SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COCONUT CODE, INC.
1430 SOUTH FEDERAL HIGHWAY
DEERFIELD BEACH, FLORIDA 33441
(954) 481-9331
FOR FISCAL YEAR ENDED: DECEMBER 31, 1996
COMMISSION FILE NUMBER: 33-64164-A
STATE OF INCORPORATION: FLORIDA
IRS EMPLOYER I.D.: 59-2556411
SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT:
NAME OF EXCHANGE ON
TITLE OF EACH CLASS: WHICH REGISTERED:
NONE NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
NAME OF EXCHANGE ON
TITLE OF EACH CLASS: WHICH REGISTERED:
COMMON STOCK, PAR VALUE
$.01 PER SHARE NONE
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT REGISTRANT WAS REQUIRED
TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS. YES(X) NO( )
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: YES ( ) NO (X)
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF
REGULATION S-B IS NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PARTS II OR III OF THIS FORM
10-KSB OR ANY AMENDMENT TO THIS FORM 10-KSB. (X)
ISSUER'S REVENUES FOR THE MOST RECENT FISCAL YEAR: $2,244,015
AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES COMPUTED BY
REFERENCE TO THE PRICE AT WHICH THE STOCK WAS SOLD, OR THE AVERAGE BID AND ASKED
PRICES OF SUCH STOCK, AS OF DECEMBER 31, 1996: NO MARKET EXISTS FOR THE
COMPANY'S COMMON STOCK.
NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK AS OF MARCH 31, 1997
3,532,325.
<PAGE>
Introductory Statement
The Private Securities Litigation Reform Act provides a "safe harbor" for
forward-looking statements. Certain statements included in this Form 10-KSB are
forward-looking, such as statements on the anticipated growth in revenues from
the sale of the Company's products, the expectation that such revenue growth
will result in profitability and that cash flows will be sufficient to fund the
Company's operations. Such forward-looking statements, are based on the
Company's current expectations and are subject to a number of risks and
uncertainties that could cause actual results to differ significantly from
results expressed or implied in any forward-looking statements made by, or on
behalf of, the Company. The Company assumes no obligation to update any
forward-looking statements contained herein or that may be made from time to
time by, or on behalf of, the Company.
Part I.
Item 1. Description of Business
Business Development
Coconut Code, Inc. (the "Company" or "Registrant") was organized under the
laws of the State of Florida on April 30, 1984 to address the growing demand for
quality based business software, specifically for the restaurant industry.
Today, the Company continues to design, develop, market and support software for
the restaurant industry and, also, for the hospitality industry and small
businesses in general. The Company's products have been installed in over 2,000
facilities in the United States, Canada and other international countries.
Business of Issuer
The Registrant currently markets over fifteen products, each of which is a
derivative of the Company's two core products: the Food Service Management
System(TM) (FSMS(R)) and TimeWare(R) System.
The FSMS(R) is a restaurant and hospitality industry specific software
application which is designed to (1) assist the user in increasing profitability
by reducing overhead costs, (2) simplify day-to-day accounting activities, (3)
improve control over inventory and, (4) provide timely reporting of financial
information to management. In addition, the software includes features which
allow it to interface with cash registers and other point-of-sale hardware
thereby eliminating the need to manually input daily sales data and other
related information into the accounting records. The Company offers the software
in configurations to satisfy the needs of all users, from single unit operations
to multi-unit operations which require the reporting of consolidated financial
information.
<PAGE>
Part I. (cont'd.)
Item 1. Description of Business (cont'd.)
Business of Issuer (cont'd.)
TimeWare(R), the Company's other core product, is an advanced time and
attendance software application designed to fully automate and improve control
over the entire payroll process. The software is run on a data collection unit
purchased from a major electronics manufacturer and serves as the time clock
into which employees enter information on time-in, breaks and time-out. The
system is designed to provide accurate collection and timely reporting of
employee time and attendance information and can also be used as a communication
tool between employees and management with respect to scheduling employee time
and other matters.
The Company also derives revenue from support of its products, principally
FSMS(R) and TimeWare(R), through on-site consultation at the customer's facility
and through a telephone access program.
The Company markets its products through its own, small sales group, as
well as dealers and independent sales agents. The majority of sales to single
unit operations are handled by dealers and sales agents, while sales to
multi-unit, regional and national chains are handled by the Company's own sales
group.
