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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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.
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Commission File Number 1-9925
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COPE, Inc.
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(Exact name of small business issuer as specified in its charter)
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Delaware 87-0427731
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Grundstrasse 14, 6343 Rotkreuz, Switzerland
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(Address of principal executive offices)
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+ 41 41 798 33 44
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(Issuer's telephone number)
Securities to be registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None N/A
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Securities to be registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
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(Title of class)
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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
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Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
The issuer's revenue for the fiscal year ended December 31, 1998 was
$29,059,150.
The aggregate market value of the voting stock held by non-affiliates of the
issuer as of April 20, 1999 was approximately $14,156,766.
The number of shares of the issuer's common stock outstanding as of April 20,
1999 was 3,573,361.
Documents incorporated by reference: None.
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Part I.
Item 1. Description of Business.
General
COPE, Inc., a Delaware corporation (the "Company" or "COPE"), is a provider of
enterprise data storage and security consulting, services and solutions to
customers located primarily in Western Europe. The Company's business consists
of the analysis, design and implementation of storage and security systems that
integrate the hardware and software products that best meet the identified
objective. COPE generates revenue from three primary sources:
. providing consulting services in connection with the initial
analysis of a client's data storage or security needs and designing
of a system best suited to meet those needs;
. the sale and implementation of the desired solution; and
. providing installation, integration and maintenance of the system,
including improving and adding to the system to keep pace with the
clients' changing needs and improvements in technology.
COPE generally provides its data storage and security systems on a turn-key
basis and purchases for resale the hardware and software components made part of
the systems solutions. The Company resells hardware and software products
offered by the major vendors in the data storage and security industry,
including:
. Advanced Digital Information . LSC
. Ascend Communications . National Semiconductor
. Cisco Systems . Oracle
. Compaq Computer . Overland Data
. Data General . Sony
. EMC Corp . Storage Technology
. IBM . Sun Microsystems
. Legato Systems . Veritas Software
Following the Company's acquisition of Hicomp Software Systems GmbH on April
19,1999 the Company also offers its own proprietary storage software products,
Hiback and Hibars. COPE provides most of its information consulting services and
solutions to companies in the financial, insurance, pharmaceutical and
telecommunication industries located primarily in Germany, Switzerland, and
Austria.
Business Development
The Company was formed under the laws of the State of Delaware in 1985 under
the name Harrier, Inc. and from 1985 until September 1998 was engaged in the
business of developing and marketing health, fitness and medical products. In
September 1998, the Company completed a series of transactions (referred to
herein as the "COPE Reorganization") by which the Company discontinued all
operations and divested itself of substantially of its assets and liabilities
and, at the same time, acquired all of the outstanding capital shares of COPE
Holding AG, a Swiss stock corporation engaged in the business of enterprise data
storage. It was at this time that the Company changed its name to COPE, Inc.
COPE Holding AG. The present business of the Company consists of the data
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storage and security operations of COPE Holding AG acquired by the Company in
September 1998 as part of the COPE Reorganization. COPE Holding AG commenced
operations in 1991 as a provider of data storage subsystems to the Swiss market.
In early 1993, COPE Holding AG began to study the RAID (redundant array of
inexpensive disk-drives) storage technologies and began designing corresponding
solutions for its clients. In the fall of 1993, the first family of RAID
systems was introduced by COPE Holding AG to the Swiss market. Some of these
systems are still in use today. In 1994, COPE Holding AG signed a distribution
agreement with Data General providing for
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COPE Holding AG's distribution of Data General's Open CLARiiON systems. This
represented COPE Holding AG's first reseller agreement. In the following years,
COPE Holding AG entered into distribution agreements with additional vendors of
storage and security products. In December 1998, COPE Holding AG entered into a
distributor agreement with EMC Corp, the recognized world leader in the
development of software for the enterprise data storage and security industry.
In 1994, COPE Holding AG began to market its services and systems in Austria.
In late 1995, COPE Holding AG commenced operations in Germany. In the same year,
COPE Holding AG became one of the first information technology companies in
Europe to obtain an ISO9001 certification. In 1998, COPE Holding AG expanded its
operations in Germany through the acquisition of Forum GmbH, a provider of data
storage and security consulting, services and solutions to the German market.
The COPE Reorganization. On September 25, 1998, the Company consummated a
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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 the
Company, COPE Holding AG, and the shareholders of COPE Holding AG ("COPE
Shareholders"), pursuant to which, among other things, (i) the Company 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) the
Company sold a controlling interest in its subsidiary, Glycosyn Pharmaceuticals,
Inc., a Delaware corporation ("Glycosyn"), 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) the Company 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,
the equity of COPE Holding AG is carried forward as the equity of the combined
entity. COPE Holding AG is assumed to have acquired the Company and therefore
the assets and liabilities of the Company as they existed immediately prior to
the consummation of the COPE Reorganization, after giving effect to the
consummation of the transactions under the Glycosyn Agreements, have been
recorded at fair value as required by the purchase method. This adjustment
reflects the elimination of the Company's equity and accumulated deficit.
Forum Acquisition. On June 25, 1998, COPE GmbH, a wholly-owned subsidiary of
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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 in accordance with Accounting
Principles Board Opinion No. 16 "Business Combinations." Accordingly, the
operating results of Forum have been included in the consolidated operating
results of the Company from the date of acquisition. On or about March 30,
1999, Forum was merged into a wholly-owned subsidiary of COPE Holding AG, COPE
GmbH, a German stock corporation
Hicomp Acquisition. On April 19, 1999, the Company acquired Hicomp Software
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Systems GmbH ("Hicomp"), a German software company. Pursuant to a Sale and
Assignment of Business Shares entered into on December 21, 1998 between the
Company and Mr. Uwe Hinrichs, the president and sole shareholder of Hicomp, the
Company issued 420,000 shares of common stock in exchange for all of the
outstanding capital shares of Hicomp. The Hicomp acquisition will be accounted
for as a pooling of interests. 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. The Company also granted Mr. Hinrichs certain securities
registration rights pursuant to which he is entitled to sell up to 200,000
shares of his common stock alongside the Company in any public offering of
securities by the Company on the New Market section of the Frankfurt Stock
Exchange taking place no less than 90 days from the date of the Company's
acquisition of Hicomp. Mr. Hinrichs granted the Company a purchase option,
expiring June 30, 2000, to acquire all of the capital shares of two US
corporations owned by Mr. Hinrichs which are engaged in the business of
distributing the Hiback and Hibars software in the US.
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Unless the context otherwise requires, the term "the Company" or "COPE" refers
to the Delaware corporation known as COPE, Inc., its wholly-owned subsidiary,
COPE Holding AG, a Swiss stock corporation, and the wholly-owned subsidiaries of
COPE Holding AG: COPE AG, a Swiss stock corporation, COPE GmbH, a German stock
corporation, COPE GesmbH, an Austrian stock corporation, and Hicomp Software
Systems GmbH, a German stock corporation. The executive offices of COPE are
located at Grundstrasse 14, 6343 Rotkreuz, Switzerland; telephone
+41 41 798 3344.
Business of COPE
General
COPE is a provider of enterprise data storage and security consulting,
services and solutions to customers located primarily in Western Europe. The
Company's business consists of the analysis, design and implementation of
storage and security systems that integrate the hardware and software products
that best meet the identified objective. COPE generates revenue from three
primary sources:
. providing consulting services in connection with the initial
analysis of a client's data storage or security needs and
designing of a system best suited to meet those needs;
. the sale and implementation of the desired system; and
. providing installation, integration and maintenance of the
system, including improving and adding to the system to keep
pace with the clients' changing needs and improvements in
technology.
COPE generally provides its data storage and security systems on a turn-key
basis and purchases for resale the hardware and software components made part of
the systems solutions. The Company resells hardware and software products
offered by the major vendors in the data storage and security industry,
including:
. Advanced Digital Information . LSC
. Ascend Communications . National Semiconductor
. Cisco Systems . Oracle
. Compaq Computer . Overland Data
. Data General . Sony
. EMC Corp . Storage Technology
. IBM . Sun Microsystems
. Legato Systems . Veritas Software
Following the Company's acquisition of Hicomp on April 19, 1999 the Company
also offers its own proprietary storage software products, Hiback and Hibars.
COPE provides most of its information consulting services and solutions to
companies in the financial, insurance, pharmaceutical and telecommunication
industries located primarily in Germany, Switzerland, and Austria.
Industry Overview
High availability of stored data is a critical factor in today's business
environment. To reduce costs, improve productivity and improve customer service,
large organizations are streamlining their processes by implementing strategic
software applications, such as databases, financial applications and electronic
mail systems, to manage their data. To be competitive, an organization needs
immediate access to necessary data, regardless of where it is stored. Providing
reliable access to this data on an enterprise-wide basis presents a significant
challenge to large organizations.
The difficulty of this challenge is compounded by a number of recent trends in
enterprise computing. In recent years, there has been a significant migration to
client/server and network computing. Today's networks are much larger and more
complex than early networks, often consisting of multiple servers, including
application servers, file servers, database servers and communications servers,
and hundreds or even thousands of personal
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computers manufactured by a number of different vendors. These servers and
personal computers may utilize a number of different operating systems,
including Unix, Novell NetWare, IBM OS/2 Warp, Windows NT, Windows 98, Windows
95, Windows 3.1 and Macintosh OS. The distributed and heterogeneous nature of
these networks, together with the increased use of computers throughout
organizations to create and store files, has resulted in an increase in the
amount and dispersion of critical data across the servers and personal
computers.
The increase in the size of networks has been accompanied by concurrent
increases in the size and complexity of computer data and files. Application
software developers continue to introduce software packages that increasingly
incorporate features which require large amounts of storage, such as graphics,
video and sound. For example, a minute of uncompressed full motion video and
sound could require approximately 1,100 megabytes of storage as compared to 300
kilobytes for the average 10 page document. Similarly, the size and complexity
of images stored and manipulated using document imaging systems have intensified
network storage requirements. Further, the increasing popularity of the Internet
as a means of communication and a medium by which to access and distribute
information has contributed to the demand for increased storage, as users
download a wide variety of complex data from the Internet.
To meet the challenges of managing the storage of increasing volumes of
enterprise data in increasingly heterogeneous systems with fewer resources, a
storage management system must incorporate a number of critical features
including:
. fully automated backup and restore capability;
. ready data availability in the event of system failures in order to
avoid interruptions of day-to-day operations;
. scalability to automate rapid growth in the volume of on-line data
and the complexity of the network;
. centralized and automated management to enable the administrator to
manage the entire system, including local and remote systems, from a
single central console;
. the ability to use a central consistent interface for applications
that share data;
. support for heterogeneous environments.
In response to the increased demand for cost-effective storage of different
types of information, a variety of storage media have been developed, including
magnetic tape, hard disk, RAID, CD-ROM and others.
Magnetic tape is the least expensive storage medium, but has the slowest
access times. Magnetic tape is ideal for backing up large amounts of
information that is only expected to be accessed infrequently. This cost
effective technique is widely used in commercial and government organizations in
cases where it is desirable to archive large amounts of data in a secure offsite
location as a safeguard against on-site disasters. Often times, the magnetic
tapes are arranged in automated tape libraries for purposes of providing for
multiple operating drives capable of conducting simultaneous functions,
including backup, data management and access.
Hard disk storage is a popular means of storing and accessing large amounts of
information that is continually changing. It also provides rapid access times
but is a relatively expensive storage medium and is easily erased. RAID storage
systems have developed in response to demand for increased data storage,
performance, security, reliability, fault tolerance and availability, as well as
for constant access. RAID is a method for allocating data across several hard
disk drives and allowing a server microprocessor to access those drives
simultaneously, thus increasing system storage and input/output performance. In
addition, lost data on any drive can be recreated using special RAID algorithms,
thus ensuring the immediate availability of RAID protected data even in the
event of a disk drive failure.
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CD-ROM technology emerged in the early 1980s as a cost-effective method by
which to store and distribute large amounts of information. Since CD-ROMs or
DVD-ROMs cannot be erased or written over, however, they are not suitable for
storage situations in which information must be continually updated and altered.
However, for organizations that require periodic distribution of written
material, such as reference books, parts lists, catalogues or manuals, CD-ROMs
and DVD-ROMs are much more cost-effective and practical than paper-based
documents. The proliferation of network computing and the rapid increase in CD-
ROMs as a means of information distribution and storage have fueled demand for
CD-ROM systems that provide network wide access.
The increase in the importance and volume of stored, complex data has
increased demand for secure and reliable methods of storage that allow for
efficient and cost-effective protection and management of such data. These
factors have also increased demand for total storage solutions that can quickly
and efficiently provide access to large volumes of data resident on a variety of
personal computers and servers running different operating environments, as well
as data generated by a wide range of applications. In addition, users are
increasingly demanding solutions comprised of not only hardware for cost-
effective storage of and access to large amounts of secure and reliable
information, but also software that manages information flow and reduces the
high costs of storage administration.
The COPE Solution
In today's business environment, the best storage or security solution most
often requires a combination of storage media and a mixture of hardware and
software products from multiple vendors. The challenge to a system designer is
the ability to identify and then integrate the specific hardware and software
products best suited to meet the clients' needs.
COPE believes that the major product vendors in the data storage industry are
naturally predisposed to selling the client a solution that is based on the
vendor's own product line. On the other hand, COPE endeavors to operate as an
independent provider of enterprise data storage and security systems and
solutions. Although COPE now offers a limited line of proprietary storage
software following its acquisition of Hicomp, the Company is committed to
offering its clients a storage solution based on a mix of the software and
hardware products that best meet the identified objectives regardless of
manufacturer. COPE believes that its willingness and ability to provide an
independent approach to its clients' storage problems provides its clients with
a better solution and COPE with a competitive advantage over the vendors with
whom it competes for the design and sale of storage solutions.
In order to provide its customers with the best available solution, COPE has
divided its operations between (i) consulting; (ii) solution sales and (iii)
integration services. A client engagement begins with the appointment of a team
from COPE's consulting division. As of April 20, 1999, COPE employed 10
professionals in its consulting division, each of whom is a specialist with a
complete understanding of the products and technologies offered in the data
storage industry. COPE initially analyzes the client's storage needs and arrives
at certain conceptual solutions. COPE then works with the client to develop
performance-cost comparisons, feasibility studies and capital budgeting
calculations for each conceptual solution. Through this process a recommendation
is made to the client for the implementation of a storage and security solution.
Typically, the recommendation will involve a storage system sold and installed
by COPE. However, COPE's consultants are encouraged to offer the client the best
solution, even if it does not include the sale of a system by COPE.
If the consulting division recommends a COPE storage or security system, COPE
will bring to the client a team from the solution sales department. As of April
20, 1999, COPE's solution sales consisted of 41 professionals, including 23
sales representatives and 18 engineers, and a 5 person administration and
support staff. A team typically consists of one or more sales representatives
and engineers. A project manager will act as the liaison between the client and
COPE's production departments.
Once the optimal solution is selected, COPE's integration services department
provides on-site integration. The integration services department also offers
the client operations and maintenance support on an interim and long-term basis.
As of April 20, 1999, this department consisted of 16 employees.
COPE's Strategy
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COPE's goal is to become the leading independent provider of enterprise data
storage and security consulting, services and solutions in Western Europe. The
key elements of COPE's strategy are:
. Emphasize Consulting Service. COPE intends to emphasize the provision
of its consulting services. COPE believes that in the enterprise data storage
and security market the key is oftentimes the "solution" and not the product.
COPE believes that a significant amount of the client's cost in a storage and
security solution is spent on consulting services associated with the design and
implementation of the system, the remainder representing the costs of the
associated software and hardware products. The consulting services often
involve higher margins than the sale of the products, even in the case of direct
sales to the client by the manufacturer/vendor. By emphasizing the quality of
its consulting services, COPE believes that it can establish and foster a
reputation in Western Europe as a leading provider of enterprise data storage
and security consulting, services and solutions.
. Foster a Reputation for Independence. COPE's major competitors are
either manufacturers of hardware and software products or large consulting firms
that offer a wide array of consulting and advisory services to business. COPE
intends to foster the reputation and image of an independent organization
dedicated exclusively to providing storage and security services and solutions
to the enterprise data storage market. Most of the customers for storage and
security systems are large corporations and institutions with sophisticated
information and technology (IT) operations. COPE believes that most IT officers
appreciate and value COPE's expertise and ability to offer solutions and
consulting services unhindered by any bias towards a particular product or
vendor.
. Expand Through Targeted Acquisitions. COPE believes that the
enterprise data storage market consists of the manufacturers/developers of the
storage products and the international consulting firms, on the one hand, and a
number of smaller independent providers of consulting services and solutions,
including COPE, on the other hand. COPE intends to aggressively seek out and
acquire high quality independent consulting firms throughout Western Europe.
COPE believes that there are a number of smaller independent firms in strategic
European markets that share COPE's commitment to providing high quality
consulting and services to the enterprise data storage market. Through the
pursuit of strategic acquisitions, COPE hopes to acquire existing sales and
engineering staffs with established contacts and client bases in key markets.
