UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________.
Commission File No. 000-30617
GLOBALSCAPE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2785449
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6000 NORTHWEST PARKWAY, SUITE 100
SAN ANTONIO, TEXAS 78249
(Address of Principal (Zip Code)
Executive Office)
(210) 308-8267
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to filed such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes __ No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in part III
of this Form 10-K or any amendment to this Form 10-K. ___
As of March 15, 2001, there were 12,936,190 shares of common stock
outstanding, of which 3,237,799 were held by non-affiliates.
Documents Incorporated by Reference: None
There is no market for GlobalSCAPE, Inc.'s common stock.
TABLE OF CONTENTS
PART I
Item 1. Business
Company Overview
History and Recent Developments
Industry Background
Strategy
Products and Services
Marketing and Sales
Customers
Network and Equipment
Research and Development
Competition
Intellectual Property
Employees
Risk Factors
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
Signatures
PRELIMINARY NOTES
"GlobalSCAPE" "CuteFTP," "CuteHTML," "CuteMAP," "CuteZIP," and
"CuteMX," are registered trademarks of GlobalSCAPE, Inc. GlobalSCAPE and CuteFTP
Pro are trademarks of GlobalSCAPE, Inc. Other trademarks and tradenames in this
annual report are the property of their respective owners.
In May 2000, our board of directors approved a 7.6 for 1 stock split.
All information in this Annual Report has been adjusted to reflect the effects
of this stock split.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K and the documents incorporated by
reference herein contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. "Forward looking statements"
are those statements that describe management's beliefs and expectations about
the future. We have identified forward-looking statements by using words such as
"anticipate," "believe," "could," "estimate," "may," "expect," and "intend."
Although we believe these expectations are reasonable, our operations involve a
number of risks and uncertainties, including those described in the "Risk
Factors" section of this Annual Report and other documents filed with the
Securities and Exchange Commission. Therefore, GlobalSCAPE's actual results
could differ materially from those discussed in this Annual Report.
1
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
Our primary business is the development and distribution of Internet
related software used in content and file management, and peer-to-peer
collaboration. Our current products are:
- CuteFTP, a leading file transfer protocol program that allows users
to quickly and efficiently transfer files between computers;
- CuteFTP Pro, a business class file transfer protocol program for
technology professionals which includes secure file transfer
capability;
- CuteZIP, a program which allows users to compress, decompress and
encrypt files;
- CuteHTML and CuteMAP, web site development tools; and
- a collaborative software platform that we are marketing to
businesses and other organizations on a customized basis. This
platform incorporates peer-to-peer technology to enable
organizations to interact via the Internet with their customers,
vendors and business partners.
We have several new products that we expect to release in the second
quarter of 2001, including:
- CuteFTP Server, a powerful yet easy-to-use file transfer protocol
server that includes security features for use in conjunction with
CuteFTP Pro. This program is substantially complete and is in the
beta testing phase;
- CuteWeb Server, a simplified web server program designed for
serving web pages and files from end user PC's. This application is
substantially complete and is in the alpha testing phase; and
- A browser based upload and download agent written in Java to
provide robust file transfer services superior to the current CGI
scripting technique commonly used by web site operators. This
product is under development and no trademark has been established
for this product.
During 2000 we distributed CuteMX, which is a file sharing program and
service which allowed users to interact directly with each other in real time to
search for and share all types of files. We ceased the CuteMX service and the
distribution of the program in February 2001.
Our "Cute" software products are available for download on a free
trial basis from our website, www.globalscape.com and from a variety of
independent software sites such as Tucow's and CNet's Download.com. We also
distribute our software on CD Rom in CompUSA, Fry's and Micro Center stores.
Copies that are not registered at the end of the trial period are totally
disabled by us. Some versions prior to 4.2 were partially disabled after the
trial but displayed ad banners as a means for generating revenue. Such versions
also generate repeated registration reminders. From January 1, 2000 to December
31, 2000 there were more than 12.5 million download requests for our products
made on our internal servers. During this same period 188,000 licenses for
copies, or 1.5% of these download requests, were registered. Our current
products range in price from $19.95 to $59.95. We provide support for our
software users via information on our websites such as our searchable knowledge
base and "Frequently Asked Questions" section. We also provide live assistance
via e-mail, fax and telephone.
In April 1999 we began contracting with third party advertising
agencies to sell advertising space in our software and on our web sites.
Pursuant to these agreements, we embedded the third parties' advertising
technology in our software to enable them to provide ads to our users. In
exchange, these third parties retained a percentage of the revenue generated
from the sale of the advertising space. Our plan at the time was to include
advertising as a significant component of our business strategy. In 1999, we
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realized significant additional revenues of $328,895, approximately 10% of all
revenues, from selling advertising space. Advertising revenue in 2000 was
$134,000, $232,000 and $172,000 in the 1st, 2nd, and 3rd quarters, respectively.
However, by the 4th quarter of 2000, our advertising revenue had dropped
dramatically, producing only $32,000. Although we were displaying a large number
of ads, the rates earned on advertising space had declined precipitously. We
believe the decline is due to an increasing supply of Internet advertising
inventory as more companies establish web sites and pursue an advertising
strategy and questions about the effectiveness of banner ads possibly causing a
decline in the overall demand for Internet advertising. We currently do not show
any ads in the latest releases of our software or on our websites, although
older versions of our software continue to display advertising. We intend to
continue to evaluate the desirability of an advertising strategy, including the
possibility of licensing or developing our own ad technology which would permit
us to serve ads to our users directly rather than relying as heavily on outside
vendors.
We derived approximately 100%, 90%, and 90% of our revenues in 1998,
1999, and 2000, respectively, from sales of licenses to use our software
products. A combination of the sale of licenses of CuteFTP and advertising from
within CuteFTP accounted for 100%, 97% and 98% of our revenues in 1998, 1999,
and 2000, respectively.
HISTORY AND RECENT DEVELOPMENTS
Globalscape was organized as a Delaware corporation in April of 1996
when we acquired the right to distribute CuteFTP from its original author. Our
parent company, ATSI Communications, Inc., established our company as its
wholly-owned subsidiary dedicated to the development, marketing and support of
Internet software products and the execution of other strategies unrelated to
ATSI's core telecommunications business. In 1998 we purchased CuteFTP from its
author and in 1999 began developing and selling complementary products under the
"Cute" name such as CuteHTML and CuteMAP. Significant recent developments are as
follows:
- FEBRUARY 2000: We released CuteFTP Version 4.0, a new version of our
award winning software that incorporates several powerful new features
and enhanced interface.
- MARCH 2000: We released CuteZIP Version 1.0, a file compression program.
- APRIL 2000: We premiered CuteMX at the Spring 2000 Internet World.
- JULY 2000: We restricted access to CuteMX in light of developments in the
legal controversy surrounding file sharing programs.
- SEPTEMBER 2000: ATSI distributed approximately 27% of its shares of
GlobalSCAPE common stock to ATSI's stockholders. As a result, GlobalSCAPE
became a reporting company under the Securities Exchange Act of 1934, as
amended. Also in September, we hired Tim Nicolaou as our Chief Executive
Officer. Mr. Nicolaou has previously served in senior management
positions with Comdisco, Inc., Direct Insite Corp., and United States
Data Corporation.
- OCTOBER 2000: Tim Nicolaou was elected to our Board of Directors. We also
demonstrated three beta programs at Internet World 2000, CuteFTP Pro,
CuteFTP Server, and CuteWeb Server. CuteFTP version 4.0 received the
coveted CNET Editor's Choice award in October 2000.
- NOVEMBER 2000: We re-released CuteMX to a limited user community to test
our proprietary filtering system and to explore possible business models
for the product.
- JANUARY 2001: Together with ATSI, we retained the investment banking firm
of Roth Capital Partners Inc. to advise us regarding strategic financing
alternatives, such as a public offering of our common stock, possible
acquisitions by us and a possible sale of all or part of ATSI's ownership
interest in GlobalSCAPE.
3
- FEBRUARY 2001: We terminated the CuteMX service and stopped distributing
the product.
- MARCH 2001: We released CuteFTP Pro Version 1, a business class file
transfer protocol program for technology professionals that includes
secure file transfer capability.
INDUSTRY BACKGROUND
We believe that the growth of the Internet will accelerate business and
consumer demand for our products. International Data Corporation Research
estimates that the online consumer software market will grow from $3.5 billion
in 1999 to $32.9 billion by 2003. Based on surveys reported by Nua Internet
Surveys, we expect to see particularly dramatic growth in e-commerce in Europe,
the Asia/Pacific region, and Latin America during the next several years. In
addition, we expect high performance computers and broadband access to the
Internet to become more affordable. We believe that all of these factors will
contribute to increasing the demand for Internet applications, which will enable
us to continue to increase sales of our existing products and leverage our brand
recognition to develop and sell complementary products and services. In
addition, the Internet user and website growth metrics continue to be strong.
IDC Research also estimates Internet users to pass the 500 million milestone by
late 2001.
STRATEGY
Our goal is to be the leading provider of high quality, affordable,
easy-to-use products and services that enable individuals and organizations to
exchange information over the Internet in a secure collaborative environment.
Key elements of this strategy are:
- INCREASE OUR PENETRATION IN THE BUSINESS MARKETS BY ADDING
SECURITY FEATURES TO OUR OFFERING. As corporate users
increasingly rely on the Internet as a trusted communications
transport they demand robust security models to protect their
information.
- INCREASE OUR PENETRATION IN THE CONSUMER MARKET BY ADDING
BROWSER-BASED PRODUCTS. We believe that the Internet browser
will be used more frequently to initiate file transfer
operations to and from consumer targeted web sites.
- MARKET OUR PEER-TO-PEER COLLABORATIVE TECHNOLOGY AS A
CUSTOMIZED SOLUTION TO SUPPORT PRIVATE USER COMMUNITIES. We
believe that the technology inherent in our CuteMX program can
be the basis for other products and services, such as the
hosting and support of collaborative work flow applications for
corporate users, and programs that enable the real time
exchange of information between consumers and corporate content
providers.
- INCREASE THE PACE OF NEW PRODUCT INTRODUCTIONS BY INVESTING IN
RESEARCH AND DEVELOPMENT. We believe that we can accelerate the
pace of new product introductions by expanding our research and
development staff and dedicating certain key individuals to the
development of new products.
- LAUNCH AN AFFILIATED MARKETING PROGRAM. We believe that we can
increase sales of our existing products by allowing third
parties to sell our products from their web sites. We are
investing in e-commerce technology that will permit us to
fulfill orders and pay commissions for sales derived from these
third parties.
- LAUNCH AGGRESSIVE MARKETING CAMPAIGNS. We believe that we can
increase sales of our existing products through aggressive
marketing campaigns, and that we can leverage our established
brand name and customer database to successfully introduce new
products.
- EXPAND OVERSEAS DISTRIBUTION. We will be developing
international distribution partners to position GlobalSCAPE as
an international supplier for the Asian market, forecasted as
4
the highest growing Internet sector. In support of this
strategy we are investing in local language versions of our
core products and web site content.
- PURSUE ACQUISITION OPPORTUNITIES. We intend to look for
opportunities to acquire synergistic companies and products, to
build research and development staff, and add new brands to our
product portfolio.
PRODUCTS AND SERVICES
All of our current products are Windows(R) based applications. During
2000 approximately 67% of our revenues were generated from customers within the
United States, with the remaining 33% concentrated mostly in Western Europe,
Canada and Australia. We offer CuteFTP in Spanish, French, German, Japanese and
Portuguese. During 2000, approximately 90% of our revenues were derived from
sales of licenses to use our software, and the remainder from the sale of
advertising space in our software and on our websites.
CUTEFTP. CuteFTP is a "file transfer protocol," or FTP, client program,
which means that it enables users to transfer information such as web pages,
graphics, and other digital files from their computer to and from FTP servers.
CuteFTP simplifies file transfer protocol by hiding the technical processes
behind a user-friendly, graphical interface, which allows users to "drag `n
drop" files between computers. CuteFTP has won several awards, and has been
highlighted in leading industry trade journals such as WindowsNT and on web
sites such as CNet's Download.com and ZDNET.com, as being the most powerful yet
easy-to-use file transfer protocol program. Approximately 98% of our revenues
for 2000 were generated by sales of licenses to use this product and from
advertising from within the product. CuteFTP was first released as freeware
February 1995 by its original author, and was first distributed as a commercial
product by GlobalSCAPE in April 1996.
CUTEFTP PRO. CuteFTP Pro is a business class FTP application designed
for security minded technology professionals. CuteFTP Pro provides major
enhancements to the file transfer process by incorporating the latest security
standards in addition to powerful features including sophisticated scripting,
folder synchronization and accelerated file transfers. CuteFTP Pro was released
in March 2001.
CUTEZIP. CuteZIP is a file compression program, that enables users to
compress large data files so that they may be stored or transferred using less
storage capacity and bandwidth. It is the only compression program that employs
what is referred to in the software industry as "strong 128-bit encryption,"
which is one of the most secure encryption formats available. CuteZIP was first
released in September 1999.
CUTEHTML. CuteHTML is a text-based hypertext mark up language or HTML
editor which is the predominant language used to create Web pages. It includes
various features that make the product easy to use such as color coded tags for
easy code identification, tag tips for quick access to standard HTML tags,
multiple document find and replace, spell check, code for individual browsers,
tabbed interface, and the ability to edit files on remote servers when used in
conjunction with CuteFTP. CuteHTML has received recognition from top software
sites including ZDNET and Tucows. CuteHTML was first released in January 1999.
CUTEMAP. CuteMAP is a tool designed to help HTML users create clickable
images on their web sites. Users select the area of an image that they want
"hot," and tell CuteMAP where the spot should point. CuteMAP automatically
creates the image map code, which can be saved as HTML or copied to an existing
HTML document. The product has been recognized by leading software sites
including Tucows and 5 Star Shareware, and has been called the "best image
mapper" by LockerGnome. CuteMAP was first released in September 1999.
CUTEMX. CuteMX is a file-searching and sharing program and service that
enables users to interact directly with each other to search for and share files
from their home computers. In February 2001, we discontinued the CuteMX service
and the distribution of the CuteMX program. While we will continue
5
to evaluate the legal and business climate for this product, at this time we do
not have plans to continue the service or the distribution of the program.
COLLABORATIVE SOFTWARE PLATFORM. We are marketing a collaborative
software program to businesses and other organizations on a customized basis.
This program enables organizations to establish a closed network via the
Internet to interact with their customers, vendors and business partners in a
secure collaborative environment. The program consists of a client program that
allows users to identify other users having specified qualifications, and to
transfer files either directly between themselves or through a centrally managed
server. It will also permit network members to communicate via chat, instant
messaging or voice over IP. We believe that this program will be attractive to
businesses who transfer a high volume of digital content, such as those in the
engineering, architectural, printing and publishing industries.
BROWSER BASED FILE TRANSFER PROGRAM. We are developing a browser based
Java applet that will provide consumers and web site operators with a robust and
flexible method of exchanging information via a web page. The current CGI
scripting technique currently used by web site operators has many limitations.
Our applet will be marketed with server-side software that is designed to
support the applet and interface to the web site operators' back-end
infrastructure. No trademark has been established for this product
CUTEFTP SERVER. CuteFTP Server is an easy-to-use file transfer protocol
server that includes security features for use in conjunction with CuteFTP Pro.
This program is substantially complete.
MARKETING AND SALES
Our target customers include all users of the Internet, whether they
are individual consumers, small businesses or Fortune 500 companies.
GlobalSCAPE's software is marketed primarily via the Internet through our
Website, software review sites, content sites and online retailers. Our products
are some of the most frequently downloaded titles on Internet software sites
including Yahoo!, CNet's Download.com and ZDNET.com. As such, these sites
include periodic reviews of the products and maintain close tabs on new
releases, providing us with substantial publicity. Other promotional activities
include targeted public relations efforts, sponsorships, participation in
newsletters and advertising on e-zines and strategic Websites. Additionally, we
participate in select trade shows and offer limited retail distribution to
increase product awareness.
We are leveraging our success with CuteFTP to add new customers by
cross promoting new products and services. We intend to expend significant
resources on our product marketing and sales staff to facilitate our growth.
