<PAGE>
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 June 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.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices)
+ 41 41 798 33 44
--------------------------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
n/a
-------------------------------------------------------------
(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 _______ No X
-----
As of August 23, 1999, the Company had 3,595,751 shares of its $.001 par
value common stock issued and outstanding.
<PAGE>
PART 1 - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. Financial Statements PAGE
----
<S> <C>
Unaudited Condensed Consolidated Balance Sheets at
June 30, 1999 and December 31, 1998 ......................................... 2
Unaudited Condensed Consolidated Statements of Operations for the three month
periods and six month periods ended June 30, 1999 and 1998................... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
six month periods ended June 30, 1999 and 1998............................... 4
Notes to Condensed Consolidated Financial Statements........................... 5
</TABLE>
-1-
<PAGE>
COPE, INC.
Condensed Consolidated Balance Sheets
(Amounts in U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1999 1998
-------------------- ----------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 185,433 $ 1,303,114
Trade accounts receivable 6,310,773 5,418,777
Inventories (net of provision of $79,471 and $89,455) 1,911,960 2,433,790
Other current assets 626,627 450,013
-------------------- ----------------------
Total current assets 9,034,793 9,605,694
Property, plant and equipment, net 891,555 751,235
Loans receivable 654,268 662,050
Goodwill (net of amortization of $755,861 and $69,578) 15,687,996 938,788
Intangible assets 55,194 88,385
Deferred income taxes 464,281 592,495
-------------------- ----------------------
TOTAL ASSETS $ 26,788,087 $ 12,638,647
==================== ======================
LIABILITIES
Current liabilities:
Short-term borrowings $ 2,304,356 $ 2,385,303
Trade accounts payable 4,567,244 5,650,422
Customer advances 419,000 216,558
Other current liabilities 1,398,161 802,384
Current income taxes payable 152,906 179,012
Deferred income taxes 269,314 216,352
-------------------- ----------------------
Total current liabilities 9,110,981 9,450,031
-------------------- ----------------------
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 725 31,852
Retained earnings 2,396,720 2,647,580
-------------------- ----------------------
Total Shareholders' equity 17,677,106 3,188,616
-------------------- ----------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 26,788,087 $ 12,638,647
==================== ======================
</TABLE>
See accompanying notes to condensed consolidated financial statements
-2-
<PAGE>
COPE, INC.
Condensed Consolidated Statements of Income
(Amounts in U.S. Dollars except share amount)
For the three month periods and six month periods ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Three month periods ended Six month periods ended
June 30, June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Revenue
Sales of solutions $ 7,096,076 4,562,246 14,351,383 8,707,773
Sales of services 929,986 580,968 2,212,593 1,076,316
----------- ------------ ------------ ------------
Total revenue 8,026,062 5,143,214 16,563,976 9,784,089
Cost of sales (5,024,910) (3,660,021) (10,698,666) (6,827,545)
----------- ------------ ------------ ------------
Gross profit 3,001,152 1,483,193 5,865,310 2,956,544
----------- ------------ ------------ ------------
Operating expenses:
Selling, general and administrative (2,336,695) (1,253,328) (4,774,214) (2,466,570)
expenses
Consultancy expenses (193,271) (47,158) (252,561) (113,660)
Depreciation (106,448) (62,448) (190,317) (101,535)
Impairment of intangibles assets 0 0 0 (63,004)
Amortization of goodwill and other (637,608) (1,548) (686,283) (15,513)
intangibles assets
----------- ------------ ------------ ------------
Total operating expenses (3,274,022) (1,364,482) (5,903,375) (2,760,282)
Operating income (272,870) 118,711 (38,065) 196,262
Other income (expense):
Interest expense (18,462) (19,644) (83,129) (32,702)
Interest income 12,909 1,178 51,185 1,178
Other 3,314 (674) (199) (814)
----------- ------------ ------------ ------------
(2,239) (19,140) (32,143) (32,338)
----------- ------------ ------------ ------------
Earnings before taxes (275,109) 99,571 (70,208) 163,924
Current income taxes (16,491) 303 (37,454) (46,994)
Deferred income taxes (107,263) 58,938 (143,198) 143,687
----------- ------------ ------------ ------------
(123,754) 59,241 (180,652) 96,693
----------- ------------ ------------ ------------
Net income (loss) (398,863) 158,812 (250,860) 260,617
=========== ============ ============ ============
Basic earnings (loss) per share $ (0.11) $ 0.06 $ (0.08) $ 0.09
Weighted average shares outstanding 3,500,677 2,862,000 3,327,979 2,862,000
