<PAGE>
As filed with the Securities and Exchange Commission on July 28, 2000.
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
FORM 10
___________
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
___________
GlobalSCAPE, Inc.
(Exact name of registrant as specified in its charter)
Delaware 74-2785449
(State incorporation or (I.R.S. Employer
organization) Identification No.)
6000 Northwest Parkway 78249
Suite 100 (Zip Code)
San Antonio, Texas
(Address of principal executive offices)
Registrant's telephone number, including area code: (210) 308-8267
___________
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class of Name of each exchange on
securities to be so registered which each class is to be registered
------------------------------ ------------------------------------
[None] [None]
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.001 per share)
----------------------------------------
(Title of class)
================================================================================
<PAGE>
INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY
REFERENCE
ITEM 1. BUSINESS.
See attached information statement under headings "Summary;"
"Capitalization;" "Risk Factors;" "The Distribution;" "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
ITEM 2. FINANCIAL INFORMATION.
See attached information statement under headings "Summary;"
"Capitalization;" "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Financial Statements."
ITEM 3. PROPERTIES.
See attached information statement under heading "Business -
Facilities."
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See attached information statement under heading "Ownership of GlobalSCAPE
Stock."
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
See attached information statement under heading "Management."
ITEM 6. EXECUTIVE COMPENSATION.
See attached information statement under heading "Management."
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See attached information statement under headings "Management" and "Certain
Relationships and Related Transactions."
ITEM 8. LEGAL PROCEEDINGS.
See attached information statement under heading "Legal Proceedings."
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
See attached information statement under headings "Dividend Policy" and
"Ownership of GlobalSCAPE Stock."
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ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
See attached information statement under heading "Sales of Unregistered
Securities."
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
See attached information statement under heading "Description of Capital
Stock."
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
See attached information statement under heading "Limitation of Director
and Officer Liability."
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See attached information statement under heading "Summary;" "Summary
Financial Data;" "Selected Financial Data;" "Risk Factors;" "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
See attached information statement under headings "Report of Independent
Auditors" and "Exhibits and Financial Statement Schedules.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary................................................................................ 2
Our Business.......................................................................... 2
The Distribution...................................................................... 2
Material Tax Consequences of the Distribution......................................... 3
General Information................................................................... 3
Summary Financial Data................................................................. 4
Risk Factors........................................................................... 5
Risks Related to This Distribution.................................................... 5
Risks Related to Operations........................................................... 7
Risks Related to Legal Uncertainty.................................................... 11
The Distribution....................................................................... 14
Dividend Policy........................................................................ 18
Accounting Treatment................................................................... 18
Sales of Unregistered Securities....................................................... 18
Capitalization......................................................................... 18
Selected Financial Data................................................................ 19
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 21
Business............................................................................... 36
Company Overview...................................................................... 36
History............................................................................... 36
Industry Background................................................................... 37
Software Products..................................................................... 37
Advertising........................................................................... 39
Sponsorships.......................................................................... 39
Our Strategy.......................................................................... 40
Marketing and Sales................................................................... 41
Our Operations and Technology......................................................... 41
Research and Development.............................................................. 41
Competition........................................................................... 42
Intellectual Property................................................................. 43
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Strategic Relationships............................................................... 44
Employees............................................................................. 44
Facilities............................................................................ 45
Management............................................................................. 46
Ownership of Globalscape Stock......................................................... 52
Certain Relationships and Related Transactions......................................... 54
Description of Capital Stock........................................................... 54
Limitation of Director and Officer Liability........................................... 58
Forward-looking Statements............................................................. 58
Legal Proceedings...................................................................... 59
Available Information.................................................................. 59
Index to Financial Statements.......................................................... F-1
Report of Independent Auditors......................................................... F-2
Exhibits and Financial Statement Schedules......................................... Exhibit-1
</TABLE>
iv
<PAGE>
[LOGO OF ATSI] [LOGO OF GLOBALSCAPE]
September ___, 2000
Dear Shareholders:
ATSI will soon distribute to you shares of GlobalSCAPE, Inc. in a partial
spin-off. We have prepared the enclosed Information Statement to describe
GlobalSCAPE and the spin-off and we recommend that you read it carefully.
You do not need to do anything to participate in the partial spin-off.
The Information Statement describes the distribution process.
In light of current market conditions, particularly the volatility of the
market for stock of Internet related companies, GlobalSCAPE will not make a
public offering of its stock contemporaneously with the spin-off. In addition
to an initial public offering, GlobalSCAPE will explore other alternatives to
accessing the public markets. Currently we do not know the timing of such
events.
We are pleased to welcome you as a new shareholder of GlobalSCAPE and we
look forward to your participation in the next phase of GlobalSCAPE's
growth.
Sincerely,
Sandra Poole-Christal
President of GlobalSCAPE
Arthur L. Smith
Chairman and CEO of ATSI
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<PAGE>
INFORMATION STATEMENT
GLOBALSCAPE, INC.
COMMON STOCK
(par value $.001 per share)
____________________
This Information Statement is being furnished in connection with the
distribution by American TeleSource International, Inc. of approximately 30% of
its holdings of the common stock of GlobalSCAPE, Inc.
There is no public market for GlobalSCAPE common stock and GlobalSCAPE does
not intend to register or list its shares on any exchange or national market
system following this distribution. Under the terms of GlobalSCAPE's bylaws,
the transfer of your GlobalSCAPE common stock will be restricted for a period
ending 180 days following the closing of a public offering and the listing of
our stock on an exchange or national market system, which will occur, if at all,
only as appropriate business and market conditions exist.
The Information Statement is first being sent to shareholders of ATSI on
or before September 1, 2000.
____________________
See the Risk Factors beginning on page 5 for a discussion of certain
factors that you should consider.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any state securities commission nor have the
Securities and Exchange Commission or any state securities commission passed
upon the accuracy or adequacy of this information statement. Any representation
to the contrary is a criminal offense.
____________________
This information statement does not constitute an offer to sell or the
solicitation of an offer to buy any securities.
ATSI shareholders with inquiries related to the distribution should contact
Karen Mella, Vice President Investor Relations and Corporate Communications,
12500 Network Boulevard, Suite 407, San Antonio, Texas 78249, at (210) 547-1000.
The GlobalSCAPE common stock transfer agent will be ChaseMellon Shareholder
Services L.L.C., Overpeck Centre, 85 Challenger Road, Ridgefield Park, NJ 07660.
ChaseMellon also is acting as distribution agent for this distribution.
1
<PAGE>
SUMMARY
This summary highlights selected information contained elsewhere in this
information statement. We urge you to read the entire information statement
carefully.
Our Business
Our primary business is sales of Internet software via the Internet,
including file management, file search and sharing, and web site development
tools targeting both business and consumer markets. Our best known product is
CuteFTP, a file transfer program. Other products include CuteZIP, which allows
users to compress files, encrypt information and convert audio files to other
digital formats, and web site development tools, CuteHTML and CuteMAP. CuteMX,
a file sharing programs that allows users to interact directly with each other
and to search for and share all file types, is the most recent addition to our
product suite. We also earn revenue through sales of advertising space within
our software.
GlobalSCAPE was originally incorporated in Delaware in April 1996 and is a
wholly-owned subsidiary of American TeleSource International, Inc.
The Distribution
On or before September 12, 2000, each ATSI shareholder as of the close of
business on July 14, 2000, the record date, will receive one share of
GlobalSCAPE common stock for each twenty shares of ATSI common stock held by the
ATSI shareholder on the record date, rounded up to the next full share of
GlobalSCAPE common stock. Following the distribution, ATSI will continue to own
approximately 70% of the outstanding shares of GlobalSCAPE common stock.
No action will be required of ATSI shareholders to participate in this
distribution. You are not required to pay for the shares of GlobalSCAPE common
stock received in the distribution, or to surrender or exchange ATSI common
stock in order to receive GlobalSCAPE common stock.
Your ownership of shares of GlobalSCAPE common stock will initially be
entered on the records of GlobalSCAPE in book-entry form and you will not
receive a stock certificate. You will receive a written confirmation from the
distribution agent, ChaseMellon Shareholder Services, showing the number of
GlobalSCAPE shares you own. You may request that a stock certificate be issued
to you by following the directions included with the confirmation you receive
from ChaseMellon.
Under the terms of our bylaws, the transfer of your shares of our common
stock will be restricted until 180 days following the closing of a public
offering of our common stock and the listing of our common stock on an exchange
or national market system. We are not planning to list the shares on an
exchange or national market system at this time and do not know when events such
as the listing or an offering will occur or if they will occur at all.
2
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The boards of ATSI and GlobalSCAPE approved this distribution as a means to
create additional value for ATSI's stockholders through GlobalSCAPE. See "The
Distribution -- Background; Reasons for the Distribution."
Material Tax Consequences of the Distribution
This distribution does not qualify as a "tax-free distribution" to the
stockholders of ATSI under Section 355(a) of the Code. This distribution may be
non-taxable to ATSI stockholders, if all of the following factors exist:
. A deficit in ATSI current-year earnings and profits exists at the time
of the distribution;
. A deficit in ATSI accumulated earnings and profits exists at the time
of the distribution;
. The fair market value of the stock distribution received by the ATSI
stockholder does not exceed the stockholder's basis in their
shares.
If any one of these factors is not satisfied, the stock distribution will
be taxable to the extent such disqualifying factor applies. See "The
Distribution -- Material Federal Income Tax Consequences of the
Distribution."
As of March 31, 2000, ATSI did not have any current year earnings and
profits or any accumulated earnings and profits. See the Risk Factor captioned
"The distribution may be treated as a taxable transaction to the ATSI
stockholders receiving shares" for a discussion of the risk that ATSI may have
earnings and profits at the time of distribution.
The aggregate basis of the ATSI stock and GlobalSCAPE stock in the hands of
each ATSI stockholder after the distribution will equal the aggregate basis of
ATSI stock held by the stockholder immediately before the distribution,
allocated between the ATSI stock and the GlobalSCAPE stock in proportion of the
relative fair market value of each on the date of distribution. There is no
readily ascertainable fair market value for the GlobalSCAPE shares.
We urge you to consult with your tax advisor regarding the tax consequences
of this distribution.
Neither ATSI nor GlobalSCAPE have requested or received opinions from tax
counsel regarding the tax consequences of the stock distribution. Furthermore,
neither ATSI's nor GlobalSCAPE's analysis used in determining ATSI's current and
accumulated earnings and profits or the fair market value of the GlobalSCAPE
stock at the time of the distribution is binding on the Internal Revenue Service
or any court.
General Information
Our executive offices are located at 6000 Northwest Parkway, Suite 100, San
Antonio, Texas 78249, and our telephone number is (210) 308-8267. We are located
on the Internet at www.globalscape.com and at www.cutemx.com. Information
available on our web sites is not a part of this information statement.
3
<PAGE>
SUMMARY FINANCIAL DATA
You should read the following summary financial data together with
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our audited financial statements and
related notes which are included elsewhere in this information statement.
<TABLE>
<CAPTION>
Year ended December 31, Quarter ended
March 31,
1996 1997 1998 1999 1999 2000
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................ $ 216 $ 871 $ 2,074 $ 3,251 $ 681 $ 1,450
------------------------------------------------------------------------------------
Gross profit................. 124 651 1,677 3,146 653 1,415
Operating income (loss)...... (212) 198 315 1,127 183 688
------------------------------------------------------------------------------------
Net income (loss)............... (213) 124 197 674 101 445
====================================================================================
Net income (loss) per share:(1)
Basic........................... ($0.02) $ 0.01 $ 0.02 $ 0.05 $ 0.01 $ 0.03
====================================================================================
Diluted......................... ($0.02) $ 0.01 $ 0.01 $ 0.05 $ 0.01 $ 0.03
====================================================================================
Number of shares used in per
share calculations: (1)
Basic........................... 12,920 12,920 12,920 12,920 12,920 12,920
====================================================================================
Diluted......................... 12,920 12,920 13,247 13,293 13,278 13,278
====================================================================================
</TABLE>
__________
(1) All per share amounts have been adjusted to reflect the 7.6 for 1 stock
split effected in May 2000.
<TABLE>
<CAPTION>
As of December 31, 1999 As of March 31, 2000
----------------------- --------------------
(Unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................. $ 16,361 $ 589,852
Working capital....................................... (160,171) 7,413
Total assets.......................................... 1,471,299 2,286,144
Total debt............................................ 296,806 270,274
Total shareholders' equity............................ 844,274 1,288,798
</TABLE>
4
<PAGE>
RISK FACTORS
There are risks inherent to the stock you will receive, including those risks
described in the risk factors below. The risks we have described are those that
we believe may have a material effect on our particular business and therefore,
believe, you should be aware of.
Risks Related to This Distribution
You may be unable to sell your stock.
There is no public market for our common stock. We do not anticipate
listing our shares with any exchange or on any quotation system.
Additionally, our bylaws provide that you may not transfer the stock you are
receiving until 180 days after we complete an initial public offering of our
stock and we list and register our stock on a national securities exchange or we
cause our shares to be quoted on the automatic quotation system of a national
securities association. We have delayed our plan to complete a public offering
and may never complete a public offering and list our stock. Consequently, you
may not be able to sell your stock for a long time, if ever. Even if we do
complete an offering and list our stock we do not know if there will be a viable
trading market for our stock. See "Description of Capital Stock--Transfer
Restrictions."
Your ownership of GlobalSCAPE stock may be significantly diluted.
GlobalSCAPE may determine at some time in the future to issue additional
shares in a public or private offering resulting in a considerable dilution of
your holdings.
The distribution may be treated as a taxable transaction to the ATSI
stockholders receiving shares.
The distribution may be treated as a dividend to the ATSI stockholder if
ATSI has accumulated earnings and profits or current year earnings and profits
at the time of the distribution. Even though ATSI does not have earnings and
profits as of March 31, 2000, ATSI may have earnings and profits if the value of
the GlobalSCAPE stock distributed exceeds ATSI's basis in that stock. Since
there is no readily ascertainable value for the GlobalSCAPE stock, there is a
risk that the IRS may believe that the value of the distributed stock is greater
than the value attributed to it by ATSI. If the distribution is treated as a
distribution of appreciated property this could increase ATSI's earnings and
profits, which in turn could affect the amount of the dividend to the ATSI
stockholder. If this occurs, you may be viewed as having dividend income to the
extent of your pro rata portion of ATSI's earnings and profits, resulting in a
tax liability to you. ATSI will not request an advance ruling from the Internal
Revenue Service. Neither ATSI nor GlobalSCAPE have requested or received
opinions from tax counsel regarding the tax consequences of the stock
distribution. See "The Distribution -- Material Federal Income Tax Consequences
of the Distribution."
5
<PAGE>
American TeleSource International, Inc. and its directors and executive officers
will be able to exert significant influence over us.
After the distribution, ATSI will own approximately 70% of our outstanding
common stock. Furthermore, ATSI's directors and executive officers as a group
will beneficially own approximately 11% of GlobalSCAPE's outstanding common
stock after the distribution. These shareholders, if they vote together, will
be 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 also delay or
prevent a change in control of us or discourage a potential acquirer from
attempting to obtain control of us, any of which could have an adverse effect on
the value of our common stock.
At least initially, Arthur L. Smith, the Chairman and Chief Executive
Officer of ATSI and H. Douglas Saathoff, the Chief Financial Officer of ATSI,
will be the only directors of GlobalSCAPE. Therefore, until additional
directors are recruited for our board, these ATSI officers may be able to exert
significant influence over us and conflicts of interest may arise. See
"Management" and "Ownership of GlobalSCAPE Stock."
The spin-off could adversely affect the aggregate value of your investment in
ATSI common stock.
The combined value of the GlobalSCAPE common stock and ATSI common stock
after the distribution may be less than the trading price of ATSI common stock
immediately before the distribution.
Anti-takeover provisions in our charter and Delaware law could inhibit others
from acquiring us.
Some of the provisions of our 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 our common stock.
In particular, our certificate of incorporation and bylaws provide for,
among other things, limitations on the individuals that may call meetings of the
shareholders and do not allow for cumulative voting. We are 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.
6
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Risks Related to Operations
We depend on one product for a substantial portion of our revenues.
We depend on a single product, CuteFTP, for about 97% of our revenues,
either through sales of licenses to use CuteFTP or sales of advertising space in
CuteFTP. In addition, our ability to raise revenues related to existing
products and new products depends substantially on exploiting the traffic to our
web sites generated by the demand for CuteFTP and leveraging the "Cute" brand
name to cross-market other products. If we are not able to maintain CuteFTP's
competitive position, our revenues could decline dramatically and our plans to
expand our business could be substantially impaired.
Our 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. In
addition, our competitors are constantly releasing improved versions of their
products. The needs and expectations of our customers are also evolving.
Therefore, we must continually enhance our products and develop new products to
keep them competitive. For example, we believe that in the past a portion of
the demand for CuteFTP was driven by the desire to transfer audio files in the
popular MP3 format. We believe that the demand for CuteFTP based on this use
has declined dramatically since the inception of newly developed file sharing
programs like Napster and CuteMX.
Software development generally requires substantial lead time, so we must
accurately predict what changes will be needed. We may fail to predict these
changes far enough in advance, or we may not have sufficient technical personnel
to make them. If we cannot keep pace, our products will lose their position in
the market.
We may not be able to compete effectively with larger, better positioned
companies, resulting in lower margins and loss of market share.
Our major competitors are Ipswitch, Inc., which distributes WS FTP, the top
competitor to CuteFTP, and Microsoft Corporation, which incorporates various
Internet software, including a file transfer protocol, in its other products.
Each of these companies have significantly greater revenues than we do as well
as greater personnel and technical resources. This may enable them to develop
new technologies more quickly than we can, 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 a
file transfer protocol in its Internet browser, which it distributes for free.
Increased competition may result in lower operating margins and loss of market
share. We expect additional competitors to enter the market as the size and
visibility of the market for web based software increases.
7
<PAGE>
It is difficult for us to recruit software developers and other technical and
management personnel that we need because we are a relatively small
company.
We compete intensely with other Internet, software development and
distribution companies internationally to recruit and hire from a limited pool
of qualified personnel. Some qualified candidates prefer to work for larger,
better known companies.
If we lose key personnel we may not be able to execute our business plan.
Our future success depends on the continued services of several key members
of our management team, including Ms. Poole-Christal, and our 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 our products and product
development processes would be difficult to transfer to another individual.
Our ability to develop our software will be seriously impaired if we are not
able to use our foreign subcontractors.
We rely on Russian subcontractors to help us develop our software. If
these programmers decided to stop working for us, or if we were unable to
continue using them because of political or economic instability in Russia, we
would have difficulty finding comparable skilled developers. In addition, we
would likely have to pay considerably more for the same work, especially if we
used U.S. personnel. If we could not replace the programmers, it would take us
significantly longer to develop our products.
We may incur losses as we expand our business.
We intend to expand our business and therefore expect to expend significant
additional resources on research and development, marketing, product development
and developing our network infrastructure. See "Strategy." As a result, we may
need to significantly increase our revenues to maintain profitability. If we
fail to successfully develop and market new products, we may not be able to
achieve the necessary revenue growth, and we may not remain profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In the past, almost all of our revenue has been earned through sales of our
software. We are increasing our emphasis on selling advertising space in our
software and web sites and marketing third-party products. Although we began
operations in 1996, we did not begin generating any significant revenue from
advertising and marketing third party products until April 1999. As a result,
our historical performance may not predict our future performance.
