PROGINET CORPORATION
FILING TYPE: 10SB12G
DESCRIPTION: REGISTRATION STATEMENT
FILING DATE:
PERIOD END: N/A
PRIMARY EXCHANGE: OTC-BB / CDNX
TICKER: N/A
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12 (g) OF THE SECURITIES EXCHANGE ACT OF 1934
PROGINET CORPORATION
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(Name of Small Business Issuer in Its Charter)
DELAWARE 11-3264929
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 GARDEN CITY PLAZA, GARDEN CITY, NEW YORK 11530
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(Address of Principal Executive Offices) (Zip Code)
(516) 248-2000
Telephone Number
Securities to be registered under Section 12(b) of the Act: None Securities to
be registered under Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which
to be Registered Each Class is to be
Registered
Common Stock, par value $0.001 OTC Bulletin Board
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TABLE OF CONTENTS
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Special Note Regarding Forward-Looking Statements.....................................................1
Part I...................................................................................................1
Item 1. Description of Business......................................................................1
BUSINESS............................................................................................1
RISK FACTORS........................................................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......10
GENERAL............................................................................................10
RESULTS OF OPERATIONS..............................................................................10
LIQUIDITY AND CAPITAL RESOURCES....................................................................12
ACQUISITIONS.......................................................................................12
IMPACT OF THE YEAR 2000............................................................................12
Item 3. Description of Property.....................................................................13
Item 4. Security Ownership of Certain Beneficial Owners and Management..............................13
Item 5. Directors, Executive Officers, Promoters and Control Persons................................15
DIRECTORS AND EXECUTIVE OFFICERS...................................................................15
COMMITTEES.........................................................................................16
FAMILY RELATIONSHIPS...............................................................................18
Item 6. Executive Compensation......................................................................19
Item 7. Certain Relationships and Related Transactions..............................................20
Item 8. Description of Securities...................................................................21
Part II.................................................................................................22
Item 1. Market Price Of and Dividends On The Registrant's Common Equity and Other Shareholder
Matters..............................................................................................22
Item 2. Legal Proceedings...........................................................................22
Item 3. Changes In and Disagreements with Accountants...............................................22
Item 4. Recent Sales of Unregistered Securities Issuances...........................................22
Item 5. Indemnification of Directors and Officers...................................................23
PART F/S..................................................................................................
Index.........................................................................................FS- Index
Independent Auditors' Report.......................................................................FS-1
Balance Sheets - July 31, 1999 and July 31, 1998...................................................FS-2
Statements of Operations - Years Ended July 31, 1999 and July 31, 1998.............................FS-3
Statements of Stockholders' Equity - Years Ended July 31, 1999 and July 31, 1998...................FS-4
Statements of Cash Flows- Years Ended July 31, 1999 and July 31, 1998..............................FS-5
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Notes to Financial Statements......................................................................FS-6
Balance Sheets - April 30, 2000 and July 31, 1999.................................................FS-14
Statements of Operations-Three Months and Nine Months Ended April 30, 2000
and January 31, 1999..............................................................................FS-15
Statements of Cash Flows - Nine Months Ended April 30, 2000 and January 31, 1999..................FS-16
Notes to Unaudited Financial Statements .........................................................FS-17
Part III................................................................................................24
Item 1. Index to Exhibits...........................................................................24
Item 2. Description of Exhibits.....................................................................25
SIGNATURES..............................................................................................26
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This registration statement on Form 10-SB contains forward-looking statements
that involve risks and uncertainties that address:
- Business strategies;
- Proginet's financial condition and results of operations;
- Forecasts;
- Trends, including growth, in the information technology
market;
- New products ; and
- Year 2000 computer problems.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "seeks," "pro forma," "anticipates," "estimates,"
"continues," or other variations thereof (including their use in the negative),
or by discussions of strategies, opportunities, plans or intentions. Such
statements include but are not limited to statements under the captions "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," as well as captions elsewhere
in this document. A number of factors could cause results to differ materially
from those anticipated by such forward-looking statements, including those
discussed under "Risk Factors" and "Business."
In addition, such forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in such forward-looking statements are
reasonable, we cannot guarantee that our plans, intentions or expectations will
be achieved. The information contained in this registration statement, including
the section discussing risk factors, identifies important factors that could
cause such differences.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
Proginet Corporation (Proginet or the Company) develops and markets two software
product lines. One is a batch file transfer software product used to link
mainframe computer systems to local area networks (LANs) and the Internet,
primarily for Microsoft Windows, Novell Netware, OS400 and UNIX platforms. The
other is a security password management software product that enables multiple
and disparate security systems, on multiple computers, to function as one. The
Company sells its products in the U.S. through its telemarketing and sales force
and internationally directly and indirectly through distributors, and through
Original Equipment Manufacturer (OEM) partners in Europe and the United States.
The Company also provides software maintenance services. The Company's stock is
traded on the Canadian Stock Exchange, CDNX, (formerly, the Vancouver Stock
Exchange), listed as PRF.U. The Company is filing this registration statement to
become a reporting company in the United States to facilitate trading the
Company's shares in the United States and broaden the trading market for
investors in Proginet.
GENERAL DEVELOPMENT OF THE BUSINESS
Proginet was incorporated in New York in 1985 as The Teleprocessing Connection,
Inc (TCI) and changed its name in 1990 to Proginet Corp. In 1995, Proginet Corp.
merged with a Delaware corporation and became Proginet Corporation.
Proginet is a Long Island, New York-based software development company that
provides software solutions for seamlessly integrating IBM mainframes and
midrange computers with Microsoft Windows NT and other distributed client/server
environments. The Company's products address the systems management software
space, including password management, enterprise managed data transfer, and
Internet managed data transfer. Proginet's first product was XCOM, a
multi-platform file transfer application. XCOM was sold to Legent Corporation in
1990 and Legent was subsequently acquired by Computer Associates. The XCOM
product is
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included as a major product within Computer Associates' Unicenter-TNG family of
products, a family of integrated business solutions for monitoring and
administering systems management across multi-platform environments. After the
sale of the XCOM line, Proginet focused on research and development, placing a
particular emphasis on the development of IBM MVS systems connectivity to
Microsoft Windows systems communication and connectivity solutions. The Company
collaborated closely with Novell in 1993 and 1994, with Novell selling its
micro-to-mainframe business and technology to Proginet (Network Navigator and
IND$FILE) and later taking an equity option in the Company in consideration for
the transfer of that technology in May of 1995. Proginet was able to raise $1.8
million of capital through an Initial Public Offering on the Vancouver Stock
Exchange. This capital infusion enabled Proginet to develop new technology to
take advantage of the explosive growth in Windows-to-MVS connectivity
requirements that began that year.
Through its work with Microsoft, the Proginet management team realized the
appeal of being able to manage secure environments across disparate systems from
a single location. Extensive co-development between the two organizations began
in the fall of 1995. The first collaboration included joint design between
Microsoft and Proginet to facilitate Proginet's successful development of the
Fusion-FTMS product, a comprehensive systems management application for secure
and reliable data delivery and replication to be fully compatible with
Microsoft's SNA Server software, introduced in 1996. The second collaboration
included, SecurPass, a password management technology came to fruition as a
result of this co-development in late 1997. Proginet acquired the mainframe
software business of Microsoft, TransAccess, at the end of 1996, providing the
Company with a recurring revenue stream. At that time Microsoft took a minority
equity stake in the Company, and entered into a comprehensive marketing and
sales agreement, which expired in October 1998. In November of 1996, Proginet
acquired the assets of KnowledgeNet, Inc., which developed NetWrk, a product
similar to Proginet's but specialized for the AS/400 area. This acquisition
allowed Proginet to expand product coverage to include the AS/400 and UNIX
platforms.
Proginet has developed three principal products: Fusion FTMS, a managed file
transfer software product; SecurPass, a password management software; and
CyberFusion, an advanced technology to move information over the Internet.
PRODUCTS
The following is a brief description of the principal products currently
marketed by Proginet. Proginet has designed its products with an emphasis on
ease of use, security and management both to enhance and protect its customers'
investments in different networking hardware and software, and to provide its
customers with flexibility for future investments.
Proginet's information movement technology allows users to send their
information over internal networks and the Internet, confident that no one other
then the intended recipient can read or receive the information.
Proginet's information movement software is currently being used by some of the
largest corporations in the world, no one of which represents material amounts
of revenues for Proginet. Proginet offers five software solutions for moving
information between computers. CyberFusion is designed for Internet file
transfer and the other four are designed for internal network file transfers.
Proginet currently offers the following products in the information movement
space:
o CyberFusion provides secure reliable information movement across the
Internet. This product includes some of the strongest encryption available
including DES, Triple DES, Blowfish and Blowfish Long, along with extensive
features to allow for the automation of information movement needs.
o Fusion FTMS manages high-speed file transfers between OS/390 hosts, LAN
servers, and desktops, throughout an enterprise environment.
o TransAccess is a data access and middleware solution for cross-platform
data retrieval, update, and transaction processing. TransAccess enables
enterprise-wide distributed applications across an extensive range of
computing platforms.
o Network Navigator is a batch file transfer capability between client/server
and MVS environments.
o Proginet also provides a version of IND$FILE, called IND$FILE Plus. While
the time sharing option (TSO) version of IND$FILE, sold by IBM, is already
the industry standard for exchanging files between
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personal computers and IBM mainframes, Proginet's VTAM - based IND$FILE
Plus provides added value and security to all IBM mainframe users.
Proginet's password management technology addresses the problem of "too many
passwords" that affects individual users from small to large corporate
enterprises. The individual user may have many passwords to access the different
systems in a typical environment. Often they resort to writing passwords on a
"Post-It". Such practices cause enterprises to have an exposure when users write
the password down or choose simple passwords that are easier to remember.
Another consequence develops when users create complex passwords for improved
security and then forget their passwords, creating a significant burden for help
desk personnel.
SecurPass, with its password synchronization technology, password management
features, and extendable application program interfaces (APIs), allows
enterprises to gain control over users' passwords. By utilizing the password
management and password synchronization technology in SecurPass, a company can
specify the rules for creating a password, and have those rules enforced among
all of the security systems throughout the company. The capabilities in
SecurPass allow a user to specify one password, and have that password allowthe
user to gain access to all of the systems needed. When a password is reset,
SecurPass propagates the password change throughout the environment to ensure
that all passwords are secure and in-sync.
Enterprises need to address this exposure to ensure that they maintain necessary
security and trust with their customers. Proginet believes enterprises must
simplify and consolidate their security administration functions, as a first
step to regaining and keeping control over their security password environments.
STRATEGY
Proginet's strategy has been and continues to be to develop state-of-the-art
technology applications for information movement and password management.
Proginet implements its strategy by investing in a highly qualified and
motivated research and development team, that produces and brings to market
unique and creative products geared to the Internet. Such technology includes
encryption and management features to assure secure and reliable transfers.
The Company's product strategy is to expand with new products specifically
designed for the Internet. Proginet's current product lines are mature,
functional products with large installed bases. The additional development of
existing products is focused on increasing the ease of product deployment and
usability.
As a software development company, significant resources have been allocated to
research and development activities over the past few years. New product
development will be specifically geared toward the Internet, e-business and the
wireless transmission marketplaces. Research and Development expenditures
amounted to $509,119 and $511,678 in fiscal years 1998 and 1999, respectively.
The criteria used in evaluating, and determining R&D priorities are as follows:
1. Products must enable powerful use of the Internet.
2. Products must focus on Proginet's core strengths (multi-platform,
manageability, secure information movement).
3. Viral marketing functionality, whereby customers and their partners can
add incrementally to sales by propagating product marketing once the
products are installed.
4. Business and technologies must be synergistic.
5. Products must have wide appeal.
6. Each product must stand on its own in terms of revenue generation
potential.
Proginet continually evaluates new technology that has great impact on the
Internet and determines how this new technology may fit into Proginet's
strategy. Two recent examples of this approach are Linux, now available in the
CyberFusion family of products, and LDAP, now being implemented in the SecurPass
line.
SALES AND MARKETING
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Proginet's sales strategy is comprised of three sales models: direct sales in
the U.S; indirect sales through distribution partners in over 20 countries
around the world; and alliances with partners who integrate Proginet's
technology with their technology and sell the combined product(s). This last
model is commonly referred to as OEM.
The direct sales model includes a direct telemarketing and sales force comprised
of Proginet employees augmented by the use of outside telemarketing services
related to lead generation for the direct sales force. The Company has an
arrangement with an outside telemarketing firm with fees based upon the number
of hours used in the generation of a lead. The company's experience is that the
cost per lead averages approximately $400 per qualified lead. Leads are turned
over to the Proginet's internal direct sales force, who then cover the entire
sales process. The direct sales model covers the entire sales cycle from lead
generation through trial evaluation process, typically 30 to 60 days, to the
signing of a software license agreement. Proginet estimates that the "typical"
sales cycle averages about 90 days and Proginet closes approximately two-thirds
of trials started.
