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN On February 6, 1990, the Board of Directors adopted a Stockholders' Rights Plan, which entitles the Right holder, upon the occurrence of specified triggering events, i.e., the acquisition by a person or group of beneficial ownership of 20% or more of outstanding shares; the commencement of a tender offer for 20% or more of outstanding shares [unless an offer is made for all outstanding shares at a price deemed by the Continuing Board to be fair and in the best interest of stockholders] and the determination by the Board that a person is an "Adverse Person," as defined in the Rights Agreement to purchase one share of common stock at an exercise price of $7.50 per share, or in certain "take over" situations, common stock equal in value to two times the exercise price. Subsequent to a triggering event, if the Company is acquired in a merger or other business transaction in which the Company is not the surviving corporation [unless Board approved], or 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right shall have the right to receive upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. The Rights may be redeemed by the Company for $.01 per Right at any time prior to the determination of the Board that a person is an Adverse Person or ten days following a public announcement of the acquisition of, or commencement of a tender offer for, 20% of the outstanding common stock. The Rights initially expired in February 2000, but were extended to February 2010. No rights were outstanding under the Stockholders Rights Plan as of June 30, 2004. 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, 2001 362,000 $ .88 Granted -- -- Exercised -- -- Forfeited/Canceled -- -- ------------- -------------- Outstanding - June 30, 2002 362,000 .88 Granted -- -- Exercised -- -- Forfeited/Canceled (8,500) .88 ------------- -------------- Outstanding - June 30, 2003 353,500 .88 Granted -- -- Exercised (31,000) .88 Forfeited/Canceled -- -- ------------- -------------- OUTSTANDING - JUNE 30, 2004 322,500 $ .88 --------------------------- ============= ============== F-15 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #10 - -------------------------------------------------------------------------------- [11] 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, 2001 75,000 $ 1.59 Granted -- -- Exercised -- -- Forfeited/Canceled -- -- ------------- -------------- Outstanding - June 30, 2002 75,000 1.59 Granted -- -- Exercised -- -- Forfeited/Canceled -- -- ------------- -------------- Outstanding - June 30, 2003 75,000 1.59 Granted -- -- Exercised -- -- Forfeited/Canceled -- -- ------------- -------------- OUTSTANDING - JUNE 30, 2004 75,000 $ 1.59 - --------------------------- ============= ============== The following table summarizes information about stock options outstanding at June 30, 2004:
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 --------------- ---------- ---- ----- ---------- ----- $.88 322,500 6.5 $.88 225,750 $.88 $1.59 75,000 6.5 $1.59 75,000 $1.59
The exercise price for each of the above grants was determined by the Board of Directors of the Company to be equal to the fair market value of the common stock on the day of grant [110% of the fair market value for incentive stock option grants to holders of more than 10% of the voting stock of the Company]. Pursuant to the required pro forma disclosure under the fair value method of estimating compensation cost, the Company has estimated the fair value of its stock option grants by using the Black-Scholes option pricing method with the following weighted-average assumptions:
2 0 0 4 2 0 0 3 2 0 0 2 ------- ------- ------- Expected Option Term (Years) -- -- -- Risk-Free Interest Rate (%) -- -- -- Expected Volatility (%) -- -- -- Dividend Yield (%) -- -- -- Weighted Average Fair Value of Options Granted $ -- $ -- $ --
F-16 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11 - -------------------------------------------------------------------------------- [11] STOCKHOLDERS' RIGHTS PLAN AND 2000 STOCK OPTION PLAN [CONTINUED] The Company applies APB Opinion No. 25 and the related Interpretations for stock options issued employees. Accordingly, no compensation cost has been recognized for option grants. Had compensation cost for these awards been determined based on the fair value at the grant dates consistent with the method prescribed by SFAS No. 123, the Company's net income would have been adjusted to the pro forma amounts indicated below:
2 0 0 4 2 0 0 3 2 0 0 2 ------- ------- ------- Net [Loss] Income: As Reported $ (1,129,549) $ (1,212,629) $ 670,497 Compensation Expense for Stock Options -- -- -- ------------- ------------- ------------ Pro Forma Net [Loss] Income $ (1,129,549) $ (1,212,629) $ 670,497 ============= ============= ============ Basic [Loss] Earnings Per Share as Reported $ (.24) $ (.25) $ .14 Pro Forma Basic [Loss] Earnings Per Share $ (.24) $ (.25) $ .14 Diluted [Loss] Earnings Per Share as Reported $ (.24) $ (.25) $ .14 Pro Forma Diluted [Loss] Earnings Per Share $ (.24) $ (.25) $ .14
[12] CONTINGENCIES Management has been notified of an unasserted possible claim or assessment involving the Company's pension plan. The pension plan was adopted in 1981 as a defined benefit plan. In 1989, various actions were taken by the Company to terminate the pension plan, to convert it to a defined contribution plan and to freeze benefit accruals. However, no filing for plan termination was made with the Pension Benefit Guaranty Corporation [the "PBGC"]. Additionally, a final amended and restated plan document incorporating the foregoing amendments and other required amendments including those required by the Tax Reform Act of 1986 have not been properly adopted. In addition, since 1989, it appears that certain operational violations occurred in the administration of the Plan including the failure to obtain spousal consents in certain instances where it was required. The Company decided to (i) take corrective action under the IRS Walk-in Closing Agreement Program ["CAP"], (ii) apply for a favorable determination letter with respect to the Plan from the IRS, and (iii) terminate the Plan. The CAP program provides a correction mechanism for "non-amenders" such as the Company. In addition, the Company will be required to correct, retroactively, operational violations, and to pay any resulting excise taxes and PBGC premiums and penalties that may be due. In December 2000, the Company made a contribution to the Plan along with payments of specified sanctions in connection with the IRS settlement. The Company is awaiting resolution with the PBGC. The Company from time to time becomes involved in various routine legal proceedings in the ordinary course of its business. Management of the Company believes that the legal matters mentioned above and the outcome of remaining pending legal proceedings and unasserted claims in the aggregate will not have a material effect on its consolidated statement of operations, consolidated balance sheet, or liquidity. F-17 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12 - -------------------------------------------------------------------------------- [13] 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. [14] SIGNIFICANT CUSTOMERS Significant customers who on an individual basis accounted for more than 10% of total revenues during fiscal 2004, 2003 and 2002 were as follows: YEARS ENDED -------------------------------------------------- JUNE 30, -------------------------------------------------- CUSTOMER 2 0 0 4 2 0 0 3 2 0 0 2 - -------- ------- ------- ------- A $ 6,732,000 $ 7,500,000 $ 6,500,000 B -- -- 16,000,000 --------------- ------------- ------------- $ 6,732,000 $ 7,500,000 $ 22,500,000 =============== ============= ============= Significant customers who on an dividual basis accounted for more than 10% of accounts receivable at June 30, 24 and 2003 were as follows: JUNE 30, -------- Customer 2 0 0 4 2 0 0 3 - -------- ------- ------- A $ 1,066,000 $ 1,415,000 B -- 515,000 C -- 545,000 --------------- ------------- $ 1,066,000 $ 2,475,000 =============== ============= [15] BUYING AGREEMENT During the year ended June 30, 2004 and 2003, the Company purchased approximately $6,000,000 and $6,250,000 of hardware from one vendor at discounted prices under a buying agreement. Should the buying agreement be terminated, the Company may not be able to obtain purchases from another supplier at comparable terms. F-18 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13 - -------------------------------------------------------------------------------- [16] 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. [17] NEW AUTHORITATIVE PRONOUNCEMENTS In May 2003, the Financial Accounting Standards Board (FASB) has issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement improves the accounting for certain financial instruments that under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. Statement No. 150 affects the issuer's accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type, which includes put options and forward purchase contracts, involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this Statement is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers' shares. Most of the guidance in Statement No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a material impact on the Company's results of operations or financial position. F-19 TRANSNET CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #14 - -------------------------------------------------------------------------------- [18] SELECTED QUARTERLY FINANCIAL DATA [UNAUDITED]
