Item 1. Business
Company
Overview
Our primary
business is the development and distribution of Internet related software used
to create and publish Web site content.
Our current products are:
• GlobalSCAPE
Secure FTP Server, a secure file serving solution for technology professionals,
complementing the CuteFTP Pro client application;
• CuteFTP Pro, a
business class secure file transfer protocol application for technology
professionals;
• CuteFTP, a
leading file transfer protocol application that allows users to quickly and
easily transfer files between computers;
• CuteZIP, a
compression utility that allows users to easily shrink and encrypt files for
secure transfer and storage;
• CuteSITE
Builder, a WYSIWIG Web site building tool targeting the novice user;
• CuteHTML and
CuteMAP, Web site development tools for Webmasters; and
• The GlobalSCAPE
Transfer Engine, a software developers’ toolkit for incorporating the CuteFTP
Pro transfer technology into developers’ own applications.
In 2002, we
expect to release Vdrive, a browser based virtual storage solution. Vdrive will enable enterprises and Web site
operators to host their own Web based storage for their user community without
requiring users to install a desktop application.
Also in 2002,
we expect to release an entry-level Web content management product targeting
companies with small to medium size Web teams.
Content management solutions permit contributors from various
disciplines within a company to directly control the company’s Web content,
helping the company more efficiently manage its Web site.
Our software
products are distributed primarily from our Web site, www.globalscape.com. Prospective buyers may download an
electronic copy of any product and run a free 30-day trial. Copies of our products are also available
from a variety of independent Internet software sites such as Tucow’s and
CNet’s Download.com, and from numerous international resellers in Western
Europe, Canada, Australia, Taiwan and Hong Kong. We also distribute our software on CD Rom in CompUSA, Fry’s and
Micro Center retail stores. Copies that
are not registered (purchased) at the end of the trial period are automatically
disabled. Some previous versions of our products were only partially disabled
after the trial but continued to display ad banners as a means of generating
revenue. During the trial period, all
versions generate repeated registration reminders. From January 1, 2001 to
December 31, 2001 there were more than 13 million download requests for our
products made on our internal servers.
During this same period we sold 191,000 licenses, or 1.5% of these
download requests. Our current products
range in price from $19.95 to $350.00.
We provide support for our users via a searchable knowledge base on our
Web site and provide live assistance via e-mail, online chat and telephone for
users who purchase our support and maintenance program.
In 1999 and
2000, we realized significant revenues from advertising. In both years, advertising accounted for
approximately 10% of all revenues.
However, by the fourth quarter of 2000, our advertising revenue had
dropped dramatically. Although we were
displaying a large number of ads, the rates earned on advertising space had
declined precipitously. In 2001, we
discontinued our advertising strategy in light of these market conditions and
as a result advertising accounted for less than 1% of total revenues. Sales of licenses to use our software
products accounted for 99% of our revenues in 2001.
We derived
approximately 90%, 90% and 99% of our revenues in 1999, 2000 and 2001
respectively, from sales of licenses for our software products. A combination of the sale of licenses of
CuteFTP and advertising from within CuteFTP accounted for 97% and 98% of our
revenues in 1999 and 2000, respectively.
The combined sales of CuteFTP and CuteFTP Pro accounted for 92% of total
revenues in 2001.
History
and Recent Developments
GlobalSCAPE
was organized as a Delaware corporation in April 1996 when we obtained the
right to distribute CuteFTP from its original author. Our parent, ATSI Communications, Inc., established our company as
a 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 all rights to CuteFTP from its author and in 1999
began developing and selling complementary products under the “Cute” name such
as CuteHTML and CuteMAP. In September
2000, ATSI distributed approximately 27% of its GlobalSCAPE common stock to its
shareholders. As a result of this
partial spin off, we became a reporting company under the Securities Exchange
Act of 1934.
Significant
recent developments are as follows:
• March 2001: We
released CuteFTP Pro Version 1, a business class secure file transfer protocol
application for technology professionals.
• April 2001: We signed a distribution agreement with Trellix Corporation
to distribute a GlobalSCAPE branded version of their Trellix Web product under
the tradename CuteSITE Builder.
• June 2001: We
signed a distribution agreement with SoftChina Corporation, for the
distribution of a Chinese language version of CuteFTP in their 6,000 store
retail channels in Taiwan and Hong Kong.
• September 2001: We sold a worldwide
enterprise license for CuteFTP Pro to Adobe Systems, Incorporated, a leader in
Web and network publishing solutions.
• October 2001: We released our multi-lingual version of CuteFTP translated for
the French, German, Spanish, Traditional Chinese, and Japanese markets.
• November 2001: We were selected as one of the top 500 companies based on annual
revenues generated from Web operations by Interactive Week, a weekly Industry
publication.
• November 2001: We released CuteSite Builder,
our Web site creation tool.
• November 2001: We released CuteFTP Pro
version 2.0.
• December 2001: We signed a non-exclusive
distribution agreement with SoftChina to represent the company’s products in
Japan.
• January 2002: We
released GlobalSCAPE Secure FTP Server.
• February 2002: Our stock began to be quoted on the NASD’s OTC Bulletin Board.
Industry
Background
The Internet
has become an integral part of operations for companies of all sizes, not only
for e-commerce, but also as a means of managing information between central and
remote locations and with employees, partners and suppliers. We believe that the growth of the Internet
will continue to create demand for our products. IDC estimates that by the end of 2002 more than 600 million people
will access the Internet worldwide, spending more than $1 trillion online. By 2005, IDC predicts that the number of
Internet users will reach almost one billion, roughly 15% of the world’s
population. IDC forecasts that spending
on information technology to support Web initiatives will grow from $115
billion in 2001 to $441 billion in 2006, a compound annual growth rate of
31%. We believe that a migration from
Web site authoring to Web site maintenance programs will occur as corporate Web
operations mature, shifting the responsibility of managing content for Web
sites from technical to non-technical personnel. This requires software solutions that empower them to change
content without editing HTML code, control versions and expedite approval
processes for improved workflow. This
shift in the market is fueling a 47% compound annual growth rate for sales of
Web Content Management software, forecasted by IDC to reach $1.2 billion by
2005.
Strategy
Our goal is to
be a leading provider of high quality, affordable, easy-to-use software for Web
site development and publishing, content and file management, and secure data
delivery, enabling individuals and organizations to create, move and manage
content in a secure, collaborative environment.
We have successfully
established a brand in the market for basic Internet software tools with our
file transfer products, CuteFTP and CuteFTP Pro. We believe the next phase of our growth will come through the
provision of software solutions that help information technology professionals
manage corporate Web sites and that enhance the ease and security of Internet
file management. We believe there is an
opportunity in the entry-level Web content management market and that our strong
brand will enable us to penetrate it successfully. We intend to provide a comprehensive Web content management
solution, while continuing to enhance our file transfer and management
offerings. We also plan to aggressively
pursue the distribution of our products in rapidly growing foreign markets, and
work to increase our penetration in the corporate market. Key elements of this strategy are:
• Introduction of an entry-level Web
content management product. “Content
management” refers to software that supports team collaboration for technical
and non-technical users that contribute to Web content, thereby reducing the
cost of maintaining Web sites through workflow improvement processes.
