UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 2000
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
___________
COMMISSION FILE NUMBER 0-28008
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PROGINET CORPORATION
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(Exact name of small business issuer as specified in its charter)
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Delaware 11-3264929
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(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
200 Garden City Plaza, Garden City, New York 11530
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (516) 248-2000
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Securities registered pursuant to Section 12(b) of the Exchange Act: None
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Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock
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Title of each class
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Indicate by check mark whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.___
Issuer's revenues for its most recent fiscal year $4,149,699.
The aggregate market value of the voting stock (based on the closing price of
such stock on the Canadian Venture Exchange (CDNX) held by non-affiliates of the
issuer as of October 5, 2000 was approximately $7,800,000. All officers and
directors of the issuer have been deemed, solely for the purpose of the
foregoing calculation, to be "affiliates" of the issuer.
There were 13,483,301 shares of Common Stock outstanding at October 5, 2000.
1
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TABLE OF CONTENTS
PART I
Item
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Page
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1. Description of Business..............................................1
2. Description of Property..............................................6
3. Legal Proceedings....................................................7
4. Submission of Matters to a Vote of Security Holders..................7
PART II
5. Market for Common Equity and Related Stockholder Matters..............8
6. Management's Discussion and Analysis or Plan of Operation.............8
7. Financial Statements.................................................10
8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................28
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................29
10. Executive Compensation...............................................29
11. Security Ownership of Certain Beneficial Owners and Management.......29
12. Certain Relationships and Related Transactions.......................29
13. Exhibits and Reports on Form 8-K.....................................29
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PART I
ITEM 1. DESCRIPTION OF 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 Venture Exchange, (CDNX), (formerly, the Vancouver Stock
Exchange), listed as PRF.U. The Company's stock also trades on the OTC- Bulletin
Board under the symbol PRGF.
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.
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 than 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 a material amount
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 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
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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 allow the
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 and wireless technology. 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.
The criteria used in evaluating, and determining research and development
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.
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SALES AND MARKETING
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.
All of Proginet's sales are dependent on visibility in the marketplace and the
market's 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.
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CUSTOMERS
Proginet has established a worldwide user base of more than 400 companies in
over 25 countries engaged in the financial, telecommunications, healthcare,
government, and other industry sectors. No one customer represents 10% or more
of Proginet's revenues.
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 July 31, 2000, Proginet had 45- full-time salaried employees, 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 (IDC).
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.
Most of the smaller players 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.
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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 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 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 informal working relationship with Microsoft 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 are 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.
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ITEM 2. 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.
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Description Location Square Ft. Lease Expiration Current
Annual Cost
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Headquarters Garden City, NY 9,804 February 28, 2006 $211,525
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Subleased to another Tenant Chicago, IL 6,068 December 31, 2002 $12,074*
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* Amount is net of related sublease revenue.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions in the ordinary
course of business. It is the opinion of Management that the outcome of such
litigation will not have a material adverse effect on the Company's financial
condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
Since May of 1995, Proginet common stock has traded on the Vancouver Stock
Exchange, under the symbol PRF.U. The ".U" extension indicates that the shares
are traded in U.S. dollars. In December 1999, the Vancouver Stock Exchange
merged with the Calgary Stock Exchange and is now called the Canadian Venture
Exchange, CDNX. Proginet's stock is held by over three hundred holders of
record. In September 2000, the Company's Registration Statement on Form 10-SB
cleared comments with the SEC and Proginet common stock also began trading on
the OTC-Bulletin Board under the symbol PRGF.
The following table sets forth, for the fiscal quarters indicated, the reported
high and low bid information for Proginet's common stock as reported on the
CDNX. The quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions.
Year Quarter High ($U.S.) Low($U.S.)
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2000 QTR 4 1.15 0.65
QTR 3 2.45 0.97
QTR 2 2.20 0.52
QTR 1 0.84 0.54
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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
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 6. 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 herein. All statements in
this 10K-SB 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.