The indirect sales model is built on the premise that presence and knowledge in
local markets is paramount to establishing necessary business relationships and
closing sales. Therefore, distributor partnerships are established in local
markets (countries) and Proginet commits significant resources to train and
support distributors to sell Proginet software in their countries. The
distributors' role is to act as agents, make the marketplace aware of Proginet's
technology and explain how the technology can be used in their business
environments. Proginet backs-up the distributors with authorized assistance and
support, customer installations and training whenever necessary. The distributor
agreement specifies that they cannot sell competitors' products. Distributors
are typically compensated at a commission rate of 25% or 50% based upon their
level of effort, resources assigned, and commitment to closing sales.
The OEM sales model is based on the ability of an outside software company with
complementary technology to sell, install and support Proginet's technology.
These OEMs incorporate Proginet's technology to provide services to other
customers. The OEM arrangements include a commission structure similar to
distributors and also include specific fixed pricing for the number of "users"
the product is licensed for.
The indirect and OEM sales models accounted for approximately half of Proginet's
new license revenue in the fiscal quarter ended April 30,2000, a significant
increase over the 31% of new license revenues in the same period in the previous
year. In the fiscal quarter ended April 30, 2000 OEM sales contributed 16% of
the total new license revenue, distributor sales represented 36% of the total
new license revenue, and direct sales comprised the remaining 48%. Going
forward, since the distributor channels are larger, they are expected to
increase their relative contribution of new license revenue.
All of Proginet's sales are dependent on visibility in the marketplace and the
markets acceptance of Proginet's products. As such, the relationship with
Microsoft most directly benefits the direct sales model and the distributor
sales model. In both models, while there is no contractual obligation, Microsoft
continues to provide leads and references to prospective customers who could
benefit from Proginet's products and their integration into Microsoft's
technology. The Company, however, does not maintain statistics on the amount of
revenues attributable to its relationship with Microsoft.
Proginet's marketing strategy is centered on communicating the Company's message
for corporate visibility to investors and the Company's product solutions to the
marketplace. The corporate visibility program is centered upon an investor
relations program, which provides communications on corporate activities to
investors, and a corporate awareness program, which includes advertising and
participation in many industry trade shows and related programs.
Proginet's product marketing strategy includes a comprehensive program that
identifies market needs, positions Proginet's product messages to address these
needs, and pursues several methods to deliver Proginet's message to the
identified target audiences. The methods include advertising, trade show and
industry conference participation, and direct mail campaigns. Additionally,
Proginet pursues specific vertical markets, including healthcare, retail and
financial services, with programs designed specifically for these vertical
markets.
CUSTOMERS
Proginet has established a worldwide user base of more than 400 companies in
over 20 countries engaged in the financial, telecommunications, healthcare,
government, and other industry sectors. No one customer represents 10% or more
of Proginet's revenues.
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SUPPLIERS
Proginet is not reliant on any particular supplier for any of its operating
needs. Any products required can be purchased from a number of sources.
EMPLOYEES
As of May 29, 2000, Proginet had 42- full-time salaried employees, 1 part time
employee and two consultants on retainer.
COMPETITION
Several companies in the marketplace provide technologies that are similar, or
are perceived by the marketplace to be similar, to Proginet's technology.
Competitive information is difficult to obtain and statistics on the number of
customers and products sold are not disclosed by either private or public
companies. For example, Computer Associates and IBM bundle product offerings and
they themselves do not fully know what products are specifically used by
customers. The information in this section was compiled from public sources as
well as from discussions with Proginet's partners, vendors, and customers.
Proginet believes the information to be reasonably accurate.
The information movement market is vast, with large and small players targeting
many market segments, typically in the client server space. Some large players
in this space including Computer Associates and Sterling Commerce, provide file
transfer products for both the client server and mainframe spaces, in which
Proginet competes. Currently, the markets for large systems data movement and
systems management are estimated at $1.5 billion and $6 billion respectively,
according to International Data Corporation..
We believe that the principal competitive factors in our market include: brand
recognition, brand selection, price, accessibility, customer service,
reliability, scalability, speed, and emerging Internet technology. Proginet also
believes that with the introduction of CyberFusion for advanced managed file
transfer over the Internet, the Company is well positioned to compete in this
emerging market for business to business (B2B) file transfer.
Many of our competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources. Certain of our competitors may devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing policies and
devote substantially more resources to web site and systems development. If our
competitors are able to offer products and services on more favorable terms, we
may experience reduced operating margins, loss of market share and a diminished
brand franchise. We cannot assure you that we will compete successfully against
our current and future competitors. Competitive pressures created by any one of
our competitors, or by our competitors collectively, could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
The Company's information movement technology products compete with major
computer and communication systems vendors including IBM, Computer Associates
and Sterling Commerce, as well as smaller companies such as SureFire Commerce
(Formerly Micro Tempus)., Firesign and Hilgraeve Systems. No competitor has more
than 10 percent market share and Proginet has an insignificant market share at
this time.
Of the smaller players, most of these have developed "bottom-up" file transfer
applications from a PC or UNIX platform as the foundation. These platforms have
been inherently unstable, or unreliable, when compared with the IBM mainframe.
Proginet's experience and expertise in this space enables the Company to develop
software with higher levels of compliance to standards for up time, reliability,
security, and scalability. The design requirement for 100 percent reliability
originated in the mainframe world and is the reason that, at this time, almost
70% of the world's data resides on IBM mainframes. Proginet's expertise in this
area provides Proginet an advantage over the competition, when reliability,
scalability and security are of paramount importance.
In the password management market, we believe Proginet has two key advantages:
(1) its expertise in mainframe development and (2) its relationship with
Microsoft which while informal, is helpful to Proginet. During 1998, the
worldwide market for Internet security increased 43% to $3.2 billion. In
particular, encryption software rose 31% while security software specialized in
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authentication/authorization/administration grew 46% within that period,
according to IDC. Again there is no dominant competitor in this market and
Proginet has an insignificant share at this time.
The mainframe is the platform where data security measures are most mature.
Consequently, customers are reliant upon the mainframe and mainframe security
packages for protecting their most critical data. Proginet's knowledge of the
mainframe positions the Company to leverage this reliance, and positions the
Company to develop strategic relationships with other mainframe - specific
vendors.
The Company's password management technology product line competes with major
software vendors, including IBM and Computer Associates, as well as smaller
companies such as Axent and Blockade.
Proginet's current informal relationship with Microsoft has positioned the
Company to exploit the most advanced elements of security provided by Microsoft
in its own products. Proginet builds upon Microsoft security, while the other
vendors merely replace it. Proginet's compliance with native Windows security
ensures that the security components of all applications, which are BackOffice
compliant, will also be fully compliant with Proginet's offering.
Proginet's technological relationship with Microsoft, also an informal working
relationship, has also enabled Proginet to provide a product that is
server-centric, requiring no code on the client desktop. This enables customers
to perform far simpler and less costly installation and maintenance than the
many other products in the marketplace that require specific desktop code.
Proginet's long-term strategy is to build upon its relationship with Microsoft,
remain at the forefront of new Microsoft technology and expand offerings related
to the Internet.
GOVERNMENT REGULATION
Proginet has received authorization from the United States Commerce Department
to export strong encryption that will ensure the security of critical business
information transferred worldwide via the Internet. Other than this
authorization, the Company is not subject to direct regulation by any government
agency, other than regulations applicable to businesses in general.
INTELLECTUAL PROPERTY
Proginet does not possess any patents. Proginet relies on a combination of
trademark, copyright and trade secret laws to protect its proprietary rights.
Proginet has registered the trademarks IND$File and TransAccess in the United
States. Neither trademark is considered significant in the protection of the
Company's technology. The Company believes the protection of the Company's
source code and its product designs is best protected by the Company's Employee
Confidentiality Information and Non-Competition Agreement. In addition, Proginet
owns most of the Internet domain names for its products.
RISK FACTORS
Investing in Proginet involves a high degree of risk. Potential investors should
carefully consider the risks described below and the other information in this
registration statement, in evaluating any investment in the Company's
securities.
WE HAVE EXPERIENCED HISTORICAL LOSSES
We have incurred significant losses in the past. In fiscal year 1998, our losses
were nearly $2,000,000. While we did have a modest profit in 1999, we expect to
increase our operating expenses significantly to expand our marketing
operations, and increase our level of capital expenditures to further develop
and maintain our proprietary software. Such increases in operating expense
levels and capital expenditures will adversely affect short-term operating
results, and therefore we believe that we may incur losses in the future. We
cannot assure you that we will achieve profitability or generate positive cash
flow from operations.
WE CANNOT ACCURATELY PREDICT OUR REVENUES
In light of our history and the rapidly evolving nature of the markets in which
we compete, our revenues are difficult to predict. We expect to experience
significant fluctuations in our future quarterly operating results
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due to a variety of factors, many of which are outside of our control. Factors
that may adversely affect our quarterly operating results include the following:
- The level of use of the Internet by businesses;
- The announcement or introduction of new services and products
by us and our competitors;
- Customer demand and acceptance of the products and services we
offer;
- Expenditures relating to expansion of our business;
- The termination of existing relationships or failure to
develop new relationships with our business partners; and
- General economic conditions and economic conditions specific
to the Internet and on-line commerce.
We also face unforeseeable seasonal sales fluctuations related to our increasing
focus on B2B Internet commerce. Due to the above factors, our operating results
likely will fluctuate in the future, making period-to-period comparisons
difficult and possibly unreliable. Any change in the above factors could reduce
our gross margins in future periods. If our operating results fall below the
expectations of our stockholders and/or securities analysts and investors, the
trading price of our common stock would likely decrease significantly. (See
"Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.")
WE MUST MANAGE OUR GROWTH
We believe that we must expand our present operations significantly in order to
maximize potential growth. This expansion will likely place a significant strain
on our management, operational and financial resources. We may hire new
employees for a number of key managerial and technical positions, and we will
need to integrate them into our management team. In order to manage our growth,
we must continue to implement and improve our operational and financial systems,
expand existing operations, attract and retain superior management and train,
manage and expand our employee base. We cannot assure you that we will manage
the expansion of our operations effectively, that our systems, procedures, or
controls will support our operations adequately or that our management will
implement our business plan successfully. If we cannot manage our growth
effectively, then our business, financial condition and results of operations
could suffer a material adverse effect.
WE EXPECT THAT WE WILL REQUIRE ADDITIONAL FUNDING TO EXPAND OUR BUSINESS; GROWTH
AND ACQUISITIONS MAY STRAIN OUR MANAGEMENT, OPERATIONAL AND FINANCIAL RESOURCES
We expect that we will require additional financing in order to expand our
business. Our working capital requirements in the foreseeable future will depend
on a variety of factors, including our ability to implement our business plan.
We cannot assure you that we will successfully negotiate or obtain additional
financing, or that we will obtain financing on terms favorable or acceptable to
us. We do not have any commitments for additional financing. Our ability to
obtain additional capital depends on market conditions, the national economy and
other factors outside of our control. If we do not obtain adequate financing or
such financing is not available on acceptable terms, our ability to finance our
expansion, develop or enhance services or products or respond to competitive
pressures would be limited significantly. Our failure to secure necessary
financing could have a material adverse effect on our business, prospects,
financial condition and results of operations. (See "Item 2- Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
OUR REVENUES DEPEND UPON KEY ALLIANCES
We currently have over 20 distributors worldwide and may continue to enter into
contractual strategic alliances. Our revenues in the past have depended and in
the future will continue to depend, in part, on these relationships. We cannot
assure you that any of these alliances will develop successfully, if at all, or
that these alliances will generate revenues or earnings for us. If we fail to
manage these relationships successfully, or if our alliances or partners fail to
perform as we expect, we could suffer substantial losses in sales and customers.
Any such losses would have a material adverse effect on our business, results of
operations and financial condition.
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WE DEPEND ON OUR ABILITY TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS
We believe that our trademarks and other proprietary rights are important to our
success and competitive position. However, we do not possess any patents. We
rely on a combination of trademark, copyright and trade secret laws to protect
our proprietary rights. We have registered the "IND$File" and "TransAccess"
trademarks in the United States. We cannot assure you that we will secure
significant protection for our proprietary rights or that claims will not be
made against us in connection with our proprietary rights. The actions we take
to establish and protect our trademarks and other proprietary rights may be
inadequate to prevent imitation of our services or products or to prevent others
from claiming violations of their trademarks and proprietary rights by us. In
addition, others may develop similar technology independently or assert rights
on our trademarks and other proprietary rights. The laws of other countries may
afford us little or no effective protection of our intellectual property.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND COULD IMPAIR OUR
BUSINESS
Other parties may assert infringement or unfair competition claims against us.