The financial difficulties of ATSI could impair our access to financing,
exacerbate conflicts of interest, and might result in a change of ownership of
their shares.
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. The financial
8
<PAGE>
condition of ATSI may make it more difficult for us to obtain financing. For
example, we have been told by a credit rating agency that we will not receive a
credit rating higher than that of our parent. If ATSI does not begin to generate
sufficient positive cash flows or is not able to obtain financing to continue
its operations, these directors may be faced with conflicts of interest
regarding the best use of our funds and may take steps to cause us to transfer
funds to them in the form of a dividend. This will deprive us of funds needed to
fully execute our business plan. 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 would tend to depress the value of the
stock in general.
We are a party to a $2 million loan to ATSI, and may have to repay this loan.
We are signatories of 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 us of the entire outstanding balance.
None of our assets or stock secure the obligation to NTFC. However, if we used
our funds to repay this loan, our ability to execute our business plan would be
seriously impaired.
The market for web advertising may deteriorate causing us to lose revenues.
Our advertising agency vendors pay us a portion of the revenues they
receive from advertisers, which fluctuates. The supply of advertising space on
the Internet is growing faster than demand at this time as more businesses adopt
an Internet advertising strategy. This has resulted in a decrease in the amount
we receive for a given amount of advertising space. If we do not continue to
increase our advertising volumes, our advertising revenue could decrease.
In addition, most advertisers and their advertising agencies have limited
experience with the Internet as an advertising medium and have not devoted a
significant portion of their advertising expenditures to web-based advertising.
Minimal information is available supporting the effectiveness of web-based
advertising. If Internet advertisers determine that web-based advertising is
not as effective as other mediums, existing advertisers might reduce their
current levels of advertising or eliminate their spending entirely. Also, the
widespread adoption of technologies that permit Internet users to selectively
block out unwanted graphics, including advertisements appearing in our software
and on our web pages, could also adversely affect the growth of the Internet as
an advertising medium.
9
<PAGE>
Our operations are vulnerable to security breaches that could harm the quality
of our products and services or disrupt our ability to deliver our products and
services.
Third parties may breach our system security and damage our products and
services or misappropriate confidential customer information. This might cause
us to lose customers, or even cause customers to make claims on us for damages
to them.
Privacy concerns may prevent us from continuing to collect user data which will
harm our ability to successfully target our advertising and market new products
and services.
We ask our customers who download products from our web pages to provide
their e-mail addresses so that we may send them advertisements for our products
via e-mail. Our advertising vendors collect data from our users which they use
to target advertising. The collection of data via the Internet has been the
subject of significant negative publicity, increasing users' concerns about
their privacy. These privacy concerns may cause users to resist providing
personal data or to avoid our products and web sites. We may become the target
of negative publicity resulting from data collection which would harm our
reputation. There is also proposed legislation in the United States that could
restrict our ability to collect this information. If we are not able to collect
data as we have in the past, our ability to target advertising and market our
products via e-mail would be impaired.
Our products may expose customers to invasion of privacy, causing customer
dissatisfaction.
Some of our products are intended to provide outsiders access to files on
customer's hard drives, making the customer vulnerable to hacking. For example,
CuteMX permits a customer to share a file by giving another person access to the
file in the customer's hard drive. If the customer suffers an invasion of
privacy or harm to their computer, this may result in customer dissatisfaction
and possible claims against us for any resulting damages.
We intend to hire new members of our management team, including an experienced
Chief Executive Officer and Chief Financial Officer, who will have little
experience working together.
Our future success will depend upon the continued service of key management
and technical personnel and on the hiring of new highly-skilled management and
employees. We have engaged a national search firm to find a Chief Executive
Officer and other individuals suited for other top management and board
positions. We may not be able to locate these persons in a timely manner, and if
we do, they may not integrate well into our business.
In addition, the members of our management committee that have been with us
since 1996 have had only limited experience managing a rapidly growing company
on either a public or private basis.
10
<PAGE>
We may have increasing risk of revenue volatility as a larger portion of our
revenue is derived from foreign countries.
The portion of our sales 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 those
countries.
Our products may contain defects that may be costly to correct, delay market
acceptance of our products and expose us to litigation.
Errors may be found in our products after distribution. This risk is
exacerbated by the fact that a significant amount of code in our products is
developed by independent parties over whom we have less control than that we
exercise over internal developers. If errors are discovered, we 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 our
products could result in a loss of, or delay in, market acceptance of our
products and could damage our reputation and our ability to convince commercial
users of the benefits of our software products.
Our products rely on the prevalence of Windows-based operating systems and if
that technology fails to maintain or improve market share our products would not
be as marketable.
Our current products can only be used on a Windows-based operating system
and are not compatible with other operating systems. Anything that affects
Windows market share negatively could have a material adverse effect on the
demand for our products.
Risks Related to Legal Uncertainty
We may be sued by members of the recording industry, movie industry or others
for distributing CuteMX, which would cause us to incur substantial legal
expenses and possibly result in the withdrawal of CuteMX and the payment of
substantial money damages.
CuteMX permits users to search for and share all types of files, including
audio and video files. A portion of CuteMX users are probably using the program
to exchange files containing copyrighted works, such as popular songs or videos.
Our competitor, Napster, Inc. distributes a similar program and has been sued by
the Recording Industry Association of America and at least two artists whose
works have been distributed by users of Napster's program. These lawsuits
allege that the sharing of files containing copyrighted music via Napster's
program is illegal and that Napster is liable for this copyright infringement
for distributing the program which facilitates the sharing. The plaintiffs are
asking for millions of dollars in money damages as well as the removal of
Napster's product from the market. Similarly, we may be sued by artists,
record and movie companies or others whose works are distributed using CuteMX.
The laws regarding this issue are not settled, and may not be settled for months
or years. If we are sued, we may be found to have violated the law and be
required to withdraw or alter CuteMX and pay substantial money damages to the
owners of works which are
11
<PAGE>
distributed via CuteMX. Even if we were to win such a lawsuit or reach a
settlement, we would have to spend substantial sums to defend ourselves. See
"Business --Software Products."
We are vulnerable to claims that our products infringe third-party intellectual
property rights particularly because our products are partially developed by
independent parties.
We may be exposed to future litigation based on claims that our products
infringe the intellectual property rights of others. This risk is exacerbated by
the fact that some of the code in our products is developed by independent
parties or licensed from third parties over whom we have less control than we
exercise over internal developers. Claims of infringement could require us to
reengineer our products or seek to obtain licenses from third parties in order
to continue offering our products. In addition, an adverse legal decision
affecting our intellectual property, or the use of significant resources to
defend against this type of claim, could place a significant strain on our
financial resources and harm our reputation.
We may not be able to protect our intellectual property rights, which may result
in damages to us.
Our patent pending technology, software code, and trade and service marks
are some of our most valuable assets. Given the global nature of the Internet
and our business, we are 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 our software making it more likely that unauthorized third parties
will copy certain portions of our proprietary information or reverse engineer
the proprietary information used in our programs.
Additionally, we have filed a patent application covering concepts and
technologies integral to our business including our proprietary search
technology which facilitates the search for and exchange of information located
at the personal computer level between a community of our product users. This
application has yet to be approved and we cannot assure you that it any of our
future patent applications or trademark or copyright applications will be
approved.
Other companies may own, obtain or claim trademarks that could prevent,
limit or interfere with our use of our trademarks. The GlobalSCAPE.com or
CuteMX.com web site addresses, or domain names, and our various trademarks are
important to our business. If we lose the use of our site addresses or the use
of our trademarks, our business would be harmed and we would need to devote
substantial resources towards developing an independent brand identity.
Defending or enforcing our trademark rights at a local and international level
could result in the expenditure of significant financial and managerial
resources.
12
<PAGE>
If our proprietary rights are infringed by a third party, our ability to
earn profits which are highly dependant on those rights would be severely
diminished. See "Business--Intellectual Property."
We may face liability relating to content on, or products and services sold
from, our web site.
Our web site network and software products provide third-party content. We
could be exposed to claims related to copyright or trademark infringement,
errors or omissions or other wrongful acts by the third parties whose content we
provide or whose web sites are linked with ours. We enter into agreements with
other companies under which we share revenues resulting from advertising or the
purchase of products or services through direct or indirect links to or from our
web sites and accessible through our software products. These arrangements may
expose us to additional legal risks and uncertainties, including government
regulation and potential liabilities to consumers of these products and
services, even if we do not provide the products and services ourselves.
13
<PAGE>
THE DISTRIBUTION
Background; Reasons for the Distribution
In January of 2000, ATSI's Board of Directors decided that a portion of the
GlobalSCAPE shares held by ATSI would be spun-off to the shareholders of ATSI.
The spin-off was to occur contemporaneously with a public offering of
GlobalSCAPE stock as part of a plan to raise funds for GlobalSCAPE's growth and
ATSI's general corporate purposes. GlobalSCAPE and ATSI have decided not to
make a public offering of GlobalSCAPE common stock contemporaneously with the
spin-off in light of current market conditions. ATSI will complete the spin-off
at this time, and ATSI and GlobalSCAPE will continue to evaluate a public
offering as well as other alternatives to finance GlobalSCAPE's growth and raise
funds for ATSI. In deciding to complete the spin-off, the Board of ATSI
considered factors weighing against the spin-off including the increased
difficulty in managing and governing separate entities, the high costs of
effectuating a distribution of this type, and determined that the spin-off was
in the best interest of both companies. The material reasons for this decision
are the following:
. Our business is very different from that of our parent company, ATSI.
ATSI is a telecommunications company, focusing on the market for
wholesale and retail services between the United States and Latin
American and within Latin America. We are a software development
company that develops, markets and distributes web-based software. We
believe that the partial separation resulting from the distribution
will help the financial community focus separately on our business,
which will in turn make a public offering or offer financing more
likely to succeed.
. ATSI shareholders will acquire a direct interest in GlobalSCAPE before
it begins its next phase of growth, lessening the potential tax
liability associated with the distribution.
. The partial separation from ATSI will provide us with greater
managerial, operational and financial independence to respond to
changing conditions in our very different business environment and
help us attract directors and executive management that is focused
solely on our business.
Manner of Effecting the Distribution
Each ATSI shareholder as of the record date of July 14, 2000 will receive
one share of GlobalSCAPE common stock for each twenty shares of ATSI common
stock held by the ATSI shareholder on the record date, rounded up to the nearest
whole number of GlobalSCAPE shares. No fractional shares will be issued.
As an example, if you hold 100 shares of ATSI common stock on the record
date, you will receive 5 shares of GlobalSCAPE common stock in the distribution.
If you hold 115 shares of ATSI stock, you will receive 6 shares of GlobalSCAPE
common stock. Any shareholders holding less than 20 shares will receive one
share of GlobalSCAPE common stock. The shares of our common stock will not be
entitled to preemptive rights. See "Description of Capital Stock".
14
<PAGE>
ATSI will distribute approximately 4 million shares of our common stock,
which constitutes approximately 30% of the total shares of our common stock
outstanding immediately after the distribution. ATSI will retain the remaining
approximately 70% of the outstanding shares of our common stock.
Our common stock will be distributed as follows:
. Approximately 3.35 million shares to holders of ATSI common stock as
of the record date,
. Approximately 240,000 shares to holders of certain ATSI preferred
stock and warrants, the terms of which require the holders to be
treated as if those securities had been exercised or converted on the
record date for the distribution, and
. Approximately 400,000 shares to holders of the common stock of Genesis
Communications International, Inc. pursuant to the terms of the merger
agreement between ATSI and Genesis. The merger agreement provides that
the Genesis stockholders are to exchange their shares of Genesis
common stock for shares of ATSI common stock upon the closing of the
merger. ATSI is required to include the Genesis shareholders in this
distribution as if the merger had closed on the record date, although
the Genesis stockholders will not receive their shares of GlobalSCAPE
common stock until the merger is actually closed. We do not know the
exact number of shares of our common stock that will be issued to the
Genesis stockholders since the terms of the merger agreement provide
that the number of shares of ATSI common stock to be received by the
Genesis stockholders will vary between certain parameters depending on
the market price for ATSI common stock as of the date of closing of
the merger. For the purposes of calculating the 400,000 shares we have
assumed that the highest possible number of ATSI shares will be issued
to the Genesis shareholders.
. Shares of GlobalSCAPE common stock distributed to you will be issued
in book-entry form, which means that your ownership of shares will be
reflected on our books and no stock certificate will be issued. You
will receive a written confirmation from ChaseMellon Shareholder
Services, our distribution and transfer agent, showing the number of
GlobalSCAPE shares you own. You may keep your shares in book-entry
form, or, if you prefer, ChaseMellon will issue a share certificate.
Instructions for making a request for a share certificate will be
included with the written confirmation you receive from ChaseMellon.
You do not need to do anything to participate in this distribution. Do
not send in your ATSI certificate. Your ATSI certificate will continue to
represent your ownership of ATSI.
The distribution agent is ChaseMellon Shareholder Services, Overpark
Centre, 85 Challenger Road, Ridgefield, NJ 07660.
15
<PAGE>
Results of the Spin-off
Following this partial spin-off, we will be a company registered under
Section 12 of the Securities Exchange Act of 1934 with ATSI retaining a majority
of the outstanding shares and we will continue to operate our software
development and distribution businesses. The number and identity of the holders
of our remaining common stock immediately after the spin-off likely will be
substantially the same as the number and identity of the holders of ATSI common
stock on the record date. Immediately after the spin-off, we expect to have
approximately 14,200 holders of record of our common stock and 12,920,000
million shares of our common stock outstanding.
The spin-off will not affect the number of outstanding shares of ATSI
common stock or any rights of ATSI stockholders.
Transfer Restrictions
You may not transfer your GlobalSCAPE common stock until 180 days following
the completion of a public offering and the listing of GlobalSCAPE common stock
on a national securities exchange or the quotation of the common stock on the
automatic quotation system of a national securities association. See
"Description of Capital Stock - Transfer Restrictions."
Listing and Trading of GlobalSCAPE Stock
We have reserved the symbol "CUTE" with the NASDAQ; however, we may not
list the GlobalSCAPE stock on any exchange or automatic quotation system for
some time, if at all. Additionally, no underwriter or broker has committed to
providing any market support for the selling of shares. See "Risk Factors -
Risks Related to This Distribution - You May Be Unable to Sell Your Stock."
Material Federal Income Tax Consequences of the Distribution
The following is a summary of the material United States federal income tax
consequences relating to the distribution. The summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder, and interpretations of the Code and Treasury regulations
by the courts and IRS, all as they exist as of the date of this document.
This discussion is not based on an opinion of tax counsel.
Tax matters are complicated, and the tax consequences of the distribution
to you may depend on the facts of your own situation. We urge you to consult
your own tax advisors for a full understanding of the tax consequences to you of
the distribution, particularly if you are subject to special treatment under the
United States federal income tax laws, such as if you are a tax-exempt entity,
non-resident alien individual, foreign entity, foreign trust or estate or
beneficiary thereof, person who acquired such stock pursuant to the exercise of
employee stock options or otherwise as compensation, insurance company or dealer
in securities, or if you do not hold your ATSI common stock as a capital asset.
This summary does not address state local or foreign tax consequences.
16
<PAGE>
The distribution does not qualify as a "tax-free distribution" to the
stockholders of ATSI under Section 355(a) of the Code. In addition, neither
ATSI nor GlobalSCAPE has received a ruling from the Internal Revenue Service
that the distribution of the stock of GlobalSCAPE to the ATSI stockholders will
qualify as a non-taxable distribution to the ATSI stockholders under Internal
Revenue Code Section 301, nor will a ruling be requested. There are several
factors which are material to the determination regarding the tax consequences
of the stock distribution. It is important to note that the below listed factors
relate to determinations made at the time of the stock distribution. See "Risk
Factors -- The distribution may be treated as a taxable transaction to the ATSI
stockholders."
When a corporation distributes property, Section 301 requires the
stockholder to include the fair market value amount of the distribution in gross
income to the extent that it constitutes a dividend. The term dividend, a
precisely defined word, generally means any distribution of property that is out
of the corporation's earnings and profits. Therefore, as long as ATSI has
sufficient current or accumulated earnings and profits, distributions are
treated as taxable dividends.
The unique complexity of the tax consequences of the ATSI distribution is
due to the fact that even though ATSI does not have earnings and profits as of
March 31, 2000, ATSI may have earnings and profits if the value of the
GlobalSCAPE stock distributed exceeds ATSI's basis in that stock. Since there
is no readily ascertainable value for the GlobalSCAPE stock, there is a risk
that the IRS may believe that the value of the distributed stock is greater than
the value attributed to it by ATSI. If the distribution is treated as a
distribution of appreciated property this could cause ATSI to have positive
earnings and profits. This in turn could cause the distribution to be a taxable
dividend to the ATSI stockholders to the extent of their pro rata share of the
positive earnings and profits.
Neither the factual representations made by GlobalSCAPE and ATSI, nor the
analysis used in determining earnings and profits at the time of the stock
distribution is binding on the Internal Revenue Service or any court.
Amounts that are not considered dividends because of inadequate earnings
and profits are nontaxable returns of capital to the extent of the stockholder's
basis in their shares. The nondividend portion of the distribution is applied
to and reduces the basis of the stockholders investment in their ATSI stock.
Should the return of capital distribution exceed the ATSI stockholders' basis,
the excess is treated as gain from the sale of the stock, normally capital gain
if the stock is a capital asset.
The aggregate basis of the ATSI stock and GlobalSCAPE stock in the hands of
each ATSI stockholder after the distribution will equal the aggregate basis of
ATSI stock held by the stockholder immediately before the distribution,
allocated between the ATSI stock and the GlobalSCAPE stock in proportion to the
relative fair market value of each on the date of distribution. There is not a
readily ascertainable fair market value for the distributed GlobalSCAPE
shares.
17
<PAGE>
Holders of ATSI stock are urged to consult with their own tax advisors
regarding the federal income and other tax consequences of the distribution of
the GlobalSCAPE stock to the ATSI stockholders, including the effects of state,
local and foreign tax laws.
DIVIDEND POLICY
We have neither declared nor paid any cash dividends on our common stock.
Any future determination as to the payment of dividends will be at the
discretion of our board of directors.
ACCOUNTING TREATMENT
Our historical financial statements present our financial position, results
of operations and cash flows as if we were a separate entity for all periods
presented. ATSI's historical basis in our assets and liabilities has been
carried over and, in accordance with generally accepted accounting principles,
allocations of certain ATSI costs have been made.
SALES OF UNREGISTERED SECURITIES
We have not made any sales of unregistered securities other than as
described in the section of this information statement entitled
"Management."
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000.
<TABLE>
<S> <C>
Cash and cash equivalents $ 589,852
================
Debt:
Notes payable and capital lease obligations............................... 270,274
================
Shareholders' equity:/(1)/
Common stock, par value $0.001 per share; 40,000,000 shares authorized;
12,920,000 shares issued and outstanding, as adjusted................... 12,920
Additional paid-in capital............................................... 49,112
Accumulated Earnings..................................................... 1,226,766
----------------
Shareholders' equity..................................................... 1,288,798
================
Total capitalization..................................................... $2,148,924
================
</TABLE>
__________
(1) All per share amounts have been adjusted to reflect the 7.6 for 1 stock
split effected in May 2000.
