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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NUMBER 333-81981
PROSPECTUS
800,000 Shares
COPE, INC.
Common Stock
We are offering 800,000 shares of common stock to non-U.S. persons outside
the United States. Our common stock is traded on the OTC Bulletin Board under
the symbol "COPE." We have applied to list our common stock on the NASDAQ
National Market System under the symbol "COPE" and on the Neuer Markt of the
Frankfurt Stock Exchange under the symbol "CVX."
The public offering price will be between (Euro) 19 and (Euro) 21 per share.
Please see "Risk Factors" beginning on page 7 to read about certain factors
you should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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Underwriting
Price to Discounts And Proceeds to
Public Commissions COPE
------------- ------------- -------------
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Per Share.......................... (Euro) (Euro) (Euro)
Total(1)........................... (Euro) (Euro) (Euro)
</TABLE>
(1) Before deducting expenses we will pay, estimated to be approximately
$1,120,000.
Our Chief Executive Officer, Stephan Isenschmid, and a major shareholder, Uwe
Hinrichs, have granted Norddeutsche Landesbank Girozentrale the right to
purchase up to an additional 100,000 shares to cover any over-allotments.
Norddeutsche Landesbank Girozentrale expects to deliver the shares to the
purchasers within 30 calendar days from the initial listing on the Neuer Markt.
Norddeutsche Landesbank Girozentrale may exercise the over allotment option
within 30 calendar days of the initial listing on the Neuer Markt.
Norddeutsche Landesbank
Girozentrale
The date of this prospectus is February 9, 2000
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus.
TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Market for Common Stock and Related Stockholder Matters.................. 14
Dividend Policy.......................................................... 14
Use of Proceeds.......................................................... 15
Dilution................................................................. 16
Capitalization........................................................... 17
The Company.............................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business of COPE......................................................... 26
Management............................................................... 33
Principal Stockholders and Beneficial Ownership of Management............ 37
Description of Securities................................................ 38
Anti-Takeover Provisions................................................. 39
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Page
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Book-Entry-Only Issuance of Common Stock Trading on German Stock
Exchanges............................................................... 41
Taxation................................................................. 41
Underwriter.............................................................. 46
Shares Eligible for Future Sale.......................................... 48
Legal Matters............................................................ 48
Experts.................................................................. 48
Available Information.................................................... 49
Index to Financial Statements............................................ F-1
Alternate Pages
General Information.................................................... A-1
The Offering........................................................... A-1
Investments............................................................ A-7
Research and Development............................................... A-8
Patents and Licenses................................................... A-8
Quality Management (ISO 9001).......................................... A-8
Recent Developments and Outlook........................................ A-8
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Until March 7, 2000 all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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PROSPECTUS SUMMARY
You should read this summary together with the more detailed information and
financial statements and notes appearing elsewhere in this prospectus. Most
financial figures are denominated in U.S. dollars and are designated by the
symbol $, however some financial figures are denominated in Euros and are
designated by the symbol (Euro).
The sale of the offered shares will be settled in Euros and the estimated
offering price is (Euro)19.50 per share. However, to provide for a consistent
financial presentation, the disclosure concerning our application of the net
proceeds of this offering is set forth in U.S. dollars and assumes an offering
price of $19.78 per share based on a Euro-U.S. dollar exchange rate of .9858
Euros for one U.S. dollar as of January 14, 2000. The actual offering price
will be between (Euro)19 and (Euro)21. The actual offering price will be based
on further negotiations between us and our underwriter.
COPE
We are a provider of enterprise data storage and security consulting,
services and solutions to customers located primarily in Western Europe. Our
business consists of the analysis, design and implementation of storage and
security systems that integrate the software and hardware products that best
meet the identified objective. We generally provide our data storage and
security systems on a turn-key basis and purchase for resale the software and
hardware components made part of the systems solutions. We resell software and
hardware products offered by the major vendors in the data storage and security
industry. We also offer our own proprietary storage software products, Hiback
and Hibars. We provide our enterprise data storage and security systems and
solutions to a variety of companies in the financial, insurance, pharmaceutical
and telecommunication industries located primarily in Germany, Switzerland, and
Austria.
High availability of stored enterprise 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 to manage their data. To be
competitive, an organization needs immediate access to necessary data,
regardless of where it is stored. Without this access, productivity, and the
cost of doing business, suffers. The importance and volume of stored, complex
data has created a demand for secure and reliable methods of storage that allow
for efficient and cost-effective protection and management of this data.
Our goal is to become the leading independent provider of enterprise data
storage and security services and solutions in Western Europe. The key elements
of our strategy are:
. Emphasize Consulting Services. By emphasizing the quality of our
consulting services, we believe that we can establish and foster a
reputation in Western Europe as a leading provider of enterprise data
storage and security services and solutions.
. Foster a Reputation for Independence. We intend to foster the reputation
and image of an independent organization firm dedicated exclusively to
providing storage and security services and solutions to the enterprise
data storage market only.
. Expand Through Targeted Acquisitions. We intend to aggressively seek out
and acquire high quality independent consulting firms throughout Western
Europe.
Our executive offices are located at Grundstrasse 14, 6343 Rotkreuz,
Switzerland; telephone + 4141-798-3344.
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The Offering
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Common stock outstanding prior to
this offering................... 3,405,423 shares(1)
Common stock offered(2):......... 800,000 shares
Common stock to be outstanding
after the offering.............. 4,205,423 shares
Use of proceeds.................. We intend to use the net proceeds from the
offering for acquisitions and working
capital, repayment of indebtedness, and
research and development.
Dividend policy.................. We have no immediate plans to pay
dividends. Because we are an emerging
enterprise, we will use all earnings to
fund our ongoing operation and the growth
of the business.
Proposed NASDAQ National Market
System symbol................... COPE
Proposed Neuer Markt symbol...... CVX
</TABLE>
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(1) Does not include options and warrants outstanding as of the date of this
prospectus to purchase an aggregate of 377,931 shares of common stock.
(2) Does not include the right of Norddeutsche Landesbank Girozentrale to
purchase up to an additional 100,000 shares of common stock from our Chief
Executive Officer, Stephan Isenschmid, and from one of our major
shareholders, Uwe Hinrichs, to cover any over-allotments.
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Summary Financial Data
The income statement and cash flow data set forth below for the years ended
December 31, 1998, 1997 and 1996 are derived from the audited financial
statements included elsewhere in this prospectus. The balance sheet information
as of September 30, 1999 and the income statement and cash flow data as of
September 30, 1999 and 1998 are derived from the unaudited financial statements
included elsewhere in this prospectus. Our financial statements are presented
in U.S. dollars and have been prepared in accordance with U.S. generally
accepted accounting principles.
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Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ------------------------
1998 1997 1996 1999 1998
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Statement of Operations
Data:
Total revenue........... $29,059,150 $17,916,171 $12,515,123 $24,905,521 $17,324,933
Cost of sales........... 20,281,131 12,817,738 8,829,711 16,561,361 12,106,255
Operating expenses...... 7,685,600 4,557,179 3,275,185 10,013,462 4,826,608
Net income (loss)....... 1,011,571 632,897 315,823 (1,668,247) 435,630
Basic earnings (loss)
per share.............. 0.34 0.23 0.12 (0.49) 0.14
Diluted earnings (loss)
per share.............. 0.34 0.23 0.12 (0.49) 0.14
Weighted average shares
outstanding:
Basic................. 2,936,589 2,740,833 2,700,000 3,418,217 3,132,654
Diluted............... 2,948,709 2,740,833 2,700,000 3,418,217 3,144,432
Cash Flow Data:
Net cash flow provided
(used) by operating
activities............. $ 725,309 $ 290,935 $ 658,632 $(1,517,528) $(1,324,482)
Net cash flow provided
(used) by investing
activities............. 33,827 (1,055,772) (230,295) (1,527,548) 512,288
Net cash flow provided
(used) by financing
activities............. (194,601) 1,197,081 (293,085) 2,758,316 846,603
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September 30, 1999
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Actual As Adjusted(1)
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Balance Sheet Data:
Working capital (deficit)........................... $(2,439,130) 11,473,670
Total assets........................................ 28,532,410 36,370,210
Total liabilities................................... 12,339,259 6,264,259
Stockholders' equity................................ 16,193,151 30,105,951
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<S> <C> <C> <C> <C> <C>
Earnings before
interest, taxes,
depreciation and
amortization (2)...... 1,463,467 800,063 759,711 87,342 605,276
</TABLE>
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(1) As adjusted to reflect the sale of 800,000 shares of common stock sold by
us at an assumed public offering price of $19.78 per share, after deducting
underwriting discounts and estimated offering expenses, and our application
of the net proceeds towards the repayment of approximately $6,075,000 of
short-term borrowings as of January 14, 2000 as described under "Use of
Proceeds."
(2) Earnings before interest, taxes, depreciation and amortization is defined
as net income plus the following:
. extraordinary items and cumulative effect of accounting change;
. provision for income taxes;
. interest expense; and
. depreciation and amortization
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Earnings before interest, taxes, depreciation and amortization is presented
not as an alternative measure of operating results or cash flow from operations
as determined in accordance with generally accepted accounting principles, but
because it is a widely accepted financial indicator of a company's ability to
incur and service debt.
Pro Forma Financial Data
The pro forma financial information set forth below is derived from the
historical financial statements of COPE, Forum GmbH, which was acquired by COPE
on June 25, 1998 and Hicomp Software Systems GmbH, which was acquired by COPE
on April 19, 1999, and the unaudited pro forma consolidated financial
statements and related notes that are included elsewhere in this prospectus.
The information sets forth on an unaudited pro forma basis for the periods
presented the consolidated results of operations of COPE, Forum and Hicomp as
if COPE's acquisitions of Forum and Hicomp had occurred on January 1, 1998.
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Year Ended Nine Months
December 31, Ended September 30,
1998 1999
Pro Forma Consolidated COPE, Forum and Hicomp ------------ -------------------
<S> <C> <C>
Total revenue: $38,578,226 $25,356,428
Net loss: (1,875,736) (2,464,983)
</TABLE>
Recent Developments
As of the date of this prospectus, the audited consolidated financial
statements of COPE for the 1999 fiscal year are not available. Management
anticipates that net revenue for the year ended December 31, 1999 will be
approximately $33,000,000, which amounts to an increase of approximately 14%
over net revenue during the prior year period. The increase in net revenue
would be approximately 19% as compared to the prior year period when calculated
without taking into account the effect of the stronger US dollar in 1999 as
compared to 1998. Management expects that net revenue in 1999 will be
approximately $17,000,000 in Germany, $13,000,000 in Switzerland and $3,000,000
in Austria.
Management anticipates that COPE's gross profit margin for the year ended
December 31, 1999 will be approximately 33% compared to approximately 30% for
the prior year. The increase is primarily attributable to the large internal
growth in sales of services as a percentage of total revenue and the increase
in the profit margin for products sold in Germany.
COPE anticipates that it will incur a net loss of approximately $2,900,000
in 1999 as compared to net income of $1,011,571 during the prior year period.
The decrease in income is mainly attributable to the amortization of goodwill
of approximately $2,300,000 related to the Hicomp and Forum acquisitions as
well as increases in research and development, selling and marketing expenses
of approximately $800,000 relating to their own software products during the
last six months of 1999.
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RISK FACTORS
This offering and an investment in our common stock involve a high degree of
risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you may lose part or all of your investment.
We Are a Rapidly Growing Company and We May Not Be Able to Properly Manage Our
Growth, Which May Increase the Cost of Our Operations and Decrease Our Profits
We have grown significantly since 1996, with increases in revenues from
$12.5 million in 1996 to $17.9 million in 1997 and $29.1 million in 1998. We
also added substantial operations through our acquisition of Forum and
conducted a slight shift in strategic focus by adding a proprietary line of
software products through our Hicomp acquisition. In addition, we intend to
pursue an aggressive growth strategy. Our growth and our acquisitions of Forum
and Hicomp have strained our management team, our consulting and services
divisions, internal information systems and other resources. We cannot assure
you that we will succeed in effectively managing our existing operations or our
anticipated growth, which could hurt our growth and increase the cost of our
operations.
Our Business is Dependent on Our Ability to Resell Hardware and Software
Products Manufactured by Third Parties, but We Have No Long Term Agreements
with Any of Those Parties
We do not develop or manufacture most of the products we sell to our
customers. Instead, we contract to deliver our information systems, including
most of the software and hardware, on a turn-key basis based on fixed price
contracts. Accordingly, we are substantially dependent on several third party
product suppliers, particularly the manufacturers and distributors of the
software and hardware products we sell to our customers. We do not have written
agreements with many of our suppliers and the written agreements we do have
tend to be short term in nature and are subject to termination by the supplier
on short notice. This risk is further enhanced by the fact that we also compete
with some of these third party product suppliers in the provision of data
storage and security services and solutions to the European market. In the
event any of our key suppliers terminate their relationship with us, or should
we be compelled to do the same, we would be forced to find new suppliers, which
could increase our operating costs and reduce our gross sales.
Our Acquisitions of Forum and Hicomp Have Caused Us to Incur Significant
Amounts of Goodwill Which Will Reduce Our Future Net Income
Our acquisitions of Forum and Hicomp have been accounted for under the
purchase method of accounting, which means that we must report at our cost the
assets of Forum and Hicomp, less their liabilities. The difference between the
purchase price we paid for Forum and Hicomp and the difference between their
assets and liabilities must be recorded by us as goodwill. As a result of these
acquisitions, we have incurred goodwill totalling $16.4 million. We are
required to amortize the goodwill as part of our operational expenses over the
next seven years in the case of the Forum acquisition, and over the next five
years in the case of the Hicomp acquisition. Although the amortization of
goodwill is a non-cash expense, and does not negatively effect our cash flow
from operations, it will result in a significant reduction of our net income
over the next seven years and may even cause us to experience net losses in
some or all of those years. This may have a negative effect on the price of our
common stock.
Future Acquisitions of Companies or Technologies May Result In Disruptions To
Our Business and Diversion of Management Attention
As part of our business strategy, we intend to continue to make acquisitions
of complementary companies, products or technologies. If we make any
acquisitions, we will be required to assimilate the operations,
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products and personnel of the acquired businesses and train, retain and
motivate key personnel from the acquired businesses. We may be unable to
maintain uniform standards, controls, procedures and policies if we fail in
these efforts. Similarly, acquisitions may subject us to liabilities and risks
that are not known or identifiable at the time of the acquisition or may cause
disruptions in our operations and divert management's attention from day-to-day
operations. This could impair our relationships with our current employees,
customers and strategic partners. We may have to incur debt or issue equity
securities to pay for any future acquisitions. The issuance of equity
securities for any acquisition could be substantially dilutive to our
shareholders. In addition, our profitability may suffer because of acquisition-
related costs or amortization costs for acquired goodwill and other intangible
assets. In consummating acquisitions, we are also subject to risks of entering
geographic and business markets in which we have no or limited prior
experience. If we are unable to fully integrate acquired businesses, products
or technologies with our existing operations, we may not receive the intended
benefits of the acquisition.
The Data Storage Industry is Highly Competitive and, if We Are Unable to
Compete Successfully, Our Revenues Will Decline
The data storage and security 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. Our major competitors are vendors of information
management software and hardware products, including Compaq Computer Corp, EMC
Corp, Hewlett Packard, Storage Technology and Unisys Corp, some of which are
significant suppliers to us. We also experience significant competition from
other independent consulting and engineering firms.
Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than us. 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 us. We also expect that competition will increase as a result of future
software industry consolidations such as those, which have occurred in the
information technology 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 such
competitors or alliances may emerge and rapidly acquire significant market
shares. There can be no assurance that we will be able to compete successfully
against current or future competitors or that competitive pressures faced by us
will not prevent us from increasing or even maintaining our present level of
operations.
We Depend Upon the Services of Our President and Chief Executive Officer and
the Loss of His Services Could Cause Our Revenues to Decrease and Could Limit
Our Opportunities for Growth
We depend on the continued service of our President and Chief Executive
Officer, Stephan Isenschmid, and the loss of his technical knowledge and
industry expertise could limit our ability to expand our operations. In
addition, the delays associated with attracting and assimilating a new
President and Chief Executive Officer following the departure of Mr. Isenschmid
could cause our growth and revenues to suffer.
Our Growth May Be Limited and Our Cost of Operations May Increase Because of
Our Inability to Attract Qualified Engineers with Experience in the Data
Storage Industry
Our strategic plans for development and growth are dependent upon our
ability to attract qualified technical engineers. However, competition for
personnel with experience in the data storage industry, particularly qualified
engineers, is intense. Qualified engineers with experience in the data storage
industry are in chronically short supply in Europe and this shortage is
expected to worsen during the next few years. As a result, the cost of
attracting and retaining qualified engineers is expected to increase over the
next few years. In addition, our inability to attract and retain engineers with
experience in the data storage industry could limit our ability to expand our
operations.
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Our Operating Results May Fluctuate Significantly and, As a Result, We May Fail
to Meet the Expectations of Investors and Analysts, Causing Our Stock Price to
Fluctuate or Decline
Our operating results may fluctuate significantly in the future which could
cause volatility in the price of our common stock. Many factors may cause these
fluctuations, including:
. The timing of introductions or enhancements of data storage and security
products and services by us or our competitors;
. Employee hiring and retention, particularly with respect to sales and
consulting personnel and the key personnel of operations acquired by us;
. The pace of development of the technology underlying the data storage and
security industry and our continued access to this technology;
. Lengthy sales and implementation cycles of our data storage and security
solutions;
. Changes in pricing policies by us or our competitors;
. Changes in strategy; and
. Changes in the level of operating expenses to support projected growth.
We tend to experience greater revenues and earnings in the fourth quarter of
the calendar year and the least amount of revenue and earnings in the first
quarter. In addition, our sales and implementation cycles vary substantially
from customer to customer and can extend over two or more quarters. This adds
to the unpredictability of our revenues. However, our expense levels, other
than for costs of goods sold, are relatively fixed. Because of this, our net
income may be lower than expected if we experience an unanticipated decline in
revenue for a particular quarter. As a result of these factors, revenues and
earnings for any quarter may vary significantly and we do not believe that
period-to-period comparisons of our financial performance are necessarily
meaningful. Fluctuations in our operating results may also result in volatility
in the price of our common stock. It is likely that in some future quarters our
revenue or operating results will be below the expectations of the public
market analysts or investors. If that happens, the price of our stock may
decline.
Our Software Products May Contain Defects That Could be Costly to Correct,
Delay Market Acceptance of Our Products and Expose Us to Costly Litigation
We may be subject to product liability claims for computer software and
hardware products and systems that contain undetected errors. Despite extensive
testing prior to sale, our data storage and security solutions have in the past
contained errors that were discovered only after they were sold. Errors or
performance problems may also be discovered in the future. If a customer
detects a defect after implementation in the future, the customer could
experience loss of sales and damage to its brand or reputation, which in turn
may lead to damages claims against us.
Although our sales agreements with our customers typically contain
provisions designed to limit our exposure to potential product liability
claims, we do not know if these limitations of liability are enforceable or
would otherwise protect us from liability for damages to a customer resulting
from a defect in one of our solutions. Although we maintain liability insurance
covering damages arising from implementation and use of our solutions and
products, we do not know if this insurance would cover any claims brought
against us for lost profits or any other economic damage suffered by our
customers. Any product liability or other claims brought against us, if
successful and of sufficient magnitude, could cause us to spend significant
resources on litigation which could materially adversely affect our cash flows.
In addition, these claims could damage our reputation in the industry.
Because We Have Few Proprietary Rights, Others Can Provide Products and
Services Substantially Equivalent to Ours
We hold no patents. We believe that with the exception of our Hiback and
Hibars software, most of the technology used by us in the design and
implementation of our storage and security solutions is generally
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known and available to others. Consequently, apart from the advantages afforded
by our Hiback and Hibars software, others can design and implement storage and
security solutions substantially equivalent to ours. With regard to our Hiback
and Hibars software, we rely on a combination of confidentiality agreements and
trade secret law to protect the confidentiality of this information. In
addition, we restrict access to confidential information on a "need to know"
basis. However, there can be no assurance that we will be able to maintain the
confidentiality of our proprietary information.
While we have registered or applied for the registration of the mark "COPE"
and other marks in Switzerland and elsewhere, we have not applied for the
registration of the "COPE" mark in the United States. If we applied to register
the "COPE" mark in the United States, there can be no assurance that we would
be able to obtain trademark protection for the COPE name in the U.S. Moreover,
there are several third parties that hold trademark registrations for the mark
"COPE" in the United States. While we do not believe that we infringe on any of
these trademark registrations, it is possible that one or more of the holders
of these trademarks may claim that we are violating their trademark rights.
If our trademark or other proprietary rights are violated, or if a third
party claims that we violate their trademark or other proprietary rights, we
may be required to engage in litigation. Proprietary rights litigation tends to
be costly and time consuming. Bringing or defending claims related to our
proprietary rights may require us to redirect our human and monetary resources
to address those claims. In addition, in the event someone claims that we are
infringing on their U.S. trademark rights to the mark "COPE," we may be
required, or we may choose, to change our corporate name.
Because We Have No Specific Plans for a Large Portion of the Proceeds,
Management May Allocate the Proceeds to Uses the Stockholders Do Not Consider
Desirable
Approximately 49% of the net proceeds from the offering are allocated toward
unspecified acquisitions and working capital. As a result, our management will
have the discretion to allocate a large portion of the net proceeds of this
offering to uses the stockholders may not deem desirable. Further, we may not
be able to invest these proceeds to yield a significant return.
We May Incur Substantial Liabilities or Costs in Defending a Claim in
Arbitration
In 1995, we were sued for money damages by a company alleging our wrongful
termination of an agreement. In 1996, the court, pursuant to our request,
stayed all proceedings and ordered the plaintiff to arbitrate the dispute in
California. As of the date of this prospectus, the plaintiff has not initiated
arbitration proceedings. However, no assurance can be made as to the ultimate
outcome of this action and it is possible that the plaintiff might be
successful in obtaining a significant judgment against us. For a more detailed
description, please see "Business--Litigation."
We May Incur Currency Risk and Conversion Costs as a Result of the Euro
Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the Euro, and adopted the Euro as their common legal currency on that date.
We currently denominate many of our transactions in Euros. Euro conversion is
expected to generally increase cross-border price transparency among the
participating countries and result in a more competitive European market. We
are uncertain as to the effect, if any, that Euro conversion will have on our
ability to sell our products and services in the European market. Euro
conversion could potentially impact our pricing strategies and the demand for
our services and products in the European market, lead to increased competition
within the European market for the services and products sold by us, or impact
our relationships with vendors and licensors. As a result of competitive
pressures, we could also potentially be required to denominate future
transactions in Euros and incur currency risk and conversion costs as a result.
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We Are Subject to the Risk of Foreign Currency Translation Gains and Losses
That Could Harm Our Financial Results
Our international sales are denominated in either Swiss Francs or Euros,
while our cost of sales are denominated predominantly in U.S. dollars.
Consequently, we are subject to the risk of foreign currency translation gains
and losses that could harm our financial results. To the extent that we
generate profits in foreign countries, our marginal income tax rate in those
countries could be higher than the marginal income tax rate in the countries in
which we operate.
Control By Existing Stockholders May Limit Your Ability to Influence the
Outcome of Director Elections and Other Transactions Requiring Stockholder
Approval
Upon the completion of this offering, COPE's present directors and executive
officers and their respective affiliates will beneficially own approximately
62.4% of the outstanding common stock, 61.2% if the overallotment option is
exercised in full. As a result, these stockholders, if they act together, will
be able to exercise significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, and will have veto power over any
stockholder action or approval requiring a majority vote.
Provisions in Our Corporate Charter and Bylaws, As Well As Applicable
Regulations May Effect the Rights of Common Stockholders
Our certificate of incorporation, bylaws, and Delaware law contain
provisions which may effect the rights of the common stockholders and may be
deemed to have an anti-takeover effect. These provisions may delay, deter or
prevent a tender offer or takeover attempt that a stockholder might consider to
be in that stockholder's best interests. For example, our certificate of
incorporation allows our board of directors to issue up to an additional
5,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action
by our stockholders. No shares of preferred stock are currently outstanding,
however, any shares of preferred stock issued by our board of directors may
contain rights and preferences adverse to the voting power and other rights of
the holders of common stock.
In addition, we are subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law which prohibits a publicly-held
Delaware corporation from engaging in business combinations with interested
stockholders for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. Finally, in connection with our
listing on the Neuer Markt of the Frankfurt Stock Exchange, we are required to
comply with the German Takeover Code, which regulates mergers, consolidations
and tender offers. Compliance with both Delaware and German law could have the
effect of delaying, deterring or preventing a tender offer or takeover attempt
that a stockholder might consider to be in that stockholder's best interests,
including attempts that might result in a premium over the market price for the
shares held by stockholders.
We Do Not Have an Active Market for Our Common Stock and If We Fail to
Establish an Active Market You May Not be Able to Sell Your Shares in a Timely
Manner or at a Fair Price
Our common stock is traded on the OTC Bulletin Board under the symbol
"COPE." On January 14, 2000, the last reported sale price of the common stock
on the OTC Bulletin Board was $23.00 per share. However, we consider our common
stock to be "thinly traded" and any last reported sale prices may not be a true
market-based valuation of the common stock. Although we intend to list our
common stock on the NASDAQ National Market System and the Neuer Markt, an
active market for our common stock may not develop. In addition, the stock
market in general, and the stocks of technology companies in particular, have
experienced extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of these companies.