We cannot predict whether third parties will assert claims of infringement
against us, or whether any past or future assertions or prosecutions will harm
our business. If we are forced to defend against any such claims, whether they
are with or without merit or are determined in our favor, then we may face
costly litigation, diversion of technical and management personnel, or product
shipment delays. As a result of such a dispute, we may have to develop
non-infringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may be unavailable on terms
acceptable to us, or at all. If there is a successful claim of product
infringement against us and we are unable to develop non-infringing technology
or license the infringed or similar technology on a timely basis, it could have
a material adverse effect on our business, financial condition and results of
operations.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO ADAPT TO RAPIDLY CHANGING
TECHNOLOGIES IN OUR INDUSTRY
The market in which we compete is characterized by rapidly changing technology,
evolving industry standards, frequent new service and product announcements,
introductions and enhancements, and changing customer demands. These market
characteristics are exacerbated by the emerging nature of the Internet and the
introduction by companies from multiple industries of web-based products and
services. Accordingly, our future success will depend on our ability to adapt to
these changes and to improve the performance, features and reliability of our
products in response to competitive offerings, emerging technology and evolving
demands of the marketplace. If we fail to adapt to these changes, there would be
a material adverse effect on our business, results of operations and financial
condition. In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require us
to make substantial expenditures to modify or adapt our products or
infrastructure, which could have a material adverse effect on our business,
results of operations and financial condition.
If the infrastructure or complementary services necessary to make the Internet a
viable commercial marketplace are not developed or if the Internet does not
become a viable commercial marketplace, our business, results of operations and
financial condition will be materially adversely affected.
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OPERATIONS
Our performance depends substantially on the continued services and performance
of our senior management and other key personnel, particularly Kevin M. Kelly,
Chief Executive Officer.
Although Proginet has management continuity agreements for Mr. Kevin M. Kelly
and Mr. James F. Kelly, Senior Vice President and director of strategic
planning, Proginet does not have any employment agreements nor does it have "key
man" life insurance for any officers. Our performance also depends on our
ability to retain and motivate our other officers and key employees. We have
relatively few senior personnel, and thus the loss of any single individual
could interrupt our operations significantly. The loss of the services of any of
our executive officers or other key employees could have a material adverse
effect on our business, prospects, financial condition and results of
operations. Our future success depends on our ability to identify, attract,
hire, train, retain and motivate other highly skilled technical, managerial and
marketing personnel. Competition for such personnel is intense, and we cannot
assure you that we will succeed in attracting and retaining such
8
<PAGE>
personnel. Our failure to attract and retain the necessary technical, managerial
and marketing personnel could have a material adverse effect on our business,
prospects, financial condition and results of operations.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE, AND MANY OF OUR
COMPETITORS ARE LARGER AND HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE DO
We believe that the principal competitive factors in our market include: brand
recognition, brand selection, price, accessibility, customer service,
reliability, scalability, and speed.
Many of our competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources. Certain of our competitors may devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing policies and
devote substantially more resources to web site and systems development. If our
competitors are able to offer products and services on more favorable terms, we
may experience reduced operating margins, loss of market share and a diminished
brand franchise. We cannot assure you that we will compete successfully against
our current and future competitors. Competitive pressures created by any one of
our competitors, or by our competitors collectively, could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
INSECURE TRANSMISSION OF CONFIDENTIAL INFORMATION AND THIRD PARTY MISCONDUCT
COULD HURT BUSINESS CONFIDENCE IN INTERNET COMMERCE
Many businesses are concerned about transmitting confidential information, such
as customer or confidential business data, over the Internet. Confidence in
secure transmissions is a significant barrier to Internet commerce and
communications. We rely on encryption technology to transmit confidential
information. In addition, servers are vulnerable to computer viruses, physical
or electronic break-ins, deliberate attempts by third parties to exceed the
capacity of systems and similar disruptive problems. Computer viruses, break-ins
or other problems caused by third parties could lead to interruptions, delays,
loss of data or cessation in service to users of our products. The law relating
to the liability of Internet services for information carried on or disseminated
through their services currently is unsettled. It is possible that claims could
be made against companies under both U.S. and foreign law for defamation, libel,
invasion of privacy, negligence, copyright or trademark infringement or other
theories based on the nature and content of the materials disseminated through
their services. Concerns regarding liability for information disseminated over
the Internet and the adoption of any additional laws for regulations may
decrease the growth of the Internet, which could decrease the demand for our
Internet transfer products and harm our business.
ADDITIONAL REGULATIONS COULD BE IMPOSED ON OUR INDUSTRY
We are not currently subject to direct regulation by any government agency other
than regulations applicable to businesses generally, which include export
regulations on encryption software for which Proginet has received exemptions
from the U.S. Commerce Department. However, due to the increasing popularity and
use of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as privacy, pricing
and characteristics and quality of products and services. Furthermore, the
growth and development of the market for Internet commerce may prompt calls for
more stringent protection laws that may impose additional burdens on those
companies conducting business over the Internet.
INTEGRATING NEW ACQUISITIONS INTO OUR BUSINESS MAY BE DIFFICULT
If appropriate opportunities present themselves, we intend to acquire
businesses, technologies, services or products that we believe will grow our
business. We currently have no understandings, commitments or agreements with
respect to any material acquisition and no material acquisition currently is
being pursued. We cannot assure you that we will be able to identify, negotiate
or finance future acquisitions successfully, or integrate such acquisitions into
our current business. The process of integrating an acquired business,
technology, service, product or personnel may result in unforeseen operating
difficulties and expenditures, and may absorb significant management attention
that would otherwise be available for ongoing development of our business.
Moreover, we cannot assure you that the anticipated benefits of any acquisition
will be realized. Any future acquisitions of other businesses, technologies,
services or products might require us to obtain additional equity or debt
financing, which may not be available on terms favorable to us, or available at
all, and such financing, if available, might result in substantial dilution to
our stockholders.
9
<PAGE>
RULE 144
Under Rule 144, a person who is not deemed to have been one of our "affiliates"
at any time during the 90 days preceding a stock sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
such shares without complying with the manner of sale, notice filing, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, "144 shares" may be sold upon the effectiveness of this registration
statement, which will increase the number of tradable shares (float) in the
marketplace.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this registration statement, is entitled to resell such shares
90 days after the effective date of this registration statement in reliance on
Rule 144, without having to comply with certain restrictions, including the
holding period, contained in Rule 144.
The SEC has indicated that Rule 701 applies to typical stock options granted by
an issuer before it becomes subject to the reporting requirements of the
Securities Exchange Act of 1934, along with the shares acquired upon exercise of
such options (including exercises after the date of this registration
statement). Securities issued in reliance on Rule 701 are restricted securities
and, beginning 90 days after the effective date of this Registration Statement,
may be sold without compliance with paragraphs (a), (d), and (e) of Rule 144 and
shares may be sold by "affiliates" under Rule 144 without compliance with its
one year minimum holding period requirement under paragraph (d). If those
individuals who hold vested options, a total of approximately 700,000, were to
exercise a portion or all of their options, this could have a diluting effect on
the existing holders of Proginet common stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
You should read the following discussion in conjunction with our financial
statements and the notes thereto included elsewhere in this registration
statement. All statements in this registration statement related to Proginet's
ongoing financial operations and expected future results constitute
forward-looking statements. The actual results may differ materially from those
anticipated or expressed in such statements. (See "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS".)
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED APRIL 30, 2000 AND APRIL 30, 1999
Revenues for the quarter were $1,159,264, an increase of 11.3%, compared to
$1,041,895 for the comparable period in 1999. Software sales and license
revenues were $531,178, relatively flat to the $532,975 for the comparable
period of 1999. Software sales and license revenues continue to be well
distributed, as indirect sales represent 54% and direct sales represent 46% of
total sales. On the product side, SecurPass(TM) represented 47% of new license
sales and the file transfer products, which include CyberFusion(TM) and
Fusion(TM), represented 53% of the product licenses.
Software maintenance fees increased $60,114 to $567,491, compared to $507,377
for the comparable period in 1999. This 11.8% increase is related to increased
income from maintenance fees from previously licensed software products.
Other revenues increased to $60,595 from $1,543 for the comparable period ended
April 30, 1999. This category of revenue is related to ad-hoc consulting
services that are typically provided in response to requests for support from
existing customers. Consulting revenue can vary considerably from period to
period.
Cost of revenues increased to $498,984 from $297,981 for the comparable period
in 1999, an increase of 67.5%. This increase includes amortization expense
related to developed software now available for sale and increases in technical
support costs.
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Operating expenses were $795,987, an increase of 15.0% over expenses of $692,024
for the comparable period last year. Research and development expenses declined
to $94,594 from $118,676 last year, reflecting reduced staffing levels assigned
to R&D activities. Selling and marketing expenses increased 49.1% to $214,916
from $144,117, as Proginet increased expenditures for marketing campaigns and
telemarketing services to generate sales leads.
General and administrative expenses were $486,477 for the quarter ended April
30, 2000, compared to $429,231 for the comparable period in 1999. This increase
of 13.3% is primarily related to increases in consulting expenses, professional
fees, and investor relations, and is somewhat offset by the favorable variance
in general and administrative payroll expense. The increased consulting expenses
are related to Proginet's increased use of outside consultants. Professional
fees increased significantly for legal and accounting fees related to the
Company's filing of a 10-SB registration statement with the U.S. Securities and
Exchange Commission for the purpose of becoming a U.S. reporting company.
Finally, the investor relations expenditures are related to the engagement of an
outside Investor Relations firm.
For the quarter, Proginet reported an operating loss of $135,707, compared to
income of $51,890 for the same period for 1999. Including other income, income
before income taxes reflected a loss of $115,612, compared to income of $58,307
for the comparable quarter ended April 30, 1999.
On a nine-month basis, revenues were $3,143,299, or 8% below the 1999 nine-month
results of $3,416,194. Software sales and licenses were $1,385,599 for the nine
months ended April 30, 2000, compared to $1,882,061 for the nine months ended
April 30, 1999. The decline in new license sales is attributed to the short fall
previously reported in mid-year results that reflected a one-third decline due
to slowed product sales from the "Y2K lockdown." Improved performance is
expected going forward.
Software maintenance fees were $1,621,605 or 5.7% above the 1999 nine-month
results of $1,533,815. Maintenance revenues continue to be strong as a result of
the solid retention of existing customers. Other revenues, related to consulting
fees, were $136,095 for the nine months ended April 30, 2000 compared to $60,318
for 1999, representing an increased demand for consulting services from
Proginet's existing customer base.
Cost of revenues increased to $1,288,007, or a 40.8% increase, from $914,686 in
the comparable nine-month period in 1999. This increase is comprised of an
increase in amortization expenses of $194,052 and an increase in technical
support costs for domestic and international customers of $179,269.
Operating expenses increased to $2,451,146 for the nine-month period ended April
30, 2000, a 14.3% increase over the comparable period amount of $2,143,584 for
1999. The increase of $307,562 is described above in the April 30, 2000
quarterly analysis. In addition, during the second quarter of fiscal 2000, the
Company recorded a $195,740 charge related to potential losses on payments due
from an international distributor.
On a nine-month basis, Proginet reported an operating loss of $595,854 compared
to income of $357,924 for the nine-month period for 1999. After inclusion of
other income, Proginet reported a net loss before taxes of $553,208 for the nine
months ended April 30, 2000, compared to net income of $397,673 for the nine
months ended April 30, 1999.
FISCAL PERIODS ENDED JULY 31, 1999 AND JULY 31, 1998
Total revenues increased to $4,174,163 in fiscal 1999 from $3,644,926 in fiscal
1998, an increase of 15%. Software license revenues increased by $564,872, or
38%, to $2,063,436. This increase is attributable to sales of Proginet's
SecurPass password management software, which produced over $1 million in
license revenues in its first full year of availability. The SecurPass license
revenue offset declines in sales from Proginet's older software products.
Software maintenance fees remained flat at $2,048,409 compared to 1998 software
maintenance fees of $2,060,952. While Proginet did increase software maintenance
fees for new products licensed, these increases were offset by declines in
software maintenance fees from some of the Company's older software products
that were dropped by customers.
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<PAGE>
Other revenues were $62,318 compared to $85,410 for 1998. These revenues are for
consulting services provided to customers who request specific support for
installations of Proginet's software. Proginet does not promote consulting
services but does respond to specific customer requests.
Cost of revenues increased from $1,186,490 to $1,314,368, an increase of 11%,
resulting in part from the amortization of previously developed software that
began to be amortized in 1999, in recognition of the Company's developed
products now being made commercially available for sale.
Operating expenses declined to $2,898,014 from $4,843,402, a reduction of
$1,945,388, or 40%, in 1999 compared to 1998. Research and development costs
were $511,678, relatively flat compared to 1998 research and development expense
of $509,119, as Proginet committed the same level of resources for the ongoing
research and development activities related to new products.
Selling and marketing expenses were $525,738 in 1999 compared to $2,062,095 in
1998. These results represent a reduction of $1,536,357, or 75%. These
significant reductions were achieved by the complete re-organization of
marketing and sales activities, including, management changes, a shift to more
aggressive outsourced telesales selling models instead of direct sales calls,
and an increased emphasis on sales through an indirect model, which includes
international distributors and OEM's to sell Proginet's software.
General and administrative expenses in 1999 were $1,860,598, a reduction of
$411,590 or 18%, compared to general and administrative expenses of $2,272,188
in 1998. These reductions were achieved by across - the - board decreases
including facilities cost, telecommunications cost, professional services cost,
supplies and administrative support staff costs.
Proginet experienced an operating loss of $38,219 for 1999 compared to an
operating loss of $2,384,966 for 1998. The Company reported net income of
$19,533 for 1999 compared to a net loss of $1,930,112 for 1998.