=========== ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
COPE, INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in U.S. Dollars)
For the six month periods ended June 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Six month periods ended
-------------------------------------------
June 30, June 30,
1999 1998
----------------- -------------------
<S> <C> <C>
Cash flow provided by operating activities
Net income/(loss) $ (250,860) $ 260,617
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 190,317 101,535
Amortization of intangibles assets 0 63,004
Amortization of goodwill and other intangibles assets 686,283 15,513
Deferred income taxes 143,198 (143,687)
Effects of changes in operating assets and liabilities
Accounts receivable (1,472,394) (1,438,311)
Inventories 263,087 (1,004,986)
Other current assets (89,937) (325,584)
Accounts payable (590,459) 2,183,307
Customer advances 238,297 (674,563)
Other current liabilities 19,586 494,506
----------------- -------------------
Net cash flow used by operating activities (862,882) (468,649)
----------------- -------------------
Cash flow used in investing activities
Purchase of property, plant and equipment (365,425) (198,676)
Loans receivables (69,520) (81,763)
Acquisition of businesses/net of cash acquired 0 437,002
----------------- -------------------
Net cash flow provided/used by investing activities (434,945) 156,563
Cash flow provided by financing activities
Issuance of common stock 188,076 0
Increase/decrease of short term borrowings 62,185 (69,539)
----------------- -------------------
Net cash flow provided/used by financing activities 250,261 (69,539)
Effect of exchange rate changes on cash (70,115) (45,555)
Net decrease of cash and cash equivalents (1,117,681) (427,180)
Cash and cash equivalents at beginning of the period 1,303,114 678,936
----------------- -------------------
Cash and cash equivalents at end of the period $ 185,433 $ 251,756
================= ===================
Supplemental cash flow disclosure
Interest paid $ 83,129 $ 32,702
Income taxes paid 53,725 18,457
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
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
COPE, INC.
Notes to Condensed Consolidated Financial Statements
As of June 30, 1999 and for the six month
periods ended June 30, 1999 and 1998
(unaudited)
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 Company'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 Company capitalized its start-up costs and amortized them
over four years. The Company 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.
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:
<TABLE>
<CAPTION>
<S> <C>
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 assets acquired $ 125,408
</TABLE>
-5-
<PAGE>
On April 19, 1999, the Company 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.
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:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
The pro forma unaudited results of operations for the six months ended June 30,
1999 and June 30, 1998, assuming consummation of the purchases as of the
beginning of the periods presented, are as follows:
<TABLE>
<CAPTION>
Six month periods ended
June 30,
--------------------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Net revenue 17,014,883 18,728,239
Net loss (966,208) (1,058,939)
Per share data:
Basic earnings (loss) (0.27) (0.32)
</TABLE>
-6-
<PAGE>
NOTE 4 - IMPAIRMENT OF INTANGIBLE 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.
NOTE 5 - COMMON STOCK AND STOCK OPTION PLAN
During 1998, the Company 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 the Company. Under the 1998 Plan, the Company 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 the Company and the 1998 Plan terminates in August
2008. In January 1999, the Company granted to employees options to purchase
129,900 shares of the Company'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, the Company issued 22,390 shares of common stock
upon exercise of outstanding common stock purchase options.
NOTE 6 - OTHER COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three month periods ended Six month periods ended
June 30, June 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
-------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net income (loss) (398,863) 158,812 (250,860) 260,617
Translation adjustment, net of tax $ 135,618 (16,859) (31,126) (110,162)
-------------- --------------- ------------- ---------------
Total comprehensive income (loss) 263,245 141,953 (281,986) 150,455
============== =============== ============= ===============
</TABLE>
NOTE 7 - SEGMENT AND GEOGRAPHIC DATA
In 1998, the Company 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 (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 the Company will have in
the next five years. 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.
