U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number 1-9925
COPE, Inc.
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(Exact name of small business issuer as specified in its charter)
Delaware 87-0427731
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Grundstrasse 14, 6343 Rotkreuz, Switzerland
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(Address of principal executive offices)
+ 41 41 798 33 44
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(Issuer's telephone number)
n/a
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
As of November 22, 1999, the Company had 3,395,751 shares of its $.001 par
value common stock issued and outstanding.
PART 1 - FINANCIAL INFORMATION
ITEM 1. Financial Statements PAGE
----
Unaudited Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 ......................................... 2
Unaudited Condensed Consolidated Statements of Operations for the three month
periods and nine month periods ended September 30, 1999 and 1998.................. 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1999 and 1998.............................. 4
Notes to Condensed Consolidated Financial Statements................................ 5
-1-
COPE, INC.
Condensed Consolidated Balance Sheets
(Amounts in U.S. Dollars)
ASSETS
September 30, December 31,
1999 1998
------------- ------------
Current assets
Cash and cash equivalents $ 955,974 $ 1,303,114
Trade accounts receivable 4,365,880 5,418,777
Inventories (net of provision of $80,980 and $89,455) 2,014,449 2,433,790
Other current assets 2,563,826 450,013
----------- -----------
Total current assets 9,900,129 9,605,694
Property, plant and equipment, net 1,005,543 751,235
Loans receivable from related party 1,784,006 635,700
Loans receivable, other 7,903 26,350
Goodwill (net of amortization of $1,555,693 and $69,578) 14,875,336 938,788
Intangible assets 73,087 88,385
Deferred income taxes 886,406 592,495
----------- -----------
TOTAL ASSETS $28,532,410 $12,638,647
=========== ===========
LIABILITIES
Current liabilities:
Short-term borrowings $ 5,088,195 $ 2,385,303
Trade accounts payable 4,622,306 5,650,422
Customer advances 0 216,558
Other current liabilities 2,417,148 802,384
Current income taxes payable 0 179,012
Deferred income taxes 211,610 216,352
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Total current liabilities 12,339,259 9,450,031
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Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Shareholders' equity:
Share capital: 3,596 3,153
Common stock, $0.001 par value
Authorized shares 30,000,000
Issued and outstanding shares 3,595,751
(3,152,861 in 1998)
Additional paid in capital 15,276,065 506,031
Accumulated other comprehensive income
Cumulative translation adjustment (65,843) 31,852
Retained earnings 979,333 2,647,580
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Total Shareholders' equity 16,193,151 3,188,616
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,532,410 $12,638,647
=========== ===========
See accompanying notes to condensed consolidated financial statements
-2-
COPE, INC.
Condensed Consolidated Statements of Income
(Amounts in U.S. Dollars except share amount)
For the three month periods and nine month periods ended
September 30, 1999 and 1998
(Unaudited)
Three month periods Nine month periods
ended September 30, ended September 30,
-------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
Net Revenue
Sales of solutions $ 7,421,082 $ 6,689,964 $ 21,772,465 $ 15,397,697
Sales of services 920,463 850,920 3,133,056 1,927,236
----------- ----------- ------------ ------------
Total revenue 8,341,545 7,540,884 24,905,521 17,324,933
Cost of sales (5,862,695) (5,278,710) (16,561,361) (12,106,255)
----------- ----------- ------------ ------------
Gross profit 2,478,850 2,262,174 8,344,160 5,218,678
----------- ----------- ------------ ------------
Operating expenses:
Selling, general and administrative
Expenses (3,107,541) (1,937,802) (7,881,755) (4,404,372)
Consultancy expenses (90,668) (31,546) (343,229) (145,206)
Depreciation (112,046) (64,118) (302,363) (165,653)
Impairment of intangibles assets 0 0 0 (63,004)
Amortization of goodwill and other
intangibles assets (799,832) (32,860) (1,486,115) (48,373)
----------- ----------- ------------ ------------
Total operating expenses (4,110,087) (2,066,326) (10,013,462) (4,826,608)
Operating income/(loss) (1,631,237) 195,848 (1,669,302) 392,070
Other income (expense):
Interest expense (63,151) (39,781) (146,280) (72,483)
Interest income 0 1,818 40,836 2,996
Interest income from related party 4,946 0 15,295
Other (31,635) (6) (31,834) (820)
----------- ----------- ------------ ------------
(89,840) (37,969) (121,983) (70,307)
----------- ----------- ------------ ------------
Earnings/(loss) before taxes (1,721,077) 157,879 (1,791,285) 321,763
Current income taxes 37,454 (16,018) 0 (63,012)
Deferred income taxes 266,236 33,192 123,038 176,879
----------- ----------- ------------ ------------
303,690 17,174 123,038 113,867
----------- ----------- ------------ ------------