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected historical financial data for each of the years in
the four-year period ended December 31, 1999 and as of December 31, 1998 and
1999 has been derived from our financial statements, which have been audited by
Ernst & Young, LLP our independent auditors, and are included elsewhere in this
information statement. The selected financial data for the year ended December
31, 1996 and the quarters ended March 31, 1999 and 2000 have been derived from
our unaudited financial statements, which include, in the opinion of our
management, all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of our financial position and
results of operations for that period and at that date. The information set
forth below should be read along with the financial statements and related notes
included elsewhere in this information statement and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended Quarter Ended
December 31, March 31,
1996 1997 1998 1999 1999 2000
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
Software product revenues............ $ 216,376 $870,539 $2,073,687 $2,922,141 $681,130 $1,315,999
Advertising revenues................. - - - 328,895 - 134,015
-------------------------------------------------------------------------------------
Total revenues................... 216,376 870,539 2,073,687 3,251,036 681,130 1,450,014
Total cost of revenues................ 92,758 219,623 396,570 105,026 27,920 34,800
-------------------------------------------------------------------------------------
Gross profit.......................... 123,618 650,916 1,677,117 3,146,010 653,210 1,415,214
Operating expenses:
Selling, general and administrative.. 333,450 448,457 1,228,644 1,625,004 382,329 514,317
Research and development............. - - 42,164 139,953 25,225 123,271
Depreciation and amortization........ 2,505 4,876 91,262 253,896 62,433 89,141
-------------------------------------------------------------------------------------
Total operating expenses......... 333,955 453,333 1,362,070 2,018,853 469,987 726,729
-------------------------------------------------------------------------------------
Income (loss) from operations......... (212,337) 197,583 315,047 1,127,157 183,223 688,485
Interest expense, net................. - - (2,345) (56,847) (22,235) (7,646)
Other income (expense), net........... (404) - - - - -
Gain (loss) on sale of assets......... - - - - - (567)
-------------------------------------------------------------------------------------
Net income (loss) before provision for
income taxes......................... (212,741) 197,583 312,702 1,070,310 160,988 680,272
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended Quarter Ended
December 31, March 31,
1996 1997 1998 1999 1999 2000
(Unaudited) (Unaudited)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision:
Current
Federal income taxes............. - 65,242 108,377 372,532 56,059 222,091
State income taxes............... - 9,042 15,020 51,629 7,769 30,779
Deferred
Federal income taxes............. - (1,004) (6,463) (24,353) (3,665) (15,038)
State income taxes............... - (139) (896) (3,375) (508) (2,084)
-------------------------------------------------------------------------------------
Total income tax provision (benefit).. - 73,141 116,038 396,433 59,655 235,748
-------------------------------------------------------------------------------------
Net income............................ (212,741) 124,442 196,664 673,877 101,333 444,524
=====================================================================================
Net income per common share......... ($0.02) $0.01 $0.02 $0.05 $0.01 $0.03
Net income per common share
(assuming dilution)................ ($0.02) $0.01 $0.01 $0.05 $0.01 $0.03
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997 1998 1999 1999 2000
(Unaudited) (Unaudited)
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data(1):
Cash and cash equivalents............. $ 2,378 $ 192,064 $ 65,480 $ 16,361 $ 53,198 $ 589,852
Working capital (deficit)............. 21,197 167,300 (798,833) (160,171) (649,164) 7,413
Total assets.......................... 59,902 280,180 1,163,648 1,471,299 1,171,890 2,286,144
Total debt including current portion.. - - 919,065 296,806 839,711 270,274
Shareholders' equity (deficit)........ ($212,741) ($26,268) $ 170,397 $ 844,274 $ 271,731 $1,288,798
</TABLE>
__________
(1) All per share amounts have been adjusted to reflect the 7.6 for 1 stock
split effected in May 2000.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to future
events or our future financial performance which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including,
but not limited to, those set forth under "Risk Factors" and "Business."
Overview
GlobalSCAPE develops, markets and distributes Internet- based software
products in a variety of categories including file management, file searching
and sharing and web application development tools to business and consumer
markets. We were incorporated in April 1996 and are a wholly owned subsidiary
of ATSI. In 1996, we entered into an exclusive, royalty based, distribution
agreement with Alex Kunadze, the author of CuteFTP. This agreement was
terminated effective October 1998 when we purchased CuteFTP.
We derive our revenue primarily through sales of software via the Internet.
A small percentage of our products are sold through traditional retail channels.
Revenues from the sale of software products are recognized upon shipment or
electronic delivery and we bear full credit risk with respect to all sales. The
installation process is simple and requires little or no support. To date, more
than 97% of our revenues have been generated from one product, CuteFTP. This
reliance on one product makes our business risky. It is our strategy to grow
our revenues by introducing new products to the market but we have not proven
our ability to do so. Our products are available for free trial periods and can
be downloaded from our website as well as many shareware sites. All products
with the exception of CuteMX have some or all functionality disabled after the
trial period to encourage the user to pay the license fee. For example, in the
case of CuteFTP if the consumer chooses not to pay, the program limits
functionality and continues to display advertising banners when used. If the
consumer pays for the product, full functionality is restored and the consumer
can choose to turn the ad banners off. For the periods 1996 through 1998 we had
more than 3 million request for downloads from our servers. During the same
period we sold 107,616 registered copies of our software, 3.4% of these download
requests. Requests for downloads grew to almost 7 million in 1999. We sold
121,649 licenses of our software in 1999 or 1.74% of these download requests.
In the first quarter of 2000 we had more than 3 million requests for downloads
from our servers and sold 52,927 licenses (including a large site license) or
1.75% of the requests. The relationship between the number of requests for
downloads from our internal servers and the number of licenses sold in a given
period is inexact and the ratio may decline in future periods.
In addition to software sales, we began generating revenues through
advertising from within our software products in 1999. We also began sponsoring
complementary products and services from within our products and receive payment
from the sponsored company when a product or service is downloaded from our web
site or accepted through
21
<PAGE>
our product. Approximately 10% of our revenues were attributable to advertising
in 1999 and approximately 9% for the quarter ended March 31, 2000. It is our
expectation that advertising will grow as a percentage of total sales in future
periods. We have agreements with third parties who sell the advertising space
generated in our products and facilitate the display of the banners. These third
parties sell on a best efforts basis and retain a portion of the gross sales as
their fee. Neither party makes guarantees regarding the number of displays or
the response rates generated from those displays. We recognize only the net
proceeds remitted to us as revenue and consider it earned in the period in which
the ads are displayed. In 1999, we earned an average of $2.21 per 1,000 banners
displayed (CPM). This number fell to $1.09 for the first quarter of 2000. This
decline was offset by very strong growth in the number of ads displayed. For all
of 1999, approximately 138 million ads were displayed while more than 112
million were displayed in the first quarter of 2000. Some of this decline in
CPM, we believe, is due to the seasonality of advertising. However, some of the
decline may be attributable to increases in supply which may keep prices
depressed in future periods. Our strategy is to reduce our reliance on
intermediaries to increase the amounts earned per display. However, we have not
yet begun this process and cannot predict our success in this endeavor. In
addition, the acceptance by our consumers of advertising is difficult to
predict. Because our advertisers direct these ads based on demographic and other
data collected from the consumer during the installation and use of the
products, right to privacy concerns may be raised which could lead to decreased
use of our products. Sponsored products accounted for less than 1% of total
revenues in all periods.
Our strategy relies on our ability to bring new products to market and
generate revenues from both the sale of licenses and from advertising. As
stated previously, most of our revenues are generated from one product, CuteFTP.
In addition, the market for advertising is new and unpredictable. We could fail
in our attempt to eliminate intermediaries, and we could suffer a decline in
rates due to increased supply or a reduction in volume due to reduced acceptance
of advertising from within software products.
In 1999, approximately 24% of our total revenues were earned outside the
United States. In the three month period ended March 31, 2000 this number was
30%. Foreign sales in both periods were concentrated in Western Europe, Canada
and Australia. No other country or region accounted for more than 1% of total
sales. All receipts are in U.S. currency.
We rely on developers outside the United States for a large portion of the
coding burden. This, we believe, is a cost effective and time efficient method
of product development. Our internal developers are responsible for managing
the process and quality control. This strategy exposes us to some risk. If
access to these developers ceases or becomes difficult, it would increase the
time and cost of bringing products to market.
There is considerable legal controversy surrounding media file sharing
programs such as CuteMX, as illustrated by the lawsuit brought by the Recording
Industry Association of America against the distributor of an MP3 file sharing
program, Napster,
22
<PAGE>
Inc. The RIAA believes that Napster is violating various laws by distributing a
product which has allowed the widespread exchange of copyrighted music files. We
have developed CuteMX as a mainstream application that discourages improper
transfers of copyrighted materials. For example, CuteMX allows end users to
transfer all file types, rather than just MP3's, it allows end users to flag MP3
files as copyrighted, in which case they are not transferable across the CuteMX
network, and displays end user Internet protocol, or IP, addresses to encourage
personal responsibility. The program respects security features embedded in
transferred files, such as features which allow files to be played only on the
computer on which they were created or which lay the foundation for copyright
owners to obtain payment for access to their intellectual property, such as
requiring an e-mail address, demographic information or a subscription to a
monthly service. Additionally cutemx.com offers a variety of content authorized
for distribution by independent and mainstream artists, who are able to earn
revenue from the distribution of their songs through advertisements placed
within music files.
Results of Operations
The following table sets forth statement of operations data for the periods
indicated:
<TABLE>
<CAPTION>
Year ended December 31, Quarter ended
March 31,
1997 1998 1999 1999 2000
-------- ---------- ---------- -------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Software product revenues.............. $870,539 $2,073,687 $2,922,141 $681,130 $1,315,999
Advertising revenues................... - - 328,895 - 134,015
------------------------------------------------------------------------
Total revenues........................... $870,539 $2,073,687 $3,251,036 $681,130 $1,450,014
Total cost of revenues:.................... 219,623 396,570 105,026 27,920 34,800
------------------------------------------------------------------------
Gross profit............................... 650,916 1,677,117 3,146,010 653,210 1,415,214
Gross profit (as a percentage of revenue).. 74.7% 80.9% 96.8% 95.9% 97.6%
Operating expenses:
Selling, general and administrative
expenses.............................. 448,457 1,228,644 1,625,004 382,329 514,317
Research and development expenses...... - 42,164 139,953 25,225 123,271
Depreciation and amortization.......... 4,876 91,262 253,896 62,433 89,141
------------------------------------------------------------------------
Total operating expenses................... 453,333 1,362,070 2,018,853 469,987 726,729
------------------------------------------------------------------------
Income from operations..................... 197,583 315,047 1,127,157 183,223 688,485
Other income (expense):
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, Quarter ended
March 31,
1997 1998 1999 1999 2000
-------- ---------- ---------- -------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest expenses, net.................. - (2,345) (56,847) (22,235) (7,646)
Gain (loss) on sale of assets........... - - - - (567)
------------------------------------------------------------------------
Total other income (expense)............ - (2,345) (56,847) (22,235) (8,213)
------------------------------------------------------------------------
Income (loss) before provision for income 197,583 312,702 1,070,310 160,988 680,272
tax.......................................
Provision for income tax: (1)
Current
Federal income taxes................... 65,242 108,377 372,532 56,059 222,091
State income taxes..................... 9,042 15,020 51,629 7,769 30,779
Deferred
Federal income taxes................... (1,004) (6,463) (24,353) (3,665) (15,038)
State income taxes..................... (139) (896) (3,375) (508) (2,084)
------------------------------------------------------------------------
Total income tax provision (benefit)....... 73,141 116,038 396,433 59,655 235,748
Net income (loss).......................... $124,442 $ 196,664 $ 673,877 101,333 444,524
========================================================================
</TABLE>
_________
(1) ATSI filed a consolidated return for income taxes, which included the
taxable income of GlobalSCAPE. Therefore, we have not paid income taxes in
any reported period. However, we generated positive net income in each
period from 1997 through 1999 and have made a provision for income taxes.
Three Months ended March 31, 1999 and 2000
Sales. We derive our revenue primarily from software sales and from
advertising from within our software products. We recognize revenue from the
sale of software products upon delivery through electronic distribution or
shipment of the physical product to the end-user. For advertising sales,
revenue is recognized as services are performed. Sales are comprised of the
gross selling price of software, including shipping charges and the net proceeds
received from advertisers. We contract with third parties for the delivery and
sale of advertising. Only the net amount earned is recognized as revenue. For
the three months ended March 31, 1999 and 2000, total revenues increased 113%
from $681,130 to $1,450,014. Sales of licenses during these periods increased
from $681,130 to $1,315,999 in 1999 and 2000 respectively, a 93% increase. Unit
sales of our software products increased 128% from 23,245 to 52,927. The average
selling price decreased period to period due to greater sales of multi-seat
licenses. We did not recognize advertising revenues in the first quarter of
1999. Advertising revenue in the first quarter of 2000 was $134,015 and
accounted for approximately 9% of total revenues
24
<PAGE>
in the period. We displayed more than 112 million banners which accounted for
the majority of advertising revenues. In addition, we generated more than
thirteen thousand responses for sponsored products which are reported as part of
the advertising revenues.
Cost of Sales. Cost of sales 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 sales increased 25% between periods primarily due
to increased unit sales of our software licenses. Our gross margin increased
from 96% for the three months ended March 31, 1999 to 98% for the same period in
2000.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of personnel and related expenses, rents, advertising
and promotional expenses, bad debt expense and credit card transaction fees.
Selling, general and administrative expenses increased from $382,329 in the
three months ended March 31, 1999 to $514,317 in the same period in 2000, a 35%
increase. As a percentage of total sales, selling, general and administrative
expenses decreased from 56% to 35% during these periods. Expenses increased
primarily as a result of increased personnel costs including salaries, payroll
taxes, insurance and recruiting fees. The number of persons we employ increased
from approximately 16 on March 31, 1999 to 28 on March 31, 2000. We moved into
a larger facility in March of 2000, resulting in greater rent and utility
expense. Professional fees for accounting and legal services increased as we
prepared ourselves for a distribution of our shares to shareholders of our
parent company, ATSI. Credit card processing fees declined between periods as
we reduced our reliance on third-party processors. We expect selling, general
and administrative expenses to increase in absolute dollars in the future,
particularly as we continue to build infrastructure to support growth and incur
additional costs associated with having a broader shareholder base.
Research and Development. Research and development expenses increased 389%
between periods, from $25,225 to $123,271. The increase is due to the rapid
expansion of our internal research and development staff 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 the source code of
CuteFTP. Depreciation and amortization expense increased from $62,433 in the
three months ended March 31, 1999 to $89,141 in the same period 2000, an
increase of 43%. This increase was due primarily to the addition of computers
and computer related equipment.
Interest Expense. Interest expense consists primarily of interest expense
related to the purchase of CuteFTP and interest expense related to our various
capital leases and working capital borrowings. Interest expense declined from
$22,235 to $7,646 between periods, a decline of 66%. The decline is due
primarily to a reduction in the interest expense recognized as part of the
purchase of CuteFTP. Our debt related to this purchase
25
<PAGE>
was satisfied in January 2000. Other interest expense recognized during the
periods is related to capital leases and working capital borrowings.
Loss on Sale of Assets. During the first quarter of 2000, we disposed of
furniture and other assets that resulted in a loss of $567. No losses on the
disposition of assets were incurred in the same period 1999.
Income Taxes. ATSI files a consolidated income tax return for it and its
affiliates, including GlobalSCAPE. Since ATSI has had and continues to have net
operating losses on a consolidated basis, no income taxes have been due in any
reported period. We, however, generated positive net income in each period from
1997 through March 31, 2000, with the exception of the third quarter of 1998,
and have made a provision for income taxes. Our financial statements reflect
the costs had we paid income taxes. Current federal income taxes for the three
months ended March 31, 1999 would have been $56,059, whereas for the same period
2000 they would have been $222,091, a 296% increase. Current Delaware state
income taxes would have increased from $7,769 to $30,779 over the same periods.
Our deferred tax expenses for the three months ended March 31, 1999 for federal
and state taxes were $3,665 and $508, respectively, whereas for 2000 those
expenses were $15,038 and $2,084 respectively.
Net Income. Net income increased 339% between periods from $101,333 in the
three month period ended March 31, 1999 to $444,524 in the same period 2000.
The increase was a result of revenue growth and a decrease in operating expenses
as a percentage of sales.
Years Ended December 31, 1998 and 1999
Sales. We derive our revenue primarily from software sales and from
advertising from within our software products. We recognize revenue from the
sale of software products upon delivery through electronic distribution or
shipment of the physical product to the end-user. For advertising sales, revenue
is recognized as services are performed. Sales are comprised of the gross
selling price of software, including shipping charges and the net proceeds
received from advertisers. We contract with third parties for the delivery and
sales of advertising. Only the net amount earned is recognized as revenue. Sales
of licenses increased from $2,073,687 in 1998 to $2,922,141 in 1999, a 41%
increase. Unit sales of our software products increased from 68,216 in 1998 to
121,649 in 1999. The average selling price decreased year to year due to greater
sales of multi-seat licenses. We recognized advertising revenues for the first
time in 1999. Advertising revenue in 1999 was $328,895 and accounted for
approximately 10% of total revenues. We displayed more than 138 million banners
which accounted for the majority of advertising revenues. In addition, we
generated more than twenty-six thousand responses for sponsored products which
are reported as part of the advertising revenues.
Cost of Sales. Cost of sales consists primarily of royalties and
production, packaging and shipping costs for boxed copies of software products.
We purchased CuteFTP from its author, Alex Kunadze, in October of 1998. Prior
to this purchase we distributed the product under an exclusive royalty based
distribution agreement. Royalties were recognized as costs of sale. The
reduction in cost of sales from $396,570 in 1998 to
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<PAGE>
$105,026 in 1999 reflects the purchase, which eliminated any further royalty
payments. The gross margin increased from 81% for the year ended December 31,
1998 to 97% for the year ended December 31, 1999.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of personnel and related expenses, rents, advertising
and promotional expenses, bad debt expense and credit card transaction fees.
Selling, general and administrative expenses increased from $1,228,644 in 1998
to $1,625,004 in 1999, a 32% increase. As a percentage of total sales, selling,
general and administrative expenses decreased from 59% in 1998 to 50% in 1999.
Expenses increased primarily as a result of increased personnel costs including
salaries, payroll taxes and recruiting fees. We had 14 employees at the end of
1998 and 23 at the end of 1999. In addition, advertising expenses increased due
to new product launches. We introduced saleable versions of CuteHTML and CuteMAP
as well as beta versions of CuteZIP in 1999. Billing fees increased as well due
to increased sales via credit card transactions.
Research and Development. In 1999, we began outsourcing some research and
development expenses. We capitalized some of these 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.
Research and development expenses were $42,164 in 1998 and $139,953 in 1999, a
232% increase. We began incurring research and development costs shortly after
the decision was made to purchase CuteFTP. Prior to the purchase, all
development costs were the responsibility of the author. In 1999, we expended
resources on CuteFTP, CuteHTML, CuteMAP, CuteZIP and CuteMX as well as other
products.
Depreciation and Amortization. Depreciation and amortization expense
consists of depreciation expense related to GlobalSCAPE's fixed assets, the
amortization of goodwill associated with our purchase of the assets of QMC in
1998 and amortization of the trademark associated with our purchase of the
source code of CuteFTP. Depreciation and amortization expense increased from
$91,262 in 1998 to $253,896 in 1999 due primarily to the increase in fixed
assets between years and approximately $180,000 of amortization related to
CuteFTP.