CUSTOMERS
Our customers include a wide spectrum of Internet users, from
individuals to small and large businesses. No single customer accounts for a
substantial portion of our revenues. We derive a substantial portion of our
revenue from sales in foreign countries. In 1999 and 2000, respectively,
approximately 24% and 33% of our revenues were generated from sales to customers
who provided addresses in other countries. These sales were concentrated mostly
in Western Europe, Canada and Australia. In 1999 and 2000, the UK accounted for
approximately 6% and 10% of total revenues, respectively. We did not have
adequate tracking mechanisms in place in 1998 to estimate international sales.
Only revenues derived from the sale of software licenses are attributed to
foreign countries. We assume all advertising revenue is generated in the United
States.
The portion of our revenues derived from foreign countries has
increased, and we expect it will continue to increase. This may expose us to
greater risks of volatility in our revenues due to greater economic volatility
in some foreign countries. All of our revenues are received in U.S. dollars so
we have no exchange rate risk. For more discussion on the risks associated with
our foreign sales, you should read the information under "Risk Factors."
6
NETWORK AND EQUIPMENT
We have contracted with various network providers for network access.
Our arrangements provide for redundancy in the event of a failure, and also for
rapid expansion of available bandwidth in the event that there is a dramatic
increase in demand. To protect critical customer data, GlobalSCAPE's secure
server utilizes ICVerify and Secure Sockets Layer technology. We have multiple
dedicated servers and expansion plans in place to allow rapid and cost effective
scalability.
RESEARCH AND DEVELOPMENT
As of March 2001 we had 14 internal software developers and quality
assurance personnel and 16 external developers engaged as independent
contractors. Our internal software developers are responsible for software
design, managing the development process, testing and quality assurance. We rely
on the external developers for a large portion of the coding burden. We use a
parallel development process which is referred to in the software industry as
the "cyclical iterative development lifecycle." This method allows us to develop
all aspects of a program simultaneously rather than completing one aspect before
moving on to another. All phases of development, including scope approval,
functional and implementation design, object modeling and programming, are
subject to quality assurance testing. Our reliance on the external developers
allows us to tap into a highly skilled labor pool, maintain a 24-hour
development schedule, decrease time to market, and minimize programming costs.
For the years 1998, 1999, and 2000, we spent $42,000, $243,000 and
$873,000, respectively on research and development of which approximately
$103,000 and $56,000 was capitalized in 1999 and 2000, respectively.
COMPETITION
The Internet software market is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other
activities of market participants. Our primary competitors vary by product and
are listed below.
CUTEFTP. CuteFTP exists in a highly competitive environment with more
than 150 FTP software utilities available on the Internet. CuteFTP possesses the
second largest U.S. market share with WS_FTP from Ipswitch, Inc. as its primary
competitor and the current market leader. CuteFTP also competes with Microsoft's
Internet Explorer and Netscape Navigator, both of which incorporate subsets of
the file transfer protocol functionality. While many FTP products have attempted
to mimic CuteFTP's interface, features and functionality, they have not been
commercially successful likely due to their lack of brand recognition, limited
features and functionality and lack of support infrastructure.
CUTEFTP PRO. CuteFTP Pro will compete in the higher end of the same
market as CuteFTP. CuteFTP Pro is positioned as the only secure FTP client that
supports a wide range of security standards related to the FTP protocol.
Competitors in the general FTP market offer products that support a smaller
subset of these standards and thus can only address a narrow segment of the
secure FTP market. Competitors include Ipswitch, Inc., Rhinosoft, and Van Dyke.
CUTEHTML. CuteHTML exists in a highly competitive environment with more
than seventy text-based HTML editors. CuteHTML's competition includes
Microsoft's Front Page and HomeSite from Allaire, Inc. CuteHTML is a light and
powerful editing tool, however, it has fewer features than some other
graphic-based editors. It does, however, have the advantage of being able to
leverage the success of CuteFTP through product integration and cross-marketing
efforts to CuteFTP's existing and loyal customer base.
CUTEMAP. CuteMAP competes against approximately 20 image-mapping
utilities, which exist in a small market. Primary competitors include MapEdit,
Live Image and Splash. CuteMAP has the advantage of being able to leverage the
success of CuteHTML through product integration and cross-marketing efforts to
an existing customer base.
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CUTEZIP. CuteZIP exists in the highly competitive file compression
utility market, competing against more than 100 file compression utilities on
CNet's Download.com alone. Its main competitors include WinZIP, the current
market leader, PKZIP and NetZIP. CuteZIP is a relative newcomer to the market
and its main advantage over the competition is that it is the only compression
utility combining MP3 and Windows Media Audio encoding with extensive file
compression formats including ZIP, CAB and TAR/GZ. Users can compress all file
types, including music, and create self-extracting executable files without
juggling multiple applications. It also employs powerful "twofish" encryption,
one of the most secure encryption formats available.
COLLABORATIVE SOFTWARE PLATFORM. Our customized solution for
peer-to-peer collaboration consists of a client application customized for
companies wishing to host private communities. There are a number of P2P
software companies that offer competitive approaches in the form of tool kits,
products or complete solutions. A few examples are Groove Networks, E-Room.net,
and Mangosoft.
We have limited information regarding our products' market shares in
their respective categories. A study of the second quarter of 1999 that we
purchased from Media Metrix included only two file transfer protocol products in
its research sample, CuteFTP and WS_FTP from Ipswitch, Inc. Based on this
limited analysis, CuteFTP had 30% of the market and WS_FTP had 70%. We do not
have any independent data regarding the market share of our other products, but
do not believe that any of the products have a significant share of the market.
For more discussion on the risks associated with our competition, you
should read the information under "Risk Factors."
INTELLECTUAL PROPERTY
Our trademarks, copyrights and technology are central to our business.
We protect our intellectual property rights through a combination of licenses,
trademarks, service marks, copyrights, trade secret laws and restrictions on
disclosure. We have also filed provisional patent applications for our file
searching, exchange and filtering processes employed in CuteMX and our
collaborative software platform, which is currently under development.
We currently have registered trademarks for GlobalSCAPE, CuteFTP,
CuteHTML, CuteZIP, CuteMAP and CuteMX and have filed applications to register
trademarks for CuteFTP Pro and Cute Web Server.
We have obtained United States copyright registrations for all but the
most recently developed versions of our software applications, and have applied
for registration for the most recently developed versions.
For more discussion on the risks associated with our Intellectual
Property, you should read the information under "Risk Factors," especially
"Risks Related to Legal Uncertainty."
EMPLOYEES
As of March 9, 2001, we had 38 full-time and part-time employees
organized within six functional areas. The employee distribution according to
function is as follows:
--------------------------------------------- -------------------
Number of
Department Employees
--------------------------------------------- -------------------
Management and Administration 8
Research and Development 8
Quality Assurance 6
Marketing 6
Information Services 3
Sales and Customer Support 7
--------------------------------------------- -------------------
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None of our employees are covered by collective bargaining agreements
and we believe our employee relations are good.
RISK FACTORS
We have described below risks that we are aware of that could have a
material adverse effect on your stock ownership and our business, including
revenues, income, operating results and financial condition.
RISKS RELATED TO STOCK OWNERSHIP
STOCKHOLDERS MAY BE UNABLE TO SELL THEIR STOCK.
There is no public market for GlobalSCAPE's common stock. In addition,
GlobalSCAPE's bylaws provide that, except under limited circumstances,
stockholders may not transfer their stock until the earlier of (i) January 1,
2002 or (ii) 180 days after GlobalSCAPE completes an initial public offering of
its stock and lists and registers the stock on a national securities exchange or
causes its shares to be quoted on the automatic quotation system of a national
securities association. GlobalSCAPE has delayed its plan to complete a public
offering and may never complete a public offering, list its common stock or
cause its common stock to be quoted on a quotation system of a national
securities association. Consequently, it may be difficult for stockholders to
sell their stock. Even if GlobalSCAPE completes an offering and lists its stock
there might not be a viable trading market for the stock.
STOCKHOLDERS' OWNERSHIP OF GLOBALSCAPE STOCK MAY BE SIGNIFICANTLY DILUTED.
GlobalSCAPE may determine at some time in the future to issue additional shares
in a public or private offering resulting in considerable dilution.
ATSI AND ITS DIRECTORS AND EXECUTIVE OFFICERS ARE ABLE TO EXERT SIGNIFICANT
INFLUENCE OVER GLOBALSCAPE.
ATSI owns approximately 73% of GlobalSCAPE's outstanding common stock.
Therefore, ATSI is able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may delay
or prevent a change in control of GlobalSCAPE or discourage a potential acquirer
from attempting to obtain control of GlobalSCAPE, either of which could have an
adverse effect on the value of GlobalSCAPE's common stock.
Arthur L. Smith, the Chairman and Chief Executive Officer of ATSI and
H. Douglas Saathoff, the Chief Financial Officer of ATSI, are two of the three
members of GlobalSCAPE's Board of Directors. Therefore, until additional
directors are recruited for GlobalSCAPE's board, these ATSI officers may be able
to exert significant influence over GlobalSCAPE and conflicts of interest may
arise.
ANTI-TAKEOVER PROVISIONS IN GLOBALSCAPE'S CHARTER AND DELAWARE LAW COULD INHIBIT
OTHERS FROM ACQUIRING GLOBALSCAPE.
Some of the provisions of GlobalSCAPE's certificate of incorporation
and bylaws and in Delaware law could, together or separately:
- discourage potential acquisition proposals;
- delay or prevent a change in control; and
- limit the price that investors may be willing to pay in the future
for shares of GlobalSCAPE's common stock.
In particular, GlobalSCAPE's certificate of incorporation and bylaws
provide for, among other things, limitations on the individuals that may call
meetings of the stockholders and do not allow for cumulative voting. GlobalSCAPE
is also subject to Section 203 of the Delaware General Corporation Law
9
which generally prohibits a Delaware corporation from engaging in any of a broad
range of business combinations with any interested stockholder, as defined in
the statute, for a period of three years following the date on which the
stockholder became an interested stockholder.
ATSI MIGHT BE MOTIVATED BY FINANCIAL STRESS TO SELL ITS GLOBALSCAPE STOCK, WHICH
COULD DEPRESS THE VALUE OF THE STOCK.
ATSI has incurred losses since inception, had negative cash flows for most of
its history, and currently has only limited resources to support its operations.
If ATSI is not able to obtain financing to support its operations or achieve
positive cash flow, ATSI might be motivated by financial stress to sell its
stock of GlobalSCAPE for less than what it might sell for under other
circumstances, which would tend to depress the value of the stock in general.
RISKS RELATED TO OPERATIONS
GLOBALSCAPE DEPENDS ON ONE PRODUCT FOR A SUBSTANTIAL PORTION OF ITS REVENUES.
GlobalSCAPE depends on a single product, CuteFTP, for about 98% of its
revenues, either through sales of licenses to use CuteFTP or sales of
advertising space in CuteFTP. In addition, GlobalSCAPE's ability to raise
revenues related to existing products and new products depends substantially on
exploiting the traffic to GlobalSCAPE's web sites generated by the demand for
CuteFTP and leveraging the "Cute" brand name to cross-market other products. If
GlobalSCAPE is not able to maintain CuteFTP's competitive position, its revenues
could decline dramatically and GlobalSCAPE's plans to expand its business could
be substantially impaired.
GLOBALSCAPE MAY NOT BE ABLE TO GENERATE SUFFICIENT REVENUE FROM THE REGISTRATION
OF ITS SOFTWARE.
All of GlobalSCAPE's products are available for free download for a
minimum 30-day evaluation period as specified in their respective license
agreements. GlobalSCAPE motivates users to purchase a permanent license for the
products by displaying registration reminder messages and by completely or
partially disabling the product at the end of the evaluation period. Currently,
product sales account for over 90% of GlobalSCAPE's revenue. If registration
does not occur, revenue generation is limited to advertising revenues which
currently account for a small portion of GlobalSCAPE's revenues.
GLOBALSCAPE'S POSITION IN THE INTERNET SOFTWARE MARKET IS CONTINUOUSLY
THREATENED BECAUSE THE MARKET IS INTENSELY COMPETITIVE AND TECHNOLOGY IS
CONSTANTLY CHANGING.
The software industry is characterized by rapid technological change.
GlobalSCAPE's competitors are constantly releasing improved versions of their
products. You should read the information under "Business-Competition" for more
information on our competitors. The needs and expectations of GlobalSCAPE's
customers are also evolving. Therefore, GlobalSCAPE must continually enhance its
products and develop new products to remain competitive. When a new product is
brought to market with functionality better suited to a particular use, the
demand for currently available products may decrease. For example, GlobalSCAPE
believes that in the past a small portion of the demand for CuteFTP was driven
by the desire to transfer audio files in the popular MP3 format, and that this
demand declined as a result of the release of file sharing programs like Napster
and CuteMX. All of GlobalSCAPE's products are subject to the threat of reduced
market share resulting from the introduction of new products. GlobalSCAPE may
fail to develop new products and functionalities as quickly as necessary in the
future to avoid losing its position in the Internet software market.
In addition, software development generally requires substantial lead
time, so GlobalSCAPE must accurately predict what changes will be needed.
GlobalSCAPE may fail to predict these changes far enough in advance, or it may
not have sufficient technical personnel to make such changes. If GlobalSCAPE
cannot keep pace, its products will lose their position in the market.
10
GLOBALSCAPE'S REVENUES MAY DECLINE IF INTERNET USE DOES NOT GROW AS PROJECTED.
If the Internet fails to continue to grow as a commercial medium and
the number of users transacting business on the Internet declines, our revenues
may be substantially impaired.
FUTURE GOVERNMENT REGULATION MAY INCREASE OUR COST OF DOING BUSINESS AND REDUCE
DEMAND FOR OUR PRODUCTS.
As Internet popularity increases, new laws may be adopted to address
areas such as taxation, privacy, copyrights, and quality of services, and
existing laws may be applied to the Internet in unexpected ways. New laws and
unexpected application of existing laws related to the Internet could create
uncertainty in the Internet market place, which could increase our cost of doing
business, reduce demand for our products, and have a material adverse effect on
our business, financial condition and operations.
GLOBALSCAPE MAY NOT BE ABLE TO COMPETE EFFECTIVELY WITH LARGER, BETTER
POSITIONED COMPANIES, RESULTING IN LOWER MARGINS AND LOSS OF MARKET SHARE.
GlobalSCAPE's major competitors are Ipswitch, Inc., which distributes
WS_FTP, the top competitor to CuteFTP, and Microsoft Corporation, which
incorporates various Internet software, including file transfer protocol
functionality, in its other products. Each of these companies has significantly
greater revenues and financial resources than GlobalSCAPE as well as greater
personnel and technical resources. This may enable them to develop new
technologies more quickly than GlobalSCAPE, to offer a broader array of
products, and to respond more quickly to new opportunities, industry standards
or customer requirements. They may also be able to adopt more aggressive pricing
strategies. For example, Ipswitch gives an older version of its file transfer
protocol program away for free for non-commercial uses, and Microsoft includes
file transfer protocol functionality in its Internet browser, which it
distributes for free. Increased competition may result in lower operating
margins and loss of market share. GlobalSCAPE expects additional competitors to
enter the market as the size and visibility of the market for web based software
increases. These competitors may have significantly greater capabilities and
resources than GlobalSCAPE. You should read the information under
"Business-Competition" for more information on our competitors.
IT MAY BE DIFFICULT FOR GLOBALSCAPE TO RECRUIT SOFTWARE DEVELOPERS AND OTHER
TECHNICAL AND MANAGEMENT PERSONNEL BECAUSE GLOBALSCAPE IS A RELATIVELY SMALL
COMPANY.
GlobalSCAPE competes intensely with other Internet software development
and distribution companies internationally to recruit and hire from a limited
pool of qualified personnel. Some qualified candidates prefer to work for
larger, better known companies.
IF GLOBALSCAPE LOSES KEY PERSONNEL IT MAY NOT BE ABLE TO EXECUTE ITS BUSINESS
PLAN.
GlobalSCAPE's future success depends on the continued services of
several key members of its management team, including Mr. Nicolaou, Ms.