Net income/(loss) $(1,417,387) $ 175,053 $ (1,668,247) $ 435,630
----------- ----------- ------------ ------------
Translation adjustment, net of tax (66,568) 251,530 (97,699) 181,368
----------- ----------- ------------ ------------
Total comprehensive income (loss) (1,483,955) 426,583 (1,765,942) 576,998
=========== =========== ============ ============
Basic earnings/(loss) per share $ (0.39) $ 0.06 $ (0.49) $ 0.14
Diluted earnings/(loss) per share $ (0.39) $ 0.06 $ (0.49) $ 0.14
Weighted average shares outstanding:
Basic 3,595,751 3,132,654 3,418,217 3,132,654
Diluted 3,595,751 3,146,391 3,418,217 3,144,432
See accompanying notes to condensed consolidated financial statements
-3-
COPE, INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in U.S. Dollars)
For the nine month periods ended September 30, 1999 and 1998
(Unaudited)
Nine month periods ended
----------------------------
September 30, September 30,
1999 1998
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Cash flow provided by operating activities
Net income/(loss) $(1,668,247) $ 435,630
Adjustments to reconcile net income to net
cash used by operating activities
Depreciation 302,363 165,653
Impairment of intangibles assets 0 63,004
Amortization of goodwill and other intangibles assets 1,486,115 48,373
Deferred income taxes (123,038) (176,897)
Effects of changes in operating assets and liabilities
Accounts receivable 1,155,103 2,351,596
Inventories 419,341 912,550
Other current assets (2,091,269) (109,481)
Accounts payable (1,447,390) (4,259,521
Customer advances (216,558) (316,301)
Other current liabilities 666,052 (439,106)
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Net cash flow used by operating activities (1,517,528) (1,324,482)
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Cash flow used/provided in investing activities
Purchase of property, plant and equipment (397,689) (261,698)
Loans receivables (1,129,859) 336,984
Acquisition of businesses/net of cash acquired 0 437,002
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Net cash flow provided/used by investing activities (1,527,548) 512,288
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Cash flow provided by financing activities
Issuance of common stock 188,076 0
Increase of short term borrowings 2,570,240 846,603
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Net cash flow provided/used by financing activities 2,758,316 846,603
Effect of exchange rate changes on cash (60,380) (32,973)
Net decrease of cash and cash equivalents (347,140) 1,436
Cash and cash equivalents at beginning of the period 1,303,114 678,936
----------- -----------
Cash and cash equivalents at end of the period $ 955,974 $ 680,372
=========== ===========
Supplemental cash flow disclosure
Interest paid $ 146,280 $ 72,483
Income taxes paid 53,759 32,478
Noncash investing and financing activities:
Short-term borrowings assumed in acquisition of business 132,652 956,543
Short-term borrowings incurred to effect acquisition of business 0 624,324
Cash acquired in acquisition 0 939,002
-4-
COPE, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
As of September 30, 1999 and for the nine month
periods ended September 30, 1999 and 1998
NOTE 1-BASIS OF PRESENTATION
These condensed consolidated financial statements of COPE, Inc., a Delaware
corporation (the "Company"), do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the financial statements and
notes thereto included in the COPE's Annual Report on Form 10-KSB for the year
ended December 31, 1998. In the opinion of management, the financial information
set forth in the accompanying condensed consolidated financial statements
reflect all adjustments necessary for a fair statement of the periods reported,
and all such adjustments were of a normal and recurring nature. Interim results
are not necessarily indicative of results for a full year.
Accounting Change
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities", which
requires that costs related to start-up activities be expensed as incurred.
Prior to 1999, the COPE capitalized its start-up costs and amortized them over
four years. COPE adopted the provisions of the SOP as of January 1. 1999.
There was no material impact on net income or financial position as a result of
the adoption of SOP 98-5.
NOTE 2 - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share". SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Basic earnings per
share is calculated by dividing net income by the weighted average shares
outstanding. The computation of diluted earnings per share is similar to basic
earnings per share except that it assumes that the weighted average shares
outstanding is increased by shares issuable upon exercise of those stock options
for which market price exceeds exercise price. Shares issuable upon exercise of
stock options have not been included in the computation of diluted earnings
(loss) per share in 1999 since their effect thereon would be anti-dilutive.
Weighted average shares have been retroactively restated for the equivalent
number of shares received by COPE shareholders as a result of the COPE
Reorganization.