FISCAL PERIODS ENDED JULY 31, 2000 AND JULY 31, 1999
Total revenues were $4,149,699 in fiscal 2000 compared to $4,174,163 in fiscal
1999, a decline of less then 1%. Software license revenues decreased by
$377,287, or 18.3%, to $1,686,149. The fiscal 2000 decrease in revenue is
primarily attributable to slower sales of Proginet's software as the Y2K
conversion lockdown severely impacted Proginet's sales cycle, including delays
of many trials.
Software maintenance fees increased to $2,266,755 compared to 1999 software
maintenance fees of $2,048,409. The increase in software maintenance fees is
from new products licensed, with the continued retention of existing maintenance
support customers.
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Other revenues were $196,795 compared to $62,318 for 1999. These revenues are
for consulting services provided to customers who request specific support for
installations of Proginet's software. Proginet has had increasing demand for
services and expects to expand our technical infrastructure to expand these
service offerings in the new fiscal year.
Cost of revenues increased from $1,314,368 to $1,760,469, an increase of 33.9%,
resulting in part from an increase of $163,000 due to amortization of
capitalized software development costs , an increase of $110,000 in customer
support costs due to the expansion of the Company's customer base and $170,000
in increased costs related to indirect sales.
Operating expenses increased to $3,523,450 from $2,898,014, an increase of
$625,436, or 21.6%, in 2000 compared to 1999. Research and development costs
were $385,965, a 24.6% reduction compared to 1999, reflective of reduced levels
of resources dedicated to analysis of research and development activities.
Selling and marketing expenses were $944,886 in 2000 compared to $525,738 in
1999. These results represent an increase of $419,148 or 79.7% and are related
to increased expenditures for external sales lead generation programs and for
increased personnel and related expenses for expanded internal marketing
programs.
General and administrative expenses in 2000 were $2,192,599 an increase of
$332,001 or 17.8%, compared to general and administrative expenses of $1,860,598
in 1999. These increases are primarily attributable to an increase in bad debt
expense of $106,000, an increase in professional fees of $66,000 relating to the
Company's U.S. registration process and an increase in investor relations costs
and compensatory stock option expense of $147,000.
Proginet experienced an operating loss of $1,134,220 for 2000 compared to an
operating loss of $38,219 for 1999. The Company reported a net loss of
$1,066,282 for 2000 compared to net income of $19,533 for 1999.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2000, the Company had a cash and cash equivalent balance of
$1,465,468 and working capital of $580,202 compared to $1,691,163 of cash and
cash equivalents and working capital of $1,260,534 at July 31, 1999.
The Company's operating activities provided cash of $1,042,444 and $2,274,700
for fiscal 2000 and 1999, respectively. The decrease in net cash provided by
operating activities resulted primarily from the Company's fiscal 2000 net loss
of $1,066,282. During fiscal 2000 and 1999, investing activities used net cash
of $1,039,661 and $1,181,734, respectively, principally from increases in
capitalized software development costs and financing activities used cash of
$228,478 and 134,305, respectively, primarily from the Company's purchase of
treasury stock.
In January 2000, the Company established a line of credit in the amount of
$100,000 with a bank. The interest rate is variable based on prime plus 1%. The
line of credit expires in September 2001. The Company does not currently owe any
money under this line of credit.
The Company believes that its present working capital, cash generated from
operations and amounts available under its present line of credit will be
sufficient to meet its cash needs for at least the next twelve months.
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ITEM 7. FINANCIAL STATEMENTS
Page
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Report of Independent Certified Public Accountants 11
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Independent Auditors' Report 12
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Balance Sheets as of July 31, 2000 and 1999 13
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Statements of Operations for the years ended July 31, 2000 and 1999 14
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Statements of Stockholders' Equity for the years ended July 31, 2000
and 1999. 15
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Statements of Cash Flows for the years ended July 31, 2000 and 1999 16
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Notes to Financial Statements 17-27
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
PROGINET CORPORATION
We have audited the accompanying balance sheet of Proginet Corporation as of
July 31, 2000, and the related statements of operations, stockholders' equity
and cash flows for the year 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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, 2000, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.