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 $ 9,848,432 $ 7,617,621 $ 7,596,887 $ 5,536,724 $ 30,599,664 Gross Profit $ 1,794,509 $ 1,409,232 $ 1,261,068 $ 293,520 $ 4,758,329 Net Income [Loss] $ 37,909 $ (190,898) $ (450,029) $ (526,531) $ (1,129,549) Net Income [Loss] Per Common Share: Basic and Diluted $ .01 $ (.04) $ (.09) $ (.12) $ (.24) THREE MONTHS ENDED ------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, FISCAL YEAR ------------- ------------ --------- -------- ----------- 2 0 0 2 2 0 0 2 2 0 0 3 2 0 0 3 2 0 0 3 ------- ------- ------- ------- ------- Net Revenues $ 9,634,231 $ 7,386,691 $ 6,855,853 $ 7,736,080 $ 32,799,020 Gross Profit $ 1,588,206 $ 1,314,724 $ 1,040,413 $ 1,041,083 $ 5,505,892 Net Income [Loss] $ 33,990 $ 343 $ (444,830) $ (609,611) $ (1,212,629) Net Income [Loss] Per Common Share: Basic and Diluted $ .01 $ -- $ (.09) $ (.13) $ (.25) THREE MONTHS ENDED ------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, FISCAL YEAR ------------- ------------ --------- -------- ----------- 2 0 0 1 2 0 0 1 2 0 0 2 2 0 0 2 2 0 0 2 ------- ------- ------- ------- ------- Net Revenues $17,076,390 $ 14,438,077 $ 9,607,548 $ 9,770,080 $ 50,892,095 Gross Profit $ 1,972,427 $ 2,084,809 $ 2,012,241 $ 1,901,672 $ 7,971,837 Net Income $ 225,960 $ 176,023 $ 132,625 $ 134,969 $ 670,497 Net Income Per Common Share Basic and Diluted $ .05 $ .04 $ .03 $ .02 $ .14
. . . . . . . . . . . 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 August 4, 2004 F-21 TRANSNET CORPORATION AND SUBSIDIARY - -------------------------------------------------------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2004, 2003 AND 2002. - --------------------------------------------------------------------------------
(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, 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 ------ ============ ============ ============ ============ Year Ended June 30, 2003 Allowance for Doubtful Accounts $ 107,000 $ -- $ (7,000) $ 100,000 Deferred Tax Asset Valuation Allowance -- 479,206 -- 479,206 Inventory Reserve 60,000 -- (15,000) 45,000 ------------ ------------ ------------ ------------ TOTALS $ 167,000 $ 479,206 $ (22,000) $ 624,206 ------ ============ ============ ============ ============ Year Ended June 30, 2002 Allowance for Doubtful Accounts $ 102,728 $ 4,272 $ -- $ 107,000 Deferred Tax Asset Valuation Allowance -- -- -- -- Inventory Reserve 60,000 -- -- 60,000 ------------ ------------ ------------ ------------ TOTALS $ 162,728 $ 4,272 $ -- $ 167,000 ------ ============ ============ ============ ============
F-22 EX-10.6 2 c33799_ex10-6.txt LEASE AGREEMENT BY AND BETWEEN: EAST COAST PROPERTY MANAGEMENT LLC "LANDLORD" AND TRANSNET CORPORATION, A DELAWARE CORPORATION "TENANT" PREMISES: 45 COLUMBIA ROAD LOT 11K, BLOCK 10 BRANCHBURG TOWNSHIP, NEW JERSEY DATED: April 28th, 2004 ---------------- THIS AGREEMENT, made this 28th day of April, 2004, by and between East Coast Property Management LLC, having an address at 16 Nottingham Way, Warren, NJ 07059 (the "Landlord") and TransNet Corporation, a Delaware Corporation, having an address at 45 Columbia Road, Somerville, NJ 08876 (the "Tenant"); WHEREAS, the Landlord intends to lease to the Tenant an industrial-type building containing approximately 21,246 square feet, outside to outside dimensions, located on and together with the premises hereinafter referenced (hereinafter the "Lease Premises:). NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that for the rents reserved, the mutual considerations herein and the parties mutually intending to be legally bound hereby, the Landlord does demise, lease and let unto the Tenant and the Tenant does rent and take from the Landlord the Leased Premises as described in ARTICLE 1, and the Landlord and Tenant do hereby mutually covenant and agree as follows: 1. LEASED PREMISES The Leased Premises shall consist of the industrial-type building containing approximately 21,246 square feet outside dimensions, located on and together with the lands known as Lot 11K, Block 10, Branchburg Township, New Jersey, together with all improvements to be constructed thereon by the Landlord for the use of the Tenant, together with and subject to all easements, improvements, tenements, appurtenances, hereditaments, fixture and rights and privileges appurtenant thereto. 2. TERM OF LEASE The Landlord leases unto the Tenant and the Tenant hires the Leased Premises for the term of seven (7) years, to commence on or about March 1, 2004, and to end on February 28, 2011. 3. RENT 3.1 The Tenant covenants and agrees to pay the annual rent ("Base Rent") as follows: (a) During the first and second years of the seven (7) year lease term, Base Rent shall be in the amount of ONE HUNDRED SIXTY-FIVE THOUSAND SEVEN HUNDRED EIGHTEEN AND 80/00 DOLLARS ($165,718.80) per annum, payable in equal installments of THIRTEEN THOUSAND EIGHT HUNDRED NINE AND 90/00 DOLLARS ($13,809.90) per month (the "Original Base Rent"). 2 (b) During the third through seventh years of the seven (7) year lease term, Base Rent shall be in the amount of ONE HUNDRED EIGHTY-FIVE THOUSAND SIX HUNDRED FIVE AND 05/00 DOLLARS ($185,605.05) per annum, payable in equal installments of FIFTEEN THOUSAND FOUR HUNDRED SIXTY-SEVEN AND 08/00 DOLLARS ($15,467.08) per month. (c) All of the foregoing monthly payments shall be made promptly in advance on the first day of each and every month during the term of the lease without demand and without offset or deduction, together with such additional rent and other charges required to be paid by Tenant as are hereinafter set forth. 3.2 Any installment of Base Rent accruing hereunder and any other sum payable hereunder by Tenant to Landlord, which is not paid prior to the FIFTH (5TH) business day of any lease month shall require payment by Tenant of a late charge of five ($.05) cents for each dollar of rental payment required, which payment shall be made in such event by Tenant with the required payment of Base Rent, if late, and which payment in any event shall be made by Tenant upon demand if not otherwise theretofore paid. 3.3 Tenant covenants and agrees that in the event of any material dispute with respect to the within Lease, its obligation to pay the rent shall continue without abatement notwithstanding any such dispute, and the Tenant agrees that it shall seek such remedies as the law may allow by way of plenary proceedings with respect to such issues in dispute. 3.4 Receipt and acceptance by Landlord of any Base Rent, additional rent and any other charge with knowledge of Tenant's default in any covenant or condition of this Lease shall not be deemed a waiver of such default. 3.5 Simultaneously with the execution hereof, the Tenant has delivered to the Landlord the first month's Base Rent payable hereunder, together with the security deposit referred to herein. 4. USE The Tenant covenants and agrees to use and occupy the Leased Premises for office and warehouse purposes only, which use by Tenant, however, is and shall be expressly subject to all applicable zoning ordinances, rules and regulations of any governmental boards or bureaus having jurisdiction hereof. The Tenant shall continue in full force and effect the current certificate of occupancy permitting Tenant's use and occupancy of the Leased Premises. In the event that any future improvements or changes require a new Certificate of Occupancy, the Tenant shall obtain same at its sole cost and expense. 3 5. CONDITION OF THE LEASED PREMISES Anything herein contained to the contrary notwithstanding, it is expressly understood and agreed that the Tenant shall take the Leased Premises and improvements as of the Commencement Date of the within Lease in an "as is" condition, without Landlord having any obligation to make any improvements or alterations therein. 6. COMPLIANCE WITH LAWS, RULES AND REGULATION 6.1(i) The Tenant covenants and agrees that upon acceptance and occupancy of the Leased Premises, it will, during the Lease term, promptly, at Tenant's cost and expense, execute and comply with all statutes, ordinances, rules, orders, regulations and requirements of the Federal, State and City Government and of any and all their departments and bureaus, applicable to the Leased Premises, as the same may require correction, prevention and abatement of nuisances, violations or other grievances, in, upon or connected with the Leased Premises, arising from the operations of the Tenant therein. (ii) The Tenant covenants and agrees, at its own cost and expense, to comply with such regulations or requests as may be required by the fire or liability insurance carriers providing insurance for the Leased Premises, and will further comply with such other requirements that may be promulgated by the Board of Fire Underwriters, in connection with the use and occupancy by the Tenant of the Leased Premises in the conduct of its business. (iii) The Tenant covenants and agrees that it will not commit any nuisance, nor permit the emission of any objectionable sound, noise or odors which would be violative of any applicable governmental rule or regulation or would per se create a nuisance. The Tenant further covenants and agrees that it will handle and dispose of all rubbish, garbage and waste in connection with the Tenant's operations in the Leased Premises in accordance with reasonable regulations established by the Landlord from time to time in order to keep the premises in an orderly condition and in order to avoid unreasonable emission of dirt, fumes, orders or debris which may constitute a nuisance or induce pests or vermin. 