Products And Services
COPE's principal operations consist of the design, implementation and
management of storage and security solutions that provide flexible and cost
effective data storage and security solutions on a turn-key basis. In addition
to providing turn-key data storage solutions, COPE also provides its clients
consulting, training and integration servicing. In 1998, approximately
$3,647,174 (or 12.6%) of COPE's $29,059,150 in revenue represented consulting
fees unrelated to sales of data storage systems. COPE intends to increase its
marketing efforts in the area of stand-alone consulting services and expects
that consulting revenues will in the future increase as a percentage of overall
revenue.
COPE is a value added reseller of a number of software and hardware products
to its customers, including back-up and system management software, tape
libraries, data storage disk arrays, high-end servers, and numerous other
peripheral products related to the installation and utilization of data storage
and security technology. COPE sells data storage software under various
reselling arrangements with several software companies where COPE functions as a
value added reseller for different leading vendors. In keeping with industry
practice, the agreements between COPE and its product vendors are nonexclusive
and short term in nature. The following table sets forth the major vendors with
which COPE works in various selling partnerships, the vendor's products resold
by COPE and the amount of COPE's revenue from the sale of hardware and software
products during fiscal 1998 represented by each vendor:
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Vendor Product % of Product Revenue
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Advanced Digital Information Corp Tape Libraries 8%
Compaq Computer/Digital Equipment. Tape Libraries 15%
Hewlett Packard Tape Libraries 3%
Data General - CLARiiON Business Unit CLARiiON Disk Arrays 10%
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IBM High End Servers 8%
Legato Systems Back-up and Archiving Software 6%
National Semiconductor Corp. CD Jukeboxes 1%
Overland Data Tape Libraries 3%
Storage Technology Corp. Tape Libraries 12%
Sun Microsystems High End Servers 7%
Veritas Software Data Management, Failure, Backup and Archiving Software 2%
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In addition to the above, in December 1998 COPE was named by EMC Corp. as a
distributor of its line of enterprise data storage products.
COPE generally contracts to deliver storage and security systems, including
all hardware and software, on a turn-key basis pursuant to 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 its storage and security systems.
Accordingly, COPE is required to finance its clients contracts, including the
purchase of the hardware and software components of the information systems.
COPE's principal sources of working capital are cash from operations and
operating lines of credit in the aggregate amount of $2,812,083 as of December
31, 1998. COPE 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 COPE will continue to do so in the future.
Consulting and Services Division. COPE's consulting division offers services
such as analyses, conceptual solutions, target-performance comparisons, quantity
structures, feasibility studies and capital budgeting calculations, as well as
project management and user training. In addition to training and education,
the COPE service division implements and maintains data management plans
recommended by the consulting division. COPE system engineers are certified
experts by strategic partners such as IBM, SUN, Microsoft and others. This
division contracts directly with the end-user to maintain systems and manage
the plan.
Hiback and Hibars. In April 1999, COPE acquired Hicomp, a Hamburg,
Germany developer of enterprise data storage and backup software. Through its
acquisition of Hicomp, COPE is now able to offer a limited line of proprietary
software products designed to provide storage capabilities to multi-platform
enterprises. The products are Hiback, backup software which is installed on
servers and desktop clients, and Hibars, automated data management software
which is installed on the backup server. COPE believes that the Hiback and
Hibars products offer a superior storage solution to multi-platform enterprises
which require superior speed in performing backup storage.
Sales and Marketing
COPE markets its data storage and security consulting, services and solutions
primarily through its field sales organization complemented by other sales
channels, including systems integrators, product vendors and distributors.
As of April 20, 1999, COPE's field sales force consisted of 23 sales
representatives and 18 engineers that provide technical assistance for systems
sales. COPE currently has five sales offices, most of which are staffed with
both sales and technical personnel. COPE uses a consultative sales approach for
selling to major accounts. This model entails the collaboration of technical
and sales personnel, typically in a one-to-one ratio, to formulate proposals
that address the specific requirements of the customer. COPE focuses its
initial sales efforts on senior IT department personnel, and works closely with
system and network administrators for evaluation and deployment. COPE also
maintains comprehensive after-sales and customer care activities covering all
aspects of support, systems tuning and follow-up.
Competition
The information management market is intensely competitive, highly fragmented
and characterized by rapidly changing technology and evolving standards.
Competitors vary in size and in the scope and breadth of the products and
services offered. COPE's major competitors are vendors of information
management software and
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hardware products, including Compaq Computer Corp., EMC Corp., Hewlett Packard,
Storage Tek, and Unisys Corp., some of whom are also significant suppliers of
COPE. In addition, COPE experiences significant competition from other
consulting and engineering firms.
Many of COPE's current and potential competitors have significantly
greater financial, technical, marketing and other resources than COPE. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or, in the case of vendors, to devote
greater resources to the development, promotion, sale and support of their
products than the Company. COPE also expects that competition will increase as a
result of future software industry consolidations, which have occurred in the
information management market in the past. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. There can be no assurance that COPE will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not materially adversely affect its
business, operating results or financial condition.
In addition to competition for client contracts, COPE also competes for
qualified technical engineers and consultants. COPE's future success depends in
significant part upon the continued service of its key technical personnel and
its continuing ability to attract and retain highly qualified technical
engineers and consultants. Competition for such personnel is intense, and there
can be no assurance that COPE can retain its key technical and managerial
employees or that it can attract, assimilate or retain other highly qualified
technical personnel in the future.
Employees
As of April 20, 1999, COPE had a total of 102 employees. Of the total,
10 were in consulting, 41 were in solution sales, 16 in integration services and
35 were in marketing and back-office operations such as general management,
finance, human resources and administration. None of COPE's employees are
represented by a labor union or subject to a collective bargaining agreement.
COPE has not experienced any work stoppages and considers its relations with its
employees to be good.
Item 2. Properties
COPE's executive offices are located in Rotkreuz, Switzerland and
consist of approximately 10,800 square feet of leased space. COPE leases this
space pursuant to a written agreement expiring in March 2001, with an option to
extend for another five years, at the rate of $11,200. COPE also maintains the
following sales offices:
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Location Size Monthly Rental Rate
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Munich, Germany 9,800 sq. ft. $7,300
Hamburg, Germany 6,600 sq. ft. $9,000
Dresden, Germany 1,600 sq. ft. $2,700
Vienna, Austria 2,000 sq. ft. $2,000
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Item 3. Litigation.
Except as set forth below, there have been no legal proceedings to which the
Company or any of its officers or directors have been a party or to which the
property of the Company has been subject over the last two years.
On August 24, 1995, American Diagnostica, Inc. ("ADI"), a private company
located in Greenwich, Connecticut, filed a civil action against the Company for
money damages alleging the Company's wrongful termination of that certain R&D
Joint Venture Agreement entered into by the parties in May 1993. The
circumstances underlying the complaint occurred prior to the COPE Reorganization
and were undertaken by prior management of the Company at a time when the
Company was engaged in the business of research and development of certain
health and medical products. See, Item 1. Development of the Company - Business
Development for a description of the COPE Reorganization.
In its complaint, ADI alleged that the Company was indebted to the plaintiff
for damages in an unspecified amount, plus punitive damages, attorneys fees and
interest. In December 1995, the Company moved the court for an order compelling
the plaintiff to submit the dispute to arbitration. In September 1996, the court
granted the Company's motion, staying all proceedings pending the conclusion of
mandatory arbitration in California, as the parties had provided in the research
and development agreement. As of the date of this report, no arbitration
proceeding has been commenced by either party. Management of the Company prior
to the COPE Reorganization has publicly announced its belief that the Company
has meritorious defenses to all of ADI's claims and that the claims are
substantially without merit. However, under current circumstances no
determination can be made as to the ultimate outcome of the litigation or as to
the necessity for any provision in the accompanying consolidated financial
statements for any liability that may result from an unfavorable outcome.
In connection with the COPE Reorganization, the Company received from the New
Capital Investment Fund and New Capital AG an agreement to indemnify the
Company against any claims outstanding as of the close of the COPE
Reorganization, including attorneys fees and costs of arbitration or litigation
relating to the ADI matter. Kevin DeVito is a director of New Capital Investment
Fund and New Capital AG. Mr. DeVito was the Chief Executive Officer of the
Company prior to the COPE Reorganization and is currently a member of the board
of directors of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders of the Company during
the fourth quarter of fiscal year 1998.
11
<PAGE>
Part II
Item 5. Market for Common Equity and Related Shareholder Matters.
Market for Common Stock. The Company's common stock traded on the OTC Bulletin
Board under the symbol "COPE." The Company's common stock also trades on the
over-the-counter market (Freiverkehr) of the Berlin Stock Exchange under the
security number [WKN] 876 954. The following table shows the high and low bid
prices for the Company's common stock for the periods indicated as reported by
the OTC Bulletin Board. These quotations may not necessarily represent actual
transactions. All share prices are adjusted to reflect the one for 58 reverse
split of the common stock effected in August 1998.
<TABLE>
<CAPTION>
High Low
------------ ------------
<S> <C> <C>
1997:
First quarter $ 10.88 $ 3.63
Second quarter $ 9.28 $ 3.63
Third quarter $ 10.88 $ 3.48
Fourth quarter $ 11.02 $ 4.06
1998:
First quarter $ 10.88 $ 4.64
Second quarter $ 11.60 $ 6.38
Third quarter $ 12.63 $ 7.25
Fourth quarter $ 20.25 $ 10.37
</TABLE>
As of April 20, 1999, the Company had approximately 358 record holders
of its common stock.
Dividends. The Company has not paid any cash dividends since its
inception and does not contemplate paying dividends in the foreseeable future.
It is anticipated that earnings, if any, will be retained for the operation of
the Company's business.
Recent Sales of Unregistered Securities. During the fiscal year ended
December 31, 1998, the Company sold unregistered shares of its common stock in
the following transactions:
A. From February 1998 to March 1998, the Company conducted a private
placement of shares of its common stock to two existing shareholders. In the
private placement, the Company sold a total of 6,897 shares of common stock for
the gross proceeds of $40,000. The issuance was conducted pursuant to
Regulation S under the 1933 Act. There was no underwriter involved in this
issuance.
B. In August 1998, the Company granted to 39 of its officers and
employees options to purchase an aggregate of 59,300 shares of common stock at
an exercise price of $8.40 per share. The options vest in four installments
commencing on March 1, 1999, March 1, 2000, March 1, 2001 and March 1, 2005.
The options were issued pursuant to Section 4(2) of the 1933 Act. There was no
underwriter involved in this issuance.
C. In September 1998, pursuant to an Amended and Restated Securities
Purchase Agreement and Plan of Reorganization dated July 24, 1998, the Company
issued 2,862,000 shares of its common stock to the stockholders of COPE Holding
AG in exchange for all of the issued and outstanding capital stock of COPE
Holding AG. The issuance was conducted pursuant to Regulation S under the 1933
Act. There was no underwriter involved in this issuance.
D. In the fourth quarter of 1998, the Company issued 20,207 shares of
common stock upon the exercise of outstanding common stock purchase warrants.
The warrants were issued prior to the Company's reorganization with COPE Holding
AG. The issuances were conducted pursuant to Regulation S under the 1933 Act.
There was no underwriter involved in these issuances.
12
<PAGE>
E. In November 1998, the Company granted to its officers and directors
and one consultant options to purchase a total of 108,200 shares of common
stock at exercise prices ranging from $8.50 to $15.00 per share. The options
vest in installments commencing in 1999. The options were issued pursuant to
Section 4(2) under the 1933 Act. There was no underwriter involved in this
issuance.
13
<PAGE>
Item 5. Management's Discussion and Analysis or Plan of Operations.
Overview
General
COPE is a Swiss-based provider of data storage and security consulting
services and solutions. The Company presently conducts business primarily in
Germany, Switzerland and Austria. Unless the context otherwise requires, the
term "Company" or "COPE" refers to the Delaware corporation known as COPE,
Inc., its wholly-owned subsidiary COPE Holding AG, a Swiss stock corporation,
and the wholly-owned subsidiaries of COPE Holding AG: COPE AG, a Swiss stock
corporation, COPE GmbH, a German stock corporation, COPE GesmbH, an Austrian
stock corporation.
COPE Reorganization. On September 25, 1998, the Company 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 the
Company, COPE Holding AG, a Swiss corporation, and the stockholders of COPE
Holding AG ("COPE Stockholders"). Pursuant to the Reorganization Agreement, the
Company, among other things, (i) effected a one for 58 reverse split of its
shares of common stock outstanding immediately prior to the close of the COPE
Reorganization, thus reducing its 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 Stockholders 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 Holding AG's equity is carried forward as the equity of the combined
entity. COPE Holding AG is assumed to have acquired the Company and therefore
the assets and liabilities of the Company as they existed immediately prior to
the consummation of the COPE Reorganization, after giving effect to the
consummation of the transactions under the Glycosyn Agreements, have been
recorded at fair value as required by the purchase method. This adjustment
reflects the elimination of the Company's equity and accumulated deficit.
Forum Acquisition. On June 25, 1998, 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 in accordance with Accounting Principles Board Opinion No. 16
"Business Combinations." Accordingly, the operating results of Forum have been
included in the consolidated operating results from the date of acquisition. On
or about March 30, 1999, Forum was merged into a wholly-owned subsidiary of COPE
Holding AG, COPE GmbH, a German stock corporation.
Hicomp Acquisition. On April 19, 1999, the Company 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 the
Company and Mr. Uwe Hinrichs, the president and sole shareholder of Hicomp, the
Company issued 420,000 shares of common stock in exchange for all of the
outstanding capital shares of Hicomp. The Hicomp acquisition will be accounted
for as a pooling of interests. 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. The Company also granted Mr. Hinrich certain securities
registration rights pursuant to which he is entitled to sell up to 200,000
shares of his common stock alongside the Company in any public offering of
securities by the Company on the New Market section of the Frankfurt Stock
Exchange taking place no less than 90 days from the date of the Company's
acquisition of Hicomp. Mr. Hinrich granted the Company a purchase option,
expiring June 30, 2000, to acquire all of the capital shares of two US
corporations owned by Mr. Hinrich which are engaged in the business of
distributing the Hiback and Hibars software in the US.
14
<PAGE>
Currency Exchange Rates. The Company regularly enters into certain financial
-----------------------
commitments payable in Swiss Francs, the unit of currency of Switzerland. All
Swiss Franc based amounts are designated by the symbol SFr. As of April 20,
1999, the Swiss Franc-Dollar exchange rate was 1.50 Swiss Franc to 1 U.S.
Dollar.
Although COPE reports its results in US dollars, virtually all of its sales
are denominated in other currencies, primarily, Swiss francs and Euros. 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, 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 or
Euro, 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 the
Company's business, financial condition and results of operations.
Results of Operations
Fiscal 1998 Compared to Fiscal 1997
Net Revenue. During the year ended December 31, 1998, COPE had net revenue of
-----------
$29,059,150, which amounts to an increase of 62% over the net revenue of
$17,916,171 during the prior year period. The increase in net revenue is due in
part to the acquisition of Forum, which was acquired by COPE on June 25, 1998
and has been included in the consolidated operating results of the Company for
the periods subsequent to June 25, 1998. Forum had net revenue of $9,040,477 for
the period June 25, 1998 through December 31, 1998. Without giving effect to the
acquisition of Forum, the Company had a 12% increase in net revenue during the
year ended December 31, 1998 over the prior year period.
Sales of solutions (revenue from resale of hardware and software components
along with associated consulting services) increased 53% during the year ended
December 31, 1998 over the prior year period reaching $25,411,976 in 1998 as
compared to $16,605,175 in 1997. The principal reason for the increase in sales
of solutions is the acquisition of Forum. Without giving effect to the
acquisition of Forum, the Company had a 3% increase in sales of solutions during
the year ended December 31, 1998 over the prior year period.
Sales of services (revenue from stand-alone consulting services) increased
178% during the year ended December 31, 1998 reaching $3,647,174 as compared to
$1,310,996 for the prior year period. Without giving effect to the consolidation
of Forum, the Company had a 123% increase in sales of services during the year
ended December 31, 1998 over the prior year period. This increase is the result
of the Company's decision to emphasize sales of services because of its
potential for higher profit margins.
Cost of Sales. During the year ended December 31, 1998, cost of sales
-------------
increased by 58% to $20,281,131 compared to $12,817,738 for the prior period,
representing 69.8% and 71.5% of the total revenue, respectively. The cost of
sales as a percentage of net revenue (total of "sales solutions" and "sales
services") decreased during the year ended December 31, 1998 because sales of
services increased as a percentage of net revenue from 7.3% up to 12.6%. Cost of
sales consists exclusively of the Company's cost for the hardware acquired for
resale as part of its information systems solutions.
15
<PAGE>
Gross Profit. The Company's gross profit margin for the year ended
------------
December 31, 1998 was 30.2% compared to 28.5% for the prior year period. The
increase in gross margin is due to the Company's strategy of emphasizing the
sale of higher margin stand alone consulting and integration services.
Selling, General, Administrative and Consulting Expenses. The Company's
--------------------------------------------------------
selling, general, administrative and consulting expenses as a percentage of net
revenue increased between the year ended December 31, 1998 (25.0%) and the prior
year period (24.2%). This trend is the consequence of the Company's strategy to
increase sales of services which required that the Company hire additional
service and consulting personnel.
