<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, 2000
[ ] 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 12, 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 X No
-----
As of August 11, 2000, the Company had 4,314,085 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, 2000 (unaudited) and December 31, 1999 (audited)............................ 2
Unaudited Condensed Consolidated Statements of Operations for the three month
periods and six month periods ended June 30, 2000 and 1999........................... 3
Unaudited Condensed Consolidated Statements of Cash Flows for the
six month periods ended June 30, 2000 and 1999....................................... 4
Notes to Condensed Consolidated Financial Statements................................... 5
</TABLE>
-1-
<PAGE>
COPE, INC.
Condensed Consolidated Balance Sheets
(Amounts in U.S. Dollars)
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
2000 1999
------------- --------------
Unaudited
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,426,641 $ 653,906
Trade accounts receivable 6,498,395 4,627,287
Inventories (net of provision of $199,828 and 2,926,400 2,111,519
$201,107)
Other current assets 948,085 668,756
------------- --------------
Total current assets 12,799,521 8,061,468
Property, plant and equipment, net 1,608,956 1,283,487
Loans receivable from related party 1,661,573 550,361
Goodwill (net of amortization of $4,098,848 and
$2,367,866) 15,984,117 14,228,210
Intangible assets 84,439 81,687
Deferred income taxes 1,278,800 823,972
Deferred capital transactions costs 0 1,264,237
------------- --------------
TOTAL ASSETS $ 33,417,406 $ 26,293,422
============= ==============
Current liabilities:
Short-term borrowings $ 658,321 $ 4,482,832
Trade accounts payable 4,821,453 6,730,851
Loans payable to related parties 764,160 1,081,611
Loans payable, other 232,545 628,180
Other current liabilities 1,854,350 2,339,600
Current income taxes payable 198,707 155,475
Deferred income taxes 102,351 96,340
------------- --------------
Total current liabilities 8,631,887 15,514,889
------------- --------------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Shareholders' equity:
Share capital:
Common stock, $0.001 par value
Authorized shares 30,000,000
Issued and outstanding shares 4,314,085 (3,405,423 in
1999) 4,314 3,405
Additional paid in capital 27,903,228 11,420,355
Accumulated other comprehensive income/(loss)
Cumulative translation adjustment (200,658) (183,177)
Retained earnings/(deficit) (2,921,365) (462,050)
------------- --------------
Total shareholders' equity 24,785,519 10,778,533
------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 33,417,406 $ 26,293,422
============= ==============
</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 30,2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Three month periods ended Six month periods ended
June 30, June 30,
----------------------------------- -------------------------------------
2000 1999 2000 1999
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net revenue
Sales of solutions $ 7,037,740 $ 7,096,076 $ 14,044,270 $ 14,351,383
Sales of services 757,918 929,986 1,832,784 2,212,593
------------ ------------ ------------ --------------
Total revenue 7,795,658 8,026,062 15,877,054 16,563,976
Cost of sales (4,938,748) (5,024,910) (10,231,513) (10,698,666)
------------ ------------ ------------ --------------
Gross profit 2,856,910 3,001,152 5,645,541 5,865,310
------------ ------------ ------------ --------------
Operating expenses:
Selling, general and administrative (3,147,980) (2,336,695) (6,071,693) (4,774,214)
expenses
Consultancy expenses (263,863) (193,271) (487,178) (252,561)
Depreciation (135,484) (106,448) (225,034) (190,317)
Impairment of intangibles assets 0 0 0 0
Amortization of goodwill and other (918,111) (637,608) (1,719,982) (686,283)
intangibles assets
------------ ------------ ------------ --------------
Total operating expenses (4,465,438) (3,274,022) (8,503,887) (5,903,375)
Operating loss (1,608,528) (272,870) (2,858,346) (38,065)
Other income (expense):
Interest expense (43,162) (18,462) (115,803) (83,129)
Interest expense to related party 0 0 (22,265) 0