Poole-Christal, and GlobalSCAPE's product development team. These individuals
would be difficult to replace, both because of the intense competition for
similarly skilled people and because the knowledge that each of these
individuals has regarding GlobalSCAPE's products and product development
processes would be difficult to transfer to another individual.
GLOBALSCAPE'S ABILITY TO DEVELOP ITS SOFTWARE WILL BE SERIOUSLY IMPAIRED IF IT
IS NOT ABLE TO USE ITS FOREIGN SUBCONTRACTORS.
GlobalSCAPE relies on foreign subcontractors to help it develop its
software. If these programmers decided to stop working for GlobalSCAPE, or if
GlobalSCAPE were unable to continue using them because of political or economic
instability, GlobalSCAPE would have difficulty finding comparably skilled
developers. In addition, GlobalSCAPE would likely have to pay considerably more
for the same work, especially if it used U.S. personnel. If GlobalSCAPE could
not replace the programmers, it would take it significantly longer to develop
its products.
11
GLOBALSCAPE MAY INCUR LOSSES AS IT EXPANDS ITS BUSINESS.
GlobalSCAPE intends to expand its business and therefore expects to
expend significant additional resources on research and development, marketing,
product development and developing its network infrastructure. As a result,
GlobalSCAPE may need to significantly increase its revenues to maintain
profitability. If GlobalSCAPE fails to successfully develop and market new
products, it may not be able to achieve the necessary revenue growth, and it may
not be profitable.
THE FINANCIAL DIFFICULTIES OF ATSI COULD IMPAIR GLOBALSCAPE'S ACCESS TO
FINANCING, EXACERBATE CONFLICTS OF INTEREST, AND MIGHT RESULT IN A CHANGE OF
OWNERSHIP OF THEIR SHARES.
ATSI has incurred losses since inception, has had negative cash flows
for most of its history, and currently has only limited resources to support its
operations. The financial condition of ATSI may make it more difficult for
GlobalSCAPE to obtain financing. For example, GlobalSCAPE has been told by a
credit rating agency that it will not receive a credit rating higher than that
of its parent. If ATSI does not begin to generate sufficient positive cash flows
or is not able to obtain financing to continue its operations, the GlobalSCAPE
directors who are ATSI executives may be faced with conflicts of interest
regarding the best use of GlobalSCAPE's funds and may take steps to cause
GlobalSCAPE to transfer funds to ATSI in the form of a dividend. This will
deprive GlobalSCAPE of funds needed to fully execute its business plan.
GLOBALSCAPE IS A PARTY TO A $2 MILLION LOAN TO ATSI, AND MAY HAVE TO REPAY THIS
LOAN.
GlobalSCAPE is a signatory, and is jointly and severally liable with
ATSI, on a $2 million dollar loan from NTFC Capital Corporation to ATSI made in
August 1999 to enable ATSI to purchase equipment for its telecommunications
business. ATSI is currently in default of some of its financial covenants under
the loan agreement, namely minimum revenue levels, gross margin levels, EBITDA
and debt-to-equity ratios.
Because of its financial condition, ATSI will likely continue to be in
default of financial covenants and may fail to meet its payment obligations.
NTFC could decide to seek repayment from GlobalSCAPE of the entire outstanding
balance. However, if GlobalSCAPE used its funds to repay this loan, its ability
to execute its business plan would be seriously impaired.
GLOBALSCAPE'S OPERATIONS ARE VULNERABLE TO SECURITY BREACHES THAT COULD HARM THE
QUALITY OF ITS PRODUCTS AND SERVICES OR DISRUPT ITS ABILITY TO DELIVER ITS
PRODUCTS AND SERVICES.
Third parties may breach GlobalSCAPE's system security and damage its
products and services or misappropriate confidential customer information. This
might cause GlobalSCAPE to lose customers, or even cause customers to make
claims on GlobalSCAPE for damages to them. In addition, GlobalSCAPE may be
required to expend significant resources to protect against security breaches
and/or to address problems caused by such breaches.
GLOBALSCAPE'S PRODUCTS MAY EXPOSE CUSTOMERS TO INVASION OF PRIVACY, CAUSING
CUSTOMER DISSATISFACTION.
Some of GlobalSCAPE's products are intended to provide outsiders access
to files on customer's hard drives, making the customer vulnerable to outsider
use of information. If the customer suffers an invasion of privacy or harm to
his or her computer, this may result in customer dissatisfaction and possible
claims against us for any resulting damages.
GLOBALSCAPE MAY HAVE INCREASING RISK OF REVENUE VOLATILITY AS A LARGER PORTION
OF ITS REVENUE IS DERIVED FROM FOREIGN COUNTRIES.
The portion of GlobalSCAPE's sales derived from foreign countries has
increased and GlobalSCAPE expects it will continue to increase. This may expose
GlobalSCAPE to greater risks of volatility in its revenues due to greater
economic volatility in those countries.
12
GLOBALSCAPE'S PRODUCTS MAY CONTAIN DEFECTS THAT MAY BE COSTLY TO CORRECT, DELAY
MARKET ACCEPTANCE OF ITS PRODUCTS AND DAMAGE ITS REPUTATION.
Errors may be found in GlobalSCAPE's products after distribution. If
errors are discovered, GlobalSCAPE may have to make significant expenditures of
capital to eliminate them and may not be able to correct them in a timely manner
or at all. Errors and failures in GlobalSCAPE's products could result in a loss
of, or delay in, market acceptance of its products and could damage its
reputation.
GLOBALSCAPE'S PRODUCTS RELY ON THE PREVALENCE OF WINDOWS-BASED OPERATING SYSTEMS
AND IF THAT TECHNOLOGY FAILS TO MAINTAIN OR IMPROVE MARKET SHARE, GLOBALSCAPE'S
PRODUCTS WOULD NOT BE AS MARKETABLE.
GlobalSCAPE's current products can only be used on a Windows-based
operating system and are not compatible with other operating systems. Anything
that affects Windows market share negatively could have a material adverse
effect on the demand for GlobalSCAPE's products.
RISKS RELATED TO LEGAL UNCERTAINTY
GLOBALSCAPE MAY BE SUED BY MEMBERS OF THE RECORDING INDUSTRY, MOTION PICTURE
INDUSTRY OR OTHERS FOR DISTRIBUTING CUTEMX, WHICH WOULD CAUSE IT TO INCUR
SUBSTANTIAL LEGAL EXPENSES AND THE PAYMENT OF SUBSTANTIAL MONEY DAMAGES.
Despite GlobalSCAPE's security measures, a portion of CuteMX users
probably used the program to exchange files containing copyrighted works, such
as popular songs or videos. Napster, Inc. distributed a similar program and was
sued in March of 2000 by numerous members of the recording industry, and Scour,
Inc. distributed a similar program and was sued in September 2000 by numerous
members of the recording and movie industry. These lawsuits allege that Napster
and Scour are vicariously and contributorily liable for the sharing of files
containing copyrighted music and videos via their service. Similarly,
GlobalSCAPE may be sued by artists, record and movie companies or others whose
works may have been distributed using CuteMX. If GlobalSCAPE were sued,
GlobalSCAPE may be found to have violated the law and be required to pay money
damages. Even if GlobalSCAPE were to win such a lawsuit or reach a settlement,
the expense of defending the suit might have a material adverse effect on its
financial condition.
GLOBALSCAPE IS VULNERABLE TO CLAIMS THAT GLOBALSCAPE'S PRODUCTS INFRINGE
THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS PARTICULARLY BECAUSE GLOBALSCAPE'S
PRODUCTS ARE PARTIALLY DEVELOPED BY INDEPENDENT PARTIES.
GlobalSCAPE may be exposed to future litigation based on claims that
GlobalSCAPE's products infringe the intellectual property rights of others. This
risk is exacerbated by the fact that some of the code in GlobalSCAPE's products
is developed by independent parties or licensed from third parties over whom
GlobalSCAPE has less control than it exercises over internal developers. Claims
of infringement could require GlobalSCAPE to reengineer its products or seek to
obtain licenses from third parties in order to continue offering its products.
In addition, an adverse legal decision affecting GlobalSCAPE's intellectual
property, or the use of significant resources to defend against this type of
claim could place a significant strain on GlobalSCAPE's financial resources and
harm its reputation.
GLOBALSCAPE MAY NOT BE ABLE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS.
GlobalSCAPE's patent-pending technology, software code, and trade and
service marks are some of GlobalSCAPE's most valuable assets. Given the global
nature of the Internet and GlobalSCAPE's business, GlobalSCAPE is vulnerable to
the misappropriation of this intellectual property, particularly in foreign
countries, such as China and Eastern Europe, where laws or law enforcement
practices are less developed. The global nature of the Internet makes it
difficult to control the ultimate destination or security of GlobalSCAPE's
software making it more likely that unauthorized third parties will copy certain
portions
13
of GlobalSCAPE's proprietary information or reverse engineer the proprietary
information used in its programs. If GlobalSCAPE's proprietary rights were
infringed by a third-party, and GlobalSCAPE did not have adequate legal
recourse, GlobalSCAPE's ability to earn profits, which are highly dependant on
those rights, would be severely diminished.
Other companies may own, obtain or claim trademarks that could prevent,
limit or interfere with GlobalSCAPE's use of its trademarks. The globalscape.com
web site address, or domain name, and GlobalSCAPE's various trademarks are
important to its business. If GlobalSCAPE were to lose the use of its site
address or trademarks, its business would be harmed and GlobalSCAPE would have
to devote substantial resources towards developing an independent brand
identity. Defending or enforcing GlobalSCAPE's trademark rights at a local and
international level could result in the expenditure of significant financial and
managerial resources.
GLOBALSCAPE MAY FACE LIABILITY RELATING TO CONTENT ON, OR PRODUCTS AND SERVICES
SOLD FROM, ITS WEB SITE.
GlobalSCAPE's web sites and software products provide third-party
content. GlobalSCAPE could be exposed to claims related to copyright or
trademark infringement, errors or omissions, or other wrongful acts by the third
parties whose content GlobalSCAPE provides or whose web sites are linked with
GlobalSCAPE's. In addition, GlobalSCAPE has agreements with other companies
under which it shares revenues resulting from advertising or the purchase of
products or services through direct or indirect links to or from GlobalSCAPE's
web sites and accessible through GlobalSCAPE's software products. These
arrangements may expose GlobalSCAPE to additional legal risks and uncertainties,
including potential liability to consumers of these products and services, even
though GlobalSCAPE did not provide the products and services itself.
ITEM 2. PROPERTIES
Our corporate office is located in a technical park in northwest San
Antonio called University Park Tech Center II. Our lease for the 14,700 square
foot facility expires in September 2008. Our annual rent is approximately
$191,000; however, our rental expense in 2000 was $127,000. We believe these
facilities will be suitable for our current business needs and that suitable
additional space will be available on acceptable terms when needed.
ITEM 3. LEGAL PROCEEDINGS
We are not currently involved in any material pending legal
proceedings, but may become subject to legal proceedings in the ordinary course
of our business. Such claims may result in the expenditure of significant
financial and managerial resources.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of 2000.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is not listed or traded on any stock exchange, nor is
it quoted on any automatic quotation system or otherwise listed. There is no
established public trading market for our common stock of which we are aware. As
of March 22, 2001, there were 2,138 holders of record of our common stock. We
believe we have approximately 14,600 beneficial owners of our common stock as of
this date.
GlobalSCAPE's bylaws provide that, except under limited circumstances,
stockholders may not transfer their stock until the earlier of (i) January 1,
2002 or (ii) 180 days after GlobalSCAPE completes an initial public offering of
its stock and lists and registers the stock on a national securities exchange or
causes its shares to be quoted on the automatic quotation system of a national
securities association. GlobalSCAPE has delayed its plan to complete a public
offering and may never complete a public offering, list its common stock or
cause its common stock to be quoted on a quotation system of a national
securities association. Consequently, it may be difficult for stockholders to
sell their stock. Even if GlobalSCAPE completes an offering and lists its stock,
there might not be a viable trading market for the stock.
We have never paid a cash dividend, and do not expect to do so in the
foreseeable future. We expect to reinvest all of our earnings in the further
growth of the business.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
1996 1997 1998 1999 2000
Revenues:
Software product revenues............ $216,376 $870,539 $2,073,687 $2,922,141 $5,165,668
Advertising revenues................. - - - 328,895 570,008
------------ ----------- ------------ ------------- ------------
Total revenues................. 216,376 870,539 2,073,687 3,251,036 5,735,676
Operating expenses:
Cost of revenues (exclusive of
depreciation and amortization shown
separately below).................... 92,758 219,623 396,570 105,026 200,118
Selling, general and administrative.. 333,450 448,457 1,228,644 1,625,004 3,606,550
Research and development............. - - 42,164 139,953 817,496
Depreciation and amortization........ 2,505 4,876 91,262 253,896 430,221
------------ ----------- ------------ ------------- ------------
Total operating expenses....... 428,713 672,956 1,758,640 2,123,879 5,054,385
------------ ----------- ------------ ------------- ------------
Income (loss) from operations........... (212,337) 197,583 315,047 1,127,157 681,291
Interest expense, net................... - - (2,345) (56,847) (42,839)
Other expense........................... (404) - - - -
Gain (loss) on sale of assets........... - - - - (13,687)
------------ ----------- ------------ ------------- ------------
Income (loss) before provision for
income taxes.......................... (212,741) 197,583 312,702 1,070,310 624,765
Income tax provision:
Current
Federal income taxes........... - 65,242 108,377 372,532 329,215
State income taxes............. - 9,042 15,020 51,629 22,532
Deferred
Federal income taxes........... - (1,004) (6,463) (24,353) (38,246)
State income taxes............. - (139) (896) (3,375) (3,375)
------------ ----------- ------------ ------------- ------------
Total income tax provision (benefit) ... - 73,141 116,038 396,433 310,126
------------ ----------- ------------ ------------- ------------
Net income ............................. ($212,741) $124,442 $196,664 $673,877 $314,639
============ =========== ============ ============= ============
Net income per common share - basic ($0.02) $0.01 $0.02 $0.05 $0.02
Net income per common share
-assuming dilution ............. ($0.02) $0.01 $0.01 $0.05 $0.02
15
December 31,
1996 1997 1998 1999 2000
Cash and cash equivalents................ $2,378 $192,064 $ 65,480 $ 16,361 $ 113,591
Working capital (deficit)................ 21,197 167,300 (798,833) (160,171) 161,939
Total assets............................. 59,902 280,180 1,163,648 1,471,299 2,122,094
Long term debt including capital lease
obligations, less current portion........ - - 73,412 56,924 149,074
Cash dividends per common share.......... $ - $ - $ - $ - $ -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999
SALES. We derive our revenues primarily from software sales and to a
lesser degree from advertising from within our software products and on our
websites. Sales are comprised of the gross selling price of software, including
shipping charges and the net proceeds received from advertisers. We contract
with third parties for the delivery and sales of advertising. For the year ended
December 31, 2000, total revenues increased 76% from $3,251,036 in 1999 to
$5,735,676 in 2000. Sales of software licenses increased from $2,922,141 to
$5,165,668, a 77% increase. Unit sales of these software licenses increased 55%
from 121,649 in 1999 to 188,407 in 2000. The average selling price per unit
increased period over period due to decreased sales of multi-seat licenses as a
percentage of total licenses sold. Advertising revenue in 2000 was $570,008, a
73% increase over 1999's advertising revenue of $328,895. Advertising revenue
accounted for 10% of total revenues in both 1999 and 2000. We began displaying
ad banners in our products for the first time in the second quarter of 1999 and
earned an average of $2.30 per thousand banners displayed (CPM). For all of
1999, we earned an average CPM of $2.21. In 2000, the market for internet
advertising collapsed. We earned an average CPM of only $0.69. This decline in
CPM was offset by very strong growth in the number of ads displayed, accounting
for the 73% increase in advertising revenues over the comparable period a year
ago. We displayed almost 800 million ad banners in 2000 as compared to just over
138 million in 1999. We believe much of the decline in advertising rates is a
combination of increases in supply and questions about the effectiveness of
banner ads, which we believe will keep prices depressed in the immediate future.