The Company markets its products in the highly competitive software
industry which is characterized by rapid technological advances and,
consequently, product obsolescence. The Company's ability to compete effectively
in the marketplace is highly dependent upon such factors as product features,
user friendliness, technical support and service, product development
capabilities and the marketing and distribution infrastructure.
On May 1, 1996, the Company began releasing to select customers the latest
version of its FSMS(R) accounting software. This new software was specifically
designed to run on Microsoft's Windows 95 operating system, N.T. and Windows
3.11 and includes many features and enhancements not available in earlier
versions of FSMS(R). The Company continues to improve and refine the new
software and now believes that the finished product will be available for
shipment to all customers by the latter part of the third quarter of 1997.
In 1995, the Company embarked on a program to address certain issues that
concern large national and regional restaurant chains such as labor scheduling,
forecasting cooked food requirements, and the reporting of meaningful
information to management covering individual store level operations through
total company performance. Using the Company's leading edge programming
technology known as SDE(TM) (System Development Environment), prototype systems
were designed for presentation to national and regional chains allowing
prospective customers to choose from a wide array of software applications or,
<PAGE>
Part I. (cont'd.)
Item 1. Description of Business (cont'd.)
Business of Issuer (cont'd.)
alternatively, working with the Company's research and development staff, design
their own exact fit applications. For 1996, custom software development revenue
approximated $1,067,000, up from $103,000 in 1995. In February 1997, the Company
entered into a $1,908,000 contract with one of its major development customers
for the installation and support of custom software at approximately 700 of the
customer's fast food units. For 1997, the Company believes that custom software
sales could approximate $3,000,000.
The Company believes that its core products, FSMS(R) and TimeWare(R)
together with custom software development, give it a significant competitive
advantage because of software features not offered by competitors, Company
support of these products and, most importantly, the fact that the Company
writes and controls its own code for both FSMS(R) and TimeWare(R).
For the years ended December 31, 1996 and 1995, the Company's expenditures
for research and development approximated $767,000 and $477,000, respectively.
The Company believes that its future success is highly dependent upon its
ability to enhance its current product base in order to maintain technological
competitiveness and satisfy the needs of current and prospective customers, as
well as develop new products which have a synergy with existing products and
demonstrate market potential.
For 1996, the Company had one customer which accounted for 28% of total
revenue. In 1995, no one customer represented more than 10% of revenue.
As of March 31, 1997, the Registrant had 43 employees, all of whom were
full-time.
Item 2. Description of Property
The Company's executive and principal administrative, sales, marketing, and
research and development functions are housed in leased office space in
Deerfield Beach, Florida. The office comprises approximately 8,000 square feet,
occupied under a lease which expires on January 31, 1998. The Company's former
Chicago sales office lease which expired on January 31, 1996 was not renewed
because most work is being performed at customers' facilities.
During 1996, the Company's employee based grew over 30%, from 31 employees
at the end of 1995 to 41 employees at the end of 1996. Because of this growth,
the Company is rapidly outgrowing its present office facility. Accordingly, the
Company is working with the building's landlord to locate a larger facility in
the general vicinity of the present office building.
<PAGE>
Part I. (cont'd.)
Item 3. Legal Proceedings
The Company is not a party to any legal proceedings, the outcome of which
would have a material adverse impact on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 1996.
Part II.
Item 5. Market for Common Equity and Related Stockholder Matters
There is no public market for the Company's common equity securities.
The approximate number of holders of record of the Company's common stock
as of March 31, 1997 was 233.
The Company has never paid a cash dividend on its common stock and does not
now or in the near future anticipate paying a cash dividend.
Item 6. Management's Discussion and Analysis of Financial Condition and Plan of
Operations
Results of Operations
Net sales for the year ended December 31, 1996 were $2,244,015 representing
an increase of 12.9% when compared to the prior year sales of $1,986,992. The
increase in net sales of $257,023 was attributable to a surge in sales of custom
software, up approximately $1,000,000 over 1995, offset, in part, by a drop in
sales of DOS-based TimeWare and FSMS(R) products because customers deferred
ordering the DOS-based products in anticipation of the release of the Company's
new Windows(R) based software. As of December 31, 1996, the Company had a
backlog of orders approximating $450,000.