LIQUIDITY AND CAPITAL RESOURCES
Proginet's liquidity position improved substantially in fiscal 1999 with an
increase in cash, cash equivalents, and short-term investments of $958,661 or
131% over July 1998. Cash, cash equivalents and short-term investments increased
to $1,691,163 as a result of improved profitability and substantial improvement
in the collection of accounts receivable. For the nine months ended April 30,
2000 Proginet's cash, cash equivalents, and short-term investments decreased
$71,351 to $1,619,812. Proginet's liquidity position is adequate to achieve its
operating plan for the next 12 months.
During fiscal 1999 Proginet purchased 861,000 shares comprised of 800,000 shares
from two former employees and 61,000 shares pursuant to Proginet's authorized
stock repurchase program. In addition, the Company issued 1,260,000 shares of
common stock to Microsoft Corporation pursuant to the terms of an agreement
entered into in December 1996 and amended in October 1998 to eliminate any
formal contractual obligations on the part of either Proginet or Microsoft.
During fiscal 2000 the Company issued 20,870 shares upon the exercise of
previously granted stock options. The Company also purchased 228,184 shares from
an ex-insider pursuant to the terms of a repurchase agreement in May 2000.
ACQUISITIONS
If opportunities present themselves, Proginet may acquire businesses,
technologies, services and/or products that we believe will grow our business.
The Company currently has no understandings, commitments or agreements with
respect to any material acquisitions and no material acquisitions currently are
being pursued.
IMPACT OF THE YEAR 2000
Many computer systems and software products were coded to accept only two-digit
entries in the date code field and could not reliably distinguish dates
beginning on January 1, 2000 from dates prior to the Year 2000. Many companies'
software and computer systems were upgraded or replaced in order to correctly
process dates beginning in 2000 and to comply with the "Year 2000" requirements.
The Company reviewed its internal programs and determined that there were no
significant Year 2000 issues within our systems or services.
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As of May 29, 2000 there have been no reports of internal system problems and no
reports of any significant problems with the Company's software as a result of
the Year 2000 situation. Proginet does not expect any adverse impact from Year
2000.
ITEM 3. DESCRIPTION OF PROPERTY
Proginet maintains its headquarters at 200 Garden City Plaza, Garden City, New
York, 11530 where a majority of its employees are located. At present, a second
facility located in Chicago, Illinois, which had served as a development lab, is
subleased to another party for $6,883 per month, until the lease expiration.
<TABLE>
<CAPTION>
----------------------------------- ------------------ --------------- ---------------------- --------------
Description Location Square Ft. Lease Expiration Current
Annual Cost
----------------------------------- ------------------ --------------- ---------------------- --------------
<S> <C> <C> <C> <C>
Headquarters Garden City, NY 9,804 February 28, 2006 $211,525
----------------------------------- ------------------ --------------- ---------------------- --------------
Subleased to another Tenant Chicago, IL 6,068 December 31, 2002 $12,074*
----------------------------------- ------------------ --------------- ---------------------- --------------
* Amount is net of related sublease revenue.
</TABLE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to Proginet regarding
the ownership of Proginet's common stock. The information is as of May 29, 2000.
This table lists the following:
(i) Each stockholder known to Proginet to be a beneficial owner of
five percent or more of Proginet's common stock;
(ii) Each director of the Company;
(iii) Each executive officer of the Company (as such term is defined
under the caption "Executive Compensation--Summary of Cash and
Certain Other Compensation"); and
(iv) All current directors and officers of Proginet Corporation as
a group.
Beneficial ownership has been determined in accordance with rules of the
Securities and Exchange Commission, and unless otherwise indicated, represents
shares for which the beneficial owner has sole voting and investment power. The
number of shares of common stock beneficially owned includes any shares issuable
pursuant to stock options that may be exercised within 60 days after May 29,
2000. Shares issuable pursuant to such options are deemed outstanding for
computing the percentage of the person holding such options but are not deemed
to be outstanding for computing the percentage of any other person.
13
<PAGE>
<TABLE>
<CAPTION>
------------------------------------- ----------------------------------- -----------------------------------
Name and Address of Beneficial Amount and Nature of Beneficial Percent of Class (2) %
Owner (1) Ownership (2)
------------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C>
Bathurst Ltd.(5) 1,827,336 (3) 13.04
P.O. Box 25
Brittanic House
Provideniales
Turks and Caicos Isle
British West Indies
------------------------------------- ----------------------------------- -----------------------------------
Microsoft Corporation 1,360,000 9.70
One Microsoft Way
9N-1264
Redmond, WA
------------------------------------- ----------------------------------- -----------------------------------
James F. Kelly 775,006 5.53
------------------------------------- ----------------------------------- -----------------------------------
Kevin M. Kelly 721,604 (4) 5.15
------------------------------------- ----------------------------------- -----------------------------------
Kevin Bohan 250,935 (4) 1.79
------------------------------------- ----------------------------------- -----------------------------------
E. Kelly Hyslop 238,700(4) 1.70
Ard na Gaoithe
Knockeen, Goleen
W.Cork, Ireland
------------------------------------- ----------------------------------- -----------------------------------
John C. Daily 232,000 (4) 1.66
18 Holly Lane
Rye, NY 10580
------------------------------------- ----------------------------------- -----------------------------------
Stephen Sternbach 32,500 .23
11 Phaeton Drive
Melville, NY 11747
------------------------------------- ----------------------------------- -----------------------------------
Arne H. Johnson 50,000 (4) .36
------------------------------------- ----------------------------------- -----------------------------------
All the Officers and Directors as a 2,310,745 16.48
Group
------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
(1) Unless otherwise indicated, the address of each beneficial owner is the
care of Proginet Corporation, 200 Garden City Plaza, Garden City, New
York 11530
(2) A person is deemed to be the beneficial owner of securities, which may
be acquired by such person within 60 days from the date of this
registration statement upon the exercise of options, warrants or
convertible securities. Each beneficial owner's percentage of ownership
is determined by assuming all options, warrants or convertible
securities that are held by such person (but not held by any other
person) and which are exercisable or convertible within 60 days of this
registration statement have been exercised or converted. The percentage
of ownership of all officers and directors as a group assumes a base of
14,017,466 including 13,387,866 shares of common stock outstanding as
of May 29, 2000 and 629,600 vested options.
(3) Bathurst Ltd. has entered into an agreement with Proginet Corporation
whereby Bathurst Ltd. agreed to vote all shares it owns consistent with
the vote of the Board of Directors of the Company through December 31,
2000.
(4) The amount of beneficial ownership includes both common stock held and
vested options owned and executable within 60 days after May 29, 2000.
The specific number of options for each individual is as follows; Kevin
M. Kelly - 219,600, Kevin Bohan - 40,000, E.Kelly Hyslop - 90,000, John
C. Daily - 190,000, Stephen Sternbach - 30,000, Arne H. Johnson -
50,000, and all officers and directors as a group 619,600.
(5) Jaws Technologies, Inc., a Nevada corporation, is the control person of
Bathurst Ltd. Robert Kubberous, President and Chief Executive Officer
of Jaws Technologies, may be deemed to be the control person of Jaws
Technologies.
14
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information with respect to the directors
and executive officers of Proginet Corporation.
<TABLE>
<CAPTION>
------------------------------------- ----------------------------------- -----------------------------------
Name Age Position
------------------------------------- ----------------------------------- -----------------------------------
<S> <C>
John C. Daily 54 Director, Chairman
------------------------------------- ----------------------------------- -----------------------------------
Kevin M. Kelly 53 Director, President and Chief
Executive Officer
------------------------------------- ----------------------------------- -----------------------------------
James F. Kelly 34 Director, Senior Vice President
and Corporate Secretary
------------------------------------- ----------------------------------- -----------------------------------
E. Kelly Hyslop Not Available Director
------------------------------------- ----------------------------------- -----------------------------------
Stephen Sternbach 45 Director
------------------------------------- ----------------------------------- -----------------------------------
Kevin Bohan 30 Vice President, Sales
------------------------------------- ----------------------------------- -----------------------------------
Arne H. Johnson 51 Vice President, Development and
Marketing
------------------------------------- ----------------------------------- -----------------------------------
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE MANAGEMENT TEAM
KEVIN M. KELLY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, DIRECTOR
Mr. Kelly is the President and Chief Executive Officer of Proginet. Mr. Kelly
became president of Proginet in June of 1994, and had previously served as an
outside director for 2 years. From 1992 to June 1994, Mr. Kelly served as Chief
Operating Officer of CDC Systems, where he managed an armored car company of
over 1500 employees. He was also Senior Vice President of Nationar Bank in New
York from 1984 to 1992, a correspondent commercial bank, and previously he was
Division Executive and Vice President of Chase Manhattan Bank, a global banking
organization. Mr. Kelly holds a Bachelor of Science degree in Mathematics from
Iona College.
JAMES F. KELLY, CO-FOUNDER, SENIOR VICE PRESIDENT, CORPORATE SECRETARY,
DIRECTOR
Mr. Kelly is a co-founder of the Company, and has been the Senior Vice President
of Proginet since May 1995. Mr. Kelly started with Proginet in 1985 where he
served as head of Quality Assurance as well as lead developer on several
platforms for the XCOM project. In August of 1988, Mr. Kelly served as a
communications analyst at Prudential-Bache Securities, a financial services
company. In September of 1989, Mr. Kelly returned to Proginet as Senior Vice
President of Engineering with responsibility for the entire development effort.
In 1996, Mr. Kelly moved over to head the research efforts for the Company,
including the merger and acquisition strategy. Mr. Kelly has been active in
professional and engineering organizations on four continents and has been the
author of more than one dozen technical articles for McGraw-Hill and Ziff Davis
publications. Mr. Kelly holds a Bachelors of Science degree in Computer Science
from Manhattan College.
ARNE H. JOHNSON, VICE PRESIDENT DEVELOPMENT AND MARKETING
Mr. Johnson has been with Proginet since June 1997 where he has been Manager of
Product Development and Marketing. Previously, he served as President of
Huntington Consulting Group, a software consulting company, from 1992 to June
1997, where his clients included J.P. Morgan Investment Management. Mr. Johnson
also served as Senior Vice President and Vice President of Nationar Bank, a
correspondent commercial bank from 1985 to 1992, and as Vice President of Chase
Manhattan Bank, a global banking organization, from 1978 to 1985. Mr. Johnson
holds a Bachelors Degree in Systems Engineering from Polytechnic Institute of
New York and a Masters of Business Administration from Pace University.
15
<PAGE>
KEVIN BOHAN, VICE PRESIDENT SALES AND CUSTOMER RELATIONS
Mr. Bohan has served as Vice President of Customer Support for Proginet since
1998. He joined the Company in 1989 as a Network Engineer, and became manager of
Customer Support in 1994. Previously, Mr. Bohan served on the Board of Directors
of OSINET Corporation, a non-profit standards based software association, and
has served as Chairman of the North American Open System Implementers Workshop
at the United States National Institute of Standards and Technology. His
standards work included work on directory services. Mr. Bohan holds a Bachelor
of Arts degree in Accounting from Iona College.
BOARD OF DIRECTORS
JOHN C. DAILY, CHAIRMAN OF THE BOARD
Mr. Daily has been Chairman of the Board since December 1998 and a Director of
the Company since 1993. He has been Senior Vice President and Principal of
Christian & Timbers, an executive search firm, since June 1996. Mr. Daily has
also served as Senior Vice President of Handy HRM, an executive search firm,
from 1994 to June 1996 and President and Chief Executive Officer of Image
Business Systems, a software development company, from June 1994 to December
1994.
DR. E. KELLY HYSLOP
Dr. Hyslop has been a Director of the Company since September 1996. Dr. Hyslop
is retired from medical practice. He practiced as a medical doctor from 1969
through 1995. He has been involved with many private investment groups as a
strategic and financial advisor, assisting in the raising of capital for
emerging growth companies such as Novadigm Corporation and Proginet Corporation.
He is currently involved with a group of private investors called HR(2) where
his role is solely that of a private investor.
STEPHEN STERNBACH
Mr. Sternbach has been a Director of the Company since November 1999. Mr.
Sternbach has been the President and Chief Executive Officer of Star Multi Care
Services, Inc, a health care provider based on Long Island, since 1986. Star
Multi Care is publicly traded on the NASDAQ Stock Exchange under the symbol
SMCS. Mr. Sternbach also serves on Star Multi Care's board of directors.
ELECTION OF OFFICERS AND DIRECTORS
Proginet's executive officers are elected by the Board of Directors on an annual
basis and serve for one year or until their successors are duly elected and
qualified. All of the current Directors were selected as Directors of Proginet
Corporation pursuant to a vote of the Stockholders of Proginet at Proginet
Corporation's Annual General Meeting on November 16, 1999. Mr. Sternbach is the
only director who serves on the board of directors of a reporting company.
COMMITTEES
The Board of Directors has established three committees: Audit, Compensation,
and Nominating.
AUDIT
The Audit Committee functions as an overseer of the Company's financial
reporting process and internal controls.