As a result of our analysis of the market for internet advertising, we have
discontinued installing the advertising modules within new releases of our
software products. We will continue to generate some advertising revenue from
the existing customer base but we expect that this base will deteriorate and we
believe that advertising revenues in 2001 will be significantly less than those
attained in 2000. We plan to continuously evaluate the market for internet
advertising and may take advantage of this market if conditions warrant.
COST OF REVENUES. Cost of revenues consists primarily of production,
packaging and shipping costs for boxed copies of software products as well as a
portion of our bandwidth costs. Cost of revenues increased 91% between periods
from $105,026 to $200,118 primarily due to increased sales volume and increased
bandwidth capacity. As a percentage of revenues, cost of revenues increased
slightly from 3.2% to 3.5%.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses consist primarily of personnel and related expenses,
marketing, customer support, professional fees, rent, bad debt and credit card
transaction fees. Selling, general and administrative expenses increased from
$1,625,004 in 1999 to $3,606,550 in 2000, a 122% increase. As a percentage of
total sales, selling, general and administrative expenses increased from 50% in
1999 to 63% in 2000. These expenses increased primarily
16
as a result of increased personnel costs including salaries, payroll taxes and
insurance as well as increased rents associated with our move to a larger
facility. The number of persons employed by GlobalSCAPE increased from
approximately 23 at the end of 1999 to 38 at December 31, 2000. We incurred a
compensation charge in the fourth quarter of $214,174 for the re-issuance of
stock options. These options were issued below fair market value and the
difference between the fair market value and the exercise price of the option
was recognized as compensation expense for all vested options. The total charge
related to these options is $255,559, $41,385 of which will be recognized in
future periods as these options vest. The vesting periods of these options vary,
the longest term being 18 months from January 1, 2001. For more information on
these options, you should read the discussion under "Executive Compensation." In
addition, we incurred a number of one-time legal and printing fees related to
ATSI's partial spin-off of our common stock in 2000.
We may incur additional compensation charges related to stock
options for which we have not made provisions. Ms. Poole-Christal claims her
option should be adjusted as a result of the forward split. The Company does
not believe that her current options are subject to the 7.6:1 split. We are
not able to predict the outcome of these discussions. If Ms. Poole-Christal's
option were adjusted to reflect the split, she would hold 2,214,860 options
at an exercise price of $0.0132 per share. This adjustment would cause us to
recognize additional compensation expense for the quarter in which the
adjustment is made equal to the difference between the fair market value of
the stock at the time of the adjustment. We estimate that this additional
non-cash compensation charge would be $892,000 if this issue were resolved
today at the fully split adjusted rate.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
484% from 1999 to 2000, from $139,953 to $817,496. The increase was due to the
rapid expansion of our internal research and development staff used for new
product development and the maintenance of existing products as well as
increased expenditures on external development resources.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists of depreciation expense related to our fixed assets, the amortization
of goodwill associated with our purchase of the assets of QMC in 1998 and
amortization of the trademark associated with our purchase of CuteFTP in 1998.
Depreciation and amortization expense increased 69% from $253,896 in 1999 to
$430,221 in 2000. This increase was due primarily to the addition of office
furniture, leasehold improvements, phone systems, computers and computer related
equipment related to our move to a larger facility and increases in personnel.
INTEREST EXPENSE, NET. Interest expense decreased from 1999 to 2000
from $56,847 to $42,839. The majority of interest expense incurred during 1999
was related to the purchase of CuteFTP. The Company's debt related to this
purchase was paid in full in January 2000. Interest expense recognized during
2000 is related primarily to capital leases for office furniture and working
capital borrowings.
INCOME TAXES. In periods prior to September 12, 2000, ATSI has filed a
consolidated federal income tax return to include the tax information for it and
for its affiliates, including GlobalSCAPE. Effective September 12, 2000, ATSI
distributed approximately 27% of its ownership in GlobalSCAPE, resulting in a
deconsolidation from the ATSI tax return filing group for federal income tax
purposes. From that date forward, GlobalSCAPE will file a separate return for
income taxes. For financial accounting purposes and in accordance with the tax
sharing agreement which was in effect by and between ATSI and GlobalSCAPE for
the periods prior to deconsolidation our financial statements have and will
continue to reflect the costs of income taxes as if GlobalSCAPE was filing
separate income tax returns. The provision for federal income taxes was $290,969
and $348,179 for 2000 and 1999, respectively. The provision for state income
taxes was $19,157 and $48,254 over the same periods. GlobalSCAPE's effective
income tax rate for 2000 was 50% compared to the 37% effective rate for 1999.
The increase in the effective income tax rate in 2000 is due primarily to the
financial accounting recognition of compensation expense related to stock option
grants.
17
NET INCOME. Net income decreased from $673,877 in 1999 to $314,639 in
2000, primarily as a result of the impact of the non-cash stock option related
compensation charges as well expenses related to the partial spin-off of our
common stock and increased personnel costs. These expenses combined to reduce
our income before taxes. In addition, the compensation charge related to stock
options did not reduce our tax liability, as it is not deductible for federal
income tax purposes.
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 AND YEAR ENDED DECEMBER 31, 1998
SALES. Software sales increased from $2,073,687 in 1998 to $2,922,141
in 1999, a 41% increase. Unit sales of our software products increased from
68,216 in 1998 to 121,649 in 1999. The average selling price decreased year to
year due to greater sales of multi-seat licenses. We recognized advertising
revenues for the first time in 1999. Advertising revenue in 1999 was $328,895
and accounted for approximately 10% of total revenues. We displayed more than
138 million banners, which accounted for the majority of advertising revenues.
COST OF REVENUES. Cost of revenues in 1998 and 1999 consist primarily
of royalties and production, packaging and shipping costs for boxed copies of
software products. We purchased CuteFTP from its author in October 1998. Prior
to this purchase we distributed the product under an exclusive royalty based
distribution agreement. Royalties were recognized as costs of revenues. The
reduction in cost of revenues from $396,570 in 1998 to $105,026 in 1999 reflects
the purchase, which eliminated any further royalty payments.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses consist primarily of personnel and related expenses,
rent, advertising and promotional expenses, bad debt expense and credit card
transaction fees. Selling, general and administrative expenses increased from
$1,228,644 in 1998 to $1,625,004 in 1999, a 32% increase. As a percentage of
total sales, selling, general and administrative expenses decreased from 59% in
1998 to 50% in 1999. Expenses increased primarily as a result of increased
personnel costs including salaries, payroll taxes and recruiting fees. We had 14
employees at the end of 1998 and 23 at the end of 1999. In addition, advertising
expenses increased due to new product launches. We introduced saleable versions
of CuteHTML and CuteMAP as well as beta versions of CuteZIP in 1999. Billing
fees increased as well due to increased sales via credit card transactions.
RESEARCH AND DEVELOPMENT. In 1999, we began outsourcing some research
and development expenses. Research and development expenses were $42,164 in 1998
and $139,953 in 1999, a 232% increase. We began incurring research and
development costs shortly after the decision was made to purchase CuteFTP. Prior
to the purchase, all development costs were the responsibility of the author. In
1999, we expended resources on CuteFTP, CuteHTML, CuteMAP, CuteZIP and CuteMX as
well as other products.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists of depreciation expense related to GlobalSCAPE's fixed assets, the
amortization of goodwill associated with our purchase of the assets of QMC in
1998 and amortization of the trademark associated with our purchase of the
source code of CuteFTP. Depreciation and amortization expense increased from
$91,262 in 1998 to $253,896 in 1999 due primarily to the increase in fixed
assets between years and approximately $180,000 of amortization related to
CuteFTP.
INTEREST EXPENSE. Interest expense consists primarily of interest
expense related to the purchase of CuteFTP and interest expense related to our
various capital leases and working capital borrowings. Interest expense grew
from $2,345 in 1998 to $56,847 in 1999, a 2,324% increase, of which $37,073 was
due solely to the purchase of CuteFTP. The author agreed to accept approximately
$190,000 in cash and twelve equal monthly payments of $63,000 for the total
purchase price. Although no interest charge was expressed in the purchase
agreement, we imputed interest at a rate of 12%.
18
INCOME TAXES. ATSI files a consolidated federal income tax return for
it and its affiliates, including GlobalSCAPE. Since ATSI has had and continues
to have net operating losses on a consolidated basis, no income taxes have been
due with the consolidated federal income tax return filing in any reported
period. GlobalSCAPE, has however, generated positive net income in each year
from 1997 through 2000 and its financial statements have and will continue to
reflect the costs of income taxes as if GlobalSCAPE was filing separate income
tax returns. The provision for federal income taxes was $348,179 and $101,914
for 1999 and 1998, respectively. The provision for state income taxes was
$48,254 and $14,124 over the same periods.
NET INCOME. Net income increased 243% between periods from $196,664 in
1998 to $673,877 in 1999. The increase was a result of revenue growth and
increased gross margins resulting from the purchase of CuteFTP.
LIQUIDITY AND CAPITAL RESOURCES
In February 2000, we borrowed $70,000 from The Frost National Bank. As
of December 31, 2000, the outstanding balance was approximately $12,000. We
began making monthly principal and interest payments of $6,142 on March 1, 2000
and continued to make such payments for a period of twelve months, through
February 1, 2001. The interest rate was subject to change and was approximately
10.5% per annum for the year ended December 31, 2000. There were no prepayment
penalties. The note was paid in full February 2, 2001.
We are a co-borrower for a capital lease obligation of, and have joint
and several liability with, ATSI with NTFC Capital Corporation entered into
August 26, 1999 in the amount of $2,000,000. In connection with this obligation
we signed a Note and a Loan and Security Agreement whereby we have granted a
security interest to NTFC in the equipment purchased with the loan proceeds.
GlobalSCAPE does not use any of that equipment in its business and none of our
stock or assets is collateral securing the obligation. Interest on the
obligation was capitalized for the first six months and is calculated at a fixed
rate per annum equal to the five year bank swap rate as reported on the first
borrowing date on the Dow Jones & Company Telerate screen, plus 495 basis
points. All principal amounts borrowed are to be amortized and repaid quarterly.
As of December 31, 2000, the outstanding balance including capitalized interest
was approximately $1,873,023.
The lease facility requires that ATSI meet certain financial covenants
on a quarterly basis beginning October 31, 1999, including minimum revenue
levels, gross margin levels, earnings before interest, taxes and depreciation
and amortization (EBITDA) results and debt to equity ratios. ATSI was in default
of financial covenants of the lease as of January 31, 2001 and has classified
the entire capital lease as a current liability. ATSI has requested a waiver for
non-compliance of the financial covenants and has asked that NTFC re-set the
covenants to prevent future defaults. Although ATSI has received waivers in the
past, there is no guarantee that NTFC will grant a waiver for ATSI's January 31,
2001 non-compliance.
On a consolidated basis as of January 31, 2001, ATSI had a working
capital deficit, had suffered recurring losses from operations since inception,
had negative cash flows from operations and had limited capital resources to
support further development of its operations. If ATSI were unable to pay this
obligation, the lender would likely exercise its rights under the Loan and
Security Agreement to sell the equipment and apply the proceeds to its loan
balance. If ATSI were unable to pay any loan balance remaining after the sale of
the equipment, the lender would have recourse against us for repayment. As a
result, assets which otherwise would be used to execute our business strategy
may have to be used to satisfy this debt.
ATSI's auditors have raised substantial doubt about ATSI's ability
to continue as a going concern. Because of the aforementioned conditions,
ATSI actions could have a substantial effect on our assets. Therefore, there
is substantial doubt of our ability to continue as a going concern. The
financial condition of ATSI may impede or eliminate our ability to execute
our business plan by impairing our ability to obtain financing. ATSI might be
motivated by financial distress to sell its stock of GlobalSCAPE for less
than what it might sell for under other circumstances, which may depress the
value of the stock in general.
19
Net cash provided by operating activities was $30,370, $808,142 and
$973,067 in 1998, 1999 and 2000, respectively. In 1998, net cash provided by
operating activities was primarily a result of net income and adjustments
related to depreciation and amortization, offset by amounts due to ATSI. Net
cash provided by operating activities in 1999 was primarily the result of net
income and adjustments related to depreciation and amortization as well as
increasing amounts due to ATSI, offset by increases in accounts receivable.
Operating cash flows in 2000 were primarily the result of net income and
adjustments related to depreciation and amortization and deferred compensation
as well as increases in accounts payable and accrued liabilities. These cash
flows were offset by reductions in the amount to ATSI.
Net cash used in investing activities for 1998, 1999 and 2000 was
$149,202, $185,997 and $620,539 respectively. Net cash used in investing
activities in each of these periods was related to the purchase of property and
equipment. The property and equipment purchased consisted primarily of phone
systems, office furniture, leasehold improvements and computer hardware and
software for our new facility during the year 2000.
Net cash used in financing activities during 1998, 1999 and 2000 was
$7,752, $671,264 and $255,298 respectively. Net cash used in financing
activities for 1999 consisted of $230,000 in bank borrowings, $888,566 in
principal payments on notes payable and $12,698 in principal payments on capital
lease obligations. The majority of principal payments on notes payable were
related to the purchase of CuteFTP. Net cash used in financing activities for
2000 consisted primarily of $70,000 in bank borrowings offset by $263,269 in
principal payments on notes payable and $63,648 in principal payments on capital
lease obligations. The final payment for CuteFTP was made in January 2000 and
accounts for the reduction in principal payments on notes payable between
periods. The increase in principal payments on capital lease obligations is a
reflection of the capital leases entered into for computer hardware in the
fourth quarter of 1999 and capital leases for office furniture in 2000.
In March 2001 we established a line of credit with The Frost National
Bank in the amount of $200,000. The interest rate is subject to change and is
indexed to the bank's prime rate. The initial rate is 9.5%. If a default occurs
under the note, the lender can accelerate all or a portion of the debt. Both
parties have agreed to arbitrate any dispute that arises under the Note in the
City of San Antonio, Bexar County. In connection with the line of credit, we
entered into a Commercial Security Agreement with The Frost National Bank
whereby we granted a security interest in all our accounts and equipment. In the
event of default under the Security Agreement, the bank may sell the collateral
in which they hold a security interest. We have not used any of the available
credit under this facility as of the date of this report.
As of December 31, 2000, we had approximately $113,591 in cash and cash
equivalents, current assets of $684,489 and current liabilities of $522,550,
resulting in working capital of $161,939. Our principal commitments consisted of
obligations outstanding under capital leases and bank borrowings. In February
2001 we paid off all balances owed related to bank borrowings. We anticipate a
rate of capital expenditures consistent with our anticipated growth in
operations, infrastructure and personnel. The facility that we currently occupy
is expected to be sufficient for our growth through December 31, 2001.
Consequently, capital expenditures for leasehold improvements and furniture
should be less in 2001 than in 2000. We anticipate that we will continue to add
computer hardware resources and that we will expend significant resources on
product development and the expansion of our management team and development
staff. We may also use cash to acquire or license technology, products or
businesses related to our current business. In addition, we anticipate that we
will continue to experience significant growth in our operating expenses for the
foreseeable future and that our operating expenses will be a material use of our
cash resources.
It is our intention to increase expenditures on personnel, sales and
marketing, research and development and infrastructure. We have, however, no
formal commitments to incur such expenses other than those disclosed in this
Annual Report and in documents previously filed with the SEC and therefore do
not have an identified need for external financing for the next 12 months. We
will manage to the current and immediately foreseeable cash flows generated
internally until such time as some external source of capital is identified.
20
TAX MATTERS
As of the date of ATSI's distribution of the GlobalSCAPE's stock,
September 12, 2000, the stock ownership requirements necessary for GlobalSCAPE
to be eligible to join in the filing of an ATSI consolidated tax return are not
met. In filing a separate return, GlobalSCAPE's income and deductions will be
taxable on a single-entity basis.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. SFAS 133, as amended by SFAS 137, is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000, with earlier
application encouraged. We do not currently have any derivative instruments and
therefore the adoption of SFAS 133 will not have any current impact on our
financial position or results of operations.
INFLATION
Increases in inflation generally result in higher interest rates and
operating costs. Our largest cost exposure is cost of salaries and general and
administrative expenses. To date we believe that inflation has not had a
significant impact on our operations.