11
<PAGE>
The Underwriter Is Not An NASD Member Firm and Therefore Will be Unable to
Stabilize Our Shares Traded on NASDAQ in the Event of a Volatile NASDAQ Market
Following the completion of this offering, our common shares will trade on
the Frankfurt Stock Exchange, "Neuer Markt" and the NASDAQ National Market
System. However, our underwriter is not a member of the NASD and, consequently,
is not allowed to act as a market maker on NASDAQ. As a result, our underwriter
will not be expected to engage in the purchase and sale of our common shares
for its own account for purposes of providing a stabilizing effect in the event
of a volatile market. We expect that those NASD member firms that presently
make a market in our common shares on the OTC Bulletin Board will continue to
serve as market makers for our common shares on NASDAQ. However, there can be
no assurance that these market makers will engage in stabilizing activities or
otherwise support the market for our common stock. In addition, volatility in
the trading in our common shares on NASDAQ may cause volatility in the trading
of our common shares on the Frankfurt Stock Exchange, "Neuer Markt".
You Will Experience Immediate Dilution Resulting in Your Stock Being Worth Less
On a Net Tangible Book Value Basis Than the Amount You Invested
Because our common stock has in the past been sold at prices substantially
less than the public offering price that you will pay, you will suffer
immediate dilution of $16.18 per share in pro forma net tangible book value.
The exercise of outstanding options and warrants may result in further
dilution.
The Sale of Shares That Are Eligible for Future Sale Could Depress the Market
Price of Our Stock
Sales in the market of a substantial number of shares of common stock after
the offering could adversely affect the market price of our common stock and
could impair our ability to raise capital through the sale of additional equity
securities. Based on the shares of common stock outstanding as of January 14,
2000, without giving effect to the exercise of the overallotment option, on
completion of this offering we will have 4,205,423 shares of common stock
outstanding. The 800,000 shares sold in this offering, which would be 900,000
shares if the underwriter's option to purchase additional shares is exercised
in full, will be freely tradable without restriction or further registration
under the Federal securities laws unless purchased by our "affiliates" as that
term is defined in Rule 144. Of the remaining shares, approximately 2,782,459
shares of common stock outstanding on completion of this offering will be
"restricted securities," as that term is defined in Rule 144, assuming the
overallotment option is exercised in full.
Our major existing shareholders, Adrian Knapp, Stephan Isenschmid and Uwe
Hinrichs, are subject to an agreement with us and we are subject to an
agreement with Deutsche Borse AG and NORD/LB that limits both our ability and
the ability of the major existing shareholders to sell shares of common stock.
Our major existing shareholders and us are obligated to refrain, during a
period of six months from the date of admission of the shares to the Frankfurt
Stock Exchange, Neuer Markt, from offering or selling shares directly or
indirectly or taking other actions economically equivalent to a sale. Deutsche
Borse AG may exempt our major existing shareholders and us from these
requirements upon our request.
Some of the Statements in this Prospectus Are Forward-Looking Statements, and
Actual Events or Results May Differ Materially From the Future Events or
Financial Performance Described in This Prospectus
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "except," "plan," "anticipate," "believe," "estimate," "predict,"
"potential" or "continue," the negative of these terms or other comparable
terminology. These statements are only predictions. Actual events or results
may differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risks Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement. Although we believe that the
12
<PAGE>
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. We are under no duty to update any of the forward-looking
statements after the date the shares are first listed on the Frankfurt Stock
Exchange, "Neuer Markt" to conform these statements to actual results or to
changes in our expectations.
13
<PAGE>
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the OTC Bulletin Board under the symbol "COPE."
The following table shows the high and low bid prices of our common stock for
the periods indicated as reported by the OTC Bulletin Board. These quotations
reflect inter-dealer prices without retail markup, markdown or commission and
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
1999
First quarter................................................. $41.00 $18.00
Second quarter ............................................... $35.00 $24.25
Third quarter................................................. $35.00 $23.50
Fourth quarter................................................ $27.00 $18.00
2000
First quarter (through January 14, 2000)...................... $25.00 $20.50
</TABLE>
As of January 14, 2000, COPE had approximately 369 record holders of its
common stock.
DIVIDEND POLICY
We have never declared nor paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore we have no immediate plans to pay
cash dividends. Any future determination to pay cash dividends will be at the
discretion of the board of directors and will be dependent upon our financial
condition, results of operations, capital requirements, general business
condition and other factors our board of directors considers relevant.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of 800,000 shares of common stock in
this offering are estimated to be approximately $13,912,800, at an assumed
public offering price of $19.78 and after deducting underwriting discounts and
commissions of approximately $791,200 and estimated offering expenses of
$1,120,000 payable by us.
We expect to use the net proceeds for yet unidentified acquisitions and
working capital ($6,837,800), repayment of bank debt ($2,500,000), the loans
from NORD/LB ($2,200,000), the loan from an unaffiliated third party, Marco
Schaerer, ($625,000) and the loan from Adrian Knapp ($750,000). We also intend
to apply $1,000,000 towards research and development. The net proceeds from the
offering will be between $13,525,200 and $15,068,000 based on an offering price
in the range of $19.27 to $21.30. To the extent that the actual public offering
price is greater than or less than $19.78 per share, the net proceeds for
unidentified acquisitions and working capital will be adjusted accordingly.
The bank debt bears interest at an average rate of 3% per annum, is due on
demand, and is collateralized by the accounts receivable of COPE and life
insurance policies on the major shareholders, Mr. Adrian Knapp and Mr. Stephan
Isenschmid. The loans from NORD/LB bear interest at a rate of 6% per annum and
all principal and interest is due and payable no later than February 29, 2000.
The loan from the third party does not bear interest, however, COPE has agreed
to issue to the lender 1,000 shares of common stock for each fiscal quarter
that the principal remains outstanding. The loan from Adrian Knapp bears
interest at a rate of 8.5% per annum and all principal and interest is due and
payable on demand.
The amounts actually expended for working capital and other expenses may
vary significantly and will depend on a number of factors, including the amount
of our future revenues and other factors described under "Risk Factors."
Accordingly, our management will retain broad discretion in the allocation of
the net proceeds of this offering. We have no current plans, agreements, or
commitments regarding any specific acquisition, and are not currently engaged
in any negotiations concerning any of these transactions. Pending these uses,
the net proceeds from this offering will be invested in short-term, interest-
bearing, investment-grade securities.
15
<PAGE>
DILUTION
Our net tangible book value per share was $0.35 based upon our consolidated
balance sheet as of September 30, 1999, without giving any effect to any
changes after September 30, 1999. "Net tangible book value" per share
represents the amount of our tangible assets, less the amount of liabilities,
divided by the number of shares of common stock outstanding. After deducting
underwriting discounts and commissions and the estimated offering expenses
payable by us, the pro forma net tangible book value per share at September 30,
1999, will be approximately $3.33. The current stockholders will thus benefit
from an immediate increase in net tangible book value per share of $2.98. There
will be an immediate dilution to new investors of approximately $14.93 per
share.
The following table illustrates the dilution to investors in this offering
on a per share basis as of September 30, 1999 assuming the sale of offered
shares at $19.78 per share:
<TABLE>
<S> <C> <C>
Offering price per share..................................... $19.78
Net tangible pro forma book value per share before
offering.................................................. $0.35
Increase per share attributable to payments made by new
investors................................................. $3.25
Pro forma net tangible book value per share after offering... $ 3.60
------
Dilution in net tangible book value per share to new
investors................................................... $16.18
</TABLE>
The calculations set for the above assume no exercise of presently
outstanding options or warrants. There were 304,803 options and warrants
outstanding as of September 30, 1999, of which 165,231 had an exercise price
less than the assumed offering price of $19.78 per share. The weighted average
exercise price of these options and warrants is $11.43. If these options and
warrants had been exercised as of September 30, 1999, the pro forma net
tangible book value per share at September 30, 1999 would have been $3.90.
There would have been an immediate dilution to new investors of approximately
$15.88 per share.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
on an actual basis and as adjusted to reflect the sale of 800,000 shares of
common stock offered by us at an assumed public offering price of $19.78 per
share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses. This table should be read in conjunction with
COPE's consolidated financial statements and the notes relating to those
statements included elsewhere in the prospectus. This information is based on
the number of shares outstanding on September 30, 1999. It excludes:
. 275,010 shares of common stock issuable upon the exercise of options
outstanding as of September 30, 1999 with a weighted average exercise
price of $18.77 per share;
. 29,793 shares of common stock issuable upon the exercise of warrants
outstanding as of September 30, 1999 warrants with an exercise price of
$7.54 per share; and
. an aggregate of 102,600 shares of common stock as of September 30, 1999
reserved for future issuance under our 1998 Stock Option Plan.
<TABLE>
<CAPTION>
September 30, 1999
------------------------
Actual As Adjusted
----------- -----------
<S> <C> <C>
Shareholders' equity:
Common stock, $.001 par value:
30,000,000 shares authorized, actual and as
adjusted; 3,595,751 shares issued and outstanding
actual; and 4,395,751 shares issued and
outstanding, as adjusted.......................... 3,596 4,396
Additional paid in capital........................... 15,276,065 29,188,065
----------- -----------
Cumulative translation adjustment.................... (65,843) (65,843)
----------- -----------
Retained earnings.................................... 979,333 979,333
----------- -----------
Total shareholders' equity......................... 16,193,151 $30,105,951
----------- -----------
Total capitalization............................. $16,193,151 $30,105,951
=========== ===========
</TABLE>
17
<PAGE>
COPE
COPE is a Swiss-based provider of enterprise data storage and security
consulting, services and solutions. COPE was formed under the laws of the State
of Utah on October 7, 1985 under the name "Harrier, Inc." From October 1985 to
September 1998, COPE operated under the name "Harrier, Inc." On June 6, 1990,
COPE reorganized as a Delaware corporation and from 1990 until September 1998
was operated by predecessor management as a developer and marketer of health,
fitness and medical products.
In September 1998, the predecessor management of COPE completed a series of
transactions by which COPE discontinued all operations and divested itself of
substantially all of its assets and liabilities relating to the development and
marketing of health, fitness and medical products. At the same time, COPE
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."
These transactions were carried out based on an Amended and Restated
Securities Purchase Agreement and Plan of Reorganization dated July 24, 1998
between COPE and the shareholders of COPE Holding AG, including Messrs. Knapp
and Isenschmid. As a result of this agreement, COPE:
. amended its certificate of incorporation to change its name from Harrier,
Inc. to COPE, Inc. and to reverse split its outstanding common stock on a
one for 58 basis;
. sold a controlling interest in its only subsidiary, Glycosyn
Pharmaceuticals, Inc., a Delaware corporation;
. divested itself of substantially all of its operations, assets and
liabilities on hand immediately prior to the reorganization; and
. issued 2,862,000 post-split shares of common stock to the shareholders of
COPE Holding AG in exchange for all of the issued and outstanding capital
shares of COPE Holding AG.
The shares issued to the shareholders of COPE Holding AG at the time of the
reorganization represented 91.4% of COPE's issued and outstanding capital
stock. Following the reorganization, the stockholders of COPE Holding AG became
the controlling stockholders of COPE's and COPE Holding AG became its wholly-
owned subsidiary. Kevin DeVito, one of COPE's current directors, was the
President and a director of COPE prior to its reorganization with COPE Holding
AG.
COPE Holding AG was formed as a Swiss stock corporation in 1991 by Adrian
Knapp and Stephan Isenschmid under the name of COPE AG. On March 25, 1998, COPE
AG changed its name to COPE Holding AG. COPE Holding AG then founded a wholly-
owned subsidiary under the name of COPE AG and transferred substantially all of
its assets and liabilities to the newly-formed subsidiary as of the same date.
Unless the context otherwise requires, the term "COPE" refers to the
Delaware corporation known as COPE, Inc., its wholly-owned subsidiary, COPE
Holding AG 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.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with COPE's financial
statements, the notes to those statements and the other financial data included
elsewhere in this prospectus. Some of the information in this section contains
forward-looking statements which involve risks and uncertainties. COPE's actual
results may differ materially from the results predicted by these forward-
looking statements due to various factors, including but not limited to those
which are discussed below and elsewhere in this prospectus.
Overview
General. COPE is a Swiss-based provider of data storage and security
services and solutions. COPE presently conducts business throughout Germany,
Switzerland and Austria.
COPE Reorganization. As more fully described in the section "COPE" on page
17, in September 1998 the predecessor management of COPE completed a series of
transactions by which COPE discontinued prior operations and at the same time
acquired COPE Holding AG. Following the reorganization of COPE with COPE
Holding AG, the former stockholders of COPE Holding AG owned approximately
91.4% of the outstanding shares of the common stock of COPE. As a result, COPE
Holding AG was the accounting acquiror and COPE'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 and COPE Holding AG is assumed to
have acquired COPE. The assets and liabilities of COPE as they existed
immediately prior to the reorganization have been recorded at fair value as
required by the purchase method.
Forum Acquisition. On June 25, 1998, COPE GmbH, a wholly-owned subsidiary of
COPE Holding AG, acquired all of the capital shares of Forum GmbH, a German
data storage company, for $962,977. The acquisition of Forum has been accounted
for by the purchase method of accounting, which means that COPE has reported at
its cost the assets of Forum, less its liabilities. The difference between the
purchase price COPE paid for Forum and the difference between the fair value of
Forum's assets and liabilities has been recorded by COPE as goodwill.
Accordingly, the operating results of Forum have been included in the
consolidated operating results from the date of acquisition. On March 30, 1999,
Forum was merged into COPE GmbH.
Hicomp Acquisition. On April 19, 1999, COPE acquired Hicomp Software Systems
GmbH, a German software company. Based on the Sale and Assignment of Business
Shares entered into on December 21, 1998 between COPE and Mr. Uwe Hinrichs, the
president and sole shareholder of Hicomp, COPE issued 420,000 shares of common
stock in exchange for all of the outstanding capital shares of Hicomp.
Additionally, the former shareholder of Hicomp granted COPE a purchase option,
expiring June 30, 2000, to acquire all of the capital shares of two U.S.
corporations owned by the shareholder, which are engaged in the business of
distributing Hiback and Hibars software in the U.S., at the then market price
based on negotiations between the two parties. No consideration was paid for
the option. The option represents a right of first refusal only and gives the
company no price advantage since this is stipulated to be based on the market
price at the date of acquisition. Accordingly, no value has been allocated to
the option as part of the allocation of the purchase price of Hicomp.
The Hicomp acquisition will be accounted for under the purchase method of
accounting, which means that COPE has reported at its cost the assets of
Hicomp, less its liabilities. The difference between the purchase price COPE
paid for Hicomp and the difference between Hicomp's assets and liabilities has
been recorded by COPE as goodwill. 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. COPE also granted Mr. Hinrichs securities registration rights
which allow him to sell up to 200,000 shares of his common stock alongside COPE
within the framework of a secondary public
19
<PAGE>
offering on the Frankfurt Stock Exchange, "Neuer Markt", at the earliest 90
days after the date of COPE's acquisition of Hicomp. In October 1999, COPE
agreed to repurchase from Mr. Hinrichs 200,000 of the common shares issued by
COPE in the acquisition at a price of DEM 7,200,000 ($3,958,000) which
fulfilled its obligations under the registration rights.
Currency Exchange Rates. COPE regularly enters into contracts payable in
Swiss Francs, German Marks and Austrian Schillings.
Although COPE reports its results in US dollars, virtually all of its sales
are denominated in other currencies, primarily, Swiss Francs and German Marks
and, to a lesser extent, Austrian Schillings, 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, COPE's cost of doing
business is directly affected by any changes in the exchange rate between the
US Dollar, on the one hand, and the Swiss Franc or German Mark, on the other
hand. The financial position and results of operations of COPE and its foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of COPE and its subsidiaries are translated at the
exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from differences in exchange rates from period
to period are included in the cumulative translation adjustment account in
stockholders' equity.
COPE typically enters into forward exchange contracts covering fifty percent
(50%) of its hardware and software purchases for its client contracts in order
to mitigate the adverse effects of currency exchange fluctuations. However,
these actions generally provide only a partial mitigation of the adverse
effects of changes in currency rates and there can be no assurance that changes
in currency rates in the future will not have a material adverse affect on
COPE's business, operating results or financial condition and results of
operations.
Results of Operations
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Net Revenue. During the nine months ended September 30, 1999, COPE had net
revenue of $24,905,521, which amounts to an increase of 43.7% over the net
revenue of $17,324,933 during the prior year period. The increase in net
revenue is due in part to the COPE's acquisition of Forum and Hicomp. COPE
acquired Forum on June 25, 1998 and Forum has been included in the consolidated
operating results for periods subsequent to June 25, 1998. COPE acquired Hicomp
on April 19, 1999 and Hicomp has been included in the consolidated operating
results for periods subsequent to April 19, 1999. COPE believes that
approximately $4,100,000 of the increase in net revenue over the prior year
period is attributable to the COPE's acquisition of Forum. COPE believes that
approximately $840,000 of the increase in net revenue over the prior period is
attributable to COPE's acquisition of Hicomp.
Sales of solutions increased 41.4% during the nine months ended September
30, 1999 over the prior year period reaching $21,772,465 as compared to
$15,397,697. Sales of solutions consists of revenue from the resale of hardware
and software components along with associated consulting services. The reason
for the increase in revenue from the sales of solutions is the integration of
Forum.
Sales of services increased 62.6% during the nine months ended September 30,
1999 reaching $3,133,056 as compared to $1,927,236 for the prior year period.
Sales of services consists of revenue from stand-alone consulting and
integration services. The increase in revenue from the sale of services is the
result of COPE's decision to emphasize sales of services because of its
potential higher profit margin.
Cost of Sales. During the nine months ended September 30, 1999, cost of
sales increased by 36.8% to $16,561,361 compared to $12,106,255 for the prior
year period, representing 76.1% and 78.6%, respectively, of the total revenue
from the sale of solutions. Cost of sales consists exclusively of the cost of
software and hardware acquired for resale. The decrease in cost of sales as a
percentage of revenue from the sale of solutions is the result COPE's ability
to negotiate with its suppliers for lower prices for the products purchased by
COPE for resale. At the same time COPE elected to discontinue the pursuit of
low margin product sales.
20
<PAGE>
Gross Profit. COPE's gross profit margin for the nine months ended September
30, 1999 was 33.5% compared to 30.1% for the prior year period. The increase is
primarily attributable to the large internal growth in sales of services as a
percentage of total revenue and the increase in the profit margin for products
sold in Germany.
Selling, General, Administrative and Consulting Expenses. COPE's selling,
general, administrative and consulting expenses as a percentage of net sales
increased in the nine months ended September 30, 1999 (33.0%) compared to the
prior year period (26.3%). The increase is primarily attributable to COPE's
large investment in research and development and sales and marketing for its
newly acquired software products, Hiback and Hibars, during the three months
ended September 30, 1999 and the hiring of additional personnel necessary to
support the growth in sales of services. In the first quarter of fiscal 1998,
COPE reported an impairment loss of $63,004 related to the write-down of an
exclusive option for the rights to purchase, develop and market a new technique
for the automatic storage of data.
Net Income/(Loss). During the nine months ended September 30, 1999, COPE had
a net loss of $1,668,247 as compared to net income of $435,630 during the prior
year period. The decrease in income is mainly attributable to the amortization
of goodwill involved with COPE's acquisition of Hicomp in April 1999 and Forum
in June 1998 and the increase in research and development, selling and
marketing expenses of approximately $600,000 during the three months ended
September 30, 1999 relating to the Hiback and Hibars software products.
Earnings before interest, taxes, depreciation and amortization for the nine
months ended September 30, 1999 was $87,342, which amounts to a decrease of
86.9% over earnings before interest, taxes, depreciation and amortization of
$605,276 for the prior year period. The decrease in earnings before interest,
taxes, depreciation and amortization between 1999 and 1998 is mainly due to the
increase in research and development, selling and marketing expenses of
approximately $600,000 during the three months ended September 30, 1999
relating to the Hiback and Hibars software products. Earnings before interest,
taxes, depreciation and amortization is defined as net income plus the
following:
. extraordinary items and cumulative effect of accounting change;
. provision for income taxes;
. interest expense; and
. depreciation and amortization.
Earnings before interest, taxes, depreciation and amortization is presented
not as an alternative measure of operating results or cash flow from operations
as determined in accordance with United States generally accepted accounting
principles, but because it is a widely accepted financial indicator of a
company's ability to incur and service debt.
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 62.2% over the net revenue of
$17,916,171 during the prior year period. The increase in net revenue is due in
part to the consolidation of Forum, which was acquired on June 25, 1998 and has
been included in the consolidated operating results 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 consolidation of
Forum, COPE had a 12% increase in net revenue during the year ended
December 31, 1998 over the prior year period. The increase in non-Forum related
revenue was due to a general growth in operations.
Sales of solutions increased 53% during the year ended December 31, 1998
over the prior year period reaching $25,411,976 as compared to $16,605,175 in
1997. Sales of solutions consists of revenue from the resale of hardware and
software components along with associated consulting services. The principal
reason for the increase in sales of solutions is the acquisition of Forum.
Without giving effect to the consolidation of Forum, COPE had 3% increase in
sales of solutions during the year ended December 31, 1998 over the prior year
period.
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<PAGE>
Sales of services increased 178.2% during the year ended December 31, 1998
reaching $3,647,174 as compared to $1,310,996 for the prior year period. Sales
of services consists of revenue from stand-alone consulting and integration
services. Without giving effect to the consolidation of Forum, COPE 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 COPE'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 58.2% to $20,281,131 compared to $12,817,738 for the prior period,
representing 79.8% and 77.2% of the total revenues from the sale of solutions,
respectively. The cost of sales as a percentage of sale of solutions increased
during the year ended December 31, 1998 due to COPE's aggressive pursuit of
increased sales in the German market in 1998. In an effort to establish itself
in the German market, during 1998 COPE pursued low margin product sales. In
addition, because COPE was not then well established in the German market it
was not able to negotiate for the lowest prices from German suppliers. As noted
above, in the first half of 1999 COPE discontinued the aggressive pursuit of
low margin product sales in Germany and, at the same time, has been able to
negotiate for better prices from its suppliers. Cost of sales consists
exclusively of COPE's cost for the software and hardware acquired for resale as
part of its information systems solutions.
Gross Profit. COPE'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 COPE's strategy of emphasizing the sale of higher margin
stand alone consulting and integration services.
Selling, General, Administrative and Consulting Expenses. COPE's selling,
general, administrative and consulting expenses as a percentage of net sales
increased between the year ended December 31, 1998 (25.1%) and the prior year
period (24.2%). This trend is the consequence of COPE's strategy to increase
sales of services which required that COPE hire additional service and
consulting personnel.
Fiscal 1997 Compared to Fiscal 1996
Net Revenue. During the year ended December 31, 1997, COPE had net revenue
of $17,916,171, which amounts to an increase of 43.2% over the net revenue of
$12,515,123 during the prior year period as a result of the expansion of COPE's
customer base. This increase was due primarily to COPE's commencement of
meaningful operations in the German market in 1997. Net revenue in Germany
increased from $937,026 in 1996 to $4,759,643 in 1997.
Sales of solutions increased 40.3% during the year ended December 31, 1997
over the prior year period reaching $16,605,175 as compared to $11,834,701 in
1996. This increase is primarily due to a significant increase in COPE's
customer base in Germany and Austria. Net revenue in these markets grew by
approximately 160.7% in 1997 as compared to 1996.
Sales of services increased 92% during the year ended December 31, 1997
reaching $1,310,996 as compared to $680,422 for the prior year period. This
increase is due to increased demand for consulting services as a result of an
expanded customer base.
Cost of Sales. During the year ended December 31, 1997, cost of sales
increased by 45.2% to $12,817,738 compared to $8,829,711 for the prior year
period, representing 71.5% and 70.6% of the total revenues, respectively. Cost
of sales consists exclusively of COPE's cost for the software and hardware
acquired for resale as part of its information systems solutions.
Gross Profit. COPE's gross profit margin for the year ended December 31,
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 U.S. dollar during 1997 as
compared to the Swiss franc as almost all of the purchases of hardware are U.S.
dollar denominated. Gross margins in Switzerland and Austria increased in 1997
over those of 1996 as a result of the increase in the sale of services as a
percentage of overall revenues.
22
<PAGE>
Selling, General, Administrative And Consulting Expenses. COPE's selling,
general, administrative and consulting expenses as a percentage of net revenues
was substantially unchanged between fiscal 1997 (24.2%) and fiscal 1996
(23.5%).
Liquidity and Financial Condition
COPE's historical working capital requirements include the financing of all
costs involved in the design, implementation and sale of information systems.
COPE generally contracts to deliver information systems, including all hardware
and software, on a turn-key basis based on fixed price contracts. Consistent
with industry practice, COPE generally is not able to obtain significant up-
front or progress payments on its contracts providing for the design,
implementation and sale of information systems. Accordingly, COPE is generally
required to finance its clients' contracts, including the purchase of the
hardware and software components of the information systems. As of September
30, 1999, COPE had established short-term overdraft facilities under which COPE
and its subsidiaries could borrow up to $4,223,142. Amounts drawn down under
these facilities are due on demand and collateralized by accounts receivable of
COPE and life insurance policies on the major shareholders, Mr. Adrian Knapp
and Mr. Stephan Isenschmid, for $342,700 each. COPE has been successful to date
in securing extensions on its lines for purposes of financing certain client
contracts as needed, however there can be no assurance that COPE will continue
to do so in the future.
In July 1999, COPE entered into a borrowing agreement with the lead
underwriter for this offering, NORD/LB, to borrow up to DEM 1,825,000. The note
bears interest at the rate of 6% per annum and all interest is due and payable
no later than February 29, 2000. COPE intends to repay this note from the
proceeds of this offering.