Interest income 36,434 7,897 70,642 40,836
Interest income from related party 7,740 5,012 15,687 10,349
Other 0 3,314 0 (199)
------------ ------------ ------------ --------------
1,012 (2,239) (51,739) (32,143)
------------ ------------ ------------ --------------
Earnings before taxes (1,607,516) (275,109) (2,910,085) (70,208)
Current income taxes (36,523) (16,491) (36,523) (37,454)
Deferred income taxes 292,148 (107,263) 487,292 (143,198)
------------ ------------ ------------ --------------
255,625 (123,754) 450,769 (180,652)
------------ ------------ ------------ --------------
Net loss $ (1,351,891) $ (398,863) $ (2,459,316) $ (250,860)
============ ============ ============ ==============
Basic earnings per share $ (0.31) $ (0.11) $ (0.60) $ (0.08)
Diluted earnings per share $ (0.31) $ (0.11) $ (0.60) $ (0.08)
Weighted average shares outstanding
Basic 4,305,584 3,500,677 4,080,016 3,327,979
Diluted 4,305,584 3,500,677 4,080,016 3,327,979
============ ============ ============ ==============
</TABLE>
See accompanying notes 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, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Six month periods ended
---------------------------------
June 30, June 30,
2000 1999
------------ ------------
<S> <C> <C>
Cash flow used by operating activities
Net loss $ (2,459,316) $ (250,860)
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 225,034 190,317
Amortization of goodwill and other intangibles assets 1,719,982 686,283
Deferred income taxes (487,293) 143,198
Effects of changes in operating assets and liabilities, net of
business acquisition
Accounts receivable (1,262,558) (1,472,394)
Inventories (799,575) 263,087
Other current assets 490,350 (89,937)
Accounts payable (880,230) (590,459)
Customer advances (13,092) 238,297
Other current liabilities (673,868) 19,586
------------ ------------
Net cash flow used by operating activities (4,140,566) (862,882)
------------ ------------
Cash flow used in investing activities
Purchase of property, plant and equipment (525,248) (365,425)
Loans receivables (1,179,286) (69,520)
Acquisition of businesses, net of cash acquired (1,233,414) 0
------------ ------------
Net cash flow used by investing activities (2,937,948) (434,945)
Cash flow provided by financing activities
Issuance of common stock 14,300,086 188,076
Increase/decrease of short term borrowings (5,439,743) 62,185
------------ ------------
Net cash flow provided by financing activities 8,860,343 250,261
Effect of exchange rate changes on cash (9,094) (70,115)
Net increase/decrease of cash and cash equivalents 1,772,735 (1,117,681)
Cash and cash equivalents at beginning of the period 653,906 1,303,114
------------ ------------
Cash and cash equivalents at end of the period $ 2,426,641 $ 185,433
============ ============
Supplemental cash flow disclosure
Interest paid $ 138,068 $ 83,129
Income taxes paid 36,523 53,725
Noncash investing and financing activities:
Short-term borrowings assumed in acquisition of business 0 132,652
Short-term borrowings incurred to effect acquisition of 0 0
business
Cash acquired in acquisition 403,267 0
</TABLE>
-4-
<PAGE>
COPE, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
As of June 30, 2000 and for the six month
periods ended June 30, 2000 and 1999
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, 1999. 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 2000 since their effect thereon would be anti-dilutive.
-5-
<PAGE>
NOTE 3 - BUSINESS ACQUISITION
On May 1, 2000, COPE acquired Multicom Software Oy ("Multicom"), a Finnish
company, in a stock and cash transaction accounted for by the purchase method of
accounting. COPE issued 24,956 new shares and paid EURO 1,795,000 in exchange
for all outstanding Multicom shares, Further, there is an Earn-out Model of EURO
800,000. Accordingly, the operating results of Multicom 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 $3,570,359 and
has been recorded as goodwill, which is being amortized on a straight line basis
over five years. Multicom, headquartered in Lappeenranta, Finland, is a system
management software provider and a data and information management consultant.