Effective January 1, 1995, the Company began recognizing revenue on its
phone support and hardware maintenance contracts over the life of the contract,
which is generally twelve months. This change was made because of the growing
significance of these contracts to the overall business of the Company. Prior to
this change, there was not a significant difference between the Company's former
cash basis method of recognizing revenue on these contracts and the Company's
current method.
In 1996, operating costs and expenses increased $258,100 to $2,947,486. The
principal reasons for this increase were the addition of research and
development staff, higher general and administrative expenses attributable, in
part, to benefits and bad debt expense, offset partly by lower selling and
marketing expenses due to less sales subject to commission and lower cost of
sales because of the drop in
<PAGE>
Part II. (cont'd.)
Item 6. Management's Discussion and Analysis of Financial Condition and Plan of
Operations (cont'd.)
Results of Operations (cont'd.)
sales of the Company's DOS-based TimeWare product in 1996.
Despite the increases in net sales in 1996 and 1995, net losses of $697,353 and
$668,222, respectively, were incurred in each year and have contributed to the
accumulated deficit of $3,010,042 at December 31, 1996. The Company expects that
the net losses experienced will turnaround with further increases in net sales.
Liquidity and Capital Resources
At December 31, 1996, the Company had a working capital deficit of $443,873
compared to working capital of $208,208 at December 31, 1995. During 1996, net
cash used in operations of the Company was $230,631, with investing activities
using net cash of $52,942, principally for the acquisition of computer
equipment. Offsetting net cash used in operations and investing activities was
net cash provided from financing activities, primarily $130,400 in proceeds from
notes payable, less $20,824 in loan payments and, loans from certain officers of
the Company in the amount of $35,100.
The Company has a $300,000 line of credit with a bank. Advances under the
line bear interest at the prime rate plus one percent and are secured by the
Company's accounts receivable and the personal guarantees of three principal
stockholders. During 1996, $103,000 in advances were taken under the line and
remain outstanding at December 31, 1996. No advances were taken during 1995. The
line of credit expires on May 1, 1997.
In September 1993, the Company commenced a stock offering for up to
1,000,000 common shares of the Company at a price of $5.10 per share. Proceeds
raised in the offering, which expired in May 1994, approximated $1,352,000, net
of offering costs.
In January 1995, the Company obtained a $100,000 term loan with a bank. The
loan agreement requires interest only payments, at the bank's prime rate plus
one percent, until the principal amount outstanding is converted to a three year
term loan. At December 31, 1995, $72,600 was outstanding under this facility. In
February 1996, the Company borrowed the remaining $27,400. All borrowings under
this facility were used primarily to finance the purchase of computer hardware
for use by the Company's research and development staff in the design of the
Company's new Windows(R) based software. In March 1996, the $100,000 balance
outstanding was converted to a three year term loan bearing interest at the
prime rate plus one percent and requiring 36 equal monthly payments of principal
and interest through March 1999.
<PAGE>
Part II. (cont'd.)
Item 6. Management's Discussion and Analysis of Financial Condition and Plan of
Operations (cont'd.)
Liquidity and Capital Resources (cont'd.)
Other than the stock offering, line of credit and term loan facility, the
Company's primary source of funds has been from the sale of products and
services. The Company's negative cash flow and continued net losses are
primarily attributable to an insufficent level of revenue to cover research and
development and other operating expenses.
During 1996 and 1995, the Company's significant capital expenditures were
for upgrading the Company's computers and research and development associated
with new products and platforms.
The Company believes that cash flow generated from continuing sales of its
DOS-based products, the release of its new Windows(R) based accounting software
and cash flow from fixed-price contracts for the custom development of
accounting related software for national and regional restaurant chains,
together with the $300,000 line of credit will be sufficient to fund the
Company's operations through the end of the year and will allow the Company to
continue expanding marketing and product distribution.
In February 1997, The Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" which requires adoption for periods ending after
December 15, 1997. SFAS No. 128 simplifies the accounting for earnings per share
by requiring the presentation of basic earnings per share including only
outstanding common stock and diluted earnigs per share including the effect of
dilutive common stock equivalents. The Company's basic and diluted earnings per
share are the same, as the Company's common stock equivalents are antidilutive.
In addition, The Company's basic and diluted earnings per share are the same as
that computed under APB No. 15, "Earnings Per Share", as presented in the
accompanying statements of operations. SFAS No. 128 must be adopted for periods
ending after December 15, 1997 and be retroactively reflected in the financial
statements.