-5-
NOTE 3 - BUSINESS ACQUISITION
On June 25, 1998, COPE GmbH, a wholly-owned subsidiary of COPE Holding AG,
acquired all of the capital shares of Forum GmbH ("Forum"), a German data
storage company, for $962,977. The acquisition of Forum has been accounted for
by the purchase method of accounting. Accordingly, the operating results of
Forum have been included in the consolidated operating results from the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired was $837,569 and has been recorded as goodwill, which is being
amortized on a straight line basis over seven years. The acquisition was
financed through available cash on hand and short term borrowings. On March 30,
1999 Forum was merged into COPE GmbH.
The purchase price was allocated to the assets acquired and liabilities assumed
based on their fair values at the date of the Forum acquisition as follows:
Cash $ 939,002
Accounts receivable 2,549,374
Inventories 1,059,078
Accounts payable (3,424,274)
Short-term borrowings (956,543)
Other, net (41,229)
---------------
Net fair value of assets acquired and liabilities assumed 125,408
Goodwill 837,569
---------------
Purchase price 962,977
===============
Cash paid for Forum 338,653
Short-term borrowings assumed 624,324
---------------
Purchase price 962,977
===============
Cash acquired in acquisition of Forum 939,002
Cash paid for Forum (338,653)
Cash paid for other business (163,347)
---------------
Net cash flow impact of acquisitions of business $ 437,002
===============
-6-
On April 19, 1999, the COPE acquired Hicomp Software Systems GmbH ("Hicomp"), a
German software company, in a stock transaction accounted for by the purchase
method of accounting. COPE issued 420,000 new shares in exchange for all
outstanding Hicomp shares. Accordingly, the operating results of Hicomp have
been included in the consolidated operating results from the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired was $15,417,264 and has been recorded as goodwill, which is being
amortized on a straight line basis over five years. Hicomp, headquartered in
Hamburg, Germany, develops back-up and retrieval software products. Its leading
products, Hiback and Hibars, are multi-platform back-up solutions recognized for
performance and flexibility.
Additionally, the former shareholder of Hicomp granted COPE a purchase option,
expiring June 30, 2000, to acquire all of the capital shares of two U.S.
corporations owned by the shareholder, which are engaged in the business of
distributing Hiback and Hibars software in the U.S., at the then market price
based on negotiations between the two parties. No consideration was paid for the
option. The option represents a right of first refusal only and gives the
company no price advantage since this is stipulated to be based on the market
price at the date of acquisition. Accordingly, no value has been allocated to
the option as part of the allocation of the purchase price of Hicomp.
In October 1999, COPE repurchased from the former shareholders of Hicomp
200,000, of the common shares issued by COPE in the acquisition at a price of
DEM 7,200,000, ($3,958,000).
The Hicomp assets acquired and liabilities assumed have been recorded at their
estimated fair values at the date of the Hicomp acquisition, and are subject to
adjustment pending completion of final valuations. A summary of the assets
acquired, liabilities assumed and consideration paid follows:
Accounts receivable......................................... $ 102,005
Other current assets........................................ 22,544
Property, plant and equipment............................... 146,399
Other assets................................................ 215,614
Short-term borrowings (132,652)
Accounts payable............................................ (240,262)
Other current liabilities................................... (444,353)
Noncurrent liabilities...................................... (264,159)
-----------
Net fair value of assets acquired and liabilities assumed... (594,864)
Goodwill.................................................... 15,417,264
-----------
Purchase Price.............................................. 14,822,400
===========
Value of the securities issued $14,582,400
Estimated acquisition costs 240,000
-----------
Purchase price 14,822,400
===========
Estimated annual amortization
(based on amortization period of five years) $ 3,083,453
The pro forma unaudited results of operations for the nine months ended
September 30, 1999 and September 30, 1998, assuming consummation of the
purchases as of the beginning of the periods presented, are as follows:
Nine month periods ended
September 30,
1999 1998
----------- ----------
Net revenue 25,356,428 27,579,319
Net loss (2,464,983) (1,646,632)
Per share data:
Basic earnings (loss) (0.69) (0.50)
-7-
NOTE 4 - OTHER CURRENT ASSETS
Other current assets include $827,645 of deferred transaction costs relating to
COPE's planned listing on the Frankfurt Stock Exchange "Neuer Markt" and will
be applied against the expected additional paid in capital to be realized from
the issue of new common stock. Should this listing not take place, these costs
will be charged to income.
NOTE 5 - IMPAIRMENT OF INTANGIBLES ASSETS
In the first quarter of fiscal 1998, COPE reported an impairment loss of $63,004
related to the write-down of an exclusive option for the rights to purchase,
develop and market a new technique for the automatic storage of data. The option
was acquired in 1997. In the first quarter of 1998, COPE conducted an in-house
pilot demonstration of the technique, which indicated that the technique had
less value than previously believed. As a result, management reduced the
carrying value of the asset to the estimated fair market value based on the
estimated amount recoverable upon sale to a third party.