The Multicom assets acquired and liabilities assumed have been recorded at their
estimated fair values at the date of the Multicom acquisition. A summary of the
assets acquired, liabilities assumed and consideration paid follows:
Cash and cash equivalent.................................... $ 403,267
Accounts receivable......................................... 279,453
Inventory................................................... 75,000
Other current assets........................................ 6,440
Property, plant and equipment............................... 48,703
Other assets................................................ 8,309
Accounts payable............................................ (149,521)
Loans payable............................................... (221,979)
Other current liabilities................................... (126,943)
----------
Net fair value of assets acquired and liabilities assumed 322,729
Goodwill.................................................... 3,570,359
----------
Purchase Price.............................................. 3,893,088
==========
Value of the securities issued, funds and potential earn out $3,793,088
Estimated acquisition costs 100,000
----------
Purchase price 3,893,088
==========
Estimated annual amortization
(based on amortization period of five years) $ 715,000
On April 19, 1999, 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.
In October 1999, the Company repurchased from the former shareholders of Hicomp
200,000 of the common shares issued by the Company in the acquisition at a price
of DEM 7,200,000 ($3,598,000).
-6-
<PAGE>
The Hicomp assets acquired and liabilities assumed have been recorded at their
estimated fair values at the date of the Hicomp acquisition. 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.................................................... 15,626,069
------------
Purchase Price.............................................. 15,031,205
============
Value of the securities issued $ 14,582,400
Estimated acquisition costs 448,805
------------
Purchase price 15,031,205
============
Annual amortization
(based on amortization period of five years) $ 3,125,214
The Company paid in the last quarter 1999 $171,330 of the acquisition cost. In
the first quarter 2000 the Company paid $277,475 acquisition costs.
The pro forma unaudited results of operations for the six months ended June,
2000 and June 30, 1999, assuming consummation of the purchases as of the
beginning of the periods presented, are as follows:
Six month periods ended
June 30,
2000 1999
Net revenue 16,597,650 18,383,716
Net loss (2,673,701) (2,041,432)
Per share data:
Basic earnings (loss) (0.62) (0.52)
-7-
<PAGE>
NOTE 4 - 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.
NOTE 5 - 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 (EBITDA) as its
measure of segment profit or lossEarnings 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.
-8-
<PAGE>
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; Finland:
Multicom Software Oy; Other: COPE, Inc.; intercompany sales are generally at
purchase cost):
<TABLE>
<CAPTION>
Six months period ended June 30,
----------------------------------
2000 1999
------------- ------------
<S> <C> <C>
Total revenue:
Switzerland $ 6,447,732 $ 6,496,864
Germany 7,345,918 8,786,815
Austria 1,708,418 1,327,112
Finland 518,130 0
------------- ------------
$ 16,020,198 $ 16,610,791
============= ============
Sales between geographic areas:
Switzerland $ (23,934) $ 0
Germany (82,227) 0
Austria (36,983) 0
Finland 0 0
------------- ------------
$ (143,144) $ 0
============= ============
Total revenue from external customers:
Switzerland $ 6,423,798 $ 6,460,266
Germany 7,273,691 8,776,598
Austria 1,671,435 1,327,112
Finland 518,130 0
------------- ------------
$ 15,877,054 $ 16,563,976
============= ============
Depreciation and amortization:
Switzerland $ 134,139 $ 137,117
Germany 126,360 114,595
Austria 26,251 25,093
Finland 3,118 0
Other 1,655,148 599,795
------------- ------------
$ 1,945,016 $ 876,600
============= ============
Earnings before interest, taxes, depreciation and amortization (EBITDA):
Switzerland $ (507,426) $ 277,755
Germany (325,317) 520,800
Austria 105,137 109,719
Finland 126,869 0
Other (312,593) (69,540)
------------- ------------
$ (913,330) $ 838,336
============= ============
</TABLE>
-9-
<PAGE>
<TABLE>
<S> <C> <C>
Reconciliation of EBITDA to earnings before taxes:
Earnings before interest, taxes, depreciation and amortization (EBITDA):
Switzerland $ (507,426) $ 277,755