In October 1999, COPE entered into a borrowing agreement with NORD/LB, to
borrow up to DEM 2,500,000 ($1,373,600). The note bears interest at the rate of
6% per annum and all interest is due and payable no later than February 29,
2000. COPE intends to repay this note from the proceeds of this offering.
In October 1999, COPE entered into a borrowing agreement with an
unaffiliated third party, Marco Schaerer, to borrow up to CHF 1,000,000
($625,000). The note does not bear interest however COPE has agreed to issue to
the lender 1,000 shares of common stock for each fiscal quarter that the
principal amount remains outstanding. COPE intends to repay this note from the
proceeds of this offering.
In October 1999, COPE entered into a borrowing agreement with Adrian Knapp
to borrow up to CHF 1,200,000 ($750,000). The note bears interest at the rate
of 8.5% per annum. COPE intends to repay this note from the proceeds of this
offering.
In October 1999, COPE repurchased from the former shareholders of Hicomp,
Uwe Hinrichs, 200,000 of the common shares issued by COPE in the acquisition at
a price of DEM 7,200,000 ($3,958,000). COPE financed this repurchase using the
proceeds from the loans set forth above.
As of September 30, 1999, COPE had a working capital deficit of
approximately $2,439,130, compared to a working capital position of $155,663 as
of December 31, 1998. As of September 30, 1999, COPE had approximately $90,921
available for borrowing under existing lines of credit under a weighted average
interest rate of approximately 3.7%.
COPE believes that it will require significant additional working capital in
order to finance continued growth. COPE believes that the proceeds from this
offering, together with its existing capital resources, will be sufficient to
meet its capital requirements and finance its continued growth for at least the
next twelve months. However, if its capital requirements vary materially from
those currently planned, COPE may require additional financing sooner than
anticipated. Additional financing may not be available when needed on terms
favorable to COPE or at all. In addition, as disclosed throughout the
prospectus, COPE intends to conduct additional acquisitions in order to expand
its revenue base and product line. These acquisitions will undoubtedly require
significant additional capital. However, it is impossible to predict right now
how much capital COPE will need or when it will need it.
23
<PAGE>
Year 2000 Issue
The Year 2000 issue is the result of computer programs, microprocessors, and
embedded date reliant systems using two digits rather than four to define the
applicable year. If these programs are not corrected, date data concerning the
Year 2000 could cause many systems to fail, lock up or generate erroneous
results. COPE considers a product to be "Year 2000 compliant" if the product's
performance and functionality are unaffected by processing of dates prior to,
during and after the Year 2000, but only if all hardware, software and firmware
used with the product properly exchange accurate date data with it.
COPE believes that it may be possible that litigation may be brought against
vendors, including COPE, of all component products of systems that are unable
to properly manage data related to the Year 2000. COPE's agreements with
customers and end users typically contain provisions designed to limit COPE's
liability for these 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 of these claims, with or without merit, could have a material adverse
effect on COPE's business, operating results or financial condition, and could
result in customer satisfaction issues and potential lawsuits.
COPE is identifying Year 2000 dependencies in its accounting software in
Germany and other systems, equipment, and processes and is implementing changes
to these systems, updating or replacing its equipment, and modifying its
processes to make them Year 2000 compliant. COPE is continuing to assess its
internal Year 2000 issues and is in the process of remediation of the critical
systems. COPE has communicated with all 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 these suppliers to continue to provide goods and services to COPE.
Each of these suppliers has assured COPE that their goods and services are Year
2000 compliant.
As a general matter, COPE is vulnerable to any failure by its key suppliers
to remedy their own Year 2000 issues, which could delay shipments of essential
components, thereby disrupting or halting COPE's operations. Further, COPE also
relies, both domestically and internationally, upon governmental agencies,
utility companies, telecommunication service companies and other service
providers outside of COPE's control. There is no assurance that these
suppliers, governmental agencies, financial institutions, or other third
parties will not suffer business disruption caused by a Year 2000 issue, and
there is little practical opportunity for COPE to test or require Year 2000
compliance from many of those large agencies, companies or providers. These
failures could have a material adverse effect on COPE's business, financial
condition and results of operations. In the worst case scenario, a storage or
security system installed by COPE could completely collapse and the client
could lose forever important data. If this were to happen and the client
incurred substantial economic loss, COPE might be held liable for the loss.
Additionally, COPE is communicating with its large customers to determine the
extent to which COPE is vulnerable to those third parties' failure to remedy
their own Year 2000 issues.
As of the date of this prospectus, nothing has come to COPE's attention that
would indicate that any of its computer software applications, or those of its
information suppliers, are unable to operate accurately after January 1, 2000.
However, COPE has been advised that the consequences of a Year 2000 failure may
not become apparent for several weeks following January 1, 2000. COPE has to
date spent approximately $35,000 to upgrade computer software and hardware to
ensure Year 2000 compliance. This amount does not include the costs of the Year
2000 compliance problems associated with COPE's vendors, customers, financial
institutions and government agencies noted above. In addition, COPE believes
that a significant amount of the total expenditures will be capitalized and
depreciated over the useful life of the applicable asset, such as computer
hardware or software replaced to keep pace with technological advances. COPE
has paid its Year 2000 compliance charges from existing working capital, and
estimates that its expenditures on Year 2000 compliance equal approximately 50%
of COPE's total expenditures on information technology. While COPE currently
expects that the Year 2000 issue will not pose significant internal operational
problems, delays in COPE's remediation efforts, or a failure to fully identify
all Year 2000 dependencies in the systems, equipment or processes of COPE or
its vendors, customers or financial institutions could have material adverse
consequences,
24
<PAGE>
including delays in the manufacture, delivery or sale of products. Therefore,
COPE is considering the development of contingency plans along with its
remediation efforts for continuing operations in the event these problems
arise.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the Euro, and adopted the Euro as their common legal currency. A
significant portion of COPE's transactions will be denominated in Euros. COPE
has successfully adapted its information systems and practices to accommodate
the Euro in those European Union member countries in which it offers its
services. Moreover, the content within the financial information distributed by
COPE (notably security quotations) has successfully begun to be denominated in
Euro, commencing on January 1, 1999.
Euro conversion is expected to generally increase cross-border price
transparency among the participating countries and result in a more competitive
European market. COPE is uncertain as to the effect, if any, that Euro
conversion will have on its ability to sell its products and services in the
European market. Euro conversion could potentially impact pricing strategies
and demand for COPE's services in the European market, lead to increased
competition within the European market for the specific types of services sold
by COPE, or impact COPE's relationships with vendors and licensors. As a result
of competitive pressures, COPE could also potentially be required to denominate
future transactions in Euros and incur currency risk and conversion costs as a
result. There can be no assurance that Euro conversion will not have a
material, adverse effect on COPE's business, operating results or financial
condition.
Forward Looking Statements
This prospectus contains forward-looking statements that are based on COPE's
beliefs as well as assumptions made by and information currently available to
COPE. When used in this prospectus, the words "believe," "expect,"
"anticipate," "estimate" and similar expressions are intended to identify
forward-looking statements. These statements are subject to those risks,
uncertainties and assumptions included in the section "Risk Factors. Should one
or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, or projected. COPE cautions its stockholders and
potential investors not to place undue reliance on any forward-looking
statements, all of which speak only as of the date made.
25
<PAGE>
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. COPE'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 the 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 improvements and additions 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 its systems solutions. COPE resells software and hardware products offered
by the major vendors in the data storage and security industry, including:
<TABLE>
<S> <C>
. Advanced Digital Information . Legato Systems
. Ascend Communications . Oracle
. Cisco Systems . Overland Data
. Data General . Sony
. Compaq Computer . Storage Technology
. EMC Corp. . Sun Microsystems
. IBM . Veritas Software
</TABLE>
The vendors set forth above represent all of COPE's vendors that individually
account for at least 2% of COPE's 1998 revenue from the sale of hardware and
software products. These vendors as a group contributed to approximately 75% of
COPE's 1998 revenue from the sale of hardware and software products.
Following its acquisition of Hicomp Software Systems GmbH on April 19, 1999,
COPE 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 in Germany, Switzerland, and Austria.
Development of COPE
COPE commenced operations in 1991 as a provider of data storage subsystems
to the Swiss market. In the European market at that time, computer
manufacturers were not directing significant corporate resources into data
storage. This opportunity allowed COPE to immediately enter the market with a
competitive mix of quality products suitable for customized internal and
external data storage applications. In early 1993, COPE began to study the
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 redundant array of inexpensive disk-drives systems was
introduced by COPE to the Swiss market. In 1994, COPE signed a distribution
agreement with Data General providing for COPE's distribution of Data General's
Open CLARiiON systems. This represented COPE's first reseller agreement. In the
following years, COPE entered into distribution agreements with additional
vendors of storage and security products. In December 1998, COPE 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.
26
<PAGE>
In 1994, COPE began to market its services and systems in Austria. In late
1995, COPE commenced operations in Germany. In the same year, COPE became one
of the first information technology companies in Europe to obtain an ISO9001
certification. In June 1998, COPE expanded its operations in Germany through
its acquisition of Forum GmbH, a provider of data storage and security services
and solutions to the German market. In April 1999, COPE acquired its first
proprietary product through its acquisition of Hicomp Software Systems GmbH, a
Hamburg, Germany based developer of back-up software, marketed under the
trademarks Hiback and Hibars.
Industry Overview
High availability of stored enterprise 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. Without this access, productivity suffers and
the cost of doing business escalates. 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 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:
. full automated backup and restore capability;
. ready data in the event of system failure in order to avoid interruptions
of day-to-day operations;
. scalability to accommodate 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 storage systems,
from a single central console; and
. support for heterogeneous environments.
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<PAGE>
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, redundant array of inexpensive disk-drives, 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 entities 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.
Redundant array of inexpensive disk-drives 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.
Redundant array of inexpensive disk-drives 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
redundant array of inexpensive disk-drives algorithms, thus ensuring the
immediate availability of redundant array of inexpensive disk-drives protected
data even in the event of a disk drive failure.
CD-ROM and DVD-ROM technology emerged in the early 1980's and 1990's,
respectively, 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 for mass data storage, 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 this 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 client 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 network 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 software and hardware
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, COPE 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 integrated 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.
28
<PAGE>
In order to provide its customers with the best available solution, COPE has
divided its operations between consulting, solution sales and integration
services. A client engagement begins with the appointment of a team from COPE's
consulting division. As of January 14, 2000, COPE employed 11 professionals in
its consulting division, each of whom is a trained engineer 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. The engineers then work with the client to
develop performance-cost comparisons, feasibility studies and capital budgeting
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
January 14, 2000, COPE's solution sales division consisted of 45 professionals,
including 24 sales representatives and 21 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 January 14, 2000, this department consisted of 19
employees.
COPE's Strategy
COPE's goal is to become the leading independent provider of enterprise data
storage and security services and solutions in Western Europe. The key elements
of COPE's strategy are:
. Emphasize Consulting Services. COPE intends to emphasize the provision of
its consulting services. COPE believes that in the enterprise data
storage 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
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 services and solutions.
. Foster a Reputation for Independence. COPE's major competitors are either
manufacturers or developers 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 firm dedicated exclusively to providing
storage and security services and solutions to the enterprise data
storage market only. Most of the customers for storage and security
systems are large corporations and institutions with sophisticated
information technology operations. COPE believes that most information
technology officers appreciate and value COPE's expertise and ability to
offer solutions and consulting services unhindered by any bias to 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. In addition to the pursuit
of organic growth, 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 sale and engineering staffs with established contacts and client
bases in key markets.
29
<PAGE>
Products and Services
COPE's principal operations consist of the design, implementation and
management of storage and security systems that provide flexible and cost
effective data storage and security solutions on a turn-key basis. In addition
to providing turn-key data storage systems, COPE also provides its clients
consulting, training and integration services. In 1998, approximately
$3,647,174 (or 12.6%) of COPE's $29,059,150 in revenue represented consulting
fees unrelated to sales of storage data 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 reseller of a number of software and hardware products to its
customers, including back-up and system management software, tape libraries,
redundant arrays of inexpensive disc drives, servers, and numerous other
products related to the installation and utilization of data storage and
security technology. 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:
<TABLE>
<CAPTION>
% of Product
Company Product Revenue
------- ------- ------------
<C> <S> <C>
Compaq Computer/Digital Equipment Servers and Storage 15%
Products
Storage Technology Corp. Tape Libraries 12%
Data General--CLARiiON Business Unit CLARiiON Disk Arrays 10%
Advanced Digital Information Corp. Tape Libraries 8%
IBM Servers 8%
Sun Microsystems Servers 7%
Legato Systems Back-up and Archiving 6%
Software
Hewlett Packard Media Libraries 3%
Overland Data Tape Libraries 3%
Veritas Software Data Management, 2%
Failure, Backup and
Archiving Software
</TABLE>
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.
Consulting and Services Division. COPE's consulting division offers services
such as analyses, conceptual solutions, target-performance comparisons,
quantity structures, feasibility studies, capital budgeting and return on
investment 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 Software Systems
GmbH, a developer of enterprise data storage software. Through its acquisition
of Hicomp, COPE is now able to offer its own proprietary line of software
products designed to provide storage capabilities to multi-platform
enterprises. The products are Hiback, backup software which is installed on
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
international distributors.
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<PAGE>
As of January 14, 2000, COPE's field sales force consisted of 24 sales
representatives and 21 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 information technology 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 data storage and security 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 hardware products, including Hewlett
Packard, EMC Corp., Storage Technology, Unisys Corp. and Compaq Computer Corp.,
some of whom are also significant suppliers of COPE. In addition, COPE
experiences significant competition from other independent 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 COPE. COPE also expects that competition will increase as a result of
future software industry consolidations, which have occurred in the information
technology 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
COPE 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 this personnel is intense, and there
can be no assurance that COPE can retain its key technical and managerial
employees or that it can attract and retain other highly qualified technical
personnel in the future.
Litigation
Except as set forth below, there have been no legal proceedings to which
COPE or any of its officers or directors have been a party or to which the
property of COPE has been subject over the last two years.
On August 24, 1995, American Diagnostica, Inc., a private company located in
Greenwich, Connecticut, filed a civil action against COPE for money damages
alleging COPE's wrongful termination of an 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 COPE at a time when COPE was engaged in the business of research
and development of various health and medical products.
In its complaint, American Diagnostica alleged that COPE was indebted to
them for damages in an unspecified amount, plus punitive damages, attorney's
fees and interest. In December 1995, COPE moved the court for an order
compelling American Diagnostica to submit the dispute to arbitration. In
September 1996, the court granted COPE'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
prospectus, no arbitration proceeding has been commenced by either party. The
prior management of COPE has publicly announced its belief that COPE has
meritorious defenses to all of American Diagnostica's claims
31
<PAGE>
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 its reorganization with COPE Holding AG, COPE received
from the New Capital Investment Fund and New Capital AG an agreement to
indemnify COPE against any claims outstanding as of the close of the
reorganization, including attorneys' fees and costs of arbitration or
litigation relating to the American Diagnostica matter. Kevin DeVito is a
director of New Capital Investment Fund and New Capital AG. Mr. DeVito was the
Chief Executive Officer of COPE, Inc. prior to its acquisition of COPE Holding
AG in September 1998 the COPE Reorganization and is currently a member of the
board of directors of COPE.
Employees
As of January 14, 2000, COPE had a total of 112 employees. Of the total, 11
were in consulting, 45 were in solution sales, 19 in integration services, and
37 were in 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.
Properties
COPE's executive and sales offices are located in Rotkreuz, Switzerland and
consist of approximately 10,800 square feet of leased space. COPE leases this
space based on a written agreement expiring in March 2001, with an option to
extend for another five years, at the rate of $11,000 per month. COPE also
maintains the following sales offices:
<TABLE>
<CAPTION>
Location Size Monthly Rental Rate
-------- ---- -------------------
<S> <C> <C>
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
</TABLE>
32
<PAGE>
MANAGEMENT
The executive officers and directors of COPE, the positions held by them and
their ages as of January 14, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Chairman of the Board and Executive Vice
Adrian Knapp........................ 37 President
Stephan Isenschmid.................. 38 President, Chief Executive Officer and Director
Markus Bernhard..................... 35 Chief Financial Officer
Peter Koch.......................... 74 Director
Markus Stalder...................... 47 Director
Kevin DeVito........................ 39 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 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.
Members of the board of directors are typically elected by the shareholders
of COPE. However, vacancies in the board may be filled by a majority of the
remaining directors. Each director holds office until his successor is elected
by the stockholders and his successor is qualified or until the director
resigns. The board of directors has established an Audit Committee consisting
of Markus Stalder, Adrian Knapp and Kevin DeVito, with Mr. Stalder to serve as
Chairman. The Audit Committee reviews COPE's independent auditors, the scope
and timing of their audit services and other services they are asked to
perform, the auditor's report on COPE's financial statements following
completion of their audit, and COPE's policies and procedures regarding
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 to serve as Chairman. The Compensation
Committee reviews and recommends to the board of directors the compensation and
benefits of all officers of COPE and reviews general policy matters relating to
compensation benefits of employees of COPE.
33
<PAGE>
Executive Compensation
Cash Compensation of Executive Officers. The following table sets forth the
cash compensation paid to the executive officers of COPE for services rendered
during the fiscal years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- --------------------------------
Common Shares
Other Underlying
Annual Restricted Stock Options Granted All Other
Name and Position Year Salary Bonus Compensation Awards($) (# Shares) Compensation(1)
----------------- ---- -------- ----- ------------ ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephan Isenschmid, 1999 $129,654 -0- -0- -0- 7,000 $12,000
President and CEO 1998 135,983 -0- -0- -0- 56,000 12,000
1997 106,922(2) -0- -0- -0- -0- -0-
Adrian Knapp, 1999 $103,723 -0- -0- -0- 7,000 $12,000
Chairman and 1998 108,787 -0- -0- -0- 56,000 12,000
Executive Vice 1997 106,922(2) -0- -0- -0- -0- -0-
President
Markus Bernhard, 1999 $ 90,226 -0- -0- -0- 7,000 $12,000
Chief Financial 1998 85,321 -0- -0- -0- 18,500 -0-
Officer(3) 1997 19,405 -0- -0- -0- -0- -0-
</TABLE>
- --------
(1) Represents a car allowance of $1,000 per month.
(2) One-half of 1997 compensation represent fees paid to consulting firms
controlled by Messrs. Isenschmid and Knapp for the services rendered by
them to COPE.
(3) Mr. Bernhard has served as Chief Financial Officer of COPE since September
1997.
34
<PAGE>
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------
Number of Securities
Underlying % of Total Options/SARs Exercise or
Options/SARs Granted Granted to Employees in Base Price
Name (#) Fiscal Year ($/Sh) Expiration Date
---- -------------------- ----------------------- ----------- ---------------
<S> <C> <C> <C> <C>
Stephan Isenschmid, 3,500 (2) 1.6% 22.00 9/30/01
President and CEO, 3,500 (2) 1.6% 22.00 9/30/03
Adrian Knapp, Chairman and
Executive Vice President, and
Markus Bernhard, CFO(1)
</TABLE>
- --------
(1) Mr. Isenschmid, Mr. Knapp and Mr. Bernhard 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 May 1, 2001.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised In-
Unexercised the-Money
Options/SARs at Options/SARs at
FY-End (#) FY-End ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable(1)
---- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Stephan Isenschmid,
President and CEO 5,000 $ 85,800 0/58,000 $0/$479,060
Adrian Knapp, Chairman
and Executive
Vice President 5,000 $ 85,800 0/58,000 $0/$479,060
Markus Bernhard, CFO 6,500 $135,350 0/19,000 $0/$156,230
</TABLE>
- --------
(1) Calculated based upon a last reported sale price of $23.875 per share of
our common stock, as reported on the OTC Bulletin Board on December 31,
1999.
Director Compensation
All directors receive reimbursement for out-of-pocket expenses in attending
Board of Directors meetings. From time to time COPE may engage certain members
of the board of directors to perform services on its behalf. In these cases,
COPE compensates the members for their services at rates no more favorable than
could be obtained from unaffiliated parties. None of the non-officer directors,
Markus Stalder, Peter Koch, or Kevin DeVito, receive compensation for serving
as directors.
Transactions Involving Officers, Directors and Principal Shareholders
Markus Stalder, a member of COPE's board of directors, is also a member of
the law firm of Stalder & Murer, COPE's general counsel since 1991. In 1998,
1997 and 1996, COPE paid legal fees to Stalder & Murer in the amount of
approximately $50,000, $30,000 and $20,000, respectively.
As described in the section "COPE" on page 17, in September 1998 the
predecessor management of COPE completed a series of transactions by which COPE
discontinued all operations and divested itself of substantially all of its
assets and liabilities relating to the development and marketing of health,
fitness and medical products. Kevin DeVito, one of COPE's current directors,
was the President and a director of COPE prior to its acquisition of COPE
Holding AG.
35
<PAGE>
In October 1999, COPE entered into a borrowing agreement with its Chairman,
Adrian Knapp, to borrow up to CHF 1,200,000. The note bears interest at the
rate of 8.5% per annum. COPE intends to repay this note from the proceeds of
this offering.
Indemnification of Directors
As permitted by Section 145 of the Delaware General Corporation Law, COPE'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, COPE's bylaws provide that it may, in its
discretion, indemnify its directors, officers, employees and agents and persons
serving in these capacities in other business enterprises at its request, to
the fullest extent permitted by Delaware law. COPE's bylaws also allow it
to advance expenses, as incurred, to its directors and officers in connection
with defending a proceeding.
COPE'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 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 U.S. federal securities laws. However, COPE is aware that in
the opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed under the U.S. federal securities laws and
is therefore unenforceable.
36
<PAGE>
PRINCIPAL STOCKHOLDERS AND BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of our common stock as of January 14, 2000, and as adjusted to
reflect the sale of shares of common stock offered in this offering by:
. each person known by COPE to be the beneficial owner of five percent (5%)
or more of the common stock;
. each of COPE's directors and executive officers; and
. all directors and executive officers as a group.
The table assumes that there are 3,405,423 shares of common stock issued and
outstanding prior to the offering and that there will be 4,205,423 shares of
common stock issued and outstanding after the offering. Unless otherwise
indicated, the persons named in the table have sole voting and sole investment
power over all shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Prior to this After this
Offering Offering(10)
-------------------- -----------------
Name and Address Number Percent Number Percent
---------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Adrian Knapp(1)(2)............... 1,310,000(2) 38.4% 1,310,000 31.0%
Stephan Isenschmid(1)(2)......... 1,310,000(2) 38.4% 1,310,000 31.0%
Markus Bernhard(1)(3)............ 9,600(3) (4) 9,600 (4)
Markus Stalder(1)(5)............. -- -- -- --
Peter Koch(1)(5)................. 16,000 (4) 16,000 (4)
Kevin DeVito(6)(7)............... 870 (4) 870 (4)
Uwe Hinrichs(8)(9)............... 220,000 6.5% 220,000 5.2%
All officers and directors as a
group........................... 2,646,470 77.2% 2,646,470 62.6%
</TABLE>
- --------
(1) Address is Grundstrasse 14, 6343 Rotkreuz, Switzerland.
(2) Includes 9,000 shares of common stock underlying options which first
become exercisable within 60 days of January 14, 2000. Does not include
49,000 shares of common stock underlying options that are subject to
vesting.
(3) Includes 3,100 shares of common stock underlying options which first
become exercisable within 60 days of January 14, 2000. Does not include
15,900 shares of common stock underlying options that are subject to
vesting.
(4) Less than one percent.
(5) Does not include 1,400 shares of common stock underlying options that are
subject to vesting.
(6) Address is 360 North Sepulveda Blvd., # 3050, El Segundo, California
90245.
(7) Does not include 4,000 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.
(10) Gives no effect to the exercise of the overallotment option. In the event
the over-allotment option is exercised in full, Stephan Isenschmid will
own 1,260,000 shares (29.9%), Uwe Hinrichs will own 170,000 shares (4.0%)
and all officers and directors as a group will own 2,596,470 shares
(61.4%).
37
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
COPE is authorized to issue 30,000,000 shares of common stock ($.001 par
value per share), of which, as of January 14, 2000, 3,405,423 shares were
issued and outstanding and held by 369 recordholders. As of the date of this
Prospectus, there are no outstanding options, warrants or other securities
which upon exercise or conversion entitle their holder to acquire shares of
common stock, except as set forth below.
Holders of shares of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders generally. The approval of
proposals submitted to stockholders at a meeting other than for the election of
directors requires the favorable vote of a majority of the shares voting,
except in the case of fundamental matters, including amendments to the
Certificate of Incorporation, and mergers and reorganizations, in which cases
Delaware law and COPE's bylaws require the favorable vote of at least a
majority of all outstanding shares. Stockholders are entitled to receive
dividends that may be declared from time to time by the board of directors out
of funds legally available for the payment of dividends, and in the event of
liquidation, dissolution or winding up, to share proportionally in all assets
remaining after payment of liabilities. The holders of shares of common stock
have no preemptive, conversion, subscription or cumulative voting rights.
Stock Option Plan
COPE has adopted a 1998 Stock Option Plan, which permits COPE to grant
options to its employees, officers, directors, consultants and independent
contractors. COPE may issue an aggregate of 400,000 shares of common stock
under the 1998 Stock Option Plan. The 1998 Stock Option Plan is governed by the
board of directors, which has the power to determine the terms of any options
granted, including the exercise price, the number of shares subject to the
option, and the exercisability of the options. Options under the 1998 Stock
Option Plan generally are not transferrable, and each option is exercisable
during the lifetime of the optionee only by the optionee. Stock options can be
exercised at any time before expiration after they are vested.