GRANT THORNTON LLP
Melville, New York
September 22, 2000
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Proginet Corporation:
We have audited the accompanying balance sheet of Proginet Corporation as of
July 31, 1999, and the related statements of operations, stockholders' equity
and cash flows for the year 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 audit 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 audit provides 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 the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG LLP
Melville, New York
September 14, 1999
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PROGINET CORPORATION
Balance Sheets
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YEAR ENDED JULY 31,
ASSETS 2000 1999
Current assets:
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Cash and cash equivalents $ 1,465,468 $ 1,691,163
Accounts receivable, net 630,956 520,343
Prepaid expenses 27,090 99,750
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Total current assets 2,123,514 2,311,256
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Property and equipment, net 373,639 504,096
Capitalized software development costs, net 3,733,712 3,571,427
Purchased software, net 686,176 1,188,892
Other assets 45,701 45,701
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$ 6,962,742 $ 7,621,372
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 55,877 $ 55,877
Accounts payable and accrued expenses 370,840 263,124
Deferred revenue 1,116,593 731,721
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Total current liabilities 1,543,310 1,050,722
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Notes payable, net of current portion 37,251 93,128
Other long-term liabilities 129,167 123,561
1,709,728 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,
14,211,058 and 14,140,000 shares issued
in 2000 and 1999, respectively 14,211 14,140
Additional paid-in capital 11,770,256 11,632,391
Treasury stock, 773,004 and 539,820 shares in 2000 and 1999,
respectively, at cost (415,856) (243,255)
Accumulated deficit (6,115,597) (5,049,315)
----------------- -----------------
Total stockholders' equity 5,253,014 6,353,961
----------------- -----------------
$ 6,962,742 $ 7,621,372
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-13-
<PAGE>
PROGINET CORPORATION
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
2000 1999
----------------- --------------------
Revenues
<S> <C> <C>
Software sales and licenses $ 1,686,149 $ 2,063,436
Software maintenance fees 2,266,755 2,048,409
Other 196,795 62,318
----------------- --------------------
4,149,699 4,174,163
Cost of revenues 1,760,469 1,314,368
----------------- --------------------
Gross profit 2,389,230 2,859,795
----------------- --------------------
Operating expenses
Research and development 385,965 511,678
Selling and marketing 944,886 525,738
General and administrative 2,192,599 1,860,598
----------------- --------------------
3,523,450 2,898,014
----------------- --------------------
Loss from operations (1,134,220) (38,219)
Other income
Interest income 66,781 46,160
Other, net 1,157 11,592
----------------- --------------------
Net income (loss) $ (1,066,282)$ 19,533
================= ====================
Basic and diluted income (loss) per common share $ (0.08)$ 0.00
================= ====================
Weighted average common shares outstanding, basic and diluted 13,562,995 13,485,254
================= ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-14-
<PAGE>
PROGINET CORPORATION
Statements of Stockholders' Equity
Years ended July 31, 2000 and 1999
<TABLE>
<CAPTION>
ADDITIONAL ACCUM-
COMMON STOCK PAID-IN TREASURY ULATED
SHARES AMOUNT CAPITAL STOCK DEFICIT TOTAL
---------- ------------- -------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - August 1, 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
Exercise of stock options 71,058 71 23,930 - - 24,001
Purchases of treasury stock - - - (172,601) - (172,601)
Stock purchase warrants issued
for services - - 47,918 - - 47,918
Compensatory stock option expense - - 66,017 - - 66,017
Net loss - - - - (1,066,282) (1,066,282)
---------- ------------- -------------- ------------- ------------ -------------
Balance - July 31, 2000 14,211,058 $ 14,211 $ 11,770,256 $ (415,856) $ (6,115,597) $ 5,253,014
========== ============= ============== ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-15-
<PAGE>
<TABLE>
<CAPTION>
PROGINET CORPORATION
Statements of Cash Flows
Year ended July 31,
2000 1999
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (1,066,282) $ 19,533
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 1,510,549 1,396,441
Provision for doubtful accounts 225,629 119,198
Deferred revenue 384,872 (65,705)
Warrants issued for services 47,918 -
Exercise of stock options 24,001 -
Compensatory stock option expense 66,017 -
Changes in operating assets and liabilities
Accounts receivable (336,242) 320,598
Notes receivable from employees - 12,000
Prepaid expenses and other current assets 72,660 33,131
Other receivables - 525,000
Other assets - 1,847
Accounts payable and accrued expenses 107,716 (101,946)
Other long-term liabilities 5,606 14,603
------------- -------------
Net cash provided by operating activities 1,042,444 2,274,700
------------- -------------
Cash flows from investing activities:
Increase in capitalized software development costs (973,346) (1,174,112)
Purchases of property and equipment (66,315) (7,622)
------------- -------------
Net cash used in investing activities (1,039,661) (1,181,734)
------------- -------------
Cash flows from financing activities:
(Repayment) proceeds of notes payable (55,877) 149,005
Purchase of treasury stock (172,601) (283,310)
------------- -------------
Net cash used in financing activities (228,478) (134,305)
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents (225,695) 958,661
Cash and cash equivalents at beginning of year 1,691,163 732,502
------------- -------------
Cash and cash equivalents at end of year $ 1,465,468 $ 1,691,163
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-16-
<PAGE>
PROGINET CORPORATION
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF 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 Venture Exchange, CDNX, (formerly, the Vancouver Stock
Exchange), listed as PRF.U. The Company stock also trades on the OTC-Bulletin
Board under the symbol PRGF.