Germany (325,317) 520,800
Austria 105,137 109,719
Finland 126,869 0
Other (312,593) (69,540)
------------- ------------
$ (913,330) $ 838,336
============= ============
Depreciation and amortization:
Switzerland $ (134,139) $ (137,117)
Germany (126,360) (114,595)
Austria (26,251) (25,093)
Finland (3,118) 0
Other (1,655,148) (599,795)
------------- ------------
$ (1,945,016) $ (876,600)
============= ============
Interest, net;
Switzerland $ (31,020) $ (13,575)
Germany (16,954) (16,029)
Austria (932) (2,340)
Finland (796) 0
Other (2,037) 0
------------- ------------
$ (51,739) $ (31,944)
------------- ------------
Earnings before taxes $ (2,910,085) $ (70,208)
============= ============
<CAPTION>
------------- ------------
June 30, December 31,
------------- ------------
2000 1999
------------- ------------
<S> <C> <C>
Total assets:
Switzerland $ 6,226,250 $ 4,986,345
Germany 6,785,324 5,246,029
Austria 1,495,830 1,227,224
Finland 942,356 0
Other 17,967,646 14,833,824
============= ============
$ 33,417,406 $ 26,293,422
============= ============
</TABLE>
NOTE 6 - SUBSEQUENT EVENT
In July 2000, COPE and Mount10.com Holding AG ("Mount10"), a Swiss stock company
engaged in the business of data storage and web hosting, entered into a Merger
Agreement pursuant to which Mount10 will acquire COPE in a stock for stock
exchange. In the merger transaction, each common share of COPE will
automatically convert at the time of merger into the capital shares of Mount10.
Pursuant to the Merger Agreement, the shareholders of COPE will hold as a group
after the consummation of the merger approximately 80% of the outstanding
capital shares of Mount10 and the pre-merger shareholders of Mount10 will hold
approximately 20% of the capital shares of Mount10. The consummation of the
merger is subject to the approval of the Merger Agreement by the shareholders of
COPE and the SEC's review of a registration statement to be filed by Mount10 for
purposes of registering its capital shares for issuance to the COPE
shareholders. The merger is expected to be consummated in the fourth quarter of
2000.
-10-
<PAGE>
ITEM 2. Management's Discussion and Analysis or Plan of Operation
OVERVIEW
COPE, Inc. ("COPE") is a provider of enterprise data storage and security
consulting, services and solutions to customers located primarily in Western
Europe. COPE's storage and security business consists of the analysis, design
and implementation of storage and security systems that integrate the software
and hardware products that best meet the identified objective. COPE generally
provides its data storage and security systems on a turn-key basis and purchases
for resale the software and hardware components made part of the systems
solutions. The company resells software and hardware products offered by the
major vendors in the data storage and security industry. COPE also offers its
own proprietary storage software products, Hiback and Hibars. COPE provides
enterprise data storage and security systems and solutions to a variety of
companies in the financial, insurance, pharmaceutical and telecommunication
industries located primarily in Germany, Switzerland, Finland and Austria.
In the first six months of 2000, COPE commenced the provision of consulting,
services and solutions to the e-platform industry, including the design,
development and operation of application infrastructure and managed web sites.
COPE intends to act as an application infrastructure provider (AIP) and managed
web host provider (MHP).
COPE's goal is to become the leading independent provider of enterprise data
storage and security services and solutions and e-platforms in Western Europe.
The key elements of COPE's strategy are:
. Continue to Emphasize Storage and Security Consulting Services. By
emphasizing the quality of its consulting services in the area of data storage
and security, COPE believes that it can establish and foster a reputation in
Western Europe as a leading provider of enterprise services and solutions.
. Foster a Reputation for Independence. COPE intends to foster the
reputation and image in the storage and security industry of an independent
organization firm dedicated to providing storage and security services and
solutions to the enterprise data storage market only.
. Expand Through Targeted Acquisitions. COPE intends to aggressively
seek out and acquire high quality independent consulting firms throughout
Western Europe.
. Leverage off its Core Competence to Develop an E-Platform Solution.