Fiscal 1997 Compared to Fiscal 1996
Net Revenue. During the 12 months ended December 31, 1997, COPE had net
-----------
revenue of $17,916,171, which amounts to an increase of 43% over the net revenue
of $12,515,123 during the prior year period as a result of further market share
increase. Sales of solutions increased 40% during 1997 reaching $16,605,175 as
compared to $11,834,701 during the prior year. This increase is primarily due to
a significant increase in market share in Germany and Austria. Net revenue in
these markets grew by approximately 83% in 1997 as compared to growth of
approximately 40% in 1996. Sales of services increased 92% during the year
reaching $1,310,996 as compared to $680,422 in 1996. This increase is due to
increased demand for consulting services as a result of greater market share.
Cost Of Sales. During fiscal year 1997, cost of sales increased by 45.2%
-------------
to $12,817,738 compared to $8,829,711 for the prior year, representing 71.5%
and 70.6% of the total revenue, respectively. Cost of sales consists
exclusively of COPE's cost for the hardware acquired for resale as part of its
information systems solutions.
Gross Profit. The Company's gross profit margin for fiscal 1997 was 28.5%
------------
compared to 29.4% for the prior year. The slight decrease in gross margin is due
in part to an increase in hardware costs. A portion of the increase in hardware
costs is due to a stronger US dollar during 1997 as compared to the Swiss franc
as almost all of the purchases of hardware are US dollar denominated. Gross
margins in Switzerland and Austria increased in 1997 over those of 1996.
However, Germany has not seen this same trend as consulting services have not
reached the same levels obtained in the other countries.
Selling, General, Administrative and Consulting Expenses. COPE's selling,
--------------------------------------------------------
general, administrative and consulting expenses as a percentage of net revenue
were substantially unchanged between fiscal 1997 (24.2%) and fiscal 1996
(23.5%).
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 data storage and
security systems. The Company generally contracts to deliver such systems,
including all hardware and software, on a turn-key basis pursuant to 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 systems. The Company's
principal sources of working capital are cash from operations and operating
lines of credit in the maximum amount of $2,812,083 as of December 31, 1998. 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.
As of December 31, 1998, the Company had working capital of approximately
$155,663, compared to a working capital position of $860,761 as of December 31,
1997. The principal reasons for the decrease in working capital is the increase
in short-term borrowings which were used to accomplish the Forum acquisition and
to purchase additional equipment.
16
<PAGE>
While the Company believes that its available working capital, including
presently available credit lines, is adequate for its current working capital
requirements, the Company believes that it will require significant additional
working capital in order to finance continued growth. However, if its capital
requirements vary materially from those currently planned, the Company may
require additional financing sooner than anticipated. In such case, additional
financing may not be available when needed on terms favorable to the Company or
at all.
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. 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, thereby 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. 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 the
replacement 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
17
<PAGE>
that the total Year 2000 compliance budget is approximately 50% of the Company's
total IT 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 report 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 those risks,
uncertainties and assumptions, including (i) the Company's lack of any long term
agreements with its hardware and software vendors to sell products to the
Company; (ii) the risks and uncertainties associated with the policy of growth
through acquisitions, including the risks associated with the integration of
acquired businesses; (iii) the availability of additional capital as and when
required; (iv) the Company's ability to keep up with technological changes; (v)
increased competition; and (vi) 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 cautions stockholders 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.
18
<PAGE>
<TABLE>
<CAPTION>
Item 7. Financial Statements PAGE
----
<S> <C>
Report of Independent Auditors.............................................................................
Consolidated Balance Sheets as of December 31, 1998 and 1997...............................................
Consolidated Statements of Operations for the years ended December 31, 1998 and 1997.......................
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998 and 1997.............
Consolidated Statements of Cash Flows for the years ended December 31, 1998 and 1997.......................
Notes to Consolidated Financial Statements.................................................................
</TABLE>
19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of COPE, Inc.
We have audited the accompanying consolidated balance sheets of COPE, Inc. as of
December 31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of COPE,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles
in the U.S.
ATAG Ernst & Young Ltd.
Kevin McCabe Yves Vontobel
Chartered Accountant Certified Accountant
Zurich, Switzerland
March 26, 1999
except as to Note 18 for which the date is April 19, 1999
<PAGE>
COPE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in U.S. Dollars)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1998 1997
------------ ------------
<S> <C> <C> <C>
Current assets
Cash and cash equivalents $1,303,114 $678,936
Trade accounts receivable 5,418,777 3,622,485
Inventories (net of provision of $89,445 and $0) 2,433,790 1,383,191
Other current assets Note 5 450,013 318,182
------------ ------------
Total current assets 9,605,694 6,002,794
------------ ------------
Property, plant and equipment, net Note 6 751,235 570,475
Loans receivable 662,050 394,406
Goodwill (net of amortization of $59,855 and $0) Note 4 777,714 0
Intangible assets 249,459 125,631
Deferred income taxes Note 11 592,495 309,652
------------ ------------
3,032,953 1,400,164
------------ ------------
TOTAL ASSETS $12,638,647 $7,402,958
============ ============
</TABLE>
See notes to the consolidated financials statements
<PAGE>
COPE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in U.S. Dollars)
<TABLE>
<CAPTION>
LIABILITIES AND December 31, December 31,
SHAREHOLDERS' EQUITY 1998 1997
------------ ------------
<S> <C> <C> <C>
Liabilities
Current liabilities
Short-term borrowings Note 8 $2,385,303 $661,982
Trade accounts payable 5,650,422 3,027,118
Amounts due to related parties 0 97,984
Customer advances 216,558 704,915
Other current liabilities Note 10 802,384 389,639
Current income taxes payable 179,012 49,349
Deferred income taxes Note 11 216,352 211,046
------------ ------------
Total current liabilities 9,450,031 5,142,033
------------ ------------
Commitments and contingent liabilities Note 15
Shareholders' equity
Share capital:
Common stock, $0.001 par value 3,153 2,862
Authorized shares 30,000,000 (2,862,000 in 1997)
Issued and outstanding shares 3,152,861 (2,862,000 in 1997)
Additional paid in capital 506,031 767,785
Accumulated other comprehensive income
Cumulative translation adjustment 31,852 (145,731)
Retained earnings 2,647,580 1,636,009
------------ ------------
Total shareholders' equity 3,188,616 2,260,925
------------ ------------
TOTAL LIABILITIES AND ------------ ------------
SHAREHOLDERS' EQUITY $12,638,647 $7,402,958
============ ============
</TABLE>
See notes to the consolidated financials statements
<PAGE>
COPE, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS DECEMBER 31, 1998 AND 1997
(Amounts in U.S. Dollars, except share amounts)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net Revenue
Sales of solutions $25,411,976 $16,605,175
Sales of services 3,647,174 1,310,996
------------- -------------
Total revenue 29,059,150 17,916,171
Cost of sales (20,281,131) (12,817,738)
------------- -------------
Gross profit 8,778,019 5,098,433
------------- -------------
Operating expenses
Selling, general and administrative expenses (6,992,971) (4,205,093)
Consultancy expenses (292,689) (131,723)
Depreciation and amortization (399,940) (220,363)
------------- -------------
Total operating expenses (7,685,600) (4,557,179)
------------- -------------
Operating income 1,092,419 541,254
Other income (expense):
Interest expense (127,028) (76,197)
Interest income 26,698 704
Other 30,786 (270)
Foreign exchange gain 3,326 38,716
------------- -------------
(66,218) (37,047)
------------- -------------
Earnings before taxes 1,026,201 504,207
Current income taxes (158,141) (34,076)
Deferred income taxes 143,511 162,766
------------- -------------
(14,630) 128,690
------------- -------------
Net income $1,011,571 $632,897
============= =============
Basic earnings per share $0.34 $0.23
Diluted earnings per share $0.34 $0.23
Weighted average shares outstanding 2,936,589 2,740,833
Dilutive effect of stock options 12,120 0
------------- -------------
Diluted average shares outstanding 2,948,709 2,740,833
------------- -------------
</TABLE>
See notes to the consolidated financials statements
<PAGE>
COPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Amounts in U.S. Dollars)
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Cash flow provided by operating activities
Net income $1,011,571 $632,897
Adjustment to reconcile net income to net cash
provided by operating activities
Depreciation 224,375 220,363
Amortization 175,565 0
Deferred income taxes (143,511) (162,766)
Gain on disposal of fixed assets (2,284) 0
Effects of changes in operating assets and liabilities
excluding effects of business acquired
Accounts receivable 1,050,835 (1,530,889)
Inventories 144,251 (488,492)
Other current assets 160,857 (226,326)
Accounts payable (2,009,336) 736,413
Customer advances 0 704,915
Other current liabilities 112,986 404,820
------------- --------------
Net cash flow provided by operating activities 725,309 290,935
Cash flow used in investing activities
Purchase of property, plant and equipment (370,208) (585,881)
Loans receivables (38,216) (394,406)
Purchase of intangible assets 0 (80,138)
Proceeds from sale of property, plant and equipment 5,249 4,653
Acquisition of business / net of cash acquired (187,322) 0
------------- --------------
Net cash flow used in investing activities (590,497) (1,055,772)
Cash flow provided by financing activities
Issuance of capital stock 152,320 694,311
Increase of short term borrowings 648,515 502,770
COPE reorganization (371,112) 0
------------- --------------
Net cash flow provided by financing activities 429,723 1,197,081
Effect of exchange rate changes on cash 59,643 (15,355)
Net increase of cash and cash equivalents 624,178 416,889
Cash and cash equivalents at beginning of the period 678,936 262,047
------------- --------------
Cash and cash equivalents at end of the period $1,303,114 $678,936
============= ==============
Supplemental cash flow disclosure
Interest paid $127,028 $76,197
Income taxes paid 32,478 22,643
</TABLE>
<PAGE>
COPE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AS OF DECEMBER 31, 1998 AND 1997
(Amounts in U.S. Dollars)
<TABLE>
<CAPTION>
Accumulated other Total
Number Share Additional Retained comprehensive shareholders'
of shares capital paid in capital earnings income equity
--------- ------- --------------- -------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997, as restated (1) 2,700,000 2,700 73,636 1,003,112 (74,420) 1,005,028
Net income 632,897 632,897
Foreign currency translation adjustments (71,311) (71,311)
---------------
Total other comprehensive income 561,586
---------------
Issuance of share capital 162,000 162 694,149 694,311
----------- ------- ------------- -------------- -------------- ---------------
Balance at December 31, 1997 2,862,000 2,862 767,785 1,636,009 (145,731) 2,260,925
----------- ------- ------------- -------------- -------------- ---------------
Net income 1,011,571 1,011,571
Foreign currency translation adjustments 177,583 177,583
---------------
Total other comprehensive income 1,189,154
---------------
COPE Reorganization 270,654 271 (414,054) (413,783)
Issuance of share capital 20,207 20 152,300 152,320
----------- ------- ------------- -------------- -------------- ---------------
Balance at December 31, 1998 3,152,861 3,153 506,031 2,647,580 31,852 3,188,616
----------- ------- ------------- -------------- -------------- ---------------
</TABLE>
(1) Share capital and additional paid in capital have been retroactively
restated to give effect to the COPE Reorganization (see Note 2 to the
consolidated financial statements)
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
Note 1- Basis of Presentation
The accompanying consolidated financial statements present the consolidated
operations of COPE, Inc., a Delaware corporation formerly known as Harrier,
Inc., and its wholly-owned subsidiaries (collectively hereinafter referred to as
the "Company"). The accompanying consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP").
Nature of Operations
COPE Inc. is a Swiss-based provider of data storage consulting, services and
solutions. With its main corporate offices located in Rotkreuz, Switzerland,
this Delaware corporation also conducts business in Germany and Austria.
Note 2- Reorganization
On September 11, 1998, the shareholders of the Company approved 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 the Company, COPE
Holding AG, a Swiss corporation and the shareholders of COPE Holding AG ("COPE
Shareholders"), as described below.
On September 11, 1998, the Company filed a Certificate of Amendment to its
Certificate of Incorporation in order to change its name from Harrier, Inc. to
COPE, Inc. and to affect a 1 for 58 reverse split of its outstanding common
stock. As a result of the reverse split, the shares of common stock of the
Company outstanding immediately prior to the COPE Reorganization were reduced to
approximately 270,654 shares.
Pursuant to the Reorganization Agreement, on September 25, 1998, the Company
issued 2,862,000 shares (post-split) of its common stock in exchange for all of
the outstanding capital shares of COPE Holding AG. At the completion of the
COPE Reorganization, the Company had approximately 3,132,634 shares (post-split)
of its common stock outstanding, approximately 91.4% of which were held by the
former COPE shareholders.
Also on September 25, 1998, and immediately prior to the Company's issuance of
2,862,000 shares (post-split) of its common stock in exchange for all of the
outstanding capital shares of COPE Holding AG, the Company consummated the
transactions under that certain Common Stock Purchase Agreement dated September
11, 1998 between the Company and New Capital Investment Fund, a Cayman Islands
Investment Fund ("NCIF"), and that a certain Assignment and Assumption Agreement
dated September 11, 1998 between the Company and Glycosyn Pharmaceuticals, Inc.,
a Delaware corporation ("Glycosyn") (collectively, the "Glycosyn Agreements").
Pursuant to the terms of the Glycosyn Agreements, NCIF purchased from the
Company 2,850,000 shares of the common stock of the Company's subsidiary,
Glycosyn, in consideration of NCIF's cancellation of all of the indebtedness
owed to it by the Company ($610,167 as of March 31, 1998), and (ii) Glycosyn
acquired all of the assets and assumed all of the liabilities of the Company as
they existed immediately prior to the consummation of the COPE Reorganization on
September 25, 1998.
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. COPE
Holding AG is assumed to have acquired the Company and therefore the assets and
liabilities of the Company as they existed immediately prior to the consummation
of the COPE Reorganization, after giving effect to the consummation of the
transactions under the Glycosyn Agreements, have been recorded at fair value as
required by the purchase method. This adjustment reflects the elimination of the
Company's equity and accumulated deficit.
Prior to the COPE Reorganization, COPE Holding AG had 1,060 shares of capital
stock issued and outstanding. As a result of the COPE Reorganization, the COPE
Shareholders were issued 2,862,000 shares of the Company's common
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
stock in exchange for all of the outstanding capital shares of COPE Holding AG.
In effect, for accounting purposes, the COPE Shareholders received a 2,700 to 1
split of their shares since COPE Holding AG was deemed to be the accounting
acquirer. Shareholders' equity and earnings per share amounts have been
retroactively restated for the equivalent number of shares received by COPE
Holding AG as a result of the COPE Reorganization. Differences between the par
value of capital stock of COPE Holding AG outstanding prior to the COPE
Reorganization and the par value of the Company's common stock subsequent to
completion of the COPE Reorganization have been recorded against paid-in
capital.
On October 1, 1998, the Company determined that it would change its fiscal year
end from June 30 to December 31, the fiscal year end of COPE Holding AG.
Note 3 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of COPE,
Inc. and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Significant Estimates
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the periods. Actual results could differ from these estimates.
Revenue Recognition
Consulting revenue is recognized at the time of delivery of the service.
Revenue from the sale of hardware and related software is recognized at the time
of acceptance by the customer, generally after installation at a customer's
site. Revenue from certain customer-installable products is recognized at the
time of shipment.
End users of equipment sold by the Company generally contract with the Company
for equipment service and software support, which includes normal maintenance
and repair or replacement of product components. Revenue from these service and
support contracts is recognized ratably over the term of the contract and the
cost associated with these activities is expensed as incurred.
Warranty
Product warranty is provided by the original equipment manufacturer. The Company
only warrants the services provided. Costs associated with post-installation
warranty obligations are estimated and accrued at the time of revenue
recognition, if significant.
Customer Advances
Customer advances include advance payments on contracts in progress at year end.
These amounts will be recognized as income after acceptance by the customers.
Cash and Cash Equivalents
Cash and cash equivalents include cash deposited in demand deposits at banks and
highly liquid investments with original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the weighted average cost method. Inventories consist of finished products held
for resale.
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
Property, Plant and Equipment
Property, plant and equipment are carried at cost and are generally depreciated
using the straight-line method over the estimated useful lives of the assets.
The useful lives utilized for this purpose are:
Machinery and equipment............................. 3 - 5 years
Leasehold improvements........... 10 years or shorter lease term
Goodwill
Goodwill represents the cost in excess of net assets acquired on business
acquisitions and is amortized on a straight-line basis over seven years. The
Company periodically evaluates the realizability of the carrying value of
goodwill by assessing current conditions and estimates of future cash flows.
Impairment of Long-lived Assets
The Company reviews long-lived assets and certain identifiable intangibles to be
held and used or disposed of for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Where the undiscounted cash flows is less than the carrying amount
of the asset, the asset is written down to its net realizable value measured on
the basis of discounted expected cash flows.
Intangible Assets
Intangible assets are carried at cost and are generally depreciated using the
straight-line method over the estimated useful lives of the assets. The useful
lives utilized for this purpose are:
Licenses............................................ 3 - 5 years
Startup costs for business operations .............. 5 years
Trademarks.......................................... 5 years
Foreign Currencies
The financial statements of each of the Company's subsidiaries are measured in
the currency in which that entity primarily conducts its business (the
functional currency). The functional currency of all the Company's non-United
States subsidiaries is the applicable local currency.