REVENUE RECOGNITION
Revenue from the sale or license of software products is recognized when
persuasive evidence of an arrangement exists, the software has been delivered,
product customization is complete, 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.
ACCOUNTS RECEIVABLE
The Company continually reviews accounts for collectibility and establishes an
allowance for doubtful accounts. As of July 31, 2000 and 1999, there was an
allowance for doubtful accounts of $107,889 and $127,500, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided using a 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. Accelerated
methods of depreciation are used for tax purposes.
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, consisting of cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses,
notes payable and deferred revenues approximate their carrying values in the
financial statements because of the short-term maturity of these instruments.
-17-
<PAGE>
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.
-18-
<PAGE>
PROGINET CORPORATION
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
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.
Amortization of capitalized software development costs, included in cost of
revenues, and amounting to $811,061 and $668,601 for fiscal 2000 and 1999,
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 $2,181,227 and $2,128,126 at July 31, 2000 and 1999,
respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company measures stock-based awards using the intrinsic value method. As
described in Note 9, pro-forma disclosure of the effect of net income (loss) and
net income (loss) per common share has been computed as if the fair value- based
method had been applied in measuring compensation expenses.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share ("EPS") is computed by dividing net
income (loss) by the weighted average number of common shares outstanding and
diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock. Potential common shares of
2,137,300 and 1,222,100 at July 31, 2000 and 1999 from stock options and
warrants are excluded in computing basic and diluted net income (loss) per share
for fiscal 2000 and 1999 as their effects would be 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.
STATEMENT OF CASH FLOWS
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. Cash
equivalents, amounting to $1,109,489 and $1,085,707 at July 31, 2000 and 1999,
respectively, consisted of a liquid reserve mutual fund. No interest payments
were made during the years ended July 31, 2000 and 1999. There were no income
taxes paid during the years ended July 31, 2000 and 1999.
RECLASSIFICATIONS
Certain prior years balances have been re-classified to conform with the current
year's presentations.
-19-
<PAGE>
PROGINET CORPORATION
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(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 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. In connection with the
settlement, the acquisition obligation and purchased software carrying amounts
were reduced by $540,000. Accumulated amortization at July 31, 2000 and 1999 was
$990,744 and $800,520, 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
The fair value of the purchased software was based on an independent appraisal
and its net book value at July 31, 2000 and 1999 was $416,673 and $729,166. This
asset is being amortized over 5 years from the date of acquisition.
20
<PAGE>
PROGINET CORPORATION
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at July 31:
<TABLE>
<CAPTION>
2000 1999
------------- -----------
<S> <C> <C>
Computer and other equipment $ 954,631 $ 931,130
Furniture and fixtures 128,189 273,425
Leasehold improvements 77,342 101,790
------------- -----------
1,160,162 1,306,345
Less accumulated depreciation
and amortization (786,523) (802,249)
------------- -----------
$ 373,639 $ 504,096
=========== ===========
</TABLE>
Depreciation and amortization expense for the years ended July 31, 2000 and 1999
was $196,772 and $202,574, respectively.