COPE has a unique standing in Central Europe due to its experience and
reputation in the date storage industry. Data storage and security are key
elements in the Internet age and COPE's core competence in this area provides it
with an advantage in designing, developing and operating application
infrastructure and managed web sites. COPE intends to leverage off it reputation
and success in the data storage and security industry to develop and market an
e-platform solution to its clientele.
Peter Zurbruegg becomes new New Chief Executive Officer
Peter Zurbruegg, former Vice President at UBS (Union Bank of Switzerland) and
responsible for distributed systems joined the Company as its new Chief
Executive Officer as of July 1, 2000. He joins COPE to oversee the integration
and management of the proposed merger with Mount10, an internet application
infrastructure and web hosting provider. Stephan Isenschmid, co-founder of COPE
and its former CEO, remain with the company as a board member and strategic
advisor.
-11-
<PAGE>
Multicom Acquisition
On May 1, 2000 COPE acquired 100% of Multicom, a Finnish Company, in a combined
share and cash transaction. The acquisition of Multicom Software gives COPE's
software business direct access to the northern European market. Multicom is a
system management software provider and a data and information management
consultant. For years Multicom Software has also been a value-added reseller of
the back-up software products of COPE's recently acquired subsidiary, HICOMP
Software Systems, of Hamburg, Germany. Multicom's staff of 13 engineers and
professionals has used HICOMP's Hiback and Hibars products to successfully
implement comprehensive solutions in the data security sector.
Merger of COPE and Mount10.com Holding AG
In July 2000, COPE and Mount10.com Holding AG ("Mount10") entered into a Merger
Agreement pursuant to which Mount10 will acquire COPE in a stock for stock
exchange. In the merger transaction, each common share of COPE will
automatically convert at the time of merger into the capital shares of Mount10.
Pursuant to the Merger Agreement, the shareholders of COPE will hold as a group
after the consummation of the merger approximately 80% of the outstanding
capital shares of Mount10 and the pre-merger shareholders of Mount10 will hold
approximately 20% of the capital shares of Mount10. The consummation of the
merger is subject to the approval of the Merger Agreement by the shareholders of
COPE and the SEC's review of a registration statement to be filed by Mount10 for
purposes of registering its capital shares for issuance to the COPE
shareholders. The merger is expected to be consummated in the fourth quarter of
2000.
Mount10 is a Swiss stock company engaged in the business of protecting strategic
data from manipulation, loss unauthorized access and damage by external or
hostile groups and individuals. Mount10 operates its own data center in a high-
security, underground vault. The vault is located in the heart of the Swiss Alps
and embedded in an operational defense force facility. The vault is designed to
withstand risks to the security of the customers data during peace and times of
war. COPE's Chairman of the Board and President, Adrian Knapp, and Director,
Stephan Isenschmid, each own approximately 16.3% of Mount10.
Public Offering
In February 2000, COPE conducted a public offering of 800,000 shares of its
common stock, at an offering price EURO 21.00 ($20.54) per share on the
Frankfurt Stock Exchange, "Neuer Markt".
Hicomp Acquisition
On April 19, 1999, COPE, Inc. acquired Hicomp Software Systems GmbH, a German
software company. Based on the Sale and Assignment of Business Shares entered
into on December 21, 1998 between COPE, Inc. 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.
Currency Exchange Rates. COPE regularly enters into contracts payable in EURO,
-----------------------
Swiss Francs, German Marks, Fin 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, EURO
and, to a lesser extent, the Austrian Schillings, Fin Marks, 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.
-12-
<PAGE>
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.
-13-
<PAGE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Net Revenue. During the six months ended June 30, 2000, the Company had net
-----------
revenue of $15,877,054, which amounts to a decrease of 4.1% over the net revenue
of $16,563,976 during the prior year period. The decrease in net revenue is due
to the stronger US Dollar compared to the prior year period. During the six
months ended June 30, 2000, the Company had net revenue of EURO 16,807,225,
which amounts to an increase of 11.6% over the net revenue of EURO 15,062,124
during the prior year period. COPE acquired Hicomp on April 19, 1999 and
Multicom Software on May 1, 2000. Hicomp has been included in the consolidated
operating results for period subsequent to April 18, 1999. Multicom has been
included in the consolidated operating results for period subsequent to May 1,
2000.