NOTE 6 - COMMON STOCK AND STOCK OPTION PLAN
During 1998, COPE adopted the 1998 Stock Option Plan ("1998 Plan") which
provides for the granting of either incentive stock options or non-qualified
stock options to employees, officers, directors, consultants and independent
contractors of COPE. Under the 1998 Plan, COPE is authorized to grant a maximum
of 400,000 stock options for terms of up to ten years (five years in the case of
incentive stock options granted to greater than 10% stockholders). Options are
subject to forfeiture upon termination of employment or other relationship with
COPE and the 1998 Plan terminates in August 2008. In January 1999, COPE granted
to employees options to purchase 129,900 shares of COPE's common stock at
exercise prices ranging from $20.00 to $50.00 per share. The options vest in
installments commencing in 2000. All options outstanding were granted at prices
which were above market price as of the date of grant and, accordingly, no
compensation expense has been recognized. On April 30, 1999, COPE issued 22,390
shares of common stock upon exercise of outstanding common stock purchase
options. On November 8, 1999 COPE issued 5,174 shares of common stock upon
exercise of outstanding common stock purchase warrants.
NOTE 7 - SEGMENT AND GEOGRAPHIC DATA
In 1998, COPE adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" which superceded SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131 established standards for the
way that public business enterprises report information about operating segments
in annual financial statements. SFAS No. 131 also established standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS 131 did not effect results of operations or
financial position, but did effect the disclosure of segment information.
Management, via country managing directors, controls operations on a geographic
basis with subsidiaries located in Switzerland, Germany and Austria and uses
earnings before interest, taxes, depreciation and amortization
-8-
(EBITDA) as its measure of segment profit or loss. Management decided to change
the measurement from EBIT (Earnings before interest and taxes) to EBITDA after
the Hicomp acquisition because of the high goodwill amortization COPE will have
in the next five years. Earnings before interest, taxes, depreciation and
amortization is defined as net income plus the following:
. extraordinary items and cumulative effect of accounting change;
. provision for income taxes;
. interest expense; and
. Depreciation and amortization
Earnings before interest, taxes, depreciation and amortization is presented not
as an alternative measure of operating results or cash flow operations as
determined in accordance with generally accepted accounting principles, but
because it is a widely accepted financial indicator of a company's ability to
incur and service debt.
Each geographic area's operations comprise the following products and services:
(1) Solutions which consist of the design, implementation and management of
storage and security solutions including the sale of related software and
hardware; and (2) Services which consist of consulting, training and integration
services including operations and maintenance support. The enterprise-wide
disclosures regarding products and services are contained in the income
statement.
Information concerning COPE's reportable segments is summarized as follows by
location of operations (Switzerland: COPE Holding AG, COPE AG; Germany: COPE
GmbH and Hicomp Software Systems GmbH, Austria: COPE Handelsges.mbH; Other:
COPE, Inc.; intercompany sales are generally at purchase cost):
Nine months period
ended September 30,
---------------------------
1999 1998
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Total revenue:
Switzerland $10,073,915 $10,682,445
Germany 12,995,445 5,617,664
Austria 1,889,796 1,075,776
----------- -----------
$24,959,156 $17,375,885
=========== ===========
Sales between geographic areas:
Switzerland $ 39,859 $ 29,460
Germany 11,854 12,275
Austria 1,922 9,217
----------- -----------
$ 53,635 $ 50,952
=========== ===========
Total revenue from external customers:
Switzerland $10,034,056 $10,652,985
Germany 12,983,591 5,605,389
Austria 1,887,874 1,066,559
----------- -----------
$24,905,521 $17,324,933
=========== ===========
Depreciation and amortization:
Switzerland $ 202,814 $ 224,041
Germany 1,542,283 39,490
Austria 43,381 13,499
----------- -----------
$ 1,788,478 $ 277,030
=========== ===========
Earnings before interest, taxes, depreciation
and amortization (EBITDA):
Switzerland $ (430,110) $ 715,416
Germany 569,362 (17,252)
Austria 52,303 36
-9-
Other (104,213) (29,920)
----------- -----------
$ 87,342 $ 668,280
=========== ===========
Reconciliation of EBITDA to earnings before taxes:
Earnings before interest, taxes, depreciation and
amortization (EBITDA):
Switzerland $ (430,110) $ 715,416
Germany 569,362 (17,252)
Austria 52,303 36
Other (104,213) (29,920)
----------- -----------
$ 87,342 $ 668,280
=========== ===========
Depreciation and amortization:
Switzerland $ (202,814) $ (224,041)
Germany (1,542,283) (39,490)
Austria (43,381) (13,499)
----------- -----------
$(1,788,478) $ (277,030)
=========== ===========
Interest, net:
Switzerland $ (52,528) $ (39,357)
Germany (34,396) (26,673)
Austria (3,225) (3,457)
----------- -----------
$ (90,149) $ (69,487)
----------- -----------
Earnings before taxes $(1,791,285) $ 321,763
=========== ===========
June 30, December 31,
----------- ------------
1999 1998
----------- ------------
Total assets:
Switzerland $ 7,383,670 $ 6,458,662
Germany 19,239,310 5,722,373
Austria 943,360 457,612
Other 966,070 0
----------- -----------
$28,532,410 $12,638,647
=========== ===========
-10-
ITEM 2. Management's Discussion and Analysis or Plan of Operation
OVERVIEW
General. COPE is a Swiss-based provider of data storage and security services
- -------
and solutions. COPE presently conducts business throughout Germany, Switzerland
and Austria.