• Continue to enhance security
features of our products. As
corporate users increasingly rely on the Internet as a trusted communications
transport they demand robust security models to protect their information.
• Increase ease-of-use and
accessibility to software by adding browser-based products. We believe that the Internet browser will be
used more frequently to initiate file transfer operations by consumers and
enterprises.
• Expand overseas distribution.
We will continue to develop our worldwide distribution partners to position
GlobalSCAPE as an international supplier.
In 2002 we plan to translate CuteFTP Pro and Secure FTP Server to
German, French, Spanish, Japanese and Traditional Chinese to enhance our
localized product offerings.
• Outbound Telesales. We have introduced an outbound telesales
group to our marketing program. This
group will facilitate the customers’ trial evaluation process for our higher
priced products with the intent of improving the percentage of trial users who
purchase a license to use our products.
• Pursue strategic product
opportunities. We intend
to look for opportunities to acquire or add synergistic products to our
portfolio.
Products
Our current
products are Windows® or Java based applications. During 2001 approximately 62% of our revenues were generated from
customers within the United States, with the remaining 38% concentrated mostly
in Western Europe, Canada and Australia.
We offer CuteFTP in German, French, Spanish, Japanese, and Traditional
Chinese. During 2001, approximately 99%
of our revenues were derived from sales of software licenses, and the remainder
from the sale of advertising banners within our software. We no longer display advertising banners
within our current software products or from our Web site.
GlobalSCAPE Secure
FTP Server.
GlobalSCAPE Secure FTP Server enables businesses to secure mission
critical file transfers with Secure Socket Layer (SSL) and advanced S/KEY
password encryption. When used in
conjunction with CuteFTP Pro, Secure FTP Server offers a complete digital
certificate management system, allowing System Administrators to create, sign,
import, export and add digital certificates to a trusted list. Additional powerful features include full
remote management capability, the ability to operate multiple FTP sites with unique
directory structures from one server, and manage user accounts with advanced
restriction settings for maximum security and control.
Vdrive. Vdrive is a browser based remote file
storage solution which will enable an enterprise to host its own Web drive for
a rapidly deployed, location-independent file transfer system. Web drives give users access to their data
through their browser from anywhere that they are Web connected. Vdrive provides a robust transfer engine, a
user-friendly status panel for monitoring queued and in-progress file
operations, supports concurrent multi-file upload and download, bandwidth
throttling and broken transfer recovery.
This product is substantially complete but has not yet been released in
final form.
CuteFTP. CuteFTP is a “file transfer protocol,” or
FTP, client application, 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
favorably reviewed in leading online and print trade journals such as PC
Magazine online, WindowsNT, CNet’s
Download.com, and Tucows, as being the most powerful, easy-to-use file transfer
protocol program available.
Approximately 75% of our revenues for 2001 were generated by sales of
licenses to use this product and from advertising from within the product.
CuteFTP was first released as freeware in 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 secure FTP
application designed for information technology professionals. CuteFTP Pro provides major enhancements to
the file transfer process by incorporating the latest security standards
including Secure Socket Layer (SSL) via FTP and HTTP, SSH2 and advanced S/Key
password encryption, in addition to powerful features including folder
synchronization and sophisticated scripting capabilities. CuteFTP Pro has been favorably reviewed by
leading online publications including ZDNET and CNet’s Download.com. CuteFTP Pro was released in March 2001 and
accounted for approximately 17% of total revenues in 2001.
CuteZIP.
CuteZIP is a file compression program that enables users to shrink and encrypt
files for secure transfer and storage using powerful 128-bit encryption. Users may compress files across multiple
disks or within a directory for easy download or storage. Users may also create encrypted
self-extracting files, which are files that may be opened by a recipient
without the use of a zip utility.
CuteZIP has been favorably reviewed in leading online publications
including CNET and MP3.com. CuteZIP
was first released in September 1999.
CuteSITE Builder. CuteSITE Builder is a WYSIWYG (what you
see is what you get) Web site creation tool enabling anyone, regardless of
skill level, to easily create, publish and manage a high quality Web site
without having the learn HTML, FTP or graphic design. Users choose the design and type of Web site they would like to
create from professionally designed templates, add personalized content such as
family photos, images and links, and can publish their Web site with just one
click.
CuteHTML.
CuteHTML is a text-based HTML (hypertext mark up language) editor 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 been favorably reviewed in
leading online and print publications including ZDNET and Tucows. CuteHTML was first released in January 1999.
CuteMAP.
CuteMAP is an image mapping tool designed to help HTML users create clickable
images on their Web site graphics for improved navigation. Users select an area of an image that they
want “hot,” and tell CuteMAP where the image should point. CuteMAP automatically creates the image map
code, which can be copied to an existing HTML document. CuteMAP has been favorably reviewed in
leading online and print publications including ZDNET, Tucows and LockerGnome.
CuteMAP was first released in September 1999.
Content Management
Solution.
We plan to introduce a Web content management system (WCM) for release
in late 2002. WCM systems permit a
broad array of users within a company to directly control Web content, reducing
a company’s reliance on technical personnel.
WCM systems typically have a centralized content storage system and
support isolated staging environments for testing and review. WCM systems are important as they reduce the
time and cost of developing and maintaining a Web site. They assist in overcoming communications
difficulties between businesses and technical contributors, ensure quality and
consistency through workflow approval processes, help manage resources and
projects, and eliminate review and deployment bottlenecks. Our product focus will be the small Web
team from 2- 20 contributors where the price for traditional WCM solution has
been cost prohibitive.
Marketing and
Sales
Our target
customers include Web development and information technology professionals and
consumers who are actively involved in moving and managing Web site content,
corporate and personal data.
GlobalSCAPE’s software is marketed primarily via the Internet through
our Web site, international resellers and distributors, software review sites,
and retailers. Our products are some of
the most frequently downloaded products on software review sites including
Yahoo!, CNet’s Download.com, ZDNET, and Tucows. As such, these sites include periodic reviews of the products and
maintain timely information on new releases, providing us with substantial
publicity. Other marketing activities
include outbound
telesales, online and print
advertising, public relations efforts, Internet promotions and trade show
participation.
We are
leveraging the success of our GlobalSCAPE brands to cross promote new
products, and we intend to expend
significant resources on product development and marketing to promote our
growth.
Customers
Our customers
include a wide spectrum of users, from large enterprise accounts to individual
consumers. No single customer accounts
for a substantial portion of our revenues. Customers use our product to publish
new and revised Web site pages and other content to Web servers, and transfer
corporate and personal information to and from remote locations via the
Internet. In 2000 and 2001, respectively, approximately 33% and 38% of our
revenues were generated from sales to customers who provided addresses in
foreign countries. These sales were concentrated
mostly in Western Europe, Canada, and Australia. In 1999, 2000 and 2001, the UK accounted for approximately 6%,
10%, and 11.5% of total revenues, respectively. 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.”
Seasonality
We believe our
sales are subject to seasonal variations and we experience significantly less
sales volume during national holidays and weekends when compared to normal
business days. In 2000, we experienced
a decline in software sales from the third to fourth quarter, primarily due to
lower December sales. Third and fourth
quarter revenues in 2001 were comparable, however, we believe this was the
result of unusually weak demand in September which skewed the comparison. We expect that in future periods we will see
weakness in the fourth quarter when compared to the third quarter due to the
holiday season.