The Audit Committee has responsibilities, including, but not limited to, the
following:
1. Recommend which firm to engage as independent auditors, and
whether to terminate that relationship.
2. Review independent auditors' compensation, the proposed terms
of engagement, and its independence.
3. Serve as a channel of communication between the independent
auditors and the board.
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<PAGE>
4. Review the findings of the independent auditors, including any
qualifications in the opinion, related management letter and
management's responses to recommendations made by the
independent auditor in connection with the audit.
5. Review the Company's annual financial statements.
6. Review the procedures employed by the Company in preparing
published financial statements and related management
commentaries.
7. Meet periodically with management to review the Company's
major financial risk exposures.
The Audit Committee meets with Proginet's independent auditors prior to the
completion of the audit to review the findings of the independent audit.
CURRENT MEMBERSHIP
Mr. John Daily is the Chairman of the Audit Committee, and Dr. Kelly Hyslop and
Mr. Stephen Sternbach are members of the committee.
COMPENSATION
The Compensation Committee recommends to the board the annual salary, bonus,
stock options, and other benefits, direct and indirect, of the senior executives
of the Company.
The Compensation Committee has responsibilities, including, but not limited to,
the following:
1. Review and recommend to the board, the annual salary, bonus,
stock options, and other benefits, direct and indirect, of the
senior executives of the company.
2. Review new executive compensation programs; review on a
periodic basis the operation of the Company's executive
compensation programs to determine whether they are properly
coordinated; establish and periodically review policies for
the administration of executive compensation programs.
3. Review and approve employee incentive compensation programs,
including profit sharing and other employee bonus programs.
4. Establish and periodically review policies in the area of
management perquisites.
5. Plan for executive development and succession.
6. Review and recommend to the board or determine the
compensation of directors.
CURRENT MEMBERSHIP
Mr. Sternbach is the Chairman of the Compensation Committee, and Mr. Daily and
Dr. Hyslop are members of the committee.
NOMINATING
The Nominating Committee recommends to the board and to the stockholders,
nominees for election to the board.
The Nominating Committee has responsibilities, including, but not limited to,
the following:
1. Propose the slate of nominees of directors to be elected by
the stockholders (and any directors to be elected by the board
to fill vacancies).
2. Recommend to the board of directors, the directors to be
selected for membership on the various board committees.
CURRENT MEMBERSHIP
Dr. Hyslop is the Chairman of the Nominating Committee, and Mr. Kevin Kelly and
Mr. Stephen Sternbach are members of the committee.
17
<PAGE>
FAMILY RELATIONSHIPS
Kevin Bohan is the nephew of Kevin M. Kelly. There are no other family
relationships among any of the directors or executive officers of the Company.
18
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets out the compensation received by the Company's Chief
Executive Officer and the Company's other executive officers whose total salary
and bonus exceeded $100,000 during the year ended July 31, 1999 (the Named
Executive Officers).
<TABLE>
<CAPTION>
Annual Compensation Long -Term Compensation
------------------------ ---- ------------ --------- ----------- ----------- -------------------
$(US) Awards Payouts
------------------------ ---- ------------ --------- ----------- ----------- -------------------
<S> <C> <C> <C>
Name and Principal Other Comp Options All Other
Position FY Salary $ Bonus $ $ Granted Compensation $
Kevin M. Kelly 99 200,000 0 0 80,000 0
Chief Executive 98 200,000 0 0 0 0
Officer and President 97 200,000 77,000 0 0 0
------------------------ ---- ------------ --------- ----------- ----------- -------------------
Joseph T. Mohen (1) 99 168,000 0 0 0 0
Executive Vice 98 168,000 0 0 0 0
President 97 120,000 31,250 0 0 0
------------------------ ---- ------------ --------- ----------- ----------- -------------------
James F. Kelly 99 110,000 0 8,500 (2) 20,000 0
Senior Vice President 98 110,000 0 0 0 0
97 95,000 19,000 0 0 0
------------------------ ---- ------------ --------- ----------- ----------- -------------------
Arne Johnson 99 145,000 0 0 25,000 0
Vice President Product 98 145,000 0 0 0 0
Development and 97 36,250 0 0 50,000 0
Marketing
------------------------ ---- ------------ --------- ----------- ----------- -------------------
Kevin Bohan 99 80,000 20,547 0 40,000 0
Vice President of 98 80,000 20,000 0 40,000 0
Sales and Customer 97 71,250 0 0 0 0
Support
------------------------ ---- ------------ --------- ----------- ----------- -------------------
</TABLE>
(1) Mr. Joseph T. Mohen resigned as an officer of the Company in October 1998
and entered into an employment agreement as "Chief of Strategic Alliances"
expiring September 30, 1999 after which time Mr. Mohen was no longer
associated with the Company.
(2) Commission earned on sales achieved for Indirect Channels license revenue.
STOCK OPTIONS
The following table provides information with respect to the stock option grants
made to the Named Executive Officers during the 1999 fiscal year under Proginet
Corporation's 1997 Stock Incentive Plan. No stock appreciation rights were
granted during such fiscal year to the Named Executive Officers.
<TABLE>
<CAPTION>
------------------- ----------- ---------------- ------------ ----------------------
% of total
Securities options
under granted to Exercise
Options employee(s) in price
Name granted # fiscal year ($U.S.) Expiration Date
------------------- ----------- ---------------- ------------ ----------------------
<S> <C> <C> <C> <C> <C>
Kevin M. Kelly 80,000 19.70 .71 3/1/09
------------------- ----------- ---------------- ------------ ----------------------
Kevin Bohan 40,000 9.85 .71 3/1/09
------------------- ----------- ---------------- ------------ ----------------------
Arne Johnson 25,000 6.16 .71 3/1/09
------------------- ----------- ---------------- ------------ ----------------------
James F. Kelly 20,000 4.93 .71 3/1/09
------------------- ----------- ---------------- ------------ ----------------------
</TABLE>
There were no options exercised by Named Executive Officers of the Company for
the fiscal year ended July 31, 1999.
OPTION GRANTS
Under the Company's 1995 stock option plan, a total of 482,600 stock options
have been granted, as of May 29, 2000 at an exercise price of $.75 per share. Of
the options granted under the 1995 plan, 482,600 have been vested and 0 are
unvested.
Under the Company's 1997 stock option plan, a total of 1,337,700 stock options
have been granted at an average exercise price of $.68 per share. As of May 29,
2000, of the options granted under the 1997 plan, 337,800 have vested and
999,900 are unvested.
19
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN THE
UNEXERCISED OPTIONS AT OPTIONS MONEY
FISCAL YEAR-END (1) FISCAL YEAR-END
--------------------------------------------------------------------------------------------------------------
NAME OF EXECUTIVE OFFICER EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Kevin M. Kelly 219,000 80,000 $0.00 $0.00
--------------------------------------------------------------------------------------------------------------
Joseph T. Mohen 0 0 $0.00 $0.00
--------------------------------------------------------------------------------------------------------------
James F. Kelly 0 20,000 $0.00 $0.00
--------------------------------------------------------------------------------------------------------------
Arne Johnson 16,000 59,000 $0.00 $0.00
--------------------------------------------------------------------------------------------------------------
Kevin Bohan 40,000 40,000 $.0.00 $0.00
--------------------------------------------------------------------------------------------------------------
</TABLE>
(1) None of the Named Executive Officers exercised any of his options during the
Company's last completed fiscal year ended July 31, 1999.
DIRECTOR COMPENSATION
Proginet compensates its non-employee directors by granting 30,000 options for
each year of service. Additionally, the Chairman of the Board receives an
additional 15,000 options. Proginet also compensates directors for reasonable
expenses incurred in attending meetings of the Board of Directors.
MANAGEMENT CONTRACTS AND CHANGE-IN-CONTROL AGREEMENTS
The Company has entered into "management agreements" with two key employees,
Kevin M. Kelly and James F. Kelly. When a change of control in the Company
occurs, these agreements provide for:
A lump sum payment equal to the present value of the aggregate of the
executive's base compensation (equal to the highest rate of base compensation in
effect during the three-year period immediately preceding the termination) for
the eighteen month period following the termination and the aggregate amount of
annual bonuses (equal to the highest aggregate amount of such bonuses that the
executive received in any one of the three years preceding the termination) that
the executive would have received for the eighteen month period following the
termination.
Continuation at the Company's expense of all benefits to which the executive was
entitled prior to termination for a period of eighteen months. These agreements
are attached as Exhibit 9.
There are no other Management Contracts or Change in Control Agreements for any
of the executives or employees of the Company.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bathurst Ltd. has entered into an agreement with Proginet whereby Bathurst Ltd.
has agreed to vote all shares it owns consistent with the votes of the Board of
Directors of the Company through December 31, 2000. See Exhibit 10.
The Company has a one million-dollar profession liability policy for directors
and officers liability coverage. The policy was obtained through a competitive
bidding process consistent with industry practice. The Company obtained such
insurance coverage from Hooghuis Inc., where the Company's CEO's daughter,
Bernadette Kelly, is employed. The transaction was at arms length and the fees
paid were competitive.
Mr. Joseph T. Mohen resigned as an officer of the Company in October 1998 and
entered into an employment agreement as "Chief of Strategic Alliances" expiring
September 30, 1999, after which time Mr. Mohen was no longer associated with
Proginet Corporation. At such time, Mr. Mohen agreed to sell 750,000 shares of
Proginet common stock to the Company for $.31 a share, the market price of the
stock. Of the $232,500 purchase price, $50,000 was paid on the date of the
agreement. The remainder is being paid over a 36-month period.
20
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
Proginet's Certificate of Incorporation authorizes the issuance of an aggregate
of 40,000,000 shares of common stock, par value $.001 per share, and the
issuance of 10,000,000 shares of preferred stock, par value $.01 per share. As
of May 29, 2000, there were 13,387,866 shares of common stock outstanding held
by over three hundred stockholders of record.
The following summarizes the rights of holders of common stock:
- Each holder of shares of common stock is entitled to one vote
per share on all matters to be voted on by stockholders
generally, including the election of directors;
- There are no cumulative voting rights;
- Holders of common stock may not take action by written consent
in lieu of a meeting;
- Holders of common stock are entitled to dividends and other
distributions as may be declared from time to time by the
Board of Directors out of any funds legally available for that
purpose;
- Upon the liquidation, dissolution or winding up of the
Company, the holders of shares of common stock will be
entitled to share ratably in the distribution of all Company
assets remaining available for distribution after satisfaction
of all of the Company's liabilities and the payment of the
liquidation preference of any outstanding preferred stock; and
- The holders of common stock have no preemptive or other
subscription rights to purchase shares of our stock, nor are
they entitled to the benefits of any redemption or sinking
fund provisions.
WARRANTS
Proginet entered into an agreement with Mallory Factor Inc. (MFI) whereby MFI
will provide guidance and support on a "Strategic Corporate and Communications
Counseling Program" for Proginet. The terms of the agreement are subject to
approval of the Canadian Venture Exchange (CDNX) and provide for granting of up
to 500,000 warrants at a price of $.54 depending upon achievement of
pre-arranged goals. The first 150,000 warrants vest upon regulatory approval of
the agreement and the next 100,000 vest provided that Proginet's stock price
reaches $1.25. The next 250,000 vest, if and only if, two criteria are
satisfied; Proginet's achievement of a listing on the United States
Over-the-Counter Bulletin Board and Proginet's stock price goes to established
thresholds. When Proginet's stock price reaches $2.25, then 100,000 warrants
will vest; when Proginet's price reaches $3.25, then 100,000 additional warrants
will vest; and when Proginet's price reaches $4.25, the final 50,000 warrants
will vest.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS.
Some provisions of the Company's Certificate of Incorporation and Bylaws may be
deemed to have an anti-takeover effect and may delay, defer or prevent a tender
offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by our stockholders. These provisions include:
- Stockholder Action; Special Meeting Of Stockholders. The Company's
Certificate of Incorporation provides that stockholders may not take
action by written consent, but rather only at a duly called annual or
special meeting of stockholders. This may limit stockholders' ability
to alter corporate policies or actions with which they disagree.
- Authorized But Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance
without stockholder approval. These additional shares may be utilized
for a variety of corporate purposes, including future public offerings
to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued and unreserved
common stock and preferred stock could render more difficult or
discourage
21
<PAGE>
an attempt to obtain control of Proginet by means of a proxy contest, tender
offer, merger or otherwise.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is CIBC Mellon Trust
Company.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
Since May of 1995, Proginet common stock has traded on the Vancouver Stock
Exchange, under the symbol PRF.U. The ".U" extension indicates that the shares
are traded in U.S. dollars. In December 1999, the Vancouver Stock Exchange
merged with the Calgary Stock Exchange and is now called the Canadian Venture
Exchange, CDNX. Proginet's stock is held by over three hundred holders of
record.