COPE Reorganization. On September 25, 1998, COPE consummated a series of
- -------------------
transactions (referred to as the "COPE Reorganization") undertaken pursuant to
an Amended and Restated Securities Purchase Agreement and Plan of Reorganization
dated July 24, 1998 ("Reorganization Agreement") by and among COPE, COPE Holding
AG, a Swiss corporation, and the shareholders of COPE Holding AG ("COPE
Shareholders"). Pursuant to the Reorganization Agreement, COPE, among other
things, (i) effected a one for 58 reverse split of its shares of common stock
issued and outstanding immediately prior to the close of the COPE
Reorganization, thus reducing its issued and outstanding shares of common stock
to approximately 270,654; (ii) sold a controlling interest in its only
subsidiary, Glycosyn Pharmaceuticals, Inc., a Delaware corporation , and
otherwise divested itself of substantially all of its assets and liabilities on
hand immediately prior to the close of the COPE Reorganization; and (iii) issued
2,862,000 shares (post-split) of its common stock in exchange for all of the
outstanding capital shares of COPE Holding AG.
Since the COPE Shareholders owned approximately 91.4% of the outstanding shares
of the common stock of the Company after giving effect to the COPE
Reorganization, COPE Holding AG was deemed the accounting acquirer and the
Company's acquisition of COPE Holding AG has been accounted for as a reverse
merger under the purchase method. Accordingly, from an accounting standpoint,
COPE's equity is carried forward as the equity of the combined entity. There has
been no step up in the Company's accounting basis and, as a result, COPE Holding
AG is assumed to have acquired the Company at the Company's book value of $0,
after giving effect to the consummation of the COPE Reorganization. This
adjustment reflects the elimination of the Company's equity and accumulated
deficit.
Currency Exchange Rates. COPE regularly enters into contracts payable in Swiss
- -----------------------
Francs, German Marks and Austrian Schillings.
Although COPE reports its results in US Dollars, virtually all of its sales are
denominated in other currencies, primarily, Swiss Francs and German Marks and,
to a lesser extent, the Austrian Schillings, and Euro. A significant amount of
COPE's cost of sales (i.e., hardware and software purchases) on the other hand,
are denominated in US Dollars. Consequently, COPE's cost of doing business is
directly affected by any changes in the exchange rate between the US Dollar, on
the one hand, and the Swiss Franc or German Mark, on the other hand. The
financial position and results of operations of COPE and its foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of COPE and its subsidiaries are translated at the
exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from differences in exchange rates from period
to period are included in the cumulative translation adjustment account in
stockholders' equity.
COPE typically enters into forward exchange contracts covering fifty percent
(50%) of its hardware and software purchases for its client contracts in order
to mitigate the adverse effects of currency exchange fluctuations. However,
these actions generally provide only a partial mitigation of the adverse effects
of changes in currency rates and there can be no assurance that changes in
currency rates in the future will not have a material adverse affect on COPE's
business, operating results or financial condition and results of operations.
-11-
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Net Revenue. During the nine months ended September 30, 1999, the Company
- -----------
had net revenue of $24,905,521, which amounts to an increase of 43.7% over the
net revenue of $17,324,933 during the prior year period. The increase in net
revenue is due in part to COPE's acquisition of Forum and Hicomp. COPE acquired
Forum on June 25, 1998 and Forum has been included in the consolidated operating
results for periods subsequent to June 25, 1998. COPE acquired Hicomp on April
19, 1999 and Hicomp has been included in the consolidated operating results for
period subsequent to April 19, 1999. COPE believes that approximately $4,100,000
of the increase in revenue over the prior year period is attributable to COPE's
acquisition of Forum. COPE believes that approximately $840,000 of the increase
in revenue over the prior period is attributable to COPE's acquisition of
Hicomp.
Sales of solutions increased 41.4% during the nine months ended September
30, 1999 over the prior year period reaching $21,772,465 as compared to
$15,397,697. Sales of solutions consist of revenue from the resale of hardware
and software components along with associated consulting services. The reason
for the increase in revenue from the sales of solutions is the integration of
Forum.
Sales of services increased 62.6% during the nine months ended September
30, 1999 reaching $3,133,056 as compared to $1,927,236 for the prior year
period. Sales of services consist of revenue from stand-alone consulting and
integration services. The increase in revenue from the sale of services is the
result of COPE's decision to emphasize sales of services because of its
potential higher profit margin.
Cost of Sales. During the nine months ended September 30, 1999, cost of sales
- --------------
increased by 36.8% to $16,561,361 compared to $12,106,255 for the prior year
period, representing 76.1% and 78.6%, respectively, of the total revenue from
the sale of solutions. Cost of sales consists exclusively of the cost of
software and hardware acquired for resale. The decrease in cost of sales as a
percentage of revenue from the sale of solutions is the result of COPE's ability
to negotiate with its suppliers for lower prices for the products purchased by
COPE for resale. At the same time COPE elected to discontinue the pursuit of low
margin product sales. During 1997, COPE had chosen to pursue low margin product
sales as part of its plan to establish itself in the German market. COPE no
longer believes it is necessary or in its best interest to pursue these sales.