RESEARCH AND DEVELOPMENT
Research and development expenses include all direct costs, primarily
salaries for personnel and outside consultants, related to the development of
new products and significant enhancements to existing products and are expensed
as incurred until such time as technological feasibility is achieved. For the
years 1998, 1999, and 2000, we spent $42,000, $243,000 and $873,000,
respectively on research and development of which approximately $103,000 and
$56,000 was capitalized in 1999 and 2000, respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
To date, we have not utilized derivative financial instruments or
derivative commodity instruments. We do not expect to employ these or other
strategies to hedge market risk in the foreseeable future. We invest our cash in
money market funds, which are subject to minimal credit and market risk. We
believe that the interest rate risk and other relevant market risks associated
with these financial instruments are immaterial.
In 2000, approximately 33% of our revenues came from customers outside
the United States. However, all revenues are received in U.S. dollars so we have
no exchange rate risk.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
GLOBALSCAPE, INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDING DECEMBER 31, 1998, 1999 AND 2000
CONTENTS
Report of Independent Auditors 23
Financial Statements
Balance Sheets 24
Statements of Operations 26
Statements of Stockholders' Equity 27
Statements of Cash Flows 28
Notes to Financial Statements 30
22
REPORT OF INDEPENDENT AUDITORS
GlobalSCAPE, Inc.
To the Board of Directors:
We have audited the accompanying balance sheets of GlobalSCAPE, Inc., a
majority-owned subsidiary of ATSI Communications, Inc. ("ATSI"), as of December
31, 1999 and 2000 and the related statements of operations, stockholders' equity
and cash flows for the three years in the period ended December 31, 2000. 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 auditing standards generally
accepted in the United States. 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 GlobalSCAPE, Inc. as
of December 31, 1999 and 2000 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
GlobalSCAPE, Inc. will continue as a going concern. As more fully described in
the Note 1, the Company is a majority owned subsidiary of ATSI Communications,
Inc. On a consolidated basis as of July 31, 2000, ATSI had a working capital
deficit, had suffered recurring losses since inception, had negative cash flows
from operations and had limited capital resources to support further development
of its operations. These conditions raise substantial doubt about ATSI's ability
to continue as a going concern. Because of the aforementioned conditions
relating to ATSI and that GlobalSCAPE is a co-borrower for a capital lease
obligation of ATSI of which ATSI was in default of certain financial covenants,
ATSI's actions could have substantial effect on the Company's assets; therefore,
there is also substantial doubt about whether GlobalSCAPE, Inc. will continue as
a going concern. The financial statements of GlobalSCAPE, Inc. do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
Ernst & Young LLP
San Antonio, Texas
March 2, 2001
23
GLOBALSCAPE, INC.
BALANCE SHEETS
December 31,
1999 2000
---- ----
Assets
Current assets:
Cash ......................................... $16,361 $113,591
Accounts receivable (net of allowance for
doubtful accounts of $70,000 and $80,719
in 1999 and 2000, respectively).......... 368,353 241,322
Due from parent............................... - 265,685
Deferred tax assets .......................... - 51,726
Prepaid expenses ............................. 25,216 12,165
---------------------------
Total current assets............................... 409,930 684,489
Property and equipment:
Furniture and equipment....................... 54,720 287,017
Software...................................... 28,554 78,822
Equipment..................................... 203,480 504,464
Leasehold improvements........................ 1,426 145,536
Software development costs.................... 102,686 158,285
---------------------------
390,866 1,174,124
Accumulated depreciation and amortization.......... 106,866 297,015
---------------------------
Net property and equipment......................... 284,000 877,109
Other assets:
Core software technology (net of
accumulated amortization of $224,736
and $406,679 for 1999 and 2000,
Respectively............................ 674,207 492,264
Goodwill (net of accumulated amortization of
and $18,837 and $26,506 in 1999 and
2000 respectively)....................... 30,287 22,618
Deferred tax assets........................... 36,230 26,125
Other......................................... 36,645 19,489
---------------------------
Total other assets................................. 777,369 560,496
---------------------------
Total assets....................................... $1,471,299 $2,122,094
===========================
24
GLOBALSCAPE, INC.
BALANCE SHEETS
December 31,
1999 2000
---- ----
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................... $ 202 $ 242,621
Accrued expenses........................... 64,764 162,248
Due to parent.............................. 265,253 -
Current maturities of long-term debt....... 215,710 47,108
Current portion of capital lease obligation 24,172 70,573
---------------------------
Total current liabilities....................... 570,101 522,550
Long-term debt, less current portion............ 24,667 -
Capital lease obligations, less current portion. 32,257 149,074
Other long-term liabilities..................... - 75,764
---------------------------
Total long-term liabilities..................... 56,924 224,838
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001 per share,
10,000,000 authorized, no shares
issued or outstanding................. - -
Common stock, par value $0.001 per share,
40,000,000 shares authorized, 12,920,000
and 12,936,190 shares issued and
outstanding at December 31, 1999 and
2000, respectively.................... 12,920 12,936
Additional paid-in capital................. 49,112 264,889
Retained earnings.......................... 782,242 1,096,881
---------------------------
Total stockholders' equity...................... 844,274 1,374,706
---------------------------
Total liabilities and stockholders' equity...... $1,471,299 $2,122,094
===========================
See accompanying notes.
25
GLOBALSCAPE, INC.
STATEMENTS OF OPERATIONS
For the Years ended December 31,
1998 1999 2000
---- ---- ----
Operating revenues:
Software product revenues.............. $2,073,687 $2,922,141 $5,165,668
Advertising revenues................... - 328,895 570,008
---------------------------------------
Total revenues..................... 2,073,687 3,251,036 5,735,676
Operating expenses:
Cost of revenues (exclusive of
depreciation and amortization
shown separately below)........... 396,570 105,026 200,118
Selling, general and administrative
expenses.......................... 1,228,644 1,625,004 3,606,550
Research and development expenses...... 42,164 139,953 817,496
Depreciation and amortization.......... 91,262 253,896 430,221
---------------------------------------
Total operating expense............ 1,758,640 2,123,879 5,054,385
---------------------------------------
Income from operations...................... 315,047 1,127,157 681,291
Other income (expense):
Interest expense, net.................. (2,345) (56,847) (42,839)
(Loss) on sale of assets............... - - (13,687)
---------------------------------------
Total other income (expense)....... (2,345) (56,847) (56,526)
---------------------------------------
Income before income taxes 312,702 1,070,310 624,765
Income tax provision
Current:
Federal............................ 108,377 372,532 329,215
State.............................. 15,020 51,629 22,532
Deferred:
Federal............................ (6,463) (24,353) (38,246)
State.............................. (896) (3,375) (3,375)
---------------------------------------
Total income tax provision.................. 116,038 396,433 310,126
---------------------------------------
Net income.................................. $196,664 $673,877 $314,639
=======================================
Net income per common share - basic $0.02 $0.05 $0.02
Net income per common share - assuming
dilution $0.01 $0.05 $0.02
See accompanying notes.
26
GLOBALSCAPE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional paid in
Shares Amount Capital Retained Earnings Total
------------------------------------------------------------------------------
Balances at December 31, 1997 12,920,000 $ 12,920 $ 49,112 ($88,299) ($26,267)
Net Income 196,664 196,664
---------------------------------------------------------------------------
Balances at December 31, 1998 12,920,000 12,920 49,112 108,365 170,397
Net Income 673,877 673,877
---------------------------------------------------------------------------
Balances at December 31, 1999 12,920,000 12,920 49,112 782,242 844,274
Net Income 314,639 314,639
Exercise of options 16,190 16 1,603 1,619
Value of stock options granted 214,174 214,174
---------------------------------------------------------------------------
Balances at December 31, 2000 12,936,190 $12,936 $264,889 $1,096,881 $1,374,706
===========================================================================
See accompanying notes.
27
GLOBALSCAPE, INC.
STATEMENTS OF CASH FLOWS
For the Years ended December 31,
1998 1999 2000
---- ---- ----
Operating Activities:
Net Income........................................... $196,664 $673,877 $314,639
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense............................ 40,220 53,614 100,858
Depreciation and amortization............... 91,262 253,896 430,221
Deferred compensation....................... - - 214,174
Loss on disposition of assets............... - - 13,687
Deferred taxes.............................. (7,359) (27,728) (41,621)
Changes in operating assets and liabilities:
Accounts receivable......................... (29,924) (368,191) 26,173
Prepaid expenses............................ (1,750) (23,466) 13,051
Other long term assets...................... (26,481) (9,895) 17,156
Accounts payable............................ 11,852 (15,611) 242,419
Accrued liabilities......................... (51,922) 31,813 173,248
Due to (from) parent........................ (192,192) 239,833 (530,938)
------------ ----------- ------------
Net cash provided by operating activities............ 30,370 808,142 973,067
Investing Activities:
Purchase of property and equipment............. (149,202) (185,997) (620,539)
------------ ----------- ------------
Net cash used in investing activities................ (149,202) (185,997) (620,539)
Financing Activities:
Issuance of common stock........................ - - 1,619
Borrowings under notes payable.................. - 230,000 70,000
Principal payments on notes payable............. - (888,566) (263,269)
Principal payments on capital lease obligations. (7,752) (12,698) (63,648)
------------ ----------- ------------
Net cash used in financing activities................ (7,752) (671,264) (255,298)
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents. (126,584) (49,119) 97,230
Cash at beginning of period.......................... 192,064 65,480 16,361
------------ ----------- ------------
Cash at end of period................................ $65,480 $16,361 $113,591
============ =========== ============
28
GLOBALSCAPE, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
For the Years ended December 31,
1998 1999 2000
---- ---- ----
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest........................................ $ - $57,000 $37,420
Income taxes paid to parent..................... - $144,500 794,487
Income taxes paid............................... - - 66,667
Supplemental disclosure of non-cash investing and
financing activities:
Office equipment acquired through issuance of
capital lease obligations..................... $27,874 $49,005 $226,866
See accompanying notes.
29
GLOBALSCAPE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 2000
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
GlobalSCAPE, Inc. (the Company or GlobalSCAPE) develops and distributes
Internet related software. The Company was incorporated in April 1996 and is a
73% owned subsidiary of ATSI Communications, Inc., a Delaware corporation, whose
shares are currently traded on the American Stock Exchange. The Company is best
known for its popular file transfer program, CuteFTP. The Company derived
approximately 100%, 90%, and 90% of its revenues in 1998, 1999, and 2000,
respectively, from sales of licenses to use its software products. A combination
of the sale of licenses of CuteFTP and advertising from within CuteFTP accounted
for 100%, 97% and 98% of its revenues in 1998, 1999, and 2000, respectively. The
Company is organized and operates as one operating segment, the provision of
Internet-based software and markets its products primarily over the Internet.
BASIS OF PRESENTATION
As described above, the Company is a majority owned subsidiary of ATSI.
On a consolidated basis as of July 31, 2000, ATSI had a working capital deficit,
had suffered recurring losses from operations since inception, had negative cash
flows from operations and had limited capital resources to support further
development of its operations. These conditions, as noted by ATSI's auditors in
their report dated September 29, 2000, raise substantial doubt about ATSI's
ability to continue as a going concern at July 31, 2000. Because of the
aforementioned conditions relating to ATSI and that GlobalSCAPE is a co-borrower
for a capital lease obligation of ATSI of which ATSI was in default of certain
financial covenants (see Note 5), ATSI's actions could have substantial effect
on the Company's assets; therefore, there is also substantial doubt about
whether GlobalSCAPE, Inc. will continue as a going concern. Subsequent to July
31, 2000, management of ATSI has arranged for additional funding it believes is
sufficient to allow the Company to operate independently of ATSI. In addition,
it is anticipated that there will be no cash requirements of the parent to be
funded by the Company for at least one year subsequent to December 31, 2000. The
financial statements of the Company do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result form the
outcome of ATSI's liquidity problems.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH
Cash includes all cash and highly liquid investments with original
maturities of three months or less.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalization of software development costs begins upon the
establishment of technological feasibility and ceases when the product is
available for general release. The establishment of technological feasibility
and the ongoing assessment of recoverability of capitalized software development
costs require considerable judgment by management concerning certain external
factors including, but not limited to, technological feasibility, anticipated
future gross revenue, estimated economic life and changes in software and
hardware technologies. Amortization expense for these costs amounted to
approximately $3,749 in 1999 and $50,467 in 2000. These software development
costs are amortized using the straight-line method over a three-year period and
are only those costs incurred in the development of products that are sold to
external customers and not used for internal purposes. These software
development costs are not related to
30
those costs incurred for the acquisition of software products or titles
reflected in Other Assets as Core Software Technology.
PROPERTY AND EQUIPMENT
Property and equipment is primarily comprised of furniture and
fixtures, software, computer equipment, and software development costs which are
recorded at cost and depreciated using the straight-line method over their
estimated useful lives. Expenditures for maintenance and repairs are charged to
operations as incurred. Property and equipment acquired under capital leases are
depreciated over their useful lives or the respective lease term, if shorter.
Depreciation periods used for property and equipment range from three to five
years.
Leasehold improvements are depreciated over the shorter of the lease
term or the estimated useful life of the asset.
GOODWILL
Goodwill related to a 1998 asset acquisition is being amortized on a
straight-line basis over a five-year period from acquisition. Goodwill is shown
net of amortization of $18,837 and $26,506 for the years ended December 31, 1999
and 2000, respectively.
The Company periodically evaluates the recoverability of goodwill in
accordance with Statement Financial Accounting Standards No 121 "Accounting for
the Impairment of Long-Live Assets." SFAS 121 requires recognition of impairment
of goodwill in the event the net book value of related assets exceeds the future
undiscounted cash flows attributable to the related business unit or assets.
Should an impairment exist, the impairment loss would be measured based on the
excess of the carrying value of the asset over the asset's fair value or
discounted estimates of future cash flows. No such impairment had been
identified as of December 31, 2000.
OTHER LONG-TERM ASSETS
Costs incurred for acquiring core software technology are capitalized
and amortized over the technology's estimated useful life of 5 years using the
straight-line method for calculating such amortization. The Core Software
Technology on the balance sheet represents the purchase of the source code and
related trademark for CuteFTP and the related amortization of such costs. Other
includes security deposits which are expected to be refunded to the Company upon
termination of certain leases.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company provides credit, in the normal course of business, to a number of
companies and performs ongoing credit evaluations to reduce credit risk. The
Company requires no collateral from its customers. Management estimates the
allowance for uncollectible accounts based on their historical experience and
credit evaluation. No single customer accounted for more than 10% of net
revenues in 1998, 1999 and 2000.
REVENUE RECOGNITION
Revenues from the sale of software products are recognized and
completely earned upon shipment of the product. The installation process is
simple and requires little or no support. An installation wizard guides the user
through the process. The Company does not provide technical support and
maintenance services as part of the fee for any of its software products nor
does it sell these services separately.
The outbound shipping charges charged to the customer are included in
software product revenues and amounted to $17,370, $32,843 and $35,202 in 1998,
1999, and 2000, respectively. The costs associated with these charges are
included in the software products cost of revenue.
31
Advertising revenue is recognized as it is earned, net of any fees paid
to third-party advertising agents. Advertising is earned in the period in which
the advertisements are displayed or in which a sponsored third-party product is
taken. The Company did not generate revenue from the sale of advertising from
within its software products during the fiscal year ended December 31, 1998. The
Company began selling advertising space from within its software products in
April 1999. The Company's current product line does not include products
containing the modules necessary to generate advertising space, although older
versions of its products continue to produce ad space. This was a strategic
decision based on the current state of the advertising market.
ROYALTY COSTS
Royalties that the Company pays on software products licensed from a
third-party which it resells are expensed as a cost of sales when the software
product is sold. In October 1998, for $899,000, the Company purchased the
license rights to the principal software product for which the Company was
previously paying royalty costs. This asset is reflected on the balance sheet as
Core Software Technology. See Note 8 to the Financial Statements.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense
charged to operations for the years ended December 31, 1998, 1999 and 2000
amounted to approximately $10,000, $58,000 and $113,000, respectively, and are
included in selling, general and administrative expenses.