6.2 In case the Tenant shall fail or neglect to comply with the aforesaid statutes, ordinances, rules, orders, regulations and requirements of any of them, or in case the Tenant shall neglect or fail to make any necessary repairs, then the Landlord or the Landlord's agents may after fifteen (15) days' notice (except for emergency repairs, which may be made immediately) enter said premises and make said repairs and comply with any and all of the said statutes, ordinances, rules, orders, regulations 4 or requirements, at the cost and expense of the Tenant and in case of the Tenant's failure to pay therefore, the said cost and expense shall be added to the next month's rent and be due and payable as such, or the Landlord may deduct the same from the balance of any sum remaining in the Landlord's hands. This provision is in addition to the right of the Landlord to terminate this Lease by reason of any default on the part of the Tenant, subject to the rights of the Tenant as herein mentioned in the manner as in this Lease otherwise provided. 6.3 Without limiting anything herein contained in this ARTICLE 14, Tenant expressly covenants and agrees to fully comply with the provisions of the New Jersey Industrial Site Recovery Act (N.J.S.A. 13:1K-6, et seq.) hereinafter referred to as "ISRA", and all regulations promulgated thereto. Tenant agrees that it shall fully cooperate with Landlord in connection with any information or documentation which may be requested by the New Jersey Department of Environmental Protection. In the event that a cleanup of the Property is required in connection with the conduct by Tenant of its business in the Leased Premises, Tenant expressly covenants and agrees that it shall be responsible for that portion of said cleanup which is attributable to the Tenant's use and occupancy thereof. Tenant hereby represents and warrants that its Standard Industrial Classification No. is 5734, 7377 and 7378, and that Tenant shall not generate, manufacture, refine, transport, treat, store, handle or dispose of "hazardous substances" as the same are denied under ISRA and the regulations promulgated pursuant thereto. Tenant hereby agrees that it shall promptly inform Landlord of any change in its SIC number or the nature of the business to be conducted in the Leased Premises. The within covenants shall survive the expiration of earlier termination of the Lease term. 7. UTILITIES The Tenant shall, at its own cost and expense, pay all utility meter, deposit and service charges, including gas, sewer, electric, water and standby sprinkler charges, if any, together with janitorial service and garbage removal. 8. TAXES 8.1 The Tenant, in addition to the rent reserved, shall, during the term of the Lease, promptly pay (before any fine, penalty, interest or cost shall be added thereto), at its cost and expenses when the same shall be lawfully due and payable, all real estate and personal property taxes assessed against the Leased Premises for land, building and improvements, including such added assessment or omitted assessment, which may be levied against the Leased Premises for the year 2004, et seq., by the applicable governmental taxing authority, said obligation to be prorated as of the Commencement Date and as of the date of expiration hereunder as applicable. In addition to the obligation to pay real estate taxes as herein set forth, the Tenant shall, during the term of this Lease, pay at its costs 5 and expense any levy for the installation of local improvements affecting the Leased Premises as may be assessed by any governmental boards or bureaus having jurisdiction thereof. Any assessment or impositions for capital or public improvements, which may be payable by law at the option of the taxpayer in installments, may be so paid by the Tenant in installments, together with any required interest. The real estate tax obligation of the Tenant herein set forth shall include, if levied any tax or imposition which may be levied by any governmental authority, agency or subdivision thereof having jurisdiction applicable to parking lot usage. The Tenant agrees that it shall, within thirty (30) days after written demand by Landlord, furnish in writing to Landlord evidence of payment of the then current and applicable real estate taxes required to be paid by Tenant. 8.2 In the event the Tenant wishes to contest any assessment or levy of taxes on the premises herein demised, the Landlord covenants and agrees that it will lend its name and execute all necessary papers to aid the Tenant in contesting or litigating said assessment, provided, however, that said litigation or contest shall be at the cost and expense of the Tenant. Any resultant reduction or rebate of taxes, paid or to be paid by the Tenant, shall belong to Tenant. 8.3 If at any time during the term of this Lease the method or scope of taxation prevailing at the commencement of the Lease term shall be altered, modified or enlarged to as to cause the method of taxation to be changed, in whole or in parts, so that in substitution for the real estate taxes now assessed there may be, in whole or in part, a capital levy or other imposition based on the value of the premises, or the rents received therefrom, or some other form of assessment based in whole or in part on some other valuation of the Landlord's real property comprising the Leased Premises, then and in such event, such substituted tax or imposition shall be payable and discharged by the Tenant in the manner required pursuant to such law promulgated which shall authorize such change in the scope of taxation, and as required by the terms and conditions of the within Lease. 8.4 Nothing in this Lease contained shall require the Tenant to pay any franchise, estate, inheritance, succession, capital levy or transfer tax of the Landlord, or Federal Income Tax, State Income Tax, or excess profits or revenue tax, unless such taxes are in substitution for real property taxes as a result of such change in the manner and scope of taxation. Any substitute tax as herein referred to shall be computed as if the lease property were the sole property owned by the Landlord. 9. INSURANCE 9.1 The Tenant will, at its sole cost and expense, obtain for the benefit of the Landlord, wherein the Landlord shall be the named insured, fire and 6 casualty insurance with full extended coverage, including flood insurance if the Lease Premises are located in a flood hazard zone as designated by HUD, in an amount and value equivalent to the full replacement value of all the insurable improvements located on the lands forming a part of the Lease Premises, without any deductible clause exceeding $1,000.00, which policy of insurance shall include broad form boiler and machinery coverage (inclusive of air-conditioning system, if any), together with insurance coverage against sprinkler damage to the building and its improvements. For the purpose of this Lease, the initial replacement value shall be established at ONE MILLION EIGHT HUNDRED THOUSAND AND 00/00 DOLLARS ($1,800,000.00). The Landlord shall have the right from time to time to determine the full replacement value as may be required to comply with full replacement insurance requirements. The insurance to be obtained shall include casualty rent insurance payable to and insuring the interest of the Landlord as to the value of the rental obligation hereunder to the extent of one (1) year's gross rental value, (inclusive of real estate taxes and applicable insurance premiums). 9.2 The Tenant covenants and agrees that it will, at its sole cost and expense, carry liability insurance covering the Leased premises and in the minimum amount of THREE MILLION AND 00/00 DOLLARS ($3,000,000.00). Said policy shall be a single limit policy. The Tenant further covenants and agrees that it will add as a party insured by such policy the interest of the Landlord and will furnish Landlord with a certificate of said liability insurance prior to the commencement of the term of this Lease. The Tenant agrees that such insurance coverage will be maintained in full force and effect during the term of the Lease. 9.3 It is expressly understood and agreed that all policies of insurance shall contain a clause that the same shall not be cancelled except on ten (10) days' written notice to any and all parties in interest. 9.4 The parties hereto mutually covenant and agree that each party, in connection with insurance policies required to be furnished in accordance with the terms and conditions of this Lease, or in connection with insurance policies which they obtain insuring such insurable interest as Landlord or Tenant may have in its own properties, whether personal or real, shall expressly waive any right or subrogation on the part of the insurer against the Landlord or Tenant as the same may be applicable, which right to the extent not prohibited or violative of any such policy is hereby expressly waived, and Landlord and Tenant each mutually waive all right of recovery against each other, their agents or employees for any loss, damage or injury of any nature whatsoever to property or person for which either party has insurance coverage. 7 10. SIGNS The Tenant shall have the right and privilege of erecting on and at the Leased Premises only such signs as are required by Tenant for the purpose of identifying the Tenant, which signs must be approved by the Landlord in writing, which approval shall not be unreasonably withheld or delayed. The said signs shall comply with the applicable rules and regulations of the applicable governmental boards and bureaus having jurisdiction thereof. The erection of such signs shall not cause any structural damage to the building. It is expressly understood and agreed that the Tenant shall not erect roof signs. 