Assets and liabilities denominated in foreign functional currencies are
translated into United States dollars ("USD" or "$") at the exchange rate as of
the balance sheet date. Income statement accounts denominated in foreign
functional currencies are translated using the average exchange rate for the
period. Translation adjustments resulting from this process are recorded as a
component of other comprehensive income and are accumulated in a separate
component of shareholders' equity.
Foreign currency transaction gains and losses resulting from the settlement of
amounts receivable or payable denominated in a currency other than the
functional currency are credited or charged to income.
A certain amount of the Company's purchases are settled in USD and the Company
enters into forward exchange contracts for the purchase of USD. Since there are
no firm purchase commitments, such exchange contracts do not qualify as a hedge
under FAS 52 and, accordingly, the gains or losses are included in the income
statement in the period in which the exchange rates change occurred.
Income Taxes
The Company accounts for certain income and expense items differently for
financial reporting purposes than for tax purposes. Provisions for deferred
taxes are made in recognition of such temporary differences, following the
requirements of Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes".
Other Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income"
which requires presentation of comprehensive income and its components in the
financial statements. Comprehensive income consists of net income and foreign
currency translation adjustments and is presented in the Consolidated Statements
of
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
Shareholders' Equity. The adoption of SFAS No. 130 had no impact on net income
or total shareholders' equity. Prior year financial statements have been
reclassified to conform to the SFAS No. 130 requirements.
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. Weighted average shares have been
retroactively restated for the equivalent number of shares received by COPE
Holding AG as a result of the COPE Reorganization (See Note 2).
Derivatives and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 1999. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
the new Statement will have a significant effect on earnings or the financial
position of the Company.
Reclassifications
Certain prior year amounts have been reclassified in order to conform to the
current year presentation.
Note 4 - Business Acquisition
On June 25, 1998, 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.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if the acquisition had
taken place on January 1, 1997.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues $ 36,744,704 $ 28,321,655
Net income 1,023,002 422,595
Basic earnings per share 0.35 0.15
Diluted earnings per share 0.35 0.15
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments such as additional amortization expense as
a result of goodwill. They do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
January 1, 1997, or which may result in the future.
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
Note 5 - Other Current Assets
Other current assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
--------------- -------------
<S> <C> <C>
Deferred costs $ 0 $ 138,821
Prepaid expenses 358,170 108,398
Value Added Taxes 37,977 43,485
Other 53,866 27,478
---------------- -------------
Total other current assets $ 450,013 $ 318,182
=============== =============
</TABLE>
Note 6 - Property, Plant and Equipment
<TABLE>
<CAPTION>
Property, plant and equipment consist of the following:
December 31,
------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Leasehold improvements $ 210,529 $ 35,347
Machinery and equipment 1,402,887 1,138,946
Accumulated depreciation (862,181) (603,818)
---------------- --------------
Total property, plant and equipment, net $ 751,235 $ 570,475
============== ==============
</TABLE>
Note 7 - Loans Receivable
Loans receivable bear interest at market rates ranging from 5.0 to 6.5 %.
Approximately $ 26,000 and $ 39,000 of the balance is due from employees as of
December 31, 1998 and 1997, respectively.
Note 8 - Short-term Borrowings
As of December 31, 1998, the Company had established short-term overdraft
facilities under which the Company and its subsidiaries could borrow up to
$2,812,083. 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. A. Knapp and Mr. S. Isenschmid, for $342,700
each.
Amounts outstanding at December 31, 1998 and 1997 total $2,385,303 and
$661,982 respectively. As of December 31, 1998, the Company had approximately
$426,780 available under these facilities. The weighted average interest rate
on amounts outstanding was 5.0 and 7.0 % at December 31, 1998 and 1997,
respectively. Interest paid for the years ending December 31, 1998 and 1997,
amounted to $127,028 and $76,197, respectively.
Note 9 - Pension plans
Substantially all of the Company's employees are covered by government pension
plans administered by the respective countries' governmental authorities. The
employees' contributions are based on a percentage of gross salary. The Company
generally contributes an amount equal to that contributed by the employees. The
cost of
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
these plans, charged to operations, for the years ended December 31,
1998 and 1997 was $ 446,528 and $ 226,904, respectively. The Company provides
no additional pension or post-retirement benefits.
Note 10 - Other Current Liabilities
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Value Added Taxes $ 363,297 $ 87,691
Legal, professional and other fees 61,140 67,190
Personnel and social security expenses 314,138 176,170
Other 63,809 58,588
-------------- --------------
$ 802,384 $ 389,639
============== ==============
</TABLE>
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
Note 11 - Income Taxes
Pretax income for the years ended December 31, 1998 and 1997 was taxed in
the following jurisdictions:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1998 1997
--------------- ------------------
<S> <C> <C>
Switzerland $ 1,242,682 $ 994,782
Other (216,481) (490,575)
--------------- ------------------
$ 1,026,201 $ 504,207
=============== ==================
</TABLE>
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1998 1997
------------- ------------------
<S> <C> <C>
Current:
Switzerland $ 154,113 $ 34,688
Other 4,028 (612)
--------------- ------------------
Total current 158,141 34,076
--------------- ------------------
Deferred:
Switzerland (6,973) 39,074
Other (136,538) (201,840)
--------------- ------------------
Total deferred (143,511) (162,766)
--------------- ------------------
$ 14,630 $ (128,690)
=============== ==================
</TABLE>
The Company has net deferred tax assets (liabilities) as of December 31, 1998
and 1997 as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997
----------------------------------------
<S> <C> <C>
Non-current deferred tax assets:
Net operating losses $ 592,495 $ 309,652
--------------- ----------------
592,495 309,652
--------------- ----------------
Deferred tax liabilities:
Inventories (100,265) (94,629)
Trade accounts receivable (23,529) (22,207)
Deductible provisions eliminated on consolidation (69,029) (65,150)
Warranty accrual (23,529) (18,814)
Other 0 (10,246)
--------------- ----------------
(216,352) (211,046)
--------------- ----------------
Net deferred tax assets $ 376,143 $ 98,606
=============== ================
Management believes it is more likely than not that all deferred tax assets are realizable.
</TABLE>
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
A reconciliation of income taxes determined using the applicable rate to actual
income taxes provided, is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Income tax expense at the applicable rate $ 57,391 $ (26,374)
of 5.59% (-5.23% in 1997)
Tax rate change on opening deferred taxes (18,021) (65,400)
Release of overprovision in prior year 0 (13,833)
Permanent differences (34,684) (25,091)
Losses with no tax benefit 9,326 0
Other 618 2,008
--------------- --------------
$ 14,630 $ (128,690)
=============== ==============
</TABLE>
The applicable tax rate is obtained by aggregating the separate reconciliations
prepared using the domestic rate in each individual jurisdiction in which the
Company operates. The negative applicable rate obtained in 1997 results from
losses incurred in jurisdictions with high domestic tax rates. In 1998, fewer
net losses were incurred in such jurisdictions.
At December 31, 1998, the Company had German and Austrian net loss carryforwards
for tax purposes of approximately $ 955,441 and $ 237,160 respectively. Under
applicable German and Austrian tax laws, the net operating losses can be carried
forward for an indefinite period of time.
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
Note 12 - Stock Options and Stock Purchase Warrants
During 1998, the Company adopted the 1998 Stock Option Plan ("1998 Plan")
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. During 1998, options to purchase 167,500 shares of the Company's common
stock were issued to employees and non-employee directors of the Company, all of
which remain outstanding as of December 31, 1998.
Summary information about the Company's stock options outstanding as of December
31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of exercise prices Options Remaining Life Average Options Average
Outstanding in Years Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$8.40 - $8.50 59,500 1.44 $ 8.40 - -
$13.00 - $15.00 108,000 5.01 13.46 - -
- -------------------------------------------------------------------------------------------------------------------------
$8.40 - $15.00 167,500 3.74 $11.66 - -
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 in accounting for
its stock options. 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. Had compensation expense for the Company's stock-
based compensation plans been determined consistent with SFAS 123 "Accounting
for Stock-Based Compensation", the impact on the Company's net earnings and
earnings per share would have been as follows:
<TABLE>
<CAPTION>
Years ended
December 31,
1998
------------------
<S> <C>
Net income as reported $ 1,011,571
Pro forma net income 948,934
Basic earnings per share:
As reported $ 0.34
Pro forma 0.32
Diluted earnings per share:
As reported $ 0.34
Pro forma 0.32
</TABLE>
The pro forma results reflect amortization of the fair value of stock options
over the vesting period. The weighted average fair value of options granted in
1998 was $5.44. The fair value of each option grant was estimated on the date of
grant using a Black-Scholes option pricing model, assuming a dividend yield of
0% for all years, a weighted average risk free interest rate of 4.7% and a
volatility factor of 60% to 75%.
Additionally, as of December 31, 1998, there were 29,793 stock purchase warrants
outstanding which were exercisable at $7.54 per share. The warrants expire
from April 1 to October 14, 2000.
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
Note 13 - Related Party Transactions
Adrian Knapp, Chairman of the Board of Directors, has been an employee of the
Company since July 1, 1997. For the year ended December 31, 1998 and the six
months from July to December 31, 1997, he earned a salary of $ 108,787 and
$53,461, respectively. Prior to July 1, 1997, his services were charged to the
Company by Adrian Knapp Consulting, a sole proprietorship owned by Mr. Knapp.
Mr. Knapp is a major shareholder, holding approximately 41.1% of the issued
share capital.
Mr. Isenschmid, Chief Executive Officer of the Company, has been an employee of
the Company since July 1, 1997. For the year ended December 31, 1998 and the six
months from July to December 31 1997, he earned a salary of $ 135,983 and
$53,461, respectively. Prior to July 1, 1997, his services were charged to the
Company by STI Marketing- und Organisationsberatung, a sole proprietorship owned
by Mr. Isenschmid. Mr. Isenschmid is a major shareholder, holding approximately
41.1% of the issued share capital.
As of December 31, 1998 and 1997, the financial statements included the
following balances due from (to) related parties:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
A. Knapp $ 0 $ (118,874)
S. Isenschmid 0 20,890
----------- -----------
Net amount due to related parties $ 0 $ (97,984)
=========== ===========
</TABLE>
Note 14 - Leases
The Company has operating leases primarily for office space and equipment which
expire at various dates through the year 2002 with, in some instances, renewal
privileges. Certain leases provide for escalation of the rentals based on the
increase in the consumer price index and base mortgage rates. Operating lease
costs are charged to income as incurred.
The minimum annual rental commitments under long-term non-cancelable operating
leases as of December 31, 1998, were as follows:
<TABLE>
<CAPTION>
1998
------------
<S> <C>
1999 $ 188,648
2000 159,038
2001 144,983
2002 86,202
----------
Total future minimum lease payments $ 578,871
==========
</TABLE>
Total rent expense for operating leases was approximately $168,970 and $120,484
for the years ended December 31, 1998 and 1997, respectively.
Note 15 - Commitments and Contingent Liabilities
Management is not aware of any matters that could give rise to any liability to
the Company that would have a material adverse effect on the Company's business,
financial condition or results of operations.
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
Note 16 - 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 and taxes as its measure of segment profit or loss.
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 the Company's reportable segments is summarized as
follows by location of operations (Intercompany sales are generally at purchase
cost):
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
Total revenue:
<S> <C> <C>
Switzerland $ 15,391,521 $ 12,133,274
Germany 11,997,975 4,759,643
Austria 1,768,674 1,182,198
Other 0 692,076
-------------- --------------
29,158,170 18,767,191
-------------- --------------
Sales between geographic areas:
Switzerland (37,743) (182,757)
Germany (31,974) (76,220)
Austria (29,303) (49,789)
Other 0 (542,254)
-------------- --------------
(99,020) (851,020)
-------------- --------------
Total revenue from external customers:
Switzerland 15,353,778 11,950,517
Germany 11,966,001 4,683,423
Austria 1,739,371 1,132,409
Other 0 149,822
-------------- --------------
$ 29,059,150 $ 17,916,171
============== ==============
Depreciation and amortization
Switzerland $ 289,685 $ 182,937
Germany 91,124 31,579
Austria 19,131 5,847
Other 0 0
-------------- --------------
$ 399,940 $ 220,363
============== ==============
</TABLE>
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
Earnings before interest and taxes
<S> <C> <C>
Switzerland $ 1,290,792 $ 1,036,864
Germany (184,280) (346,364)
Austria 47,447 (117,797)
Other (27,428) 6,997
-------------- --------------
$ 1,126,531 $ 579,700
============== ==============
Total Assets:
Switzerland $ 5,681,247 $ 5,493,536
Germany 5,722,295 1,544,735
Austria 1,125,184 364,687
Other 109,921 0
-------------- --------------
$ 12,638,647 $ 7,402,958
============== ==============
</TABLE>
Note 17 - Financial Instruments
Fair Value
The carrying value of financial instruments such as cash and cash equivalents,
accounts receivable, accounts payable approximate their fair value due to the
short-term maturities of these instruments.
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
DECEMBER 31, 1998 AND 1997
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company's
cash is principally denominated in Swiss Francs and is maintained principally
with one financial institution in Switzerland. The Company provides credit in
its normal course of business to a wide variety of customers and, generally,
requires no collateral from its customers. The allowance for non-collection of
accounts receivable ($ 0 in both, 1998 and 1997) is based upon management's
expectations of collectibility. In the years ended December 31, 1998 and 1997,
sales to the five biggest customers of the Company amounted to 36% and 29% of
consolidated net sales, respectively. Sales to one customer accounted for 14%
and 11% of consolidated sales in the years ended December 31, 1998 and 1997 .
The Company performs ongoing credit evaluations of its customers.
The Company enters into forward exchange contracts for significant U.S. Dollar
purchase transactions. At December 31, 1998, no such contracts were open. At
December 31, 1997, seven forward exchange contracts were open with settlement
dates from January to June 1998.
Note 18 - Subsequent Event
On April 19, 1999, COPE acquired Hicomp Software Systems GmbH ("Hicomp"), a
German software company, in a stock transaction accounted for as a pooling-of-
interest. COPE issued 420,000 new shares in exchange for all outstanding Hicomp
shares. 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.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The executive officers and directors of COPE, Inc., the positions held by
them and their ages as of April 20, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------------------------- ----------- -----------------------------------------------------
<S> <C> <C>
Adrian Knapp 36 Chairman of the Board and Executive Vice President
Stephan Isenschmid 37 President, Chief Executive Officer and Director
Markus Bernhard 35 Chief Financial Officer
Peter Koch 73 Director
Markus Stalder 46 Director
Kevin DeVito 38 Director
</TABLE>
Mr. Knapp has served as Chairman of the Board and Executive Vice President
of COPE, Inc. since September 25, 1998. Mr. Knapp co-founded COPE Holding AG in
1991 and has served as Chairman of the Board of that company since its
inception.
Mr. Isenschmid has served as President, Chief Executive Officer and a
director of COPE, Inc. since September 25, 1998. Mr. Isenschmid co-founded COPE
Holding AG in 1991 and has served as President, Chief Executive Officer and a
director of that company since its inception.
Mr. Bernhard has served as Chief Financial Officer of COPE, Inc. since
September 25,1998. Mr. Bernhard has also served as Chief Financial Officer of
COPE Holding AG since September 1997. From 1991 to September 1997, Mr. Bernhard
was employed as a Swiss certified accountant at Revisuisse Price Waterhouse.
Mr. Koch has served as a director of COPE, Inc. since September 25, 1998.
Mr. Koch has served as General Manager of acp GmbH, a German-based distributor
of computer products and peripherals since 1991.
Mr. Stalder has served as a director of COPE, Inc. since September 25,1998.
Mr. Stalder has been a partner in the law firm, Stalder & Murer, located in
Sihlbrugg, Switzerland, since 1991. Stalder & Murer has acted as general
counsel to COPE Holding AG since 1991.
Mr. DeVito has served as a director of COPE, Inc. since June 1992. From
1992 to September 25, 1998, Mr. DeVito served as Chief Executive Officer and
President of COPE, Inc., which during that period was known as Harrier, Inc.
Since 1996, Mr. DeVito has served as a principal of New Capital AG, a Zurich
based financial and management consulting firm.
Each director holds office until his successor is elected and qualified or
until his earlier resignation in the manner provided in the Bylaws of the
Company. The Board of Directors has established an Audit Committee consisting of
Markus Stalder, Adrian Knapp and Kevin DeVito, with Mr. Stalder as Chairman.
The Audit Committee reviews the Company's independent auditors, the scope and
timing of their audit services and other services they are asked to perform,
their report on the Company's financial statements following completion of the
their audit, and the Company's policies and procedures with respect to internal
accounting and financial controls. In addition, the Audit Committee makes annual
recommendations to the Board of Directors for the appointment of independent
auditors for the ensuing year. The Board of Directors has also established a
Compensation Committee consisting of Kevin DeVito, Markus Stalder and Adrian
Knapp, with Mr. DeVito as
20
<PAGE>
Chairman. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company and
reviews general policy matters relating to compensation benefits of employees of
the Company.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the officers and directors of the Company and those persons who beneficially own
more than 10% of the outstanding shares of common stock of the Company to file
reports of securities ownership and changes in such ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than 10% beneficial owners are also required by rules promulgated by the SEC to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to the
Company, or written representations that no Form 5 filings were required, the
Company believes that during 1998 all Section 16(a) filing requirements
applicable to the officers, directors and greater than 10% beneficial owners of
the Company were complied with.