As of the date of this prospectus, COPE has granted under the 1998 Stock
Option Plan options to purchase an aggregate of 380,200 shares of common stock
to its employees, officers, directors and consultants. The options outstanding
as of January 14, 2000 have exercise prices ranging from $8.40 to $50.00 per
share with a weighted average exercise price of $17.30 per share. Options to
purchase 22,390 shares were exercised on April 30, 1999 at an exercise price of
$8.40 per share. Options to purchase 4,500 shares were exercised in November
1999 at exercise prices ranging from $13.00 to $15.00 per share. The
outstanding options have terms expiring between March 31, 2000 and December 31,
2008.
The purpose of the 1998 Stock Option Plan is to strengthen COPE by providing
to its employees, officers, directors, consultants and independent contractors
added incentive for high levels of performance and unusual efforts to increase
earnings. The plan seeks to accomplish this purpose by enabling these persons
to purchase common stock thereby increasing their proprietary interest in
COPE's success and encouraging them to remain in the employ or service of COPE.
Once their relationship with COPE is terminated, all options held by the holder
also terminate. Options are granted for a period of one to ten years. The board
of directors can modify or terminate the existing plan or determine not to
grant any further options, however, changes that adversely affect the rights of
the option holders can not be made without the consent of the option holders.
Warrants
As of January 14, 2000, COPE had issued warrants to purchase an aggregate of
24,621 shares of common stock at an exercise price of $7.54 per share. Warrants
to purchase 5,172 shares were exercised in November 1999 at an exercise price
of $7.54 per share.
Dividends
COPE has no immediate plans to pay cash dividends on its common stock. See,
"Dividend Policy."
Transfer Agent and Registrar
The Transfer Agent and Registrar for COPE's common stock is Interwest
Transfer Co., Inc., 1981 E. Murray Holladay Road, Salt Lake City, Utah 84114.
38
<PAGE>
ANTI-TAKEOVER PROVISIONS
General
The Delaware General Corporation Law and COPE's certificate of incorporation
and bylaws contain provisions which could have the effect of delaying,
deterring or preventing a future takeover or change in control of COPE, unless
the takeover or change in control is approved by COPE's board of directors.
These provisions also may render the removal of directors and management more
difficult. As a result, these provisions could limit the price that investors
might be willing to pay in the future for shares of the common stock. These
provisions of Delaware law and COPE's certificate of incorporation and bylaws
also may have the effect of discouraging or preventing transactions that
involve an actual or threatened change of control of COPE, even though these
transactions may offer COPE's stockholders the opportunity to sell their stock
at a price above the prevailing market price.
Certificate Of Incorporation And Bylaws
COPE's certificate of incorporation and bylaws contain provisions that could
have the effect of discouraging potential acquisition proposals or delaying or
preventing a change of control of COPE. In particular, the certificate of
incorporation does not include a provision for cumulative voting in the
election of directors. Under cumulative voting, a minority stockholder holding
a sufficient number of shares may be able to ensure the election of one or more
directors. The absence of cumulative voting may have the effect of limiting the
ability of minority stockholders to effect changes in the board of directors
and, as a result, may have the effect of deterring a hostile takeover or
delaying or preventing changes in control or management of COPE.
COPE's certificate of incorporation also provides that newly created
directorships resulting from any increase in the number of directors and any
vacancies on the board of directors will be filled by the affirmative vote of a
majority of the remaining directors then in office, although less than a quorum
and not by the stockholders unless authorized by the board of directors at a
special meeting of the stockholders.
The certificate of incorporation allows COPE to issue up to 5,000,000 shares
of undesignated preferred stock with rights senior to those of the common stock
and that otherwise could adversely affect the interests of holders of common
stock. COPE has not issued any shares of preferred stock as of this date.
However, the issuance of shares of preferred stock could decrease the amount of
earnings or assets available for distribution to the holders of common stock or
could adversely affect the rights and powers, including voting rights, of the
holders of common stock. The preferred stock can also be convertible into
common stock at a discount to the market price, which would have the effect of
decreasing the market price of the common stock, as well as having the anti-
takeover effect discussed above.
COPE's certificate of incorporation allows the bylaws of COPE to be altered
or repealed and new bylaws to be adopted either:
. at any annual or special meeting of stockholders, by the affirmative vote
of a majority of the voting stock, provided that in the case of any
stockholder action at a special meeting of stockholders, notice of the
proposed alteration, repeal or adoption of any bylaws must be contained
in the notice of the special meeting; or
. by the vote of a majority of the total number of directors which the
board of directors of COPE would have if there were no vacancies.
These provisions are designed to reduce the vulnerability of COPE to an
unsolicited acquisition proposal and to discourage tactics that may be used in
proxy fights designed to effect a hostile change in control. These provisions
could have the effect of discouraging others from making tender offers for
COPE's shares and may inhibit fluctuations in the market price of COPE's shares
that could otherwise result from actual or rumored takeover attempts. These
provisions also may have the effect of preventing changes in the management of
COPE.
39
<PAGE>
Delaware Takeover Statute
Section 203 of the Delaware Code prohibits a Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the date that the stockholder became an
interested stockholder. The exceptions to that rule are as follows:
. prior to the date of the business combination, the board of directors of
the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines business combinations to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested
stockholder, subject to the five exceptions enumerated in that section;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
German Takeover Code
In connection with its listing on the Neuer Markt of the Frankfurt Stock
Exchange, COPE is required to comply with the German Takeover Code. The German
takeover code regulates merger and acquisitions by public companies, and
requires that companies making an offer to a target company: notify the German
regulatory authorities and the public of the offer, disclose the terms of the
offer to the target company's stockholders, treat stockholders equally in an
offer, and comply with other regulatory requirements. In addition, the rights
of COPE's stockholders under the German law differ from rights afforded to
stockholders under the United States federal and state laws governing tender
offers and takeovers. German regulatory authorities are given broad authority
to interpret German law and to review and regulate specific merger and
acquisitions. Compliance with German law could have the effect of delaying,
deferring or preventing a tender offer or takeover, notwithstanding that the
tender offer or takeover might result in stockholders receiving a premium over
the market price for their shares.
40
<PAGE>
BOOK-ENTRY-ONLY ISSUANCE OF COMMON STOCK TRADING
ON GERMAN STOCK EXCHANGES
The shares of common stock offered by this prospectus will trade on the
Neuer Markt of the Frankfurt Stock Exchange (when approved for listing) and on
the Freiverkehr of German Stock Exchanges only through book entry transfers of
interests therein held through Clearstream Banking AG. Any investor who has an
actual certificate representing shares of common stock who desires to sell
shares of common stock on a German Exchange will be required to deposit the
certificate with the Depository Trust Company for credit to Clearstream
Banking's account as described below, which transfer will be reflected on the
books and records of Clearstream Banking. Certificates representing shares of
common stock held through Clearstream Banking will not be issued unless the
shares are withdrawn from Clearstream Banking in which case the shares will not
be eligible to trade on a German Exchange unless redeposited as described
above. Clearstream Banking will hold shares of common stock through its account
with Depository Trust Company. Depository Trust, or its nominee, will be the
registered owner of all shares of common stock that are held by investors
through Clearstream Banking.
Beneficial owners of common stock held through Clearstream Banking will
receive confirmations and statements of their holdings from Clearstream Banking
through their brokers or other financial institutions that are Clearstream
Banking participants. Clearstream Banking will register all transfers of the
common stock between Clearstream Banking participants on its books and records
through its book-entry system. Shares of common stock held by Depository Trust
will be registered in the name of its nominee, Cede & Co.
Any dividend or other payments on common stock held through Clearstream
Banking will be made by COPE to Cede & Co., as nominee of Depository Trust.
Depository Trust, upon receipt of these payments, will credit Clearstream
Banking's account at Depository Trust for the amount of these payments.
Payments by Clearstream Banking to the beneficial owners of common stock will
be governed by standing instructions and Clearstream Banking's customary
practices, subject to any statutory or regulatory requirements as may be in
effect from time to time. If requested, the dividends will be converted into
German Marks or Euros, if applicable, and distributed by Clearstream Banking.
The underwriter will act as paying and depository agent in this case.
TAXATION
Material Tax Consequences Under German Laws
The following discussion is a summary of the material anticipated tax
consequences of an investment in the common stock under German tax laws. The
discussion does not deal with all possible tax consequences relating to an
investment in the common stock. In particular, the discussion does not address
the tax consequences under state, local, and other (e.g. non-German) tax laws,
nor does it address special circumstances of any individual investor. The
discussion is limited to the taxation of dividends, capital gains, income,
gifts and inheritance under German law, and does not address all aspects of
German taxation. The discussion does not consider any specific facts or
circumstances that may apply to a particular purchaser. In particular, this
discussion does not comprehensively treat the tax considerations that will be
relevant to prospective investors who reside outside Germany. Accordingly, each
prospective investor should consult its tax advisor regarding the tax
consequences of an investment in the common stock. The discussion is based on
the tax laws of the Federal Republic of Germany as in effect on the date of
this prospectus, which are subject to change, possibly with retroactive effect,
in particular concerning proposed or anticipated changes which may result from
action by the German government. Thus, the following summary is for
illustrative purposes only and not to be relied upon. In addition, COPE has
undertaken no obligation to update this discussion for changes in facts or laws
occurring subsequent to the date of this prospectus. Further, any variation or
differences from the facts or representations recited in this prospectus, for
any reason, might affect the following discussion, perhaps in an adverse
manner, and render this discussion inapplicable.
41
<PAGE>
Taxation of Dividends. The following dividends on the common stock are
subject to German income or corporate taxes at regular German tax rates:
. dividends paid to stockholders that are natural persons having a
residence or his or her habitual abode in Germany;
. to corporations that maintain their statutory seat or principal place of
management in Germany; or
. dividends attributable to a permanent establishment maintained by, or a
fixed base regularly available to, a stockholder who is otherwise not
deemed to be a German resident.
These dividend payments also are subject to a surcharge equal to 5.5% of the
otherwise applicable German income or corporate income tax liability.
German residents who are natural persons may claim a tax allowance for
income derived from capital investments of DM 6,000 (DM 12,000 in the case of
married couples filing joint returns). This allowance will be reduced to DM
3,000/DM 6,000 beginning in the year 2000.
German residents who are natural persons may deduct from dividend income the
expenses associated with the acquisition, safeguarding, or maintaining of the
common stock, including fees for custodian and re-financing costs. Without
supporting documents, expenses in the amount of DM 100, or DM 200 in the case
of married couples filing joint returns, are deductible for tax purposes from
this dividend income.
The United States imposes a withholding tax of 15% of the gross amount of
dividends paid to a German investor. The double taxation treaty between the
United States and Germany reduces this withholding tax to 5% of the gross
amount of the dividends if the beneficial owner is a company that holds
directly at least 10% of the voting shares of the company paying the dividends.
The withholding tax can be credited against the part of the German income tax
attributable to the dividend income. If, however, the German income tax
attributable to the dividends is lower than the withholding tax because of a
deduction of expenses (including, but not limited to refinancing costs) from
the dividends, withholding taxes can only be credited against German income
taxes up to an amount of German income tax attributable to the dividend income.
Instead of taking a credit for the withholding tax, the German holder can apply
for a deduction of the withholding tax from his or her taxable income.
Dividend income is tax-exempt in Germany if a German holder, such as a
corporation, holds for a minimum of twelve months prior to the fiscal year end,
at least 10% of the nominal share capital of the company which declares the
dividend and which has its seat outside of Germany. For tax exempt dividends
paid beginning in 1999, an amount equal to 15% of the tax free gross dividend
is considered for the corporate income tax purposes of the German corporate
holder to be non-deductible expenses in connection with the tax-free dividend.
If, however, the tax-exempt dividend derived by a corporate German holder is
distributed to a German holder who is a natural person, the distribution is
taxable on the personal level of this holder.
Capital Gains. Capital gains from the sale of the common stock are not
subject to taxes in Germany, unless:
. the gains are attributable to a permanent establishment maintained by, or
a fixed base regularly available to, a stockholder who is otherwise not
deemed to be a German resident;
. the stockholder is a corporate entity that is a German resident or the
common stock was held by the German resident as a business asset,
. the stockholder is a natural person and a German resident that holds or
has held at any time during a period of five years before the disposal
directly or indirectly 10% or more of the share capital in his private
property; or
. the stockholder is a natural person and a German resident and the time
period between the acquisition and the disposal of the common stock does
not exceed one year and the common stock does not qualify as a business
asset.
42
<PAGE>
Inheritance and Gift Tax. Under German law, a German gift or inheritance tax
is imposed on transfers of common stock by gift or at death if the donor or
transferor, or the heir, donee, or other beneficiaries, are German residents
within the meaning of Section 2 of the German Inheritance Tax Act.
Other German Taxes. There does not appear to be German transfer, stamp, or
other similar taxes that apply on the sale or transfer of shares of common
stock.
Material United States Federal Income Tax Consequences To Non-United States
Holders
The following is a general discussion of all expected material United States
federal income and estate tax consequences of the ownership and disposition of
common stock by a non-U.S. holder. As used in this prospectus, the term "non-
U.S. holder" is defined as any person or entity that is, for United States
federal income tax purposes, a foreign corporation, a non-resident alien
individual, a foreign partnership, or a non-resident fiduciary of a foreign
estate or trust. This discussion is based on currently existing provisions of
the Internal Revenue Code of 1986, existing, final, temporary, and proposed
treasury regulations based on the U.S. tax code, and administrative and
judicial interpretations of these regulations. This discussion is based on the
U.S. tax code, the regulations and the interpretations in effect or proposed on
the date of this prospectus all of which are subject to change, possibly with
retroactive effect, or different interpretations. This discussion is limited to
non-U.S. holders who hold shares of common stock as capital assets within the
meaning of Section 1221 of the U.S. tax code. Moreover, this discussion is for
general information only and does not address all of the tax consequences that
may be relevant to particular non-U.S. holders in light of their personal
circumstances, nor does it discuss certain tax provisions which may apply to
individuals who relinquish their U.S. citizenship or residence.
An alien individual may be considered a resident alien by virtue of being
present in the United States for at least 31 days in the current calendar year
and for an aggregate of at least 183 days during a three-year period ending in
the current calendar year. In calculating an alien's presence in the United
States during a three-year period, all of the days present in the current year
are counted, one-third of the days present in the immediately preceding year
are counted, and one-sixth of the days present in the second preceding year are
counted. An alien who holds a "green card" is a U.S. resident for income tax
purposes for the entire part of the year that he holds the card. Resident
aliens are subject to U.S. federal income taxes as if they were U.S. citizens.
Each prospective purchaser of common stock should consult with a tax advisor
regarding current and possible future tax consequences of acquiring, holding,
and disposing of common stock, as well as any tax consequences that may arise
under the laws of any U.S. federal, state, municipality, or other taxing
jurisdiction.
Dividends. If dividends are paid on shares of common stock to a non-U.S.
holder, they will be subject to withholding of United States federal income
taxes at a rate of 30%, unless a treaty between the United States and the
country of residence of the stockholder specifies a lower rate. However, the
dividends are not subject to withholding tax, but instead are subject to United
States federal income taxes on a net basis at the applicable individual or
corporate rate if:
. the dividends are effectively connected with the conduct of a trade or
business by the non-U.S. holder within the United States and, where a tax
treaty applies, are attributable to a United States permanent
establishment of the non-U.S. holder; and
. an Internal Revenue Service Form 4224 or successor form is filed with the
payor.
However, any of these dividends that are received by a foreign corporation
may be subject to an additional "branch profits tax" at a rate 30%, unless a
treaty covering these dividends provides for a lower rate.
Dividends paid to an address in a country outside the United States are
presumed to be paid to a resident of that country for purposes of the
withholding discussed above and for purposes of determining the applicability
of the tax treaty rate. However, recently finalized Treasury regulations
pertaining to United States
43
<PAGE>
federal withholding tax, scheduled to take effect for payments made after
December 31, 2000, provide that a non-U.S. holder must comply with
certification procedures, directly or through an intermediary, to obtain the
benefits of a reduced rate under a treaty that provides for a lower tax rate.
In addition, a non-U.S. holder who is an offshore account must provide
documentary evidence that they are not a U.S. resident to obtain the benefits
of a treaty that provides for a lower tax rate. In addition, the withholding
tax regulations will require a non-U.S. holder who provides an IRS form 4224 or
successor form (as discussed above) also to provide its U.S. taxpayer
identification number.
A non-U.S. holder of common stock eligible for a reduced rate of United
States withholding taxes based on an income tax treaty may obtain a refund of
any excess amount withheld by filing an appropriate claim for refund with the
IRS.
Gain on Disposition of Common Stock. A non-U.S. holder will not be subject
to United States federal income taxes for any gain recognized on the sale or
other disposition of common stock unless:
. the gain is effectively connected with the conduct of a trade or business
of the non-U.S. holder in the United States and, where a tax treaty
applies, is attributable to a United States permanent establishment of
the non-U.S. holder; or
. the company is or has been a U.S. Real Property Holding Corporation for
United States federal income tax purposes, as described below.
An individual non-U.S. holder who falls within the first clause above will,
unless an applicable treaty provides otherwise, be taxed on his or her net gain
derived from the sale under regular United States federal income tax rates. An
individual non-U.S. holder who falls under clause the second above will be
subject to taxation in accordance with the special rules regarding the sale or
other disposition of a U.S. Real Property Interest.
A non-U.S. holder that is a foreign corporation engaged in a trade or
business in the United States may be taxed on its gain under regular United
States federal income tax rates and may be subject to an additional branch
profits tax equal to 30% of its effectively connected earnings and profits
within the meaning of the tax code for the taxable year unless an income tax
treaty allows it to qualify for a lower rate.
A corporation is a real property holding company if the fair market value of
the U.S. real property interests held by the corporation is 50% or more of the
aggregate fair market value of its U.S. and foreign real property interests and
any other assets used or held for use by the corporation in a trade or
business. Based on its current and anticipated assets, COPE believes that it
currently is not and is not likely to become a real property holding company.
However, since the determination of real property holding company status is
based upon the composition of the assets of COPE from time to time, and because
there are uncertainties in the application of the relevant rules, there can be
no assurance that COPE will not become a real property holding company. If COPE
were to become a real property holding company, then gains on the sale or other
disposition of common stock by a non-U.S. holder would be subject to U.S.
federal income taxes unless both the common stock was "regularly traded" on an
established securities market, and the non-U.S. holder actually or
constructively owned 5% or less of the common stock. Non-U.S. holders should
consult their tax advisors concerning any U.S. tax consequences that may arise
if COPE were to become a real property holding company.
Federal Estate Tax. Common stock held by an individual non-U.S. holder at
the time of death will be included in the holder's gross estate for United
States federal and state tax purposes, unless an applicable estate tax treaty
provides otherwise.
Information Reporting and Back Up Withholding Tax. Under treasury
regulations, COPE must report annually to the IRS and to each non-U.S. holder
the amount of dividends paid to these holders and the amount of any tax
withheld regarding these dividends, regardless of whether withholding was
required. Copies of the
44
<PAGE>
information returns reporting these dividends and withholding also may be made
available to the tax authorities in the country in which the non-U.S. holder
resides.
A back-up withholding tax is imposed at the rate of 31% on payments to
persons that fail to furnish identifying information to the payor. Back-up
withholding will not apply to dividends paid to a non-U.S. holder at an address
outside the United States unless the payor has knowledge that the payee is a
U.S. person. However, in the case of dividends paid after December 31, 2000,
the non-U.S. holder must comply with certification procedures, directly or
though an intermediary, to obtain the benefits of a reduced rate under a treaty
that provides for a lower tax rate. In addition, a non-U.S. holder who is an
offshore account must provide documentary evidence that they are not a U.S.
resident to obtain the benefits of a treaty that provides for a lower tax rate.
Back-up withholding and information reporting will also apply to dividends paid
on common stock at addresses inside the United States to non-U.S. holders that
fail to provide identifying information in the manner required. In these cases,
a non-U.S. holder would be subject to back-up withholding and information
reporting unless COPE receives certification from the holder of its non-U.S.
status.
Payment of the proceeds of the sale of common stock by or through a United
States office of a broker is subject to both back-up withholding and
information reporting unless the beneficial owner provides the payor with its
name and address and certifies under penalties of perjury that it is a non-U.S.
holder, or otherwise establishes an exemption. Back-up withholding and
information reporting will not apply to a payment of the proceeds of a sale of
common stock by or through a foreign office of a broker. If, however, the
broker is, for United States federal income tax purposes, a U.S. person, a
controlled foreign corporation, or a foreign person that derives 50% or more of
its gross income from the conduct of a trade or business in the United States,
these payments will be subject to information reporting, but no back-up
withholding, unless the broker has documentary evidence in its records that the
beneficial owner is a non-U.S. holder or the beneficial owner otherwise
establishes an exemption. After December 31, 2000, the same rules shall apply
to a foreign partnership that at any time during its fiscal year either is
engaged in the conduct of a trade or business in the United States, or has as
partners one or more U.S. persons that, in the aggregate, hold more than 50% of
the income or capital interest in the partnership.
A holder will be allowed a refund or a credit against the holder's U.S.
federal income tax liability for any amounts withheld under the back-up
withholding rules, provided the required information is furnished in a timely
manner to the IRS.
45
<PAGE>
UNDERWRITER
Subject to the conditions contained in an underwriting agreement, NORD/LB
has agreed to purchase 800,000 shares of common stock from COPE. The shares
will be purchased at the offering price set forth on the cover page of this
prospectus, less underwriting commissions and fees. The bookbuilding period is
intended to be conducted for a period of three days (February 7 to February 9,
2000), but may be reduced by NORD/LB, in its reasonable discretion in agreement
with COPE. The number of shares of common stock that NORD/LB has agreed to
purchase and acquire is set forth opposite its name below:
<TABLE>
<CAPTION>
Number
Name of shares
---- ---------
<S> <C>
NORD/LB.......................................................... 800,000
</TABLE>
In the underwriting agreement, our Chief Executive Officer, Stephan
Isenschmid, and one of our major existing stockholders, Uwe Hinrichs, granted
to NORD/LB an overallotment option exercisable for thirty (30) calendar days
from the first day of listing of the shares at the Frankfurt Stock Exchange,
"Neuer Markt" up to an aggregate amount of 100,000 additional shares of common
stock at the offering price set forth on the cover page of this prospectus,
less underwriting commissions. NORD/LB may exercise this option for the purpose
of covering over-allotments, if any, made in connection with this secondary
public offering of shares of common stock. If this option is exercised, NORD/LB
will become obligated, subject to the terms of the underwriting agreement, to
acquire and purchase the number of shares of common stock as specified by the
representative.
Of the 800,000 shares of common stock issued by COPE, up to 5% of these
shares of common stock shall be allocated on a preferential basis by the
underwriters to persons designated by COPE. COPE intends to make these shares
available to its employees, vendors and shareholders. As a result, the number
of shares of common stock available for sale to the public will be reduced
accordingly.
Our major existing shareholders, Adrian Knapp, Stephan Isenschmid and Uwe
Hinrichs, are subject to an agreement with us and we are subject to an
agreement with Deutsche Borse AG and NORD/LB that limit their and our ability
to sell shares of common stock. COPE and its major existing shareholders are
obligated to refrain, during a period of six months from the date of admission
of the shares to the Frankfurt Stock Exchange, Neuer Markt, from offering or
selling shares directly or indirectly or taking other actions economically
equivalent to a sale. Deutsche Borse AG may exempt COPE or its major existing
shareholders from these requirements upon request from COPE. The restrictions
described in this paragraph do not apply to the sale of the shares that are
subject to the overallotment option.
COPE has submitted an application to have its shares of common stock
approved for quotation on the Nasdaq National Market System under the symbol
"COPE" and has submitted an application to have its shares of common stock
admitted to the Regulated Market ("Geregelter Markt"), with listing of these
shares at the "Neuer Markt". Additionally, COPE has filed a Registration
Statement (SB-2) for declaration of effectiveness with the Securities and
Exchange Commission.
In order to facilitate the secondary public offering, NORD/LB will take the
stabilising measures, in agreement with COPE, that are deemed to be necessary
in order to stabilise, maintain or otherwise affect the price of the common
stock. Additionally, NORD/LB, and Landesbank Rheinland Pfalz will be available
as designated sponsors for the Frankfurt Stock Exchange, "Neuer Markt" for the
period of at least one year.
46
<PAGE>
COPE, Adrian Knapp and Stephan Isenschmid have agreed to indemnify the
underwriter and each other against certain liabilities, as specified in the
underwriting agreement including liabilities under the U.S. federal securities
laws and liabilities arising from breaches of representations and warranties
contained in the underwriting agreement.
In July 1999, COPE entered into a borrowing agreement with NORD/LB pursuant
to which COPE borrowed DEM 1,825,000 ($1,002,700) from NORD/LB. The loan bears
interest at the rate of 6% per annum. All principal and interest is due and
payable no later than February 29, 2000. COPE intends to repay the loan from
the proceeds of this offering.
In October 1999, COPE entered into a second borrowing agreement with NORD/LB
pursuant to which COPE borrowed DEM 2,500,000 ($1,373,600) from NORD/LB. The
loan also bears interest at the rate of 6% per annum. All principal and
interest is due and payable no later than February 29, 2000. COPE intends to
repay the loan from the proceeds of this offering.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Based on the shares of common stock outstanding as of January 14, 2000,
without giving effect to the exercise of the overallotment option, on
completion of this offering we will have 4,205,423 shares of common stock
outstanding. The 800,000 shares sold in this offering, which would be 900,000
shares if NORD/LB's option to purchase additional shares is exercised in full,
will be freely tradable without restriction or further registration under the
U.S. federal securities laws unless purchased by our "affiliates" as that term
is defined in Rule 144. Of the remaining shares, approximately 2,782,459 shares
of common stock outstanding on completion of this offering will be "restricted
securities" as that term is defined in Rule 144.