11. FIXTURES 11.1 The Tenant is given the right and privilege of installing and removing property, equipment and fixtures in the Lease Premises during the term of the Lease. However, if the Tenant is in default and moves out, or is dispossessed, and fails to remove any property, equipment and fixtures or other property within (30) days after such default, dispossess or removal, then and in that event, the said property, equipment and fixtures or other property shall be deemed at the option of the Landlord, to be abandoned; or in lieu thereof, at the Landlord's option, the Landlord may remove such property and charge the reasonable cost and expense of removal and storage to the Tenant. 11.2 Anything to the contrary contained herein notwithstanding, it is expressly understood and agreed that the Tenant may install, connect and operate equipment as may be deemed necessary by the Tenant for its business, subject to compliance with applicable rules and regulations of governmental boards and bureaus having jurisdiction thereof. Subject to the terms and conditions of this Lease, the machinery, fixtures and equipment belonging to the Tenant shall at all times be considered and intended to be personal property of the Tenant, and not part of the realty, and subject to removal by the Tenant, provided at the time of such removal, that the Tenant is not in default pursuant to the terms and conditions of this Lease, and that the Tenant, at its own cost and expense, pays for any damage to the Leased Premises caused by such removal. 12. SECURITY Upon execution of this Lease, the Tenant shall deposit with the Landlord the sum of TWENTY-SEVEN THOUSAND SIX HUNDRED NINETEEN AND 80/00 DOLLARS ($27,619.80) AS SECURITY FOR THE FULL AND FAITHFUL PERFORMANCE OF THIS Lease upon the part of the Tenant to be performed. Upon termination of this Lease, and providing the Tenant is not in default hereunder and has performed all of the conditions of this Lease, the Landlord shall return the said sum of TWENTY-SEVEN THOUSAND SIX HUNDRED NINETEEN AND 80/00 DOLLARS ($27,619.80) to the Tenant. Anything herein contained to the contrary notwithstanding, it is expressly 8 understood and agreed that the said security deposit shall not bear interest. Tenant covenants and agrees that it will not assign, pledge, hypothecate, mortgage or otherwise encumber the aforementioned security during the term of this Lease. It is expressly understood and agreed that the Landlord shall have the right to co-mingle the security funds with its general funds and said security shall not be required to be segregated. 13. FIRE AND CASUALTY 13.1 In the case of any damage to or destruction of any of the buildings or structures on the Leased Premises by fire or other casualty occurring during the term of this Lease which is not covered by the insurance required to be carried by ARTICLE 9.1, or which cannot be repaired within one hundred eighty (180) days from the happening of such casualty, then, in such event, the term hereby created shall, at the option of either party, upon written notice to the other by certified mail, return receipt requested, within thirty (30) days of such fire or casualty, cease and become null and void from the date of such destruction or damage. However, if neither party shall elect to cancel this Lease within the thirty (30) day period hereinabove provided, the Landlord shall thereupon repair and restore the Leased Premises with reasonable speed and dispatch, and the rent shall not be accrued after said damage or while the repairs and restorations are being made, but shall recommence immediately after said premises are restored. Landlord, in any event, shall advise Tenant in writing as to whether or not the Leased Premises can be restored within the one hundred eighty (180) day period from the date of such casualty. Anything in this ARTICLE 13 to the contrary notwithstanding, it is expressly understood and agreed that the Landlord shall be obligated to restore the Leased Premises only to the extent of such cost as will be equivalent to the proceeds received by Landlord pursuant to the fire insurance coverage to be provided to Landlord as in ARTICLE 9 provided. If the insurance proceeds are not sufficient to restore the premises to substantially the same condition which they were in prior to the casualty, then the Landlord shall have a period of thirty (30) days within which to determine whether to terminate the term hereby created unless the Landlord and Tenant shall mutually agree to the funding of any such excess construction costs. In the event of cancellation in accordance with this Article, the Tenant shall immediately surrender the Leased Premises and the Tenant's interest in said Lease to the Landlord, and the Tenant shall only pay rent to the time of such destruction or damage, in which event, the Landlord may re-enter and repossess the Leased Premises thus discharged from this Lease and may removal all parties therefrom. 13.2 Nothing herein contained with respect to the Tenant's right to abate rent under proper conditions shall be construed to limit or affect the Landlord's right to payment under any claim for damages covered by the rent insurance policy pursuant to the contract therefore required to be provided pursuant to ARTICLE 9 of this Lease. 9 13.3 For the purposes of this ARTICLE 13, in determining what constitutes reasonable speed and dispatch, consideration shall be given for delays which would be excuses for non-performance as in ARTICLE 24 hereinafter provided (Force Majeure). 13.4 In the event of such fire or casualty as above provided, wherein the Landlord shall rebuild, the Tenant agrees, as its cost and expense, to forthwith remove any and all of its equipment, fixtures, stock and personal property as the same may be required to permit Landlord to expedite rebuilding and/or repair. In any event, the Tenant shall assume at its sole risk the responsibility for damage or security with respect to such fixtures and equipment in the event the building area where the same may be located has been damaged, until the building shall be restored and made secure. 13.5 Anything in this ARTICLE 13 to the contrary notwithstanding, it is expressly understood and agreed that wherever reconstruction shall be undertaken, in the event of damage or casualty as in this ARTICLE 13 provided, the Landlord shall prosecute such reconstruction with reasonable speed and dispatch. In the event, however, such reconstruction or repair shall not be completed within six (6) months from the date of such damage or casualty, then, in that event, the Tenant shall have the option at the expiration of the six (6) month period to terminate the Lease by notice in writing by Tenant to Landlord by certified mail, return receipt requested. In the event of such termination, neither party shall thereafter have any further liability, one to the other, in accordance with the terms and conditions of the Lease. The Landlord during such period of reconstruction shall give the Tenant reasonable notice at least thirty (30) days in advance of the date on which the building shall be ready for re-occupancy. 14. REPAIR AND MAINTENANCE 14.1 During the term of the Lease, and during the term of any renewals or extensions thereof, the Tenant shall, at its sole cost and expense, take good care of the Leased Premises, make any and all necessary repairs to the Leased Premises and shall, at the end of the expiration of the term, deliver up the Leased Premises in good order and condition. 14.2 The Tenant, at its cost and expense, shall (i) maintain, repair and replace the lawns, shrubbery, driveways and parking arrears; (ii) keep the parking area and driveways, sidewalks and steps of the Leased Premises free and clear of ice and snow; and (iii) keep the exterior of the Leased Premises free and clear of paper, and other debris so as to keep same in a good and orderly manner. 10 15. INSPECTION BY LANDLORD The Tenant agrees that the said Landlord's agents, and other representatives, shall have the right, during normal business hours, to enter into and upon the Leased Premises, or any part thereof, at all reasonable hours for the purpose of examining the same, or for exhibiting the same to prospective tenants and purchasers in the presence of a representative of Tenant (except in the event of emergency) or making such repairs or alterations therein as may be necessary for the safety and preservation thereof, without unduly or unreasonably disturbing the operations of the Tenant (except in the event of emergency). 