21
<PAGE>
Item 10. Executive Compensation And Other Information.
Cash Compensation of Executive Officers
The following table sets forth the cash compensation paid to the executive
officers of the Company for services rendered during the fiscal years ended
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------- --------------------------------------
Common Shares
Other Restricted Stock Underlying Options
Annual Awards Granted All Other
Name and Position Year Salary Bonus Compensation ($) (# Shares) Compensation(1)
- ----------------- ------- -------- ------ ------------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephan Isenschmid, 1998 139,000 -0- -0- -0- 56,000 12,000
CEO 1997 -0- -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- -0- -0-
Adrian Knapp, Vice 1998 108,000 56,000 12,000
President 1997 -0- -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- -0- -0-
</TABLE>
___________________
(1) Represents a car allowance of $1,000 per month.
22
<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
- -----------------------------------------------------------------------------------------------------------------------------------
Number of Securities % of Total Options/SARs
Underlying Options/SARs Granted to Employees in Exercise or Base
Name Granted (#) Fiscal Year 1998 Price ($/Sh) Expiration Date
- ------------------- ------------------------ ----------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Stephan Isenschmid, 3,000 (11) 1.8% 8.40 4/30/99
CEO, and Adrian 4,000 (2) 2.4% 8.40 3/31/00
Knapp, Chairman 1,000 (3) (4) 8.40 3/31/01
and Vice President(1) 1,000 (5) (4) 8.40 3/31/05
3,000 (6) 1.8% 13.00 12/31/00
7,000 (7) 4.2% 13.00 12/31/01
6,000 (8) 3.6% 13.00 12/31/03
8,000 (9) 4.8% 13.00 12/31/05
4,000 (10) 2.4% 13.00 12/31/08
1,000 (11) (4) 13.00 12/31/99
1,000 (6) (4) 13.00 12/31/00
1,000 (7) (4) 13.00 12/31/01
2,000 (8) 1.2% 13.00 12/31/03
5,000 (9) 3.6% 13.00 12/31/05
1,000 (11) (4) 15.00 12/31/99
1,000 (6) (4) 15.00 12/31/00
2,000 (7) 1.2% 15.00 12/31/01
5,000 (8) 3.6% 15.00 12/31/03
____________________
</TABLE>
(1) Mr. Isenschmid and Mr. Knapp each received options in the amounts and on
the terms and conditions as set forth in table presented.
(2) Options vest and first become exercisable on March 1, 2000.
(3) Options vest and first become exercisable on March 1, 2001.
(4) Less than one percent.
(5) Options vest and first become exercisable on March 1, 2005.
(6) Options vest and first become exercisable on March 1, 2000.
(7) Options vest and first become exercisable on March 1, 2001.
(8) Options vest and first become exercisable on March 1, 2003.
(9) Options vest and first become exercisable on March 1, 2005.
(10) Options vest and first become exercisable on March 1, 2008.
(11) Options vest and first become exercisable on March 1, 1999.
23
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs at In-the-Money Options/SARs at
Shares FY-End (#) FY-End ($)
Acquired on Value Realized
Name Exercise (#) ($) Exercisable/ Unexercisable Exercisable/ Unexercisable
- ------------------------------- ------------- -------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C>
Stephan Isenschmid, CEO -0- -0- 0/56,000 $0/$338,120
Adrian Knapp, Chairman and Vice -0- -0- 0/56,000 $0/$338,120
President
</TABLE>
Compensation of Directors
All directors receive reimbursement for out-of-pocket expenses incurred in
attending board of directors meetings. From time to time, the Company may engage
certain members of the board of directors to perform services on its behalf. In
such cases, the Company compensates the members for their services at rates no
more favorable than could be obtained from unaffiliated parties.
Indemnification of Directors
As permitted by Section 145 of the Delaware General Corporation Law, the
Company's Certificate of Incorporation includes a provision that eliminates the
personal liability of its directors for monetary damages for breach or alleged
breach of their fiduciary duty as directors. In addition, as permitted by
Section 145 of the Delaware General Corporation Law, the Company's Bylaws
provide that it may, in its discretion: (i) indemnify its directors, officers,
employees and agents and persons serving in such capacities in other business
enterprises (including, for example, its subsidiaries) at its request, to the
fullest extent permitted by Delaware law; and (ii) advance expenses, as
incurred, to its directors and officers in connection with defending a
proceeding.
The Company's policy is to enter into indemnification agreements with each
of its directors and officers that provide the maximum indemnity allowed to
directors and officers by Section 145 of the Delaware General Corporation Law
and the Bylaws as well as certain additional procedural protections.
The indemnification provisions in the Bylaws and the indemnification
agreements COPE enters into with its directors and officers may be sufficiently
broad to permit indemnification of its directors and officers for liabilities
arising under the 1933 Act. However, COPE is aware that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is therefore unenforceable.
24
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of the shares of common stock as of April 20, 1999 by (1) each person
known by the Company to be the beneficial owner of more than five percent (5%)
of the common stock, (2) each of the Company's directors and executive officers
and (3) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Name and Address Number Percent
- --------------------------------------------------- --------------------------------- ------------------------------
<S> <C> <C>
Adrian Knapp(1)(2) 1,301,000(2) 36.4%
Stephan Isenschmid(1)(2) 1,301,000(2) 36.4%
Markus Bernhard(1)(3) 6,500(3) (4)
Markus Stalder (1)(5) -- --
Peter Koch (1)(5) 16,000 (4)
Kevin DeVito(6)(7) 870 (4)
Uwe Hinrichs(8)(9) 420,000 11.8%
All officers and directors as a group 2,625,370 73.1%
</TABLE>
____________________
(1) Address is Grundstrasse 14, 6343 Rotkreuz, Switzerland.
(2) Includes 5,000 shares of common stock underlying presently exercisable
options. Does not include 51,000 shares of common stock underlying options
that are subject to vesting.
(3) Represents 6,500 shares of common stock underlying presently exercisable
options. Does not include 12,000 shares of common stock underlying options
that are subject to vesting.
(4) Less than one percent.
(5) Does not include 1,000 shares of common stock underlying options that are
subject to vesting.
(6) Address is 2200 Pacific Coast Highway, Suite 301, Hermosa Beach, California
90254.
(7) Does not include 3,000 shares of common stock underlying options that are
subject to vesting.
(8) Address is Gruendgenstrasse 16D-22309 Hamburg, Germany.
(9) Does not include 60,000 shares of common stock underlying options subject to
vesting.
25
<PAGE>
Item 12. Certain Relationships and Related Transactions
Markus Stalder, a member of the Company's board of directors, is also a
member of the law firm of Stalder & Murer, general counsel to the COPE Holding
AG since 1991. In 1998 and 1997, COPE Holding AG paid legal fees to Stalder &
Murer in the amount of approximately $50,000 and $30,000, respectively.
In September 1998, the Company completed a series of transactions (referred
to herein as the "COPE Reorganization") by which the Company discontinued all
operations and divested itself of all of its assets and substantially all of its
liabilities and, at the same time, acquired all of the outstanding capital
shares of COPE Holding AG. As part of the COPE Reorganization, the Company
issued to Adrian Knapp and Stephan Isenschmid 1,296,000 shares each of common
stock of the Company in exchange for their shares of COPE Holding AG.
As of September 25, 1998, the Company was indebted to New Capital
Investment Fund ("NCIF") in the principal amount of $590,000 plus interest
thereon, from June 30, 1996, at the rate of 12% per annum. NCIF is an investment
fund controlled by Mr. Jurg Kehrli and Mr. Kevin DeVito, the Chairman of the
Board and Chief Executive Officer of the Company, respectively, immediately
prior to the COPE Reorganization. In connection with the COPE Reorganization,
the Company sold to NCIF a controlling interest in its former subsidiary,
Glycosyn Pharmaceuticals, Inc., in consideration of NCIF's cancellation of all
of the indebtedness and certain indemnification agreements described below. The
Company's sale of the controlling interest in Glycosyn was subject to the
approval of the Company's shareholders and the Company's receipt of an opinion
from an independent business appraiser that the terms of the transaction were
fair to the Company's shareholders.
In connection with the COPE Reorganization, the Company received from
NCIF and New Capital AG, an agreement to indemnify the Company against any
claims outstanding as of the close of the COPE Reorganization. Kevin DeVito and
Jurg Kehrli are directors of both NCIF and New Capital AG. Mr. Jurg Kehrli and
Mr. Kevin DeVito served as the Chairman of the Board and Chief Executive Officer
of the Company, respectively, immediately prior to the COPE Reorganization. Mr.
DeVito is currently a member of the board of directors of the Company.
26
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits
2.1 Amended and Restated Securities Purchase Agreement and
Plan of Reorganization dated July 24, 1998 between the
Registrant and COPE Holding AG (14)
2.2 Common Stock Purchase Agreement dated September 11, 1998
between the Registrant and New Capital Investment Fund (15)
3.1 Articles of Incorporation (1)
3.2 Certificate of Amendment dated September 11, 1998 to
Certificate of Incorporation (15)
3.3 Certificate of Correction dated September 15, 1998 to
Certificate of Amendment of Certificate of Incorporation
(15)
3(ii) Bylaws (1)
10.1 Agreement with Licensia Export Trading Co. dated December
12, 1986 (2)
10.2 Agreement with Erich Klemke dated June 6, 1988 (3)
10.3 Amendment to agreement with European Investment and Equity
Trading dated March 30, 1989 (5)
10.4 Distribution agreement with Mobal AG, dated January 17,
1989 (4)
10.5 1989 Stock Option and Stock Award Plan (1)
10.6 Warrant Agreement dated as of November 13, 1989 among the
Registrant, ASFAG AG and Martin S. Wohnlich (5)
10.7 Agreement dated November 10, 1989 between Tibech AG and
Bioptron AG (5)
10.8 Agreement dated February 7, 1990 between Tibech AG and
Bioptron AG (5)
10.9 Sales Agreement for HDC AG stock between Dr. Carl Odermatt
and the Registrant (5)
10.10 Distribution Agreement with Planeta, dated September 1,
1991 (with accompanying unofficial translation. (6)
10.11 Univ. of Michigan Agreement dated October 17, 1992. (10)
10.12 Univ. of Michigan Agreement dated March 18, 1992. (10)
10.13 Sale of Assets Agreement by and between the Registrant and
a German Investor (8)
10.14 Agreement to Dissolve Joint Research and Development
Project by and between the Registrant and Tecno-Bio CO.,
Ltd. (9)
10.15 Purchase and License Agreement of HDC AG by and between
the Registrant and Tecno-Bio CO., Ltd. T (9)
10.16 American Diagnostica Inc. R&D Joint Venture Agreement (11)
10.17 Loan Agreement between New Capital Investment Fund and
Registrant (12)
10.18 Asset Transfer and Plan of Liquidation and
Dissolution dated June 30, 1997 between the Registrant,
Naturade, Inc. and DermaRay, LLC (13)
27
<PAGE>
10.19 Amended and Restated Securities Purchase Agreement and
Plan of Reorganization dated July 24, 1998 between
Registrant and COPE Holding AG. (14)
10.20 Agreement dated October 30, 1997 between Registrant and
New Concept Therapeutics, Inc. (13)
10.21 Agreement dated September 25, 1998 between Registrant, COPE
Holding AG, and New Capital Investment Fund
10.22 Common Stock Purchase Agreement dated September 11, 1998
between Registrant and New Capital Investment Fund
10.23 Assumption and Assignment Agreement dated September 11, 1998
between Registrant and Glycosyn Pharmaceuticals, Inc.
10.24 Indemnification Agreement dated September 28, 1998 by New
Capital AG
10.25 Sale and Transfer of Business Shares (Forum GmbH) dated
July 25, 1998 between COPE GmbH and Peter Doelling (English
translation of original German text)
10.26 Sale and Transfer of Business Shares (Hicomp Software
Systems GmbH) dated December 21, 1998 between Registrant and
Uwe Hinrichs (English translation of original German text)
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
_____________________________________________________
(1) Filed as an exhibit to Proxy Statement dated May 14, 1990, filed on May 16,
1990 (File No 1-9925), incorporated herein by reference.
(2) Filed as an exhibit to Report on Form 10-K for the year-ended June 30, 1987,
filed on March 18, 1988 (File No 1-9925), incorporated by reference.
(3) Filed as an exhibit to Report on Form 10-K for the year-ended June 30, 1988,
filed on November 3, 1988 (File No 1-9925), incorporated herein by
reference.
(4) Filed as an exhibit to Report on Form 10-K for the year-ended June 30, 1989,
filed on October 13, 1989 (File No 1-9925), incorporated herein by
reference.
(5) Filed as an exhibit to Report on Form 10-K for the year-ended June 30, 1990,
filed on October 13, 1990 (File No 1-9925), incorporated herein by
reference.
(6) Filed as an exhibit to Report on Form 10-K for the year-ended June 30, 1991,
filed on October 13, 1991 (File No 1-9925), incorporated herein by
reference.
(7) Filed as an exhibit to Report on Form 8-K dated July 27, 1990,, filed on
September 6, 1990 (File No 1-9925), incorporated herein by reference.
(8) Filed as an exhibit to Report on Form 8-K dated July 10, 1992, filed on July
31, 1992 (File No 1-9925), incorporated herein by reference.
(9) Filed as an exhibit to Report on Form 8-K dated August 1, 1992, filed on
August 26, 1992 (File No 1-9925), incorporated herein by reference.
(10) Filed as an exhibit to Report on form 10-K for the year-ended June 30,
1992, filed on October 24, 1992 (File No. 1-9925), incorporated herein by
reference.
(11) Filed as an exhibit to Report on Form 10-K for the year-ended June 30,
1993, filed on November 25, 1993 (File No. 1-9925), incorporated herein by
reference.
(12) Filed as an exhibit to Report on Form 10-K for the year-ended June 30,
1996, filed on December 3, 1996 (File No. 1-9925), incorporated herein by
reference.
(13) Filed as an exhibit to Report on Form 10-K for the year-ended June 30,
1997, filed on December 10, 1997 (File No. 1-9925), incorporated herein by
reference.
(14) Filed as an exhibit to Registrant's Proxy Statement/Prospectus dated August
20, 1998 made part of the Registrant's Form S-4 Registration Statement
(File No. 33-53223), incorporated herein by reference.
(15) Filed as an exhibit to Report on Form 8-K dated September 25, 1998, filed
on October 13, 1998 (File No 1-9925), incorporated herein by reference.
(16) Filed as an exhibit to Report on Form 8-K dated March 18, 1999, filed on
March 24, 1999 (File No 1-9925), incorporated herein by reference.
28
<PAGE>
SIGNATURES
In accordance with Section 13(a) or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
COPE, INC.
By: /s/ Adrian Knapp
------------------
Adrian Knapp
Chairman and Vice President
In accordance with the Exchange Act, this report has been signed by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ------------------------------------ ---------------------------------------------------- --------------------------
<S> <C> <C>
/s/ Stephan Isenschmid President and Chief Executive Officer and April 27, 1999
- ------------------------------------ Director (principal executive officer)
Stephan Isenschmid
/s/ Markus Bernhard Chief Financial Officer (principal financial and April 27, 1999
- ------------------------------------ accounting officer)
Markus Bernhard
/s/ Adrian Knapp Chairman of the Board April 27, 1999
- ------------------------------------
Adrian Knapp
/s/ Markus Stalder Director April 27, 1999
- ------------------------------------
Markus Stalder
/s/ Peter Koch Director April 27, 1999
- ------------------------------------
Peter Koch
/s/ Kevin DeVito Director April 27, 1999
- ------------------------------------
Kevin DeVito
</TABLE>
29
<PAGE>
EXHIBIT 10.21
AGREEMENT
This agreement ("Agreement") is entered into this 25th day of
September, 1998 between and among COPE Holding AG, a Swiss stock corporation
("COPE Holding AG"), COPE, INC., a Delaware corporation formerly known as
Harrier, Inc. ("COPE, Inc."), and NEW CAPITAL INVESTMENT FUND, a Cayman Islands
trust ("Fund").
RECITALS
--------
A. The Fund and COPE, Inc. have entered into that certain Common
Stock Purchase Agreement dated September 11, 1998 pursuant to which, among other
things, the Fund acquired a controlling interest in Glycosyn Pharmaceuticals,
Inc., a Delaware corporation ("Glycosyn").
B. COPE, Inc. and Glycosyn have entered into that certain Assignment
and Assumption Agreement ("Indemnification Agreement") dated September 11, 1998
pursuant to which, among other things, Glycosyn assumed all outstanding
obligations of COPE, Inc., including the Payables (as defined below).
C. COPE Holding AG has alleged that COPE, Inc. is in breach of that
certain Amended and Restated Securities Purchase Agreement and Plan of
Reorganization dated July 24, 1998 previously entered into by COPE, Inc. and
COPE Holding AG due to the presence of approximately $150,000 of payables
("Payables") of COPE, Inc. set forth in the List of Payables attached hereto as
Exhibit A.