Network
and Equipment
We have
contracted with various network providers for Internet 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 Secure Sockets Layer encryption. We have dedicated servers on and off site
and expansion plans in place to allow rapid and cost effective scalability.
Research
and Development
Our internal
software developers are responsible for software design, managing the
development process, testing and quality assurance. We utilize offshore
developers for a large portion of the coding phase of software
development. All phases of development,
including scope approval, functional and implementation design, object modeling
and programming, are subject to internal quality assurance testing. Our use of 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
1999, 2000, and 2001, GlobalSCAPE spent $243,000, $1,017,000 and $1,177,000,
respectively on research and development, of which approximately $103,000 and
$56,000 was capitalized in 1999 and 2000, respectively. No research and development costs were
capitalized in 2001.
Competition
The Web
development and FTP 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 several hundred FTP software utilities available on the
Internet. We believe our primary competitors are WS_FTP from Ipswitch and FTP
Voyager by Rinosoft. CuteFTP was the
second Windows base FTP client to market and is consistently the most
frequently downloaded FTP client on the Internet.
CuteFTP Pro. CuteFTP Pro competes in the higher end of
the same market as CuteFTP, targeting the security minded IT professional. CuteFTP Pro is positioned as one of the only
secure FTP clients that support 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 address a narrow segment of the secure FTP market. Competitors include Van Dyke, Inc.,
Ipswitch, Inc., and Rhino Software, Inc.
CuteHTML. CuteHTML exists in a highly competitive
environment with approximately one hundred text-based HTML editors. CuteHTML’s
competition includes HomeSite from Allaire, Inc. CuteHTML is a light and
powerful editing tool, which doesn’t add any code to Web pages, preferred by
many professional Web masters.
CuteMAP. CuteMAP competes against approximately 65
image-mapping utilities, which exist in a niche market. Primary competitors
include CoffeeCup Image Mapper, Ulead Smart Saver and MapEdit. 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.
CuteZIP. CuteZIP exists in the highly competitive
file compression utility market, competing against several hundred file
compression utilities. Its main competitors include WinZIP, the current market
leader, and NetZIP. CuteZIP is a
relative newcomer to the market and its main advantage is that it is one of the
only compression utilities offering 128-bit encryption to secure compressed
files. Additionally users can create
self-extracting encrypted archives that recipients may open even if they don’t
have a zip utility installed.
GlobalSCAPE Secure
FTP Server.
GlobalSCAPE Secure FTP Server (GSFTPS) competes against a limited number
of secure Windows based FTP servers. We
believe our primary competitors are WS_FTP Server and Serve-U. GSFTPS has the advantage of leveraging the
success of CuteFTP Pro through product integration offering proprietary
extension to the FTP protocol, and cross-marketing efforts to an existing
customer base.
CuteSITE Builder. CuteSITE Builder competes against
approximately one hundred WYSIWYG editors, including MS FrontPage, Macromedia’s
Dreamweaver, HotMetal and HotDog, with MS FrontPage as the industry leader. CuteSITE Builder offers most of the features
available in FrontPage, however, the product was developed to further simplify
the Web site creation process and is arguably easier to use, better serving the
novice. Additionally the product is
priced well below FrontPage.
Vdrive. Vdrive is a unique solution that enhances
the limitations of the HTTP upload function.
Competitive solutions include tool kits and hosted storage service
providers such as XDrive.
Content Management
Software.
Competitive hosted solutions include vendors such as Atomz, Crownpeak,
Accumedia and packaged software providers include vendors such as Userland,
Infosquare, Ektron. Management believes there is no leader in the entry-level
market segment.
We have limited information
regarding our products’ market shares in their respective categories. 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 a patent application for our
file searching, exchange and filtering processes employed in CuteMX.
We currently
have registered trademarks for GlobalSCAPE, CuteFTP, CuteFTP Pro, CuteHTML,
CuteZIP, CuteMAP and CuteMX and have filed applications to register trademarks
for CuteSITE Builder and Vdrive.
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 8,
2002, we had 36 full-time and part-time employees organized within seven
functional areas. The employee
distribution according to function is as follows:
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.
Risks Related to Operations
GlobalSCAPE depends on two products for a
substantial portion of its revenues.
GlobalSCAPE
depends on a two products, CuteFTP and CuteFTP Pro, for about 92% of its
revenues. In addition, GlobalSCAPE’s
ability to produce 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 CuteFTP Pro. If GlobalSCAPE is not able to maintain its competitive position
with these products, its revenues could decline dramatically and GlobalSCAPE’s
plans to expand its business could be substantially impaired. From 1996 to 2000, sales of licenses for
CuteFTP increased significantly year to year.
In 2001, sales remained relatively flat. This product may be reaching a mature stage or the end of its
life cycle, which could result in flat or declining revenues in future periods.
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. 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.
All of GlobalSCAPE’s products
are subject to the threat of reduced market share resulting from the
introduction of competitive products.
GlobalSCAPE may fail to develop new products and functionalities as
quickly as is necessary in the future to avoid losing its position in the
Internet software market.
In addition to
stand-alone FTP clients, CuteFTP competes with browsers, open source file
sharing communities and download utilities, which provide subsets of the file
transfer protocol functionality. These
competing products may reduce demand for our products.
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.
GlobalSCAPE may fail to develop or license
the intellectual property needed to launch new products.
Our strategy
for future growth depends significantly on the addition of new products to our
suite. If we fail to timely license
and/or develop new programs, or if our new programs are not functionally
competitive with other programs in this market, our revenue growth could be
substantially impaired. For example,
our current emphasis is on the development of a content management program
suitable for the entry-level market. We
do not currently have such a content management program under development so we
must either license such a program or develop it or some combination of the
two.
GlobalSCAPE utilizes “open source” software
in some of its products.
The open
source software community develops software technology for free use by
anyone. We have relied on open source
technology for the encryption features in our CuteFTP Pro and GlobalSCAPE
Secure FTP Server products. For these
products to remain competitive we must continue to enhance their features,
including the encryption features. If
the open source community does not continue to develop and enhance the
encryption technologies we rely on, we would have to license this
technology. We may have to pay
substantial fees for such a license, and it is possible that we would not be
able to license this technology on any acceptable terms.
GlobalSCAPE’s planned new product
introductions may fail to generate sufficient revenue.
Even if we
successfully develop or license the technology needed for new products, we may
fail to distribute or market them successfully. If so, they may fail to result in revenue growth, or may even
fail to generate sufficient revenues to support the cost of bringing them to
market. We may fail to successfully
market and distribute new products if we are unable to retain persons with
marketing expertise or do not have sufficient income to bear marketing
expenses.
GlobalSCAPE’s revenues may decline if
Internet usage 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.
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
competitive technology, 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. Failure to attract and maintain qualified personnel would impede
our development and maintenance of new and existing products.
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.
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 achieve and 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
deprive GlobalSCAPE of funds, impair GlobalSCAPE’s access to financing, and
exacerbate conflicts of interest.