16. DEFAULT BY TENANT 16.1 Each of the following shall be deemed a default by Tenant and breach of this Lease: (1) (i) Filing of a petition by the Tenant for adjudication as a bankrupt, or for reorganization, or for an arrangement under any Federal or State Statute; (ii) Dissolution or liquidation of the Tenant; (iii) Appointment of a permanent receiver or a permanent trustee of all or substantially all the property of the Tenant; (iv) Taking possession of the property of the Tenant by a governmental officer or agency pursuant to statutory authority for dissolution, rehabilitation, reorganization or liquidation of the Tenant; (v) Making by the Tenant of an assignment for the benefit of creditors; (vi) Abandonment, desertion or vacation of the Leased Premises by the Tenant. If any event mentioned in this subsection (1) shall occur, Landlord may thereupon or at any time thereafter elect to cancel this Lease by ten (10) days notice to the Tenant, and this Lease shall terminate on the day in such notice specified with the same force and effect as if that date were the date herein fixed for the expiration of the term of the Lease. (2) (i) Default in the payment of the Base Rent or additional rent herein reserved or any part thereof for a period of seven (7) days after the same is due and payable as in this Lease required; 11 (ii) A default in the performance of any other covenant or condition of this Lease on the part of the Tenant to be performed for a period of thirty (30) days after notice. For purposes of this subdivision (2) (ii) hereof, no default on the part of Tenant in performance of work required to be performed or acts to be done or conditions to be modified shall be deemed to exist if steps shall have been commenced by Tenant diligently after notice to rectify the same and shall be prosecuted to completion with reasonable diligence, subject, however, to unavoidable delays. 16.2 In case of any such default under ARTICLE 16.1 (2) and at any time thereafter following the expiration of the respective grace periods above mentioned, or in the event that Tenant is consistently late in the punctual payment of Base Rent and/or additional rent required to be paid under this Lease as shall be evidenced by late payments made during any period of four (4) consecutive months during any twelve (12) month period measured from the date of the first late payment, Landlord may serve a notice upon the Tenant electing to terminate this Lease upon a specified date not less than seven (7) days after the date of serving such notice and this Lease shall then expire on the date so specified as if that date has been originally fixed as the expiration date of the term herein granted; however, a default under ARTICLE 16.1 (2) hereof shall be deemed waived if such default is made good before the date specified for termination in the notice of termination served on Tenant. 16.3 In case this Lease shall be terminated as hereinbefore provided, or by summary proceedings or otherwise, Landlord or its agents may, immediately or any time thereafter, re-enter and resume possession of the Leased Premises or such part thereof, and remove all persons and property therefrom, either by summary proceedings or by a suitable action or proceeding at law without being liable for any damages, provided any entry pursuant to the foregoing shall be in accordance with law. No re-entry by Landlord shall be deemed an acceptance of a surrender of this Lease. 16.4 (1) In case this Lease is terminated by summary proceedings, or otherwise, as provided in this ARTICLE 16, and whether or not the premises is relet, Landlord shall be entitled to recover from the Tenant, the following: (i) A sum equal to all expenses, if any, including reasonable counsel fees, incurred by Landlord in recovering possession of the Leased Premises, and all reasonable costs and charges for the care of said premises while vacant, which damages shall be due and payable by Tenant to Landlord at such time or time as such expenses shall have been incurred by Landlord; 12 (ii) A sum equal to all damages set forth in this ARTICLE 16 and in ARTICLE 17 hereinafter referred to. (2) Without any previous notice or demand, separate actions may be maintained by Landlord against Tenant from time to time to recover any damages, which, at the commencement of any such action, have then or theretofore become due and payable to the Landlord under this ARTICLE 16 and subsections hereof without waiting until the end of the then current term. (3) All sums which tenant has agreed to pay by way of taxes, sewer charges, water rents or water meter charges, insurance premiums and other similar items becoming due from time to time under the terms of this Lease, shall be deemed additional rent reserved in this Lease within the meaning of this ARTICLE 16 and subsections hereof. 17. LIABILITY OF TENANT FOR DEFICIENCY In the event that the relation of the Landlord and Tenant may cease or terminate by reason of the default by the Tenant and the re-entry of the Landlord as permitted by the terms and conditions contained in this Lease or by the ejectment of the Tenant by summary proceedings or other judicial proceedings, or after the abandonment of the Leased Premises by the Tenant, it is hereby agreed that the Tenant shall remain liable to pay in monthly payments the rent which shall accrue subsequent to the re-entry by the Landlord, and the Tenant expressly agrees to pay as damages for the breach of the covenants herein contained the difference between the rent reserved and the rent collected and received, if any, by the Landlord, during the remainder of the unexpired term, as the amount of such difference or deficiency shall from time to time be ascertained. Anything herein contained to the contrary notwithstanding, the rent referred to shall include the stated reserved Base Rent together with all additional rent and charges required to be paid by the Tenant under the Lease including but not limited to taxes and insurance costs, and the costs of re-renting. 18. NOTICES All notices required or permitted to be given to the Landlord shall be given by certified mail, return receipt requested, at the address hereinbefore set forth on the first page of this Lease, and/or such other place as the Landlord may designate in writing. All notices required or permitted to be given to the Tenant shall be given by certified mail, return receipt requested, at the address hereinbefore set forth on the first page of this Lease, and/or such other place as the Tenant shall designate in writing. 13 19. NON-WAIVER BY LANDLORD The failure of the Landlord to insist upon strict performance of any of the covenants or conditions of this Lease or to exercise any option of the Landlord herein conferred in any one or more instances, shall not be construed as a waiver by the Landlord of any of its rights or remedies in this Lease, and shall not be construed as a waiver, relinquishment or failure of any such covenants, conditions, or options, but the same shall be and remain in full force and effect. 20. RIGHT OF TENANT TO MAKE ALTERATIONS AND IMPROVEMENTS The Tenant may make alterations, additions or improvements to the Leased Premises only with the prior written consent of the Landlord, which consent shall not be unreasonably withheld, provided such alterations, additions or improvements do not require structural changes in the Leased Premises, or do not lessen the value of the Leased Premises. Any consent which Landlord may give shall be conditioned upon Tenant furnishing to Landlord, detailed plans and specifications with respect to any such changes, to be approved by Landlord in writing. As a condition of such consent, Landlord reserves the right to require Tenant to remove, at Tenant's sole cost and expense, any such alterations or additions prior to the expiration of the Lease term. If Landlord does not require such removal, any such alterations or additions shall be deemed to be part of the realty upon installation, provided that Tenant, at its option, shall have the right to remove the same, provided it shall be responsible to repair any damage to the premises occasioned by such removal, provided such removal is made prior to the expiration of the Lease term. All such alterations, additions or improvements shall be only in conformity with applicable governmental and insurance company requirements and regulations applicable to the Leased Premises. Tenant shall hold and save Landlord harmless and indemnify Landlord against any claim for damage or injury in connection with any of the foregoing work which Tenant may make as herein provided. 21. NON-LIABILITY OF LANDLORD 21.1 It is expressly understood and agreed by and between the parties to this agreement that the Tenant shall assume all risk of damage to its property, equipment and fixtures occurring in or about the Leased Premises, whatever the cause of such damage or casualty. 21.2 It is expressly understood and agreed that in any event, the Landlord shall not be liable for any damage or injury to property or person caused 14 by or resulting from steam, electricity, gas, water, rain, ice or snow, or any leak or flow from or into any part of the Leased Premises, or from any damage or injury resulting or arising from any other cause or happening whatsoever. 22. RESERVATION OF EASEMENT The Landlord reserves the right, easement and privilege to enter on the Leased Premises in order to install, at its own cost and expense, any storm drains and sewers and/or utility lines in connection therewith as may be required by the Landlord. It is understood and agreed that if such work as may be required by Landlord requires any installation which may displace any paving, lawn, seeded area or shrubs, the Landlord, shall, at its own cost and expense, restore said paving, lawn, seeded area or shrubs. The Landlord covenants that the foregoing work shall not unreasonably interfere with the normal operation of Tenant's business, and the Landlord shall indemnify and save the Tenant harmless in connection with such installations. 23. AIR, WATER AND GROUND POLLUTION The Tenant expressly covenants and agrees to indemnify, defend, and save the Landlord harmless against any claim, damage, liability, costs, penalties, or fines which the Landlord may suffer as a result of air, water or ground pollution caused by the Tenant in its use of the Leased Premises. The Tenant covenants and agrees to notify the Landlord immediately of any claim or notice served upon it with respect to any such claim that the Tenant is causing water, air or ground pollution; and the Tenant, in any event, will take immediate steps to halt, remedy or cure any pollution of air, water or ground caused by the Tenant by its use of the Leased Premises. The within covenant on the part of the Tenant shall survive the expiration or earlier termination of this Lease. 