Other Factors That May Affect Future Operating Results
The market for the Company's products is generally characterized by rapidly
changing technology and frequent new product introductions that can make
existing products obsolete or unsalable. The success of the Company will depend
to a large degree upon its ability to develop and introduce in timely fashion,
enhancements to its existing products and new products that meet customer
requirements and changing industry standards. The inability of the Company to
introduce in a timely manner new products and respond to changes in the industry
could have a material adverse impact on the Company's business, results of
operations and financial condition.
<PAGE>
Part II. (cont'd.)
Item 6. Management's Discussion and Analysis of Financial Condition and Plan of
Operations (cont'd.)
Other Factors That May Affect Future Operating Results
The development of new, technologically advanced products is a complex
process requiring accurate prediction of technological and market trends. In
addition, the introduction and marketing of new or enhanced products require the
Company to manage the transition from current products in order to minimize any
disruption in customer orders and related sales. There can be no assurance that
the Company will successfully develop and market in a timely manner new products
and enhancements, that its new products will satisfy the changing needs of the
marketplace, or that it will successfully manage the transition from existing
products. In addition, the Company has on occasion experienced delays in the
introduction of new products and product enhancements. Furthermore, there can be
no assurance that the Company will be able to introduce new products and
enhancements in a timely manner. Beacause of the complexity of the Company's
products, undetected errors may be present when the product is first introduced
or new versions are released. There can be no assurance that, despite extensive
testing by the Company, errors will not be found in new peoducts until after
official release of the product to the marketplace. The occurrence of such
errors could result in the loss or delay in market acceptance of the Company's
products, damage to the Company's reputation, diversion of management resources,
any of which could have a material adverse effect on the Company.
In addition, the Company's growth has placed, and will continue to place,
strains on its management, operations and systems. To effectively manage its
growth, the Company must continuously evaluate the adequacy of its existing
systems and procedures, including its financial and internal control systems and
management structure. There can be no assurance that the Company's management
will adequately anticipate all of the changing demands that growth will impart
on the Company. Any failure by the Company's management to effectively
anticipate and implement the changes required to sustain the Company's growth
would have a material adverse effect on the Company.
Item 7. Financial Statements
See Item 13 for a list of the Company's financial statements filed as part
of this report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
Part III.
Item 9. Directors, Executive Officers, Promoters and Control Persons
The directors, executive officers and significant employees of the Company
are as follows:
Name Age Position
---- --- --------
John E. Abdo 53 Chairman of the Board
Mark E. Wotell 50 President and Director
Matthew J. Wotell 45 Executive Vice President of
Sales and Director
Christopher L. Wotell 44 Vice President of Marketing
and Director
Eugene J. Wotell 41 Vice President Support
Services and Director
Clement E. Wotell 76 Vice President of Production
and Director Emeritus
Frank J. Abdo 48 Director
J. Kenneth Gulden 56 Director
James W. Rascoe 35 Vice President of Research
and Development
Daniel W. Reese 49 Vice President and Chief
Financial Officer
Business Experience of Directors, Executive Officers and
Significant Employees
John E. Abdo has served as Chairman of the Board of the Company since 1991.
Since 1974, Mr. Abdo has been Chairman of the Board and President of Wellington
Construction & Realty, Inc., a real estate development company headquartered in
South Florida, which has built several thousand residential dwelling units as
well as many commercial and industrial properties since 1971. In 1984, he was
elected to the Board of Directors of BankAtlantic, a Federal Savings Bank
("BankAtlantic") and currently serves as Vice Chairman of the Board and Chairman
of its Executive Committee. Since 1985, Mr. Abdo has held the position of
Chairman of the Board and President of BankAtlantic Development Corporation, a
wholly-owned subsidiary of BankAtlantic.
<PAGE>
Part III. (cont'd.)
Item 9. Directors, Executive Officers, Promoters and Control Persons (cont'd.)
Business Experience of Directors, Executive Officers and
Significant Employees (cont'd.)
In 1987, Mr. Abdo became a member of the Board of Directors and Vice Chairman of
BFC Financial Corporation, the controlling owner of BankAtlantic Bancorp., Inc.
In 1994, Mr. Abdo was elected to the Board of Directors and named Chairman of
BFC Financial Corporation, the controlling owner of BankAtlantic Bancorp., Inc.,
and was elected to the Board of Directors and named Vice Chairman and Chairman
of the Executive Committee of BankAtlantic Bancorp, Inc., the holding company of
BankAtlantic. Since 1990, Mr. Abdo has also been a Director of Benihana National
Corporation, the International Japanese Steakhouse.