Interest Expense. Interest expense consists primarily of interest expense
related to the purchase of CuteFTP and interest expense related to our various
capital leases and working capital borrowings. Interest expense grew from
$2,345 in 1998 to $56,847 in 1999, a 2,324% increase. Thirty-seven thousand
seventy-three dollars of the increase was due solely to the purchase of CuteFTP.
The author agreed to accept approximately $190,000 in cash and twelve equal
monthly payments of $63,000 for the total purchase price. Although no interest
charge was expressed in the purchase agreement, we imputed interest at a rate of
12%.
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<PAGE>
Income Taxes. ATSI files a consolidated return for it and its affiliates,
including GlobalSCAPE, for income taxes. Since ATSI has had and continues to
have net operating losses on a consolidated basis, no income taxes have been due
in any reported period. We, however, generated positive net income in each
period from 1997 through March 31, 2000 and have made a provision for income
taxes. Our financial statements reflect the costs had we paid income taxes.
Current federal income taxes for 1998 would have been $108,377, whereas for 1999
they would have been $372,532, a 244% increase. Current Delaware state income
taxes would have increased from $15,020 to $51,629 over the same period. Our
deferred tax expenses for 1998 for federal and state taxes were $6,463 and
$896, respectively, whereas for 1999 those expenses were $24,353 and $3,375
respectively.
Net Income. Net income increased 243% between periods from $196,664 in
1998 to $673,877 in 1999. The increase was a result of revenue growth and
increased gross margins resulting from the purchase of CuteFTP.
Years Ended December 31, 1997 and 1998
Sales. Our sales increased from $870,539 for the year ended December 31,
1997 to $2,073,687 for the year ended December 31, 1998, a 138% increase, as a
result of significant growth in the number of licenses sold for our software
products. We sold an estimated 32,000 licenses in 1997 and 68,216 licenses in
1998, a 113% increase.
Cost of Sales. Cost of sales increased from $219,623 in 1997 to $396,570 in
1998, an increase of 81%, primarily as a result of increased royalty payments
due to the increased sales volume. The gross margin increased from 75% for the
year ended December 31, 1997 to 81% for the year ended December 31, 1998.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $448,457 in 1997 to $1,228,644 in 1998, a 174% increase.
This increase in expenses resulted from additional personnel and related
expenses such as commissions, payroll taxes and insurance. The number of
personnel increased from 7 in December 1997 to 14 in December 1998. Contract
labor costs increased due to marketing related expenses and the creation of a
new order entry system. In 1998, we decided to discontinue sharing offices with
ATSI and relocated to new facilities to accommodate growth. This move resulted
in increased rent expense. Bad debt expense and billing fees increased due to
the increased sales volume. As a percentage of sales, selling, general and
administrative expense increased from 52% in the year ended December 31, 1997 to
59% for the year ended December 31, 1998.
Research and Development. We incurred research and development costs for
the first time in 1998 of $42,164. Prior to 1998 all development costs were the
responsibility of the author of CuteFTP, Alex Kunadze.
Depreciation and Amortization. Depreciation and amortization expense
increased from $4,876 in 1997 to $91,262 in 1998, a 1,772% increase due to the
purchase of CuteFTP, computer equipment and office furniture.
28
<PAGE>
Interest Expense. Interest expense for 1998 was $2,345 resulting from
capital leases we entered into. No interest expense was recognized in
1997.
Income Taxes. Without consolidation, current federal income taxes for 1997
would have been $65,242, whereas for 1998 they would have been $108,377 a 66%
increase. Current Delaware state income taxes would have increased from $9,042
to $15,020 over the same period. Our deferred tax expenses in 1997 for federal
and state taxes were $1,004 and $139, respectively, whereas for 1998 those
expenses were $6,463 and $896.
Net Income. Net income increased 58% between periods from $124,442 in 1997
to $196,664 in 1998. The increase was a result of revenue.
Years Ended December 31, 1996 and 1997
Sales. Our sales increased from $216,376 in 1996 to $870,539 in 1997, a
302% increase. The number of licenses sold increased from an estimated 7,400 in
1996 to an estimated 32,000 in 1997, a 332% increase.
Cost of Sales. Cost of sales increased from $92,758 in 1996 to $219,623 in
1997, a 137% increase due to increased sales volume. Gross profit increased
from 57% of sales in 1996 to 75% in 1997.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $333,450 in 1996 to $448,457 in 1997, a 34% increase.
The increase in expenses reflects the increase in the number of personnel and
related expenses including salaries, commissions, payroll taxes and insurance.
Billing fees increased substantially due to both the increase in sales volume
and the fact that the third party contracted to process credit cards was not
engaged until the fourth quarter of 1996. In 1997 it was determined that
services provided by ATSI should be charged to us. These fees were for such
services as legal counsel, accounting systems, payroll processing and management
oversight.
Depreciation and Amortization. Depreciation and amortization expense
increased from $2,505 in 1996 to $4,876 in 1997, a 95% increase due to the
purchase of general office equipment.
Income Taxes. No income taxes would have been paid in 1996, whereas in 1997
we would have incurred $65,242 in current federal income taxes and $9,042 in
current state income taxes. Deferred tax expense was $1,004 and $139 for
federal and state taxes, respectively.
Net Income. We produced positive net income increased for the first time
in 1997 of $124,442 as opposed to a net loss of $212,741 in 1996. This was
achieved through increased gross margins and greater efficiency in operating
expenses.
29
<PAGE>
Liquidity and Capital Resources
GlobalSCAPE was incorporated in April 1996 and was funded by ATSI. ATSI
invested approximately $62,000 in the operation. We have been profitable since
1997 and have funded our operations solely through operating cash flows, capital
leases and traditional lenders.
On January 28, 1999, we entered into a note payable for $180,000 as
evidenced by a Promissory Note with The Frost National Bank as Lender. As of
May 5, 2000, the outstanding balance is approximately $100,000. We began making
monthly interest payments on February 28, 1999 and will continue to make such
payments through December of 2000. The interest rate fluctuates and is
calculated on the unpaid principal balance. On January 28, 1999, the interest
rate was 8.75% per annum. We are making monthly principal payments as follows:
. beginning February 28,1999 and for a period of 12 months, we paid
twelve consecutive monthly payments of $5,000 each with interest;
. from February 28, 2000 and for a period of eleven months, we have paid
and will pay, eleven consecutive monthly payments of $10,000 each with
interest; and
. on January 31, 2001, the Maturity Date, one final principal and
interest payment is due in the amount of $10,075.35.
There are no prepayment penalties so we can pay all or a portion of the loan at
any time without owing a penalty amount. If a default occurs under the Note,
Lender may accelerate all or a portion of the debt. Both parties have agreed to
arbitrate any dispute that arises under the Note in the City of San Antonio,
Bexar County.
In connection with the $180,000.00 note payable described above, we have
entered into a Commercial Security Agreement, dated January 28, 1999, with The
Frost National Bank as Lender whereby we granted Lender a security interest in
all of our accounts and equipment. In the event of a default under the
Commercial Security Agreement, Lender may sell the collateral in which they hold
a security interest.
On October 6, 1999, we entered into a note payable for $50,000 as evidenced
by a Promissory Note with The Frost National Bank as Lender. As of May 5, 2000,
the outstanding balance is approximately $44,000. We began making monthly
interest payments on November 6, 1999 and will continue to make such payments
through April of 2001. The interest rate fluctuates and is calculated on the
unpaid principal balance. On October 6, 1999, the interest rate was 9.25% per
annum. We are making monthly principal payments as follows:
. beginning November 6, 1999 and for a period of 6 months, we paid six
consecutive monthly payments of $1,000.00 each with interest;
. beginning May 6, 2000 and for a period of twelve months, we have paid
and will pay, twelve consecutive monthly payments of $3,666.67 each
with interest.
30
<PAGE>
Our final payment of $3,666.67 is due on April 6, 2001. There are no prepayment
penalties so we can pay all or a portion of the loan at any time without owing a
penalty amount. If a default occurs under the Note, Lender may accelerate all
or a portion of the debt. Both parties have agreed to arbitrate any dispute
that arises under the Note in the City of San Antonio, Bexar County.
In connection with the $50,000.00 note payable described above, we have
entered into a Commercial Security Agreement, dated October 6, 1999, with The
Frost National Bank as Lender whereby we granted Lender a security interest in
all of our accounts and equipment. In the event of a default under the
Commercial Security Agreement, Lender may sell the collateral in which they hold
a security interest.
On February 1, 2000, we entered into a note payable for $70,000.00 as
evidenced by a Promissory Note with The Frost National Bank as Lender. As of
May 5, 2000, the outstanding balance is approximately $58,808. We began making
monthly principal and interest payments in the amount of $6,141.50 on March 1,
2000 and will continue to make such payments for a period of twelve months,
through February 1, 2001. The interest rate is subject to change. On March 1,
2000, the interest rate was 9.50% per annum. There are no prepayment penalties
so we can pay all or a portion of the loan at any time without owing a penalty
amount. If a default occurs under the Note, Lender may accelerate all or a
portion of the debt. Both parties have agreed to arbitrate any dispute that
arises under the Note in the City of San Antonio, Bexar County.
In connection with the $70,000 note payable described above, we have
entered into a Commercial Security Agreement, dated February 1, 2000, with The
Frost National Bank as Lender whereby we granted Lender a security interest in
all of our accounts and equipment. In the event of a default under the Security
Agreement, Lender may sell the collateral in which they hold a security
interest.
On August 26, 1999, we, as a subsidiary of ATSI, entered into a Promissory
Note along with American TeleSource International, Inc., a Texas corporation,
and TeleSpan, Inc., a Texas corporation. The Note is in the amount of
$2,000,000.00 payable to NTFC Capital Corporation, or NTFC. Interest is
capitalized for the first six months and is calculated at a fixed rate per annum
of interest equal to the five year bank swap rate as reported on the first
borrowing date on the Dow Jones & Company Telerate screen, plus 495 basis
points. All principal amounts borrowed are amortized and repaid quarterly with
the first quarterly payment due June 2001. As of May 5, 2000, the outstanding
balance including capitalized interest was approximately $2,119,013.
In connection with the $2 million note payable described above we have
entered into a Loan and Security Agreement along with American TeleSource
International, Inc., a Texas corporation, and TeleSpan, Inc., dated July 31,
1999, whereby we have granted a security interest to NTFC in the equipment
purchased with the loan proceeds, all proceeds from insurance policies, monies
received from governmental bodies or agencies in connection with seizure of the
collateral property, any amounts payable in connection with the collateral, and
all cash proceeds and non-cash proceeds of the collateral in the form of
equipment, inventory, accounts, general intangibles, chattel paper or other
proceeds.
31
<PAGE>
The lease facility requires that ATSI meet certain financial covenants on a
quarterly basis beginning October 31, 1999, including minimum revenue levels,
gross margin levels, earnings before interest, taxes and depreciation and
amortization (EBITDA) results and debt to equity ratios. As of April 30, 2000,
ATSI was in default of quarterly financial covenants related to revenues, gross
margins and EBITDA. ATSI has received a waiver from NTFC stating that it waived
the ATSI's compliance requirements as of April 30, 2000. However, based upon
ATSI's results before and after the period ended April 30, 2000, ATSI will most
likely be in default of these same covenants at the end of its next fiscal
quarter and year end, July 31, 2000. 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 unable to pay this obligation,
the lender would likely exercise its rights under the Loan and Security
Agreement to sell the equipment and apply the proceeds to its loan balance. If
ATSI were unable to pay any loan balance remaining after the sale of the
equipment, the lender would have recourse against us for repayment. As a
result, assets which otherwise would be used to execute our business strategy
may have to be used to satisfy this debt.
Net cash provided by operating activities in the three months ended March
31, 1999 and 2000 was $125,180 and $920,142 respectively. Net cash provided by
operating activities in these periods were primarily the result of net income
offset by inter-company transactions.
Net cash used in investing activities for the three months ended March 31,
1999 and 2000 was $11,178 and $320,119 respectively. Net cash used in investing
activities in each of these periods was related to the purchase of property and
equipment. The property and equipment purchased consisted primarily of phone
systems and computer hardware and software for our new facility.
Net cash used in financing activities in the three months ended March 31,
1999 and 2000 was $126,284 and $26,532 respectively. Net cash used in financing
activities for the three months ended March 31, 1999 consisted of $180,000 in
bank borrowings and $306,284 in principal payments on notes payable. Net cash
used in financing activities for the three months ended March 31, 2000 consisted
of $70,000 in bank borrowings, $90,969 in principal payments on notes payable
and $5,563 in principal payments on capital lease obligations.
As of March 31, 2000, we had approximately $589,852 in cash and cash
equivalents. Our principal commitments consisted of obligations outstanding
under capital leases and bank borrowings. As of March 31, 2000, we had material
commitments for capital expenditures related to its relocation to the Technology
Center on Northwest Parkway in San Antonio, Texas and the related expansion of
its facilities of approximately $300,000. We anticipate an increase in the rate
of capital expenditures consistent with our anticipated growth in operations,
infrastructure and personnel. We anticipate that we will continue to add
computer hardware resources and that we will expend significant resources on
product development and the expansion of our management team and development
staff. We may also use cash to acquire or license technology, products or
businesses related to our current business. We also anticipate
32
<PAGE>
that we will continue to experience significant growth in our operating expenses
for the foreseeable future and that our operating expenses will be a material
use of our cash resources.
Net cash provided by operating activities in the years ended December 31,
1996, 1997, 1998 and 1999 was $15,268, $142,273, $30,370 and $808,142,
respectively. Net cash provided by operating activities in these periods were
primarily the result of net income (loss) offset by intercompany transactions in
1996, 1997, 1998, and 1999 as well as increases in accounts receivable in 1999.
Net cash used in investing activities in the years ended December 31, 1996,
1997, 1998 and 1999 was $12,891, $14,619, $149,202 and $185,997, respectively.
Net cash used in investing activities in each of these periods was related to
the purchases of property and equipment and trademark acquisition costs. The
property and equipment purchased consisted primarily of furniture and computer
hardware and software.
Net cash provided by or used in financing activities in the years ended
December 31, 1997, 1998 and 1999 was $62,032, ($7,752), and ($671,264),
respectively. Financial activities had no impact in 1996. The cash provided by
financing activities in 1997 was a result of the initial capitalization provided
by ATSI. Net cash used in 1998 consisted solely of principal payments on
capital lease obligations, while net cash used in 1999 consisted of $230,000 in
bank borrowings, $888,566 in principal payments related to the purchase of
CuteFTP and the aforementioned borrowings as well as $12,698 in principal
payments on capital lease obligations.
As of December 31, 1999, we had approximately $16,361 of cash and cash
equivalents. Our principal commitments consisted of obligations outstanding
under capital leases, bank borrowings and the purchase of CuteFTP which was
satisfied in January 2000.
On a consolidated basis as of July 31, 1999, 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 is likely to require additional
financial resources in the near term and could require additional financial
resources in the long-term to support its ongoing operations. These conditions
raise substantial doubt about ATSI's ability to continue as a going concern.
The financial condition of our parent company may impede or eliminate our
ability to execute our plan by impairing our ability to obtain financing. ATSI
might be motivated by financial stress to sell its stock of GlobalSCAPE for less
than what it might sell for under other circumstances, which may depress the
value of the stock in general.
Tax Matters
After the distribution of the GlobalSCAPE stock, the stock ownership
requirements necessary for GlobalSCAPE to be eligible to join in the filing of
an ATSI consolidated tax return will not be met. In filing a separate return,
GlobalSCAPE's income and deductions will be taxable on a single entity
basis.
33
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Recently Issued Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
SFAS 133 as amended by SFAS 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000, with earlier application encouraged.
We do not currently nor do we intend in the future to use derivative instruments
and therefore does not expect that the adoption of SFAS 133 will have any impact
on our financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
Revenue Recognition in Financial Statements ,which currently must be adopted by
December 31, 2000. SAB 101 provides additional guidance on revenue recognition
as well as criteria for when revenue is generally realized and earned and also
requires the deferral of incremental direct selling costs. We are currently
assessing the impact of SAB 101.
Year 2000 Readiness
In preparation for the year 2000, we engaged in efforts to ensure that our
products and business systems properly recognize date-sensitive information in
the year 2000 and beyond. These efforts and their costs are described below. We
have not experienced any significant "year 2000 problems" with our products and
business systems and do not expect that we will do so in the future.
State of Readiness. We implemented a year 2000 readiness plan in 1996. We
completed an audit and assessed the ability of our hardware and software systems
to operate properly in the year 2000 and beyond. We investigated the year 2000
readiness of our software, hardware and other significant vendors by requiring
them to complete questionnaires and submit internal year 2000 plans to insure no
disruption would occur in our supply chain. To date, we have not encountered
any material year 2000 issues or significant disruptions to our operations. We
have incurred minimal direct costs in assessing and remediating year 2000
problems most of which was incorporated in general research and development and
business operations costs. We do not expect to spend more than $100,000 in the
aggregate to complete the process.
Risks. We could be exposed to a loss of revenues and our operating
expenses could increase if our products or business systems have year 2000
problems. Our potential areas of exposure include products purchased from third
parties, information technology, including computers and software, and non-
information technology, including telephone systems and other equipment used
internally. The reasonably likely worst case scenario for year 2000 problems
would be if a significant defect exists in key hardware or software and if a
solution for such a problem were not immediately available.
Contingency Plan. Although we have not experienced any year 2000-related
problems affecting our internal systems, we have developed contingency plans to
be
34
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implemented if our efforts to identify and correct year 2000 problems are not
effective. Depending on the systems affected, these plans include:
. accelerated replacement of affected equipment or software;
. short to medium-term use of back-up equipment and software or other
redundant systems; and
. increased work hours for our personnel or the hiring of additional
information technology staff.
The discussion of our efforts and expectations relating to year 2000
compliance are forward-looking statements.
Inflation
Increases in inflation generally result in higher interest rates and
operating costs. Our largest cost exposure is cost of salaries and general and
administrative expenses. To date we believe that inflation has not had a
significant impact on our operations.
Research and Development
Research and development expenses include all direct costs, primarily
salaries for personnel and outside consultants, related to the development of
new products and significant enhancements to existing products and are expensed
as incurred until such time as technological feasibility is achieved.
Quantitative and Qualitative Discussion of Market Risk
To date, we have not utilized derivative financial instruments or
derivative commodity instruments. We do not expect to employ these or other
strategies to hedge market risk in the foreseeable future. We invest our cash
in money market funds, which are subject to minimal credit and market risk. We
believe that the interest rate risk and other relevant market risks associated
with these financial instruments are immaterial.
Most of our revenues are realized currently in U.S. dollars, however, up to
approximately 25% are from customers who are from outside the United States. All
revenues are received in U.S. dollars so direct exchange rate risk is minimized.
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BUSINESS
"GlobalSCAPE," "CuteFTP(R)," "CuteHTML(R)," "CuteMAP(TM)," "CuteZIP(TM),"
"CuteMX(TM)," are trademarks of GlobalSCAPE. Other trademarks and tradenames in
this information statement are the property of their respective owners.
Company Overview
Our primary business is to develop, market and distribute powerful, yet
easy-to-use software products that help make users time spent on the Internet
more enjoyable and productive. We currently have approximately 1.1 million
unique monthly users of our software. Our flagship "Cute" product line
includes:
. CuteFTP, a leading file transfer protocol program that allows users to
quickly and efficiently transfer files between computers;
. CuteZIP, a program which allows users to compress files, encrypt
information, and convert audio files to the popular MP3 and Windows
Media Audio, or WMA, formats;
. CuteHTML and CuteMAP, web site development tools; and
. CuteMX, a leading file-sharing program that allows users to interact
directly with each other in real time to search for and share all
types of files, including multi-media files, as well as providing
chat, instant messaging, a Windows multimedia player, and streaming
audio and video capacity.