24. FORCE MAJEURE Except for the obligation of the Tenant to pay rent and other charges as in this Lease provided, the period of time during which the Landlord or Tenant is prevented from performing any act required to be performed under this Lease by reason of fire, catastrophe, strikes, lockouts, civil commotion, acts of God or the public enemy, government prohibitions or preemptions, embargoes, inability to obtain material or labor by reason of governmental regulations or prohibitions, the act or default of the other party, or other events beyond the reasonable control of Landlord or Tenant, as the case may be, shall be added to the time for performance of such act. 15 25. CONDEMNATION 25.1 If due to condemnation or taking or seizure by any authority having the right of eminent domain (i) more than twenty-five (25%) per cent of the building on the Leased Premises is taken, or (ii) in the event that more than twenty-five (25%) percent of the ground is taken (including the parking areas, but exclusive of front, side and rear set back areas), or (iii) if access to the Leased Premises be denied, which taking in the manner herein referred to and in excess of the foregoing percentage amounts shall unreasonably or unduly interfere with the use of the building, ground area, parking area, or deny access to these premises, then and in either of such events as herein provided, the Lease term created shall, at the option of the Tenant, terminate, cease and become null and void from the date when the authority exercising the power of eminent domain takes or interferes with the use of the building on the Leased Premises, its use of the ground area, parking area, or area of access to the Leased Premises. The Tenant shall only be responsible for the payment of rent until the time of surrender. In any event, no part of the Landlord's condemnation award shall belong to or be claimed by the Tenant. Without diminishing Landlord's award, the Tenant shall have the right to make a claim against the condemning authority for such independent claim which it may have and as may be allowed by law, for costs and damages due to relocating, moving and other similar costs and charges directly incurred by the Tenant and resulting from such condemnation. 25.2 In the event of any partial taking which would not be cause for termination of the within Lease or in the event of any partial taking in excess of the percentages provided in ARTICLE 25.1, and in which event the Tenant shall elect to retain the balance of the Leased premises remaining after such taking, then and in either event, the rent shall abate in an amount mutually to be agreed upon between the Landlord and Tenant based on all the relationship that the character of the property taken bears to the property which shall remain after such condemnation. In any event, no part of the Landlord's condemnation award shall belong to or be claimed by the Tenant. However, the Landlord shall, to the extent permitted by applicable law and as the same may be practicable on the site of the Leased premises, at the Landlord's sole cost and expense, promptly make such repairs and alterations in order to restore the building and/or improvements to the extent of the condemnation award. 26. QUIET ENJOYMENT The Landlord further covenants that the Tenant, on paying the rental and performing the covenants and conditions contained in this Lease, shall and may peaceably and quietly have, hold and enjoy the Leased Premises for the term aforesaid. 16 27. SURRENDER OF PREMISES On the last day, or earlier permitted termination of the Lease term, Tenant shall quit and surrender the premises in good and orderly condition and repair (reasonable wear and tear, and damage by fire or other casualty excepted) and shall deliver and surrender the Leased Premises to the Landlord peaceably, together with all alterations, additions and improvements in, to or on the premises made by Tenant as permitted under the Lease. The Landlord reserves the right, however, to require the Tenant at its cost and expense to remove any alterations or improvements installed by the Tenant and not permitted or consented to by the Landlord pursuant to the terms and conditions of the Lease, which covenant shall survive the surrender and the delivery of the premises as provided hereunder. Prior to the expiration of the Lease term the Tenant shall remove all of its property, fixtures, equipment and trade fixtures from the premises. All property not removed by Tenant shall be deemed abandoned by Tenant, and Landlord reserves the right to charge the reasonable cost of such removal to the Tenant, which obligations shall survive the Lease termination and surrender herein provided. If the premises shall not be surrendered at the end of the Lease term, Tenant shall be responsible to pay Landlord, monthly, an amount equal to twice the monthly installment of annual rent payable by Tenant prior to the expiration or earlier termination of this Lease for each month or part thereof that Tenant holds over in the Leased premises. 28. INDEMNITY Anything in this Lease to the contrary notwithstanding, and without limiting the Tenant's obligation to provide insurance pursuant to ARTICLE 9 hereunder, the Tenant covenants and agrees that it will indemnify, defend and save harmless the Landlord against and from all liabilities, obligations, damages, penalties, claims, costs, charges and expenses, including without limitation, reasonable attorney's fees, which may be imposed upon or incurred by Landlord by reason arising from Tenant's use of the premised, except for any such claims, actions, demands, judgment, damages, liabilities or expenses arising from the intentional acts or omissions of Landlord, its agents, employees or contractors. 29. LEASE CONSTRUCTION This Lease shall be construed pursuant to the laws of the State of New Jersey. 30. BIND AND INURE CLAUSE The terms, covenants and conditions of the within Lease shall be binding upon and inure to the benefit of each of the parties hereto, their respective executors, administrators, heirs, successors and assigns, as the case may be. 17 31. NET RENT It is the purpose and intent of the Landlord and Tenant that the rent shall be absolutely net to Landlord, so that this Lease shall yield, net, to Landlord, the rent specified in ARTICLE 3 hereof in each month during the term of the Lease, and that all costs, expenses and obligations of every kind and nature whatsoever relating to the Leased Premises, which may arise or become due during or out of the term of this Lease, shall be paid by the Tenant, except for such obligations and charges as have otherwise expressly been assumed by the Landlord in accordance with the terms and conditions of the Lease. Nothing herein shall require the Tenant to undertake obligations in connection with the sale or mortgaging of the Leased Premises, unless otherwise expressly provided in accordance with the terms and conditions of this Lease. 32. COVENANTS OF FURTHER ASSURANCES If, in connection with obtaining financing for the improvements on the Leased Premises, the Mortgage Lender shall request reasonable modifications in this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or refuse its consent thereto, provided that such modifications do not in Tenant's reasonable judgment increase the obligations of Tenant hereunder or materially adversely affect the leasehold. 33. LANDLORD'S REMEDIES The rights and remedies given to the Landlord in this Lease are distinct, separate and cumulative remedies, and no one of them, whether or not exercised by the Landlord, shall be deemed to be in exclusion of any of the others. 34. SUBORDINATION OF LEASE This Lease shall be subject and subordinate at all times to the lien of any bona fide mortgages now or hereafter placed on the land and building and Leased Premises without the necessity of any further instrument or act on the part of Tenant to effectuate such subordination, but Tenant covenants and agrees to execute and deliver upon demand such further instrument or instruments evidencing such subordination of the Lease to the lien of any such mortgage or ground rent or other encumbrances as shall be desired by a mortgagee or proposed mortgagee or by any person. 18 35. ASSIGNMENT AND SUBLETTING 35.1 The Tenant shall not transfer, assign, sublet or otherwise alienate its interest in and to the premises without first obtaining the written consent of the Landlord, which consent shall not be unreasonably withheld. Any assignment, subletting or license of the Lease or of Tenant's Leasehold interest in the premises without the prior written consent of Landlord shall be null and void. 35.2 Notwithstanding, Landlord reserves the right to refuse to give its consent to any assignment, subletting or transfer of Tenant's interest in the Premises unless Tenant remains fully liable for the performance of the Tenant's covenants and obligations under this Lease. 36. SURVIVAL OF OBLIGATION It is expressly understood and agreed that in the event there are any obligations of Tenant with respect to payment or performance as required under the terms and conditions of this Lease that shall have not been performed prior to the expiration or termination of the Lease in accordance with its terms, such obligation, including the obligation to make rent adjustments and other lease adjustments, shall survive the expiration or termination of the Lease term and surrender of the Leased Premises by the Tenant to the Landlord. 