-7-
<PAGE>
Information concerning the Company'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):
<TABLE>
<CAPTION>
Six month period ended June 30,
-------------------------------
1999 1998
----------- ------------
<S> <C> <C>
Total revenue:
Switzerland $ 6,496,864 $ 7,102,254
Germany 8,786,815 2,112,835
Austria 1,327,112 617,781
----------- -----------
16,610,791 9,832,870
----------- -----------
Sales between geographic areas:
Switzerland $ 36,598 $ 28,942
Germany 10,217 11,085
Austria 0 8,754
----------- -----------
46,815 48,781
----------- -----------
Total revenue from external customers:
Switzerland $ 6,460,266 $ 7,073,312
Germany 8,776,598 2,101,750
Austria 1,327,112 609,027
----------- -----------
$16,563,976 $ 9,784,089
=========== ===========
Depreciation and amortization:
Switzerland $ 137,117 $ 69,061
Germany 714,390 24,167
Austria 25,093 7,763
----------- -----------
$ 876,600 $ 100,991
=========== ===========
Earnings before interest, taxes, depreciation
and amortization (EBITDA):
Switzerland $ 277,755 $ 467,769
Germany 520,800 (111,904)
Austria 109,719 (48,612)
Other (69,739) 0
----------- -----------
$ 838,535 $ 307,253
=========== ===========
June 30, December 31,
----------- ------------
1999 1998
----------- -----------
Total assets:
Switzerland $ 6,105,056 $ 6,458,662
Germany 19,032,008 5,722,373
Austria 1,275,048 457,612
Other 375,975 0
----------- -----------
$26,788,087 $12,638,647
=========== ===========
</TABLE>
-8-
<PAGE>
ITEM 2. Management's Discussion and Analysis or Plan of Operation
OVERVIEW
General. The Company is a Swiss-based provider of data storage and security
- -------
consulting services and solutions. The Company's principal operations consist of
the design and implementation of information systems in the areas of data
storage, data security and data warehousing. The Company presently conducts
business primarily in Germany, Switzerland and Austria.
COPE Reorganization. On September 25, 1998, the Company consummated a series of
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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 the Company, COPE
Holding AG, a Swiss corporation, and the shareholders of COPE Holding AG ("COPE
Shareholders"). Pursuant to the Reorganization Agreement, the Company, 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. The Company regularly enters into certain financial
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commitments payable in Swiss Francs, Deutsche Marks and Austrian Schillings. All
Swiss Franc based amounts are designated by the symbol SFr. As of August 20,
1999, the Swiss Franc-Dollar exchange rate was 1.50 Swiss Franc to 1 U.S.
Dollar.
Although the Company reports its results in US Dollars, virtually all of its
sales are denominated in other currencies, including, primarily, Swiss Francs
and Deutsche Marks and, to a lesser extent, Austrian Schillings. A significant
amount of the Company's cost of sales (i.e., hardware and software purchases) on
the other hand, are denominated in US Dollars. Consequently, the Company'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 and Euro, on the
other hand. The financial position and results of operations of the Company and
its foreign subsidiaries are measured using local currency as the functional
currency. Assets and liabilities of the Company 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.
The Company 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 the Company's business, financial condition and results of operations.
-9-
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net Revenue. During the six months ended June 30, 1999, the Company had net
- -----------
revenue of $16,563,976, which amounts to an increase of 69.3% over the net
revenue of $9,784,089 during the prior year period. The increase in net revenue
is due in part to the Company's acquisition of Forum and Hicomp. The Company
acquired Forum on June 25, 1998 and Forum has been included in the consolidated
operating results for periods subsequent to June 25, 1998. The Company acquired
Hicomp on April 19, 1999 and Hicomp has been included in the consolidated
operating results for period subsequent to April 19, 1999. The Company believes
that approximately $5,500,000 of the increase in revenue over the prior year
period is attributable to the Company's acquisition of Forum. The Company
believes that approximately $560,000 of the increase in revenue over the prior
period is attributable to the Company's acquisition of Hicomp.
Sales of solutions increased 64.8% during the six months ended June 30,
1999 over the prior year period reaching $14,351,383 as compared to $8,707,773.
Sales of solutions consists 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 105.6% during the six months ended June 30,
1999 reaching $2,212,593 as compared to $1,076,316 for the prior year period.
Sales of services consists of revenue from stand-alone consulting and
integration services. The increase in revenue from the sale of services is the
result of the Company's decision to emphasize sales of services because of its
potential higher profit margin.
Cost of Sales. During the six months ended June 30, 1999, cost of sales
- -------------
increased by 56.7% to $10,698,666 compared to $6,827,545 for the prior year
period, representing 74.5% and 78.4%, 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 the Company's
ability to negotiate with its suppliers for lower prices for the products
purchased by the Company for resale. At the same time the Company elected to
discontinue the pursuit of low margin product sales. During 1997, the Company
had chosen to pursue low margin product sales as part of its plan to establish
itself in the German market. The Company no longer believes it is necessary or
in its best interest to pursue these sales.
Gross Profit. The Company's gross profit margin for the six months ended June
- ------------
30, 1999 was 35.4% compared to 30.2% 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. The Company's
- --------------------------------------------------------
selling, general, administrative and consulting expenses as a percentage of net
sales increased between the six months ended June 30, 1999 (28.8%) compared to
the prior year period (25.2%). The increase is primarily attributable to the
hiring of additional personnel necessary to support the growth in sales of
services. In the first quarter of fiscal 1998 the Company 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.