Gross Profit. COPE's gross profit margin for the nine months ended September
- ------------
30, 1999 was 33.5% compared to 30.1% for the prior year period. The increase is
primarily attributable to the large internal growth in sales of services as a
percentage of total revenue and the increase in the profit margin for products
sold in Germany.
Selling, General, Administrative and Consulting Expenses. COPE's selling,
- --------------------------------------------------------
general, administrative and consulting expenses as a percentage of net sales
increased between the nine months ended September 30, 1999 (31.6%) compared to
the prior year period (25.4%). The increase is attributable to COPE's large
investment for research and development, sales and marketing growth for its
newly acquired software products, Hiback and Hibars, during the three months
ended September 30, 1999 and the hiring of additional personnel necessary to
support the growth in sales of services. In the first quarter of fiscal 1998,
COPE reported an impairment loss of $63,004 related to the write-down of an
exclusive option for the rights to purchase, develop and market a new technique
for the automatic storage data.
Net Income/(Loss). During the nine months ended September 30, 1999, COPE had a
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net loss of $1,668,247 as compared to net income of $435,630 during the prior
year period. The decrease in income is mainly attributable to the amortization
of goodwill involved with COPE's acquisition of Hicomp in April 1999 and Forum
in June 1998 and the increase in research and development, selling and marketing
expenses of approximately $600,000 during the three months ended September 30,
1999 relating to the Hiback and Hibars software products. Earnings before
interest, taxes, depreciation and amortization for the nine months ended
September 30, 1999 was $87,342, which amounts to a decrease of 86.9% over
earnings before interest, taxes, depreciation and amortization of $668,280 for
the prior year period. The decrease in earnings before interest, taxes,
depreciation and amortization between 1999 and 1998 is mainly due to the
increase in research and development, selling and marketing expenses of
approximately $600,000 during the three months ended September 30, 1999 relating
to the Hiback and Hibars software products.
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Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net Revenue. During the three months ended September 30, 1999, COPE had
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net revenue of $8,341,545, which amounts to an increase of 10.6% over the net
revenue of $7,540,884 during the prior year period. The increase in net revenue
is due in part to COPE's acquisition of Hicomp. COPE acquired Hicomp on April
19, 1999 and Hicomp has been included in the consolidated operating results for
period subsequent to April 19, 1999. Approximately $280,000 of the increase in
revenue over the prior year period is attributable to COPE's acquisition of
Hicomp.
Sales of solutions increased 10.9% during the three months ended September 30,
1999 over the prior year period reaching $7,421,082 as compared to $6,689,964.
Sales of solutions consist of revenue from the resale of hardware and software
components along with associated consulting services.
Sales of services increased 8.2% during the three months ended September 30,
1999 reaching $920,463 as compared to $850,920 for the prior year period. Sales
of services consist of revenue from stand-alone consulting and integration
services. The increase is the result of COPE's decision to emphasize sales of
services because of its potential higher profit margin.
Cost of Sales. During the three months ended September 30, 1999, cost of sales
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increased by 11.1% to $5,862,695 compared to $5,278,710 for the prior year
period, representing 79.0% and 78.9%, respectively, of the total revenue from
the sale of solutions. Cost of sales consists exclusively of the cost of
software and hardware acquired for resale.
Gross Profit. COPE's gross profit margin for the three months ended September
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30, 1999 was 29.7% compared to 30.0% for the prior year period. The small
decrease is primarily attributable to the smaller internal growth in sales of
services as a percentage of total revenue in three months ended September 30.
1999 compared to the prior year period.
Selling, General, Administrative and Consulting Expenses. COPE's selling,
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general, administrative and consulting expenses as a percentage of net sales
increased between the three months ended September 30, 1999 (37.2%) and the
prior year period (25.7%). The increase is attributable to COPE's large
investment for research & development, sales and marketing for the software
products Hiback and Hibars in the three months ended September 30, 1999.
Net Income/(Loss). During the three months ended September 30, 1999, COPE had a
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net loss of $1,417,387 as compared to net income of $175,053 during the prior
year period. The decrease in income is due to the amortization of goodwill
($799,832 compared to $32,860 for the prior year period) involved with COPE's
acquisition of Hicomp in April 1999 and Forum in June 1998 and the expenses
related to the Hiback and Hibars software products of approximately $600,000 in
the three months ended September 30, 1999. Earnings before interest, taxes,
depreciation and amortization for the three months ended September 30, 1999 was
($750,994) compared to $292,826 for the prior year period. The decrease is
mainly due to the increase in research and development, selling and marketing
expenses of approximately $600,000 during the three months ended September 30,
1999, relating to the Hiback and Hibars software products.