37. OPTION TO RENEW 37.1 Provided the Tenant is not in default pursuant to the terms and conditions of this Lease, the Tenant is hereby given the right and privilege to renew the within Lease, for one seven (7) year renewal period to commence at the end of the initial term of this Lease, which renewal shall be upon the same terms and conditions as in this Lease contained, except as follows: (a) During the seven (7) year renewal period, Tenant shall pay Base Rent in accordance with ARTICLE 3 hereof as follows: (i) During the first through seventh year of the seven (7) year renewal term, Base Rent shall be in the amount of TWO HUNDRED THIRTEEN THOUSAND FOUR HUNDRED FORTY-FIVE AND 80/00 DOLLARS ($213,445.80) per annum, payable in equal installments of SEVENTEEN THOUSAND SEVEN HUNDRED EIGHTY-SEVEN AND 15/00 DOLLARS ($17,787.15) per month, and; 37.2 The right, option, and privilege of the Tenant to renew this Lease as herein set forth is expressly conditioned upon the Tenant delivering to the Landlord, in writing, by certified mail, return receipt requested, nine (9) months prior notice of its intention to renew, which notice shall be given to the Landlord by the Tenant no later than nine (9) months prior to the date fixed for termination of the original term of this Lease. 19 IN WITNESS WHEREOF, the parties have hereunto set their hands and seals or caused these presents to be signed by its proper corporate officers and caused its proper corporate seal to be hereunto affixed, the day and year first above written. WITNESS: EAST COAST PROPERTY MANAGEMENT LLC (Landlord) /s/ Antoine Bassil By: /s/ Steven J. Wilk - -------------------- ---------------------------------- STEVEN J. WILK, Member By: /s/ Jay A. Smolyn ---------------------------------- JAY A. SMOLYN, Member WITNESS: TRANSNET CORPORATION (Tenant) /s/ Antoine Bassil By: /s/ Steven J. Wilk - -------------------- ---------------------------------- Title: Board Chairman ---------------- 20 EX-14 3 c33799_ex14.txt EXHIBIT 14 TRANSNET CORPORATION CODE OF BUSINESS CONDUCT AND ETHICS CODE OF BUSINESS CONDUCT AND ETHICS TABLE OF CONTENTS Page ---- Introduction 1 Purpose of the Code 1 Conflicts of Interest 2 Corporate Opportunities 2 Public Disclosure 2 Confidentiality 3 Fair Dealing 3 Protection and Proper Use of Company Assets 3 Compliance with Applicable Laws, Rules and Regulations 3 Equal Opportunity and Harassment 4 Accuracy of Company Records 4 Retaining Business Communications 4 Political Contributions 5 Media Relations 5 Intellectual Property Information 5 Internet and E-mail Policy 6 Reporting Illegal or Unethical Behavior and Code Violations 6 Sanctions for Code Violations 7 Waivers of the Code 7 TransNet CORPORATION CODE OF BUSINESS CONDUCT AND ETHICS INTRODUCTION ------------ Ethics are important to TransNet Corporation and to each member of our management, our investment professionals and employees. TransNet Corporation is committed to the highest ethical standards and to conducting our business with the highest level of integrity. Each of us at TransNet Corporation, including members of senior management and our Board of Directors, is responsible for maintaining this level of integrity and for complying with the policies contained in this Code. If you have a question or concern about what is proper conduct for you or anyone else, please raise these concerns with any member of management, or follow the procedures outlined in this Code. PURPOSE OF THE CODE ------------------- This Code is intended to: o help you recognize ethical issues and take the appropriate steps to resolve these issues; o deter ethical violations; o assist you in reporting any unethical or illegal conduct; and o reaffirm and promote our commitment to a culture within our company that values honesty and accountability. All employees, as a condition of employment or continued employment, will acknowledge in writing that they have received a copy of this Code, read it, and understand that the Code contains TransNet Corporation's expectations regarding employee conduct. 1 CONFLICTS OF INTEREST --------------------- You must avoid any conflict, or the appearance of a conflict, between your personal interests and the interests of TransNet Corporation. A conflict exists when your personal interest in any way interferes with the interests of TransNet Corporation as a whole, or when you take any action or have any interest that may make it difficult for you to perform your job objectively and effectively. For example, a conflict of interest probably exists if: o you cause TransNet Corporation to enter into business relationships with you or a member of your family, or invest in companies affiliated with you or a member of your family; o you use any nonpublic information about TransNet Corporation, our affiliates, our lenders, our clients, or our other business partners for your personal gain, or the gain of a member of your family; or o you or a family member receive a loan, or guarantee of a loan or other obligation, as a result of your position with TransNet Corporation. You must disclose any conflicts of interest, or any action or relationship that might give rise to a conflict, to the General Counsel In the event that the General Counsel is involved in the action or relationship giving rise to the conflict of interest, you should disclose the conflict to any other member of senior management. CORPORATE OPPORTUNITIES ----------------------- Each of us has a duty to advance the legitimate interests of TransNet Corporation when the opportunity to do so presents itself. Therefore, you may not: o take for yourself personally opportunities, including investment opportunities, discovered through the use of your position with TransNet Corporation, or through the use of TransNet Corporation's property or information; o use TransNet Corporation's property, information, or position for your personal gain or the gain of a family member; or o compete, or prepare to compete, with TransNet Corporation. PUBLIC DISCLOSURE ----------------- TransNet Corporation is committed to a policy of full, fair, accurate, timely, and understandable disclosure to shareholders of all material information regarding our business. This policy extends to our filings with the SEC and to all other public communications. All individuals involved in our SEC reporting process and in preparing 2 and making public communications regarding our business must take all reasonable steps to comply with this policy, including the steps described in our Disclosure Policy, Controls and Procedures. CONFIDENTIALITY --------------- You must not disclose confidential information regarding TransNet Corporation, our affiliates, our lenders, our clients, or our other business partners, unless disclosure is authorized or required by law. Confidential information includes all non-public information that might be harmful to, or useful to the competitors of, TransNet Corporation, our affiliates, our lenders, our clients, or our other business partners. FAIR DEALING ------------ You must endeavor to deal fairly with companies or individuals with whom we do business or come into contact with, including fellow employees of TransNet Corporation and TransNet Corporation's competitors. You must not take unfair advantage of these or other parties by means of: o manipulation; o concealment; o abuse of privileged information; o misrepresentation of material facts; or o any other unfair-dealing practice. PROTECTION AND PROPER USE OF COMPANY ASSETS ------------------------------------------- TransNet Corporation's assets are to be used only for legitimate business purposes. You should protect TransNet Corporation's assets and ensure that they are used efficiently. Incidental personal use of telephones, fax machines, copy machines, personal computers and similar equipment is generally allowed if there is no significant added cost to TransNet Corporation, it does not interfere with an employee's work duties, and is not related to an illegal activity or to any outside business. COMPLIANCE WITH APPLICABLE LAWS, RULES AND REGULATIONS ------------------------------------------------------ Each of us has a duty to comply with all laws, rules and regulations that apply to our business. In particular, you must comply with all laws, rules and regulations pertaining to: 3 o INSIDER TRADING. It is against the law to buy or sell securities using material information that is not available to the public. Individuals who give this "inside" information to others may be liable to the same extent as the individuals who trade while in possession of such information. You must not trade in the securities of TransNet Corporation, or the securities of our affiliates, our lenders, our clients, or our other business partners while in the possession of "inside" information. o "WHISTLEBLOWER" PROTECTIONS. It is against the law to discharge, demote, suspend, threaten, harass, or discriminate in any manner against an employee who provides information or otherwise assists in investigations or proceedings relating to violations of federal securities laws or other federal laws prohibiting fraud against shareholders. You must not discriminate in any way against an employee who engages in these "whistleblower" activities. Please talk to your supervisor or any member of senior management if you have any questions about how to comply with the above regulations and other laws, rules and regulations. EQUAL OPPORTUNITY AND