CAPITALIZED INTEREST
No interest was capitalized during 1998, 1999 or 2000. GlobalSCAPE
incurred and charged to expense $2,345, $56,847 and $42,839 in 1998, 1999 and
2000, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." The liability
method provides that the deferred tax assets and liabilities are recorded based
on the difference between the tax bases of assets and liabilities and their
carrying amount for financial reporting purposes, as measured by the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. The Company is included in the American TeleSource International, Inc.
(a Texas corporation) consolidated federal income tax return through April 3,
2000 and the ATSI Communications, Inc. (a Delaware corporation) consolidated
federal income tax return from April 4, 2000 through September 12, 2000. On
September 12, 2000, ATSI distributed approximately 27% of its ownership in
GlobalSCAPE, resulting in a deconsolidation from the ATSI tax return filing
group for federal income tax purposes. In general, the Company's income tax
provision reflects income taxes as if the Company filed returns on a separate
company basis.
RESEARCH AND DEVELOPMENT
Research and development expenses include all direct costs, primarily
salaries for Company personnel and outside consultants, related to the
development of new products and significant enhancements to existing products
and are expensed as incurred until such time as technological feasibility is
achieved. For the years 1998, 1999, and 2000, GlobalSCAPE spent $42,000,
$243,000 and $873,000, respectively on research and development of which
approximately $103,000 and $56,000 was capitalized in 1999 and 2000,
respectively.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No.
123, Accounting for Stock Based Compensation, and elected to us the intrinsic
value method in accounting for its stock option plan in accordance with
Accounting Principles Board opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations under which compensation expense is
recorded to the extent that the
32
current market price of the underlying stock exceeds the exercise price. The pro
forma effects of fair value accounting for compensation costs related to
options, on net income would not be material.
EARNINGS PER COMMON SHARE
Basic and diluted net income per common share is presented in
conformity with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128) for all periods presented. Basic earnings per share is
based on the weighted effect of all common shares issued and outstanding, and is
calculated by dividing net income available to common stockholders by the
weighted average shares outstanding during the period. Diluted earnings per
share is calculated by dividing net income available to common stockholders by
the weighted average number of common shares used in the basic earnings per
share calculation plus the number of common shares that would be issued assuming
conversion of all potentially dilutive common shares outstanding. Below is a
reconciliation of the numerators and denominators of basic and diluted earnings
per share for each of the following years:
Year ended December 31,
1998 1999 2000
---- ---- ----
NUMERATORS
Numerator for basic and diluted earnings per
share:
Net Income........................ $196,664 $673,877 $314,639
Numerator for basic and diluted
earnings per share................ 196,664 673,877 314,639
DENOMINATORS
Denominators for basic earnings per share:
Weighed average shares
outstanding--Basic............... 12,920,000 12,920,000 12,924,866
DILUTIVE POTENTIAL COMMON SHARES:
Stock Options (1)...................... 326,881 372,673 542,116
Denominator for dilutive earnings per
share.................................. 13,246,881 13,292,673 13,466,982
Net income per common share
Net Income............................. $0.02 $0.05 $0.02
Net income per common share - assuming
dilution
Net Income............................. $0.01 $0.05 $0.02
(1) For the year ended December 31, 2000, 950,000 options have not been
included in dilutive shares as the effect would be anti-dilutive.
33
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
SFAS 133 as amended by SFAS 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000, with earlier application encouraged.
The Company does not currently nor does it intend in the future to use
derivative instruments and therefore does not expect that the adoption of SFAS
133 will have any impact on its financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements, which was adopted by the Company in the
fourth quarter of 2000. SAB 101 provides additional guidance on revenue
recognition as well as criteria for when revenue is generally realized and
earned and also requires the deferral of incremental direct selling costs. The
Company's revenue recognition policies were already consistent with the guidance
provided in SAB 101.
2. ACCOUNTS RECEIVABLE
Accounts receivable, which are primarily from product sales, are presented net
of an allowance for doubtful accounts. The activity of the Company's allowance
for doubtful accounts for the years ended December 31, 1998, 1999 and 2000 is
presented in the following table:
Balance at Charged to Balance at
Year Ended Beginning Income or End of
December 31 of Period Expense Deductions (1) Period
- ---------------------------------------------------------------------------------
1998 $13,000 $40,220 $(28,220) $25,000
1999 25,000 53,614 (8,614) 70,000
2000 70,000 100,858 (90,139) 80,719
(1) Represents amounts written off as uncollectible accounts receivable.
3. LONG-TERM DEBT
The Company had debt outstanding as follows:
December 31,
---------------------------------
1999 2000
--------------- -----------------
Note payable to individual dated October 1998,
principal and interest payable in monthly
installments of $63,000 beginning February 1999,
including interest at 12% due January 2000....... $62,377 $ -
Note payable to a bank dated January 1999, principal
and interest payable in 12 monthly installments
of $5,000 and 12 monthly installments of $10,000
including interest at prime rate plus 1%, 10.5%
at December 31, 2000; due January 2001........... 130,000 20,000
Note payable to a bank dated October 1999, principal
and interest payable in 6 monthly installments of
$1,000 and 12 monthly installments of $3,667
including interest at prime rate plus 1%, 10.5%
at December 31, 2000; due April 2001............. 48,000 14,667
34
Notepayable to a bank dated February 2000, principal
and interest payable in 12 monthly installments
of $6,141 including interest at prime rate plus
1%, 10.5% at December 31, 2000; due April 2001... 12,441
--------------- -----------------
240,377 47,108
Less current portion................................. 215,710 47,108
--------------- -----------------
$24,667 $ -
=============== =================
4. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The Company has financed the acquisition of certain fixed assets through capital
lease obligations. The present value of the future minimum lease payments for
these leases at December 31, 2000 is as follows:
Year ended December 31:
2001...................................... $85,092
2002...................................... 80,283
2003...................................... 64,445
2004...................................... 15,644
----------------
Total minimum lease payments................... 245,464
Less amount representing interest ............. 25,817
----------------
Present value of minimum lease payments ....... 219,647
Less current portion .......................... 70,573
----------------
Capital lease obligation, less current portion $149,074
================
Furniture and equipment at December 31, 1999 and 2000 include $77,000 and
$295,000, respectively for assets held under capital leases, less associated
accumulated depreciation of $20,000 and $51,000, respectively. Depreciation is
included in depreciation and amortization expense.
In March of 2000, the Company entered into a capital lease agreement for office
equipment for $227,289. The payment terms are for 48 months after receipt of the
equipment and include a one-dollar bargain purchase option at the end of the
lease term.
OPERATING LEASES
Minimum future lease payments on non-cancelable operating leases for office
facilities are as follows for the years ending December 31:
2001 ........... $ 190,656
2002 ........... 190,656
2003 ........... 190,656
2004 ........... 190,656
2005 ........... 190,656
Thereafter ..... 476,662
-----------------
$1,429,942
=================
Operating lease expense amounted to approximately $71,000, $90,000 and
$139,000 in 1998, 1999 and 2000, respectively.
35
The Company entered into a lease for new facilities in April 1999. The
monthly lease term began in January 2000. The terms of this lease included an
escalation clause whereby no payments were due from January through June of
2000.
CONTINGENCIES
On January 15, 1998, GlobalSCAPE's President and Chief Operating
Officer, was awarded an option to purchase 291,429 shares of common stock at
$0.10 per share under the 1998 Stock Option Plan (Plan). The Plan contains a
provision that states that in the event of any change in the number of issued
and outstanding shares of Common Stock which results from a stock split, reverse
stock split, the payment of a stock dividend or certain other changes in the
capital structure of the Company, such as a merger, consolidation,
reorganization or re-capitalization, the Board or Committee shall appropriately
adjust the number of shares subject to each outstanding option and the option
price per share.
In January 2000, the ATSI Board of Directors adopted a financing
plan that included a plan to partially spin off its shares of GlobalSCAPE. In
February 2000, in connection with this financing plan, Ms. Poole-Christal
signed an agreement whereby she agreed that she would not claim any right of
adjustment in the number of common shares underlying her option under the
terms of the Plan as a result of the consummation of the financing plan. In
May 2000, GlobalSCAPE performed a 7.6:1 forward stock split as part of the
financing plan. As of March 2001, the financing plan as adopted by the Board
of Directors had not been consummated.
In the fourth quarter of 2000, the Company recognized a charge of
approximately $106,000 based upon the re-issuance of Ms. Poole-Christal's
original option for 291,429 shares. Ms. Poole-Christal claims her option
should be adjusted as a result of the forward split. The Company does not
believe that her current options are subject to the 7.6:1 split. If Ms.
Poole-Christal's option were adjusted to reflect the split, she would hold
2,214,860 options at an exercise price of $0.0132 per share. This adjustment
would cause the Company to recognize additional compensation expense for the
quarter in which the adjustment is made equal to the difference between the
fair value and the exercise price of the stock at the time of the adjustment.
We estimate that this additional compensation charge would be $892,000 if
this issue were resolved today at the fully split adjusted rate. This charge
would be a non-cash charge and would be reflected as an increase in operating
expenses and a corresponding increase in additional paid-in capital. The
ultimate outcome of this matter cannot be presently determined.
5 RELATED PARTY TRANSACTIONS
General corporate overhead related to ATSI's corporate headquarters and
common support divisions has been allocated to the Company based on the ratio of
the Company's external costs and expenses to ATSI's consolidated external costs
and expenses, adjusted for any functions that the Company performs on its own.
These services included various accounting, human resource functions and legal
services. The costs of these services charged to the Company are not necessarily
indicative of the costs that would have been incurred if the Company had
performed these functions entirely as a stand-alone entity, nor are they
indicative of costs that may be charged in the future. However, the Company
believes the method of allocation is reasonable. Expenses for these services in
the amount of $92,000, $105,000 and $386,000 were paid to ATSI during the years
ending December 31, 1998, 1999 and 2000, respectively, and are reflected in the
statement of operations. A total of $1,181,000 in cash was transferred to ATSI
in 2000 to pay these expenses as well as estimates of GlobalSCAPE's income tax
liability as a stand-alone entity. The balance due from ATSI to GlobalSCAPE at
December 31, 2000 was $267,000.
36
GlobalSCAPE is a co-borrower for a capital lease obligation of ATSI
with NTFC Capital Corporation ("NTFC") entered into August 26, 1999 in the
amount of $2,000,000. In connection with this obligation the Company signed a
Note and a Loan and Security Agreement whereby it has granted a security
interest to NTFC in the equipment purchased with the loan proceeds. GlobalSCAPE
does not use any of that equipment in its business and none of its stock or
assets is collateral securing the obligation. Interest on the obligation was
capitalized for the first six months and is calculated at a fixed rate per annum
equal to the five year bank swap rate as reported on the first borrowing date on
the Dow Jones & Company Telerate screen, plus 495 basis points. All principal
amounts borrowed are to be amortized and repaid quarterly. As of December 31,
2000, the outstanding balance including capitalized interest was approximately
$1,873,000.
The lease facility requires that ATSI meet certain financial covenants
on a quarterly basis beginning October 31, 1999, including minimum revenue
levels, gross margin levels, earnings before interest, taxes and depreciation
and amortization (EBITDA) results and debt to equity ratios. ATSI was in default
of financial covenants of the lease as of January 31, 2001 and has classified
the entire capital lease as a current liability. ATSI has requested a waiver for
non-compliance of the financial covenants and has asked that NTFC re-set the
covenants to prevent future defaults. Although ATSI has received waivers in the
past, there is no guarantee that NTFC will grant a waiver for ATSI's January 31,
2001 non-compliance.
On a consolidated basis as of January 31, 2001, ATSI had a working
capital deficit, had suffered recurring losses from operations since inception,
had negative cash flows from operations and had limited capital resources to
support further development of its operations. If ATSI were unable to pay this
obligation, the lender would likely exercise its rights under the Loan and
Security Agreement to sell the equipment and apply the proceeds to its loan
balance. If ATSI were unable to pay any loan balance remaining after the sale of
the equipment, the lender would have recourse against the Company for repayment.
As a result, assets which otherwise would be used to execute the Company's
business strategy may have to be used to satisfy this debt.
These conditions raise substantial doubt about ATSI's ability to
continue as a going concern. The financial condition of our parent company may
impede or eliminate our ability to execute our plan by impairing our ability to
obtain financing. ATSI might be motivated by financial stress to sell its stock
of GlobalSCAPE for less than what it might sell for under other circumstances,
which may depress the value of the stock in general
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are related to the following:
1999 2000
---------- ----------
Deferred tax assets:
Depreciation and amortization ......... $ 6,168 $5,155
Accrued expenses....................... 2,334 18,542
Allowance for doubtful accounts........ - 51,726
---------- ----------
$8,502 $75,423
========== ==========
A reconciliation of income tax expense and the amount computed by applying the
statutory federal income tax rate (34%) to income before income taxes is as
follows:
1998 1999 2000
----------- ------------ ------------
Taxes computed at federal statutory rate............ $106,319 $363,905 $212,419
Increases (decreases) in taxes resulting from:
State taxes, net of federal benefit............ 9,322 31,848 19,158
Non-deductible incentive stock option
compensation charges........................... - - 72,818
37
Other non-deductible expenses.................. 397 680 5,731
----------- ------------ ------------
Total............................................... $116,038 $396,433 $310,126
=========== ============ ============
7. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) plan that covers substantially all employees with at
least six months of service. Under the plan, employees may elect to contribute a
percentage of their annual salary subject to the Internal Revenue Code maximum
limitations. The plan provides for employer matching and discretionary
contributions, the amount of which are to be determined annually by the Board of
Directors. The Company had no contribution expense to the plan in 1998, $3,271
in 1999, and an indeterminate amount in 2000.
8. COMPUTER SOFTWARE LICENSE AGREEMENTS
The Company entered into a computer software license agreement with a third
party in 1996. This agreement provided the Company with copyright interests and
licenses to market and sell the related software product. In return, the Company
was required to pay royalties based on a percentage of the net wholesale price
of units sold as stated in the agreement. Royalty expense for the year ended
December 31, 1998 was $355,000 and is included in costs of goods sold. In
October 1998, the Company elected to purchase the trademark rights to the
software product for $899,000. The Company arrived at the fair value of the
asset based on negotiations with the owner, analysis of royalties paid in
previous periods and expectations of future royalty payments. The purchase
agreement called for a sum of money immediately and 12 equal payments of $63,000
and did not require additional interest expense on this stream of payments.
However, the Company recognized interest expense on this obligation at an annual
rate of 12%. The rate was similar to the rate incurred by the Company at the
time on other obligations. The value placed on the asset reflects the total
dollars paid less the interest expense imputed by the Company.
9. STOCK OPTIONS AND STOCK BASED COMPENSATION
JANUARY 1998: The Company approved the 1998 Stock Option Plan (the
"1998 Plan") for officers, other employees, directors, and consultants of the
Company. Under the terms of the 1998 Plan, up to 728,571 shares of the Company's
common stock may be granted in the form of incentive stock options or
non-qualified stock options, awarded, or sold to officers, other employees,
directors and consultants. The Company awarded 384,499 options under the 1998
Plan, all of which were subsequently cancelled and re-issued as more fully
described below and in Note 4. As of January 15, 2001, no additional grants
could be issued under the 1998 Plan.
FEBRUARY 2000: The Company canceled options to purchase 44,500 shares
of common stock under the 1998 Stock Option Plan and substantially modified the
terms under which all other option holders could exercise their options. In
consideration for canceling these options, the Company paid $5,000 in cash
consideration to the optionholders. In addition, the Company and Ms.
Poole-Christal agreed to the substantial modification of her option to purchase
291,429 shares. The Company agreed to issue 38,500 shares to the optionholders
whose options were cancelled when and if a public offering of the Company was
completed.