Our major existing shareholders, Adrian Knapp, Stephan Isenschmid, and Uwe
Hinrichs, are subject to an agreement with us and we are subject to an
agreement with Deutsche Borse AG and NORD/LB that limits their and our ability
to sell shares of common stock. Our major existing shareholders and we are
obligated to refrain, during a period of six months from the date of admission
of the shares to the Frankfurt Stock Exchange, Neuer Markt, from offering or
selling shares directly or indirectly or taking other actions economically
equivalent to a sale. Deutsche Borse AG may exempt our major existing
shareholders or us from these requirements upon our request.
Prior to the offering, there has only been a limited market for the common
stock in the United States and Germany and no predictions can be made about the
effect, if any, that market sales of common stock or the availability of the
shares for sale will have on the market price prevailing from time to time.
Nevertheless, the actual sale of, or the perceived potential for the sale of,
common stock in the public market may have an adverse effect on the price of
the common stock.
LEGAL MATTERS
Our counsel, Oppenheimer Wolff & Donnelly LLP, Newport Beach, California,
will give an opinion that the shares of common stock covered by this prospectus
are valid. Hale and Dorr LLP, Boston, Massachusetts, has acted as counsel to
the underwriter in connection with this offering.
EXPERTS
ATAG Ernst & Young Ltd., Badenerstrasse 47, CH-8004, Zurich, Switzerland,
independent auditors, have audited our consolidated financial statements at
December 31, 1998, 1997 and 1996 and for each of the three years ended December
31, 1998 as set forth in their report. We have included our financial
statements in the prospectus and elsewhere in the registration statement in
reliance on ATAG Ernst & Young Ltd.'s report, given on their authority as
experts in accounting and auditing.
Prior to the COPE Reorganization in August 1998, COPE's independent auditors
for the fiscal years ended June 30, 1998 and 1997 were Raimondo Pettit Group
(formerly Raimondo Pettit & Glassman) 21515 Hawthorne Boulevard, Suite 1250,
Torrance, California 90503. On March 18, 1999, the Board of Directors approved
the appointment of ATAG Ernst & Young Ltd., who had been the independent
auditors for COPE Holding AG for the fiscal years ended December 31, 1997, 1996
and 1995.
Raimondo Pettit Group's report on COPE, financial statements for the past
two years did not contain any adverse opinion or disclaimer of opinion, nor was
it qualified as to uncertainty, audit scope or accounting principles, except
that the firm's report for the fiscal year ended June 30, 1997 financial
statements included an explanatory paragraph relating to substantial doubt
existing about COPE's ability to continue as a going concern. COPE has had no
disagreements with Raimondo Pettit Group during the past two years and the
subsequent interim period preceding this dismissal on any matter of accounting
principles or practices, financial statement disclosure, or audit scope or
procedure, which disagreement(s), if not resolved to the satisfaction of
Raimondo Pettit Group, would have caused it to make a reference to the subject
matter of the disagreement(s) in connection with its reports.
48
<PAGE>
Ernst & Young Deutsche Allgemeine Treuhand AG (formerly Schitag Ernst &
Young), Herrengraben 3, 20431 Hamburg, Germany, independent auditors, have
audited the financial statements of Hicomp Software Systems GmbH at December
31, 1998 and 1997 and for each of the two years ended December 31, 1998 as set
forth in their report. We have included Hicomp's financial statement in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young Deutsche Allgemeine Treuhand AG's report, given on their authority as
experts in accounting and auditing.
Ernst & Young Deutsche Allgemeine Treuhand AG, Marsstrasse 22, 80335 Munich,
Germany, independent auditors, have audited the statements of operations of
Forum GmbH for the period from January 1, 1998 to June 24, 1998 and for the
year ended December 31, 1997 as set forth in their report. We have included
Forum's statements of operations in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young Deutsche Allgemeine
Treuhand AG's report, given on their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
COPE is subject to the informational requirements of the U.S. federal
securities laws and, in accordance therewith, files reports, proxy statements
and other information with the Securities and Exchange Commission. COPE's
reports, proxy statements and other information filed under the U.S. federal
securities laws may be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of the material can also be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission's Web site is
http://www.sec.gov. Moreover, all the documents relating to COPE that are
referred to in this prospectus may be inspected during normal business hours at
the registered offices of Norddeutsche Landesbank Girozendrale, Georgsplatz 1,
30159 Hannover, Germany.
COPE has filed with the Commission a Registration Statement on Form SB-2
under the U.S. federal securities laws relating to the common stock offered in
this prospectus. The registration statement, including the attached exhibits
and schedules, contains additional relevant information about COPE and its
capital stock. The rules and regulations of the Commission allow COPE to omit
certain information, exhibits, schedules and undertakings included in the
registration statement, from this document. Copies of the registration
statement and the exhibits are on file with the Commission and may be obtained
from the Commission's Web site or upon payment of the fee prescribed by the
Commission, or may be examined, without charge, at the offices of the
Commission set forth above. For further information, reference is made to the
registration statement and its exhibits.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following Financial Statements and Independent Auditors' Report thereon
are included in this prospectus on the pages indicated:
COPE, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Audited Financial Statements
Consolidated Balance Sheets as of December 31, 1998, 1997 and 1996...... F-3
Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996.......................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996................................. F-6
Notes to the Consolidated Financial Statements.......................... F-7
Unaudited Interim Condensed Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999.......... F-19
Condensed Consolidated Statements of Income for the nine month periods
ended September 30, 1999 and 1998...................................... F-20
Condensed Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1999 and 1998.............................. F-21
Notes to Condensed Consolidated Financial Statements.................... F-22
HICOMP SOFTWARE SYSTEMS GMBH
Report of Independent Auditors............................................ F-28
Audited Financial Statements
Balance Sheets as of December 31, 1998 and 1997......................... F-29
Statements of Income for the years ended December 31, 1998 and 1997..... F-30
Statements of Cash Flows for the Years Ended December 31, 1998 and
1997................................................................... F-31
Statements of Shareholders' Equity for the years ended December 31, 1998
and 1997............................................................... F-32
Notes to Financial Statements........................................... F-33
FORUM GMBH
Report of Independent Auditors............................................ F-38
Audited Financial Statements
Statements of Operations for the period January 1, 1998 to June 24 1998
and for the year ended December 31, 1997............................... F-39
Notes to Statements of Operations....................................... F-40
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Notes to Unaudited Pro Forma Consolidated Statements of Operations...... F-42
Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1998................................................ F-43
Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 1998........................................ F-44
</TABLE>
F-1
<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, 1997 and 1996, and the related consolidated statements
of income, shareholders' equity, and cash flows for each of the three 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, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three 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 August 27, 1999
F-2
<PAGE>
COPE, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in U.S. Dollars)
<TABLE>
<CAPTION>
December 31,
----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents.......... $ 1,303,114 $ 678,936 $ 262,047
Trade accounts receivable (net of
provision of $0, $0, and
$38,519).......................... 5,418,777 3,622,485 2,226,227
Inventories (net of provision of
$89,445, $0 and $0)............... 2,433,790 1,383,191 981,941
Other current assets............... Note 5 450,013 318,182 171,647
----------- ---------- ----------
Total current assets........... 9,605,694 6,002,794 3,641,862
----------- ---------- ----------
Property, plant and equipment,
net............................... Note 6 751,235 570,475 267,627
Loans receivable from related
party............................. Note 13 635,700 355,161 0
Loans receivable, other............ Note 7 26,350 39,245 0
Goodwill (net of amortization of
$69,578, $1,757 and $1,217)....... Note 4 938,788 0 9,736
Intangible assets.................. 88,385 125,631 51,064
Deferred income taxes.............. Note 11 592,495 309,652 131,110
----------- ---------- ----------
3,032,953 1,400,164 459,537
----------- ---------- ----------
Total assets................... $12,638,647 $7,402,958 $4,101,399
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
-----------------------------
Current liabilities
Short-term borrowings.............. Note 8 $ 2,385,303 $ 661,982 $ 172,066
Trade accounts payable............. 5,650,422 3,027,118 2,116,029
Amounts due to related parties..... 0 97,984 190,048
Customer advances.................. 216,558 704,915 0
Other current liabilities.......... Note 10 802,384 389,639 395,029
Current income taxes payable....... 179,012 49,349 36,989
Deferred income taxes.............. Note 11 216,352 211,046 186,032
----------- ---------- ----------
Total current liabilities...... 9,450,031 5,142,033 3,096,193
----------- ---------- ----------
Commitments and contingent
liabilities....................... Note 15
Minority interest.................. 0 0 178
Shareholders' equity
Share capital:
Common stock, $0.001 par value
Authorized shares 30,000,000
(2,862,000 in 1997, 2,700,000 in
1996)
Issued and outstanding shares
3,152,861 (2,862,000 in 1997,
2,700,000 in 1996)............... 3,153 2,862 2,700
Additional paid in capital......... 506,031 767,785 73,636
Accumulated other comprehensive
income............................
Cumulative translation
adjustment...................... 31,852 (145,731) (74,420)
Retained earnings.................. 2,647,580 1,636,009 1,003,112
----------- ---------- ----------
Total shareholders' equity..... 3,188,616 2,260,925 1,005,028
----------- ---------- ----------
Total liabilities and
shareholders' equity.......... $12,638,647 $7,402,958 $4,101,399
=========== ========== ==========
</TABLE>
See notes to the consolidated financials statements
F-3
<PAGE>
COPE, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the Years December 31, 1998, 1997 and 1996
(Amounts in U.S. Dollars, except share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Net Revenue
Sales of solutions.................... $ 25,411,976 $ 16,605,175 $11,834,701
Sales of services..................... 3,647,174 1,310,996 680,422
------------ ------------ -----------
Total revenue......................... 29,059,150 17,916,171 12,515,123
Cost of sales......................... (20,281,131) (12,817,738) (8,829,711)
------------ ------------ -----------
Gross profit.......................... 8,778,019 5,098,433 3,685,412
------------ ------------ -----------
Operating expenses
Selling, general and administrative
expenses........................... (6,992,971) (4,205,093) (2,394,693)
Consultancy expenses................ (292,689) (131,723) (540,347)
Depreciation and amortization....... (336,936) (220,363) (340,145)
Impairment of intangible assets..... (63,004) 0 0
------------ ------------ -----------
Total operating expenses.............. (7,685,600) (4,557,179) (3,275,185)
------------ ------------ -----------
Operating income...................... 1,092,419 541,254 410,227
Other income (expense):
Interest expense.................... (127,028) (76,197) (63,940)
Interest income..................... 6,769 704 2,791
Interest income from related party.. 19,929 0 0
Other............................... 30,786 (270) (3,069)
Foreign exchange gain............... 3,326 38,716 12,408
------------ ------------ -----------
(66,218) (37,047) (51,810)
------------ ------------ -----------
Earnings before minority interests and
taxes................................ 1,026,201 504,207 358,417
Minority interests.................... 0 0 696
Current income taxes.................. (158,141) (34,076) (42,775)
Deferred income taxes................. 143,511 162,766 (515)
------------ ------------ -----------
Net income............................ $ 1,011,571 $ 632,897 $ 315,823
============ ============ ===========
Basic earnings per share.............. $ 0.34 $ 0.23 $ 0.12
Diluted earnings per share............ $ 0.34 $ 0.23 $ 0.12
Weighted average shares outstanding... 2,936,589 2,740,833 2,700,000
Dilutive effect of stock options...... 12,120 0 0
------------ ------------ -----------
Diluted average shares outstanding.... 2,948,709 2,740,833 2,700,000
------------ ------------ -----------
</TABLE>
See notes to the consolidated financials statements
F-4
<PAGE>
COPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
(Amounts in U.S. Dollars)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Cash flow provided by operating
activities
Net income............................... $ 1,011,571 $ 632,897 $ 315,823
Adjustment to reconcile net income to net
cash provided by operating activities
Depreciation........................... 224,375 219,823 260,938
Amortization........................... 175,565 540 1,217
Deferred income taxes.................. (143,511) (162,766) 515
Gain on disposal of fixed assets....... (2,284) 0 2,697
Minority interest share in negative
equity absorbed by parent............. 0 0 (696)
Effects of changes in operating assets
and liabilities excluding effects of
business acquired
Accounts receivable.................... 1,050,835 (1,530,889) (872,870)
Inventories............................ 144,251 (488,492) (176,839)
Other current assets................... 160,857 (226,326) (73,195)
Accounts payable....................... (2,009,336) 736,413 1,269,952
Customer advances...................... 0 704,915 0
Other current liabilities.............. 112,986 404,820 (68,910)
----------- ----------- ----------
Net cash flow provided by operating
activities.............................. 725,309 290,935 658,632
Cash flow used in investing activities
Purchase of property, plant and
equipment............................. (370,208) (585,881) (229,210)
Loans receivables...................... (38,216) (394,406) 0
Purchase of intangible assets.......... 0 (80,138) (6,998)
Proceeds from sale of property, plant
and equipment......................... 5,249 4,653 9,778
Acquisition of businesses/net of cash
acquired.............................. 437,002 0 (3,865)
----------- ----------- ----------
Net cash flow used by investing
activities.............................. 33,827 (1,055,772) (230,295)
Cash flow provided by financing
activities
Issuance of capital stock.............. 152,320 694,311 0
Increase (decrease) of short term
borrowings............................ 24,191 502,770 (293,085)
COPE reorganization.................... (371,112) 0 0
----------- ----------- ----------
Net cash flow provided (used) by
financing activities.................... (194,601) 1,197,081 (293,085)
Effect of exchange rate changes on cash.. 59,643 (15,355) (34,477)
Net increase of cash and cash
equivalents............................. 624,178 416,889 100,775
Cash and cash equivalents at beginning of
the period.............................. 678,936 262,047 161,272
----------- ----------- ----------
Cash and cash equivalents at end of the
period.................................. $ 1,303,114 $ 678,936 $ 262,047
=========== =========== ==========
Supplemental cash flow disclosure
Interest paid.......................... $ 127,028 $ 76,197 $ 63,940
Income taxes paid...................... 32,478 22,643 13,525
Noncash investing and financing
activities
Short-term borrowings, assumed in
acquisition of business............. 956,543 0 0
Short-term borrowings, incurred to
effect acquisition of business...... 624,324 0 0
Cash acquired in acquisition........... 939,002 0 0
</TABLE>
F-5
<PAGE>
COPE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
As of December 31, 1998, 1997 and 1996
(Amounts in U.S. Dollars, except share amounts)
<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,
1996, as restated (1).. 2,700,000 $2,700 $ 73,636 $ 687,289 $ 94,652 $ 858,277
Net income.............. 315,823 315,823
Foreign currency
translation
adjustments............ (169,072) (169,072)
----------
Total other
comprehensive income... 146,751
--------- ------ --------- ---------- --------- ----------
Balance at December 31,
1996................... 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)
F-6
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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 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
F-7
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
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.
F-8
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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:
<TABLE>
<S> <C>
Machinery and equipment................... 3-5 years
Leasehold improvements.................... 10 years or shorter lease term
</TABLE>
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:
<TABLE>
<S> <C>
Licenses....................................................... 3-5 years
Startup costs for business operations.......................... 5 years
Trademarks..................................................... 5 years
</TABLE>
In the first quarter of fiscal 1998, the Company reported an impairment loss
of $63,004 related to the write-down of an exclusive option for the rights to
purchase, develop and market a new technique for the automatic storage of data.
The option was acquired in 1997. In the first quarter of 1998, the Company
conducted an in-house pilot demonstration of the technique, which indicated
that the technique had less value than previously believed. As a result,
management reduced the carrying value of the asset to the estimated fair market
value based on the estimated amount recoverable upon sale to a third party.
Foreign Currencies
The financial statements of each of the Company's subsidiaries are measured
in the currency in which that entity primarily conducts its business (the
functional currency). The functional currency of all the Company's non-United
States subsidiaries is the applicable local currency.
F-9
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Assets and liabilities denominated in foreign functional currencies are
translated into United States dollars ("USD" or "$") 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 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.
F-10
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 GmbH 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 at the beginning of the period presented.
<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.
The purchase price was allocated to the assets acquired and liabilities
assumed based on their fair values at the date of the Forum acquisition as
follows:
<TABLE>
<S> <C>
Cash............................................................ $ 939,002
Accounts receivable............................................. 2,549,374
Inventories..................................................... 1,059,078
Accounts payable................................................ (3,424,274)
Short-term borrowings........................................... (956,543)
Other, net...................................................... ( 41,229)
-----------
Net fair value of assets acquired and liabilities assumed....... $ 125,408
Goodwill........................................................ 837,569
-----------
Purchase price.................................................. 962,977
===========
Cash paid for Forum............................................. 338,653
Short-term borrowing assumed.................................... 624,324
-----------
962,977
===========
Cash acquired in acquisition of Forum........................... 939,002
Cash paid for Forum............................................. (338,653)
Cash paid for other business.................................... (163,347)
-----------
Net cash flow impact of acquisitions of businesses.............. 437,002
===========
</TABLE>
F-11
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Other Current Assets
Other current assets consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred costs................................. $ 0 $138,821 $ 0
Prepaid expenses............................... 358,170 108,398 95,392
Value Added Taxes.............................. 37,977 43,485 55,799
Other.......................................... 53,866 27,478 20,456
-------- -------- --------
Total other current assets................... $450,013 $318,182 $171,647
======== ======== ========
</TABLE>
Note 6--Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Leasehold improvements................ $ 210,529 $ 35,347 $ 35,347
Machinery and equipment............... 1,402,887 1,138,946 715,735
Accumulated depreciation.............. (862,181) (603,818) (483,455)
---------- ---------- ---------
Total property, plant and equipment,
net................................ $ 751,235 $ 570,475 $ 267,627
========== ========== =========
</TABLE>
Note 7--Loans Receivable, other
Loans receivable, other, represents loans due from employees.
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, 1997 and 1996 total $2,385,303,
$661,982 and $172,066, 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%, 7.0% and 7.4% at December 31,
1998, 1997 and 1996, respectively. Interest paid for the years ending December
31, 1998, 1997 and 1996, amounted to $127,028, $76,197 and $63,940,
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 these plans, charged to operations, for the years
ended December 31, 1998, 1997 and 1996 was $446,528, $226,904 and $148,257,
respectively. The Company provides no additional pension or post-retirement
benefits.
F-12
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Other Current Liabilities
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Value Added Taxes................................ $363,297 $ 87,691 $171,396
Legal, professional and other fees............... 61,140 67,190 48,148
Personnel and social security expenses........... 314,138 176,170 125,897
Other............................................ 63,809 58,588 49,588
-------- -------- --------
$802,384 $389,639 $395,029
======== ======== ========
</TABLE>
Note 11--Income Taxes
Pretax income for the years ended December 31, 1998, 1997 and 1996 was taxed
in the following jurisdictions:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1998 1997 1996
---------- --------- --------
<S> <C> <C> <C>
Switzerland................................. $1,242,682 $ 994,782 $401,093
Other....................................... (216,481) (490,575) (42,676)
---------- --------- --------
$1,026,201 $ 504,207 $358,417
========== ========= ========
</TABLE>
Components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Current:
Switzerland.................................. $ 154,113 $ 34,688 $36,453
Other........................................ 4,028 (612) 6,322
--------- --------- -------
Total current.................................. 158,141 34,076 42,775
--------- --------- -------
Deferred:
Switzerland.................................. (6,973) 39,074 515
Other........................................ (136,538) (201,840) 0
--------- --------- -------
Total deferred................................. (143,511) (162,766) 515
--------- --------- -------
$ 14,630 $(128,690) $43,290
========= ========= =======
</TABLE>
F-13
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has net deferred tax assets (liabilities) as of December 31,
1998, 1997 and 1996 as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Non-current deferred tax assets:
Net operating losses.................... $ 592,495 $ 309,652 $ 131,110
--------- --------- ---------
592,495 309,652 131,110
--------- --------- ---------
Deferred tax liabilities:
Inventories............................. (100,265) (94,629) (102,270)
Trade accounts receivable............... (23,529) (22,207) (12,800)
Deductible provisions eliminated on
consolidation.......................... (69,029) (65,150) (67,486)
Warranty accrual........................ (23,529) (18,814) 0
Other................................... 0 (10,246) (3,476)
--------- --------- ---------
(216,352) (211,046) (186,032)
--------- --------- ---------
Net deferred tax assets................... $ 376,143 $ 98,606 $ (54,922)
========= ========= =========
</TABLE>
Management believes it is more likely than not that all deferred tax assets
are realizable.
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 1996
-------- --------- -------
<S> <C> <C> <C>
Income tax expense at the applicable rate of
5.59% (-5.23% in 1997; 9.23% in 1996)....... $ 57,391 $ (26,374) $33,083
Tax rate change on opening deferred taxes.... (18,021) (65,400) 0
Release of overprovision in prior year....... 0 (13,833) 0
Permanent differences........................ (34,684) (25,091) 6,997
Losses with no tax benefit................... 9,326 0 0
Other........................................ 618 2,008 3,210
-------- --------- -------
$ 14,630 $(128,690) $43,290
======== ========= =======
</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.
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
F-14
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Weighted Weighted
Average Average Average
Options Remaining Life Exercise Options Exercise
Range of exercise prices Outstanding in Years Price Exercisable 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.
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
F-15
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1997 and 1996, the financial statements included
the following balances due from (to) related parties:
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997 1996
---- --------- ---------
<S> <C> <C> <C>
A. Knapp....................................... $ 0 $(118,874) $(148,635)
S. Isenschmid.................................. 0 20,890 (41,413)
--- --------- ---------
Net amount due to related parties.............. $ 0 $ (97,984) $(190,048)
=== ========= =========
</TABLE>
Loans receivable from related party represents a 6.0% demand loan. The loan
is due from acp GmbH, Germany, of which Mr. Peter Koch, a member of the
Company's Board of Directors, is the General Manager.
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, $120,484
and $133,333 for the years ended December 31, 1998, 1997 and 1996,
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.
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.
F-16
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1996
----------- ----------- -----------
<S> <C> <C> <C>
Total revenue:
Switzerland..................... $15,391,521 $12,133,274 $10,635,512
Germany......................... 11,997,975 4,759,643 937,026
Austria......................... 1,768,674 1,182,198 1,342,177
Other........................... 0 692,076 1,394,105
----------- ----------- -----------
29,158,170 18,767,191 14,308,820
----------- ----------- -----------
Sales between geographic areas:
Switzerland..................... (37,743) (182,757) (448,179)
Germany......................... (31,974) (76,220) (12,120)
Austria......................... (29,303) (49,789) (23,779)
Other........................... 0 (542,254) (1,309,619)
----------- ----------- -----------
(99,020) (851,020) (1,793,697)
----------- ----------- -----------
Total revenue from external
customers:
Switzerland..................... 15,353,778 11,950,517 10,187,333
Germany......................... 11,966,001 4,683,423 924,906
Austria......................... 1,739,371 1,132,409 1,318,398
Other........................... 0 149,822 84,486
----------- ----------- -----------
$29,059,150 $17,916,171 $12,515,123
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Depreciation and amortization
Switzerland......................... $ 289,685 $ 182,937 $ 232,906
Germany............................. 91,124 31,579 97,802
Austria............................. 19,131 5,847 9,437
Other............................... 0 0 0
----------- ---------- ----------
$ 399,940 $ 220,363 $ 340,145
=========== ========== ==========
Earnings before interest and taxes
Switzerland......................... $ 1,290,792 $1,036,864 $ 506,198
Germany............................. (184,280) (346,364) (14,675)
Austria............................. 47,447 (117,797) (67,216)
Other............................... (27,428) 6,997 (4,741)
----------- ---------- ----------
$ 1,126,531 $ 579,700 $ 419,566
=========== ========== ==========
Total Assets:
Switzerland......................... $ 5,681,247 $5,493,536 $3,219,598
Germany............................. 5,722,295 1,544,735 332,213
Austria............................. 1,125,184 364,687 447,053
Other............................... 109,921 0 102,535
----------- ---------- ----------
$12,638,647 $7,402,958 $4,101,399
=========== ========== ==========
</TABLE>
F-17
<PAGE>
COPE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 1998, 1997 and $38,519 in 1996) is based upon
management's expectations of collectibility. In the years ended December 31,
1998, 1997 and 1996, sales to the five biggest customers of the Company
amounted to 36%, 29% and 29% of consolidated net sales, respectively. Sales to
one customer accounted for 14%, 11% and 11% of consolidated sales in the years
ended December 31, 1998, 1997 and 1996, respectively. 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. At December 31, 1996, one forward
exchange contract was open which had a March 1997 settlement date.
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 an acquisition
under the purchase method of accounting. COPE issued 420,000 new shares valued
at $14,582,400 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.