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. Because of ATSI’s financial
condition, and because of GlobalSCAPE’s joint and several liability on the $2
million loan described below, GlobalSCAPE’s auditors have stated in their
report on our financial statements that they have substantial doubt over
GlobalSCAPE’s ability to continue as a going concern. The financial
condition of ATSI and this “going concern” opinion may make it more difficult
for GlobalSCAPE to obtain financing. In
addition,
ATSI has borrowed money from
GlobalSCAPE in the past and currently has outstanding loans from GlobalSCAPE
with an approximate balance of $410,000 (principal and interest), which it may
not be able to repay. 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 loan further
funds to ATSI. This would 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. If GlobalSCAPE used its funds
to repay this loan, its ability to execute its business plan would be seriously
impaired. The balance of the loan as of
December 31, 2001 was approximately $1.5 million.
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.
GlobalSCAPE’s
Secure FTP Server is intended to provide outsiders access to a customer’s
computer, making the customer vulnerable to security breaches, which could
result in the loss of their privacy or property. If customers suffer invasions of privacy or other harm, this may
result in customer dissatisfaction and possible claims against us for any
resulting damages.
GlobalSCAPE may have lower margins and
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 may
continue to increase. This might expose
GlobalSCAPE to greater risks of volatility in its revenues due to greater
economic volatility in those countries.
Local political developments, foreign laws or policies, as well as U.S.
policies affecting trade, taxation and investment in other countries may also
adversely affect our foreign operations.
In addition, we rely to some degree on international resellers and
distributors for sales in foreign countries.
We do not realize as much revenue for units sold to resellers and
distributors and as a result, our margins may decline if sales through these
channels increase.
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.
Most of
GlobalSCAPE’s 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 Stock Ownership
Our stock is a penny stock, which makes it
more difficult to sell.
A “penny
stock” is any stock which is not traded on a national exchange or quoted on
NASDAQ and which falls below a selling price of $5.00 per share in the public
market. Our common stock is quoted on the NASD’s OTC Bulletin Board and not on
an exchange or the NASDAQ, and it has traded from $.15 to $1.05 since it began
active trading in February 2002. The
SEC’s penny stock rules require brokers and dealers to take certain steps
before trading in a penny stock, making it more difficult to sell a penny stock
than other stock. A sale of penny stock
does not usually take place as quickly as a sale of other stock. You may decide to sell your stock when the
market price is desirable to you, but by the time the sale is complete, the
price of the stock may have fallen to the point that the sale is no longer
desirable. The price of penny stocks is
typically more volatile than other stocks, exacerbating this problem. Also, some brokers are unwilling to trade in
shares of penny stocks.
Our stock price is/may be volatile.
The trading
price of our common stock has been and could continue to be subject to wide
fluctuations in response to certain factors, including:
• Quarter-to-quarter
variations in results of operations;
• Our
announcements of new products;
• Our competitors’
announcements of new products;
• Our product
development or release schedule;
• General
conditions in the software industry;
• Investor
perceptions and expectations regarding our products, plans and strategic
position and those of our competitors and customers.
In addition,
the public stock markets experience extreme price and trading volume
volatility, particularly in high-technology sectors of the market. This volatility has significantly affected
the market prices of securities of many technology companies for reasons often
unrelated to the operating performance of the specific companies. The broad market fluctuations may adversely
affect the market price of our common stock.
We do not pay dividends on our common stock.
We have not
paid a dividend on our common stock and have no plan to do so in the near
future.
ATSI and its directors and executive officers
are able to exert significant influence over us.
ATSI owns
approximately 73% of our 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 our 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, these ATSI officers exert
significant influence over GlobalSCAPE and conflicts of interest may arise.
ATSI might be motivated by financial stress
to sell its GlobalSCAPE stock, which could depress the value of the stock.
ATSI owns
approximately 73% of our outstanding common 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 GlobalSCAPE stock. ATSI could sell its GlobalSCAPE stock either
by requiring GlobalSCAPE to file a registration statement pursuant to the
Securities Act of 1933 (the “Securities Act”), or it could sell pursuant to an
exemption from registration, such as the SEC’s Rule 144, which permits it to
sell without registration provided that certain volume and other restrictions
are met. If ATSI sells its GlobalSCAPE
stock in the public market, it will tend to depress the value of the stock in
general, and impair our ability to raise capital through the sale of equity
securities.
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, 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.
Stockholders’ ownership of GlobalSCAPE stock
may be significantly diluted, affecting the value of the stock.
GlobalSCAPE
may determine at some time in the future to issue additional shares in a public
or private offering resulting in considerable dilution, which would tend to
depress the value of the stock.
In addition,
there are options for 3,557,480 shares currently outstanding under
GlobalSCAPE’s employee stock option plans, with 3,057,980 of those options held
by affiliates of GlobalSCAPE. Of those
options, 1,805,980 are vested, and an additional 230,000 will become vested in
April 2002. We have filed a
registration statement under the Securities Act of 1933, as amended (the
“Securities Act”) covering stock issued upon the exercise of options by
non-affiliates, and we may file a registration statement covering options held
by affiliates as well. If we do not
file a registration statement covering affiliates, affiliates who exercise
their options may choose to sell the stock under an exemption from
registration, such as Rule 144 under the Securities Act. The exercise of these options and sale of
the resulting stock could depress the value of our stock.
Risks Related to Legal Uncertainty
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. In addition, we expect that infringement
claims against software developers will become more prevalent as the number of
products and developers grows and the functionality of software programs in the
market increasingly overlaps. Claims of
infringement could require GlobalSCAPE
to re-engineer 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
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 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.
Item 2.
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. We
believe these facilities will be suitable for our current business needs and
that suitable additional space will be available on acceptable terms when
neededsuitable for our current business needs and that suitable additional
space will be available on acceptable terms when needed.
Item 3.
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.
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 2001.
Item 4A. Information
Regarding Executive Officers
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 twenty
five years of industry experience with 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.
Sandra
Poole-Christal.
Ms. Poole-Christal launched GlobalSCAPE in April 1996 at age 29 as a
subsidiary of ATSI Communications, 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.
Part
II
Item 5.
Item 5. Market for Registrant’s Common Equity
and Related Stockholder Matters
Our common
stock is listed on the NASD’s OTC Bulletin Board under the symbol GSCP. As of
March 27, 2002, there were 2,886 holders of record of our common stock
representing approximately 14,500 beneficial owners. GlobalSCAPE stock began trading in February 2002 and the closing
bid price of our stock has ranged between $0.15 and $1.05. The closing price on March 28, 2002 was
$0.30. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down, or
commission and may not necessarily represent actual transactions.
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.
Item 6. Selected Financial Data
Item 7.
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operation
Significant
Accounting Policies
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 began selling technical support and maintenance services for
some of its software products in 2001 and has deferred recognition of
approximately $11,000 in revenue. Total
sales of technical support and maintenance agreements did not comprise a
significant portion of the Company’s revenues in 2001. These services, however, may become a
greater portion of overall revenues in future periods, resulting in the
deferral of a significant amount of revenue.
Stock-Based Compensation
The Company
has adopted Statement of Financial Accounting Standards No. 123, Accounting for
Stock Based Compensation, and elected to use 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 current market price of the underlying stock exceeds the exercise
price. In 2000 and 2001 we recognized
approximately $214,000 and $434,000, respectively in non-cash charges related
to options granted below intrinsic value.