LIQUIDITY AND FINANCIAL CONDITION
COPE's historical working capital requirements include the financing of all
costs involved in the design, implementation and sale of information systems.
COPE generally contracts to deliver information systems, including all hardware
and software, on a turn-key basis based on fixed price contracts. Consistent
with industry practice, COPE generally is not able to obtain significant up-
front or progress payments on its contracts providing for the design,
implementation and sale of information systems. Accordingly, COPE is generally
required to finance its clients' contracts, including the purchase of the
hardware and software components of the information systems. As of September 30,
1999, COPE had established short-term overdraft facilities under which COPE and
its subsidiaries could borrow up to $4,223,142. Amounts drawn down under these
facilities are due on demand and collateralized by accounts receivable of COPE
and life insurance policies on the major shareholders, Mr. Adrian Knapp and Mr.
Stephan Isenschmid for $342,700 each. COPE has been successful to date in
securing extensions on its lines for purposes of financing certain client
contracts and, in the most recent months, also the costs of COPE's proposed
secondary public offering as needed, however there can be no assurance that COPE
will continue to do so in the future.
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During the second quarter of 1999, COPE filed a Form SB-2 registration statement
with the Securities and Exchange Commission for purposes of registering the
secondary public offering of shares of its common stock. Although the secondary
public offering is being underwritten on a firm-commitment basis, there can be
no assurance as to the success of the offering.
In July 1999, COPE entered into a borrowing agreement with the lead bank for
COPE's secondary public offering, Nord/LB, to borrow up to DEM 1,825,000. The
note bears interest at the rate of 6% per annum and all interest is due and
payable no later than March 15, 2000. COPE intends to repay this note from the
proceeds of the secondary public offering.
In October 1999, COPE entered into a borrowing agreement with the lead bank for
COPE's secondary public offering, Nord/LB, to borrow up to DEM 2,500,000. The
note bears interest at the rate of 6% per annum and all interest is due and
payable no later than March 31, 2000. COPE intends to repay this note from the
proceeds of the secondary public offering.
In October 1999, COPE entered into a borrowing agreement with a third party, to
borrow up to CHF 1,000,000. COPE intends to repay this note from the proceeds of
the secondary public offering. The note does not bear interest however COPE has
agreed to issue to the lender 1,000 shares of common stock for each quarter that
the principal amount remains outstanding.
In October 1999, COPE entered into a borrowing agreement with Adrian Knapp, to
borrow up to CHF 1,200,000. The note bears interest at the rate of 8.5% per
annum. COPE intends to repay this note from the proceeds of the secondary public
offering. COPE used this loan for financing the repurchase of 200,000 common
shares from the former shareholder of Hicomp in October 1999.
As of September 30, 1999, COPE had a working capital deficit of approximately
$2,439,130, compared to a working capital position of $155,663 as of December
31, 1998. As of September 30, 1999, COPE had approximately $90,921 available for
borrowing under existing lines of credit under a weighted average interest rate
of approximately 3.7%.
COPE believes that it will require an additional $1,000,000 of working capital
over the next twelve months in order to finance continued operations and planned
growth. COPE intends to pursue the additional capital by way of its proposed
secondary public offering. COPE believes that the net proceeds form the
secondary offering, together with its existing capital resources, will be
sufficient to meet its capital requirements and finance its continued growth for
at least the next twelve months. However, there can be no assurance that the
proposed secondary offering will be completed or, if the offering is
unsuccessful, that COPE can obtain the required capital from alternative
sources. In addition, COPE's capital requirements may vary materially from those
currently planned, in which case COPE may require additional financing sooner
than anticipated. Additional financing may not be available when needed on terms
favorable to COPE or at all.
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YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs, microprocessors, and
embedded date reliant systems using two digits rather than four to define the
applicable year. If such programs are not corrected, date data concerning the
Year 2000 could cause many systems to fail, lock up or generate erroneous
results. COPE considers a product to be "Year 2000 compliant" if the product's
performance and functionality are unaffected by processing of dates prior to,
during and after the Year 2000, but only if all products (for example hardware,
software and firmware) used with the product properly exchange accurate date
data with it.
COPE believes that it may be possible that litigation may be brought against
vendors, including COPE, of all component products of systems that are unable to
properly manage data related to the Year 2000. COPE's agreements with customers
and end users typically contain provisions designed to limit COPE's liability
for such claims. It is possible, however, that these measures will not provide
protection from liability claims, as a result of existing or future federal,
state or local laws or ordinances or unfavorable judicial decisions. Any such
claims, with or without merit, could result in a material adverse effect on
COPE's business, financial condition and results of operations, customer
satisfaction issues and potential lawsuits.