We also derive revenues from the sale of advertisements in our software and
on our websites.
All of our software products are available for download on a 30 day free
trial basis from our websites, www.globalscape.com and www.cutemx.com, and from
------------------- --------------
a variety of independent software sites such as Tucow's and CNet's Download.com.
During the trial period, the software shows advertisements. To disable the
advertisements, the user must register the product by paying for a license.
Copies that are not registered may be partially or totally disabled, and those
that continue to function will show advertisements and generate repeated
registration reminders. From April 1, 1999 to March 31, 2000, there were
approximately 8,814,432 download requests for our products made on our internal
servers. During this same period 151,331 copies, or 1.72% of these download
requests, were registered and paid for.
History
GlobalSCAPE was organized as a Delaware corporation in April of 1996 when
we acquired the right to distribute CuteFTP from its original author, Alex
Kunadze. Our parent company, ATSI, established our company as its wholly-owned
subsidiary dedicated to the development, marketing and support of Internet
software products and the execution of other strategies unrelated to ATSI's core
telecommunications business. In 1998, we purchased CuteFTP from Mr. Kunadze and
in 1999 began developing and selling complementary products under the Cute name
such as CuteHTML, CuteMAP and
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<PAGE>
CuteZIP. In 1999 we also began incorporating advertisements in our products by
contracting with Internet advertising technology companies.
Industry Background
We believe that the growth of the Internet will accelerate business and
consumer demand for our products. IDC Research estimates that the online
consumer software market will grow from $3.5 billion in 1999 to $32.9 billion by
2003. Based on reports by Nua Internet Surveys we expect to see particularly
dramatic growth in demand for our products in Europe, the Asia/Pacific region,
and Latin America during the next several years. In addition, we expect high
capacity computers and broadband access to the Internet to become more
affordable, further increasing the demand for Internet applications. We believe
that we will continue to increase sales of our existing products as this market
grows, and that we will be able to leverage our brand recognition to develop and
sell complementary products.
We expect our advertising revenues to grow, both as a result of increasing
product distribution, and because we expect the market for Internet advertising
to grow. According to the Internet Advertising Bureau, online ad revenues surged
in 1999, more than doubling, for a year-end total of over $4.6 billion. A report
from Forrester Research, Inc. projects spending on online advertising worldwide
will reach $33 billion by 2004. We believe that as bandwidth and high
performance personal computers become more accessible and affordable, software
will become more robust, enabling the inclusion of media-rich features and
advertising capabilities.
These growth rates may not effect our growth rate. Our products represent
a subset of these markets and we do not have information available on the growth
rates of these subsets.
Software Products
All of our products are Windows(R) based programs. For the first quarter
of 2000 approximately 70% of our sales were to users in the United States, with
the remaining 30% concentrated mostly in Western Europe and Canada. We offer
our major titles in Spanish, French, German, Japanese and Portuguese. For 1999,
approximately 90% of our revenues were derived from sales of licenses to use
software.
CuteFTP. CuteFTP is a "file transfer protocol," or FTP, program, which
means that it enables users to transfer information such as web pages, software,
digital music, graphics, and other files from their computer to and from FTP
servers. CuteFTP simplifies file transfer protocol by hiding the technical
processes behind a user-friendly, graphical interface, which allows users to
"drag `n drop" files between computers. CuteFTP has won several awards, and has
been highlighted in leading industry trade journals such as WindowsNT and on web
sites such as CNet's Download.com and ZDNET.com, as being the most powerful yet
easy-to-use file transfer protocol program. Based on research prepared for us
by Media Metrix, we believe that we have 30% of the market for file transfer
protocol programs. Approximately 90% of our revenue for 1999 was generated by
sales of licenses to use this product.
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CuteZIP. CuteZIP is a file compression program, meaning that it enables
users to compress large data files so that they may be stored or transferred
using less capacity. Its main competitors include WinZIP, PKZIP and NetZIP.
CuteZIP's main advantage over the competition is that it is the only compression
program that employs what is referred to in the Internet industry as
"strong 128-bit encryption," which is one of the most secure encryption formats
available. It also permits users to convert files into the popular audio
formats, MP3 and WMA. Users can compress all file types including music and
create self-extracting executable files without juggling multiple applications.
CuteHTML. CuteHTML is a text-based hyper text mark up language or HTML
editor which is the predominant language used to create Web pages. It includes
various features that make the product easy to use such as color coded tags for
easy code identification, tag tips for quick access to standard HTML tags,
multiple document find and replace, spell check, code for individual browsers,
tabbed interface, access to a variety of online services and the ability to edit
files on remote servers when used in conjunction with CuteFTP. CuteHTML has
received recognition from top shareware sites including ZDNET and TUCOWS.
CuteMAP. CuteMAP is a tool designed to help HTML users create clickable
images on their web sites. Users select the area of an image that they want
"hot," and tell CuteMAP where the spot should point. CuteMAP automatically
creates the image map code, which can be saved as HTML or copied to an existing
HTML document. The product has been recognized by leading shareware sites
including Tucows and 5 Star Shareware, and has been called the "best image
mapper" by LockerGnome.
CuteMX. CuteMX is a file-searching and sharing program that enables users
to interact directly with each other to search for and share files from their
home computers. Users provide a list of files they are willing to share to our
server, and are able to search for files available from other users. The users
then communicate directly with each other to share files over the Internet.
CuteMX allows searches in "real time" meaning that only the files of users who
are actually logged on and using the program at any given time will appear in
other users' search results. This real time aspect of the program solves the
frustrating problem inherent in older file search methods, which often provide
lists of files that are not available because the provider is not on line at the
time of the search. CuteMX enables sharing of all types of files, but the most
popular use to date has been media files, especially music in the MP3 format.
This product includes a chat feature, has a built-in Microsoft media player and
can stream audio and video files. It has been recognized by ZDNET and CNet's
Download.com as a "hot file" and one of the most popular programs.
The technology employed by CuteMX integrates our proprietary patent-pending
algorithms and processes to produce search results quickly without using a large
amount of capacity.
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The related web site, www.cutemx.com, offers access to thousands of songs
by independent and mainstream artists who have authorized those song for
distribution. Visitors may search for songs based on genre, song name, or band
name. Additionally, visitors can learn more about new talent through the
featured artist section, or submit original music of their own for distribution.
The site also includes music and media-related news articles as well as various
artist resources.
There is considerable legal controversy surrounding media file sharing
programs such as CuteMX, as illustrated by the lawsuit brought by the Recording
Industry Association of America against the distributor of an MP3 file sharing
program, Napster, Inc. The RIAA believes that Napster is violating various laws
by distributing a product which has allowed the widespread exchange of
copyrighted music files. We have developed CuteMX as a mainstream application
that discourages improper transfers of copyrighted materials. For example,
CuteMX allows end users to transfer all file types, rather than just MP3's, it
allows end users to flag MP3 files as copyrighted, in which case they are not
transferable across the CuteMX network, and displays end user Internet protocol
or IP, addresses to encourage personal responsibility. The program respects
security features embedded in transferred files, such as features which allow
files to be played only on the computer on which they were created or which lay
the foundation for copyright owners to obtain payment for access to their
intellectual property, such as requiring an e-mail address, demographic
information or a subscription to a monthly service. Additionally, cutemx.com
offers a variety of content authorized for distribution by independent and
mainstream artists, who are able to earn revenue from the distribution of their
songs through advertisements placed within music files.
Advertising
We incorporate advertisements in our software and web sites by contracting
with third party Internet advertising technology companies. Our software
includes a feature which permits users to receive advertisements via the
Internet while they are using the software. The advertising may take multiple
forms including sponsorships, ad banners or web commercials that employ
streaming audio and video. The form of advertising used is dependent on our
products' and the advertisers' capabilities. We now rely on third party
technology to provide us with ad-enabling software that we embed in our program,
so that ad banners may be shown while the program is in use. Approximately 9%
of our revenues for 1999 were derived from advertising.
These advertising technology companies collect data from our users as part
of the installation of our software, such as areas of interest, gender,
education, marital status, job, location, household income, year of birth,
primary computer use, people in household, company size and zip code.
Sponsorships
We earn a small portion of our revenue through sponsorships, which means
that we promote third party products and services through our software and on
our websites and receive a portion of the sales price in return. For example,
we distribute
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HitBoxTracker, a program which gathers statistics on web site traffic with
CuteHTML and receive a fee in return. Less than 1% of our revenues are derived
from sponsorships.
Our Strategy
Our goal is to be the leading provider of powerful, yet easy-to-use
software products designed to make users' life on the Internet more productive
and enjoyable. Key elements of our strategy to attain this goal are:
Improving file-sharing technology. We believe there is dramatic trend
underway in movement of information away from the central server to the desktop
level. Our patent pending file search and sharing technology provides an avenue
to capitalize on this trend. We plan to develop additional products that use
this technology, including products that we can license to other Internet
companies.
Develop in-house advertising capability. Based on the size and current
growth of our user base, we estimate that GlobalSCAPE will display more than 600
million advertising banners within our products during 2000. In 1999 we earned
an average of $2.21 per thousand banners displayed. Additional opportunities
exist to license an ad server technology so we can eliminate third-party brokers
and thereby increase the rates we receive. Through these changes, it is our
belief that advertising revenues can increase significantly without incurring
proportionate expenses.
Expanding our Web site offerings. We intend to further expand the breadth
of information available on our web sites to include complementary information,
products and services, which we believe will present us with opportunities to
capitalize on additional advertising and sponsorship opportunities. We are an
emerging portal for media enthusiasts, meaning that in addition to providing our
software for download, we provide information on related subjects, including
media files, links to other sites containing information, complementary products
and services, and forums for discussion.
We are developing our www.cutemx.com site to present artistic works not
only in audio or music form, but also in video, image and textual forms. Our
site currently includes links to media and entertainment-related news articles
and helpful information for artists who wish to distribute their works via the
Internet. We are also expanding the information available on our
www.globalscape.com site in a similar way, presenting information for web
enthusiasts such as instructions for building web sites and posting images for
sale on auction sites.
Maintain Technological Leadership. We intend to continue to devote
substantial resources to the development and acquisition of new and innovative
products for the Internet user market. We intend to leverage our understanding
of the market to introduce additional innovative products allowing more users to
participate in the Internet.
Distributing Third Party Products. We plan to use the expertise we have
developed in marketing and distributing our own products to provide marketing
and distribution services to third party software developers and retailers. We
can provide third parties with access to our large customer base and association
with our well-known
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brand name in addition to fundamental services such as billing, technical
support and customer service. This will allow third-party developers and
retailers to concentrate on software development or their core competencies,
while increasing their product exposure.
Marketing and Sales
Our target customers include all users of the Internet, whether they are
individual consumers, small businesses or fortune 500 companies. No one
customer accounts for any substantial portion of our revenues. GlobalSCAPE's
software is marketed primarily via the Internet through shareware sites, content
sites, online retailers and service providers. Our products are some of the
most popular shareware titles on Internet shareware sites including Yahoo!,
CNet's Download.com and ZDNET.com. So these sites include periodic reviews of
the products and maintain close tabs on new releases, providing us with
substantial publicity. CuteFTP has received significant attention from the
media including being featured on radio, television and in print publications
such as Wired PC Magazine, PC Magazine, and Yahoo! Life. Other online
promotional activities include sponsorships, targeted public relations efforts
and ad banner placement on strategic sites. More traditional advertising
activities such as ad placement in leading industry publications, and
participation in select trade shows are paired with limited retail distribution
to increase product awareness.
We are leveraging our success with CuteFTP to add new customers by cross
promoting new products and services and merging software applications with
existing web sites. We intend to expend significant resources on our marketing
and sales staff to facilitate our growth.
Our Operations and Technology
Internet users access the GlobalSCAPE network through the Internet on a T-3
line provided by Digex. Redundant bandwidth is also provided by UUNET through
separate entry which is expandable and wired for OS3. To protect critical
customer data, GlobalSCAPE's secure server utilizes ICVerify and SSL
technology.
We provide support for our software users via information on our websites
such as our searchable knowledge base and "Frequently Asked Questions" section.
We also provide live assistance via e-mail, fax and telephone.
GlobalSCAPE currently has multiple dedicated servers and expansion plans
are in place to ensure rapid and cost-effective scalability.
Research and Development
Our research and development program is managed in-house by a team of
program managers, software engineers and technical personnel, which oversee all
projects from initial product concept to final release. We use a parallel
development process which is referred to in the software industry as the
"cyclical iterative development lifecycle." All phases of development including
scope approval, functional and implementation design, object modeling and
programming are subject to quality
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assurance testing. We also rely on developers in Russia, which allows us to tap
into a highly skilled labor pool, maintain a 24-hour development schedule,
decrease time to market, and minimize programming costs.
Competition
The Internet software market is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other
activities of market participants.
Competitors
Companies that have similar marketing strategies and product offerings
include Allaire, Digital River, RealNetworks and NetZip which are briefly
described below.
Allaire Corporation. Allaire Corporation develops, markets and supports a
wide range of web development tools that allow the production of complex web
sites and web applications for electronic commerce, collaborative computing, and
business information systems, all without the use of elaborate coding. Allaire's
main products include ColdFusion, a web application server that is used to
create interactive intranet, extranet and public Internet sites, and HomeSite,
an HTML editor used to create and maintain web sites. Their revenues were $55.2
million for 1999.
Digital River, Inc. Digital River provides outsourcing solutions for web
commerce and online marketing to software publishers, online software retailers,
music and video publishers, shareware publishers, and other web-ready companies.
Services mainly include electronic delivery and web store hosting. Digital
River's revenues were $75 million for 1999.
RealNetworks. RealNetworks provides media delivery on the Internet. It
develops and markets software products and services designed to enable users of
personal computers and other consumer electronic devices to send and receive
audio, video and other multimedia services using the Web. Their products include
RealPlayer, RealJukebox, and RealSystem software and their revenues were $43.5
million for 1999. Additionally, RealNetworks acquired NetZip in January 2000.
NetZip was also viewed as a competitor in the software development arena. Their
products included NetZip Classic and NetZip Download Demon used for downloading
files on the Internet. They incorporated advertisements in their products and
could target the messages and content to be delivered to users' desktops as they
use the product. Their products and market share can now be attributed to
RealNetworks.
Specific Product Competition
Our primary competitors vary by product and are listed below:
CuteFTP. CuteFTP exists in a highly competitive environment with more than
one hundred fifty FTP software utilities available on the Internet. It possesses
the second largest U.S. market share with WS_FTP from Ipswitch, Inc. as its
primary competitor and the current market leader. While many FTP products have
attempted to mimic CuteFTP,
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they are not commercially successful likely due to their late arrival to the
marketplace, limited features and functionality and lack of support
infrastructure.
CuteHTML. CuteHTML exists in a highly competitive environment with more
than seventy text-based HTML editors. Its competition includes HomeSite from
Allaire, Inc. CuteHTML is a light and powerful editing tool, however it has
fewer features than HomeSite. It does however have the advantage of being able
to leverage the success of CuteFTP through product integration and cross-
marketing efforts to CuteFTP's existing and loyal customer base.
CuteMAP. CuteMAP competes against approximately twenty image mapping
utilities, which exist in a small market. Primary competitors include MapEdit,
Live Image and Splash. CuteMAP has the advantage of being able to leverage the
success of CuteHTML through product integration and cross-marketing efforts to
an existing customer base.
CuteZIP. CuteZIP exists in the highly competitive file compression utility
market, competing against more than one hundred file compression utilities on
Cnet's Download.com alone. Its main competitors include WinZIP, the current
market leader, PKZIP and NetZIP. CuteZIP is a relative newcomer to the market
and its main advantage over the competition is that it is the only compression
utility combining MP3 and Windows Media Audio encoding with extensive file
compression formats including ZIP, CAB and TAR/GZ. Users can compress all file
types including music and create self-extracting executable files without
juggling multiple applications. It also employs powerful "twofish" encryption,
one of the most secure encryption formats available.
CuteMX. CuteMX competes against approximately a dozen file sharing programs
on the market, including Napster, the current market leader, Gnutella and Scour,
though all but CuteMX and Gnutella are MP3-centric. The CuteMX program has broad
applications allowing end users to transfer all file types and is positioned as
a mainstream application.
Intellectual Property
We have one patent pending for CuteMX which seeks to protect our file
searching and exchange processes. We protect our intellectual property rights
through a combination of trademark, service mark, copyright and trade secrets
laws.
We currently have registered trademarks for CuteFTP and CuteHTML. We have
also applied for trademarks for CuteZIP, CuteMAP, and CuteMX. Other trademarks
and tradenames in this information statement are the property of their
respective owners.
We have a United States copyright registration for CuteHTML Version 1.06
and have filed several other United States copyright applications covering our
computer programs including, without limitation, Cute FTP Version 3.5, CuteHTML
Version 2.0., CuteMAP Version 1.1 and CuteMX alpha version.
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CuteZIP relies on Thomson Consumer Electronics GmbH's MP3 encoding
technology. In January of 2000, GlobalSCAPE entered into a patent licensing
agreement with the Thomson to manufacture, sell and distribute the software in
GlobalSCAPE's products.
Strategic Relationships
We have strategic relationships with several well known Internet companies.
Although these relationships do not generate a material amount of revenue at
this time, they are valuable to us because they demonstrate our products'
ability to meet the quality standards of industry leaders, and provide promotion
opportunity by association with strong brands and the potential for cross
marketing to their customer base.
Microsoft Business Partners Network. The Microsoft Business Partner Network
is an information delivery system that improves the communication capabilities
between Microsoft and its business partners. Microsoft actively markets CuteFTP
through its MSPBN web site and pays a discounted rate for volume copies of
CuteFTP distributed free of charge to its members.
Lycos. We developed a customized version of CuteFTP for use and
distribution by LYCOS through the Lycos Network in exchange for a percentage of
revenues derived from advertising from within the program.
WebSideStory. We bundle access to WebSideStory's traffic analysis
services, HitBOX Tracker, within its software to complement its own products and
generate referral fees from those who register for the service.
Interland. We promote Interland's web hosting services from within its
software to complement its own products and generate a percentage of revenues
from those who register for the service.
MyComputer.com. We provide access to MyComputer.com's online services
within its software to complement its own products and generate referral fees
from those who register for the service.
NetMechanic. We participate in NetMechanic's "Partner Program" in which it
promotes NetMechanic's web site optimization services in exchange for referral
fees.
EverAd, Inc. We distribute EverAd's Play J technology from our cute.mx.com
website, which provides our users access to thousands of songs by mainstream and
independent artists.
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Employees
As of June 2000, we had 29 full-time and part-time employees organized
within five functional areas. The employee distribution according to function
is as follows:
<TABLE>
<CAPTION>
Number of
Department Employees
---------------------------------------------
<S> <C>
Management and Administration 7
Research and Development 8
Marketing 5
Management Information Services 3
Sales and Customer Support 6
---------------------------------------------
</TABLE>
None of our employees are covered by collective bargaining agreements and
we believe our employee relations are good.