(For more information you should read Note 8. Stock Options and Stock Based Compensation in the Notes to Financial Statements.)
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 1999,
2000, and 2001, we spent approximately $243,000, $1,017,000 and $1,177,000,
respectively on research and development of which approximately $103,000 and
$56,000 was capitalized in 1999 and 2000, respectively. No research and development expenses were
capitalized in 2001.
Comparison
of Year Ended December 31, 2001 to Year Ended December 31, 2000
Sales. We derive our revenues primarily from
software sales. Sales are comprised of the gross selling price of software,
including shipping charges and the net proceeds received from advertisers. Total revenues declined 8% from $5,735,676
in 2000 to $5,297,688 in 2001. However,
software sales increased 2% from $5,165,668 in 2000 to $5,259,148 in 2001 due
to a slight increase in overall unit volume from 188,000 in 2000 to 191,000 in
2001. The overall drop in revenue is
due to the loss of advertising revenue, which declined to less than 1% of total
revenues in 2001 from 10% in 2000 and is no longer a meaningful part of our
strategy.
We introduced
two new products in 2001, CuteFTP Pro and CuteSITE Builder, bringing our
portfolio of products to six. In 2001,
approximately 92% of our revenues were generated from sales of CuteFTP and
CuteFTP Pro. Our reliance on these
products may negatively impact future results from operations if we are unable
to maintain or grow revenues from these products or diversify our product
offerings. (For more information, you
should read the section titled Risks Related
to Operations.)
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, certain licensing expenses and
royalties. Cost of revenues increased
62% between periods from $200,118 in 2000 to $323,309 in 2001 due to an
increase in royalty expenses related to our distribution agreement with Trellix
Corporation announced in June 2001. We
expect cost of revenues to increase both as a percentage of sales and in gross
terms in future periods.
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 slightly year over year from $3,463,044 in
2000 to $3,551,498 in 2001 due to higher salary expense and compensation
charges, partially offset by lower professional fees. Although the number of persons employed by GlobalSCAPE fell from
38 at the end of 2000 to 33 at the end of 2001, we averaged approximately 3
more employees per quarter because of the employee growth that took place in
late 2000. We incurred non-cash
compensation charges of $214,174 in 2000 and $434,499 in 2001. However, fees for professional services were
less in 2001 due to the expenses incurred in connection with the distribution
of our common stock to our shareholders.
Certain
unexercised stock options for which we recognized non-cash charges in 2000 and
2001 are subject to variable accounting.
The charges that we recognized related to the grant and re-pricing of
these options will fluctuate with our stock price. If our stock price closes above $0.464 at the end of a quarter,
we will recognize additional compensation expense equal to the amount of the
difference between the closing price and $0.464 multiplied by the number of
options subject to variable accounting.
Currently, the number of options subject to variable accounting is
205,429.
Research and Development. Research and development expenses increased
approximately 22% from $961,002 in 2000 to $1,176,714 in 2001 due to the
continued expansion of our internal research and development staff. We reduced
expenditures with external developers by about $100,000 between years. Research and development will continue to be
a material use of funds and may grow as a percentage of revenues as we develop
new products.
Depreciation and
Amortization.
Depreciation and amortization expense consists of depreciation expense
related to our fixed assets and the amortization of goodwill and the trademark
associated with our purchase of CuteFTP in 1998. Depreciation and amortization expense increased 27% from $430,221
in 2000 to $546,017 in 2001 due to capital expenditures for software, office
furniture, computers and leasehold improvements.
Interest Expense,
net. We
had net interest expense of $42,839 in 2000, mostly for capital lease and
working capital borrowings. In 2001, we
had net interest income of $4,420. Most
of the interest expense recognized during the current year, about $15,600, was
for capital leases. In addition, we
recognized interest income of approximately $20,000 related to loans made to
our parent, ATSI.
Income Taxes. The provision for federal income taxes was
($44,909) and $290,969 for 2001 and 2000, respectively. The provision for state income taxes was
$6,614 and $19,157 over the same periods.
GlobalSCAPE’s effective income tax rate was 13% and 50% for 2001 and
2000, respectively. The increase in the effective income tax rate in both years
is due primarily to the financial accounting recognition of compensation
expense related to stock option grants.
Net Income. Net income decreased from $314,639 in 2000
to a net loss of $257,135 in 2001 due to the decline in advertising revenues,
increased cost of revenues due to royalty expenses, greater R&D expense and
increased depreciation and amortization. These increased 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, 2000 to Year Ended December 31, 1999
Sales. 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 believed much of the decline in
advertising rates was a combination of increases in supply and questions about
the effectiveness of banner ads, which we believed would keep prices depressed
in the immediate future. As a result of
our analysis of the market for internet advertising, we discontinued installing
the advertising modules within new releases of our software products.
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 $3,463,044 in
2000, a 113% increase. These expenses
increased primarily 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.
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.
Research and
Development.
Research and development expenses increased 587% from 1999 to 2000, from
$139,953 to $961,002. 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.
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.
Liquidity
and Capital Resources
We rely
heavily on cash flows from operations and these cash flows are directly linked
to CuteFTP and CuteFTP Pro, which accounted for 92% of our revenues in
2001. Anything that has a negative
impact on these products will negatively impact our cash flow from operations
and our ability to meet our commitments.
In addition, we had outstanding loans to ATSI of $340,000 at December
31, 2001 and loaned an additional $50,000 on February 15, 2002. The total
balance due from ATSI at December 31, 2001 was $461,124. GlobalSCAPE is also a co-lessee on a capital
lease obligation of ATSI with a December 31, 2001 balance of $1.5 million of
which ATSI is in default of certain covenants.
Our financial statements do not include any adjustments to reflect the
possible future effects of the recoverability and classification of these
assets or the amounts and classification of liabilities that may result from
the outcome of ATSI’s liquidity problems.
The financial condition of our parent company may impede or eliminate our
ability to obtain financing if needed. 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.
Net cash
provided by operating activities was $808,142, $973,067 and $676,970 in 1999,
2000 and 2001, respectively. 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 non-cash compensation as well as increases in accounts payable
and accrued liabilities. These cash
flows were offset by reductions in the amount due to ATSI. In 2001, operating cash flow resulted from
adjustments related to depreciation and amortization as well as non-cash
compensation charges, offset by a loss from operations, increased deferred tax
assets and decreased accounts payable.
Net cash used
in investing activities for 1999, 2000 and 2001 was $185,997, $620,539 and
$545,801, respectively. Net cash used
in investing activities in 1999 and 2000 was related to the purchase of office
furniture, software, computer and other equipment and leasehold
improvements. In 2001, we capitalized
$205,801 related to the purchase of software, computer equipment, furniture and
leasehold improvements and loaned $340,000 to our parent, ATSI Communications,
Inc.
Net cash used
in financing activities during 1999, 2000 and 2001 was $671,264, $255,298 and
$110,223, 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. In 2001 we made principal payments of $47,108 on notes payable
and $71,715 on capital lease obligations.
We did not enter any new capital leases in 2001.