(4) CREDIT LINE
On January 12, 2000, Proginet established a line of credit in the amount of
$100,000 with a bank. The interest rate is variable, based on prime plus 1%. As
of July 31, 2000, the Company has not borrowed against this line of credit.
Subsequent to year-end, the Company extended its line of credit agreement to
September 30, 2001.
(5) RELATED PARTY TRANSACTIONS
During fiscal 1999, Joseph T. Mohen, the founder of Proginet, resigned as an
officer of the Company 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. 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 at the time such agreement was consummated. 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.
The aggregate maturities of long-term debt are as follows:
2001 $ 55,877
2002 37,251
----------
$ 93,128
==========
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.
21
<PAGE>
PROGINET CORPORATION
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
(6) 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>
2000 1999
------------ ----------
<S> <C> <C>
Expense (benefit) at statutory rate $ (363,000) $ 3,000
Increases (reductions) in taxes due to:
Nondeductible expenses 2,000 1,000
State tax expense, net of federal benefit (64,000) (86,000)
Increase in valuation allowance 162,000 222,000
NOL utilization - (53,000)
Change in deferred taxed due to differences in rate
booked at beginning of year and prior year adjustments 263,000 (87,000)
------------ ----------
Income tax provision $ - $ -
============ ==========
</TABLE>
At July 31, 2000, 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:
<TABLE>
<CAPTION>
R&D NOL
--- ---
<S> <C> <C>
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
2018 34,000 3,427,000
2019 34,000 530,000
---------------- ----------------
$ 256,000$ 8,109,000
================ ================
</TABLE>
22
<PAGE>
PROGINET CORPORATION
Notes To Financial Statements
July 31, 2000 and 1999
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>
2000 1999
--------------- --------------
Deferred tax assets:
--------------------
<S> <C> <C>
Net operating loss carryforward $ 2,991,000 $ 2,776,000
Accounts payable and other 146,000 109,000
Deferred revenue 457,000 304,000
Deferred contract costs 62,000 77,000
Purchased software 149,000 383,000
Property and equipment 3,000 -
Research and development carryforward 256,000 222,000
Unbilled rent 53,000 52,000
--------------- --------------
Gross deferred tax asset 4,117,000 3,923,000
Valuation allowance (2,311,000) (2,150,000)
--------------- --------------
Net deferred tax asset 1,806,000 1,773,000
Deferred tax liabilities:
Capitalized software development costs 1,536,000 1,466,000
Accounts receivable 259,000 265,000
Other receivables - 29,000
Prepaid expenses 11,000 12,000
Other - 1,000
--------------- --------------
Gross deferred tax liabilities 1,806,000 1,773,000
--------------- --------------
Net deferred tax asset $ - $ -
=============== ==============
</TABLE>
At July 31, 2000 and 1999, 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.
(7) TREASURY STOCK
In October 1997 and 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 5,000 and 61,000 shares in fiscal 2000 and 1999, respectively, under
these authorizations. In conjunction with the settlement between the Company and
Joseph Mohen (as discussed in footnote 5), the Company purchased 750,000 shares
in fiscal 1999. In addition, the Company purchased from two other former
employees 50,000 shares in fiscal 1999. In May 2000, the Company repurchased
228,184 shares from a former officer at a cost of $168,856.
The total cost of these stock repurchases was $172,601 and $283,310 in fiscal
2000 and 1999, respectively.
23
<PAGE>
PROGINET CORPORATION
Notes To Financial Statements
July 31, 2000 and 1999
(8) STOCK PURCHASE WARRANTS
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 were approved by 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 year ended July 31, 2000,
Proginet recognized a non-cash expense of $47,918 relating to this agreement.
The expense relates to the first 250,000 warrants.
(9) STOCK OPTION PLANS
Under the 1997 Stock Option Plan and 1994 Equity Incentive Plan, (the "Plans")
as amended, the Company had reserved an aggregate of 2,000,000 shares of common
stock for grants to employees, directors and consultants. In June 2000, the
Board of Directors authorized the increase of the number of shares reserved
under the Plan to 2,500,000. 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). The Plans provide
that they will be administered by a committee selected by the Board of Directors
of the Company and that the committee will have full authority to determine the
identity of the recipients of the options and the number of shares subject to
each option. The term of any option may be fixed by the committee but in no
event shall exceed 10 years from the date of grant.