Facilities
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
feet facility expires in September 2008, but if the owners of the building fail
to repair or maintain the building and the building becomes uninhabitable or if
a substantial government taking of the property occurs, we can terminate the
lease. Additionally, if the building is destroyed or damaged by a fire or other
casualty, we may also be able to terminate the lease after providing the
necessary notice to the property owner and satisfying the other lease
requirements unless the owner is in the process of rebuilding the property. Our
annual rent is approximately $190,656; however, this year our rental expense is
$127,339. We believe the new facilities will be suitable for our current
business needs and that suitable additional space will be available on
acceptable terms when needed.
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MANAGEMENT
Executive Officers, Significant Employees, and Directors
The following table sets forth information about our management and
directors as of May 9, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Arthur L. Smith...................... 35 Chairman of the Board, Director
Sandra Poole-Christal................ 33 President
H. Douglas Saathoff.................. 38 Director, Secretary and Treasurer
Daniel P. McRedmond.................. 32 Director of Finance and Accounting
</TABLE>
Arthur L. Smith. Mr. Smith is the founder and current Chairman and CEO of
ATSI with over 10 years of specialized experience in the telecommunications
industries within Mexico and the United States. Prior to founding ATSI in 1993,
Mr. Smith served as the Director of International Sales for GeoComm Partners,
Inc., an international company based in Los Angeles, California, providing
satellite network services to corporations in the Fortune 500 environment.
Sandra Poole-Christal. Ms. Christal launched GlobalSCAPE in April 1996 as
a subsidiary of ATSI, a company which she co-founded in 1994. She is responsible
for leading GlobalSCAPE's strategic vision, securing the acquisition of our
flagship product, CuteFTP, and creating strategic alliances with leading
distributors, resellers, and corporate and educational institutions, including
Microsoft Business Partners Network. From 1993 to 1996, Ms. Poole-Christal
served as Director of International Sales and Marketing for ATSI and from 1990
to 1992 she was an account executive for GeoComm Partners, Inc. She holds a B.A.
in Communications from Baylor University.
H. Douglas Saathoff. Mr. Saathoff is the current CFO and
Secretary/Treasurer of ATSI. Prior to joining ATSI in 1994, Mr. Saathoff served
as Accounting Manager, Controller and Financial Reporting Manager for U.S. Long
Distance from 1990 to 1993. Mr. Saathoff also served as Senior Staff Accountant
for Arthur Andersen & Co. where he planned, supervised and implemented audits
for a variety of clients, including telecommunications companies. Mr. Saathoff
holds a B.A. of Business Administration from Texas A&M University and is a
Certified Public Accountant.
Daniel P. McRedmond. Mr. McRedmond is responsible for the management of
all accounting, treasury, risk management, budgeting and forecasting activities
for GlobalSCAPE. He manages our commercial banking relationships as well as the
relationships with other members of the investment banking community. Mr.
McRedmond has more than 6 years of experience in the telecommunications
industry. Prior to joining GlobalSCAPE in July 1999, he had responsibilities
including serving as Treasurer for ATSI from 1998 to July 1999 and serving as
Budgeting Director and other
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management positions for Metrocall, Inc. from 1995 to 1998. He holds a B.B.A.
and M.S. from Texas A&M University.
Board of Directors and Committees
Board of Directors
Our board of directors currently consists of two members and must always
have at least one member. Each director holds office until his or her term
expires or until his or her successor is duly elected and qualified. Directors
need not be stockholders or residents of the State of Delaware. For a
description of the transactions between GlobalSCAPE and a member of the Board of
Directors and entities affiliated with any member, see "Certain Relationships
and Related Transactions."
Director and Management Search
GlobalSCAPE has engaged Korn/Ferry, a national search firm, to find a Chief
Executive Officer for GlobalSCAPE. We are also searching for other individuals
to complete our top management team, as well as new, outside directors which
would be required if GlobalSCAPE were to eventually list for trading on a
primary exchange. It is difficult to determine how successful these searches
will be or whether it will be completed in a timely manner.
Compensation
Director Compensation
The board of directors has the authority to determine the amount of
compensation to be paid to its members for their services as directors and
committee members. Currently, however, directors are not compensated with cash
payments for attendance at board of directors meetings. In the past, stock
options had been granted to the GlobalSCAPE directors in return for their
participation.
Directors may be reimbursed for their expenses incurred in attending board
of directors or committee meetings, and no director is precluded from serving
GlobalSCAPE in any other capacity and receiving compensation appropriate to the
value of such services rendered.
Executive Compensation
The following table sets forth information with respect to the compensation
earned during the years ended December 31, 1997, 1998 and 1999 by our President
who was acting in the capacity of chief executive officer. No other officer
earned a salary and bonus in excess of $100,000 during the year ended December
31, 1999.
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Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation (1) Long-Term Compensation Awards
----------------------------------------------------------------------------------
Name and Principal Restricted Securities
------------------ Annual Stock Securities Underlying
Position Year Salary ($) Bonus ($) Compensation ($) Awards ($) Options (#)
--------- ---- ----------- --------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sandra Poole-Christal, 1999 $ 87,692 $39,113 $0 $0 0
President
1998 $ 80,000 $0 $0 291,429
1997 $67,910.88 $0 $0 0
</TABLE>
__________
(1) In accordance with the rules of the Securities and Exchange Commission,
the compensation described in this table does not include medical, group
life insurance or other benefits that are available generally to all of our
salaried employees and certain perquisites and other personal benefits
received which do not exceed the lesser of $50,000 or 10% of any officer's
salary and bonus disclosed in this table.
Insider Participation in Compensation Decisions
Executive compensation decisions are made by our Board of Directors. Doug
Saathoff is a member of our Board and also our Secretary and Treasurer. In
addition both Mr. Saathoff and Art Smith are executive officers of parent, ATSI
and members of our Board. Both were involved in the deliberations regarding
executive officer compensation, still, neither are compensated monetarily for
their efforts related to GlobalSCAPE.
Option Grants and Exercises in Last Fiscal Year
No stock options were granted to the Named Executive Officers during the
year ended December 31, 1999 and no options have been granted in the year 2000.
The following table sets forth information with respect to the option and stock
appreciation right (or SARs) exercises and the value of those options and SARs
as of December 31, 1999 of our President who was acting in the capacity of chief
executive officer.
Aggregated Option and Stock Appreciation Rights Exercises and Values
<TABLE>
<CAPTION>
Numbers of Securities
Underlying Unexercised Value of Unexercised In-the-
Shares Options/SARs as of Money Options/SARs as of
Acquired on Value December 31, 1999 December 31, 1999
Name Exercise Realized Exercisable Unexerciseable Exercisable Unexerciseable
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sandra Poole-Christal, None None None 291,429 None No readily
President ascertainable
value(1)
</TABLE>
__________
(1) There is no established fair market value for the underlying securities.
The underlying securities would be in the money to the extent the fair
market value exceeds the exercise price of $0.10 per share.
48
<PAGE>
2000 Stock Option Plan
Our 2000 Stock Option Plan authorizes the granting of options intended to
qualify as incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended and options that do not so qualify.
The 2000 Plan is administered by the Board of Directors or a board, if
appointed. The administrators of the plan have the authority to fix the terms
and determine the expiration date and purchase price for any options granted.
The aggregate number of shares of common stock for which options may be granted
or for which stock grants may be made under the 2000 Plan is 3,660,000. The 2000
Plan will terminate in respect to incentive stock options on December 31, 2009
and on December 31, 2049 with respect to non-qualifying options, unless
terminated sooner by the board.
Each option granted pursuant to the 2000 Plan is exercisable at any time
upon or after vesting and expires on the date determined by a committee
appointed by the board of directors. In no event will any option expire earlier
than one year or later than ten years from the date of grant. In no event will
any option granted to a person who, on the date of grant of the option, owns
stock possessing more than ten percent of the total combined voting power of all
classes of stock of us, expire later than five years from the date of grant.
With respect to a participant who is an employee or advisor, each option expires
within three months after the date the participant ceases to be an employee or
advisor. During that three month period, those options may only be exercised if
they were exercisable immediately prior to the time the employment was
terminated. If the employee's, advisor's or non-employee director's employment
is governed by an employment agreement and is terminated for "cause," the option
will automatically expire. The exercise price of each option granted will be
determined by the committee, but shall not be less than 100% of the fair market
value of the common stock at the time such option is granted. Options are not
transferable other than by will or the laws of descent or distribution or to a
beneficiary, as defined in the plan, in the event of the participant's death.
Options may be exercised during the lifetime of the option holder only by the
option holder or the option holder's authorized representative.
Shares of common stock awarded under restricted stock grants are subject to
restrictions prohibiting their sale, assignment, transfer or encumbrance for a
period of time specified by the compensation committee and will revert to us if
the participant's relationship with us terminates during such period of
restriction, unless the compensation committee, by rule or regulation or in any
award agreement, provides otherwise.
As of May 9, 2000 we had no options outstanding under the 2000 Plan. We
may, however, grant options to existing or newly hired executives and other
employees prior to the effectiveness of this registration statement. Thereafter,
we expect that options will continue to be granted to eligible persons as part
of our incentive-based compensation program.
1998 Stock Option Plan
GlobalSCAPE's 1998 Stock Option Plan, as amended (referred to as the 1998
Plan), was adopted by the Board of Directors and GlobalSCAPE's sole shareholder
in
49
<PAGE>
January 1998. Pursuant to the 1998 Plan, GlobalSCAPE granted incentive options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and nonstatutory, or nonqualified, stock options to directors and
employees of, and advisors and consultants to, GlobalSCAPE, and any GlobalSCAPE
parent or subsidiary in existence.
Subject to the limitations set forth in the 1998 Plan, the Board of
Directors had the sole discretion and authority to determine when options will
be given, who shall receive options, and how many options shall be granted.
As of December 31, 1999, GlobalSCAPE had issued options to purchase 384,499
shares of GlobalSCAPE common stock, all exercisable at $0.10 per share, to 9
employees, directors and consultants under the 1998 Plan. No additional options
are to be granted under the 1998 Plan.
Messrs. Arthur L. Smith, Craig Clement and H. Douglas Saathoff were each
granted options to purchase 16,190 shares of Common Stock on January 1, 1998,
1,000 shares of Common Stock on April 30, 1999 and 1,000 shares of Common Stock
on July 1, 1999. On February 4, 2000, GlobalSCAPE entered into Letter
Agreements with each of them whereby:
. the two options for 1,000 shares of Common Stock were canceled;
. each agreed to not exercise his options until an initial public
offering of GlobalSCAPE shares had been completed; and
. each agreed to not claim any right of adjustment in the number of
shares underlying his option as a result of GlobalSCAPE's corporate
restructure plan.
If a public offering of our stock is not completed by August 31, 2000, the
restrictions on the rights of Mssrs. Smith, Clement and Saathoff to exercise the
options and claim adjustment terminate.
Additionally Ms. Sandra Poole-Christal was granted options to purchase
291,429 shares of Common Stock on January 1, 1998. On February 8, 2000,
GlobalSCAPE entered into a Letter Agreement with her whereby;
. she agreed to not exercise her options until an initial public
offering of GlobalSCAPE shares had been completed, and
. we paid her $5,000 to forego any claim for adjustment in the number of
shares underlying her option as a result of any corporate restructure
plan.
Additionally, other employees were granted options to purchase an aggregate
of shares of Common Stock. On February 8, 2000, we entered into Letter
Agreements with those employees whereby we paid them each $1,000 to cancel their
options with the agreement that we would issue the employees 38,500 shares of
Common Stock on a pro rata basis when, and if, GlobalSCAPE made an initial
public offering its stock. If a
50
<PAGE>
public offering of our stock is not completed by August 31, 2000, the options
previously held by these employees are restated.
Employment Agreements
We have entered into an employment agreement with Ms. Sandra Poole-
Christal. The agreement with Ms. Poole-Christal expires on January 1, 2001.
When the agreement expires, it will automatically renew on a year-to-year
basis unless either party gives notice of termination at least one-hundred
twenty days before the end of the then current term. The employment agreement
provides for increases in salary and payment of cash bonuses as determined by
the Board of Directors. The bonus is not to exceed 50% of Ms. Poole-Christal's
base salary. As of January 1, 2000, Ms. Poole-Christal's base salary was
$100,000.
If we terminate our employment agreement with Ms. Poole-Christal for any
reason other than just cause, Ms. Poole-Christal is entitled to continue to
receive her base salary until January 1, 2001 or twelve months after her
termination, whichever is longer. Furthermore, if Ms. Poole-Christal terminates
her employment agreement with us for GlobalSCAPE's failure to pay her salary and
incentives; a material diminution in her responsibilities, duties or authority;
or a change in control of GlobalSCAPE, she will be entitled to continue to
receive her salary, benefits and unpaid incentives until January 1, 2001 or
twelve months after her termination, whichever is longer.
Under Ms. Poole-Christal's employment agreement, she has also been granted
options to purchase 291,429 shares of GlobalSCAPE stock at $0.10 per share of
which options to purchase 194,286 shares have already vested. The remaining
options will vest as of January 1, 2001.
51
<PAGE>
OWNERSHIP OF GLOBALSCAPE STOCK
Prior to the distribution, ATSI owned all the shares of GlobalSCAPE. This
table sets forth information regarding the beneficial ownership of our common
stock after our restructure and assumes that 4,000,000 shares have been
distributed to ATSI shareholders.
. each person known to us to own beneficially more than five percent of
. our outstanding common stock;
. each of our directors;
. each of our executive officers;
. all of our directors and executive officers as a group; and
. each selling stockholder.
The calculations of the percentages in the following table are based on
12,920,000 shares of our common stock outstanding prior to the distribution and
assumes a distribution of 4,000,000 shares to ATSI's shareholders. The actual
percentage ownership will vary depending upon the number of ATSI common shares
outstanding on the record date for the distribution. Unless otherwise noted,
each of the persons listed below has sole voting power and control with respect
to their shares of common stock.
<TABLE>
<CAPTION>
Pre-Distribution Post-Distribution
------------------------------------ ----------------------------------
Amount and Nature Percent of Amount and Percent of
of Beneficial Class Nature of Class
Name and Address of Beneficial Owner Ownership Beneficial
<S> <C> <C> <C> <C>
ATSI (1).................................. 12,920,000 100.00% 8,920,000 69.00%
Arthur L. Smith, Chairman of the Board (2) 673,818 (3) 5.22% 673,818 (3) 5.22%
Sandra Poole-Christal, President (4)...... 313,393 (5) 2.43% 313,393 (5) 2.43%
H. Douglas Saathoff, Secretary and 215,158 (7) 1.67% 215,158 (7) 1.67%
Treasurer (6)
All executive officers and directors as a 1,202,369 9.31% 1,202,369 9.31%
group (3 persons) (3)(5)(6)..............
</TABLE>
___________
(1) The address for American TeleSource International, Inc. is 6000 Northwest
Parkway, Suite 110, San Antonio, Texas 78249.
(2) The address for Arthur L. Smith is 6000 Northwest Parkway, Suite 110, San
Antonio, Texas 78249.
(3) Includes 16,190 shares purchasable pursuant to a stock option and 657,628
shares owned by ATSI of which Mr. Smith owns 5.09%.
(4) The address for Sandra Poole-Christal is 6000 Northwest Parkway, Suite 100,
San Antonio, Texas 78249.
(5) Includes 291,429 shares purchasable pursuant to a stock option and 21,964
shares owned by ATSI of which Ms. Poole-Christal owns .17%.
52
<PAGE>
(6) The address for H. Douglas Saathoff is 6000 Northwest Parkway, Suite 110,
San Antonio, TX 78249.
(7) Includes 16,190 shares purchasable pursuant to a stock option and 198,968
shares owned by ATSI of which Mr. Saathoff owns 1.54%.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a Stock Purchase Agreement dated April 3, 2000, ATSI purchased
from ATSI-Texas all of the then-issued and outstanding stock of GlobalSCAPE in
consideration for the issuance of a Promissory Note dated April 3, 2000, in the
amount of $6,000,000, payable to ATSI-Texas.
ATSI performs various accounting and human resource functions for
GlobalSCAPE and periodically incurs legal expenses on our behalf. GlobalSCAPE
is charged by ATSI for these services which are reflected in our statement of
operations. Expenses in the amount of $93,847, $92,457 and $104,500 were paid to
ATSI for the periods ending December 31, 1997, 1998 and 1999, respectively.
ATSI files a consolidated income tax return for it and its affiliates,
including GlobalSCAPE. Since ATSI has had and continues to have net operating
losses on a consolidated basis, no income taxes have been due in any reported
period. We, however, generated positive net income in each period from 1997
through March 31, 2000, with the exception of the third quarter of 1998, and
have made a provision for income taxes. Our financial statements reflect the
costs had we paid income taxes.
The charges for accounting, human resources, legal fees and income taxes
discussed above are reflected on the Balance Sheet as "Due to parent" under
Current liabilities and are reduced by payments made to ATSI from time to time.
No formal agreement for the repayment of these expenses exists between ourselves
and ATSI.
We are a party to $2 million debt of ATSI to NTFC Capital Corporation that
was made to purchase equipment for use in ATSI's telecommunications equipment.
See "Management's Discussion and Analysis -Liquidity and Capital
Resources."
We have entered into an employment agreement with Ms. Sandra Poole-Christal
which expires on January 1, 2001. See "Management--Employment Agreements."
Except as described above, since January 1, 2000, GlobalSCAPE has not been
party to any transaction involving more than $60,000 with any director, nominee
for director, executive officer, holder of 5% or more of the our Common Stock,
or any member of the immediate family of any of the foregoing persons.
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue up to 50,000,000 shares of capital stock,
consisting of 40,000,000 shares of common stock and 10,000,000 shares of
preferred stock of which 12,920,000 shares of common stock and no shares of
preferred stock were issued and outstanding as of July 18, 2000. Prior to the
distribution all shares of our stock were held by ATSI. An additional 339,999
shares of common stock are issuable upon exercise of outstanding stock options
under 1998 Stock Option Plan. In addition, we are authorized to issue up to
3,660,000 shares of common stock under our 2000 Stock Option Plan.
54
<PAGE>
The following description provides a summary of the material rights and
limitations relating to ownership of our capital stock. For a complete legal
description of our capital stock, you should refer to our certificate of
incorporation and bylaws, copies of which are included as exhibits to the
registration statement of which this information statement is a part.
Common Stock
Our shares of common stock have identical rights and privileges in every
respect. Our shareholders do not have the preemptive right to subscribe to any
and all issues of our shares and securities. Each holder of common stock is
entitled to one vote for each share owned of record on matters submitted to a
vote of the shareholders. Holders of common stock are not entitled to
cumulative voting rights in the election of directors. If we are liquidated,
the holders of common stock are entitled to participate ratably in the assets
available for distribution after preferential payments are made to holders of
preferred stock.
Our board of directors has discretion to declare dividends or make other
distributions on the outstanding shares of capital stock at any regular or
special meeting out of legally available funds.
Preferred Stock
The board of directors may, without further action of our shareholders,
issue shares of preferred stock in one or more series and fix the designations,
powers, preferences and relative, participating, optional or other rights of
such series and any qualifications, limitations or restrictions. The board of
directors may, without further action by our shareholders, issue shares of
preferred stock which it has designated. The rights of holders of common stock
will be subject to, and may be adversely affected by, the rights of holders of
preferred stock. While the issuance of preferred stock provides flexibility in
connection with additional financing, possible acquisitions and other corporate
purposes, future issuances may have the effect of delaying, deferring or
preventing the change of control in us without further action by the
shareholders and may discourage bids for the common stock at a premium over the
market price. The board of directors may, without stockholder approval, provide
for the issuance of preferred stock that could have voting, conversion or other
rights superior to the rights of holders of common stock. We have no present
plans to issue any preferred stock.