HARASSMENT -------------------------------- TransNet Corporation is committed to providing equal opportunity in all of our employment practices including selection, hiring, promotion, transfer, and compensation of all qualified applicants and employees without regard to race, color, sex or gender, religion, age, national origin, handicap, disability, citizenship status, or any other status protected by law. With this in mind, there are certain behaviors that will not be tolerated. These include harassment, violence, intimidation, and discrimination of any kind involving race, color, religion, gender, age, national origin, disability, or martial status. ACCURACY OF COMPANY RECORDS --------------------------- TransNet Corporation requires honest and accurate recording and reporting of information in order to make responsible business decisions. This includes such data as quality, safety, and personnel records, as well as financial records. All financial books, records and accounts must accurately reflect transactions and events, and conform both to required accounting principles and to TransNet Corporation's system of internal controls. No false or artificial entries may be made. RETAINING BUSINESS COMMUNICATIONS --------------------------------- The law requires us to maintain certain types of corporate records, usually for specified periods of time. Failure to retain those records for those minimum periods could 4 subject TransNet Corporation to penalties and fines, cause the loss of rights, obstruct justice, place TransNet Corporation in contempt of court, or seriously disadvantage TransNet Corporation in litigation. From time to time TransNet Corporation establishes retention or destruction policies in order to ensure legal compliance. TransNet Corporation expects all employees to fully comply with any published records retention or destruction policies, provided that all employees should note the following exception: If an employee believes, or TransNet Corporation informs you, that TransNet Corporation's records are relevant to litigation, or potential litigation, then all employees must preserve those records until TransNet Corporation determines the records are no longer needed. This exception supersedes any previously or subsequently established destruction policies for those records. If an employee believes that this exception may apply, or has any questions regarding the possible applicability of that exception, please contact the Designate Officer. POLITICAL CONTRIBUTIONS ----------------------- No funds of TransNet Corporation may be given directly to political candidates. Employees may, however, engage in political activity with their own resources on their own time. MEDIA RELATIONS --------------- TransNet Corporation must speak with a unified voice in all dealings with the press and other media. As a result, except as otherwise designated by TransNet Corporation's Chief Executive Officer, the Investor Relations Department is the sole contact for media seeking information about TransNet Corporation. Any requests from the media must be referred to the Investor Relations Department. INTELLECTUAL PROPERTY INFORMATION --------------------------------- Information generated in TransNet Corporation's business is a valuable asset. Protecting this information plays an important role in our growth and ability to compete. Such information includes business and research plans; objectives and strategies; trade secrets; unpublished financial information; salary and benefits data; employee, lender and other business partner lists. Employees who have access to TransNet Corporation's intellectual property information are obligated to safeguard it from unauthorized access and: o Not disclose this information to persons outside of TransNet Corporation. o Not use this information for personal benefit or the benefit of persons outside of TransNet Corporation. o Not share this information with other employees except on a legitimate "need to know" basis. 5 INTERNET AND E-MAIL POLICY -------------------------- TransNet Corporation provides an e-mail system and Internet access to certain of its employees to help them do their work. You may use the e-mail system and the Internet only for legitimate business purposes in the course of your duties. Incidental and occasional personal use is permitted, but never for personal gain or any improper use. Further, employees are prohibited from discussing or posting information regarding TransNet Corporation in any external electronic forum, including Internet chat rooms or electronic bulletin boards. REPORTING VIOLATIONS AND COMPLAINT HANDLING ------------------------------------------- You are responsible for compliance with the rules, standards and principles described in this Code. In addition, you should be alert to possible violations of the Code by TransNet's employees, officers and directors, and you are expected to report a violation promptly. Normally, reports should be made to one's immediate supervisor. Under some circumstances, it may be impractical or you may feel uncomfortable raising a matter with your supervisor. In those instances, you are encouraged to contact our General Counsel who will investigate and report the matter to our Chairman and Chief Executive Officer and/or Board of Directors, as the circumstance dictates. You will also be expected to cooperate in an investigation of a violation. Anyone who has a concern about our conduct, the conduct of an officer of TransNet or our accounting, internal accounting controls or auditing matters, may communicate that concern to the Audit Committee of the Board of Directors by direct communication with our General Counsel or by email or in writing. All reported concerns shall be forwarded to the Audit Committee and will be simultaneously addressed by our General Counsel in the same way that other concerns are addressed by us. The status of all outstanding concerns forwarded to the Audit Committee will be reported on a quarterly basis by our General Counsel. The Audit Committee may direct that certain matters be presented to the full board and may also direct special treatment, including the retention of outside advisors or counsel, for any concern reported to it. All reports will be investigated and whenever possible, requests for confidentiality shall be honored. And, while anonymous reports will be accepted, please understand that anonymity may hinder or impede the investigation of a report. All cases of questionable activity or improper actions will be reviewed for appropriate action, discipline or corrective actions. Whenever possible, we will keep confidential the identity of employees, officers or directors who are accused of violations, unless or until it has been determined that a violation has occurred. THERE WILL BE NO REPRISAL, RETALIATION OR ADVERSE ACTION TAKEN AGAINST ANY EMPLOYEE 6 WHO, IN GOOD FAITH, REPORTS OR ASSISTS IN THE INVESTIGATION OF, A VIOLATION OR SUSPECTED VIOLATION, OR WHO MAKES AN INQUIRY ABOUT THE APPROPRIATENESS OF AN ANTICIPATED OR ACTUAL COURSE OF ACTION. FOR REPORTING CONCERNS ABOUT TRANSNET'S CONDUCT, THE CONDUCT OF AN OFFICER OF TRANSNET, OR ABOUT TRANSNET'S ACCOUNTING, INTERNAL ACCOUNTING CONTROLS OR AUDITING MATTERS, YOU MAY USE THE FOLLOWING MEANS OF COMMUNICATION: E-MAIL: auditcommittee@TransNet.com ADDRESS: Audit Committee of the Board of Directors TransNet Corporation 45 Columbia Road Somerville, NJ 08876 In the case of a confidential, anonymous submission, employees should set forth their concerns in writing and forward them in a sealed envelope to the Chairperson of the Audit Committee, in care of our General Counsel, such envelope to be labeled with a legend such as: "To be opened by the Audit Committee only." SANCTIONS FOR CODE VIOLATIONS ----------------------------- All violations of the Code will result in appropriate corrective action, up to and including dismissal. If the violation involves potentially criminal activity, the individual or individuals in question will be reported, as warranted, to the appropriate authorities. WAIVERS OF THE CODE ------------------- Any waiver of the Code for TransNet Corporation's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions must be promptly disclosed to shareholders. In addition, this Code shall incorporate any other provisions relating to disclosure and/or approval of waivers of the Code required by the national securities exchange or national securities association on which TransNet Corporation's securities trade. 7 EX-31.1 4 c33799_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, 2004 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. (c) Date: September 27, 2004 /s/ Steven J. Wilk - ---------------------------------- Steven J. Wilk Chief Executive Officer EX-31.2 5 c33799_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, 2004 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: (e) 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; (f) 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; (g) 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 (h) 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): (d) 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 (e) 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, 2004 /s/ John J. Wilk - ----------------------------------- John J. Wilk Chief Financial Officer EX-32 6 c33799_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, 2004, 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, 2004 /s/ John J, Wilk ----------------------- John J. Wilk Chief Financial Officer Date: September 27, 2004 -----END PRIVACY-ENHANCED MESSAGE-----