MAY 2000: The Board of Directors amended the certificate of
incorporation to increase the number of authorized shares of capital stock which
the Company has the authority to issue to 50,000,000 shares consisting of
40,000,000 shares of common stock, par value $0.001 per share and 10,000,000
shares of preferred stock, par value $0.001 per share. The Board of Directors
also declared a 7.6 for 1 stock split of the shares of the Company's issued and
outstanding common stock. In May 2000, the Board of Directors approved the 2000
stock option plan (the "2000 Plan") for key employees, non-employee directors,
and advisors of the Company. Under the terms of the 2000 Plan, up to 3,660,000
shares of the Company's common stock may be granted in the form of incentive
stock options or non-qualified stock options. The maximum aggregate number of
shares of common stock which may be granted to any optionee during the term of
the 2000 Plan may not exceed 2,000,000. The 2000 Plan provides that the purchase
price per share for incentive stock options and non-qualified stock options
shall not be less than the fair market value of the common stock on the date of
grant. The maximum term for an option granted is ten years from the date of
grant.
38
SEPTEMBER 2000: Craig Clement, a former board member, exercised his
option to purchase 16,190 shares of GlobalSCAPE's common stock at $0.10 per
share.
OCTOBER 2000: Pursuant to the Company's Employment Agreement with Tim
Nicolaou, the Company agreed to issue him an option to purchase 700,000 shares
of GlobalSCAPE stock at an exercise price of $1.00 per share. The options will
vest as follows: 200,000 of these options will vest on the date of GlobalSCAPE's
initial public offering or at the end of the first year of employment, whichever
comes first, 200,000 will vest one year from the date of GlobalSCAPE's initial
public offering or at the end of the second year of employment, whichever comes
first, and 300,000 will vest ratably over a three-year schedule from the date of
hire, October 16, 2000.
DECEMBER 2000: The optionholders representing 38,500 previously
cancelled options, had their options forward split and the exercise price
reduced 7.6 for 1 to 292,600 shares at $0.0132 per share. These options were
re-granted with vesting schedules corresponding to the original vesting
schedules of the options prior to cancellation. Ms. Poole-Christal's option to
purchase 291,429 shares at $0.10 per share under the 1998 Plan was reissued
without adjustment as well as the 16,190 options to each of Arthur L. Smith and
H. Douglas Saathoff. Mr. Nicolaou was granted 250,000 options with an exercise
price of $0.464 per share of which 125,000 vest upon approval of GlobalSCAPE's
business plan. The remaining 125,000 vest upon placement of two independent
members to the GlobalSCAPE board.
The Company recognized $214,174 in compensation charges in the fourth
quarter of 2000 related to the re-issuance of stock options to the various
employees whose options had been cancelled. The compensation charge was computed
by multiplying the number of options granted by the difference between the
exercise price of the option and its fair market value on the date of grant. The
total amount of the charge was $255,559, $41,385 of which will be recognized in
future periods as these options vest. This deferred compensation charge is
netted in stockholders' equity and will be recognized ratably over the remaining
vesting life of each of the option grants. As of December 31, 2000, the
remaining vesting schedules for the options subject to these compensation
charges ranged from 10 months to 18 months.
Ms. Poole-Christal claims her option should be adjusted as a result of the
forward split. The Company does not believe that her current options are
subject to the 7.6:1 split. See Note 4. The Company has adopted Statement of
Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation and uses the fair value method as prescribed by SFAS 123 when
accounting for stock based compensation. The fair value of options granted
was $0.02 for options granted during 1999 and 1998, respectively. The fair
value of these options were estimated at the date of grant using a minimum
value option pricing model with the following assumptions for 1999 and 1998,
respectively: risk-free interest rates of 5.68% and 6.38%, respectively; no
dividends for each year; and a volatility factor of the expected market price
of the Company's common stock of near zero. The Company recognized no charge
for compensation costs related to options in 1998 or 1999. In 2000,
GlobalSCAPE recognized $214,174 of compensation expense related to the
re-issuance of previously cancelled options. The Company based the estimated
fair value of the options using discounted cash flow analysis.
SUPPLEMENTAL DISCLOSURES FOR STOCK OPTIONS
The following table shows the number of options granted, cancelled and
exercised for all option plans for the three years ending December 31, 2000.
Number of Weighted Avg.
Shares Exercise Price
1998
Granted 357,999 $ 0.10
Cancelled - -
Exercised - -
Outstanding December 31, 1998 357,999 0.10
39
1999
Granted 26,500 0.10
Cancelled - -
Exercised - -
Outstanding December 31, 1999 384,499 0.10
2000
Granted 1,582,599 0.54
Cancelled 384,499 0.10
Exercised 16,190 0.10
Outstanding December 31, 1999 1,566,409 $ 0.54
The following table shows information about outstanding stock options
at December 31, 2000.
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Options Contractual Exercise Number of Exercise
Prices Outstanding Life Price Options Price
$0.0132 292,600 9.97 $ 0.0132 178,600 $ 0.0132
$0.10 323,809 9.97 0.10 323,809 0.10
$0.46 - $1.00 950,000 9.83 0.86 250,000 0.464
---------------------------------------------------------------------------------
$0.0132 - $1.00 1,566,409 9.89 $ 0.54 752,409 $ 0.20
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FISCAL YEAR 1999
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------------- --------------- ---------------
Net revenue............................. $ 681,130 $ 743,627 $ 793,890 $ 1,032,389
Total operating expenses................ 497,907 470,649 636,254 519,069
Net income before provision for taxes... 160,988 254,563 148,149 506,610
Net income.............................. 101,333 160,272 93,231 319,041
Net income per common share:
Basic.............................. 0.01 0.01 0.01 0.02
Diluted............................ 0.01 0.01 0.01 0.02
Weighted average shares outstanding:
Basic.............................. 12,920,000 12,920,000 12,920,000 12,920,000
Diluted............................ 13,277,999 13,287,029 13,304,499 13,304,499
FISCAL YEAR 2000
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------------- --------------- ---------------
Net revenue .............................. $ 1,450,014 $ 1,541,256 $ 1,526,586 $ 1,217,820
Total operating expenses ................. 761,529 1,275,111 1,353,160 1,664,585
Net income (loss) before provision for 680,272 252,263 161,537 (469,307)
income taxes ..........................
Net income (loss) ........................ 444,524 157,783 101,273 (388,941)
40
Net income per share:
Basic ............................... 0.03 0.01 0.01 (0.03)
Diluted ............................. 0.03 0.01 0.01 (0.03)
Weighted average shares outstanding:
Basic ............................... 12,920,000 12,920,000 12,923,168 12,924,866
Diluted ............................. 13,278,318 13,287,029 12,923,168 13,466,982
11. SUBSEQUENT EVENTS (unaudited)
On March 20, 2000 GlobalSCAPE established a line of credit with The
Frost National Bank in the amount of $200,000. The interest rate is subject to
change and is indexed to the bank's prime rate. The initial rate is 9.5%. If a
default occurs under the note, the lender can accelerate all or a portion of the
debt. Both parties have agreed to arbitrate any dispute that arises under the
Note in the City of San Antonio, Bexar County. In connection with the line of
credit, GlobalSCAPE entered into a Commercial Security Agreement with The Frost
National Bank whereby GlobalSCAPE granted a security interest in all its
accounts and equipment. In the event of default under the Security Agreement,
the bank may sell the collateral in which they hold a security interest.
GlobalSCAPE has not used any of the available credit under this facility as of
the date of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth information about our management and
directors as of March 15, 2001:
NAME AGE POSITION
Arthur L. Smith................................... 36 Chairman of the Board, Director
Tim Nicolaou...................................... 45 Chief Executive Officer, Director
Sandra Poole-Christal............................. 34 President, Chief Operating Officer
H. Douglas Saathoff............................... 38 Treasurer, Director
Daniel P. McRedmond............................... 33 Director of Finance and Accounting
ARTHUR L. SMITH. Mr. Smith is the founder and current Chairman and CEO
of ATSI with over 10 years of specialized experience in the telecommunications
industries within Mexico and the United States. Prior to founding ATSI in 1993,
Mr. Smith served as the Director of International Sales for GeoComm Partners,
Inc., an international company based in Los Angeles, California, providing
satellite network services to corporations in the Fortune 500 environment. Mr.
Smith has been a Chairman of the Board of directors of GlobalSCAPE since its
founding in 1996. His current term extends until the next annual meeting of the
stockholders, or until his successor has been duly elected and qualified, his
death, resignation or removal.
TIM NICOLAOU. Mr. Nicolaou has served as our Chief Executive Officer
and as a director since October 16, 2000. Prior to joining GlobalSCAPE Mr.
Nicolaou was Vice President, Product Management of the Web Services Division at
Comdisco, Inc. Mr. Nicolaou has more than a decade of senior management
experience including serving as Executive Vice President of Sales & Marketing
for Computer Concepts Corp. and management consultant for Perot Systems
Corporation. In addition, his early career was in product management and
software engineering. He holds a MBA in Marketing from Southern Methodist
University and a BA in Computer Science from the University of Texas in Austin.
Mr. Nicolaou was elected a director of GlobalSCAPE effective October 16, 2000 by
the unanimous vote of the Board.
41
SANDRA POOLE-CHRISTAL. Ms. Poole-Christal launched GlobalSCAPE in April
1996 at age 29 as a subsidiary of American TeleSource International, Inc. where
she had served as Director of Sales and Marketing. She holds a BA in
Communications from Baylor University. Ms. Poole-Christal is responsible for
implementation of the Company's strategic plan, managing daily operations and
achieving profitability goals as set by the Board of Directors. She oversees
sales, marketing, quality assurance and information systems.
H. DOUGLAS SAATHOFF. Mr. Saathoff is the current CFO and Treasurer
of ATSI. Prior to joining ATSI in 1994, Mr. Saathoff served as Accounting
Manager, Controller and Financial Reporting Manager for U.S. Long Distance
from 1990 to 1993. Mr. Saathoff also served as Senior Staff Accountant for
Arthur Andersen & Co. where he planned, supervised and implemented audits for
a variety of clients, including telecommunications companies. Mr. Saathoff
holds a BA of Business Administration from Texas A&M University and is a
Certified Public Accountant. Mr. Saathoff has been the Treasurer and a
director of GlobalSCAPE since its founding in 1996. His current term as
director extends until the next annual meeting of the shareholder, or until
his successor has been duly elected and qualified, his death, resignation or
removal.
DANIEL P. MCREDMOND. Mr. McRedmond has served as Director of Finance
and Accounting since July 1999. Mr. McRedmond is responsible for the management
of all accounting, treasury, risk management, budgeting and forecasting
activities for GlobalSCAPE. He manages our commercial banking relationships as
well as the relationships with members of the investment banking community. Mr.
McRedmond has more than 6 years of experience in the telecommunications
industry. Prior to joining GlobalSCAPE, he had responsibilities including
serving as Treasurer for ATSI from 1998 to July 1999 and serving as Budgeting
Director and other management positions for Metrocall, Inc.'s Southeast region
from 1995 to 1998. He holds a BBA and MS in Finance from Texas A&M University.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each of Mr. Smith, Mr. Saathoff, Mr. Nicolaou, Mr. McRedmond and Ms.
Poole-Christal failed to timely file Form 3 required by Section 16(a) of the
Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information with respect to the
compensation earned during the years ended December 31, 1998, 1999 and 2000 by
our Chief Executive Officer and our President who was acting in the capacity of
chief executive officer. No other officer earned a salary and bonus in excess of
$100,000 during the year ended December 31, 2000.
SUMMARY COMPENSATION TABLE
------------------------------------- -----------------------------------------
Annual Compensation (1) Long Term Compensation
---------- ---------- --------------- --------------- ----------- -------------
Restricted Securities
Name and Principal Year Salary($) Bonus($) Other annual Stock Securities Underlying
Position compensation($) compensation($) Awards($) Options(#)
- ----------------------- ----- ---------- ---------- --------------- --------------- ----------- -------------
Tim Nicolaou, Chief 2000 $38,077 $25,000 950,000(2)
Executive Officer (2)
- ----------------------- ----- ---------- ---------- --------------- --------------- ----------- -------------
Sandra 2000 $100,000 $155,895 $5,000(3) $106,022(3) 291,429(3)
Poole-Christal,
President (3)
----- ---------- ---------- --------------- --------------- ----------- -------------
1999 $87,692 $39,113
----- ---------- ---------- --------------- --------------- ----------- -------------
1998 $80,000 291,429(3)
----- ---------- ---------- --------------- --------------- ----------- -------------
42
(1) In accordance with the rules of the Securities and Exchange Commission,
the compensation described in this table does not include medical,
group life insurance or other benefits that are available generally to
all of our salaried employees and certain perquisites and other
personal benefits received which do not exceed the lesser of $50,000 or
10% of any officer's salary and bonus disclosed in this table.
(2) Tim Nicolaou was hired in October 2000. The amount reported as Salary
in the Summary Compensation Table represents only a partial year of
employment. Mr. Nicolaou's base salary is a minimum $180,000 per year.
For a more complete discussion of Mr. Nicolaou's compensation, you
should read the information contained in the section below titled
EMPLOYMENT AGREEMENTS.. Mr. Nicolaou's option to purchase 950,000
shares of GlobalSCAPE's common stock is comprised of an option to
purchase 700,000 shares at $1.00 per share and an option to purchase
250,000 shares at $0.464 per share.
(3) Ms. Poole-Christal was awarded an option to purchase 291,429 shares
of GlobalSCAPE stock at $0.10 per share in 1998. In February 2000,
the Company paid Ms. Poole-Christal$5,000 in connection with an
agreement which substantially modified the terms under which she
could exercise her options. In May 2000, the Company executed a 7.6
for 1 forward split of its stock. In December 2000, Ms.
Poole-Christal's award of the option to purchase 291,429 shares was
re-issued at an exercise price of $0.10 per share with the original
vesting schedule. GlobalSCAPE recognized compensation expense of
$106,022 in 2000 for this grant because the options were re-issued
at below fair market value, as determined by GlobalSCAPE. Although
we recognized compensation expense related to the re-issuance of
these options and have reported it as Stock Compensation to Ms.
Poole-Christal, there is no public market for our stock and there
are trading restrictions on our stock. For more information read the
sections titled Stock Options and Commitments and Contingencies in
the notes to the financial statements.
OPTION GRANTS IN THE LAST FISCAL YEAR
Stock options were granted to the named executive officers during the
year ended December 31, 2000 as set forth in the following table.
OPTION/SAR GRANTS IN 2000
- ----------------------------------------------------------------------- ------------------------ ------------
Potential Realized
Value at Assumed Alternative
Annual Rates of Stock to (f) and
Price Appreciation for (g): Grant
Individual Grants Option Term Date Value
- ------------------------------------------------------------------------------------------------ ------------
(a) (b) (c) (d) (e) (f) (g)
- --------------- ------------- ------------- ------------ -------------- ----------- ------------ ------------
% of Total
Number of Options/SARs
Securities Granted to Exercise Grant Date
Underlying Employees or Base Present
Options/SARs in the year Price Expiration Value ($)
Name Granted (#) 2000 ($/Sh) Date 5% ($) 10% ($) (1)
- --------------- ------------- ------------- ------------ -------------- ----------- ------------ ------------
Tim Nicolaou, 700,000 45.63% $1.00 Oct. 16, 2010 $ -
CEO
------------- ------------- ------------ -------------- ----------- ------------ ------------
250,000 16.30% $0.464 Dec. 14, 2010 $ -
- --------------- ------------- ------------- ------------ -------------- ----------- ------------ ------------
Sandra
Poole-Christal,
President 291,429 19.00% $0.0132 Jan 01, 2008 $106,022
- --------------- ------------- ------------- ------------ -------------- ----------- ------------ ------------
43
(1) The Company calculated the present value of the option grants on the
grant date by multiplying the difference between the fair market
value per share (as determined by the Company using discounted cash
flow analysis) and the exercise price of the options, multiplied by
the number of options granted. The present value of these stock
grants was recognized as compensation expense in 2000 for all vested
options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
The named executive officers exercised no stock options during the year
ended December 31, 2000. The following table sets forth information with respect
to the option and stock appreciation right (or SARs) exercises and the value of
those options and SARs as of December 31, 2000 of our Chief Executive Officer
and our President.