D. COPE, Inc. and COPE Holding AG have alleged that Glycosyn is
required to indemnify COPE, Inc. against the Payables and, to such end, should
pay the Payables pursuant to the terms of the Indemnification Agreement.
E. The Fund wishes to induce COPE, Inc. and COPE Holding AG to
forebear against bringing any claims against Glycosyn at this time and, in
addition, wishes to acquire additional common shares of Glycosyn from COPE,
Inc.; and, to this end, the Fund wishes to enter into this Agreement on the
terms and conditions set forth below.
AGREEMENT
---------
It is agreed as follows:
1. Subject to and upon the terms and conditions set forth herein, the
Fund hereby delivers to COPE, Inc. its promissory note ("Note") in the original
principal amount of $150,000 in the form of Note attached hereto as Exhibit B.
The Fund's obligations under the Note shall be secured by 150,000 unrestricted
and freely tradable shares ("VTI Shares") of the $.001 par value common stock of
Virtual Telecom, Inc., a Delaware corporation ("VTI"). The Fund hereby grants
COPE, Inc. with a first priority security interest in and to the VTI Shares and,
concurrently herewith, shall deliver the certificates representing the VTI
Shares along with a stock power duly executed by the Fund for purposes of
transferring the Shares into the record name of COPE, Inc. The Fund acknowledges
and agrees that in the event of its default under the Note, COPE, Inc. may sell
the VTI Shares for purposes of curing any defaults under the Note. COPE, Inc.
agrees that in the event of a default by the Fund under the Note, COPE, Inc.
shall use its best efforts to maximize the resale price of the VTI Shares and,
upon its receipt of cash proceeds from the sale of the VTI Shares which equals
the unpaid amount of the Fund's obligations
<PAGE>
under the Note, shall return the remaining portion of the VTI Shares or the cash
proceeds therefrom to the Fund.
2. As an inducement to the Fund to enter into this Agreement, COPE,
Inc. agrees that, for the period ending December 31, 1998, it shall offer the
Fund the option to purchase up to 750,000 ("Glycosyn Shares") of the $.001 par
value common stock of Glycosyn, at a price of $.20 per share. The Fund
acknowledges that it would be purchasing the Glycosyn Shares for its own account
and that the Glycosyn Shares would be sold pursuant to exemptions from
registration providing for transactions not involving an issuer, underwriter or
dealer and, therefore, will bear a standard restrictive legend as provided for
under the Securities Act of 1933. In the event that the Fund elects to purchase
any or all of the Glycosyn Shares, the parties shall enter into an appropriate
investment agreement at the time of such acquisition.
3. This Agreement contains the entire agreement among the parties and
correctly sets forth the rights and duties of each of the parties to each other
as of this date, and may not be modified, altered or changed in any manner
whatsoever, except by a written agreement signed by all of the parties hereto.
Any agreement or representation concerning the subject matter of this Agreement
or the duties of the parties in relation thereto not set forth in this Agreement
or a subsequent written agreement signed by all of the parties hereto is null
and void. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns. The rights and
obligation of either party to this Agreement may not be assigned by such party
without the prior written consent of the other party. This Agreement may be
executed in two or more counterparts, each signed by one of the parties and all
of said counterparts together shall constitute one and the same instrument. The
parties agree that facsimile signatures may be relied upon by each of the
parties hereto as original signatures.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date and year first above written.
COPE, INC.,
a Delaware corporation
By: /s/ Adrian Knapp
----------------------------------------
Adrian Knapp, Chairman of the Board
COPE Holding AG,
a Swiss stock corporation
By: /s/ Adrian Knapp
----------------------------------------
Adrian Knapp, Director
NEW CAPITAL INVESTMENT FUND,
a Cayman Islands trust
By: /s/ Kevin DeVito
----------------------------------------
Kevin DeVito, Director
<PAGE>
EXHIBIT 10.22
COMMON STOCK PURCHASE AGREEMENT
-------------------------------
THIS COMMON STOCK PURCHASE AGREEMENT ("Agreement") is made and entered
into as of the 11th day of September 1998 by and between HARRIER, INC., a
Delaware corporation ("Harrier"), and NEW CAPITAL INVESTMENT FUND, a Cayman
Islands corporation ("NCIF").
R E C I T A L S
- - - - - - - -
A. Harrier currently owns 5,000,000 shares of the $.001 par value
common stock ("Common Stock") of Glycosyn Pharmaceuticals, Inc., a Delaware
corporation ("Glycosyn").
B. Harrier intends to undertake a reorganization which is conditioned
on Harrier selling 2,850,000 shares ("Shares") of Glycsoyn Common Stock prior to
consummation of the reorganization.
C. The principals of NCIF include certain current executive officers
and directors of Harrier and Glycosyn who are involved in the day-to-day
business activity of Glycosyn and are fully aware of all aspects of its
business.
D. NCIF wishes to acquire the Shares on the terms and conditions as
contained in this Agreement.
E. Prior to the transfer of the Shares, Harrier shall have received
from a qualified independent business appraiser an opinion to the effect that
the consideration to be received by Harrier in exchange for the Shares is fair
to the shareholders of Harrier from a financial point of view.
NOW, THEREFORE, the parties agree as follows:
A G R E E M E N T
- - - - - - - - -
1. Incorporation of Recitals. The foregoing Recitals are herein
-------------------------
incorporated by this reference.
2. Purchase and Sale of Shares.
---------------------------
<PAGE>
2.1 Purchase and Sale of Stock. Subject to the terms and
--------------------------
conditions of this Agreement, at the Closing, Glycosyn will sell to NCIF, and
NCIF agrees to purchase from Glycosyn, the Shares in exchange for the
consideration as set forth in Section 2.2.
2.2 Purchase Price. In consideration of its receipt of the
--------------
Shares, NCIF agrees:
2.2.1. That concurrent with its receipt of the Shares
and without the need for any further action on the part of NCIF, all of the
indebtedness owing to NCIF by Harrier pursuant to that certain Loan Agreement
between NCIF and Harrier dated June 9, 1996 shall be canceled; and
2.2.2. Effective as of the Closing, agree to indemnify,
defend and hold harmless Harrier against and in respect of any and all claims,
demands, losses, costs, expenses, liabilities and damages, including interest,
penalties, and reasonable attorneys' fees, that Harrier shall incur or suffer
which arise, result from or relate to that certain Research and Development
Agreement dated as of May 1, 1993 between Harrier and American Diagnostica, Inc.
("ADI"). In the event Harrier receives a complaint, claim or other notice of any
loss, claim or damage, liability or action, giving rise to a claim for
indemnification under this Section 2.2.2, Harrier shall promptly notify NCIF of
such complaint, notice, claim or action, and NCIF shall have the right to
investigate and defend any such loss, claim, damage, liability or action.
Harrier shall have the right to employ separate counsel in any such action and
to participate in the defense thereof but the fees and expenses of such counsel
shall not be at the expense of NCIF, unless NCIF fails to promptly defend, in
which case the fees and expenses of such separate counsel shall be borne by
NCIF. In no event shall NCIF be obligated to indemnify Harrier for any
settlement of any claim or action effected without NCIF's prior written consent.
3. Closing. The purchase and sale of the Shares shall take place at
-------
the offices of Harrier, at 2200 Pacific Coast Highway, Suite 301, Hermosa Beach,
California 90254 at 10:00 a.m., California time, on September 11, 1998, or at
such other time and place as Harrier and NCIF shall mutually agree (which time
and place are designated as the "Closing"). At the Closing, Harrier shall
deliver to NCIF a certificate representing the Shares that NCIF is purchasing
against delivery of an executed copy of this Agreement.
4. Representations and Warranties of Harrier. Harrier hereby
-----------------------------------------
represents and warrants to NCIF as follows.
4.1 Organization: Good Standing: Qualification. Harrier is a
------------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware, has all requisite corporate power and authority
to own and operate its properties and assets and to carry on its business as now
conducted and as proposed to be conducted, to execute and deliver this Agreement
and each other agreement executed concurrently herewith. Harrier is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure so to qualify would have a material adverse affect on its
business, properties, prospects or financial condition.
<PAGE>
4.2 Authorization. All corporate action on the part of Harrier
-------------
necessary for the authorization, execution and delivery of this Agreement and
the performance of its obligations hereunder at the Closing has been taken or
will be taken prior to the Closing, and this Agreement shall constitute the
valid and legally binding obligation of Harrier, enforceable in accordance with
its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally; and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies.
4.3 Validity; Title. The Shares, when sold and delivered in
---------------
accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid, and nonassessable, and will
be free of restrictions on transfer other than restrictions on transfer under
this Agreement and under applicable state and federal securities laws. Harrier
shall deliver to NCIF at the Closing the original certificate(s) evidencing the
Shares with such endorsements, assignments and other instruments of transfer, in
form satisfactory to NCIF and its counsel, in order to effectively vest in NCIF
all of Harrier's right, title and interest in and to the Shares. From time to
time after the Closing, and without further consideration, Harrier will execute
and deliver such other instruments of transfer and take such other actions as
NCIF may reasonably request in order to more effectively transfer to NCIF the
securities intended to be transferred hereunder.
4.4 Approval of Harrier Stockholders. Harrier will duly call
--------------------------------
and will promptly hold a meeting of its stockholders for the purpose of
approving, among other things, its sale of the Shares on the terms and
conditions set forth in this Agreement and in connection therewith will comply
fully with the applicable provisions of the Bylaws of Harrier and the Delaware
General Corporation Law relating to the calling and holding of a meeting of
stockholders for such purpose.
4.5 Governmental Consents. All consents, approvals, orders,
---------------------
authorizations or registrations, qualifications, designations, declarations or
filings with any U.S., federal or state governmental authority on the part of
Harrier required in connection with the consummation of the transactions
contemplated herein shall have been obtained prior to and be effective as of the
Closing.
4.6 No Further Representations. Except as expressly provided
--------------------------
herein, Harrier makes no representations or warranties concerning Glycosyn, its
assets, operations, contracts or affairs. Harrier states hereby its intent to
enter into this Agreement in strict reliance on NCIF's representations,
acknowledgements and agreements set forth in Section __ that it is intimately
familiar with all aspects of Glycosyn and that it is willing to acquire the
Shares on a "as is", "where is" and "with all faults basis."
5. Representations and Warranties of NCIF. NCIF hereby represents and
--------------------------------------
warrants to Harrier as follows.
<PAGE>
5.1 Organization; Good Standing; Qualification. NCIF is a
------------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the Cayman Islands. NCIF has all requisite corporate power and authority
to own and operate its properties and assets and to carry on its business as now
conducted and as proposed to be conducted, to execute and deliver this Agreement
and each other agreement executed concurrently herewith. NCIF is duly qualified
to transact business and is in good standing in each jurisdiction in which the
failure so to qualify would have a material adverse effect on its business,
properties, prospects or financial condition.
5.2 Authorization. All corporate action on the part of NCIF
-------------
necessary for the authorization, execution and delivery of this Agreement and
the performance of all obligations of NCIF hereunder at the Closing has been
taken or will be taken prior to the Closing, and this Agreement shall constitute
the valid and legally binding obligation of NCIF, enforceable in accordance with
its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally; and (ii) as limited by laws relating
to the availability of specific performance, injunctive relief, or other
equitable remedies.
5.3 Investment and Related Representations.
--------------------------------------
5.3.1 Harrier Shares as "Restricted" Securities. NCIF
-----------------------------------------
is aware that neither the Shares nor the offer or sale thereof to the NCIF has
been registered under the Securities Act of 1933, as amended ("Securities Act"),
or under any foreign or state securities law. NCIF further understands that no
registration statement has been filed with the Securities and Exchange
Commission ("SEC"), nor with any other U.S. or foreign regulatory authority and
that, as a result, any benefit which might normally accrue to an investor such
as NCIF by an impartial review of such a registration statement by the SEC or
other regulatory commission will not be forthcoming. NCIF acknowledges that the
Shares are being offered pursuant to certain exemptions from Section 5 of the
Securities Act for offers and sale of securities not involving and issuer,
underwriter or dealer. NCIF understands that Shares are "restricted" securities
under U.S. federal securities laws inasmuch as they are being acquired from an
affiliate of the issuer and that under such laws and applicable regulations such
securities may be resold without registration under the Securities Act only in
certain limited circumstances. NCIF represents that it is familiar in general
with Rule 144 under the Securities Act (which provides generally for a one year
holding period and limitations on the amount of "restricted" securities that can
be sold in compliance with the rule upon completion of the holding period), and
understands the resale limitations imposed thereby and by the Securities Act.
NCIF understands that each certificate representing the Shares and any other
securities issued in respect of the Shares upon any stock split, stock dividend,
recapitalization, merger or similar event (unless no longer required in the
opinion of counsel for Glycosyn) shall be stamped or otherwise imprinted with
legends substantially in the following forms (in addition to any legend that may
now or hereafter be required by applicable state law):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
<PAGE>
SECURITIES LAWS. THEY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED
OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH
RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL SATISFACTORY TO
THE ISSUER OF SUCH SECURITIES THAT SUCH OFFER, SALE, TRANSFER, PLEDGE OR
HYPOTHECATION IS IN FULL COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED,
OR UNLESS SOLD IN COMPLIANCE WITH RULE 144 UNDER SUCH ACT."
NCIF agrees that the it will not sell any portion of Shares except pursuant to
registration under the Securities Act or pursuant to an available exemption from
registration under the Securities Act. NCIF understands that Glycosyn shall
refuse to transfer the Shares except in accordance with the restrictions and
agreements of NCIF set forth in this Section 5.3.
5.3.2 Investment Representation. The Shares are being
-------------------------
acquired by NCIF pursuant to this Agreement for investment and not with a view
to the public resale or distribution thereof unless pursuant to an effective
registration statement or exemption under the Securities Act.
5.3.3 No Public Solicitation. NCIF is acquiring the
----------------------
Shares after private negotiation and has not been attracted to the acquisition
of the Shares by any press release, advertising or publication.
5.3.4 Investor Sophistication and Ability to Bear Risk
------------------------------------------------
of Loss. NCIF has not been organized for the purpose of acquiring the Shares.
- -------
NCIF acknowledges that it is able to protect its interests in connection with
the acquisition of the Shares and can bear the economic risk of investment in
such securities without producing a material adverse change in NCIF's financial
condition. NCIF otherwise has such knowledge and experience in financial or
business matters that NCIF is capable of evaluating the merits and risks of the
investment in the Shares.
5.4 Governmental Consents. All consents, approvals, orders,
---------------------
authorizations or registrations, qualifications, designations, declarations or
filings with any U.S., federal or state governmental authority on the part of
NCIF required in connection with the consummation of the transactions
contemplated herein shall have been obtained prior to and be effective as of the
Closing.
5.5 Third Party Consents. All third party consents, approvals,
--------------------
orders or authorizations required to be obtained by NCIF in connection with the
consummation of the transactions contemplated herein have been obtained.
5.6 Disclaimer of Warranty. NCIF acknowledges and agrees that
----------------------
it is acquiring the Shares "AS-IS", "WHERE-IS" and "WITH ALL FAULTS" and subject
to any conditions which may exist, without any representations or warranties by
Harrier except as expressly provided herein. NCIF acknowledges that it is
relying solely upon its own inspections, examinations and evaluations of the
Shares and Glycosyn and is accepting assignment of the
<PAGE>
Shares without the standard representations, warranties or covenants customarily
provided to the purchaser of a business.
6. Conditions of to the Parties' Obligations at Closing. The
----------------------------------------------------
obligations of the parties under Section 2 of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any party unless such waiver is
in writing and signed by the party against whom the waiver is sought to be
enforced.
6.1 Representations and Warranties. The representations and
------------------------------
warranties contained herein shall be true and correct on and as of the Closing
with the same effect as though such representations and warranties had been made
on and as of the date of such Closing.
6.2 Performance. Each party shall have performed and complied
-----------
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with on or before the Closing.
6.3 Qualifications. All authorizations, approvals, or permits,
--------------
if any, of any governmental authority or regulatory body of the United States or
of any state that are required to complete the purchase and sale described
herein shall be duly obtained and effective as of the Closing.
6.4 Harrier Stockholder Approval. The holders of the
----------------------------
outstanding shares of the Harrier Common Stock shall have approved, in
accordance with Delaware General Corporation Law, Harrier's sale of the Shares
pursuant to the terms and conditions of this Agreement.
6.5 Fairness Opinion. Harrier shall have received the fairness
----------------
opinion referred to in the recitals.
6.6. Proceedings and Documents. All corporate and other
-------------------------
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to NCIF, which shall have received all such counterpart originals and
certified or other copies of such documents as it may reasonably request.
7. Termination. This Agreement and each party's obligations
-----------
hereunder may be terminated at any time and for any reason, effective upon the
delivery of written notice by the terminating party, up to the time of the
Closing.
8. MISCELLANEOUS.
-------------
8.1 Cumulative Remedies. Any person having any rights under any
-------------------
provision of this Agreement will be entitled to enforce such rights
specifically, to recover damages by reason of any breach of any provision of
this Agreement, and to exercise all other rights granted by law, which rights
may be exercised cumulative and not alternatively.