F-18
<PAGE>
COPE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Amounts in U.S. Dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1999
-------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents........................................ $ 955,974
Trade accounts receivable........................................ 4,365,880
Inventories (net of provision of $80,980)........................ 2,014,449
Other current assets............................................. 2,563,826
-----------
Total current assets.............................................. 9,900,129
Property, plant and equipment, net................................ 1,005,543
Loans receivable from related party............................... 1,784,006
Loans receivable, other........................................... 7,903
Goodwill (net of amortization of $1,555,693)...................... 14,875,336
Intangible assets................................................. 73,087
Deferred income taxes............................................. 886,406
-----------
TOTAL ASSETS...................................................... $28,532,410
===========
LIABILITIES
Current liabilities:
Short-term borrowings............................................ $ 5,088,195
Trade accounts payable........................................... 4,622,306
Other current liabilities........................................ 2,417,148
Deferred income taxes............................................ 211,610
-----------
Total current liabilities......................................... 12,339,259
-----------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Shareholders' equity:
Share capital:
Common stock, $0.001 par value
Authorized shares 30,000,000
Issued and outstanding shares 3,595,751......................... 3,596
Additional paid in capital....................................... 15,276,065
Accumulated other comprehensive income
Cumulative translation adjustment............................... (65,843)
Retained earnings................................................ 979,333
-----------
Total Shareholders' equity........................................ 16,193,151
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................ $28,532,410
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-19
<PAGE>
COPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in U.S. Dollars except share amount)
For the three month periods and nine month periods ended September 30, 1999 and
1998
(Unaudited)
<TABLE>
<CAPTION>
Three month
periods ended Nine month periods ended
September 30, September 30,
------------------------ --------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net Revenue
Sales of solutions...... $ 7,421,082 $ 6,689,964 $ 21,772,465 $ 15,397,697
Sales of services....... 920,463 850,920 3,133,056 1,927,236
----------- ----------- ------------ ------------
Total revenue............ 8,341,545 7,540,884 24,905,521 17,324,933
Cost of sales............ (5,862,695) (5,278,710) (16,561,361) (12,106,255)
----------- ----------- ------------ ------------
Gross profit............. 2,478,850 2,262,174 8,344,160 5,218,678
----------- ----------- ------------ ------------
Operating expenses:
Selling, general and
administrative
expenses............... (3,107,541) (1,937,802) (7,881,755) (4,404,372)
Consultancy expenses.... (90,668) (31,546) (343,229) (145,206)
Depreciation............ (112,046) (64,118) (302,363) (165,653)
Impairment of
intangibles assets..... 0 0 0 (63,004)
Amortization of goodwill
and other intangibles
assets................. (799,832) (32,860) (1,486,115) (48,373)
----------- ----------- ------------ ------------
Total operating
expenses................ (4,110,087) (2,066,326) (10,013,462) (4,826,608)
Operating income/(loss).. (1,631,237) 195,848 (1,669,302) 392,070
Other income (expense):
Interest expense........ (63,151) (39,781) (146,280) (72,483)
Interest income......... 0 1,818 40,836 2,996
Interest income from
related party.......... 4,946 0 15,295 0
Other................... (31,635) (6) (31,834) (820)
----------- ----------- ------------ ------------
(89,840) (37,969) (121,983) (70,307)
----------- ----------- ------------ ------------
Earnings/(loss) before
taxes................... (1,721,077) 157,879 (1,791,285) 321,763
Current income taxes..... 37,454 (16,018) 0 (63,012)
Deferred income taxes.... 266,236 33,192 123,038 176,879
----------- ----------- ------------ ------------
303,690 17,174 123,038 113,867
----------- ----------- ------------ ------------
Net income/(loss)........ $(1,417,387) $ 175,053 $ (1,668,247) $ 435,630
----------- ----------- ------------ ------------
Translation adjustment,
net of tax............. (66,568) 251,530 (97,699) 141,368
Total comprehensive
income (loss)........... (1,483,955) 426,583 (1,765,946) 576,998
=========== =========== ============ ============
Basic earnings/(loss) per
share................... $ (0.39) $ 0.06 $ (0.49) $ 0.14
Diluted earnings/(loss)
per share............... $ (0.39) $ 0.06 $ (0.49) $ 0.14
Weighted average shares
outstanding:
Basic................... 3,595,751 3,132,654 3,418,217 3,132,654
Diluted................. 3,595,751 3,146,391 3,418,217 3,144,432
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-20
<PAGE>
COPE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in U.S. Dollars)
For the nine month periods ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Nine month periods ended
---------------------------
September 30, September 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flow provided by operating activities
Net income/(loss).................................. $(1,668,247) $ 435,630
Adjustments to reconcile net income to net cash
used by operating activities
Depreciation...................................... 302,363 165,653
Impairment of intangibles assets.................. 0 63,004
Amortization of goodwill and other intangibles
assets........................................... 1,486,115 48,373
Deferred income taxes............................. (123,038) (176,897)
Effects of changes in operating assets and
liabilities
Accounts receivable............................... 1,155,103 2,351,596
Inventories....................................... 419,341 912,550
Other current assets.............................. (2,091,269) (109,481)
Accounts payable.................................. (1,447,390) (4,259,521)
Customer advances................................. (216,558) (316,301)
Other current liabilities......................... 666,052 (439,088)
----------- -----------
Net cash flow used by operating activities......... (1,517,528) (1,324,482)
----------- -----------
Cash flow used/provided in investing activities
Purchase of property, plant and equipment......... (397,689) (261,698)
Loans receivables................................. (1,129,859) 336,984
Acquisition of businesses/net of cash acquired.... 0 437,002
----------- -----------
Net cash flow provided/used by investing
activities........................................ (1,527,548) 512,288
----------- -----------
Cash flow provided by financing activities
Issuance of common stock.......................... 188,076 0
Increase of short term borrowings................. 2,570,240 846,603
----------- -----------
Net cash flow provided by financing activities..... 2,758,316 846,603
----------- -----------
Effect of exchange rate changes on cash............ (60,380) (32,973)
Net decrease of cash and cash equivalents.......... (347,140) 1,436
Cash and cash equivalents at beginning of the
period............................................ 1,303,114 678,936
----------- -----------
Cash and cash equivalents at end of the period..... $ 955,974 $ 680,372
=========== ===========
Supplemental cash flow disclosure
Interest paid..................................... $ 146,280 $ 72,483
Income taxes paid................................. 53,759 32,478
Noncash investing and financing activities:
Short-term borrowings assumed in acquisition of
business........................................ 132,652 956,543
Short-term borrowings incurred to effect
acquisition of business......................... 0 624,324
Cash acquired in acquisition...................... 0 939,002
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-21
<PAGE>
COPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of September 30, 1999 and for the nine month
periods ended September 30, 1999 and 1998
Note 1--Basis of Presentation
These condensed consolidated financial statements of COPE, Inc., a Delaware
corporation (the "Company"), do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998. In the opinion of management, the
financial information set forth in the accompanying condensed consolidated
financial statements reflect all adjustments necessary for a fair statement of
the periods reported, and all such adjustments were of a normal and recurring
nature. Interim results are not necessarily indicative of results for a full
year.
Accounting Change
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5, "Reporting the Costs of Start-Up Activities", which
requires that costs related to start-up activities be expensed as incurred.
Prior to 1999, the Company capitalized its start-up costs and amortized them
over four years. The Company adopted the provisions of the SOP as of January 1.
1999. There was no material impact on net income or financial position as a
result of the adoption of SOP 98-5.
Note 2--Earnings Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". SFAS No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share is calculated by dividing net income by the weighted
average shares outstanding. The computation of diluted earnings per share is
similar to basic earnings per share except that it assumes that the weighted
average shares outstanding is increased by shares issuable upon exercise of
those stock options for which market price exceeds exercise price. Shares
issuable upon exercise of stock options have not been included in the
computation of diluted earnings (loss) per share in 1999 since their effect
thereon would be anti-dilutive. Weighted average shares have been retroactively
restated for the equivalent number of shares received by COPE shareholders as a
result of the COPE Reorganization.
Note 3--Business Acquisition
On June 25, 1998, COPE GmbH, a wholly-owned subsidiary of COPE Holding AG,
acquired all of the capital shares of Forum GmbH ("Forum"), a German data
storage company, for $962,977. The acquisition of Forum has been accounted for
by the purchase method of accounting. Accordingly, the operating results of
Forum have been included in the consolidated operating results from the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired was $837,569 and has been recorded as goodwill, which is being
amortized on a straight line basis over seven years. The acquisition was
financed through available cash on hand and short term borrowings. On March 30,
1999 Forum was merged into COPE GmbH.
F-22
<PAGE>
COPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The purchase price was allocated to the assets acquired and liabilities
assumed based on their fair values at the date of the Forum acquisition as
follows:
<TABLE>
<S> <C>
Cash............................................................ $ 939,002
Accounts receivable............................................. 2,549,374
Inventories..................................................... 1,059,078
Accounts payable................................................ (3,424,274)
Short-term borrowings........................................... (956,543)
Other, net...................................................... (41,229)
-----------
Net fair value of assets acquired and liabilities assumed....... $ 125,408
Goodwill........................................................ 837,569
-----------
Purchase price.................................................. 962,977
===========
Cash paid for Forum............................................. 338,653
Short-term borrowings assumed................................... 624,324
-----------
Purchase price.................................................. 962,977
===========
Cash acquired in acquisition of Forum........................... 939,002
Cash paid for Forum............................................. (338,653)
Cash paid for other business.................................... (163,347)
-----------
Net cash flow impact of acquisitions of businesses.............. 437,002
===========
</TABLE>
On April 19, 1999, the Company acquired Hicomp Software Systems GmbH
("Hicomp"), a German software company, in a stock transaction accounted for by
the purchase method of accounting. COPE issued 420,000 new shares in exchange
for all outstanding Hicomp shares. Accordingly, the operating results of Hicomp
have been included in the consolidated operating results from the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired was $15,417,264 and has been recorded as goodwill, which is being
amortized on a straight line basis over five years. Hicomp, headquartered in
Hamburg, Germany, develops back-up and retrieval software products. Its leading
products, Hiback and Hibars, are multi-platform back-up solutions recognized
for performance and flexibility.
Additionally, the former shareholder of Hicomp granted COPE a purchase
option, expiring June 30, 2000, to acquire all of the capital shares of two
U.S. corporations owned by the shareholder, which are engaged in the business
of distributing Hiback and Hibars software in the U.S., at the then market
price based on negotiations between the two parties. No consideration was paid
for the option. The option represents a right of first refusal only and gives
the company no price advantage since this is stipulated to be based on the
market price at the date of acquisition. Accordingly, no value has been
allocated to the option as part of the allocation of the purchase price of
Hicomp.
In October 1999, COPE repurchased from the former shareholders of Hicomp
200,000 of the common shares issued by COPE in the acquisition at a price of
DEM 7,200,000 ($3,958,000).
F-23
<PAGE>
COPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Hicomp assets acquired and liabilities assumed have been recorded at
their estimated fair values at the date of the Hicomp acquisition, and are
subject to adjustment pending completion of final valuations. A summary of the
assets acquired, liabilities assumed and consideration paid follows:
<TABLE>
<S> <C>
Accounts receivable.......................................... $ 102,005
Other current assets......................................... 22,544
Property, plant and equipment................................ 146,399
Other assets................................................. 215,614
Short-term borrowings........................................ (132,652)
Accounts payable............................................. (240,262)
Other current liabilities.................................... (444,353)
Noncurrent liabilities....................................... (264,159)
------------
Net fair value of assets acquired and liabilities assumed.... (594,864)
Goodwill..................................................... 15,417,264
------------
Purchase price............................................... $ 14,822,400
============
Value of the securities issued............................... $ 14,582,400
Estimated acquisition costs.................................. 240,000
------------
Purchase price............................................... $ 14,822,400
============
Estimated annual amortization (based on amortization period
of five years) $ 3,083,453
</TABLE>
The pro forma unaudited results of operations for the nine months ended
September 30, 1999 and September 30 1998, assuming consummation of the
purchases as of the beginning of the periods presented, are as follows:
<TABLE>
<CAPTION>
Nine month periods
ended September 30,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net revenue.......................................... 25,356,428 27,579,319
Net loss............................................. (2,464,983) (1,646,632)
Per share data:
Basic earnings (loss)................................ (0.69) (0.50)
</TABLE>
Note 4--Other Current Assets
Other current assets include $827,645 of deferred transaction costs relating
to COPE's planned listing on the Frankfurt Stock Exchange "Neuer Markt" and
will be applied against the expected additional paid in capital to be realized
from the issue of new common stock. Should this listing not take place, these
costs will be charged to income.
Note 5--Impairment of Intangibles Assets
In the first quarter of fiscal 1998, the Company reported an impairment loss
of $63,004 related to the write-down of an exclusive option for the rights to
purchase, develop and market a new technique for the automatic storage of data.
The option was acquired in 1997. In the first quarter of 1998, the Company
conducted an in-house pilot demonstration of the technique, which indicated
that the technique had less value than previously believed. As a result,
management reduced the carrying value of the asset to the estimated fair market
value based on the estimated amount recoverable upon sale to a third party.
F-24
<PAGE>
COPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Common Stock and Stock Option Plan
During 1998, the Company adopted the 1998 Stock Option Plan ("1998 Plan")
which provides for the granting of either incentive stock options or non-
qualified stock options to employees, officers, directors, consultants and
independent contractors of the Company. Under the 1998 Plan, the Company is
authorized to grant a maximum of 400,000 stock options for terms of up to ten
years (five years in the case of incentive stock options granted to greater
than 10% stockholders). Options are subject to forfeiture upon termination of
employment or other relationship with the Company and the 1998 Plan terminates
in August 2008. In January 1999, the Company granted to employees options to
purchase 129,900 shares of the Company's common stock at exercise prices
ranging from $20.00 to $50.00 per share. The options vest in installments
commencing in 2000. All options outstanding were granted at prices which were
above market price as of the date of grant and, accordingly, no compensation
expense has been recognized. On April 30, 1999, the Company issued 22,390
shares of common stock upon exercise of outstanding common stock purchase
options. On November 8, 1999, COPE issued 5,172 shares of common stock upon
exercise of outstanding common stock purchase warrants.
Note 7--Segment and Geographic Data
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which superceded SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 established
standards for the way that public business enterprises report information about
operating segments in annual financial statements. SFAS No. 131 also
established standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 did not effect
results of operations or financial position, but did effect the disclosure of
segment information.
Management, via country managing directors, controls operations on a
geographic basis with subsidiaries located in Switzerland, Germany and Austria
and uses earnings before interest, taxes, depreciation and amortization
(EBITDA) as its measure of segment profit or loss. Management decided to change
the measurement from EBIT (Earnings before interest and taxes) to EBITDA after
the Hicomp acquisition because of the high goodwill amortization the Company
will have in the next five years. Earnings before interest, taxes, depreciation
and amortization is defined as net income plus the following:
.extraordinary items and cumulative effect of accounting change;
.provision for income taxes;
.interest expense; and
.depreciation and amortization
Earnings before interest, taxes, depreciation and amortization is presented
not as an alternative measure of operating results or cash flow from operations
as determined in accordance with generally accepted accounting principles, but
because it is a widely accepted financial indicator of a company's ability to
incur and service debt.
Each geographic area's operations comprise the following products and
services: (1) Solutions which consist of the design, implementation and
management of storage and security solutions including the sale of related
software and hardware; and (2) Services which consist of consulting, training
and integration services including operations and maintenance support. The
enterprise-wide disclosures regarding products and services are contained in
the income statement.
F-25
<PAGE>
COPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information concerning the Company's reportable segments is summarized as
follows by location of operations (Switzerland: COPE Holding AG, COPE AG;
Germany: COPE GmbH and Hicomp Software Systems GmbH, Austria: COPE
Handelsges.mbH; Other: COPE, Inc.; intercompany sales are generally at purchase
cost):
<TABLE>
<CAPTION>
Nine month period ended
September 30,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Total revenue:
Switzerland...................................... $ 10,073,915 $10,682,445
Germany.......................................... 12,995,445 5,617,664
Austria.......................................... 1,889,796 1,075,776
------------ -----------
$ 24,959,156 $17,375,885
============ ===========
Sales between geographic areas:
Switzerland...................................... $ 39,859 $ 29,460
Germany.......................................... 11,854 12,275
Austria.......................................... 1,922 9,217
------------ -----------
$ 53,635 $ 50,952
============ ===========
Total revenue from external customers:
Switzerland...................................... $ 10,034,056 $10,652,985
Germany.......................................... 12,983,591 5,605,389
Austria.......................................... 1,887,874 1,066,559
------------ -----------
$ 24,905,521 $17,324,933
============ ===========
Depreciation and amortization:
Switzerland...................................... $ 202,814 $ 161,037
Germany.......................................... 1,542,283 39,490
Austria.......................................... 43,381 13,499
------------ -----------
$ 1,788,478 $ 214,026
============ ===========
Earnings before interest, taxes, depreciation and
amortization (EBITDA):
Switzerland...................................... $ (430,110) $ 652,412
Germany.......................................... 569,362 (17,252)
Austria.......................................... 52,303 36
Other............................................ (104,213) (29,920)
------------ -----------
$ 87,342 $ 605,276
============ ===========
</TABLE>
F-26
<PAGE>
COPE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C> <C>
Reconciliation of EBITDA to earnings before taxes:
Earnings before interest, taxes, depreciation and
amortization (EBITDA):
Switzerland....................................... $ (430,110) $ 652,412
Germany........................................... 569,362 (17,252)
Austria........................................... 52,303 36
Other............................................. (104,213) (29,920)
----------- -----------
$ 87,342 $ 605,276
=========== ===========
Depreciation and amortization:
Switzerland....................................... $ (202,814) $ (161,037)
Germany........................................... (1,542,283) (39,490)
Austria........................................... (43,381) (13,499)
----------- -----------
$(1,788,478) $ (214,026)
=========== ===========
Interest, net:
Switzerland....................................... $ (52,528) $ (39,357)
Germany........................................... (34,396) (26,673)
Austria........................................... (3,225) (3,457)
----------- -----------
$ (90,149) $ (69,487)
=========== ===========
Earnings before taxes............................... $(1,791,285) $ 321,763
=========== ===========
<CAPTION>
September December
30, 31,
----------- -----------
1999 1998
----------- -----------
<S> <C> <C>
Total assets:
Switzerland....................................... $ 7,383,670 $ 6,458,662
Germany........................................... 19,239,310 5,722,373
Austria........................................... 943,360 457,612
Other............................................. 966,070 0
----------- -----------
$28,532,410 $12,638,647
=========== ===========
</TABLE>
F-27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders of COPE, Inc.
We have audited the accompanying balance sheets of Hicomp Software Systems
GmbH (formerly Hinrichs & Hinrichs GmbH) as of December 31, 1998 and December
31, 1997, and the related statements of income, shareholders' equity, and cash
flows for the years then ended. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Hicomp Software Systems
GmbH at December 31, 1998 and December 31, 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles in the U.S.
Hamburg, July 9, 1999
Schitag Ernst & Young
Deutsche Allgemeine Treuhand AG
Wirtschaftsprufungsgesellschaft
R. Law P. Marshall
Chartered Accountant Certified Public Accountant
F-28
<PAGE>
HICOMP SOFTWARE SYSTEMS GMBH
BALANCE SHEETS
(Amounts in U.S. Dollars)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents........................... 542 1,508
Trade accounts receivable, net...................... 145,341 250,585
Other current assets................................ 32,895 30,716
--------- ---------
Total current assets.................................. 178,778 282,809
--------- ---------
Property and equipment, net........................... 174,145 111,213
Deferred income taxes................................. 138,780 258,698
--------- ---------
312,925 369,911
--------- ---------
Total assets...................................... 491,703 652,720
========= =========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Short-term borrowings............................... 185,412 4,043
Trade accounts payable.............................. 56,723 36,320
Deferred revenue on sales contracts................. 202,141 221,593
Accrued professional fees........................... 62,941 9,842
Accrued marketing fees.............................. 47,710 0
Other current liabilities........................... 210,887 143,734
--------- ---------
Total current liabilities............................. 765,814 415,532
--------- ---------
Long term debt........................................ 302,717 589,377
Other noncurrent liabilities.......................... 0 81,768
--------- ---------
Total liabilities................................. 1,068,531 1,086,677
--------- ---------
Shareholders' equity
Share capital......................................... 29,515 29,515
Retained deficit.................................... (659,203) (569,636)
Accumulated other comprehensive income.............. 52,860 106,164
--------- ---------
Total shareholders' equity........................ (576,828) (433,957)
--------- ---------
Total liabilities and shareholders' equity........ 491,703 652,720
========= =========
</TABLE>
See accompanying notes to financial statements
F-29
<PAGE>
HICOMP SOFTWARE SYSTEMS GMBH
STATEMENTS OF INCOME
(Amounts in U.S. Dollars)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Net revenue
User license fees................................... 1,182,295 1,093,783
Maintenance contract fees........................... 578,766 391,954
Consulting fees..................................... 159,946 517
---------- ----------
Total revenue......................................... 1,921,007 1,486,254
---------- ----------
Cost of sales......................................... (22,012) (45,468)
---------- ----------
Gross profit.......................................... 1,898,995 1,440,786
---------- ----------
Operating expenses
Selling, general and administrative expenses........ (1,579,302) (1,505,097)
Consultancy expenses................................ (96,401) (44,705)
Depreciation and amortization....................... (80,860) (57,502)
---------- ----------
Total operating expenses.............................. (1,756,563) (1,607,304)
---------- ----------
Operating income (loss)............................... 142,432 (166,518)
Other income (expenses)
Interest expense.................................... (11,498) (22,236)
Interest income..................................... 11,862 673
Other income........................................ 76,175 41,032
---------- ----------
Income (loss) before taxes............................ 218,971 (147,049)
---------- ----------
Deferred income taxes................................. (120,434) 80,877
---------- ----------
Net income (loss)..................................... 98,537 (66,172)
========== ==========
</TABLE>
See accompanying notes to financial statements
F-30
<PAGE>
HICOMP SOFTWARE SYSTEMS GMBH
STATEMENTS OF CASH FLOWS
(Amounts in U.S. Dollars)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income(loss)........................................... 98,537 (66,172)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization............................ 80,860 57,502
Gain on sale of fixed assets............................. (1,915) 0
Deferred income taxes.................................... 120,434 (80,877)
Changes in operating assets & liabilities:
Accounts receivable.................................... 105,244 (72,079)
Other current assets................................... (2,179) (26,422)
Accounts payable & other current liabilities........... 148,510 (82,075)
Other long-term liabilities............................ (81,768) (13,712)
-------- --------
Total Adjustments...................................... 369,186 (217,663)
-------- --------
Net cash provided by (used in) operating activities.. 467,723 (283,835)
-------- --------
Cash flow from investing activities:
Proceeds from sale of fixed assets....................... 13,881 0
Capital expenditures..................................... (138,858) (109,555)
Other.................................................... (6,528) (328)
-------- --------
Net cash used in investing activities................ (131,505) (109,883)
-------- --------
Cash flow from financing activities:
Increase in short term borrowings........................ 181,369 4,180
Change in note receivable/payable due from/to
shareholder............................................. (199,564) 13,653
Change in long term debt................................. (286,660) 357,418
-------- --------
Net cash (used in) provided by financing activities........ (304,855) 375,251
-------- --------
Effect of exchange rate changes on cash flows.............. (32,329) (2,573)
Net decrease in cash....................................... (966) (21,040)
Cash at beginning of year.................................. 1,508 22,548
-------- --------
Cash at end of year........................................ 542 1,508
======== ========
</TABLE>
See accompanying notes to financial statements
F-31
<PAGE>
HICOMP SOFTWARE SYSTEMS GMBH
STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in U.S. Dollars, except share amounts)
<TABLE>
<CAPTION>
Accumulated other Total
Number Share Retained comprehensive shareholders'
of shares capital deficit income equity
--------- ------- -------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 50,000 29,515 (514,924) (485,409)
Comprehensive income
Net loss............... (66,172) (66,172)
Foreign currency
translation
adjustments........... 106,164 106,164
--------
Comprehensive income 39,992
Note receivable/payable
to shareholder......... 11,460 11,460
------ ------ -------- ------- --------
Balance at December 31,
1997................... 50,000 29,515 (569,636) 106,164 (433,957)
------ ------ -------- ------- --------
Comprehensive income
Net income............. 98,537 98,537
Foreign currency
translation
adjustments........... (53,304) (53,304)
--------
Comprehensive income.... 45,233
Note receivable/payable
to shareholder......... (188,104) (188,104)
------ ------ -------- ------- --------
Balance at December 31,
1998................... 50,000 29,515 (659,203) 52,860 (576,828)
====== ====== ======== ======= ========
</TABLE>
See accompanying notes to financial statements
F-32
<PAGE>
HICOMP SOFTWARE SYSTEMS GMBH
NOTES TO THE DECEMBER 31, 1998 AND 1997 FINANCIAL STATEMENTS
Note 1--Basis of Presentation
The accompanying financial statements present the operations of Hicomp
Software Systems GmbH formerly known as Hinrichs and Hinrichs GmbH (the
"Company" or "Hicomp") and have been prepared in accordance with United States
generally accepted accounting principles ("U.S. GAAP").
Nature of operations
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
conducts business principally in western Europe and the United States.
Note 2--Summary of Significant Accounting Policies
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 period. Actual results could differ from these
estimates.
Revenue Recognition
Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with American Institute of Certified Public
Accountants Statements of Position 97-2 and 98-4, Software Revenue Recognition.
Revenue from license programs is recorded when the software has been delivered
and the customer is invoiced. Revenue from product sales to distributors and
resellers is recorded when related products are shipped. Consulting revenue is
recognized as services are provided. End users of products sold by the Company
generally contract with the Company for service and support, which includes
normal product maintenance. Revenue from these service and support contracts is
recognized in earnings pro rata temporis over the terms of the contracts and
the cost associated with these activities is expensed as incurred.
Cash
Cash includes cash deposited in demand deposits at banks.
Property and Equipment
Property and equipment is stated at cost and depreciated principally on a
straight-line basis over the estimated useful lives of the assets which
generally range from 2 to 5 years.
Impairment of Long-lived Assets
The Company reviews long-lived assets 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.
F-33
<PAGE>
HICOMP SOFTWARE SYSTEMS GMBH
NOTES TO THE DECEMBER 31, 1998 AND 1997 FINANCIAL STATEMENTS--(Continued)
Foreign Currencies
The Company principally conducts its business and maintains the financial
records in German Marks ("DM," the functional currency).