The following table sets forth, for the fiscal quarters indicated, the reported
high and low bid information for Proginet's common stock as reported on the
CDNX. The quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Year Quarter High Low
---------- -------------------------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
2000 QTR 3 2.45 0.97
QTR 2 2.20 0.52
QTR 1 0.84 0.54
---------- -------------------------------------------- -------------------------- --------------------------
1999 QTR 4 0.89 0.40
QTR 3 1.25 0.49
QTR 2 0.70 0.29
QTR 1 0.60 0.23
---------- -------------------------------------------- -------------------------- --------------------------
1998 QTR 4 0.75 0.30
QTR 3 1.75 0.60
QTR 2 2.20 1.20
QTR 1 4.50 2.00
---------- -------------------------------------------- -------------------------- --------------------------
</TABLE>
DIVIDENDS
Proginet has not paid dividends and does not anticipate paying dividends in the
foreseeable future. The Board of Directors intends to retain earnings, if any,
to finance growth. Accordingly, any payment of dividends by Proginet in the
future will depend upon the need for working capital and the financial condition
of the Company at the time.
ITEM 2. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions in the ordinary
course of business. In the opinion of management, based on advice from its legal
counsel, the ultimate disposition of these matters will not have a material
adverse effect on the financial statements of the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Proginet has not changed its accountants in the last three fiscal years, and
there are no disagreements with its accountants concerning accounting and
financial disclosure.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES ISSUANCES
The Company issued 1,260,000 shares of common stock in October 1998 to Microsoft
Corporation pursuant to an agreement between the companies in December 1996.
When these securities were issued under the exemption afforded by Section 4 (2)
of the Securities Act of 1933, the Company relied on representations made by the
purchaser that: 1) it was an "accredited investor" as that term is defined in
Rule 501 of Regulation D promulgate under the Securities Act; and 2) it was
taking the shares for its own account for investment purposes, and without any
view towards the resale or redistribution of the issued securities. There were
no broker fees or commissions paid related to this transaction.
22
<PAGE>
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware provides, in
general, that a corporation incorporated under the laws of the State of
Delaware, such as the Company, may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than a derivative action by or in the right of the
corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful. In the case of a derivative action, a Delaware corporation may
indemnify any such person against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification will be made in
respect of any claim, issue or matter as to which such person will have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnity for such expenses.
Our certificate of incorporation provides that directors will not be personally
liable for monetary damages to us or our stockholders for breach of fiduciary
duty as a director, except for liability resulting from a breach of the
director's duty of loyalty to us or our stockholders, intentional misconduct or
willful violation of law, actions or inactions not in good faith, an unlawful
stock purchase or payment of a dividend under Delaware law, or transactions from
which the director derives improper personal benefit. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. Our certificate of incorporation also
authorizes us to indemnify our officers, directors and other agents, by bylaws,
agreements or otherwise, to the fullest extent permitted under Delaware law. We
have entered into an indemnification agreement with each of our directors and
officers which may, in some cases, be broader than the specific indemnification
provisions contained in our certificate of incorporation or as otherwise
permitted under Delaware law. Each indemnification agreement may require us,
among other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as a director or
officer, against liabilities arising from willful misconduct of a culpable
nature, and to obtain directors' and officers' liability insurance if available
on reasonable terms.
Proginet currently has a $1,000,000 D&O policy for its directors and officers
through Rock River Insurance Company. Hooghuis, Inc. is Sentry/Rock River's
exclusive worldwide Underwriting Manager for directors and officers liability
coverage.
23
<PAGE>
PART F/S
<TABLE>
<CAPTION>
INDEX
<S> <C>
AUDITED FINANCIAL STATEMENTS - YEARS ENDED JULY 31, 1999 AND JULY 31, 1998 PAGE NO.
Independent Auditors' Report FS- 1
Balance Sheets FS- 2
Statements of Operations FS- 3
Statements of Stockholders' Equity FS- 4
Statements of Cash Flows FS- 5
Notes to Financial Statements FS- 6
UNAUDITED FINANCIAL STATEMENTS - PERIODS ENDED APRIL 30, 2000 AND APRIL 30, 1999
Balance Sheets FS- 14
Statements of Operations FS- 15
Statements of Cash Flows FS- 16
Notes to Financial Statements FS- 17
</TABLE>
FS-Index
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Proginet Corporation:
We have audited the accompanying balance sheets of Proginet Corporation as of
July 31, 1999 and 1998, and the related statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Proginet Corporation as of July
31, 1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Melville, New York KPMG LLP
September 14, 1999
FS-2
<PAGE>
PROGINET CORPORATION
Balance Sheets
July 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------------- -----------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 605,456 206,005
Short-term investments 1,085,707 526,497
Accounts receivable, net 520,343 960,139
Notes receivable from employees - 12,000
Other receivable - 525,000
Prepaid expenses 99,750 132,881
----------------- -----------------
Total current assets 2,311,256 2,362,522
----------------- -----------------
Property and equipment, net 504,096 699,048
Capitalized software development costs, net 3,571,427 3,065,916
Deferred contract costs, net - 30,854
Purchased software, net 1,188,892 2,223,304
Other assets 45,701 47,548
----------------- -----------------
Total assets $ 7,621,372 8,429,192
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 263,124 365,070
Deferred revenue 731,721 797,426
Current portion of notes payable 55,877 -
Acquisition obligation payable with common stock - 1,170,000
----------------- -----------------
Total current liabilities 1,050,722 2,332,496
----------------- -----------------
Notes payable, net of current portion 93,128 -
Unbilled rent 123,561 108,958
----------------- -----------------
Total liabilities 1,267,411 2,441,454
----------------- -----------------
Commitments and contingencies (notes 8 and 9)
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued - -
Common stock, $.001 par value, 40,000,000 shares
authorized, 14,140,000 shares issued 14,140 14,140
Additional paid-in capital 11,632,391 12,495,246
Treasury stock, 539,820 and 938,820 shares in
1999 and 1998, respectively (243,255) (1,452,800)
Accumulated deficit (5,049,315) (5,068,848)
----------------- -----------------
Total stockholders' equity 6,353,961 5,987,738
----------------- -----------------
Total liabilities and stockholders' equity $ 7,621,372 8,429,192
================= =================
</TABLE>
See accompanying notes to financial statements.
FS-3
<PAGE>
PROGINET CORPORATION
Statements of Operations
Years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
Revenues:
<S> <C> <C>
Software sales and licenses $ 2,063,436 1,498,564
Software maintenance fees 2,048,409 2,060,952
Other 62,318 85,410
----------------- -----------------
4,174,163 3,644,926
Cost of revenues 1,314,368 1,186,490
----------------- -----------------
Gross profit 2,859,795 2,458,436
----------------- -----------------
Operating expenses:
Research and development 511,678 509,119
Selling and marketing 525,738 2,062,095
General and administrative 1,860,598 2,272,188
----------------- -----------------
2,898,014 4,843,402
----------------- -----------------
Operating loss (38,219) (2,384,966)
Other income (expense):
Interest income 46,160 74,526
Other, net 11,592 380,328
----------------- -----------------
Income (loss) before income taxes 19,533 (1,930,112)
Income tax expense - -
----------------- -----------------
Net income (loss) $ 19,533 (1,930,112)
================= =================
Basic and diluted net loss per common share $ 0.00 (0.15)
================= =================
Weighted average common shares outstanding 13,485,254 13,253,675
================= =================
</TABLE>
See accompanying notes to financial statements.
FS-4
<PAGE>
PROGINET CORPORATION
Statements of Stockholders' Equity
Years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUM-
------------------------------- PAID-IN TREASURY ULATED
SHARES AMOUNT CAPITAL STOCK DEFICIT TOTAL
--------------- -------------- --------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance - July 31, 1997 14,111,000 $ 14,111 12,467,146 (1,349,812) (3,138,736) 7,992,709
Exercise of stock options 29,000 29 28,100 - - 28,129
Purchase of treasury stock - - - (102,988) - (102,988)
Net loss - - - - (1,930,112) (1,930,112)
--------------- -------------- --------------- ---------------- ---------------- ------------
Balance - July 31, 1998 14,140,000 14,140 12,495,246 (1,452,800) (5,068,848) 5,987,738
Purchase of treasury stock - - - (283,310) - (283,310)
Issuance of shares in connection
with Microsoft transaction - - (862,855) 1,492,855 - 630,000
Net income - - - - 19,533 19,533
--------------- -------------- --------------- ---------------- ---------------- ------------
Balance - July 31, 1999 14,140,000 $ 14,140 11,632,391 (243,255) (5,049,315) 6,353,961
=============== ============== =============== ================ ================ ============
</TABLE>
See accompanying notes to financial statements.
FS-5
<PAGE>
PROGINET CORPORATION
Statements of Cash Flows
Years ended July 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Net income (loss) $ 19,533 (1,930,112)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 1,396,441 1,318,774
Decrease in accounts receivable 439,796 25,585
Decrease in notes receivable from employees 12,000 145,000
Decrease (increase) in prepaid expenses 33,131 (41,478)
Decrease (increase) in other receivable 525,000 (525,000)
Decrease in other assets 1,847 2,904
Decrease in accounts payable
and accrued expenses (101,946) (542,076)
Increase (decrease) in deferred revenue (65,705) 6,680
Increase in unbilled rent 14,603 18,589
----------------- -----------------
Net cash provided by (used in) operating activities 2,274,700 (1,521,134)
----------------- -----------------
Proceeds from sale of (purchase of) short-term investments, net (559,210) 2,405,475
Capitalized software development costs (1,174,112) (1,272,307)
Capital expenditures (7,622) (113,381)
Proceeds from sale of assets - 25,000
----------------- -----------------
Net cash provided by investing activities (1,740,944) 1,044,787
----------------- -----------------
Increase in notes payable 149,005 -
Proceeds from exercise of options - 28,129
Purchase of treasury stock (283,310) (102,988)
----------------- -----------------
Net cash used in financing activities (134,305) (74,859)
----------------- -----------------
Increase (decrease) in cash and cash equivalents 399,451 (551,206)
Cash and cash equivalents at beginning of year 206,005 757,211
----------------- -----------------
Cash and cash equivalents at end of year $ 605,456 206,005
================= =================
Supplemental disclosures:
Income taxes paid $ - -
================= =================
Interest paid $ - -
================= =================
</TABLE>
See accompanying notes to financial statements
FS-6
<PAGE>
PROGINET CORPORATION
Notes To Financial Statements
July 31, 1999 and 1998
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Proginet Corporation (the Company) develops and markets two software product
lines. The first is a batch file transfer software product used to link
mainframe computer systems to local area networks (LANs), primarily for
Microsoft Windows, Novell Netware, OS400 and UNIX platforms. The second is a
security password management software product that enables multiple and
disparate security systems, on multiple computers, to function as one. The
Company sells its products in the U.S. through its telemarketing and sales force
and internationally directly and indirectly through distributors, and through
OEM partners in Europe and the United States. The Company also provides software
maintenance services. The Company's stock is traded on the Vancouver Stock
Exchange, listed as PRF.U&V.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments with a maturity of
three months or less at the time of purchase to be cash equivalents. Short-term
investments, amounting to $1,085,707 and $526,497 at July 31, 1999 and 1998,
respectively, consisted of a liquid reserve mutual fund. The Company has
classified its investments as "available for sale" and the market value equaled
the cost at July 31, 1999 and 1998.
REVENUE RECOGNITION
During fiscal 1998, the Company adopted the provisions of Statement of Position
No. 97-2, "Software Revenue Recognition", which did not have a significant
impact on the financial statements. Revenue from the sale or license of software
products is recognized when persuasive evidence of an arrangement exists, the
software has been delivered, the software's selling price is fixed or
determinable and collection of the resulting receivable is probable.
Software maintenance fees are deferred and recognized as revenue ratably over
the term of the contract, typically one year.
Cost of revenues primarily consists of product costs, amortization of
capitalized software development costs and salaries and consulting fees relating
to providing customer software support under maintenance contracts.
Based on the terms of a signed software license agreement with a European
customer, the Company recognized $1,080,000 of revenue in the third quarter of
fiscal 1997 when the product was delivered to the customer. In the fourth
quarter of fiscal 1997, the Company reduced software license revenues by
$1,080,000 as a result of a customer dispute over the terms of such agreement,
including the customer's assertion that the contract was not binding. In the
fourth quarter of fiscal 1998, the Company recognized $375,000 of other income,
which is net of related expenses of $150,000, for the full resolution of this
dispute. Such amount was collected in August 1998.
ACCOUNTS RECEIVABLE
The Company continually reviews accounts for collectibility and establishes an
allowance for doubtful accounts. As of July 31, 1999 and 1998, there was an
allowance for doubtful accounts of $127,500 and $198,600, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the assets' useful lives, generally five years.
Leasehold improvements are amortized over the lesser of the economic life of the
asset or the lease term.
FS-7
<PAGE>
PROGINET CORPORATION
Notes To Financial Statements
July 31, 1999 and 1998
RESEARCH AND DEVELOPMENT COSTS
Research and development costs consist of salaries and other costs related to
the development and enhancement of computer software programs. Software
development costs are capitalized upon the establishment of product
technological feasibility until the product is available for general release to
the public. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development costs require
considerable judgment by management with respect to certain factors including,
but not limited to, the timing of technological feasibility, anticipated future
gross revenues, estimated economic life and changes in software and hardware
technologies. Software development costs not capitalized are expensed as
research and development as incurred.