<PAGE>
8.2 Successors and Assigns. The rights and obligations of the
----------------------
parties under this Agreement shall not be assignable without the written consent
of COPE and Harrier and any such purported assignment with their written consent
shall be void ab initio. Except as otherwise expressly provided herein, all
-- ------
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto will bind and inure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not.
8.3 Severability. Whenever possible, each provision of this
------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement or the other documents.
8.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts when taken together will constitute one and the
same agreement.
8.5 Notices. Any approvals, consents or notices required or
-------
permitted to be sent or given shall be delivered in writing personally or
mailed, certified mail, return receipt requested, to the following addresses and
shall be deemed to have been received within five days after such mailing:
If to NCIF: New Capital Investment Fund
Georgetown, Grand Cayman
Cayman Islands, British West Indies
Attn: Jurg Kehrli, Director
<PAGE>
with a copy to: Raiskin and Ravitz
10390 Santa Monica Boulevard
Los Angeles, California 90254
Attn: Daniel Raiskin, Esq.
If to Harrier: Harrier, Inc.
2200 Pacific Coast Highway, Suite 301
Hermosa Beach, California 90254
Attn: Kevin DeVito, President
with a copy to: Oppenheimer Wolff & Donnelly
A Professional Corporation
500 Newport Center Drive, Suite 700
Newport Beach, California 92660
Attn: Daniel K. Donahue, Esq.
8.6 Governing Law; Arbitration. The validity, meaning and
--------------------------
effect of this Agreement shall be determined in accordance with the laws of the
State of California, applicable to contracts made and to be performed in that
state, without regard to its conflicts of laws rules; provided however that the
Federal Arbitration Act of the United States shall govern issues as to
arbitrability. If a dispute arises in connection with or relating to this
Agreement and the parties are unable to resolve it within forty-five (45) days
through direct negotiations, the dispute shall be referred to final and binding
arbitration to be held in Los Angeles, California in accordance with the rules
of the American Arbitration Association for Commercial Arbitration (as they may
be amended from time to time). The award of the arbitrator(s) shall be final and
binding upon the parties hereto and may be enforced by any court of competent
jurisdiction.
8.7 Litigation Costs. If any legal action or any arbitration or
----------------
other proceeding is brought for the enforcement of this Agreement, or because of
an alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions thereof, the successful or prevailing party or parties shall
be entitled to recover reasonable attorneys' fees and other costs incurred in
that action or proceeding, in addition to any other relief to which it or they
may be entitled.
8.8 Entire Agreement. This Agreement constitutes the entire
----------------
agreement and understanding of the parties with respect to the subject matter
thereof, and supersedes all prior and contemporaneous agreements and
understandings.
<PAGE>
IN WITNESS WHEREOF, each of the parties to this Agreement has executed
or caused this Agreement to be executed as of the date first above written.
"HARRIER"
Harrier, Inc.,
a Delaware corporation
By:/s/ Kevin DeVito
------------------------
Kevin DeVito, President
"NCIF"
New Capital Investment Fund,
a Cayman Islands corporation
By:/s/ Jurg Kehrli
------------------------
Jurg Kehrli, Director
<PAGE>
EXHIBIT 10.23
ASSUMPTION AND INDEMNIFICATION AGREEMENT
----------------------------------------
THIS ASSUMPTION AND INDEMNIFICATION AGREEMENT ("Assumption Agreement")
is entered into this 11th day of September 1998 by and between HARRIER, INC., a
Delaware corporation ("Harrier"), and GLYCOSYN PHARMACEUTICALS, INC., a Delaware
corporation ("Glycosyn").
R E C I T A L S
- - - - - - - -
A. Harrier currently owns 95% of the issued and outstanding shares of
common stock of Glycosyn.
B. Harrier intends to undertake a reorganization which is conditioned
on Harrier transferring all of its assets to Glycosyn, and Glycosyn assuming all
of the liabilities of Harrier.
C. Following the transfer of assets and assumption of liabilities,
Harrier will sell a controlling interest in its shares of common stock of
Glycosyn to New Capital Investment Fund, a Cayman Islands corporation, ("NCIF")
in accordance with a Common Stock Purchase Agreement of even date herewith.
NOW, THEREFORE, the parties agree as follows:
A G R E E M E N T
- - - - - - - - -
1. Incorporation of Recitals. The foregoing Recitals are herein
-------------------------
incorporated by this reference.
2. Conveyance of Assets. Harrier agrees to, and hereby does, sell,
--------------------
convey, transfer, assign and deliver to Glycosyn, and Glycosyn agrees to accept
from Harrier, all assets of Harrier (collectively, the "Assets").
3. Disclaimer of Warranty. The foregoing Assets are being assigned
----------------------
by Harrier to Glycosyn "AS-IS", "WHERE-IS" and "WITH ALL FAULTS" and subject to
any conditions which may exist, without any representations or warranties by
Harrier. Glycosyn acknowledges that it is relying solely upon its own
inspections, examinations and evaluations of the Assets and
<PAGE>
is accepting assignment of them "AS-IS", "WHERE-IS" and "WITH ALL FAULTS",
without representation, warranty or covenant, express or implied, of any kind or
nature. Further, Glycosyn hereby assumes the risk of any condition that may
exist pertaining to the Assets and releases Harrier of and from any and all
claims, actions, demands, rights, damages, costs or expenses which might arise
out of or in connection with the condition or ownership of the Assets.
4. Assumption of Liabilities. Glycosyn hereby agrees to, and does,
-------------------------
assume and undertake responsibility for all of the liabilities of Harrier (known
or unknown) as of the date of this Agreement. Further, Glycosyn agrees to hold
Harrier harmless from, and indemnify it, together with each of the officers,
directors, employees, shareholders, agents, executors, administrators,
successors or assigns, attorneys, investment bankers and accountants ("Harrier
Party" or Harrier Parties") from any and all claims, demands, actions, causes of
action, damages, attorneys' fees, costs or expenses, whatsoever in law or equity
made and/or brought by any person arising from or in any way based upon such
liabilities.
5. Subrogation. In the event of payment by Glycosyn under this
-----------
Assumption Agreement, Glycosyn shall be subrogated to the extent of such payment
to all of the rights of recovery of the Harrier Party receiving indemnification,
which party shall execute all papers reasonably required and shall do everything
that may be necessary or appropriate to secure such rights, including the
execution of such documents necessary or appropriate to enable Glycosyn to
effectively bring suit to enforce such rights.
6. Release from Harrier Creditors. Glycosyn agrees to undertake such
------------------------------
steps as are reasonably necessary to obtain from the creditors of Harrier
documentation unconditionally and irrevocably releasing Harrier from any further
liability, claim or demand in regard to those liabilities assumed by Glycosyn
pursuant to this Assumption Agreement. The form of creditor acknowledgment of
assumption and release is attached as Exhibit "C."
7. Miscellaneous Provisions.
------------------------
7.1 Other Agreements. Nothing contained in this Assumption
----------------
Agreement shall be deemed to diminish or other restrict the rights of the
parties to this Assumption Agreement as such rights or obligations may be
defined by other written agreements between the parties.
7.2 Governing Law. This Assumption Agreement shall be
-------------
governed by and construed in accordance with the laws of the State of California
without reference to the rules of conflicts of laws thereof.
7.3 Successors and Assigns. Except as otherwise expressly
----------------------
provided in this Assumption Agreement, the terms and conditions of this
Assumption Agreement shall enure to the benefit of and be binding upon the
respective successors and assigns of the parties.
<PAGE>
7.4 Counterparts. This Assumption Agreement may be executed in
------------
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument and Agreement.
7.5 Notices. Any approvals, consents or notices required or
-------
permitted to be sent or given shall be delivered in writing personally or
mailed, certified mail, return receipt requested, to the following addresses and
shall be deemed to have been received within five days after such mailing:
If to Glycosyn: Glycosyn Pharmaceuticals, Inc.
3100 Tower Boulevard, Suite 513
Durham, North Carolina 27707
If to Harrier: Harrier, Inc.
2200 Pacific Coast Highway, Suite 301
Hermosa Beach, California 90254
7.6 Severability. If one or more provisions of this Assumption
------------
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Assumption Agreement and the balance of this
Assumption Agreement shall be interpreted as if such provision were so excluded
and shall be enforceable in accordance with its terms.
7.7 Further Documents. Each of the parties to this Assumption
-----------------
Agreement agrees to execute and deliver to the other party such instruments,
documents, pleadings and other items as may be necessary or appropriate to
perfect the assignment, assumption, and indemnification provisions as contained
in this Assumption Agreement. The failure of a party to this Assumption
Agreement to supply any documentation as may be requested in accordance with
this Section shall be deemed a breach of this Assumption Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Assumption
Agreement as of the day and year first above-written.
"HARRIER"
Harrier, Inc.,
a Delaware corporation
By: /s/ Jurg Kehrli
---------------------------
Jurg Kehrli, Chairman
"GLYCOSYN"
Glycosyn Pharmaceuticals,Inc.,
a Delaware corporation
By: /s/ Kevin DeVito
---------------------------
Kevin DeVito
<PAGE>
EXHIBIT 10.24
September 25, 1998
COPE, Inc. COPE Holding AG
2200 Pacific Coast Hwy, Ste 301 Grundstrasse 14
Hermosa Beach, CA 90254 6343 Rotkreuz
Switzerland
Gentlemen:
In order to induce both COPE, Inc., a Delaware corporation formerly
known as Harrier, Inc., on the one hand, and COPE Holding AG, a Swiss stock
corporation, and the shareholders of COPE Holding AG, on the other hand, to
consummate the transactions set forth in that certain Amended and Restated
Securities Purchase Agreement and Plan of Reorganization {"Agreement") dated
July 24, 1998 entered into by, among others, COPE, Inc. and COPE Holding AG, New
Capital AG, a Swiss stock corporation, hereby agrees effective as of the Closing
(as that term is defined in the Agreement) to indemnify, defend and hold
harmless COPE, Inc. against and in respect of any and all claims, demands,
losses, costs, expenses, liabilities and damages, including interest, penalties,
and reasonable attorneys' fees, that COPE, Inc. shall incur or suffer which
arise, result from or relate to any claims that might be brought against COPE,
Inc., based on facts or actions alleged to have taken place prior to September
25, 1998. In the event COPE, Inc. receives a complaint, claim or other notice of
any loss, claim or damage, liability or action, giving rise to a claim for
indemnification under this letter, COPE, Inc. shall promptly notify New Capital
AG of such complaint, notice, claim or action, and New Capital AG shall have the
right to investigate and defend any such loss, claim, damage, liability or
action. COPE, Inc. shall have the right to employ separate counsel in any such
action and to participate in the defense thereof but the fees and expenses of
such counsel shall not be at the expense of New Capital AG, unless New Capital
AG fails to promptly defend, in which case the fees and expenses of such
separate counsel shall be borne by New Capital Ag. In no event shall New Capital
Ag be obligated to indemnify COPE, Inc. for any settlement of any claim or
action effected without New Capital AG's prior written consent.
Very truly yours,
NEW CAPITAL AG,
a Swiss stock corporation
By: /s/ JURG KEHRI
-----------------------
Jurg Kehri, Director
By: /s/ KEVIN DEVITO
-----------------------
Kevin Devito, Director
<PAGE>
EXHIBIT 10.25
[English translation of
original German text]
SALE AND TRANSFER
------------------
OF BUSINESS SHARES
------------------
Negotiated at Waterswil-Zug, on 25 July 1998
In the presence of the undersigned notary and lawyer, Peter Muellhaupt,
Sihlbruggstrasse 105, CH-6340 Walterswil-Zug, Switzerland, the following parties
are present today
1) Peter Doelling, born on 16.02.1942,
resident in 3 Hauptstrasse, D-82284 Grafrath
proof of which is given by presentation of a valid German identity card no.
8184025622
(hereafter referred to as the seller)
and
Mr. Wolfgang Schallhorn, born on 29.12.1946,
Resident in 37 Josef Heppner Strasse, D-82049 Pullach,
Proof of which is given by presentation of a valid German passport, no.
8275073910
Who is not acting under his own name, rather under the name of the company
COPE GmbH, Rotwandweg 3a, D-82024 Taufkircken
due to his position as the sole legally authorised managing director of COPE
Gmbh, the character of which has been verified by notary search in a currently
valid commercial register compendium.
(hereafter referred to as the buyer)
The parties present place the following declaration on record:
A company is registered in the commercial register of the Munich District Court,
under entry HRB 81996, which has its head office in Olching, in the district of
Fuerstenfeldbruck, and conducts business under the name of
Forum Technische Entwicklung und Vertrieb GmbH
(hereafter referred to as "the company")
<PAGE>
The total share capital of the company, which stands at DM 500,000 (five
hundred thousand Deutschmarks), is held by the seller, and is divided into the
following shares, namely: a share for DM 25,000.-, a further share for DM
25,000.-, another for DM 200,000.-, and finally a share for DM 250,000.-. All
shares are fully paid up.
Having made the above declaration, we conclude as follows:
<PAGE>
BUSINESS SHARES - TRANSFER AGREEMENT
------------------------------------
Article 1.
1. The seller hereby sells the afore-mentioned business shares of the above-
named company in their entirety to the buyer who has entered into this
agreement and hereby transfers the shares and all rights and duties
pertaining thereto to the contracting buyer.
2. The assignment and transfer of the above-mentioned business shares takes
effect immediately. Article 4 is not affected by this provision.
3. The approval of associates and / or the company, in accordance with the
requirements of the law and articles of association, remains outside the
remit of this transfer deed.
Article 2
1. The purchase price for the shares sold according to Article 1 stands at DM
1,540,000.--.
2. The purchase price is payable as follows:
- - DM 1,103,593.48 to be paid immediately as certification of the transfer of the
afore-mentioned shares by way of an endorsed bank cheque from a German or Swiss
bank through the certifying notary.
- - DM 336,406.52 to be paid by transfer to one of the company accounts by reason
of the transfer of a part of the seller's purchase offer to the company
according to the agreement of 31.05.98 (annexed to this contract).
- - the remaining DM 100,000.--is to be paid by endorsed bank cheque on 01.07.1999
Unless otherwise stipulated by the terms of this deed, balancing between the
sums is not permitted.
Article 3.
1. The seller guarantees that the sold shares are at this full disposal, and
that until then they have neither been transferred, seized, pledged, nor in
any other way burdened by the rights of third parties.
2. The seller further guarantees that no long-term delivery or removal
restrictions, or leasing obligations subsist. They have not been evidenced by
the `due diligence' report by ATAG Ernst & Young, Zug, September 1997, and /
or the auditing report
<PAGE>
by Schitag Ernst & Young, Munich, 19.03.1998 (annexed to this contract);
moreover, the seller knows of no risks to be present outside normal business
operations, which have not been insured against. This guarantee by the seller
exists for the period commencing on 01.01.98 until the termination of this
contract, and concerns in particular the activities of his spouse, Daniela
Doelling in her position as managing director of the company.
3. Moreover, the seller agrees to meet any tax obligations whatsoever which
arise from the accounts audited by Schitag Ernst & Young until the 31
December 1997 account closing date, or where necessary from the resetting or
entry of the demarcation of separate accounts.
4. The seller does not undertake any further guarantees, in particular as
regards the future returns or profits of the company.
5. If claims are made against the seller as a result of the above-mentioned
provisions relating to the obligations of the company towards third parties,
he can ask to be exonerated from performing them, and for them to be
completely annulled by petition before a court. This petition must be brought
by the seller; any contingent court costs incurred are at the seller's
expense.
6. The seller acknowledges and hereby agrees that by 01.07.1998, his contract of
employment with the company until that date is superseded by a contract of
employment by the buyer. At the same date, the agreement with Daniela
Doelling, and the DP Agency of 04.05.1998, respectively, with the company is
superseded by a new agreement entered into with the buyer. These contracts
are discharged by the present agreement and replaced by the latter. Thereby,
all claims of the seller, Daniela Doelling and the DP Agency, respectively,
arising from contracts of employment or other contract with the company are
extinguished by balance of all claims with the exception of regular claims in
respect of wages and commissions until 30.06.1998.
Article 4
1. The buyer is entitled to the right to draw profits from profits earned by the
company from 01.01.1998 onwards.
2. The buyer is obliged to exempt the seller from any claims made in relation to
the transferred business shares made through the company, its associates or
third parties.
3. The seller hereby irrevocably authorises the buyer, and is exempt from the
limitations imposed by Article 181 Civil Code (BGB), to make and receive any
requisite declarations which are currently still necessary for the purpose of
carrying out the transfer of the business shares.
Article 5
1. Any securities or guarantees placed by the seller and / or Mrs. Daniela
Doelling for liabilities of the company are discharged by the buyer. The
discharge takes place in
<PAGE>
such a way that the buyer presents without delay in exchange for the transfer
of the business shares i.e. at the same time as he pays the purchase price of
DM 1,103,593.48 in accordance with Article 2 of this contract declarations
exonerating the guarantor and declarations releasing the Commerzbank AG for
the securities guaranteed in the appropriate form in the land register.