Transactions involving the Plans are summarized as follows:
<TABLE>
<CAPTION>
SHARES SUBJECT EXERCISE PRICE WEIGHTED AVERAGE
TO OPTION PER SHARE EXERCISE PRICE
---------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Outstanding at August 1, 1998 1,025,000 $0.97 - $4.85 $ 1.80
Granted 432,100 $0.71 $ 0.71
Cancelled (235,000) $0.71 - $3.61 $ 1.76
----------------
Outstanding at July 31, 1999 1,222,100 $0.71 - $0.75 $ 0.74
Granted 1,269,000 $0.62 - $1.85 $ 0.78
Exercised (486,600) $0.75 $ 0.75
Cancelled (367,200) $0.62 - $1.10 $ 0.73
----------------
Outstanding at July 31, 2000 1,637,300 $0.62 - $1.85 $ 0.77
================
</TABLE>
24
<PAGE>
PROGINET CORPORATION
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
The following table summarizes information about Employee Stock Options
outstanding and exercisable at July 31, 2000.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Number Weighted - average Weighted Number Weighted -
outstanding remaining -average exercisable average
at July 31, contractual life exercise at July 31, exercise
Exercise prices 2000 (years) price 2000 price
<S> <C> <C> <C> <C> <C> <C>
$0.62 - $0.85 1,517,300 9.5 $ 0.71 1,024,800 $ 0.74
$1.10 - $1.20 35,000 10 1.17 - -
$1.70 - $1.85 85,000 10 1.72 - -
-------------- --------------
1,637,300 9.5 $ 0.77 1,024,800 $ 0.74
============== ==============
</TABLE>
All options have been granted with exercise prices at the market price of the
stock at the date of the grant.
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. On June 22,
2000, the Board of Directors approved a cash payment of $0.10 per option for
128,400 options that were previously repriced by the Company. For the year ended
July 31, 2000, a charge of $12,840 was recorded to compensation expense for this
payment. At July 31, 2000, 138,000 repriced options remain outstanding.
Additionally, on June 22, 2000, the Board of Directors approved the removal of
specific performance criteria from 325,300 outstanding stock options and
accelerated the vesting of these options to July 1, 2000. The Company reported a
charge of $66,017 during the year ending July 31, 2000 to compensation expense
relating to the removal of the performance criteria of these options.
At July 31, 2000, an additional 115,000 outstanding options vest only if certain
specific performance criteria are met, generally aggressive Company revenue
targets or identified individual goals. No stock compensation expense was
recorded related to these options for fiscal 2000 and 1999.
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>
2000 1999
------------------ -------------------
Net income (loss):
<S> <C> <C>
As reported $ (1,066,282) 19,533
Pro forma (1,605,121) (214,289)
Basic and diluted net loss per share:
As reported (.08) -
Pro forma (.12) (.02)
</TABLE>
25
<PAGE>
PROGINET CORPORATION
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
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
2000 and 1999 was $.58 and $.56, 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 2000 and 1999; risk free
interest rate of 6.1% and 5.3% in fiscal 2000 and 1999, expected stock
volatility of 91% and 102% in 2000 and 1999, 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.
(10) 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.
(11) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
As of July 31, 2000, the future minimum lease payments under noncancelable
operating leases for office space and equipment was as follows:
Year ended July 31:
2001 $ 313,000
2002 325,000
2003 275,000
2004 241,000
2005 250,000
Thereafter 152,000
-------------
1,556,000
Sub-lease rental income (215,000)
-------------
$ 1,341,000
=============
Total rent expense, net of sub-lease rental income, for the years ended July 31,
2000 and 1999, was $218,791 and $195,616, respectively.
26
<PAGE>
PROGINET CORPORATION
NOTES TO FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
LITIGATION AND CLAIMS
The Company is involved in various claims and legal actions in the ordinary
course of business. It is the opinion of Management that the outcome of such
litigation will not have a material adverse effect on the Company's financial
condition and results of operations.