Net Income (Loss). During the six months ended June 30, 1999, COPE had a net
- -----------------
loss of $250,860, as compared to net income of $260,617 during the prior year
period. The decrease in income is due to the amortization of goodwill involved
with COPE's acquisition of Hicomp in April 1999 and Forum in June 1998. Earnings
before interest, taxes, depreciation and amortization for the six months ended
June 30, 1999 was $838,535, which amounts to an increase of 172.9% over earnings
before interest, taxes, depreciation and amortization of $307,253 for the prior
year period.
-10-
<PAGE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net Revenue. During the three months ended June 30, 1999, the Company had net
- -----------
revenue of $8,026,062, which amounts to an increase of 56.1% over the net
revenue of $5,143,214 during the prior year period. The increase in net revenue
is due in part to the Company's acquisition of Forum and Hicomp. The Company
acquired Forum on June 25, 1998 and Forum has been included in the consolidated
operating results for periods subsequent to June 25, 1998. The Company acquired
Hicomp on April 19, 1999 and Hicomp has been included in the consolidated
operating results for period subsequent to April 19, 1999. The Company believes
that approximately $1,900,000 of the increase in revenue over the prior year
period is attributable to the Company's acquisition of Forum, and approximately
$560,000 of the increase in revenue to the Company's acquisition of Hicomp.
Sales of solutions increased 55.5% during the three months ended June 30, 1999
over the prior year period reaching $7,096,076 as compared to $4,562,246. Sales
of solutions consists of revenue from the resale of hardware and software
components along with associated consulting services. The main reason for the
increase in revenue from the sale of solutions is the integration of Forum.
Sales of services increased 60.1% during the three months ended June 30, 1999
reaching $929,986 as compared to $580,968 for the prior year period. Sales of
services consists of revenue from stand-alone consulting and integration
services. The increase is the result of the Company's decision to emphasize
sales of services because of its potential higher profit margin. As compared
with the first quarter's increase, the increase in the three months ended June
30, 1999 decreased from 158.9% to 60.1%. The increase in the first quarter 1999
was extraordinary high and does not represent an average rate of increase.
Cost of Sales. During the three months ended June 30, 1999, cost of sales
- -------------
increased by 37.3% to $5,024,910 compared to $3,660,021 for the prior year
period, representing 70.8% and 80.2%, 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 is the
result of the Company's ability to negotiate with its suppliers for lower prices
for the products purchased by the Company for resale, as well as the additional
revenue from the Company's own backup-software, Hiback and Hibars, which are
included in the sales of solutions.
Gross Profit. The Company's gross profit margin for the three months ended June
- ------------
30, 1999 was 37.4% compared to 28.8% 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 sale of the Company's own software products.
Selling, General, Administrative and Consulting Expenses. The Company's selling,
- --------------------------------------------------------
general, administrative and consulting expenses as a percentage of net sales
increased between the three months ended June 30, 1999 (29.1%) and the prior
year period (24.4%). The increase is primarily attributable to the hiring of
additional personnel necessary to support the growth in sales of services.
Net Income (Loss). During the three months ended June 30, 1999, COPE had a net
- -----------------
loss of $398,863 as compared to net income of $158,812 during the prior year
period. The decrease in income is due to the amortization of goodwill involved
with COPE's acquisition of Hicomp in April 1999 and Forum in June 1998. Earnings
before interest, taxes, depreciation and amortization for the three months ended
June 30, 1999 was $471,186, which amounts to an increase of 157.9% over earnings
before interest, taxes, depreciation and amortization of $182,707 for the prior
year period.
LIQUIDITY AND FINANCIAL CONDITION
The Company's historical working capital requirements include the financing of
all costs involved in the design, implementation and sale of information
systems. The Company 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, the Company 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, the
Company is generally required to finance its clients' contracts, including the
purchase of the hardware and software components of the
-11-
<PAGE>
information systems. As of June 30, 1999, the Company had established short-term
overdraft facilities under which the Company and its subsidiaries could borrow
up to $ 2,498,218. Amounts drawn down under these facilities are due on demand
and collateralized by accounts receivable of the Company and life insurance
policies on the major shareholders, Mr. Adrian Knapp and Mr. Stephan
Isenschmid, for $342,700 each. The Company has been successful to date in
securing extensions on its lines for purposes of financing certain client
contracts as needed, however there can be no assurance that the Company will
continue to do so in the future.