Amortization of capitalized software development costs, included in cost of
revenues, and amounting to $668,601 and $460,859 for fiscal 1999 and 1998,
respectively, is provided on a product-by-product basis at the greater of the
amount computed using the ratio of current gross revenues for a product to the
total of current and anticipated future gross revenues or the straight-line
method over the remaining estimated economic life of the product. Amortization
commences once a product becomes available for sale to customers. Generally, an
original estimated economic life of five years is assigned to capitalized
software development costs. Capitalized software development costs are net of
accumulated amortization of $2,128,126 and $1,459,525 at July 31, 1999 and 1998,
respectively.
DEFERRED CONTRACT COSTS
Deferred contract costs represented the costs of obtaining servicing rights from
Novell. Such amounts were amortized over the five-year life of the contract.
Amortization of deferred contract costs in fiscal 1999 and 1998 were $30,854 and
$37,020, respectively. The deferred contract costs were fully amortized as of
July 31, 1999.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the tax bases of assets and
liabilities and their financial reporting amounts based on enacted tax laws and
statutory tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to be
realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments approximate their
carrying values in the financial statements because of the short-term maturity
of these instruments.
LONG-LIVED ASSETS
The Company reviews long-lived assets such as plant and equipment and certain
identifiable intangibles to be held and used or disposed of for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company records compensation expense for employee and director stock options
and warrants if the current market price of the underlying stock exceeds the
exercise price on the date of the grant. On August 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation".
The Company has elected not to implement the fair value based accounting method
for employee and director stock options and warrants, but has elected to
disclose the pro forma net earnings and pro forma earnings per share including
compensation expense for employee and director stock option and warrant grants
made as if the fair value method had been applied.
FS-8
<PAGE>
PROGINET CORPORATION
Notes To Financial Statements
July 31, 1999 and 1998
EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings Per Share", in fiscal 1998. Under
this standard, the Company presents basic and diluted earnings per share (EPS).
Basic EPS is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding and dilutive EPS adds the
dilutive effect of stock options and warrants. There were no dilutive common
stock equivalents in fiscal 1999 or 1998 and therefore the basic and diluted EPS
calculations were identical. Options outstanding to purchase 1,222,100 and
1,025,000 shares of common stock at July 31, 1999 and 1998, respectively, (note
7) were not included in the fiscal 1999 and 1998 computations of diluted EPS
because they were antidilutive.
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.
(2) ACQUISITIONS
On December 17, 1996, the Company acquired its TransAccess software product line
from Microsoft, which enables transaction processing across a diverse range of
platforms within the enterprise network. The Company received an existing
software product and assumed maintenance contracts with deferred revenue of
$324,246 on the date of acquisition. The purchase price consisted of 100,000
shares of common stock issued at closing, which were not tradable until June
1998, and $2.1 million of common stock to be issued in October 1998 (the number
of shares issued was to be based on the average price of the common stock during
the twenty days prior to the payment date), which become tradable from two to
three years after the closing date. The fair value of the 100,000 shares of
common stock and shares subsequently issuable, based on an independent
appraisal, was $246,000 and $1,170,000, respectively. The appraisal was based
upon the market price of the securities, reduced for the restrictions applicable
to the shares issued and to be issued. The total cost of the acquired product
and technology was $1,800,246, including $60,000 of transaction costs, which was
recorded as purchased software and is being amortized over five years. In
October 1998, the Company and Microsoft settled certain issues relating to this
matter and amended the agreement which allowed Proginet to satisfy all
obligations to Microsoft by issuing and delivering to Microsoft 1,260,000 shares
of Proginet common stock from treasury, valued at their then current trading
price on the Vancouver Stock Exchange. In connection with the settlement, the
acquisition obligation and purchased software carrying amounts were reduced by
$540,000. Accumulated amortization at July 31, 1999 and 1998 was $800,520 and
$582,000, respectively.
On November 26, 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of KnowledgeNet, Inc. for $1,080,000 plus 100,000
shares of common stock, with a fair value of $328,000 based on an independent
appraisal. KnowledgeNet develops and markets software which facilitates
multi-platform connectivity in corporate data processing systems. The
acquisition was accounted for as a purchase. The total cost of the acquisition,
including assumed liabilities and related expenses was $1,657,000, which was
allocated as follows:
Purchased software $ 1,379,000
Fixed assets 223,000
Accounts receivable 50,000
Cash 5,000
----------------
$ 1,657,000
================
FS-9
<PAGE>
PROGINET CORPORATION
Notes To Financial Statements
July 31, 1999 and 1998
The fair value of the purchased software was based on an independent appraisal
and its net book value at July 31, 1999 and 1998 was $729,166 and $1,005,058.
The Company is currently amortizing this asset over 5 years.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at July 31:
1999 1998
-------------- -------------
Computer and other equipment $ 931,130 922,732
Furniture and fixtures 273,425 274,201
Leasehold improvements 101,790 101,790
-------------- -------------
1,306,345 1,298,723
Less accumulated depreciation
and amortization (802,249) (599,675)
-------------- --------------
$ 504,096 699,048
============== ==============
Depreciation and amortization expense for the years ended July 31, 1999 and 1998
was $202,574 and $236,256, respectively.
(4) RELATED PARTY TRANSACTIONS
The Company had notes receivable from employees, amounting to $12,000 at July
31, 1998, bearing interest at 7%. At July 31, 1999, the notes were fully
satisfied.
During fiscal 1999, Joseph T. Mohen, the founder of Proginet, resigned. At such
time, Mr. Mohen agreed to sell 750,000 shares of Proginet common stock to the
Company for $.31 a share, the market price of the stock. Of the $232,500
purchase price, $50,000 was paid on the date of the agreement. The remainder is
being paid over a 36 month period and is included in the accompanying balance
sheet as notes payable.
(5) INCOME TAXES
The following is a reconciliation of the tax provision with the amount obtained
by applying the statutory U.S. federal income tax rate to the income (loss)
before income taxes:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Expense (benefit) at statutory rate $ 3,000 (656,000)
Increases (reductions) in taxes due to:
Nondeductible expenses 1,000 5,000
State tax expense, net of federal benefit (86,000) -
Increase in valuation allowance 222,000 651,000
NOL utilization (53,000) -
Change in deferred taxes due to differences
in rate booked at beginning of year (87,000) -
------------- --------------
Income tax provision $ - -
============= =============
</TABLE>
FS-10
<PAGE>
PROGINET CORPORATION
Notes To Financial Statements
July 31, 1999 and 1998
At July 31, 1999, the Company had available federal net operating loss (NOL)
carryforwards and research and development tax credit (R&D) carryforwards
expiring in the following fiscal years:
R&D NOL
2007 $ 54,000 -
2008 31,000 -
2009 29,000 174,000
2010 42,000 1,064,000
2011 - 1,519,000
2012 32,000 1,395,000
2013 34,000 3,427,000
----------- -------------
$ 222,000 7,579,000
=========== =============
For income tax purposes, the Company utilizes the cash method of accounting for
revenues and expenses. The types of temporary differences, which represent items
that are reflected in the financial statements and the tax return at different
times that give rise to a significant portion of the deferred tax asset
(liability) and their approximate tax effects are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Deferred tax assets:
<S> <C> <C>
Net operating loss carry forward $ 2,776,000 2,567,000
Accounts payable and other 109,000 161,000
Deferred revenue 304,000 271,000
Deferred contract costs 77,000 63,000
Purchased software 383,000 217,000
Property and equipment - 53,000
Research and development credit carryforward 222,000 188,000
Unbilled rent 52,000 -
--------- ---------
Gross deferred tax asset 3,923,000 3,520,000
Valuation allowance (2,150,000) (1,928,000)
--------- ---------
Net deferred tax asset 1,773,000 1,592,000
Deferred tax liabilities:
Capitalized software development costs 1,466,000 1,042,000
Accounts receivable 265,000 326,000
Other receivable 29,000 179,000
Prepaid expenses 12,000 45,000
Prepaid expenses 1,000 -
--------- ---------
Gross deferred tax liabilities 1,773,000 1,592,000
--------- ---------
Net deferred tax asset $ - -
========= =========
</TABLE>
FS-11
<PAGE>
PROGINET CORPORATION
Notes To Financial Statements
July 31, 1999 and 1998
At July 31, 1999 and 1998 the Company has provided a valuation allowance against
its net deferred tax assets as the Company does not believe realization is more
likely than not in light of operating losses in recent years.
(6) TREASURY STOCK
In October 1997 which was subsequently renewed in December 1998, the Board of
Directors authorized the Company to purchase up to 300,000 shares of its common
stock. The Company purchased 61,000 and 54,500 shares in fiscal 1999 and 1998,
respectively, under these authorizations. In conjunction with the settlement
between the Company and Joseph Mohen (as discussed in footnote 4), the Company
purchased 750,000 shares in fiscal 1999. In addition, the Company purchased from
two other former employees 50,000 shares in each of fiscal 1999 and 1998. The
total cost of these stock repurchases were $283,310 and $102,988 in fiscal 1999
and 1998, respectively. Subsequent to July 31, 1999 and through September 8,
1999, the Company repurchased an additional 5,000 shares at a cost of $3,745.
(7) STOCK OPTION PLAN
Under the 1997 Stock Option Plan and 1994 Equity Incentive Plan, as amended, the
Company has reserved in the aggregate 2,000,000 shares of common stock for
grants to employees, directors and consultants. Grants under the plan can be in
the form of qualified or non-qualified stock options. Qualified stock options
(which are intended to qualify as incentive stock options under Section 422A of
the United States Internal Revenue Code) may be awarded only to employees of the
Company and must have an exercise price of not less than 100% of the fair market
value of the Company's common stock on the grant date (110% for qualified
options granted to any 10% or greater stockholder of the Company).
Transactions involving the plans are summarized as follows:
<TABLE>
<CAPTION>
SHARES SUBJECT WEIGHTED AVERAGE
TO OPTION EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at July 31, 1997 1,737,300 $2.37
Granted 374,400 $1.73
Cancelled (1,086,700) $2.68
-------------
Outstanding at July 31, 1998 1,025,000 $1.80
Granted 432,100 $0.71
Cancelled (235,000) $1.76
-------------
Outstanding at July 31, 1999 1,222,100 $0.74
============= =====
</TABLE>
FS-12
<PAGE>
PROGINET CORPORATION
Notes To Financial Statements
July 31, 1999 and 1998
As of July 31, 1999, 763,300 of the outstanding options are exercisable and have
a weighted average exercise price of $.75. The remaining outstanding options
vest at various dates during the following fiscal years:
2000 259,400
2001 191,900
2002 7,500
-------
458,800
=======
All options have been granted with exercise prices at the market price of the
stock at the date of the grant. Of the above options 315,600 vest only if
certain specific performance criteria are met, generally aggressive Company
revenue targets or identified individual goals. Stock option compensation
expense related to these options was $0 for fiscal 1999 and 1998, respectively.
On January 30, 1998, the exercise price of 145,800 options were repriced to
$1.28, the market value of the stock on that date. On March 2, 1999, the
exercise price of 824,000 options were repriced to $.75 which was greater than
the market value of the stock on that date.
The Company applies APB Opinion No.25 in accounting for its stock option grants
and, accordingly, no compensation cost has been recognized in the financial
statements for its stock options, which have exercise prices equal to or greater
than the fair value of the stock on the date of grant. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock options under SFAS No.123, the Company's net income (loss) and net loss
per share would have been the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998
------------------ -------------------
Net income (loss):
<S> <C> <C>
As reported $ 19,533 (1,930,112)
Pro forma (214,289) (2,150,574)
Basic net loss per share:
As reported - (.15)
Pro forma (.02) (.16)
</TABLE>
Pro forma net loss reflects only options granted in fiscal 1996 and thereafter.
Therefore, the full impact of calculating compensation cost for stock options
under the fair value method is not reflected in the pro forma net loss amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to August 1, 1995 was not
considered.
The per share weighted average fair value of stock options granted during fiscal
1999 and 1998 was $.56 and $.70, respectively, on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: expected dividend yield of 0% for fiscal 1999 and 1998; risk free
interest rate of 5.3% and 5.5% in fiscal 1999 and 1998, expected stock
volatility of 102% and 94% in 1999 and 1998, respectively, and an expected
option life of approximately five years for both years. These assumptions are
used for these calculations only and they do not necessarily represent an
indication of management's expectations of future developments.
FS-13
<PAGE>
PROGINET CORPORATION
Notes To Financial Statements
July 31, 1999 and 1998
(8) MANAGEMENT AGREEMENTS
The Company has entered into "management agreements" with two key employees.
When a change of control in the Company occurs, these agreements provide for:
o A lump sum payment equal to the present value of the aggregate of the
executive's base compensation (equal to the highest rate of base
compensation in effect during the three-year period immediately
preceding the termination) for the eighteen month period following
the termination and the aggregate amount of annual bonuses (equal to
the highest aggregate amount of such bonuses that the executive
received in any one of the three years preceding the termination)
that the executive would have received for the eighteen month period
following the termination.
o Continuation at the Company's expense of all benefits to which the
executive was entitled prior to termination for a period of eighteen
months.