Likelihood of Dilution
There are 339,999 shares of common stock subject to outstanding options.
There are no other outstanding warrants or other types of convertible securities
nor has GlobalSCAPE agreed to register any shares currently held by other
securities holders. Additionally, there are no shares which can be sold
pursuant to Rule 144 under Securities Act. GlobalSCAPE has publicly discussed
the possibility of a future public offering, however, these plans have been
postponed indefinitely in light of current market conditions.
55
<PAGE>
Transfer Restrictions
Transfer restrictions have been placed on the stock in a desire to maximize
the potential for a successful underwriting in the future. It is common for an
underwriter to require that existing stockholders restrict the transfer of their
stock for a period of 180 days following an initial public offering. However,
there can be no assurances that the restrictions will enhance our ability to
consummate a public offering of our stock.
The transfer of the stock you are receiving is restricted, pursuant to our
bylaws, for a period ending 180 days after such time as we complete an initial
public offering of our stock and we list and register our stock on a national
securities exchange or we cause our shares to be quoted on the automatic
quotation system of a national securities association. There can be no
assurances such events will occur. Consequently, you may not be able to sell
your stock for a long time. Prior to that time, your common stock may not be
transferred except for:
. transfers to GlobalSCAPE;
. transfers to existing GlobalSCAPE stockholders;
. transfers by gift, bequest or operation of the laws of descent;
. transfers to another entity pursuant to the merger, consolidation,
stock-for-stock exchange or similar transaction involving GlobalSCAPE;
. transfers by the stockholder to members of his or her immediate family,
trusts for the benefit of such immediate family members and partnerships
in which such immediate family members are the only partners;
. transfers by a partnership to its partners, provided that the common
stock in the hands of the transferee remains subject to the same
restrictions on transfer as they were when held by the transferor;
. transfers which would be exempt from the registration requirements of
Section 5 of the Securities Act by virtue of the exemption provided by
Section 4(2) of the Securities Act if the transferor were the issuer of
common stock, provided that the transferee is an "accredited investor"
within the meaning of Rule 501(a) under the Securities Act and the
common stock in the hands of such transferee remains subject to the same
restrictions on transfer as they were when held by the transferor; or
. other transfers upon the prior written consent of GlobalSCAPE, in its
sole discretion.
So long as these restrictions are in effect, each certificate representing
shares of common stock shall contain a legend referring to these bylaw transfer
restrictions. The Bylaws, including these transfer restrictions, may be
modified or amended by a majority vote of our board of directors.
56
<PAGE>
Anti-Takeover Matters
Provisions of the DGCL
Section 203 of the Delaware General Corporation Law, or DGCL, generally
restricts a corporation from entering into certain business combinations with an
interested stockholder for a period of 3 years from the time such stockholder
became an interested stockholder (defined as any person or entity that is the
beneficial owner of at least 15% of a corporation's voting stock) or its
affiliates, unless:
. the transaction is approved by the board of directors of the corporation
prior to the date such person or entity became an interested
stockholder;
. the interested stockholder acquired 85% of the corporation's stock,
excluding voting stock owned by directors and officers and certain
employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer.
. the business combination is approved by the board of directors and by a
vote of 66 2/3% of the outstanding voting stock not owned by the
interested stockholder.
The DGCL provides that a corporation may elect not to be governed by
Section 203. At present, we do not intend to make such an election and we
intend to avail ourselves of the rights afforded by Section 203. The effect of
Section 203 may be to render more difficult a change in control of our company.
Certain Charter and Bylaw Provisions
Our certification of incorporation and bylaws provide that any action
required or permitted to be taken by our shareholders may be taken only at a
duly called annual or special meeting of shareholders or by a written consent
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted, and
that special meetings of shareholders may be called only by our President, the
board of directors, or a committee of the board of directors which has been
designated by the board of directors. These provisions could have the effect of
delaying until the next shareholders' meeting stockholder actions which are
favored by the holders of a majority of our outstanding voting securities. Our
bylaws do not allow for cumulative voting for directors or for any other
purpose. Under cumulative voting, a minority stockholder holding a sufficient
percentage of a class of shares might be able to ensure the election of one or
more directors. These and other provisions contained in our certificate of
incorporation and bylaws could delay or discourage certain types of transactions
involving an actual or potential change in control of us or our management
(including transactions in which shareholders might otherwise receive a premium
for their shares over the then current prices) and may limit the ability of
shareholders to remove then-current management or approve transactions that
57
<PAGE>
shareholders may deem to be in their best interests and, therefore, could
adversely affect the price of our common stock.
Transfer Agent
ChaseMellon Shareholder Services will be the transfer agent and registrar
for our common stock.
LIMITATION OF DIRECTOR AND OFFICER LIABILITY
Our certificate of incorporation and bylaws provide that, to the extent not
prohibited by law, we will indemnify any person who is or was made, or
threatened to be made, party to any threatened, pending or completed action,
suit or proceeding, by reason of the fact that such person is or was our
director or officer or, while a director or officer of the Corporation is or was
serving in any capacity at our request for any other corporation, partnership or
other enterprise, against judgments, fines, penalties, excise taxes, amounts
paid in settlement costs, charges and expenses, including attorneys' fees.
Persons who have ceased being a director or officer may be similarly indemnified
in respect of service to us to the extent our board of directors at any time
specifies such persons are entitled to the benefits of the indemnification
provisions contained in our certificate of incorporation or bylaws.
Our certificate of incorporation eliminates personal liability to us or our
shareholders for monetary damages for breach of fiduciary duty as a director,
except for:
. any breach of the director's duty of loyalty to us or our shareholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. certain unlawful dividends or redemptions as provided under Section 174
of the DGCL; or
. any transaction from which the director derived an improper personal
benefit.
FORWARD-LOOKING STATEMENTS
This information statement includes forward-looking statements that involve
risks and uncertainties. These forward-looking statements include statements
under the captions "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this information statement. You should not rely on these forward-
looking statements which apply only as of the date of this information
statement. These statements refer to our future plans, objectives, expectations
and intentions. We use words such as "believe," "anticipate," "expect," "will,"
"intend," "estimate" and similar expressions to identify forward-looking
statements. This information statement also contains forward-looking statements
attributed to third parties relating to their estimates regarding the growth of
certain markets. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this information statement. Our
actual
58
<PAGE>
results could differ materially from those discussed in these forward-looking
statements. Factors that could contribute to these differences include those
discussed under the caption "Risk Factors" and elsewhere in this information
statement.
LEGAL PROCEEDINGS
We are currently not involved in any material legal proceedings. From time
to time the Company has been, and expects to continue to be, subject to legal
proceedings and claims in the ordinary course of its business, including claims
of alleged infringement of third party trademarks and other intellectual
property rights by the Company and its licensees. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form 10 under the Securities Act with respect
to the shares of common stock offered hereby. You may inspect a copy of the
registration statement without charge at the SEC's principal office in
Washington, D.C. and obtain copies of all or any part thereof upon payment of
certain fees from the Public Reference Section of the SEC at the SEC's principal
office, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the Commission's
Regional Offices in New York, located at 7 World Trade Center, Suite 1300, New
York, New York 10048, or in Chicago, located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. The SEC maintains an Internet site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of the SEC's web
site is (http://www.sec.gov).
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. We intend to furnish other reports as we may determine or as may be
required by law.
59
<PAGE>
GlobalSCAPE, INC.
Index to Financial Statements
Years ending December 31, 1999, 1998 and 1997
Contents
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Financial Statements F-3
Balance Sheets F-3
Statements of Operations F-5
Statements of Stockholder's Equity F-7
Statements of Cash Flows F-8
Notes to Financial Statements F-10
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
GlobalSCAPE, Inc.
To the Board of Directors:
We have audited the accompanying balance sheets of GlobalSCAPE, Inc., a
wholly-owned subsidiary of American TeleSource International, Inc. ("ATSI"), as
of December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. 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.
Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated May 9, 2000, which
report contained an explanatory paragraph regarding the Company's ability to
continue as a going concern, the Company, as discussed in Note 1, continues
to generate positive cash flows from operations and obtained a representation
from ATSI that it has no plans that would adversely affect the operations or
financial position of the Company. Therefore, the conditions that raised
substantial doubt about whether the Company will continue as a going concern no
longer exist.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GlobalSCAPE, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young, LLP
San Antonio, Texas
May 9, 2000, except for Note 1, as to which
the date is July 25, 2000
F-2
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
As of
As of December 31, March 31,
1998 1999 2000
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash................................................. $ 65,480 $ 16,361 $ 589,852
Accounts receivable (net of allowance for doubtful
accounts of $25,000 and $70,000 in 1998 and 1999,
respectively, and $101,598 for first quarter 2000).. 53,776 368,353 336,158
Prepaid expenses..................................... 1,750 25,216 49,708
------------------------------------------
Total current assets................................... 121,006 409,930 975,718
Property and equipment:
Furniture and equipment.............................. 54,720 54,720 49,079
Software............................................. 25,948 28,554 28,629
Equipment............................................ 73,770 203,480 339,444
Leasehold improvements............................... 1,426 1,426 111,042
Software development costs........................... - 102,686 173,750
------------------------------------------
155,864 390,866 701,944
Accumulated depreciation and amortization.............. 42,585 106,866 141,133
------------------------------------------
Net property and equipment............................. 113,279 284,000 560,811
Other assets:
Core software technology (net of accumulated
amortization of $44,947, $224,736, for 1998 and
1999, respectively and $269,373 for first quarter
2000)............................................... 853,996 674,207 629,570
Goodwill (net of accumulated amortization of and
$9,009 and $18,837 in 1998 and 1999, respectively
and $20,595 for first quarter 2000)................. 40,115 30,287 28,529
Deferred tax asset................................... 8,502 36,230 53,353
Other................................................ 26,750 36,645 38,163
------------------------------------------
Total other assets..................................... 929,363 777,369 749,615
------------------------------------------
Total assets........................................... $1,163,648 $1,471,299 $2,286,144
==========================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
As of
As of December 31, March 31,
1998 1999 2000
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable..................................... $ 15,815 $ 202 $ 50,437
Accrued expenses..................................... 32,951 64,764 91,900
Due to parent........................................ 25,420 265,253 584,735
Current maturities of long-term debt................. 836,566 215,710 215,741
Current portion of capital lease obligation.......... 9,087 24,172 25,492
------------------------------------------
Total current liabilities.............................. 919,839 570,101 968,305
Long-term liabilities:
Long-term debt, less current portion................... 62,377 24,667 3,667
Capital lease obligations, less current portion........ 11,035 32,257 25,374
------------------------------------------
Total long-term liabilities............................ 73,412 56,924 29,041
Stockholder's equity:
Preferred Stock, par value $0.001 per share,
10,000,000 authorized, no shares issued or
outstanding......................................... - - -
Common stock, par value $0.001 per share, 40,000,000
shares authorized, 12,920,000 shares issued and
outstanding......................................... 12,920 12,920 12,920
Additional paid-in capital........................... 49,112 49,112 49,112
Accumulated earnings................................. 108,365 782,242 1,226,766
------------------------------------------
Total stockholder's equity............................. 170,397 844,274 1,288,798
------------------------------------------
Total liabilities and stockholder's equity............. $1,163,648 $1,471,299 2,286,144
==========================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Statements of Operations
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Software product revenues............ $870,539 $2,073,687 $2,922,141 $681,130 $1,315,999
Advertising revenues................. - - 328,895 - 134,015
-----------------------------------------------------------------------
Total revenues.................... $870,539 $2,073,687 $3,251,036 $681,130 $1,450,014
Cost of revenue:
Software products.................... 219,623 396,570 105,026 27,920 34,800
-----------------------------------------------------------------------
Total cost of revenues............ 219,623 396,570 105,026 27,920 34,800
Gross profit........................... 650,916 1,677,117 3,146,010 653,210 1,415,214
Operating expenses:
Selling, general and administrative
expenses............................ 448,457 1,228,644 1,625,004 382,329 514,317
Research and development expenses.... - 42,164 139,953 25,225 123,271
Depreciation and amortization........ 4,876 91,262 253,896 62,433 89,141
-----------------------------------------------------------------------
Total operating expense........... 453,333 1,362,070 2,018,853 469,987 726,729
-----------------------------------------------------------------------
Income from operations................. 197,583 315,047 1,127,157 183,223 688,485
Other income (expense):
Interest expense, net................ - (2,345) (56,847) (22,235) (7,646)
Gain (loss) on sale of assets........ - - - - (567)
-----------------------------------------------------------------------
Income before income taxes............. 197,583 312,702 1,070,310 160,988 680,272
Income tax provision
Current:
Federal........................... 65,242 108,377 372,532 56,059 222,091
State............................. 9,042 15,020 51,629 7,769 30,779
Deferred:
Federal........................... (1,004) (6,463) (24,353) (3,665) (15,038)
State............................. (139) (896) (3,375) (508) (2,084)
-----------------------------------------------------------------------
Total income tax provision............. 73,141 116,038 396,433 59,655 235,748
-----------------------------------------------------------------------
Net income............................. $124,442 $ 196,664 $ 673,877 $101,333 $ 444,524
=======================================================================
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net income per common share $0.01 $0.02 $0.05 $0.01 $0.03
Net income per common share - assuming $0.01 $0.01 $0.05 $0.01 $0.03
dilution
</TABLE>
See accompanying notes.
F-6
<PAGE>
Statements of Stockholder's Equity
<TABLE>
<CAPTION>
Common Stock Accumulated Accumulated
Shares Amount Paid-in Capital Earnings Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996 - - - $ (212,741) $ (212,741)
Issuance of common stock 12,920,000 12,920 49,112 - 62,032
Net Income - - - 124,442 124,442
------------------------------------------------------------------------------
Balances at December 31, 1997 12,920,000 12,920 49,112 (88,299) (26,267)
Net Income - - - 196,664 196,664
------------------------------------------------------------------------------
Balances at December 31, 1998 12,920,000 12,920 49,112 108,365 170,397
Net Income - - - 673,877 673,877
------------------------------------------------------------------------------
Balances at December 31, 1999 12,920,000 12,920 49,112 782,242 844,274
Net Income 444,524 444,524
------------------------------------------------------------------------------
Balances at March 31, 2000 (unaudited) 12,920,000 $12,920 $49,112 $1,226,766 $1,288,798
==============================================================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
Statement of Cash Flows
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities
Net Income..................................... $124,442 $ 196,664 $ 673,877 $ 101,333 $ 444,524
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 4,876 91,262 253,896 62,433 89,141
Loss on disposition of assets............. - - - - 567
Changes in operating assets and liabilities:
Accounts receivable....................... (29,709) 10,296 (314,577) (19,080) 32,195
Prepaid expenses.......................... - (1,750) (23,466) (2,155) (24,492)
Other receivables......................... 10,268 - - - -
Deferred tax assets....................... (1,143) (7,359) (27,728) (4,173) (17,123)
Other long term assets.................... (269) (26,481) (9,895) 561 (1,518)
Accounts payable.......................... 3,787 11,852 (15,611) (17,038) 50,231
Accrued liabilities....................... 59,237 (51,922) 31,813 77,320 27,136
Due to parent............................. (29,216) (192,192) 239,833 (74,021) 319,481
---------------------------------------------------------------------------
Net cash provided by operating activities...... 142,273 30,370 808,142 125,180 920,142
Investing Activities
Purchase of property and equipment............. (14,619) (149,202) (185,997) (11,178) (320,119)
---------------------------------------------------------------------------
Net cash used in investing activities.......... (14,619) (149,202) (185,997) (11,178) (320,119)
Financing Activities
Issuance of common stock..................... 62,032 - - - -
Borrowings under notes payable............... - - 230,000 180,000 70,000
Principal payments on notes payable.......... - - (888,566) (306,284) (90,969)
Principal payments on capital lease
obligations.................................. - (7,752) (12,698) - (5,563)
---------------------------------------------------------------------------
Net cash provided by (used in) financing
activities..................................... 62,032 (7,752) (671,264) (126,284) (26,532)
---------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents.................................... 189,686 (126,584) (49,119) (12,282) 573,491
Cash at beginning of period.................... 2,378 192,064 65,480 65,480 16,361
---------------------------------------------------------------------------
Cash at end of period.......................... $192,064 $ 65,480 $ 16,361 $ 53,198 $ 589,852
===========================================================================
</TABLE>
F-8
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flows
information:
Cash paid during the year for:
Interest...................................... $ - $ - $57,000 $22,235 $7,528
Supplemental disclosure of noncash investing
and financing activities:
Office equipment acquired through issuance of
capital lease obligations.................... $ - $27,874 $49,005 $ - $ -
</TABLE>
See accompanying notes.
F-9
<PAGE>
1. Significant Accounting Policies
Nature of Business
GlobalSCAPE, Inc. (the Company) develops, markets, distributes and supports
leading web-based software products in a variety of categories including file
management, multimedia utilities and web application development tools. The
Company was incorporated in April 1996 and is a wholly owned subsidiary of
American TeleSource International, Inc., a public company. The Company is best
known for its popular file transfer program, CuteFTP.
As described above, the Company is a wholly owned subsidiary of ATSI. On a
consolidated basis as of July 31, 1999, 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 5, 1999, raise substantial doubt about ATSI's ability
to continue as a going concern at July 31, 1999. Management believes the ability
of ATSI to continue as a going concern is dependant upon the ongoing support of
its stockholders and customers, its ability to obtain capital resources to
support operations and its ability to successfully market its services. In
addition, ATSI is likely to require additional financial resources to support
its ongoing operations. There can be no assurances, however, that such equity
offerings or the long term debt financing arrangements will be sufficient to
support existing operations.
The Company has a history of earnings and positive cash flow. The assets and
stock of GlobalSCAPE do not secure any obligations of ATSI. In addition, ATSI
has represented it has no plans or intentions that would adversely affect the
operations or financial position of the Company.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. Comprehensive income for the
Company is the same as net income for all periods presented.
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
F-10
<PAGE>
1. Significant Accounting Policies (continued)
hardware technologies. Amortization expense for these costs amounted to
approximately $3,749 in 1999. 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.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for disclosures about operating segments,
products and services, geographic areas and major customers. The Company is
organized and operates as one operating segment, the provision of Internet-based
software products. The Company markets its products through retailers and over
the Internet.
Property and Equipment
Property and equipment is primarily comprised of furniture and fixtures,
software, computer equipment, and software development costs which are recorded
at cost and depreciated using the straight-line method over their estimated
useful lives. Expenditures for maintenance and repairs are charged to
operations as incurred. Property and equipment acquired under capital leases
are depreciated over their useful lives or the respective lease term, if
shorter. Depreciation periods used for property and equipment range from three
to five years.
Leasehold improvements are depreciated over the shorter of the lease term or the
estimated useful life of the asset.
Goodwill
Goodwill related to a 1998 asset acquisition is being amortized over a five year
period from acquisition. Goodwill is shown net of amortization as $9,009 and
$18,837 for the years ended December 31, 1998 and 1999, respectively.
The Company periodically evaluates the recoverability of goodwill in accordance
with Statement Financial Accounting Standards No 121 "Accounting for the
Impairment of Long-Live Assets." SFAS 121 requires recognition of impairment of
goodwill in the event the net book value of related assets exceeds the future
undiscounted cash flows attributable to the related business unit or assets.