In June 1999, the Company 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. In the secondary public offering,
the Company intends to offer up to 400,000 shares of common stock and a selling
shareholder intends to offer 200,000 shares of 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, the Company entered into a borrowing agreement with the lead bank
for the Company'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 December 15, 1999. The Company intends to repay
this note from the proceeds of the secondary public offering.
As of June 30, 1999, the Company had a working capital deficit of approximately
$76,188, compared to a working capital position of $155,663 as of December 31,
1998. As of June 30, 1999, the Company had approximately $200,000 available
for borrowing under existing lines of credit under a weighted average interest
rate of approximately 3%.
The Company believes that it will require significant additional working capital
in order to finance continued growth. The Company believes that the proceeds
from its secondary public 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, if its capital
requirements vary materially from those currently planned, the Company may
require additional financing sooner than anticipated. Additional financing may
not be available when needed on terms favorable to the Company or at all.
-12-
<PAGE>
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. The Company 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.
The Company believes that it may be possible that litigation may be brought
against vendors, including the Company, of all component products of systems
that are unable to properly manage data related to the Year 2000. The Company's
agreements with customers and end users typically contain provisions designed to
limit the Company'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 the Company's business, financial condition and
results of operations, customer satisfaction issues and potential lawsuits.
The Company 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. The Company is continuing to assess
its internal Year 2000 issues and is in the process of remediation of the
critical systems. While management believes the Company's current accounting
software systems in the other countries of operations appear to be Year 2000
compliant, the Company 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. The Company 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 the Company. Each of
these suppliers has assured the Company that their goods and services are Year
2000 compliant.
As a general matter, the Company 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 the Company's manufacturing
operations. Further, the Company also relies, both domestically and
internationally, upon governmental agencies, utility companies,
telecommunication service companies and other service providers outside of the
Company'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 the Company 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 the Company's business, financial condition and
results of operations. In the worst case scenario, a storage or security system
installed by the Company could completely collapse and the client could lose
forever important data. If this were to happen and the client incurred
substantial economic loss, the Company might be held liable for such loss.
Additionally, the Company is communicating with its large customers to determine
the extent to which the Company is vulnerable to those third parties' failure to
remedy their own Year 2000 issues.
The Company 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 the Company of achieving Year 2000
compliance is evolving; however, it is not currently expected to have a material
effect on the Company's financial condition or results of operations. The
Company has to date spent approximately $30,000 to upgrade computer software and
hardware to insure Year 2000 compliance. The Company 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 the Company's vendors, customers,
financial institutions and government agencies noted above) although the Company
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. The Company 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 the Company's total IT
-13-
<PAGE>
expenditures. While the Company currently expects that the Year 2000 issue will
not pose significant internal operational problems, delays in the Company's
remediation efforts, or a failure to fully identify all Year 2000 dependencies
in the systems, equipment or processes of the Company or its vendors, customers
or financial institutions could have material adverse consequences, including
delays in the manufacture, delivery or sale of products. Therefore, the Company
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 the Company's transactions will be denominated in Euros.
The Company 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. The Company 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 the Company's services in the European market, lead to increased
competition within the European market for the specific types of services sold
by the Company, or impact the Company's relationships with vendors and
licensors. There can be no assurance that Euro conversion will not have a
material, adverse effect on the Company's business, financial condition and
results of operation.
FORWARD LOOKING STATEMENTS
This Form 10-QSB contains certain forward-looking statements that are based on
the Company's beliefs as well as assumptions made by and information currently
available to the Company. 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 the
Company'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. The Company caution shareholders of the
Company and potential investors not to place undue reliance on any such forward-
looking statements, all of which speak only as of the date made.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
Inapplicable.
Item 2. Changes in Securities.
---------------------
On April 19, 1999, COPE acquired Hicomp Software Systems GmbH ("Hicomp"), a
German software company. Pursuant to a Sale and Assignment of Business Shares
entered into on December 21, 1998 between COPE and Mr. Uwe Hinrichs, the
president and sole shareholder of Hicomp, COPE issued 420,000 shares of common
stock in exchange for all of the outstanding capital shares of Hicomp.
Item 3. Defaults Upon Senior Securities.
-------------------------------
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
Inapplicable.
Item 5. Other Information.
-----------------
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits
--------
27.1 Financial Data Schedule
Inapplicable.
(b) Reports on Form 8-K
-------------------
On March, 1999, the Company filed a Form 8-K to report the appointment of ATAG
Ernst & Young, a member of Ernst & Young International, as the Company's
independent auditors for the fiscal year ending December 31, 1998.
-15-
<PAGE>
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: August 23, 1999 By: /s/ MARKUS BERNHARD
------------------------------
Markus Bernhard
Chief Financial Officer
-16-
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