2. There are loan repayments owed to Sparta GmbH by the company for the sum of
DM 336,406.52 by 31.05.1998. The seller has bought the corresponding debt
from the company, which has been handed over to him. As payment of this sum,
he has transferred a corresponding part of the purchase price to the company
(agreement of 31.05.1998, annexed to this contract). The outstanding amount
owed by the buyer to the seller as the purchase price therefore stands at DM
1,203,593.48.
Article 6
1. All the necessary agreements pertaining to this deed will take effect upon
their receipt by the notary.
2. The buyer shall bear the costs of certification of this contract.
3. For the purposes of this contract German substantive law shall be applicable.
Article 7
In the event that one of the provisions of this contract is or becomes
ineffective, or if there is a deficiency in this contract by way of omission,
then the effectiveness of the remaining provisions remains untouched by it. The
contracting parties undertake to replace the ineffective provision with an
effective one, which reflects as close as is possible the economic intention of
the ineffective clause. Any omission should be filled taking into consideration
the economic commercial objectives of this contract. Oral agreements will not
be valid.
Article 8
The notary has advised the parties about the legal effects of the transfer of
the business shares, and draws particular attention to the following:
1. If an associate acquires an additional business share to his original share,
then each one retains its legal validity independently of the other.
2. Not until the registration of the share transfer and proof of the transfer
has been received by the company, does the transferor take the place of the
transferee in the company, regardless of whether or not notice of the
transfer has already reached the company in another way (Article 16, para.1
GmbHG).
3. The business transactions of the company with the transferee or the those of
the transferee with the company, prior to this registration must be made
available to the transferor (Article 16, para. 2, GmbHG).
<PAGE>
4. For the period of the registration of the transferred business shares, any
contingent outstanding obligations are the joint responsibility of the
transferor and transferee in the external relationship.
This record has been read in the presence of the deponents, who have agreed to
its contents, and hereafter certify it, as follows:
For the seller For the buyer
(/s/Peter Doelling) (/s/Wolfgang Schallhorn)
<PAGE>
PUBLIC DEED
-----------
I, the undersigned, Peter Muellhaupt, solicitor, 105 Sihlbruggstrasse 105, 6340
Walterswil-Zug, deeds draftsman in the canton of Zug,
hereby witness in public:
- -------------------------
1. The document, which has been submitted for registration, has been agreed
between Peter Doelling, born on 16.02.1942, resident in 3 Hauptstrasse, D-
82284 Grafrath, and Mr. Wolfgang Schallhorn, born on 29.12.1946, resident in
37 Josef Heppner Strasse, D-82049 Pullach, (who is not acting under his own
name, rather under the name of the company, COPE GmbH, Rotwandweg 3a, D-82024
Taufkircken), and has been signed in my presence by these persons.
2. Mr. Peter Doelling has given proof of his identity by presentation of a valid
German identity card, and Mr. Shallhorn has presented a valid German
passport.
3. The supporting documents referred to in this deed are hereby submitted, have
been inspected by myself, and attached to this deed as an integral part of
it.
One specimen of this deed will be drawn up.
Walterswil-Zug, 25 July 1998 The deeds draftsman
Forum URKU Peter Muellhaupt
<PAGE>
EXHIBIT 10.26
[English translation of
original German text]
SALE AND ASSIGNMENT
OF
BUSINESS SHARES
Negotiated on December 21 (twenty one) 1998 in Hamburg
Before Dr. Henning Voscherau at Alstertor 14, 20095 Hamburg
1) Mr. Uwe Hinrichs, born April 12, 1941
Resident at Loehrsweg 2, 20249 Hamburg, Germany
Identified with personal identity card No. 1300463083
(hereinafter called "Seller")
And
2a) Mr. Adrian Knapp, born December 10, 1962
Resident at Oberseeburg 45, 6006 Lucerne, Switzerland
Identified with Swiss passport No. 5403362
And
2b) Mr. Stephan Isenschmid, born November 1, 1961
Resident at Buchenweg 5, 6034 Inwil
Identified with Swiss passport No. 528/2018
Acting not in their own names, but as representatives of
COPE, Inc., a Delaware corporation, Grundstrasse 14, 6343 Rotkreuz, Switzerland
(hereinafter called "Buyer")
The persons appearing declared the following for the record:
The company with the name
HICOMP Software Systems GmbH
<PAGE>
Page 2 of 9
(hereinafter called "Company")
has its registered office in Hamburg and has been entered in the Commercial
Register of the Amtsgericht [Local Court] in Hamburg under Commercial Register
No. 53 850.
Of the total capital stock of 50,000.00 DM (fifty thousand German marks), the
Seller holds business shares (Stammanteile) of 49,000.00 DM and 1,000.00 DM,
which have been paid in full.
Based on the above, we enter into the following
ASSIGNMENT AGREEMENT FOR BUSINESS SHARES
(S) 1
The Seller herewith sells and assigns his aforementioned business shares in the
named Company with all rights and duties pertaining to the business shares to
the Buyer who accepts the business shares.
The Seller in his capacity as sole holder of business shares in the Company
herewith gives any and all consent to the transfer of the business shares in the
Company to the Buyer if and insofar as such consent is required by law and
articles of association.
If appropriate, the Company will give any approval necessary pursuant to law or
shareholder agreement outside of this document.
(S) 2
The parties have assessed the business value or special purpose value of this
agreement to be approximately 20 million DM. The Buyer is paying for the
aforementioned business shares of the Company exclusively with shares of the
Buyer, listed on the stock exchange. Accordingly, the Buyer undertakes to
deliver to the Seller 420,000 shares of the Buyer on February 28, 1999, and it
has the right to sell 200,000 of those shares within the framework of a
secondary placement at the "Neue Markt" (Frankfurt) at the earliest 90 days
after they were transferred. According to the parties, the remaining 220,000
shares are subject to sales restrictions under American law, pursuant to
Appendix 1 to this agreement.
<PAGE>
Page 3 of 9
(S) 3
1. The Seller guarantees that the business shares sold are at his free
disposition and have not been assigned or pledged or otherwise encumbered with
the rights of third parties.
2. The Seller further guarantees that the Company in a legally valid manner
holds all industrial rights of use for the software products, know-how,
trademarks and trademark rights developed and sold by the Company (in
particular, but not exclusively in the trademarks HIBACK, HIBARS, and
INNOVATORS) and any other intangible property rights. The Seller in particular
guarantees that no actual or former employees of the Company hold any rights in
intangible property of the Company on the basis of inventions made by them,
(Arbeitnehmerfindung).
3. The Seller further guarantees that no claims for additional tax payments (for
example for trade, corporate, transfer or salary taxes) against the Company
exist except for those contained in the annual statements of accounts as of
December 31, 1996, December 31, 1997 and in the not yet set up annual statement
of accounts as of December 31, 1998, be it for salary taxes to be paid later or
for any other reason. The same applies to social security taxes.
4. The Seller further guarantees that the Company is not involved in any pending
litigation or other proceedings before any authorities and that it is not
threatened with any litigation or proceedings.
5. The Seller further guarantees that the Company has entered into all insurance
agreements necessary or customary for its business operation.
6. The Seller further guarantees that the software products developed by the
Company and either installed with clients or in its own business operation do
not contain any Year 2000 problem.
The Seller herewith undertakes that any problem that might arise with Dbtune
will be solved by March 31, 1999.
(S) 4
1. Upon signing this agreement, the Seller shall hand over to the Buyer a copy
of the Articles of Association (Gesellschaftsvertrag) of the Company at the
latest by February 15, 1999, the Seller shall hand over to the Buyer the
following additional documents:
<PAGE>
Page 4 of 9
a) Asset and liability statements and income statements of the company with
certified reports of the tax consulting company, FAXON Auditors, 22083 Hamburg,
as of December 31, 1996, December 31, 1997 and December 31, 1998.
b) Economic plan for 1999 with projections to be defined jointly by the parties.
c) A list of all of the agreements entered into between the Company and third
parties (including Seller) that have a special purpose value of at least
50,000.00 DM each (non-recurrent or yearly recurring value).
2. The parties assume that the operating result as of December 31, 1998 will
consist of minimum sales of 3.6 million DM and minimum EBITDA of 450,000.00 DM.
EBITDA is defined as "earnings before interests, taxes, depreciation and
amortization."
(S) 5
1. Regardless of any rights of rescission provided for by law and any other
claims notwithstanding, both parties have the right to rescind this agreement
within 60 days after it was entered into in the following cases:
a) The Seller has the right to rescind the agreement in case the Buyer does not
within the time period mentioned enter into a cooperative agreement with an
investment bank (which is the condition for admission to the "Neue Markt,"
Frankfurt) and it thus becomes uncertain whether the shares will be saleable
pursuant to (S) 2, item 2, of this agreement.
b) The Buyer has the right to rescind the agreement in case the guarantees of
(S) 3 of this agreement should prove to be incorrect, in case the documents
listed in (S) 4, item 1, should not be handed over or not handed over in their
entirety, or in case the operating result pursuant to (S) 4, item 2, should not
be attained.
2. Regardless of any limitation in time, the Buyer has the right to rescind the
agreement if pursuant to US GAAP or pursuant to the SEC (Security and Exchange
Commission) the business transaction set forth in this agreement does not
qualify as "pooling of interests."
3. Upon receipt of an effectively exercised declaration of rescission of either
party, the business shares sold pursuant to (S) 1 of this agreement shall revert
to the Seller. The Buyer herewith executes the reassignment subject to a
condition precedent and the Seller accepts the reassignment.
<PAGE>
Page 5 of 9
(S) 6
1. The Seller grants to the Buyer a purchase right and right of first refusal
for the shares he owns in the two American companies HICOMP America, Inc. (New
York) and HICOMP America, Inc. (Colorado). The purchase right and right of first
refusal shall expire at midnight on June 30, 2000 and shall be considered
exercised in a timely fashion if the pertinent declaration reaches the Seller
before that point in time.
2. The purchase price corresponds to the intrinsic value of the shares at the
point in time when the purchase right or right of first refusal is exercised. In
case of a dispute, an independent auditing company shall determine the intrinsic
value.
(S) 7
1. The Buyer is obligated to hold the Seller harmless from any and all liability
towards the Company or third parties, which might arise from the transferred
business shares.
2. The Seller shall be empowered and exclusively responsible for registering the
change in the shareholder position of the Company. He is obligated to make the
registration as soon as his contractual rights to rescission pursuant to (S) 5,
item 2.a), have expired and the Buyer has declared that it will not exercise its
right to rescission pursuant to (S) 5, item 2.
3. Until the registration has taken place, the Seller undertakes to coordinate
with the Buyer any measures taken at the Company level.
4. In order to be effective, the registration has to be made by explicit written
declaration to the second managing director of the Company by way of a
registered letter with return receipt for the Seller. Any other declarations not
made in this form will not be considered a registration ((S) 16 Gesetz uber
Gesellschaften mit beschrankter Haftung, GmbHG [Limited Liability Company Act]).
(S) 8
All profits shall remain with HICOMP Software Systems GmbH until the
registration or any rescission has taken place. There shall be no withdrawal of
profits.
(S) 9
After the contractual duration of the management contract with the Seller of
five years following August 28, 1998, the Seller shall be subject to a
comprehensive prohibition to compete with regard to the Buyer and HICOMP
Software Systems GmbH for an additional 18 months.
(S) 10
For SEC purposes, the parties undertake to sign an additional purchase agreement
(securities purchase agreement) governed by American law.
<PAGE>
Page 6 of 9
That supplemental agreement shall not contain any provisions that would
contradict this agreement.
The parties further agree and undertake to sign any documents and undertake any
actions that may be required by German law in order to effect and complete the
transfer of the business shares from the Seller to the Buyer pursuant to the
terms of this agreement.
(S) 11
1. There shall be no rights of retention or set-off within the framework of this
agreement or in connection with it.
2. The Buyer shall pay the direct costs for this agreement, including the costs
for the notary public and consultation by tax consultants and attorneys.
(S) 12
Should any provision of this agreement be or become null and void, or should the
agreement contain any gaps, the validity of the remaining provisions shall not
be affected. The contracting parties undertake to replace any void provision
with another valid provision coming as close as possible to the economic effect
intended with the void provision. Any gap shall be filled by taking into account
the economic goals of this agreement. No oral subsidiary agreements exist.
This provision applies mutatis mutandi to (S) 6, in so far as this is advisable
under US law.
(S) 13
The parties were advised about the legal effects of the transfer of business
shares and in particular pointed out the following:
1. If a shareholder purchases a business share in addition to its original
business share, both of them remain legally independent.
2. The Buyer obtains the position with regard to the Company previously held by
the Seller only after the transfer of the share has been registered with and
proven to the Company, regardless of whether or not the Company had already
learned of the purchase from another side ((S) 16, paragraph 1, GmbHG).
3. The Buyer is obligated to accept any legal transactions undertaken before the
registration took place by the Company towards the Seller or by the Seller
towards the Company with regard to the conditions at the company ((S) 16,
paragraph 2, GmbHG).
<PAGE>
Page 7 of 9
4. Buyer and Seller shall be jointly and severally liable vis-a-vis third
parties for any outstanding claims on the transferred business share at the time
of the registration ((S) 16, paragraph 3, GmbHG).
The parties were not advised about provisions of American law.
<PAGE>
Page 8 of 9
The persons appearing read this record, approved it and then signed it as
follows:
Seller
By:/s/ Uwe Hinrichs
-------------------------------
Mr. Uwe Hinrichs
Buyer
COPE, Inc.,
a Delaware corporation
By:/s/ Adrian Knapp
-------------------------------
Adrian Knapp
By:/s/ Stephan Isenschmid
-------------------------------
Stephan Isenschmid
<PAGE>
Page 9 of 9
Appendix 1
COPE Shares as "Restricted" Securities. The Seller is aware that neither the
- --------------------------------------
420,000 shares of Buyer ("COPE Shares") nor the offer or sale thereof to the
Seller has been registered under the U.S. Securities Act of 1933, as amended
("Securities Act"), or under any foreign or state securities law. The Seller
further understand that no registration statement has been filed with the U.S.
Securities sand Exchange Commission ("SEC"), nor with any other U.S. or foreign
regulatory authority and that, as a result, any benefit which might normally
accrue to an investor such as the Seller by an impartial review of such a
registration statement by the SEC or other regulatory commission will not be
forthcoming. The Seller acknowledges that the COPE Shares will be characterized
as "restricted" securities under U.S. federal securities laws inasmuch as they
are being in a transaction not involving a public offering and that under such
laws and applicable regulations such securities may be resold without
registration under the Securities Act only in certain circumstances. The Seller
represents that the Seller is familiar in general with Rule 144 under the
Securities Act (which provides generally for a one year holding period and
limitations on the amount of "restricted" securities that can be publicly resold
in compliance with the rule upon completion of the holding period), and
understand the resale limitations imposed thereby and by the Securities Act.
The Seller agrees that the Seller will not sell all or any portion of COPE
shares except in accordance with an available exemption from registration under
the Securities Act. The Seller understands that each certificate for the COPE
Shares issued to the Seller or to any subsequent transferee shall be stamped or
otherwise imprinted with an appropriate legend summarizing the restrictions
described in this Appendix 1 and that Buyer shall refuse to transfer the COPE
Shares except in accordance with such restrictions, such legend to be
substantially as follows:
"This security has not been registered under the United States
Securities Act of 1933, as amended (the "Securities Act"), and such security may
not be offered, sold, pledged or otherwise transferred except pursuant to an
effective registration statement under the Securities Act or pursuant to an
exemption from registration, in each case as confirmed in an opinion of counsel
satisfactory to the company and in each case in accordance with any other
applicable law."
<PAGE>
EXHIBIT 21.1
List of Subsidiaries
COPE Holding AG, a Swiss stock corporation
COPE AG, a Swiss stock corporation
COPE GmbH, a German stock corporation
COPE GesmbH, a Austrian stock corporation
HICOMP Software Systems GmbH, a German stock corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 1,303,114 678,936
<SECURITIES> 0 0
<RECEIVABLES> 5,418,777 3,622,485
<ALLOWANCES> 0 0
<INVENTORY> 2,433,790 1,383,191
<CURRENT-ASSETS> 9,605,694 6,002,794
<PP&E> 1,613,416 1,174,293
<DEPRECIATION> (862,181) (603,818)
<TOTAL-ASSETS> 12,638,647 7,402,958
<CURRENT-LIABILITIES> 9,450,031 5,142,033
<BONDS> 0 0
0 0
0 0
<COMMON> 3,153 2,862
<OTHER-SE> 3,185,463 2,258,063
<TOTAL-LIABILITY-AND-EQUITY> 12,638,647 7,402,958
<SALES> 29,059,150 17,916,171
<TOTAL-REVENUES> 29,059,150 17,916,171
<CGS> 20,281,131 12,817,738
<TOTAL-COSTS> (27,966,731) (17,374,917)
<OTHER-EXPENSES> (34,112) (38,446)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (127,028) (76,197)
<INCOME-PRETAX> 1,026,201 504,207
<INCOME-TAX> (14,630) 128,690
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,011,571 632,897
<EPS-PRIMARY> 0.34 0.23
<EPS-DILUTED> 0.34 0.23
</TABLE>