Should an impairment exist, the impairment loss would be measured based on the
excess of the carrying value of the asset over the asset's fair value or
discounted estimates of future cash flows. No such impairment had been
identified as of December 31, 1999.
F-11
<PAGE>
1. Significant Accounting Policies (continued)
Other Assets
Costs incurred for acquiring core software technology are capitalized and
amortized over the technology's estimated useful life of 5-years using the
straight-line method for calculating such amortization. The Core Software
Technology on the balance sheet represents the purchase of the source code and
related trademark for CuteFTP and the related amortization of such costs. Other
Assets include security deposits which are expected to be refunded to the
Company upon termination of certain leases.
Concentrations of Credit Risk and Significant Customers
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts receivable. The Company provides
credit, in the normal course of business, to a number of companies and performs
ongoing credit evaluations to reduce credit risk. The Company requires no
collateral from its customers. Management estimates the allowance for
uncollectible accounts based on their historical experience and credit
evaluation. No single customer accounted for more than 10% of net revenues in
1997, 1998 and 1999.
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. The Company does not provide technical support and
maintenance services as part of the fee for any of its software products nor
does it sell these services separately.
The outbound shipping charges charged to the customer are included in software
product revenues and amounted to $3,094, $17,370, and $32,843 in 1997, 1998, and
1999. 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 or in which a sponsored third party product is
taken. Fees deducted from gross advertising receipts by the third-party agents
were $136,624 in 1999 and $40,901 in the three month period ending March 31,
2000. The Company did not generate revenue from the sale of advertising from
within its software products during the fiscal years ended December 31, 1997 and
1998. The Company began selling advertising space from within its software
products in April 1999.
Royalty Costs
Royalties that the Company pays on software products licensed from a third party
which it resells are expensed as a cost of sales when the software product is
sold. In October 1998, the Company purchased the license rights to the
principal software product for which the Company was previously paying royalty
costs. GlobalSCAPE paid $898,943 for these rights. This asset is reflected on
the Balance Sheet as Core Software Technology. See Note 9 to the Financial
Statements.
F-12
<PAGE>
1. Significant Accounting Policies (continued)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense charged
to operations for the year ended December 31, 1997, 1998 and 1999 amounted to
$2,000, $10,000 and $58,000, respectively, and is included in selling, general
and administrative expenses.
Income Taxes
The Company accounts for income taxes using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes." The liability method provides
that the deferred tax assets and liabilities are recorded based on the
difference between the tax bases of assets and liabilities and their carrying
amount for financial reporting purposes, as measured by the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
The Company is included in the American TeleSource International, Inc. (a Texas
corporation) consolidated federal income tax return. In general, the Company's
income tax provision reflects the financial consequences of filing on a separate
return 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.
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. Accordingly, no compensation
cost has been recognized in the financial statements for this plan. The pro
forma effects of fair value accounting for compensation costs related to
options, on net income would not be material.
Earnings Per Common Share
Basic and diluted net income per common share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128) for all periods presented. Basic earnings per share is based on the
weighted effect of all common shares issued and outstanding, and is calculated
by dividing net income available to common stockholders by the weighted average
shares outstanding during the period. Diluted earnings per share is calculated
by dividing net income available to common stockholders by the weighted average
number of common shares used in the basic earnings per share calculation plus
the number of common shares that would be issued assuming conversion of all
potentially dilutive common shares outstanding. Below is a reconciliation of the
numerators and denominators of basis earnings per share for each of the
following years:
F-13
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
Year Ended December 31, March 31,
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Numerators
Numerator for basic and diluted
earnings per share:
Net Income.......................... $ 124,442 $ 196,664 $ 673,877 $ 101,333 $ 444,524
Numerator for basic and diluted
earnings per share................. 124,442 196,664 673,877 101,333 444,524
Denominators
Denominators for basic earnings per
share:
Weighed average shares
outstanding--Basic................. 12,920,000 12,920,000 12,920,000 12,920,000 12,920,000
Dilutive potential common shares:
Stock Options......................... - 326,881 372,673 357,999 358,318
Denominator for dilutive earnings per
share................................ 12,920,000 13,246,881 13,292,673 13,277,999 13,278,318
Net income per common share
Net Income............................ 0.01 0.02 0.05 0.01 0.03
Net income per common share -
assuming dilution
Net Income............................ 0.01 0.01 0.05 0.01 0.03
</TABLE>
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging activities.
SFAS 133 as amended by SFAS 137, is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000, with earlier application encouraged.
The Company does not currently nor does it intend in the future
F-14
<PAGE>
1. Significant Accounting Policies (continued)
to use derivative instruments and therefore does not expect that the adoption of
SFAS 133 will have any impact on its financial position or results of
operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, Revenue
Recognition in Financial Statements, which currently must be adopted by June 30,
2000. SAB 101 provides additional guidance on revenue recognition as well as
criteria for when revenue is generally realized and earned and also requires the
deferral of incremental direct selling costs. The Company is currently
assessing the impact of SAB 101.
2. Accounts Receivable
Accounts receivable, which are primarily from product sales, are presented net
of an allowance for doubtful accounts. The activity of the Company's allowance
for doubtful accounts for the years ended December 31, 1998 and 1999 is
presented in the following table:
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Year Ended Beginning Income or End of
December 31 of Period Expense Deductions/(a)/ Period
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 - 13,000 - 13,000
1998 13,000 40,220 (28,220) 25,000
1999 25,000 53,614 (8,614) 70,000
</TABLE>
__________
(a) Represents amounts written off as uncollectible accounts receivable.
3 Long-Term Debt
The Company had debt outstanding as follows:
<TABLE>
<CAPTION>
As of March 31,
As of December 31, 2000
1998 1999 (Unaudited)
------------------------------------------------------
<S> <C> <C> <C>
Note payable to individual dated October 1998,
principal and interest payable in monthly
installments of $63,000 beginning February 1999,
including interest at 12% due January 2000....... $898,943 $ 62,377 $ -
Note payable to a bank dated January 1999,
principal and interest payable in 12 monthly
installments of $5,000 and 12 monthly
installments of $10,000 including interest at
prime rate plus 1%, 9.5% at December 31, 1999;
due January 2001................................. - 130,000 110,000
------------------------------------------------------
</TABLE>
F-15
<PAGE>
<TABLE>
<CAPTION>
As of March 31,
As of December 31, 2000
1998 1999 (Unaudited)
------------------------------------------------------
<S> <C> <C> <C>
Note payable to a bank dated October 1999,
principal and interest payable in 6 monthly
installments of $1,000 and 12 monthly
installments of $3,667 including interest at
prime rate plus 1%, 9.5% at December 31, 1999;
due April 2001................................... - 48,000 45,000
--------------------------------------------------------
898,943 240,377 155,000
Less current portion.............................. 836,566 215,710 151,333
--------------------------------------------------------
$ 62,377 $ 24,667 $ 3,667
========================================================
</TABLE>
4. Capital Leases
The Company has financed the acquisition of certain fixed assets through capital
lease obligations. Amortization expense on these capital lease agreements is
included in depreciation expense.
The present value of the future minimum lease payments for these leases at
December 31, 1999 is as follows:
<TABLE>
<S> <C>
Year ended December 31:
2000....................................................... $32,340
2001....................................................... 21,622
2002....................................................... 15,845
--------------
Total minimum lease payments................................. 69,807
Less amount representing interest............................ 13,378
Present value of minimum lease payments...................... 56,429
Less current portion......................................... 24,172
--------------
Capital lease obligation, less current portion............... $32,257
==============
</TABLE>
Furniture and equipment at December 31, 1998 and 1999 include $27,874 and
$76,879, respectively for assets held under capital leases, less associated
accumulated amortization of $8,517 and $20,382, respectively.
In September 1999, the Company entered into a capital lease agreement for office
equipment for $250,000. The payment terms are for 48 months after receipt of
the equipment and includes a one dollar bargain purchase option at the end of
the lease term. The equipment was delivered and installed in March 2000.
F-16
<PAGE>
5. Operating Leases
Minimum future lease payments on non-cancelable operating leases for office
facilities are as follows for the years ending December 31:
<TABLE>
<S> <C>
2000....................... $ 127,339
2001....................... 190,656
2002....................... 190,656
2003....................... 190,656
2004....................... 190,656
Thereafter................. 667,296
-------------
$1,557,259
=============
</TABLE>
Operating lease expense amounted to approximately $90,006 and $71,293 in 1999
and 1998, respectively. As described in Note 6, the management fee paid to the
parent company in 1997 included a charge for rental of office facilities.
The Company entered into a lease for new facilities in April 1999. The monthly
lease term begins in April 2000. The terms of this lease include an escalation
clause whereby no payments are due from April 2000 to September 2000. The
minimum future lease payments for the new facility lease are in the table above.
6. Related Party Transactions
General corporate overhead related to ATSI's corporate headquarters and common
support divisions has been allocated to the Company based on the ratio of the
Company's external costs and expenses to ATSI's consolidated external costs and
expenses, adjusted for any functions that the Company performs on its own.
These services included various accounting and human resource functions,
legal services and charges for rental of office facilities.
The costs of these services charged to the Company are not necessarily
indicative of the costs that would have been incurred if the Company had
performed these functions entirely as a stand alone entity, nor are they
indicative of costs that may be charged in the future. However, the Company
believes the method of allocation is reasonable. Expenses in the amount of
$93,847, $92,457 and $104,500 were paid to ATSI for period ending December 31,
1997, 1998 and 1999, respectively, and are reflected in the statement of
operations.
The Company is a co-borrower for a capital lease obligation of ATSI with NTFC
Capital Corporation ("NTFC"). The lease obligation at December 31, 1999 totaled
$2,000,000. ATSI was in default of financial covenants of the lease as of
January 31, 2000 and received a waiver from NTFC stating that it waived ATSI's
compliance requirement as of that date. ATSI believes it will likely be in
default of the same covenants at April 30, 2000 and has requested NTFC to re-set
the covenants to prevent future defaults. NTFC is reviewing the request. ATSI
has classified the lease obligation as long-term. No assets or stock of the
Company secure the capital lease obligation with NTFC.
F-17
<PAGE>
7. 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:
<TABLE>
<CAPTION>
1998 1999
-----------------------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization........... $ 6,538 $6,168
Accrued expenses........................ 3,813 2,334
Allowance for doubtful accounts......... 25,879 -
-----------------------
$36,230 8,502
=======================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------------------------
<S> <C> <C> <C>
Taxes computed at federal statutory rate................. $67,178 $106,319 $363,905
Increases (decreases) in taxes resulting from:
State taxes, net of federal benefit.................... 5,876 9,322 31,848
Nondeductible expenses................................. 87 397 680
----------------------------------------
Total.................................................... $73,141 $116,038 $396,433
========================================
</TABLE>
8. Employee Benefit Plan
The Company has a 401(k) plan which 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
contribution, the amount of which are to be determined annually by the Board of
Directors. The Company had no contribution expense to the plan in 1999.
9. Computer Software License Agreements
The Company entered into a computer software license agreement with a third
party in 1996. This agreement provided the Company with copyright interests and
licenses to market and sell the related software product. In return, the
Company was required to pay royalties based on a percentage of the net wholesale
price of units sold as stated in the agreement. In October 1998, the Company
elected to purchase the trademark rights to the software product for $898,943.
Royalty expense for the year ended December 31, 1998 and 1997 amounted to
$354,679 and $165,958, respectively, and is included in costs of goods sold.
F-18
<PAGE>
10. Stock Options
In January 1998, the Company approved the 1998 Stock Option Plan (the Plan) for
officers, other employees, directors, and consultants of the Company. Under the
terms of the 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. At
December 31, 1999, 344,072 remained available for issuance of additional option
grants under the Plan. At December 31, 1999, no options were exercisable.
A summary of the Company's stock option activity and related information for the
years ended December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1998 1999
---------------------------
<S> <C> <C>
Outstanding at beginning of year....................... - 357,999
Granted.............................................. 357,999 26,500
Exercised............................................ - -
Forfeited............................................ - -
---------------------------
Outstanding at end of year............................. 357,999 384,499
===========================
</TABLE>
Subsequent to December 31, 1999, the Company canceled options to purchase 44,500
shares of common stock under the plan. In consideration for canceling these
options, the Company paid $5,000 in cash consideration to the optionholders. In
addition, the Company agreed to issue 38,500 shares to the optionholders when
and if a public offering of the Company is completed.
Options may be granted under the Plan at prices not less than 100% of fair
market value at date of grant for incentive stock options. Options are
exercisable for such periods as the Board of Directors shall determine, but no
more than 10 years from date of grant. The vesting period for stock options is
generally over a three-year period and carry an exercise price of $0.10 per
share.
Pro forma information regarding net income is required by SFAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted subsequent to January 1, 1998 under the fair
value method prescribed by SFAS 123. The fair value of options granted was
$0.02 for options granted during 1999 and 1998, respectively. The fair value of
these options were estimated at the date of grant using a minimum value option
pricing model with the following assumptions for 1998 and 1998, respectively:
risk-free interest rates of 5.68% and 6.38%, respectively; no dividends for each
year; and a volatility factor of the expected market price of the Company's
common stock of near zero.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The impact on the pro
forma results which follow may not be representative of compensation expense in
future years when the effect of the amortization of multiple awards may be
reflected in the amounts. The Company's
F-19
<PAGE>
pro forma income (loss) from continuing operations, including the pro forma
stock-based compensation expense, is as follows:
<TABLE>
<CAPTION>
Year Ending December 31
---------------------------
<S> <C>
1998 $194,818
1999 672,158
</TABLE>
11. Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
Fiscal Year 1998
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue............................ $ 429,777 $ 554,515 $ 472,352 $ 617,043
Gross margin........................... 347,760 439,611 288,983 600,763
Net Income (loss) before provision for
income taxes.......................... 33,530 126,657 (906) 153,421
Net Income............................. 21,122 79,793 (906) 96,655
Net income per share:
Basic................................ 0.00 0.01 (0.00) 0.01
Diluted.............................. 0.00 0.01 (0.00) 0.01
Weighted average shares outstanding:
Basic................................ 12,920,000 12,920,000 12,920,000 12,920,000
Diluted.............................. 13,191,999 13,259,999 13,259,999 13,274,399
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1999
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue............................ $ 681,130 $ 743,627 $ 793,890 $ 1,032,389
Gross margin........................... 653,210 718,176 765,252 1,009,372
Net income before provision for taxes.. 160,988 254,563 148,149 506,610
Net Income............................. 101,333 160,272 93,231 319,041
Net income per common share:
Basic................................ 0.01 0.01 0.01 0.02
Diluted.............................. 0.01 0.01 0.01 0.02
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year 1999
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding:
Basic................................ 12,920,000 12,920,000 12,920,000 12,920,000
Diluted.............................. 13,277,999 13,287,029 13,304,499 13,304,499
</TABLE>
12. Subsequent Events
Stockholders Equity
In May 2000, the board of directors amended the certificate of incorporation to
increase the number of authorized shares of capital stock which the corporation
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 $.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. All information in the accompanying financial statements and notes to
the financial statements has been retroactively adjusted to reflect the efforts
of this stock split.
Stock Option Plan
In May 2000, the board of directors approved the 2000 stock option plan (the
"Plan") for key employees, nonemployee directors, and advisors of the Company.
Under the terms of the 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
F-21
<PAGE>
aggregate number of shares of common stock which may be granted to any optionee
during the term of the Plan shall not exceed 2,000,000. The 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.
F-22
<PAGE>
Exhibits and Financial Statement Schedules
Exhibit Description
-----------
Number
------
2.1 Stock Purchase Agreement between American TeleSource International,
Inc. (Texas) and American TeleSource International, Inc. (Delaware)
dated April 3, 2000.*
2.2 Promissory Note between American TeleSource International, Inc. and
GlobalSCAPE, Inc. and as dated April 3, 2000.*
3.1 Certificate of Incorporation of the Company dated April 17, 1996.*
3.2 Certificate of Renewal and Revival of Certificate of Incorporation for
the Company dated February 16, 1999.*
3.3 Certificate of Amendment to Certificate of Incorporation dated May 8,
2000.*
3.4 Bylaws of the Company.*
4.1 Specimen of Stock Certificate.*
4.2 1998 Stock Option Plan as amended May 13, 1999.*
4.3 2000 Stock Option Plan dated May 8, 2000.*
4.4 Form of 1998 Stock Option Plan Rights Termination Letter Agreement of
Directors to Cancel Options dated February 4, 2000.*
4.5 Form of 1998 Stock Option Plan Rights Termination Letter Agreement of
Directors to Agree Not to Exercise Options dated February 4, 2000.*
4.6 Form of 1998 Stock Option Plan Rights Termination Letter Agreement of
Directors to Agree Not to Claim Any Right of Adjustment dated February
4, 2000.*
4.7 Form of 1998 Stock Option Plan Rights Termination Letter Agreement for
Employees and Consultants to Cancel Options dated February 8, 2000.*
4.8 Form of 1998 Stock Option Plan Rights Termination Letter of Officer to
Agree Not to Claim Any Right of Adjustment dated February 8, 2000.*
4.9 Form of 1998 Stock Option Plan Rights Termination Letter Agreement of
Officer to Agree Not to Exercise Options dated February 8, 2000.*
10.1 Commercial Lease Agreement between ACLP University Park S.A. II, L.P.
and the Company dated April 13, 1999.*
10.2 Patent License Agreement between Thomson Consumer Electronics Sales
GmbH and the Company dated December 15, 1999.*
10.3 Purchase Agreement between Alex Kunadze and the Company dated January
16, 1999.*
Exhibit-1
<PAGE>
Exhibit Description
-----------
Number
------
10.4 NTFC Loan and Security Agreement between American TeleSource
International, Inc. (Delaware), American TeleSource International,
Inc. (Texas), TeleSpan, Inc. and Company dated July 31, 1999.
10.5 NTFC Promissory Note for $2,000,000.00 between American TeleSource
International, Inc. (Delaware), American TeleSource International,
Inc. (Texas), TeleSpan, Inc., and the Company dated August 26, 1999.*
10.6 Frost Bank Note for $180,000 Loan dated January 28, 1999 between The
Frost National Bank as Lender and the Company as Borrower.*
10.7 Security Agreement between Frost Bank and the Company for the $180,000
Note dated January 28, 1999.*
10.8 Frost Bank Note for $70,000 Loan dated February 1, 2000 between The
Frost National Bank as Lender and the Company as Borrower.*
10.9 Commercial Security Agreement between Frost Bank and the Company for
the $70,000 Note dated February 1, 2000.*
10.10 Frost Bank Note for $50,000 Loan dated October 6, 1999 between The
Frost National Bank as Lender and the Company as Borrower.*
10.11 Commercial Security Agreement between Frost Bank and the Company for
the $50,000 Note dated October 6, 1999.*
10.12 Consulting Agreement between the Company and David Christal dated
February 22, 2000.*
10.13 Corrected & Restated Executive Employment Agreement between the
Company and Sandra Poole-Christal dated January 1, 1998.*
21.1 Subsidiaries.*
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
__________
* Filed on May 12, 2000.
All other schedules and exhibits are omitted because they are not applicable or
because the required information is contained in the Financial Statements or
Notes thereto.
Exhibit-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Act of 1934,
GlobalSCAPE, Inc. has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Antonio, State of Texas, on July 28, 2000.
GLOBALSCAPE, INC.
By: /s/ SANDRA POOLE-CHRISTAL
---------------------------
Sandra Poole-Christal
President