As of December
31, 2000, we had approximately $134,537 in cash and cash equivalents, current
assets of $808,506 and current liabilities of $310,372, resulting in working
capital of $498,134. Our principal
commitments consisted of obligations outstanding under capital and operating
leases and royalty
agreements with third
parties. 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, 2002. Consequently, we do not expect significant
expenditures for leasehold improvements or furniture in 2002. We plan to expend significant resources on
product development in 2002 and may also use cash to acquire or license
technology, products or businesses related to our current business. In addition, we anticipate that operating
expenses will be a material use of our cash resources.
It is our
intention to continue to expend resources on personnel, sales and marketing,
research and development and, to a lesser degree, infrastructure. We have 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 from operations until such time as
some external source of capital is identified.
In February
2000, we borrowed $70,000 from The Frost National Bank. The note was paid in full February 2, 2001.
In March 2001,
we established a line of credit with The Frost National Bank in the amount of
$200,000. We did not use any of the
available credit under this facility and it expired unused in February 2002.
GlobalSCAPE is
a co-lessee and jointly and severally liable 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 GlobalSCAPE 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. As of December 31, 2001, the outstanding
balance including capitalized interest was approximately $1.5 million.
The NTFC 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 July 31,
2001 and has classified the entire capital lease as a current liability.
On April 16,
2001, GlobalSCAPE loaned $200,000 to ATSI pursuant to a Note having a final
maturity of April 30, 2001. The Note
provided for interest at 12% per annum and was secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. This Note was paid in full on April 23,
2001.
On April 27,
2001, GlobalSCAPE loaned $200,000 to ATSI pursuant to a Note having a final
maturity of May 31, 2001. The Note
provides for interest at 12% per annum and is secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. The entire amount of this Note is
outstanding as of the date of this report.
On May 4,
2001, GlobalSCAPE loaned $50,000 to ATSI pursuant to a Note having a final
maturity of May 31, 2001. The Note
provided for interest at 12% per annum and was secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. This Note was paid in full on May 7, 2001.
On October 18,
2001, GlobalSCAPE loaned $100,000 to ATSI.
This Note was paid in full on October 26, 2001.
On November
15, 2001, GlobalSCAPE loaned $100,000 to ATSI pursuant to a Note having a final
maturity of January 31, 2002. The Note
provides for interest at 12% per annum and is secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. The entire amount of this Note is
outstanding as of the date of this report.
On December
12, 2001, GlobalSCAPE loaned $40,000 to ATSI pursuant to a Note having a final
maturity of January 31, 2002. The Note
provides for interest at 12% per annum and is secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. The entire amount of this Note is
outstanding as of the date of this report.
On February
15, 2002, GlobalSCAPE loaned $50,000 to ATSI pursuant to a Note having a final
maturity of April 30, 2002. The Note
provides for interest at 12% per annum and is secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. The entire amount of this Note is
outstanding as of the date of this report.
On a
consolidated basis as of July 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. ATSI may
be unable to repay the loans from GlobalSCAPE and the NTFC obligation. If ATSI were unable to pay these loans,
GlobalSCAPE could foreclose on the receivable securing the loans. GlobalSCAPE believes the value of the
receivable securing these loans is sufficient to pay them in full. If ATSI were unable to pay the NTFC
obligation, NTFC 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, NTFC would have
recourse against GlobalSCAPE for repayment.
As a result, assets which otherwise would be used to execute
GlobalSCAPE’s business strategy may have to be used to satisfy this debt.
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.
Inflation
Increases in
inflation generally result in higher interest rates and operating costs. Our largest cost exposure is the cost of
salaries and general and administrative expenses. To date we believe that
inflation has not had a significant impact on our operations.
Item 7A.
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 may 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 2001,
approximately 38% 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.
Item 8.
Item 8. Financial Statements and
Supplementary Data
GlobalSCAPE,
Inc.
Years ending December 31, 1999, 2000 and 2001
Contents
Report of Independent Auditors
Financial Statements
Balance Sheets
Statements of Operations
Statements of Stockholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
Report
of Independent Auditors
To the Board of Directors
GlobalSCAPE, Inc.
We have
audited the accompanying balance sheets of GlobalSCAPE, Inc., a majority owned
subsidiary of ATSI Communications, Inc. (“ATSI”), as of December 31, 2000 and
2001 and the related statements of operations, stockholders’ equity and cash
flows for the three years in the period ended December 31, 2001. 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, 2000 and 2001 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2001 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, 2001, 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
February 15, 2002
GlobalSCAPE, Inc.
Balance
Sheets
See accompanying notes.
GlobalSCAPE, Inc.
Statements
of Operations
See accompanying notes.
GlobalSCAPE, Inc.
Statements
of Stockholders’ Equity
See accompanying notes.
GlobalSCAPE, Inc.
Statements
of Cash Flows
See accompanying notes.
GlobalSCAPE, Inc.
Notes
to Financial Statements
December 31, 2000 and 2001
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. GlobalSCAPE’s shares are quoted on the NASD’s OTC Bulletin
Board. The Company is best known for
its popular file transfer program, CuteFTP.
The Company derived approximately 90%, 90%, and 99% of its revenues in
1999, 2000, and 2001, 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 97% and
98% of its revenues in 1999 and 2000, respectively. Sales of CuteFTP and CuteFTP Pro accounted for 92% of total
revenues in 2001. 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, 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. These conditions, as noted by ATSI’s auditors in their report
dated October 18, 2001, raise substantial doubt about ATSI’s ability to
continue as a going concern. Because of
ATSI’s financial condition and the fact 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 had arranged for additional funding it believed was sufficient to allow
the Company to operate independently of ATSI.
In addition, it was anticipated that there would be no cash requirements
of the parent to be funded by the Company for at least one year subsequent to
December 31, 2000. However, ATSI did
borrow funds from GlobalSCAPE in 2001 and some of these loans remain
outstanding as of the date of this report (see Note 5). 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 from the outcome of ATSI’s liquidity problems.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the Unites States 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.
Reclassifications
Certain prior
year amounts have been reclassified to conform to the current year
presentation. These reclassifications had no impact on operating income as
previously reported.
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 $4,000, $50,000 and $53,000 in 1999, 2000 and 2001,
respectively. 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 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
GlobalSCAPE
accelerated the amortization of goodwill in 2001 related to a 1998 asset
acquisition. Goodwill in prior periods was amortized on a straight-line basis
over a five-year period from the date of the acquisition. Goodwill is shown net of amortization of
$26,506 for the year ended December 31, 2000 and was fully amortized at December
31, 2001. GlobalSCAPE recognized
amortization expense related to Goodwill of approximately $10,000, $8,000 and
$23,000 in 1999, 2000 and 2001, respectively.
Other Long-Term
Assets
Costs incurred
for acquiring core software technology are capitalized and amortized over the
technology’s estimated useful life of five years using the straight-line
method. 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 these costs. GlobalSCAPE recognized amortization expense
related to this core software technology of approximately $180,000, $182,000
and $178,000 in 1999, 2000 and 2001, respectively. Other assets include deposits for facilities, which will be refunded
to the Company upon termination of the lease.
Other Long-Term
Liabilities
Other
long-term liabilities relate to deferred payments of rent expense.
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 2% of net revenues in
1999, 2000 and 2001.