(9) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
As of July 31, 1999, the future minimum lease payments under noncancelable
operating leases for office space and equipment was as follows:
Year ended July 31:
2000 $ 302,094
2001 313,201
2002 324,752
2003 274,582
2004 240,728
Thereafter 388,527
----------------
$ 1,843,884
================
Total rent expense for the years ended July 31, 1999 and 1998, was $195,616 and
$281,998, respectively.
LITIGATION AND CLAIMS
The Company is involved in various claims and legal actions in the ordinary
course of business. In the opinion of management, based on advice from its legal
counsel, the ultimate disposition of these matters will not have a material
adverse effect on the financial statements.
(10) BUSINESS AND CREDIT CONCENTRATIONS AND EXPORT SALES
Revenue for the years ended July 31, 1999 and 1998 included sales in foreign
countries of approximately $550,000 and $337,000, respectively. As of July 31,
1999 and 1998, two customers accounted for approximately 67% and 35%,
respectively, of total accounts receivable.
FS-14
<PAGE>
PROGINET CORPORATION
Balance Sheets
Financial statements for the period ended
April 30, 2000 and July 31, 1999
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
Assets 2000 1999
(UNAUDITED) (AUDITED)
----------------- ----------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 129,080 605,456
Short-term investments 1,490,732 1,085,707
Accounts receivable, net 603,562 520,343
Prepaid expenses 83,931 99,750
----------------- ----------------
Total current assets 2,307,305 2,311,256
----------------- ----------------
Property and equipment, net 376,046 504,096
Capitalized software development costs, net 3,744,050 3,571,427
Purchased software, net 811,855 1,188,892
Officer loan 50,000 -
Other assets 51,421 45,701
----------------- ----------------
Total assets $ 7,340,677 7,621,372
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 327,270 263,124
Deferred revenue 923,532 731,721
Current portion of notes payable 55,877 55,877
----------------- ----------------
Total current liabilities 1,306,679 1,050,722
----------------- ----------------
Notes payable, net of current portion 51,220 93,128
Unbilled rent 128,227 123,561
----------------- ----------------
Total liabilities 1,486,126 1,267,411
----------------- ----------------
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued - -
Common stock, $.001 par value, 40,000,000 shares authorized,
14,160,870 shares issued in April 30, 2000 and 14,140,000 in July 31, 1999 14,161 14,140
Additional paid-in capital 11,689,912 11,632,391
Treasury stock, 544,820 in April 30, 2000 and 539,820 shares in July 31, 1999
respectively (247,000) (243,255)
Accumulated deficit (5,602,522) (5,049,315)
----------------- ----------------
Total stockholders' equity 5,854,551 6,353,961
----------------- ----------------
Total liabilities and stockholders' equity $ 7,340,677 7,621,372
================= ================
</TABLE>
See accompanying notes to financial statements
FS-15
<PAGE>
PROGINET CORPORATION
Statements of Operations (Unaudited)
Three months and nine months ended April 30, 2000 and April 30, 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDING NINE MONTHS ENDING
APRIL 30, APRIL 30,
2000 1999 2000 1999
Revenues:
<S> <C> <C> <C> <C>
Software sales and licenses $ 531,178 532,975 $ 1,385,599 1,822,061
Software maintenance fees 567,491 507,377 1,621,605 1,533,815
Other 60,595 1,543 136,095 60,318
--------- --------- --------- ---------
1,159,264 1,041,895 3,143,299 3,416,194
Cost of revenues 498,984 297,981 1,288,007 914,686
--------- --------- --------- ---------
Gross profit 660,280 743,914 1,855,292 2,501,508
--------- --------- --------- ---------
Operating expenses:
Research and development 94,594 118,676 286,799 409,493
Selling and marketing 214,916 144,117 664,666 465,477
General and administrative 486,477 429,231 1,499,681 1,268,614
--------- --------- --------- ---------
795,987 692,024 2,451,146 2,143,584
--------- --------- --------- ---------
Operating income (loss) (135,707) 51,890 (595,854) 357,924
Other income (expense):
Interest income 20,095 8,611 55,025 31,463
Other, net - (2,194) (12,379) 8,286
--------- --------- --------- ---------
Income (loss) before income taxes (115,612) 58,307 (553,208) 397,673
Income tax expense - - - -
--------- --------- --------- ---------
Net income (loss) $ (115,612) 58,307 $ (553,208) 397,673
========= ========= ========= =========
Basic and diluted net loss per common share $ (0.01) 0.00 $ (0.04) 0.03
========= ========= ========= =========
Weighted average common shares outstanding 13,597,963 13,338,346 13,596,650 13,234,846
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements
FS-16
<PAGE>
PROGINET CORPORATION
Statements of Cash Flows (Unaudited)
Nine Months ended April 30, 2000 and April 30, 1999
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30,
2000 1999
---------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (553,208) 397,673
Adjustments to reconcile net income (loss) to cash provided by
Operating activities:
Depreciation and amortization 1,139,265 992,684
Non-cash charges relating to options and warrants 57,542 -
(Increase) Decrease in accounts receivable (278,960) 435,559
Provision for doubtful accounts 195,740 (133,637)
Decrease in prepaid expenses 15,821 35,388
(Increase) in other assets (5,720) -
Increase in accounts payable
and accrued expenses 64,145 63,953
(Decrease) in notes payable (41,907) -
Increase in deferred revenue 191,811 15,226
Increase in unbilled rent 4,662 12,053
---------- ----------
Net cash provided by operating activities 789,191 1,818,899
---------- ----------
Cash flows from investing activities:
Purchase of short-term investments (405,023) (541,463)
Capitalized software development costs (773,531) (859,049)
Capital expenditures (33,267) (7,415)
Decrease (Increase) in officer loan (50,000) 12,000
---------- ----------
Net cash used in by investing activities (1,261,821) (1,395,927)
---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (3,746) (279,810)
---------- ----------
Net cash used in financing activities (3,746) (279,810)
---------- ----------
Increase (Decrease) in cash and cash equivalents (476,376) 143,162
Cash and cash equivalents at beginning of year 605,456 202,516
---------- ----------
Cash and cash equivalents at end of year $ 129,080 345,678
========== ==========
</TABLE>
See accompanying notes to financial statements.
FS-17
<PAGE>
PROGINET CORPORATION
Notes To Unaudited Financial Statements
Six Months Ended January 31, 2000 and January 31, 1999
PROGINET CORPORATION
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NINE MONTHS ENDED APRIL 30, 2000 AND APRIL 30, 1999
1. INTERIM FINANCIAL DATA
The accompanying unaudited financial statements have been prepared by Proginet
Corporation ("Proginet" or "the Company") in accordance with generally accepted
accounting principles. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments, consisting only of those of a
normal recurring nature, necessary for a fair presentation of the Company's
financial position, results of operations and cash flows at the dates and for
the periods indicated. These financial statements should be read in conjunction
with the audited financial statements and notes related thereto for the years
ended July 31, 1999 and 1998.
These results of the three- and nine-month periods ended April 30, 2000 are not
necessarily indicative of the results to be expected for the full fiscal year.
The preparation of the 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.
2. INVESTOR RELATIONS AGREEMENT
In the first quarter of fiscal 2000 Proginet entered into an agreement with
Mallory Factor Inc. (MFI) whereby MFI will provide guidance and support on a
"Strategic Corporate and Communications Counseling Program" for Proginet. The
terms of the entire agreement are subject to approval of the Canadian Venture
Exchange (CDNX) and provide for granting of up to 500,000 warrants exercisable
at a price of $.54 per share depending upon achievement of pre-determined goals.
The first 150,000 warrants vest upon regulatory approval of the agreement and
the next 100,000 vest provided that Proginet stock price reaches $1.25. The next
250,000 vest, if and only if, two criteria are satisfied: (i) Proginet's
achievement of a listing on the United States OTC:BB and (ii) Proginet's stock
price reaching established thresholds. When Proginet's stock price reaches
$2.25, then 100,000 warrants will vest; when Proginet's stock price reaches
$3.25, then 100,000 additional warrants will vest; and when Proginet's stock
price reaches $4.25, the final 50,000 warrants will vest. During the nine months
ended April 30, 2000 Proginet recognized a non-cash expense of $33,542 relating
to this agreement. The expense relates to the first 250,000 warrants.
3. DISTRIBUTOR BANKRUPTCY
In the second quarter of fiscal 2000, one of Proginet's international
distributors filed for protection from creditors, analogous to bankruptcy, in
its local country. The Company recorded a charge of $195,740 to reserve for
losses on payments due from this distributor. The charge is included in general
and administrative expenses in the accompanying unaudited statement of
operations for the nine months ended April 30, 2000.
4. CREDIT LINE
On January 12, 2000, Proginet established a line of credit in the amount of
$100,000 with Citibank. The interest rate is variable, based on prime plus 1%.
As of April 30, 2000 the Company has not borrowed against this line of credit.
FS-18
<PAGE>
5. RESEARCH AND DEVELOPMENT
Research and development costs not capitalized in connection with a specific
product are expensed in the period incurred. Such expenses are based on
management's estimate of time spent and costs incurred in connection with
research and development.
6. CAPITALIZED SOFTWARE
Capitalized software development costs consist of costs that are directly
related to programmers and facilities that develop software, which has reached
technical feasibility. These costs are $272,787 for the three months ended April
30, 2000; $773,531 for the nine months ended April 30, 2000; $281,541 for the
three months ended April 30, 1999; and $859,049 for the nine months ended April
30, 1999.
7. OFFICER LOAN
During the quarter ended April 30, 2000, the Company loaned $50,000 to an
officer. The loan is for three years unless the officer is no longer employed by
the Company, in which case it becomes due on demand. The loan bears interest at
9.5% per annum.
FS-19
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
The following exhibits have been filed with this Registration Statement:
<TABLE>
<CAPTION>
----------------------- -----------------------------------------------------------------------------------
EXHIBIT NO. EXHIBIT NAME
----------------------- -----------------------------------------------------------------------------------
<S> <C>
3(i) Certificate of Incorporation.
----------------------- -----------------------------------------------------------------------------------
3(i)(a) Certificate of Amendment of Certificate of Incorporation dated December 2, 1996.
----------------------- -----------------------------------------------------------------------------------
3(ii) Bylaws of the Registrant.
----------------------- -----------------------------------------------------------------------------------
3(ii)(a) Amended and Restated Bylaws of the Registrant.
----------------------- -----------------------------------------------------------------------------------
9 Shareholder Voting Agreement between Bathhurst, Ltd. and the Company, dated
September 20, 1999.
----------------------- -----------------------------------------------------------------------------------
10.1 Form of Employee Confidential Information and Non-Competition Agreement.
----------------------- -----------------------------------------------------------------------------------
10.2 Form of Confidential Information And Non-Competition Agreement For Consultants.
----------------------- -----------------------------------------------------------------------------------
10.3 Investor Relations Agreement.
----------------------- -----------------------------------------------------------------------------------
10.4 Form of Software License Agreement.
----------------------- -----------------------------------------------------------------------------------
10.5 Form of Distributor Agreement.
----------------------- -----------------------------------------------------------------------------------
10.6 Form of OEM Agreement.
----------------------- -----------------------------------------------------------------------------------
10.7 Form of Management Continutity Agreement.
----------------------- -----------------------------------------------------------------------------------
10.8 Independent Directors Stock Option Plan, amended and restated as of February 21,
1995.
----------------------- -----------------------------------------------------------------------------------
10.9 1995 Equity Incentive Plan, amended and restated as of December 5, 1995.
----------------------- -----------------------------------------------------------------------------------
10.10 1997 Stock Option Plan.
----------------------- -----------------------------------------------------------------------------------
10.11 Form of Incentive Stock Option Agreement.
----------------------- -----------------------------------------------------------------------------------
10.12 Asset Purchase Agreement between the Company and Microsoft, dated as of December
17, 1996.
----------------------- -----------------------------------------------------------------------------------
10.13 Amendment to Asset Purchase Agreement between the Company and Microsoft, dated
October 28, 1998.
----------------------- -----------------------------------------------------------------------------------
10.14 Stock Redemption Agreement between the Company and Joseph T. Mohen, dated October
20, 1998.
----------------------- -----------------------------------------------------------------------------------
10.15 Stock Purchase Agreement between Joseph T. Mohen and Bathhurst Ltd., dated as of
July 12, 1999.
----------------------- -----------------------------------------------------------------------------------
10.16 Consulting Agreement between the Company and Mallory Factor, Inc., dated
September 22, 1999.
----------------------- -----------------------------------------------------------------------------------
27 Financial Data Schedule.
----------------------- -----------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
ITEM 2. DESCRIPTION OF EXHIBITS
See Item 1 above.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROGINET CORPORATION, INC.
(Registrant)
/s/ Kevin M. Kelly
------------------
Date: May 29, 2000 By: Kevin M. Kelly
President and CEO
/s/ James F. Kelly
------------------
Date: May 29, 2000 By: James F. Kelly
Corporate Secretary
25