Assets and liabilities denominated in the functional currency are translated
into United States Dollars ("USD" or "$") at the exchange rate as of the
balance sheet date. Income statement accounts denominated in the functional
currency 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
shareholder's 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.
Income taxes
As a result of prior years operating losses the Company has net operating
loss carryforwards for income tax purposes. These loss carryforwards have been
capitalized 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 Shareholder's Equity.
Fair Value
The carrying value of financial instruments such as cash, accounts
receivable and accounts payable approximate their fair value due to the short-
term maturities of these instruments.
Note 3--Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
USD USD
<S> <C> <C>
Computer software............................... 78,002 63,756
Office equipment................................ 313,950 196,373
Accumulated depreciation........................ (217,807) (148,916)
-------- --------
Total property and equipment, net............. 174,145 111,213
======== ========
</TABLE>
Note 4--Short-term Borrowings
As of December 31, 1998, the Company had short-term overdraft facilities.
Amounts drawn down under these facilities are due on demand. Amounts
outstanding at December 31, 1998 and 1997 total $185,412 and $4,043,
respectively. The interest rate on the amount outstanding was 11.25% at
December 31, 1998 and 1997. Interest paid in respect of short-term borrowings
for the years ending December 31, 1998 and 1997 amounted to $2,437 and $2,061,
respectively.
F-34
<PAGE>
HICOMP SOFTWARE SYSTEMS GMBH
NOTES TO THE DECEMBER 31, 1998 AND 1997 FINANCIAL STATEMENTS--(Continued)
Note 5--Other Liabilities
Other liabilities consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
USD USD
<S> <C> <C>
Payroll and employee benefits................... 48,900 35,085
Sales tax payable (VAT)......................... 24.959 20,516
Accrued liability-Borsu......................... 101,388 55,600
Accrued liability-Deutsche Bank................. 0 69,662
Other........................................... 35,640 44,639
------- -------
Total other liabilities....................... 210,887 225,502
Portion classified as non-current............. 0 (81,768)
------- -------
Total other current liabilities............... 210,887 143,734
------- -------
</TABLE>
Note 6--Income Taxes
The Company accounts for income taxes using the liability method required
by FASB Statement No. 109, Accounting for Income Taxes.
At December 31, 1998 and 1997, the Company has net operating loss
carryforwards (NOL's) of approximately DM 449,000 and DM 764,000,
respectively, for corporate income tax purposes and approximately, DM 365,000
and DM 680,000, respectively, for local trade tax purposes. These NOL's
resulted from losses incurred during the first years of the Company's
operations. Under German tax law the NOL's are not currently subject to any
expiration limitations. For financial reporting purposes, no valuation
allowance has been recorded as the Company's management expects existing
service and support contracts and licensing programs to produce sufficient
taxable income to realize the deferred tax asset.
The deferred tax asset comprised solely the above net operating loss
carryforward calculated as follows: the local trade tax rate of 19% is first
applied to the NOL for trade tax purposes with the result reducing the NOL for
corporate income tax purposes; the remaining NOL for corporate income tax
purposes is multiplied by the German corporate tax rate of 40%, and the
solidarity tax rate of 5.5%.
Note 7--Long-term Debt
On May 22, 1998 the Company paid a long-term debt obligation in the amount
of $278,102. The original amount borrowed was $201,740 which was entered into
in February 1994. The related annual interest rate was 8%. The amount of
related interest paid in 1998 totaled $9,061.
At December 31, 1997 the outstanding balance totaled $263,116 including
accrued interest of $20,149.
In October 1997, the Company entered into an agreement with Commerzbank AG
(the "Commerz Agreement") in the amount of $341,520. The amount is not
interest bearing. The Commerz Agreement settles defaulted loans in the amounts
of $2,028,236 and $251,615 relating to companies previously owned by the
shareholder of Hicomp, Mr. Hinrichs. Under terms of the Commerz Agreement, the
Company is to make monthly payments in the amount of $3,757 beginning in
November 1997 through October 2004 followed by 12 monthly payments of $2.161
ending in October 2005. According to the Commerz Agreement, should monthly
payments become greater than 21 days overdue then Commerzbank AG has the right
to nullify the agreement and seek further restitution.
At December 31, 1998 and 1997 the outstanding balance under the Commerz
Agreement totaled $302,717 and $326,261, respectively.
F-35
<PAGE>
HICOMP SOFTWARE SYSTEMS GMBH
NOTES TO THE DECEMBER 31, 1998 AND 1997 FINANCIAL STATEMENTS--(Continued)
Note 8--Related Party Transactions
At December 31, 1998 and 1997, the Company held notes receivable in the
amounts of $450,810 and $155,714, respectively, from the Hicomp shareholder,
Mr. Hinrichs. The notes accrue interest at a rate of 5% annually. The note as
of December 31, 1998, will be paid immediately upon the sole shareholder's sale
of COPE, Inc. (COPE) shares during COPE's secondary offering. (See Note 13
Subsequent Events)
In 1995, Hicomp entered into a licensing agreement (the Agreement) with
Hicomp USA, Inc., an entity wholly owned by the Company's shareholder, Mr.
Hinrichs. Under terms of the Agreement, the Company is to pay fees equal to
7.5% of license program revenues to Hicomp USA. As of December 31, 1998 and
1997 amounts totaling $262,706 and $167,174 had been accrued for license fees
payable to Hicomp USA. These amounts have been netted against the shareholder
receivable discussed above on the accompanying balance sheets as of December
31, 1998 and 1997.
Attorney fees totaling $89,455 and $23,735 as of December 31, 1998 and 1997,
respectively, were incurred by the Company. The fees were charged by an
attorney who is also a member of board of directors of Hicomp USA. Hicomp USA
is wholly owned by the Company's shareholder, Mr. Hinrichs.
See Note 7 "Long-term Debt" for disclosure relating to the Commerzbank
Agreement.
As of December 31, 1998 and 1997, the Company incurred expenses of $81,200
and $70,451, respectively, relating to companies previously owned by the
Company's shareholder, Mr. Hinrichs. $71,968 and $36,413 of these expenses
relate to a former line of credit entered into with Deutsche Bank AG and Hicomp
Storage, an entity which was wholly owned by the shareholder of the Company,
Mr. Hinrichs.
During 1998 and 1997, the Company made payments in the amount of $17,428 and
$5,173 for rent on the principal residence of Hicomp's shareholder, Mr.
Hinrichs. The payments were made in accordance with the terms of the
shareholder's former employment contract, but not in accordance with the
subsequent employment contract.
Note 9--Leases
The Company has operating leases primarily for office space, office
equipment and automobiles which expire at various dates through the year 2003
with, in some instances, renewal privileges. Operating lease costs are charged
to income as incurred.
The minimum annual rental commitments under long-term non-cancelable
operating leases were as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------
USD
<S> <C>
1999................................................... 162,575
2000................................................... 143,928
2001................................................... 140,985
2002................................................... 124,614
2003................................................... 104,579
-------
Total future minimum lease payments.................. 676,681
=======
</TABLE>
Total rent expense for operating leases was $169,525 and $159,497 for the
years ended December 31, 1998 and 1997, respectively.
F-36
<PAGE>
HICOMP SOFTWARE SYSTEMS GMBH
NOTES TO THE DECEMBER 31, 1998 AND 1997 FINANCIAL STATEMENTS--(Continued)
Note 10--Commitments and Contingent Liabilities
In 1995 the Company entered into a joint venture with Borsu Systema (Borsu)
to form Hicomp Borsu, to develop certain data technology. Subsequently, due to
a change of shareholders at Borsu, the joint venture was dissolved. As a
result, disagreements arose about amounts owed between the companies.
Subsequent to the balance sheet date, Hicomp received correspondence from
attorneys representing Aecis B.V. (formerly Borsu) notifying Hicomp of claims
approximating $119,000. As of the date of the opinion of these financial
statements no payment has been made nor have terms of settlement been formally
agreed upon. As of December 31, 1998, the Company has accrued $101,000 relating
to this issue and management believes the accrual to be adequate.
Management is not aware of any other 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.
Note 11--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 DM and is maintained principally with one
financial institution in Germany.
The Company provides credit in its normal course of business to a wide
variety of customers and, generally, requires no collateral from its customers.
There was no allowance for doubtful accounts in 1998 based on management's
expectations of collectibility. The Company performs ongoing credit evaluations
of its customers.
Note 12--Subsequent Event
On April 19, 1999, COPE, Inc., a U.S. holding corporation with principal
operations in Switzerland and Germany, and a provider of data storage,
consulting services and solutions, acquired Hicomp in a stock transaction
accounted for using the purchase method of accounting. COPE issued 420,000 new
shares in exchange for all outstanding Hicomp shares. Under terms of the
purchase agreement, any tax liabilities which arise in the future for Hicomp
but relate to the period before the purchase by COPE, are to be born wholly by
the seller.
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder
Forum GmbH
We have audited the accompanying statements of operations of Forum GmbH for
the period from January 1, 1998 to June 24, 1998 and for the year ended
December 31, 1997. These statements of operations are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements of operations 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 statements of operations are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of operations. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall statement of
operations presentation. We believe that our audit of the statement of
operations provides a reasonable basis for our opinion.
In our opinion, the statements of operations referred to above present
fairly, in all material respects, the results of operations of Forum GmbH for
the period from January 1, 1998 to June 24, 1998 and for the year ended
December 31, 1997, in conformity with generally accepted accounting principles
in the U.S.
Ernst & Young
Deutsche Allgemeine Treuhand AG
Dr. Zimmermann Walbrol
November 8, 1999
Munich, Germany
F-38
<PAGE>
FORUM GMBH
STATEMENT OF OPERATIONS
For the period January 1 to June 24, 1998 and
the year ended December 31, 1997
(Amounts in US Dollars)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(6 months) (12 months)
<S> <C> <C>
Net Revenue
Total revenue....................................... $ 7,685,554 $10,770,484
Cost of sales....................................... (6,548,329) (8,694,482)
----------- -----------
Gross profit......................................... 1,137,225 2,076,002
----------- -----------
Operating expenses
Selling, general and administrative expenses........ 1,007,731 2,029,684
Consultancy expenses................................ 60,687 39,356
Depreciation and amortization....................... 19,613 31,880
----------- -----------
Total operating expenses............................. 1,088,031 2,100,920
----------- -----------
Operating income..................................... 49,194 (24,918)
Other income (expense)
Interest expense.................................... (18,693) (69,686)
Interest income..................................... 0 11,070
Other expense....................................... (5,099) 0
----------- -----------
(23,792) (58,616)
----------- -----------
Earnings (loss) before taxes......................... 25,402 (83,534)
Current income taxes................................. 0 0
Deferred income taxes................................ (13,971) 37,550
----------- -----------
Net income (loss).................................... 11,431 (45,984)
Translation adjustment............................... (652) (24,189)
----------- -----------
Comprehensive income (loss).......................... $ 10,779 $ (70,173)
=========== ===========
</TABLE>
F-39
<PAGE>
FORUM GMBH
NOTES TO THE STATEMENTS OF OPERATIONS
For the period from January 1 to June 24, 1998 and
the year ended December 31, 1997
Note 1--Basis of Presentation
The accompanying statements of operations present the operations of Forum
GmbH (the "Company" or "Forum") and have been prepared in accordance with
United States generally accepted accounting principles ("U.S. GAAP").
Nature of operations
Forum, headquartered in Olching, Germany, is a provider of data storage and
security services and solutions principally to the German market.
Note 2--Summary of Significant Accounting Policies
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 period. Actual results could differ from these
estimates.
Revenue Recognition
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 products components. Revenue from
these service and support contracts is recognized ratably over the terms of the
contract and the cost associated with these activities is expensed as incurred.
Property and Equipment
Property and equipment is stated at cost and depreciated principally on a
straight-line basis over the estimated useful lives of the assets which
generally range from 2 to 5 years.
Foreign Currencies
The Company principally conducts its business and maintains the financial
records in German Marks (the functional currency).
Assets and liabilities denominated in the functional currency are translated
into United States dollars ("USD" or "$") at the exchange rate as of the
balance sheet date. Income statement accounts denominated in the functional
currency 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
shareholder's 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.
F-40
<PAGE>
FORUM GMBH
NOTES TO THE STATEMENTS OF OPERATIONS--(Continued)
Income taxes
As a result of prior years operating losses the Company has net operating
loss carryforwards for income tax purposes. These loss carryforwards have been
capitalized 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 Statement of
Operations. 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.
Note 3--Income Taxes
The Company accounts for income taxes using the liability method required by
FASB Statement No. 109, Accounting for Income Taxes.
At June 24, 1998 and 1997, the Company has net operating loss carryforwards
(NOL's) of approximately DM 330,000 (USD 182,000) and DM 376,000 (USD 209,000)
respectively, for corporate income tax purposes and approximately, DM 380,000
(USD 210,000) and DM 426,000 (USD 237,000), respectively, for local trade tax
purposes. Under German tax law the NOL's are not currently subject to any
expiration limitations. For financial reporting purposes, no valuation
allowance has been recorded as the Company's management expects existing
service and support contracts and licensing programs to produce sufficient
taxable income to realize the deferred tax asset.
Note 4--Subsequent Event
On June 24, 1998, COPE GmbH., a German based provider of data storage,
consulting services and solutions, acquired the Company for USD 962,977. The
acquisition is to be accounted for using the purchase method of accounting.
F-41
<PAGE>
COPE, INC. AND FORUM GMBH AND HICOMP SOFTWARE SYSTEMS GMBH
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
FOR THE YEAR ENDED DECEMBER 31, 1998
(Unaudited)
To reflect COPE's acquisitions of Forum and Hicomp
The following tables present summary historical information for COPE, Forum
and Hicomp derived from their financial statements. The acquisitions of Forum
and Hicomp have been accounted for using the purchase method of accounting and,
accordingly, the assets acquired and the liabilities assumed have been recorded
at their fair values as of the date of the acquisition, which do not differ
significantly from historical costs. The excess of the purchase price over the
fair value of the assets and the liabilities assumed has been recorded as
goodwill.
The unaudited pro forma consolidated statements of operations for the year
ended December 31, 1998 and for the nine months ended September 30, 1999
present the results for COPE, Forum and Hicomp as if the acquisitions of Forum
and Hicomp had occurred on January 1, 1998.
The unaudited pro forma financial information presented is based on the
assumptions and adjustments described in the accompanying notes. The unaudited
pro forma statement of operations does not purport to represent what our
results of operations would have been if the events described above had
occurred as of the dates indicated or what our results of operations would be
for any future periods. The unaudited pro forma statements of operations are
based on assumptions and adjustments that we believe are reasonable. The
unaudited pro forma statements of operations, and the accompanying notes,
should be read in conjunction with the historical financial statements and
related notes included elsewhere in this document.
This information is based on the historical financial statements of COPE,
Forum and Hicomp as well as the unaudited interim condensed consolidated
financial statements and the related notes that are included elsewhere in this
prospectus. This financial data should be read in conjunction with the
Financial Statements and with Management's Discussion and Analysis of Financial
Condition or Plan of Operations for COPE included elsewhere herein.
F-42
<PAGE>
COPE, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in U.S. Dollars, except share amounts)
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Forum
Cope, Inc. GmbH(1) Hicomp GmbH Pro Forma
------------ ---------- ----------- -----------------------------
Historical Adjustments Consolidated
------------------------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net Revenue
Total revenue......... $ 29,059,150 $7,685,554 $ 1,921,007 $ (39,775) (2) $ 38,578,226
(47,710) (3)
Cost of sales......... (20,281,131) (6,548,329) (22,012) 39,775 (2) (26,811,697)
------------ ---------- ----------- ----------- ------------
Gross profit.......... 8,778,019 1,137,225 1,898,995 (47,710) 11,766,529
------------ ---------- ----------- ----------- ------------
Operating expenses
Selling, general and
administrative
expenses............. (6,992,971) (1,007,731) (1,579,302) 47,710 (3) (9,532,294)
Consultancy expenses.. (292,689) (60,687) (96,401) (449,777)
Depreciation and
amortization......... (336,936) (19,613) (80,860) (3,042,912) (4) (3,534,684)
(54,363) (5)
Impairment of
intangible assets.... (63,004) 0 0 (63,004)
------------ ---------- ----------- ----------- ------------
Total operating
expenses............ (7,685,600) (1,088,031) (1,756,563) (3,049,565) (13,579,759)
------------ ---------- ----------- ----------- ------------
Operating income
(loss)................. 1,092,419 49,194 142,432 (3,097,275) (1,813,230)
Other income (expense):
Interest expense...... (127,028) (18,693) (11,498) 100,000 (6) (57,219)
Interest income....... 26,698 0 11,862 38,560
Other................. 34,112 (5,099) 76,175 105,188
------------ ---------- ----------- ----------- ------------
(66,218) (23,792) 76,539 100,000 86,529
------------ ---------- ----------- ----------- ------------
Earnings (loss) before
taxes.................. 1,026,201 25,402 218,971 (2,997,275) (1,726,701)
Current income taxes.... (158,141) 0 0 (158,141)
Deferred income taxes... 143,511 (13,971) (120,434) 9,106
------------ ---------- ----------- ----------- ------------
Net income (loss)....... $ 1,011,571 $ 11.431 $ 98,537 $(2,997,275) $ (1,875,736)
============ ========== =========== =========== ============
Basic earnings (loss)
per share.............. $ 0.34 $ (0.56)
Diluted earnings (loss)
per share.............. $ 0.34 $ (0.56)
Weighted average shares
outstanding:
Basic................. 2,936,589 3,356,589
Diluted............... 2,948,709 3,356,589
</TABLE>
- --------
(1) Covers the period from January 1, 1998 to June 24, 1998.
(2) Elimination of software sales from Hicomp to COPE, Inc.
(3) Elimination of intercompany management fees
(4) Amortization of goodwill related to the acquisition of Hicomp
(5) Amortization of goodwill related to the acquisition of Forum
(6) Decrease in interest expense attributable to the assumed repayment of $2.5
million in borrowings from the proceeds of the offering.
F-43
<PAGE>
COPE, Inc.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(Amounts in U.S. Dollars, except share amounts)
For The Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
COPE, Inc. Hicomp GmbH(1) Pro Forma
------------ -------------- ---------------------------
Historical Adjustments Combined
---------------------------- ----------- ------------
<S> <C> <C> <C> <C>
Net Revenue
Total revenue......... $ 24,905,521 $450,907 $ 25,356,428
Cost of sales......... (16,561,361) (915) (16,562,276)
------------ -------- ------------
Gross profit.......... 8,344,160 449,992 8,794,152
------------ -------- ------------
Operating expenses
Selling, general and
administrative
expenses............. (7,881,755) (349,775) (8,231,530)
Consultancy expenses.. (343,229) (14,402) (357,631)
Depreciation and
amortization......... (1,788,478) (40,075) (891,013)(2) (2,719,566)
------------ -------- --------- ------------
Total operating
expenses........... (10,013,462) (404,252) (891,013) (11,308,727)
------------ -------- --------- ------------
Operating income
(loss)................. (1,669,302) 45,740 (891,013) (2,514,575)
Other income (expense):
Interest expense...... (146,280) (30,562) 75,000 (3) (101,842)
Interest income....... 40,836 0 40,836
Interest income
related party........ 15,295 0 15,295
Other................. (31,834) 27,659 (4,175)
------------ -------- --------- ------------
(121,983) (2,903) 75,000 (49,886)
------------ -------- --------- ------------
Earning (loss) before
taxes.................. (1,791,285) 42,837 (816,013) (2,564,461)
Current income taxes.... 0 0 0
Deferred income taxes... 123,038 (23,560) 99,478
------------ -------- --------- ------------
Net income (loss)....... $ (1,668,247) $ 19,277 $(816,013) $ (2,464,983)
============ ======== ========= ============
Basic earnings (loss)
per share.............. $ (0.49) $ (0.69)
Diluted earnings (loss)
per share(4)........... $ (0.49) $ (0.69)
Weighted average shares
outstanding
Basic................. 3,418,217 3,585,909
Diluted............... 3,418,217 3,585,909
</TABLE>
- --------
(1) Covers the period from January 1, 1999 to April 18, 1999.
(2) Amortization of goodwill related to the acquisition of Hicomp
(3) Decrease in interest expense attributable to the assumed repayment of $2.5
million in borrowings related of the net proceeds from the Offering
(4) Shares issuable upon exercise of stock options are not included in the
calculation of earnings per share when their effect is anti-dilutive
F-44
<PAGE>
Preliminary Offering Prospectus
for
800,000 par value shares of common stock
with a par value per share of USD 0.001
- deliverable through book-entry transfer of the Certificates
deposited with Depository Trust Company for credit to Deutsche Borse Clearing
AG's account -
from the capital increase for cash resolved by the meeting of the Board of
Directors on November 30, 1999
and
up to
100,000 par value shares of common stock
with a par value per share of USD 0.001
- deliverable through book-entry transfer of the Certificates
deposited with Depository Trust Company for credit to Deutsche Borse Clearing
AG's account -
taken from the shareholdings of existing shareholders
in view of the Greenshoe option granted to Norddeutsche Landesbank -
Girozentrale
each carrying full dividend rights as from the fiscal year 2000
Securities Code Number 876 954 -
- Common Code 100 94 313 -
- ISIN Code US 217 208 107 5 -
- Valor Number CH 952517 -
of
COPE, Inc.
Delaware, USA
<PAGE>
and
Company Report
for admission to the Geregelter Markt
and to trading on the
Neuer Markt
of the Frankfurt Stock Exchange
of
3,405,423 par value shares of common stock
with a par value per share of USD 0.001
USD 3,405.-
and
800,000 par value shares of common stock
with a par value per share of USD 0.001
USD 800.-
from the capital increase for cash resolved by the meeting of the Board of
Directors on November 30, 1999
each carrying full dividend rights as from the fiscal year
from January 1, 2000 through December 31, 2000
- Securities Code Number 876 954 -
- Common Code 100 94 313 -
- ISIN Code US 217 208 107 5 -
- Valor Number CH 952517 -
and
up to
373,110 par value shares of common stock
with a par value per share of USD 0.001
USD 373.-
in view of the option rights granted or to be granted in connection with the
Stock Option Plan
into par value shares of common stock
carrying full dividend rights for the fiscal year in which the option is
exercised
and
up to
24,621 par value shares of common stock
with a par value per share of USD 0.001
USD 25.-
in view of the warrant rights granted by COPE, Inc.
into par value shares of common stock
carrying full dividend rights for the fiscal year in which the warrant is
exercised
of
COPE, Inc.
Delaware, USA
<PAGE>
Verkaufsprospekt
fur
Stuck 800.000 auf den Namen lautende Stammaktien
im Nennbetrag von USD 0,001 je Aktie
- lieferbar in Form von Miteigentumsanteilen
an dem von der DTC fur die Clearstream Banking AG verwahrten Sammelbestand -
aus der vom Board of Directors am 30. November 1999 beschlossenen
Kapitalerhohung gegen Bareinlagen
sowie
bis zu
Stuck 100.000 auf den Namen lautende Stammaktien
im Nennbetrag von USD 0,001 je Aktie
- lieferbar in Form von Miteigentumsanteilen
an dem von der DTC fur die Clearstream Banking AG verwahrten Sammelbestand -
aus Altaktionarsbesitz
im Hinblick auf die der Norddeutsche Landesbank--Girozentrale eingeraumte
Mehrzuteilungsoption
(,,Green Shoe")
mit jeweils voller Gewinnanteilberechtigung ab dem Geschaftsjahr 2000
Wertpapier-Kenn-Nummer 876 954 -
- ISIN Code US 217 208 107 5 -
- Valorennummer CH 952517 -
der
COPE, Inc.
Delaware, USA
<PAGE>
zugleich
Unternehmensbericht
fur die Zulassung zum Geregelten Markt
mit Aufnahme des Handels im
Neuen Markt
an der Frankfurter Wertpapierborse
fur
Stuck 3.405.423 auf den Namen lautende Stammaktien
im Nennbetrag von USD 0,001 je Aktie
USD 3.405,-
sowie
Stuck 800.000 auf den Namen lautende Stammaktien
im Nennbetrag von USD 0,001 je Aktie
USD 800,-
aus der vom Board of Directors am 30. November 1999 beschlossenen
Kapitalerhohung gegen Bareinlagen
mit jeweils voller Gewinnanteilberechtigung ab dem Geschaftsjahr 2000
Wertpapier-Kenn-Nummer 876 954 -
- ISIN Code US 217 208 107 5 -
- Valorennummer CH 952517 -
sowie
bis zu
Stuck 373,110 auf den Namen lautende Stammaktien
im Nennbetrag von USD 0,001 je Aktie
USD 373,-
im Hinblick auf die im Zusammenhang mit dem Stock Option Plan gewahrten oder zu
gewahrenden Optionsrechte zum Bezug von auf den Namen lautenden Stammaktien mit
voller
Gewinnanteilberechtigung fur das Geschaftsjahr, in dem das Optionsrecht
ausgeubt wird
sowie
bis zu
Stuck 24.621 auf den Namen lautende Stammaktien
im Nennbetrag von USD 0,001 je Aktie
USD 25,-
im Hinblick auf die von der COPE, Inc. gewahrten Wandlungsrechte zur Wandlung
in auf den Namen lautende Stammaktien mit voller Gewinnanteilberechtigung fur
das Geschaftsjahr, in dem das Wandlungsrecht ausgeubt wird.
der
COPE, Inc.
Delaware, USA
<PAGE>
GENERAL INFORMATION
Liability for the contents of this Prospectus
COPE, Inc. and NORD/LB (see also Caption "Underwriter" of the Prospectus)
assume liability for the contents of this Prospectus pursuant to section 13 of
the Wertpapier-Verkaufsprospektgesetz (German Offering Prospectus Act) and
section 77 of the Borsengesetz (German Stock Exchange Act), each in conjunction
with sections 45ff. of the Borsengesetz, and herewith state that to the best of
their knowledge the information contained in this Prospectus is accurate and
that no material circumstances have been omitted.