Sales of solutions decreased 2.1% (increase in EURO 13.6.%) during the six
months ended June 30, 2000 over the prior year period reaching $14,044,270 (EURO
14,857,207) as compared to $14,351,383 (EURO 13,080,206). Sales of solutions
consist of revenue from the resale of hardware and software components along
with associated consulting services. Sales of services decreased 17.2% (decrease
in EURO 1.6%) during the six months ended June 30, 2000 reaching $1,832,784
(EURO 1,950,019) as compared to $2,212,593 (EURO 1,981,918) for the prior year
period. Sales of services consist of revenue from stand-alone consulting and
integration services. The decrease in sales of services is due, in part, the
focus of marketing efforts in the second quarter of 2000 which are expected to
result in revenues in the third and fourth quarters of this year.
Cost of Sales. During the six months ended June 30, 2000, cost of sales
-------------
decreased by 4.4% (in EURO increase 10.9%) to $10,231,513 (EURO 10,809,173)
compared to $10,698,666 (EURO 9,742,424) for the prior year period, representing
72.9% (in EURO 72.8%) and 74.5% (in EURO 74.5%), 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 six months ended June 30, 2000
------------
was 35.6% (in EURO 35.7%) compared to 35.4% (in EURO 35.3%) for the prior year
period.
Selling, General, Administrative and Consulting Expenses. COPE's selling,
--------------------------------------------------------
general, administrative and consulting expenses as a percentage of net sales
increased between the six months ended June 30, 2000 (41.3%; in EURO 41.4%)
compared to the prior year period (30.3%; in EURO 30.3%).
Net Income/(Loss). During the six months ended June 30, 2000, COPE had a net
-----------------
loss of $2,459,316 (EURO 2,578,301) as compared to net loss of $250,860 (EURO
243,825) during the prior year period. Earnings before interest, taxes,
depreciation and amortization for the six months ended June 30, 2000 was
$(913,330) , which amounts to an decrease of 209% over earnings before interest,
taxes, depreciation and amortization of $838,336 for the prior year period. The
decrease in income is mainly attributable due to the amortization of goodwill
involved with COPE's acquisition of Multicom in May 2000 and Hicomp in April
1999.
-14-
<PAGE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Net Revenue. During the three months ended June 30, 2000, the Company had net
-----------
revenue of $7,795,658, which amounts to a decrease of 2.9% over the net revenue
of $8,026,062 during the prior year period. The decrease in net revenue is due
in the stronger US Dollar compared to the prior year period. During the three
months ended June 30, 2000, the Company had net revenue of EURO 8,542,850, which
amounts to an increase of 15.2% over the net revenue of EURO 7,415,906 during
the prior year period. 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 acquired Multicom on May 1, 2000 and Multicom has been
included in the consolidated operating results for period subsequent to May 1,
2000.
Sales of solutions decreased 0.8% (increase in EURO 16.7%) during the three
months ended June 30, 2000 over the prior year period reaching $7,037,740 (EURO
7,680,502) as compared to $7,096,076 (EURO 6,581,824). Sales of solutions
consist of revenue from the resale of hardware and software components along
with associated consulting services. Sales of services decreased 18.5% (increase
in EURO 2%) during the three months ended June 30, 2000 reaching $757,918 (EURO
850,808) as compared to $929,986 (EURO 834,082) for the prior year period. Sales
of services consist of revenue from stand-alone consulting and integration
services. The decrease in sales of services is due, in part, the focus of
marketing efforts in the second quarter of 2000 which are expected to result in
revenues in the third and fourth quarters of this year.