Other Concentrations
Sales in Foreign Markets. In 1999, 2000 and
2001, respectively, approximately 24%, 33% and 38% of our revenues were
generated from sales to customers who provided addresses in foreign
countries. However, all revenues are
received in U.S. dollars so there is no exchange rate risk. These sales were concentrated mostly in
Western Europe, Canada, and Australia.
In 1999, 2000 and 2001, the UK accounted for approximately 6%, 10%, and
11.5% of total revenues, respectively.
Labor.
GlobalSCAPE utilizes offshore developers for a
large portion of the coding phase of software development. If GlobalSCAPE were unable to continue using
these developers because of political or economic instability, GlobalSCAPE may
have difficulty finding comparably skilled developers or may have to pay
considerably more for the same work, which would have a material adverse impact
on results of operations.
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 began selling technical support and maintenance services for
some of its software products in 2001 and has deferred recognition of
approximately $11,000 in revenue. Total
sales of technical support and maintenance agreements did not comprise a
significant portion of the Company’s revenues in 2001.
The outbound
shipping charges charged to the customer are included in software product
revenues and amounted to $33,000, $35,000 and $25,000 in 1999, 2000, and 2001,
respectively. The costs associated with
these charges are included in the software products cost of revenue.
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. The Company’s current product line does not
include products containing the modules necessary to generate advertising space
and does not feel that advertising will be a material source of revenue in
future periods.
Royalty Costs
Royalties that
the Company pays on software products licensed from third parties, which it
resells, are expensed as a cost of sales when the software product is
sold. On June 6, 2001 GlobalSCAPE
announced an agreement with Trellix Corp. whereby GlobalSCAPE has distribution
rights to Trellix Web, a desktop Web site creation and management tool for
users of all skill levels.
GlobalSCAPE has integrated the
existing Trellix Web code into its new product offering, CuteSITE Builder and
will develop all future enhancements to the software.
Advertising Costs
The Company
expenses advertising costs as incurred.
Advertising expenses charged to operations for the years ended December
31, 1999, 2000 and 2001 amounted to approximately $58,000, $113,000 and
$138,000 respectively, and are included in selling, general and administrative
expenses.
Capitalized interest
No interest
was capitalized during 1999, 2000 or 2001.
GlobalSCAPE incurred and charged to expense $57,000, $43,000 and $16,000
in 1999, 2000 and 2001, respectively.
Income Taxes
The Company
accounts for income taxes using the liability method in accordance with
Statement of Financial Accounting Standards 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 1999, 2000, and 2001,
GlobalSCAPE spent $243,000, $1,017,000 and $1,177,000, 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 use 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 current market price of the underlying stock exceeds the exercise price.
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 (loss) available to
common stockholders by the weighted average shares outstanding during the
period. Diluted earnings per share is
calculated by dividing net income (loss) 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:
(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.
(2) For the year ended December
31, 2001, 3,557,480 options have not been included in dilutive shares as the
effect would be anti-dilutive.
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, 1999, 2000 and 2001 is presented in the following table:
(1) Represents amounts written
off as uncollectible accounts receivable.
3. Debt
At December
31, 2000 and 2001, the Company had no long-term debt outstanding. On March 20, 2001 GlobalSCAPE established a
line of credit with a bank in the amount of $200,000. The interest rate was subject to change and was indexed to the
bank’s prime rate. The initial rate was
9.5%. In connection with the line of
credit, GlobalSCAPE entered into a Commercial Security Agreement with the bank
whereby GlobalSCAPE granted a security interest in all its accounts and
equipment. In the event of default
under the Security Agreement, the bank could sell the collateral in which they
held a security interest.
GlobalSCAPE did not use any of
the available credit under the facility and it expired unused in February 2002
and was not renewed.
4. Commitments
and Contingencies
Capital
Leases
The Company
has financed the acquisition of certain fixed assets through capital lease
obligations. These obligations are
classified as capital leases due to the bargain purchase option contained
therein. The present value of the
future minimum lease payments for these leases at December 31, 2001 is as
follows:
Furniture and
equipment at December 31, 2000 and 2001 includes $295,000 and $276,000,
respectively, for assets held under capital leases, less associated accumulated
depreciation of $51,000 and $130,000, respectively. Depreciation is included in depreciation and amortization
expense.
The Company
did not enter any new capital lease agreements in 2001.
Operating Leases
Minimum future
lease payments on non-cancelable operating leases for office facilities are as
follows for the years ending December 31:
This lease
provides the Company with two successive 5-year renewal options. Operating lease expense amounted to
approximately $90,000, $139,000 and $180,000 in 1999, 2000 and 2001,
respectively.
Resolution
of Contingencies
In GlobalSCAPE’s 2000 Annual Report on Form 10-K, GlobalSCAPE described
potential additional compensation charges, for which it had not made
provisions, related to potential future stock option grants to GlobalSCAPE’s
President, Ms. Poole-Christal. In April
2001, GlobalSCAPE and Ms. Poole-Christal resolved her claim that her option
should be adjusted as a result of the 7.6:1 forward split performed in May
2000. As part of the
resolution of this claim, Ms. Poole-Christal was granted 808,571 fully vested
options at $0.0132 per share,
575,000 options at $0.464 per share and will be paid a bonus of $0.0868 per
share, grossed up for taxes, for each share issued related to the original
291,429 options issued on January 15, 1998.
GlobalSCAPE recognized a non-cash compensation charge for these grants
of
approximately $405,000 for the
estimated intrinsic value of the fully vested options and reflected this charge
as an increase in operating expenses and a corresponding increase in additional
paid-in capital.
5. Related
Party Transactions
ATSI incurs
various expenses for the joint benefit of ATSI and GlobalSCAPE, such as the
premiums for group health and general business insurance. ATSI allocates a portion of these expenses
to GlobalSCAPE based on GlobalSCAPE’s proportionate use of the services. The amounts allocated to GlobalSCAPE are not
necessarily indicative of the amounts that would have been incurred if
GlobalSCAPE had acquired these services on its own, nor of the amounts that
might be charged in the future. However,
management believes the method of allocation is reasonable. Expenses for these services in the amount of
$105,000, $386,000 and $190,000 were charged to GlobalSCAPE by ATSI during the
years ending December 31, 1999, 2000 and 2001, respectively, and are reflected
in the statement of operations. The
balance due from ATSI to GlobalSCAPE at December 31, 2001 was $461,000, a
$195,000 increase over the prior year due primarily to loans to ATSI during the
year.
GlobalSCAPE is
a co-lessee 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 GlobalSCAPE 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. As
of December 31, 2001, the outstanding balance including capitalized interest
was approximately $1.5 million.
The NTFC 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 July 31,
2001 and has classified the entire capital lease as a current liability.
On April 16,
2001, GlobalSCAPE loaned $200,000 to ATSI pursuant to a Note having a final
maturity of April 30, 2001. The Note
provided for interest at 12% per annum and was secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. This Note was paid in full on April 23,
2001.
On April 27,
2001, GlobalSCAPE loaned $200,000 to ATSI pursuant to a Note having a final
maturity of May 31, 2001. The Note
provides for interest at 12% per annum and is secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. The entire amount of this Note is
outstanding as of the date of this report.