Subject of the Offering Prospectus / Company Report
The subject of the Prospectus as an Offering Prospectus is
. 800,000 par value shares of common stock with a par value per share of
USD 0.001 from the capital increase for cash resolved by the meeting of
the Board of Directors on November 30, 1999.
. up to 100,000 par value shares of common stock with a par value per share
of USD 0.001 taken from the shareholdings of existing shareholders in
view of the Greenshoe option granted to NORD/LB
each carrying full dividend rights as from the fiscal year from January 1, 2000
through December 31, 2000.
The subject of the Prospectus as a Company Report is
. 3,405,423 par value shares of common stock with a par value per share of
USD 0.001
. 800,000 par value shares of common stock with a par value per share of
USD 0.001 from the capital increase for cash resolved by the meeting of
the Board of Directors on November 30, 1999 in Rotkreuz, Switzerland
each carrying full dividend rights as from the fiscal year from January 1, 2000
through December 31, 2000,
. up to 373,110 par value shares of common stock with a par value per share
of USD 0.001 in view of the option rights granted or to be granted in
connection with the Stock Option Plan into par value shares of common
stock
. up to 24,621 par value shares of common stock with a par value per share
of USD 0.001 in view of the warrant rights granted by COPE, Inc. into par
value shares of common stock each carrying full dividend rights for the
fiscal year in which the warrant is exercised.
each carrying full dividend rights for the fiscal year in which the option is
exercised.
THE OFFERING
General Information
A total of 800,000 par value shares of common stock of COPE, Inc. with a par
value per share of USD 0.001 are being offered for sale in this Prospectus.
Additionally, a total of up to 100,000 par value shares of common stock of
COPE, Inc. with a par value per share of USD 0.001 may be offered in case that
NORD/LB exercises its Greenshoe option granted by two major existing
stockholders.
The 800,000 shares have been acquired by NORD/LB who has undertaken to offer
the shares for sale under the terms of a public offering, during the period
between February 7, 2000 and February 9, 2000 (with the right to curtail the
offering period), for the account of COPE, Inc. and in the case of the shares
currently belonging to existing shareholders, for the account of those
shareholders as part of the bookbuilding procedure.
A-1
<PAGE>
The total volume of the shares on offer is composed of:
. 800,000 par value shares of common stock with a par value per share of
USD 0.001 from the capital increase for cash resolved by the meeting of
the Board of Directors on November 30, 1999 in Rotkreuz, Switzerland
. up to 100,000 par value shares of common stock with a par value per share
of USD 0.001 taken from the shareholdings of existing stockholders in
view of the Greenshoe option granted to NORD/LB
each carrying full dividend rights as from the fiscal year from January 1, 2000
through December 31, 2000, while the holders of shares of common stock have no
subscription rights (see also captions "Description of Securities" and
"Dividend Policy").
The price for the shares on offer ranges from EURO 19 to EURO 21 per share.
The price range, within which bids were submitted, was announced at a press
conference on February 4, 2000, and was published together with the public
offer for sale in the Boersenzeitung on February 5, 2000. An announcement
regarding the availability of the preliminary offering prospectus/company
report and its approval by the Frankfurt Stock Exchange, Listing, was published
in both the Boersenzeitung and the Bundesanzeiger.
The final selling price will be determined by NORD/LB, with the consent of
COPE, Inc. on February 9, 2000 on the basis of the order book drawn up during
the bookbuilding process. It is scheduled to be published in the Boersenzeitung
on February 10, 2000. Admission of COPE's common stock in the Frankfurt Stock
Exchange and the availability of the preliminary offering prospectus/company
report, was published in both the Boersenzeitung and the Bundesanzeiger.
Investors can obtain information regarding the number of shares allotted to
them from their custodian bank as of February 10, 2000. It is anticipated that
purchasers will be required to pay the purchase price for the shares plus the
standard securities commission on February 14, 2000.
In connection with the allocation of the up to 100,000 par value shares of
common stock to be placed, NORD/LB is entitled to make additional allocations
or to take other measures in order to stabilize the market price or to maintain
this price at a level which it would not otherwise attain. Such stabilization
measures may be discontinued at any time.
Stock exchange admission and listing on Frankfurt Stock Exchange
The total share capital of COPE, Inc., which amounts to a nominal value of
USD 3,405.42, has been admitted to the Geregelter Markt (Second Trading
Segment) of the Frankfurt Stock Exchange with trading on the "Neuer Markt" on
February 9, 2000. Admission to trading on the Neuer Markt is envisaged for
February 11, 2000.
In the event that NORD/LB exercises its Green Shoe option, it will apply for
admission to trading of up to 100,000 Greenshoe shares together with COPE, Inc.
on the Neuer Markt.
Availability of the shares
In general, the shares of common stock offered in this Prospectus will trade
on the Neuer Markt of the Frankfurt Stock Exchange only through book entry
transfers of interests therein held through Clearstream Banking AG (see also
caption: "book-entry-only issuance of common stock trading on German stock
exchanges"). NORD/LB will act as paying and depository agent (see also caption:
"book-entry-only issuance of common stock trading on German stock exchanges").
A-2
<PAGE>
Common stock of a Delaware Corporation
The currently outstanding common stock of COPE, Inc. amounts to 3,405,423
shares with a par value per share of USD 0.001. Hence, the total aggregate par
value is USD 3,405.- (diluted). In the event of liquidation, dissolution or
winding up the stockholders are entitled to proportionately share in all assets
remaining after payment of liabilities in accordance with (for a more
comprehensive overview of the rights of the stockholders see caption
"Description of Securities") COPE, Inc.'s Delaware state identification number
is 2178897 8100.
Recent Developments of Common Stock
Since August 1998, COPE, Inc. has issued securities in the following
transactions:
A. In August 1998, COPE, Inc. granted to 39 of its 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.
B. In September 1998, pursuant to an Amended and Restated Securities
Purchase Agreement and Plan of Reorganization dated July 24, 1998, the holders
of all of the issued and outstanding capital stock of COPE Holding AG
transferred those shares to COPE, Inc. in exchange for COPE, Inc.'s issuance of
2,862,000 shares of its common stock. Of these shares, 270,000 shares were
issued pursuant to a Registration Statement on Form S-4 and the balance of
2,592,000 shares were issued to the two co-founders of COPE Holding AG pursuant
to Section 4(2) of the 1933 Act. There was no underwriter involved in this
issuance.
C. In the fourth quarter of 1998, COPE, Inc. issued 20,207 shares of common
stock upon the exercise of outstanding common stock purchase warrants. The
issuance was conducted pursuant to Regulation S under the 1933 Act. There was
no underwriter involved in this issuance.
D. In November 1998, COPE, Inc. granted to its officers and directors
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 were issued pursuant
to Section 4(2) of the 1933 Act. There was no underwriter involved in this
issuance.
E. In January 1999, COPE, Inc. granted to its employees options to purchase
an aggregate of 129,900 shares of common stock at exercise prices ranging from
$20.00 to $50.00 per share. The options were issued pursuant to Section 4(2) of
the 1933 Act. There was no underwriter involved in this issuance.
F. In April, 1999, COPE, Inc. issued 420,000 shares of common stock to Uwe
Hinrichs in exchange for all of the issued and outstanding shares of Hicomp
GmbH. The issuance was conducted pursuant to Section 4(2) of the 1933 Act.
There was no underwriter involved in this issuance.
G. In April 1999, COPE, Inc. issued 22,390 shares of common stock to its
employees upon the exercise of outstanding common stock options. The issuance
was conducted pursuant to Section 4(2) of the 1933 Act. There was no
underwriter involved in this issuance.
H. In October 1999, COPE, Inc. issued 5,172 shares of common stock upon the
exercise of common stock purchase warrants. The issuance was conducted pursuant
to Regulation S under the 1933 Act. There was no underwriter involved in this
issuance.
I. In November 1999, COPE, Inc. issued 4,500 shares of common stock to three
of its officers upon the exercise of outstanding common stock options. The
issuance was conducted pursuant to a Registration Statement on Form S-8 filed
under the 1933 Act. There was no underwriter involved in this issuance.
J. In November 1999, COPE, Inc. granted to its employees, officers and
directors options to purchase an aggregate of 82,800 shares of common stock at
an exercise price of $22.00 per share. The issuance was conducted pursuant to
Section 4(2) of the 1933 Act. There was no underwriter involved in this
issuance.
A-3
<PAGE>
Major existing stockholders of COPE's common stock:
<TABLE>
<CAPTION>
Interest
after the placement
-------------------------------------
Interest
before the not incl.
placement Greenshoe incl. Greenshoe
------------------ ------------------ ------------------
Number of Interest Number of Interest Number of Interest
shares in % shares in % shares in %
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Adrian Knapp............ 1,301,000 38.2% 1,301,000 30.9% 1,301,000 30.9%
Stephan Isenschmid...... 1,301,000 38.2% 1,301,000 30.9% 1,251,000 29.7%
further Directors and
Officers............... 23,370 0.7% 23,370 0.6% 23,370 0.6%
Uwe Hinrichs............ 220,000 6.5% 220,000 5.3% 170,000 4.0%
Free Float.............. 560,053 16.4% 1,360,053 32.8% 1,460,053 34.7%
--------- ---- --------- ---- --------- ----
Total................. 3,405,423 100% 4,205,423 100% 4,205,423 100%
========= ==== ========= ==== ========= ====
</TABLE>
[DIAGRAM OF THE STRUCTURE OF THE COPE, INC. GROUP APPEARS HERE]
Corporate structure of COPE, Inc.
According to the Delaware General Corporation law and the applicable bylaws
of COPE, Inc., COPE, Inc. is governed exclusively by its Board of Directors,
except in the case of fundamental matters, including amendments to the
Certificate of Incorporation, and mergers and reorganizations, in which cases
Delaware law and the bylaws of COPE, Inc. require the favorable vote of the
holders of at least a majority of all outstanding voting shares.
A supervisory board ("Aufsichtsrat") as required for German stock
corporations under the German stock corporation act ("Aktiengesetz") or a
similar body is non-existing and is also not required under Delaware law.
A-4
<PAGE>
Substantial equity interests
COPE, Inc. holds the total share capital of COPE Holding AG, Rotkreuz,
Switzerland, which was founded at the stockholders meeting on August 2nd 1991
and entered in the Commercial Register of the Canton Luzern, originally under
the name of Cope AG with a total share capital of CHF 100,000.-. Pursuant to
its relocation the corporation was entered in the Commercial Register of the
Canton Zug (No. CH-170.3.018.595-1) on September 15, 1993. Its currently
registered total share capital is CHF 146,000.-, which is fully paid. The
purpose of COPE Holding AG is the acquisition, holding and disposal of equity
investments, administration of intangible rights and acquisition, sale and rent
of real estate. The book value of COPE Holding AG was $3,604,671 as of
September 30, 1999.
COPE Holding AG holds the total share capital of COPE AG, Rotkreuz,
Switzerland, which was founded at the stockholders meeting on March 25, 1998
and entered in the Commercial Register of the Canton Zug (No. CH-170.3.022.016-
2) on April 1, 1998 with a total share capital of CHF 600,000.-, which is fully
paid. Its purpose is the import, export and trade with computer-hardware and
software as well as services in the IT-industry. The book value of COPE AG was
600,000 Swiss francs as of September 30, 1999.
COPE Holding AG holds the total share capital of COPE GmbH, Olching,
Germany, which was founded at the partners meeting on March 6, 1995 with the
amendment on May 2, 1995 and entered in the Commercial Register of the Munich
District Court (No. HRB 109763) on June 8, 1995 with a total share capital of
DEM 100,000.-. Its currently registered total share capital is EURO 300,000.-,
which is fully paid. The purpose of COPE GmbH is the distribution of computer
systems, computer parts and peripherals and development of computer-software as
well as business, product and personnel consulting in the area of IT. The book
value of COPE GmbH was one Swiss franc as of September 30, 1999.
COPE Holding AG holds the total share capital of COPE HandelsgmbH, Vienna,
Austria, which was founded at the partners meeting on April 6, 1994 and entered
in the corporations book of the Vienna District Court (No. FN 97305) on May 20,
1994 with a total share capital of ATS 1.000.000,-, which is fully paid. The
purpose of COPE HandelsgmbH is the trade with computer peripherals. The book
value of COPE HandelsgmbH was one Swiss franc as of September 30, 1999.
COPE Holding AG holds the total share capital of HICOMP Software Systems
GmbH, Hamburg, Germany, which was founded at the partners meeting on August 11,
1993 and entered in the Commercial Register of the Hamburg District Court (No.
HRB 53850) on September 22, 1993, originally under the name of Hinrichs &
Hinrichs GmbH, with a total share capital of DEM 50,000.-, which is fully paid.
Its purpose are activities in all areas of business consulting and information
processing and the execution of the corresponding actions and the entering into
the legal transactions in connection herewith as well as activities in similar
industries. These include consulting and planning activities, organization and
technical rationalization activities, delivery of expert opinions and studies,
programming, development and exploitation of software systems and products,
including granting and obtaining licences and training activities in all
aforementioned areas, distribution and trade with machinery, electrical
equipment and peripherals of electronic data processing. The book value of
HICOMP Software Systems GmbH was 40,000 Swiss francs as of September 30, 1999.
A-5
<PAGE>
Each of the COPE, Inc. subsidiaries obtain annual audits of their financial
statements pursuant to the financial reporting laws of their jurisdiction,
except for COPE GmbH and Forum GmbH each of which obtain limited reviews of
their financial statements. Each of the COPE, Inc. subsidiaries, other than
COPE GmbH and Forum GmbH, have received audit reports on their 1998 financial
statements that do not include any disclaimers or qualifications. Set forth
below are the public accountants for COPE, Inc. and each of its subsidiaries:
<TABLE>
<C> <S>
COPE, Inc. ATAG Ernst & Young Ltd.,
Zurich, Switzerland
COPE Holding AG ATAG Ernst & Young Ltd.,
Zurich, Switzerland
COPE AG ATAG Ernst & Young Ltd.,
Zurich, Switzerland
Hicomp Software Ernst & Young Deutsche Allgemeine Treuhand AG,
Systems GmbH (formerly Schitag Ernst & Young)
Hamburg, Germany
COPE GmbH Ernst & Young Deutsche Allgemeine Treuhand AG,
(formerly Schitag Ernst & Young)
Munich, Germany
Forum GmbH Ernst & Young Deutsche Allgemeine Treuhand AG,
(formerly Schitag Ernst & Young)
Munich, Germany
COPE Europa Treuhand (Member of
HandelsgmbH Ernst & Young International)
</TABLE>
A-6
<PAGE>
INVESTMENTS
COPE's ability to conceive and to expeditiously introduce to the market
practice-oriented and innovative data storage and data security solutions is
the most important precondition for the implementation of the goals of the
company. The success and the rapid development of the company over the last
few years is largely attributable to its employees. Their motivation,
commitment and their readiness to adapt to and master new technologies on an
ongoing basis will also be a comparative advantage of COPE in the future. In
order to achieve this objective, highly qualified employees will be recruited
on a continuous basis. Predominantly, COPE will invest in new employees in the
fields of research, technical customer service, distribution and project
oriented business.
COPE has identified investments in the field of further development of its
own backup-software HIBACK and HIBARS, and the training and further
qualification of their employees as major factors for the success of the
company which-simultaneously-shall afford to the customers the necessary
protection of their investments.
With the acquisition of all business shares of Forum GmbH, Olching, which
was completely merged in the first quarter 1999 into COPE GmbH, Olching, and
HICOMP Software Systems GmbH, Hamburg being executed in the previous months,
the first acquisitions in the history of the company are now being integrated
into the group. Further acquisitions will be made in the future following the
capital increase and the listing of COPE, Inc. at the Frankfurt Stock
Exchange, "Neuer Markt".
COPE invested approximately $1.1 million in the business year 1999 and
intends to invest approximately $9.3 million in the business year 2000. Of
those investments $0.5 million in 1999 and approximately $1.1 million in 2000
will be allocated to additional personnel expenses and $0.6 million in 1999
and approximately $7.8 million in 2000 to the planned expansion of COPE's
international business activities and additional acquisitions. Within the
context of investment planning for purposes of the current business year the
purchase of Miracle XRP, software equipment for thirty additional working
places and additional software have already been considered.
Miracle XRP was introduced in the fourth quarter of 1999 and was launched
on January 1, 2000. Miracle XRP is a standard software package. Its standard
modules and its modifications, among others, will meet the following
requirements: administration of orders, accounting, stock keeping,
marketing/distribution, calculation of commissions, maintenance contracts;
rental agreements; maintenance of software and management information systems.
At present, COPE's software systems already meet the aforementioned
requirements. Aside from serving as an integration tool for the comprehensive
package offered by COPE, Miracle XRP will, as a standard package with open
interfaces, produce substantial improvements in the field of distributive
evaluation, serving as a basis for targeted marketing measures.
The emphasis of investments over the past three years has been related to
the purchase of Forum GmbH with an amount of $962,977.-. Moreover, investments
for plant and equipment purposes have been effected on a customary level (for
the business year 1996: $229,210.-, for the business year 1997: $585,881.- and
for the business year 1998: $370,208.-). The purchase of Hicomp Software
Systems GmbH on April 1999 was a non cash transaction (share exchange).
The investments have been financed by cash-flow payments, however, all
recent and current investments have been predominantly equity-financed.
Sales and Marketing
For the market in German-speaking countries, investments for marketing
activities are currently undertaken for the business segment of sales of
solutions. For the marketing of COPE's products in other countries,
investments are undertaken in Europe and the United States. Key distribution
measures are uniformly implemented throughout the COPE group.
Consulting
The expansion of consulting services will be furthered by the employment of
nine additional employees.
A-7
<PAGE>
RESEARCH AND DEVELOPMENT
Both research and development play a crucial role to our business.
Subsequent to COPE's acquisition of HICOMP Software Systems GmbH the
development of software products became very important for its business. COPE
is planning on increasing the capacities to further develop its proprietary
Back-up Software HIBACK & HIBARS.
Additionally, COPE is focusing on extending its business development team,
which is researching the market for innovative technologies and products. In
case of positive results from due evaluation and testing procedures of a
specific technology or product the business development team then proposes such
technology or product to the management for the use of COPE.
COPE's management believes, that a strong market position can only be
granted by continuing technological development.
PATENTS AND LICENSES
COPE currently does not hold any patents or licenses.
Although the agreements between COPE and its product vendors are
nonexclusive and short-term in nature, there are no specific dependencies (see
also caption: "Products and Services").
QUALITY MANAGEMENT (ISO 9001)
COPE has its own quality management team. The quality of the services and
products sold by COPE is being tested on a standardized basis. Statistical
data, which is being generated, helps to sort out poor quality services and
products, revolving mistakes, etc.
COPE has been ISO 9001-certified since 1995.
RECENT DEVELOPMENTS AND OUTLOOK
Recent Business Development
Fiscal year 1999 has successfully developed during the first 9 months. Sales
grew in this period $24,905,521 (+ 43.7%) compared to $17,324,933 of the same
period in 1998. This growth is based on all business segments. Strongest growth
with 105.6% was achieved by the services segment.
During the nine months ended September 30, 1999, COPE had a net loss of
$1,668,247 as compared to net income of $435,630 during the prior year period.
The decrease in income is primarily attributable to the amortization of
goodwill involved with COPE's acquisitions of Hicomp in April 1999 and Forum in
June 1998, as well as an increase in research and development, selling and
marketing expenses of approximately $600,000 during the three months ended
September 30, 1999 relating to the Hiback and Hibars software products.
As of the date of this prospectus, the audited consolidated financial
statements of COPE for the 1999 fiscal year are not available. Management
anticipates that net revenue for the year ended December 31, 1999 will be
approximately $33,000,000, which amounts to an increase of approximately 14%
over net revenue during the prior year period. The increase in net revenue
would be approximately 19% as compared to the prior year period when calculated
without taking into account the effect of the stronger US dollar in 1999 as
compared to 1998. Management expects that net revenue in 1999 will be
approximately $17,000,000 in Germany, $13,000,000 in Switzerland and $3,000,000
in Austria.
A-8
<PAGE>
Management anticipates that COPE's gross profit margin for the year ended
December 31, 1999 will be approximately 33% compared to approximately 30% for
the prior year. The increase is primarily attributable to the large internal
growth in sales of services as a percentage of total revenue and the increase
in the profit margin for products sold in Germany.
COPE anticipates that it will incur a net loss of approximately $2,900,000
in 1999 as compared to net income of $1,011,571 during the prior year period.
The decrease in income is mainly attributable to the amortization of goodwill
of approximately $2,300,000 related to the Hicomp and Forum acquisitions as
well as increases in research and development, selling and marketing expenses
of approximately $800,000 relating to their own software products during the
last six months of 1999.
Outlook
Based on the business development of the 1999 fiscal year, COPE expects
sales to grow in fiscal year 1999 as compared to fiscal year 1998. This growth
in sales and revenues is reflected in the financial statements as of September
30, 1999.
COPE has positioned itself in a niche of the IT industry, which is expected
to considerably grow further. Enterprises have become more and more aware of
the problems arising from storing and securing mass data. Being an independent
provider COPE is able to offer optimal and individually tailored storage and
security solutions to its customers.
Support of Consulting Services
Crucial to COPE's business is the solution as opposed to the product. A
significant portion of the customer's expenses for data storage and security
solutions is being dedicated nowadays to consulting in respect of system design
and implementation. Consulting services tend to achieve higher margins than
direct reselling of products from the manufacturer to the customer. Sales in
the business segments consulting and integration services is scheduled to be
supported by further marketing activities.
Growth based on specific acquisitions
Aside from its inherent growth COPE will significantly grow based on further
acquisitions. COPE focuses on enterprises, which share COPE's dedication to
high standard consulting and services. Through those acquisitions COPE intends
to among others gain additional experienced staff.
While COPE did not yet enter into any agreements with such enterprises there
may be the possibility of short-term acquisitions after the offering.
Proprietary software-technology as an accelerator to COPE's future business
Subsequent to the acquisition of HICOMP Software Systems GmbH in April 1999
COPE prospered to a full system provider with its own proprietary software-
solutions. In order to convey the potential of this software to the market COPE
engaged in significant marketing activities for the brand names HIBACK &
HIBARS.
The strong support of this high margin business segment is crucial to COPE's
growth strategy.
COPE expects to significantly enlarge its degree of publicity through its
dual listing on NASDAQ National Market System and Neuer Markt Frankfurt as well
as through its concurrent marketing activities.
The Year 2000 Issue brings both chances and risks to the IT industry. COPE
believes to have stronger sales opportunities in the field of data storage from
the beginning of 2000.
A-9
<PAGE>
[translation of the admission clause:]
On the basis of the above
Company Report
the
3,405,423 par value shares of common stock
with a par value per share of USD 0.001
and
800,000 par value shares of common stock
with a par value per share of USD 0.001
each carrying full dividend rights as from the fiscal year 2000
- Securities Code Number 876 954 -
- Common Code 100 94 313 -
- ISIN Code US 217 208 107 5 -
- Valor Number CH 952517 -
and
up to
373,110 par value shares of common stock
with a par value per share of USD 0.001
in view of the option rights granted or to be granted in connection with the
Stock Option Plan
into par value shares of common stock
carrying full dividend rights for the fiscal year in which the option is
exercised
and
up to
24,621 par value shares of common stock
with a par value per share of USD 0.001
in view of the warrant rights granted by COPE, Inc.
into par value shares of common stock
carrying full dividend rights for the fiscal year in which the option is
exercised
of
COPE, Inc.
Delaware, USA
have been admitted to the Geregelter Markt
with trading on the
Neuer Markt
of the Frankfurt Stock Exchange
Hannover, February 2000
Norddeutsche Landesbank
Girozentrale
<PAGE>
Aufgrund des vorstehenden
Unternehmensberichtes
siud
Stuck 3.405.423 auf den Namen lautende Stammaktien
im Nennbetrag von USD 0,001 je Aktie
sowie
Stuck 800.000 auf den Namen lautende Stammaktien
im Nennbetrag von USD 0,001 je Aktie
mit jeweils voller Gewinnanteilberechtigung ab dem Geschaftsjahr 2000
- Wertpapier-Kenn-Nummer 876 954 -
- Common Code 100 94 313 -
- ISIN Code US 217 208 107 5 -
- Valorennummer CH 952517 -
sowie
bis zu
Stuck 373.110 auf den Namen lautende Stammaktien
im Nennbetrag von USD 0,001 je Aktie
im Hinblick auf die im Zusammenhang mit dem Stock Option Plan gewahrten oder zu
gewahrenden Optionsrechte zum Bezug von auf den Namen lautenden Stammaktien mit
voller
Gewinnanteilberechtigung fur das Geschaftsjahr, in dem das Optionsrecht
ausgeubt wird
sowie
bis zu
Stuck 24.621 auf den Namen lautende Stammaktien
im Nennbetrag von USD 0,001 je Aktie
im Hinblick auf die von der COPE, Inc. gewahrten Wandlungsrechte
zur Wandlung in auf den Namen lautende Stammaktien mit voller
Gewinnanteilberechtigung fur das Geschaftsjahr, in dem das Wandlungsrecht
ausgeubt wird
der
COPE, Inc.
Delaware, USA
zum Geregelten Markt
mit Aufnahme des Handels im
Neuen Markt
an der Frankfurter Wertpapierborse
zugelassen worden.
Hannover, im Februar 2000
Norddeutsche Landesbank
Girozentrale