COPE is identifying Year 2000 dependencies in its accounting software in Germany
and other systems, equipment, and processes and is implementing changes to such
systems, updating or replacing such equipment, and modifying such processes to
make them Year 2000 compliant. COPE is continuing to assess its internal Year
2000 issues and is in the process of remediation of the critical systems. While
management believes COPE's current accounting software systems in the other
countries of operations appear to be Year 2000 compliant, COPE intends to
upgrade all those systems during fiscal 1999, and will ensure that Year 2000
compliance is a major factor in the selection of the appropriate accounting
software package. COPE has also initiated formal communications with many of its
significant suppliers and financial institutions to evaluate their Year 2000
compliance plans and state of readiness and to determine whether any Year 2000
issues will impede the ability of such suppliers to continue to provide goods
and services to COPE. Each of these suppliers has assured COPE that their goods
and services are Year 2000 compliant.
As a general matter, COPE is vulnerable to any failure by its key suppliers to
remedy their own Year 2000 issues, which could delay shipments of essential
components, there by disrupting or halting COPE's manufacturing operations.
Further, COPE also relies, both domestically and internationally, upon
governmental agencies, utility companies, telecommunication service companies
and other service providers outside of COPE's control. There is no assurance
that such suppliers, governmental agencies, financial institutions, or other
third parties will not suffer business disruption caused by a Year 2000 issue,
and there is little practical opportunity for COPE to test or require Year 2000
compliance from many of those large agencies, companies or providers. Such
failures could have a material adverse effect on COPE's business, financial
condition and results of operations. In the worst case scenario, a storage or
security system installed by COPE could completely collapse and the client could
lose forever important data. If this were to happen and the client incurred
substantial economic loss, COPE might be held liable for such loss.
Additionally, COPE is communicating with its large customers to determine the
extent to which COPE is vulnerable to those third parties' failure to remedy
their own Year 2000 issues.
COPE anticipates that its internal systems, equipment and processes will be
substantially Year 2000 compliant by the end of October 1999. A formal budget
has not been established, and the cost to COPE of achieving Year 2000 compliance
is evolving; however, it is not currently expected to have a material effect on
COPE's financial condition or results of operations. COPE has to date spent
approximately $30,000 to upgrade computer software and hardware to insure Year
2000 compliance. COPE anticipates that the cost of Year 2000 compliant software
(including the upgraded accounting software noted above) is not likely to exceed
$50,000, (excluding the costs of the Year 2000 compliance problems associated
with COPE's vendors, customers, financial institutions and government agencies
noted above) although COPE believes that a significant amount of the total
expenditures relating to there placement of such computer hardware and software
to keep pace with technological advances would be capitalized and depreciated
over the useful life of the applicable asset. COPE estimates that Year 2000
compliance charges will be paid from existing Company working capital, and that
the total Year 2000 compliance budget is approximately 50% of COPE's total IT
expenditures. While COPE currently expects that the Year 2000 issue will not
pose significant internal operational problems, delays in COPE's remediation
efforts, or a failure to
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fully identify all Year 2000 dependencies in the systems, equipment or processes
of COPE or its vendors, customers or financial institutions could have material
adverse consequences, including delays in the manufacture, delivery or sale of
products. Therefore, COPE is considering the development of contingency plans
along with its remediation efforts for continuing operations in the event such
problems arise.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European Union
("EU") established fixed conversion rates between their existing sovereign
currencies and the Euro, and adopted the Euro as their common legal currency. A
significant portion of COPE's transactions will be denominated in Euros. COPE
has successfully adapted its information systems and practices to accommodate
the Euro in those EU member countries in which it offers its services. Euro
conversion is expected to generally increase cross-border price transparency
among the participating countries and result in a more competitive European
market. COPE is uncertain as to the effect, if any, that Euro conversion will
have on its ability to sell its products and services in the European market.
Euro conversion could potentially impact pricing strategies and demand for
COPE's services in the European market, lead to increased competition within the
European market for the specific types of services sold by COPE, or impact
COPE's relationships with vendors and licensors. There can be no assurance that
Euro conversion will not have a material, adverse effect on COPE's business,
financial condition and results of operation.
FORWARD LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements that are based on
COPE's beliefs as well as assumptions made by and information currently
available to COPE. When used herein, the words "believe," "expect,"
"anticipate," "estimate" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions, including (i) the intense competition in COPE's
industry; (ii) future developments and changes in prevailing technologies and
standards in the data storage industry; (iii) availability of additional capital
as required; and (iv) general economic conditions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated,
or projected. COPE caution shareholders of COPE and potential investors not to
place undue reliance on any such forward-looking statements, all of which speak
only as of the date made.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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Inapplicable.
Item 2. Changes in Securities.
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Inapplicable.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Inapplicable.
Item 5. Other Information.
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Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
Inapplicable.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COPE, Inc.
(Registrant)
Dated: November 22, 1999 By: /s/ MARKUS BERNHARD
----------------------------
Markus Bernhard
Chief Financial Officer
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