On May 4,
2001, GlobalSCAPE loaned $50,000 to ATSI pursuant to a Note having a final
maturity of May 31, 2001. The Note
provided for interest at 12% per annum and was secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. This Note was paid in full on May 7, 2001.
On October 18,
2001, GlobalSCAPE loaned $100,000 to ATSI.
This loan was paid in full on October 26, 2001.
On November
15, 2001, GlobalSCAPE loaned $100,000 to ATSI pursuant to a Note having a final
maturity of January 31, 2002. The Note
provides for interest at 12% per annum and is secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. The entire amount of this Note is
outstanding as of the date of this report.
On December
12, 2001, GlobalSCAPE loaned $40,000 to ATSI pursuant to a Note having a final
maturity of January 31, 2002. The Note
provides for interest at 12% per annum and is secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. The entire amount of this Note is
outstanding as of the date of this report.
On February
15, 2002, GlobalSCAPE loaned $50,000 to ATSI pursuant to a Note having a final
maturity of April 30, 2002. The Note
provides for interest at 12% per annum and is secured by a receivable from a
third party owing to ATSI’s subsidiary, TeleSpan, Inc. The entire amount of this Note is
outstanding as of the date of this report.
GlobalSCAPE,
Inc. recognized interest income of $20,000 in the year ended December 31, 2001
related to the Notes described above.
Interest earned on the loans has not been paid and is reflected in the
due from parent account.
On a consolidated
basis as of July 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. ATSI may be unable to
repay the loans from GlobalSCAPE and the NTFC obligation. If ATSI were unable to pay these loans,
GlobalSCAPE could foreclose on the receivable securing the loans. GlobalSCAPE believes the value of the
receivable securing these loans is sufficient to pay them in full. If ATSI were unable to pay the NTFC
obligation, NTFC 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, NTFC would have
recourse against GlobalSCAPE for repayment.
As a result, assets which otherwise would be used to execute
GlobalSCAPE’s business strategy may have to be used to satisfy this debt.
The financial condition of ATSI
may impede or eliminate our ability to obtain financing if needed. In addition, 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:
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:
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 made
contributions to the plan of $3,271 for 1999 and $4,377 for 2000. The contribution related to the 2001 plan
year is indeterminate at the time of this report.
8. Stock
Options and Stock Based Compensation
In 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 July 31, 2001, no
additional grants could be issued under the 1998 Plan.
In 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.
In 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.
In GlobalSCAPE’s 2000 Annual Report on Form 10-K, GlobalSCAPE described
potential additional compensation charges, for which it had not made
provisions, related to potential future stock option grants to GlobalSCAPE’s
President, Ms. Poole-Christal. In April
2001, GlobalSCAPE and Ms. Poole-Christal resolved her claim that her option
should be adjusted as a result of the 7.6:1 forward split performed in May
2000. As part of the
resolution of this claim, Ms. Poole-Christal was granted 808,571 fully vested
options at $0.0132 per share, 575,000 options at $0.464 per share and will be
paid a bonus of $0.0868 per share, grossed up for taxes, for each share
exercised related to the original 291,429 options issued on January 15,
1998. GlobalSCAPE recognized a non-cash
compensation charge for these grants of approximately $405,000 for the
estimated intrinsic value of the fully vested options and reflected this charge
as an increase in operating expenses and a corresponding increase in additional
paid-in capital.
On April 4,
2001, GlobalSCAPE issued options under the 2000 Stock Option Plan to
substantially all of its employees, an aggregate of 551,000 options with an
exercise price of $0.464 per share. The
options vest in thirds over a three-year period and expire on April 3,
2011. No compensation expense was
recognized related to these grants.
On April 20,
2001, GlobalSCAPE issued 808,571 options under the 1998 Stock Option Plan to
Ms. Poole-Christal at an exercise price of $0.0132 per share. The options are fully vested. Compensation expense was recognized related
to these grants and the price adjustment of the 291,429 original options in the
amount of $405,000, as described above.
On April 20,
2001, GlobalSCAPE issued 575,000 options under the 2000 Stock Option Plan to
Ms. Poole-Christal at an exercise price of $0.464 per share. The options vest in thirds over a three-year
period and expire on April 19, 2011. No
compensation expense was recognized related to these grants.
On August 2,
2001, GlobalSCAPE issued 250,000 options under the 2000 Stock Option Plan to
Tim Nicolaou at an exercise price of $0.46 per share. The options vest in thirds over a three-year period and expire on
August 1, 2011. No compensation expense
was recognized related to these grants.
On December
20, 2001, Sandra Poole-Christal exercised her option to purchase 86,000 shares
of GlobalSCAPE commons stock at an exercise price of $0.10 per share. The Company paid a bonus to Ms.
Poole-Christal related to this exercise of approximately $12,000.
GlobalSCAPE,
Inc. records compensation expense for stock options issued below intrinsic
value as those options vest. For the
year ended December 31, 2001, total non-cash compensation charges related to
the issuance of stock options below fair market value was $434,000.
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, 2001.
The following
table shows information about outstanding stock options at December 31, 2001.
The Company
has elected to follow APB 25, however, FAS 123 requires presentation of pro
forma net income and earnings per share as if the Company had accounted for its
employee stock options granted under the fair value method of that statement. The weighted average fair value of the
individual stock options granted during 1999, 2000, and 2001 is estimated at
$0.02, $0.02 and $0.24, respectively, on the date of grant. The impact on net income is minimal;
therefore, pro forma disclosure requirements prescribed by FAS 123 are not
significant to the Company. The fair
values were determined using a minimum value options-pricing model with the
following assumptions:
9. Quarterly
Financial Information (unaudited)
The Company
recognized non-cash compensation charges in the fourth quarter of 2000 and the
first quarter of 2001 of $214,714 and $417,570, respectively. Comparisons of GlobalSCAPE’s quarterly
results from operations should take these charges into consideration.
10. Subsequent
Events (unaudited)
None.
Item 9.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosures
None.
Part
III
Item
10.
Item
10. Directors
and Executive Officers of the Registrant
The
information called for by item 10 of Form 10-K as to Directors is incorporated
herein by reference to such information included in our Proxy Statement for the
2002 Annual Meeting of Stockholders.
The information called for by item 10 of Form 10-K as to Executive
Officers appears in Part I of this Form 10-K.
Item 11.
Item 11. Executive Compensation
The
information called for by item 11 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2002
Annual Meeting of Stockholders, except for those parts under the captions
“Board Report on Executive Compensation” and “Report on Repricing of Options”.
Item 12.
Item 12. Security
Ownership of Certain Beneficial Owners and Management
The
information called for by item 12 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2002
Annual Meeting of Stockholders.
Item 13.
Item 13. Certain
Relationships and Related Transactions
The
information called for by item 13 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement of the 2002
Annual Meeting of Stockholders.
PART
IV
Item 14.
Item 14. Exhibits, Financial Statement Schedule,
and Reports on Form 8-K
(a)(1) Financial Statements and Schedules
(2) Schedules not listed above have
been omitted because they are not applicable or required, or the information
required to be set forth therein is included in the Financial Statements or
Notes thereto.
(3) Exhibits
* Management Compensatory Plan
or Agreement
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter
of the period covered by this report.
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 29,
2002.
GlobalSCAPE, Inc.
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 29, 2002.
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)