(12) CONCENTRATION OF RISKS
Revenue for the years ended July 31, 2000 and 1999 included sales in foreign
countries of approximately $404,000 and $550,000, respectively. As of July 31,
2000, four customers accounted for approximately 49% of total accounts
receivable. As of July 31, 1999, two customers accounted for approximately 67%
of total accounts receivable. No customer represented 10% or more of revenues in
the years ended July 31, 2000 and 1999.
(13) RETIREMENT PLAN
The Company maintains a 401(k) savings plan which covers all full-time
employees. Employees become eligible for participation in the plan after one
year of service and attainment of age twenty-one. Under the plan, employees may
contribute up to 15% of their salary to the plan. The Company matches between 0%
and 100%, as determined by the Board of Directors, of the employee's
contribution up to 10%. The Company's contributions were approximately $69,114
and $51,204 for the years ended July 31, 2000 and 1999, respectively.
27
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
On July 20, 2000, Proginet terminated the client-auditor relationship between
the Company and KPMG LLP ("KPMG"), and the Company engaged Grant Thornton LLP
("Grant") as its independent auditors for the fiscal year ending July 31, 2000.
The decision to engage Grant was approved by the Board of Directors of the
Company, upon the recommendation of the Audit Committee of the Board of
Directors. KPMG's reports on the financial statements of the Company for fiscal
years 1999 and 1998 did not contain any adverse opinion or a disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During fiscal years 1999 and 1998 and the subsequent
interim period preceding the termination of KPMG, there were no disagreements
with KPMG regarding any matters of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of KPMG, would have caused KPMG to make reference
to the subject matter of the disagreements in connection with its report. The
Company requested that KPMG furnish it with a letter addressed to the Securities
and Exchange Commission stating whether it agrees with the above statements. The
letter, dated August 23, 2000, indicating KPMG's response, has been filed as an
exhibit to the Company's Form 8-K/A.
-28-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16 (A) OF THE EXCHANGE ACT.
The information called for by this Item is set forth under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the
Annual Meeting of Stockholders to be held on November 14, 2000 and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information called for by this Item is set forth under the caption
"Executive Compensation" in the Proxy Statement for the Annual Meeting of
Stockholders to be held on November 14, 2000 and is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this Item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
for the Annual Meeting of Stockholders to be held on November 14, 2000 and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this Item is set forth under the caption " Certain
Relationships and Related Transactions" in the Proxy Statement for the Annual
Meeting of Stockholders to be held on November 14, 2000 and is incorporated
herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Unless otherwise noted, the exhibits below are incoporated by reference to the
Company's Registration Statement on Form 10-SB/A, filed with the SEC on July 18,
2000:
<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 Continuity 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.
----------------------- -----------------------------------------------------------------------------------
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
----------------------- -----------------------------------------------------------------------------------
EXHIBIT NO. EXHIBIT NAME
----------------------- -----------------------------------------------------------------------------------
<S> <C>
10.12 Stock Redemption Agreement between the Company and Joseph T. Mohen, dated October
20, 1998.
----------------------- -----------------------------------------------------------------------------------
27 Financial Data Schedule.*
----------------------- -----------------------------------------------------------------------------------
</TABLE>
* Filed herewith.
(B) REPORTS ON FORM 8-K
A Form 8-K and a Form 8-K/A were filed on August 10, 2000 and August 23, 2000,
respectively, each of which reported on the termination of KPMG LLP as the
Company's independent accountants in Item 4, "Changes in Registrant's Certifying
Accountant," of said Form 8-K or Form 8-K/A.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Garden City,
State of New York, on the 25th day of October, 2000.
PROGINET CORPORATION
BY: /s/ Kevin M. Kelly
-----------------------------------------
Kevin M. Kelly
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Kevin M. Kelly President, Chief Executive October 25, 2000
----------------------------- Officer and Director
Kevin M. Kelly
/s/ James F. Kelly Director, Secretary and Senior October 25, 2000
----------------------------- Vice President
James F. Kelly
/s/ John C. Daily Chairman October 25, 2000
-----------------------------
John C. Daily
/s/ Stephen Sternbach Director October 25, 2000
-----------------------------
Stephen Sternbach
/s/ E. Kelly Hyslop Director October 25, 2000
-----------------------------
Dr. E. Kelly Hyslop
</TABLE>
31