Cost of Sales. During the three months ended June 30, 2000, cost of sales
-------------
decreased by 1.7% (in EURO increase 15.8%) to $4,938,748 (EURO 5,396,561)
compared to $5,024,910 (EURO 4,660,711) for the prior year period, representing
70.2% (in EURO 70.2%) and 70.8% (in EURO 70.8%), 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 June 30,
------------
2000 was 36.6% (in EURO 36.8%) compared to 37.4% (in EURO 37.2%) for the prior
year period.
Selling, General, Administrative and Consulting Expenses. COPE's selling,
--------------------------------------------------------
general, administrative and consulting expenses as a percentage of net sales
increased between the three months ended June 30, 2000 (43.8%; in EURO 43.8%)
compared to the prior year period (31.5%; in EURO 31.4%).
Net Income/(Loss). During the three months ended June 30, 2000, COPE had a net
-----------------
loss of $1,351,891 (EURO 1,463,196) as compared to net loss of $398,863 (EURO
387,940) during the prior year period. Earnings before interest, taxes,
depreciation and amortization for the three months ended June 30, 2000 was
$(554,933), which amounts to an decrease of 217.8% over earnings before
interest, taxes, depreciation and amortization of $474,500 for the prior year
period. The decrease in income is mainly attributable due to the amortization of
goodwill involved with COPE's acquisition of Multicom in May 2000 and Hicomp in
April 1999.
-15-
<PAGE>
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 June 30,
2000, COPE had established short-term overdraft facilities under which COPE and
its subsidiaries could borrow up to $1,589,189. Amounts drawn down under these
facilities are due on demand and collateralized by COPE's investments in Cope AG
and Cope GmbH. 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, however there can be no assurance that COPE will continue to do so in
the future.
As of June 30, 2000, COPE had a working capital of approximately $4,167,634,
compared to a working capital deficit of $7,453,421 as of December 31, 1999. In
February 2000 COPE completed a secondary public offering of 800,000 common
shares at 21.00 ($20.54) per share on the Frankfurt Stock Exchange, "Neuer
Markt". The net proceeds in that offering were approximately $14,200,000. During
fiscal 1999, COPE supplemented its working capital with a series of short term
loans in the total aggregate amount of $3,700,000, including an advance of
$767,521 and $314,090 from COPE's Chairman of the Board and President, Adrian
Knapp and COPE's Director Stephan Isenschmid, respectively. COPE applied
approximately $3,700,000 of the net proceeds from its secondary pubic offering
towards the repayment of the short term loans and the repayment of $2,100,000 of
bank indebtedness under its short-term overdraft facilities.
COPE 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 during fiscal year 2000. However,
if its capital requirements vary materially from those currently planned, COPE
may require additional financing sooner than anticipated. Additional financing
may not be available when needed on terms favorable to COPE or at all. In
addition, as disclosed throughout the annual report, COPE intends to conduct
additional acquisitions in order to expand its revenue base and product line.
These acquisitions will undoubtedly require significant additional capital.
However, it is impossible to predict right now how much capital COPE will need
or when it will need it.
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.
-16-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
In 1999, Cope engaged a Swiss software development company to design,
implement and maintain a company-wide enterprise resource planning solution for
COPE. The system was to be completed in January 2000, however in April 2000 COPE
served notice that it would refuse to accept the system due to problems that
materially impaired the systems's quality of operation. The software supplier
has served COPE with notice of its intent to sue COPE for the remaining $500,000
owed the supplier under its contract with COPE. Cope believes that the supplier
has breached the contract and, therefore, COPE is not obligated to pay the
supplier any additional amounts under the contract. If the supplier institutes
legal action, COPE intends to counter-claim for damages in excess of $1,000,000,
representing payments made to the supplier, additional costs incurred by COPE in
connection with the supplier's activities and damages incurred by COPE due to
the supplier's failure to deliver the promised operating system by the required
due date.
Item 2. Changes in Securities.
---------------------
Inapplicable.
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
--------
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
Inapplicable.
-17-
<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 11, 2000 By: /s/ MARKUS BERNHARD
------------------------------------
Markus Bernhard
Chief Financial Officer
-18-