AGGREGATED OPTION AND STOCK APPRECIATION RIGHTS EXERCISES AND VALUES
Numbers of Securities
Underlying Unexercised Value of Unexercised
Shares Options/SARs as of In-the-Money Options/SARs
Acquired Value December 31, 2000 as of December 31, 2000 (1)
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ------------ --------- ----------- -------------- ------------ ---------------
Tim Nicolaou, CEO None None None 950,000 $ - $ -
Sandra Poole-Christal,
None None 291,429 - $106,022(1) $ -
President
(1) There is no established fair market value for the underlying securities.
However, the Company calculated the present value of the option grants on
the grant date by multiplying the difference between the fair market value
per share (as determined by the Company using discounted cash flow
analysis) and the exercise price of the options, multiplied by the number
of options granted. The present value of these stock grants was recognized
as compensation expense in 2000 for all vested options.
EMPLOYMENT AGREEMENTS
SANDRA POOLE - CHRISTAL. We have entered into an employment agreement
with Ms. Sandra Poole-Christal that expires on January 1, 2002. The agreement
will automatically renew on a year-to-year basis unless either party gives
notice of termination at least one hundred twenty days before the end of the
then current term. The agreement provides for a minimum salary of $80,000 per
year, with increases in salary and payment of annual cash bonuses up to 50% of
base salary to be determined by the Board of Directors. The agreement provides
for continuation of base salary after termination of employment as follows:
Termination by GlobalSCAPE without cause: twelve months from
termination, plus earned but unpaid incentive compensation;
Termination by Ms. Poole-Christal for good cause: until the conclusion
of the then-current term, plus earned but unpaid incentive
compensation; "good cause" is defined to include a change in control of
GlobalSCAPE
Death: six months, plus earned but unpaid incentive compensation;
Disability: for the shorter of six months or the remainder of the then
current term, plus earned but unpaid incentive compensation.
TIM NICOLAOU. We have entered into an employment agreement with Mr.
Nicolaou that expires on September 30, 2001. The agreement will automatically
renew for another one-year term unless either
44
party gives notice of termination no less than thirty (30) days prior to the end
of the term. The agreement provides for a minimum salary of $180,000 per year, a
minimum cash bonus of $100,000 for the first year of employment, and a signing
bonus of $50,000, with increases in base salary and bonus to be determined by
the Board of Directors. The agreement provides for a cash payment upon
termination of employment as follows:
Termination by GlobalSCAPE without cause: one years' base salary plus
earned but unpaid incentive compensation;
Termination by Mr. Nicolaou for good cause: one years' base salary plus
earned but unpaid incentive compensation; "good cause" is defined to
include a change in control of GlobalSCAPE, and notice by GlobalSCAPE
that it will not renew the agreement.
Death: one years' base salary plus earned but unpaid incentive
compensation;
Disability: one years' base salary plus earned but unpaid incentive
compensation.
GlobalSCAPE also agreed to pay certain relocation and travel expenses
and to grant Mr. Nicolaou the option to purchase to 700,000 shares of
GlobalSCAPE common stock.
COMPENSATION OF DIRECTORS
The board of directors has the authority to determine the amount of
compensation to be paid to its members for their services as directors and
committee members. Currently, however, directors are not compensated with cash
payments for attendance at board of directors meetings. In the past, stock
options had been granted to the GlobalSCAPE directors in return for their
participation.
Directors may be reimbursed for their expenses incurred in attending
board of directors or committee meetings, and no director is precluded from
serving GlobalSCAPE in any other capacity and receiving compensation appropriate
to the value of such services rendered.
Our Board of Directors makes executive compensation decisions. Doug
Saathoff is a member of our Board and also our Treasurer. In addition both Mr.
Saathoff and Mr. Smith are executive officers of our parent company, ATSI and
members of our Board. Both were involved in the deliberations regarding
executive officer compensation, still, neither are compensated monetarily for
their efforts related to GlobalSCAPE.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding ownership
of the Common Stock as of February 15, 2001 by (i) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding shares of
Common Stock, (ii) each director of the Company, (iii) the Chief Executive
Officer and each other executive officer of the Company named in the Summary
Compensation Table, and (iv) all executive officers and directors of the Company
as a group.
- ------------------------------------- ----------------------------------- -----------------------------------
Amount and Nature of Beneficial
Name Ownership of Common Stock Percent of Class
- ------------------------------------- ----------------------------------- -----------------------------------
Tim Nicolaou 250,000 (2) 1.90%
6000 Northwest Pkwy, Suite 100
San Antonio, TX 78249
- ------------------------------------- ----------------------------------- -----------------------------------
Sandra Poole-Christal
6000 Northwest Pkwy, Suite 100 340,426 (3) 2.56
San Antonio, TX 78249
- ------------------------------------- ----------------------------------- -----------------------------------
Arthur L. Smith 669,253 (4) 4.92
45
6000 Northwest Pkwy, Suite 110
San Antonio, TX 78249
- ------------------------------------- ----------------------------------- -----------------------------------
H. Douglas Saathoff
6000 Northwest Pkwy, Suite 110 216,188 (5) 1.64
San Antonio, TX 78249
- ------------------------------------- ----------------------------------- -----------------------------------
ATSI Communications, Inc.
6000 Northwest Pkwy, Suite 110 9,474,279 73.24
San Antonio, TX 78249
- ------------------------------------- ----------------------------------- -----------------------------------
All directors and executive 1,502,467 (6) 10.41%
officers as a group (5 persons)
- ------------------------------------- ----------------------------------- -----------------------------------
(1) To the knowledge of the Company, each person named in the table has
sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by him or her. Shares of
Common Stock that are not outstanding but that may be acquired by a
person upon exercise of options within 60 days of February 15, 2000
are deemed outstanding for the purpose of computing the percentage
of outstanding shares beneficially owned by such person but are not
deemed outstanding for the purpose of computing the percentage of
outstanding shares beneficially owned by any other person.
(2) Includes 250,000 shares issuable upon exercise of presently
exercisable options or options exercisable within 60 days of
February 15, 2001.
(3) Includes 338,426 shares issuable upon exercise of presently
exercisable options or options exercisable within 60 days of
February 15, 2001.
(4) Includes 498,997 shares issuable upon exercise of presently
exercisable options or options exercisable within 60 days of
February 15, 2001.
(5) Includes 164,332 shares issuable upon exercise of presently
exercisable options or options exercisable within 60 days of
February 15, 2001.
(6) Includes 1,278,355 shares issuable upon exercise of presently
exercisable options or options exercisable within 60 days of
February 15, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General corporate overhead related to ATSI's corporate headquarters and
common support divisions has been allocated to GlobalSCAPE based on the ratio of
GlobalSCAPE's external costs and expenses to ATSI's consolidated external costs
and expenses, adjusted for any functions that GlobalSCAPE performs on its own.
These services included various accounting, human resource functions and legal
services. The costs of these services charged to GlobalSCAPE are not necessarily
indicative of the costs that would have been incurred if GlobalSCAPE had
performed these functions entirely as a stand-alone entity, nor are they
indicative of costs that may be charged in the future. However, GlobalSCAPE
believes the method of allocation is reasonable. Expenses in the amount of
$92,000, $105,000 and $386,000 were paid to ATSI during the periods ending
December 31, 1998, 1999 and 2000, respectively, for the services previously
described and are reflected in the statement of operations. A total of
$1,181,000 in cash was transferred to ATSI in 2000 to pay these expenses as well
as estimates of GlobalSCAPE's income tax liability as a stand-alone entity. The
balance due from ATSI to GlobalSCAPE at December 31, 2000 was $267,000.
We are a co-borrower for a capital lease obligation of ATSI with NTFC
Capital Corporation ("NTFC") entered into August 26, 1999 in the amount of
$2,000,000. In connection with this obligation
46
we signed a Note and a Loan and Security Agreement whereby we have granted a
security interest to NTFC in the equipment purchased with the loan proceeds.
GlobalSCAPE does not use any of that equipment in its business and none of our
stock or assets is collateral securing the obligation. Interest on the
obligation was capitalized for the first six months and is calculated at a fixed
rate per annum equal to the five year bank swap rate as reported on the first
borrowing date on the Dow Jones & Company Telerate screen, plus 495 basis
points. All principal amounts borrowed are to be amortized and repaid quarterly.
As of December 31, 2000, the outstanding balance including capitalized interest
was approximately $1,873,023.
The lease facility described above requires that ATSI meet certain
financial covenants on a quarterly basis beginning October 31, 1999, including
minimum revenue levels, gross margin levels, earnings before interest, taxes and
depreciation and amortization (EBITDA) results and debt to equity ratios. ATSI
was in default of financial covenants of the lease as of January 31, 2001 and
has classified the entire capital lease as a current liability. ATSI has
requested a waiver for non-compliance of the financial covenants and has asked
that NTFC re-set the covenants to prevent future defaults. Although ATSI has
received waivers in the past, there is no guarantee that NTFC will grant a
waiver for ATSI's January 31, 2001 non-compliance.
On a consolidated basis as of January 31, 2001, ATSI had a working
capital deficit, had suffered recurring losses from operations since inception,
had negative cash flows from operations and had limited capital resources to
support further development of its operations. If ATSI is unable to pay this
obligation, the lender would likely exercise its rights under the Loan and
Security Agreement to sell the equipment and apply the proceeds to its loan
balance. If ATSI were unable to pay any loan balance remaining after the sale of
the equipment, the lender would have recourse against us for repayment. As a
result, assets which otherwise would be used to execute our business strategy
may have to be used to satisfy this debt.
These conditions raise substantial doubt about ATSI's ability to
continue as a going concern. The financial condition of our parent company may
impede or eliminate our ability to execute our plan by impairing our ability to
obtain financing. ATSI might be motivated by financial stress to sell its stock
of GlobalSCAPE for less than what it might sell for under other circumstances,
which may depress the value of the stock in general
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The Company filed Current Reports on Form 8-K on October 10, 2000,
reporting an amendment to its bylaws, and on November 7, 2000
announcing the re-release of CuteMX.
(b) Financial Statements and Schedules
The following financial statements of GlobalSCAPE, Inc. are included in
Item 8:
- Balance sheets - December 31, 1999 and 2000
- Statements of operations - Years ended December 31, 1998, 1999 and
2000
- Statements of stockholders' equity - Years ended December 31, 1998,
1999 and 2000
- Statements of cash flows - Years ended December 31, 1998, 1999 and
2000
- Notes to financial statements - December 31, 2000
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
47
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
2.1 Stock Purchase Agreement between American TeleSource International,
Inc. (Texas) and American TeleSource International, Inc. (Delaware)
dated April 3, 2000 (Filed as Exhibit 2.1 to Form 10 filed May 12,
2000).
2.2 Promissory Note between American TeleSource International, Inc. and
GlobalSCAPE, Inc. and as dated April 3, 2000 (Filed as Exhibit 2.2 to
Form 10 filed May 12, 2000).
3.1 Certificate of Incorporation of the Company dated April 17, 1996 (Filed
as Exhibit 3.1 to Form 10 filed May 12, 2000).
3.2 Certificate of Renewal and Revival of Certificate of Incorporation for
the Company dated February 16, 1999 (Filed as Exhibit 3.2 to Form 10
filed May 12, 2000).
3.3 Certificate of Amendment to Certificate of Incorporation dated May 11,
2000 (Filed as Exhibit 3.3 to Form 10 filed May 12, 2000).
3.4 Certificate of Amendment to Certificate of Incorporation dated
September 5, 2000 (Filed as Exhibit 3.5 to Form 10, Amendment No. 2,
filed September 12, 2000)
3.5 Bylaws of the Company (Filed as Exhibit 3.4 to Form 10 filed May 12,
2000).
3.6 Amended and Restated Bylaws of the Company effective as of September 1,
2000 (Filed as Exhibit 3.6 to Form 10, Amendment No. 2, filed September
12 2000).
3.7 Amended and Restated Bylaws of GlobalSCAPE effective as of October 10,
2000 (Filed as Exhibit to Form 8-K filed October 10, 2000).
4.1 Specimen of Stock Certificate (Filed herewith).
*10.9 1998 Stock Option Plan as amended May 13, 1999 (Filed as Exhibit 4.2 to
Form 10 filed May 12, 2000).
*10.10 2000 Stock Option Plan dated May 8, 2000 (Filed as Exhibit 4.3 to Form
10 filed May 12, 2000).
*10.11 Form of 1998 Stock Option Plan Rights Termination Letter Agreement of
Directors to Cancel Options dated February 4, 2000 (Filed as Exhibit
4.4 to Form 10 filed May 12, 2000).
*10.12 Form of 1998 Stock Option Plan Rights Termination Letter Agreement of
Directors to Agree Not to Exercise Options dated February 4, 2000
(Filed as Exhibit 4.5 to Form 10 filed May 12, 2000).
*10.13 Form of 1998 Stock Option Plan Rights Termination Letter Agreement of
Directors to Agree Not to Claim Any Right of Adjustment dated February
4, 2000 (Filed as Exhibit 4.6 to Form 10 filed May 12, 2000).
*10.14 Form of 1998 Stock Option Plan Rights Termination Letter Agreement for
Employees and Consultants to Cancel Options dated February 8, 2000
(Filed as Exhibit 4.7 to Form 10, filed May 12, 2000).
*10.15 Form of 1998 Stock Option Plan Rights Termination Letter of Officer to
Agree Not to Claim Any Right of Adjustment dated February 8, 2000
(Filed as Exhibit 4.8 to Form 10 filed May 12, 2000).
*10.16 Form of 1998 Stock Option Plan Rights Termination Letter Agreement of
Officer to Agree Not to Exercise Options dated February 8, 2000 (Filed
as Exhibit 4.9 to Form 10, filed May 12, 2000).
*10.17 Form of 1998 Stock Option Plan Reinstatement and Adjustment Letter for
Employees dated December 19, 2000 (Filed herewith).
*10.18 Form of Release and Indemnity Agreement between GlobalSCAPE, Inc. and
Employees dated December 19, 2000 (Filed herewith).
10.1 Commercial Lease Agreement between ACLP University Park S.A. II, L.P.
and the Company dated April 13, 1999 (Filed as Exhibit 10.1 to Form
10 filed May 12, 2000).
10.2 Patent License Agreement between Thomson Consumer Electronics Sales
GmbH and the Company dated December 15, 1999 (Filed as Exhibit 10.2 to
Form 10 filed May 12, 2000).
48
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------
10.3 NTFC Loan and Security Agreement between American TeleSource
International, Inc. (Delaware), American TeleSource International, Inc.
(Texas), TeleSpan, Inc. and Company dated July 31, 1999 (Filed as
Exhibit 10.4 to Form 10, Amendment No. 1, filed July 28, 2000).
10.4 NTFC Promissory Note for $2,000,000.00 between American TeleSource
International, Inc. (Delaware), American TeleSource International, Inc.
(Texas), TeleSpan, Inc., and the Company dated August 26, 1999 (Filed
as Exhibit 10.5 to Form 10 filed May 12, 2000).
*10.5 Corrected & Restated Executive Employment Agreement between the Company
and Sandra Poole-Christal dated January 1, 1998 (Filed as Exhibit 10.13
to Form 10 filed May 12, 2000).
*10.6 Employment Agreement between GlobalSCAPE, Inc. and Tim Nicolaou (Filed
as Exhibit 10.1 to Quarterly Report on Form 10-Q filed November 15,
2000).
10.7 Promissory Note executed by GlobalSCAPE, Inc. in favor of The Frost
National Bank dated February 23, 2001 (Filed herewith).
10.8 Commercial Security Agreement between GlobalSCAPE, Inc. and The Frost
Bank dated February 23, 2001 (Filed herewith).
21.1 Subsidiaries (Filed herewith).
* Management Compensatory Plan or Agreement
49
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 San Antonio,
Texas on March 30, 2001.
GLOBALSCAPE, INC.
BY: /s/ TIM NICOLAOU
-----------------
Tim Nicolaou
Chief Executive Officer
BY: /s/ DANIEL MCREDMOND
-----------------
Daniel McRedmond
Director of Finance and Accounting
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on March 30, 2001.
SIGNATURE TITLE
--------- -----
/s/ Tim Nicolaou Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Arthur L. Smith Chairman of the Board and Director
/s/ H. Douglas Saathoff Director
/s/ Daniel McRedmond Director of Finance and Accounting
(Principal Accounting and Financial Officer)
50