Mark E. Wotell was a co-founder of the Company and has served in a variety
of positions since its inception. Since 1988, he has served as President of the
Company and as a Director. Mr. Wotell received a Bachelor of Aeronautical and
Astronautical Engineering degree from Ohio State University in 1970 and did
extensive post graduate work in the field of aerodynamics. He is the son of
Clement E. Wotell and brother of Matthew J. Wotell, Christopher L. Wotell and
Eugene J. Wotell.
Matthew J. Wotell was a co-founder of the Company and has served in a
variety of positions with the Company since its inception in 1984. Since 1988,
he has served as Vice President of Sales (effective September 1, 1994, Executive
Vice President of Sales) and as a Director. He is the son of Clement E. Wotell
and brother of Mark E. Wotell, Christopher L. Wotell and Eugene J. Wotell.
Christopher L. Wotell was a co-founder of the Company and has served in a
variety of positions since its formation in 1984. Since 1988, he has served as
Vice President of Marketing and as a Director. He is the son of Clement E.
Wotell and brother of Mark E. Wotell, Matthew J. Wotell and Eugene J. Wotell.
Eugene J. Wotell was a co-founder of the Company and has served in a
variety of positions since its inception in 1984. Since 1988 to December 31,
1994, he served as Vice President of Research and Development. Effective January
1, 1995, he became Vice President of Support Services responsible for all
product support. He is the son of Clement E. Wotell and brother of Mark E.
Wotell, Christopher L. Wotell and Matthew J. Wotell.
<PAGE>
Part III. (cont'd.)
Item 9. Directors, Executive Officers, Promoters and Control Persons (cont'd.)
Business Experience of Directors, Executive Officers and
Significant Employees (cont'd.)
Clement E. Wotell was a co-founder of the Company and has served in a
variety of positions since its inception in 1984. Since 1988, he has served as
Vice President of Production for the Company and as a Director. Effective July
1, 1993, he resigned as a Director of the Company and was designated a
non-voting Director Emeritus. He is the father of Mark E. Wotell, Christopher L.
Wotell, Matthew J. Wotell and Eugene J. Wotell.
Frank J. Abdo has served on the Board of Directors for the Company since
1991. Mr. Abdo is the Executive Vice President for Wellington Construction &
Realty, Inc., a real estate development company headquartered in South Florida,
which has built and developed several thousand residential dwelling units as
well as many commercial and industrial properties since 1971. In 1987, Mr. Abdo
was elected to the Board of Directors of BankAtlantic Development Corporation, a
wholly-owned subsidiary of BankAtlantic. He is the brother of John E. Abdo.
J. Kenneth Gulden has served on the Board of Directors of the Company since
1991. Mr. Gulden is the Chairman of the Board and President of the Cove
Restaurant and Marina, Inc. in Deerfield Beach, Florida and has held such
position since 1976. He was an active member of the Florida Bar until 1989 when
he chose an inactive status.
James W. Rascoe served as Director of Research and Development for the
Company from May 1993 to December 1994. Effective January 1, 1995, he was named
Vice President of Research and Development. Prior to joining the Company, Mr.
Rascoe spent four years as Vice President with Fortis Development Corporation
and approximately two years as President of Innovative Research and Development,
both of which were involved in the research and development of computer software
applications. Mr. Rascoe is married to the daughter of Clement E. Wotell.
Daniel W. Reese has served as Vice President and Chief Financial Officer
since July 1994. Prior to joining the Company, Mr. Reese spent approximately 13
years with RJR Nabisco, Inc. where he held a variety of positions, the most
recent of which was Vice President of Finance for the Del Monte Foods Division.
Before joining RJR Nabisco, Mr. Reese worked approximately nine years for
Coopers & Lybrand, Certified Public Accountants.
<PAGE>
Part III. (cont'd.)
Item 10. Executive Compensation
The following table sets forth the cash compensation paid with respect to
services rendered in all capacities to the Company during the fiscal year ended
December 31, 1996 to the five most highly compensated executive officers of the
Company whose cash compensation (including bonuses and deferred compensation)
exceeded $60,000 and for all executive officers as a group:
Name of Individual or Capacities in Cash
Number in Group Which Served Compensation (1)
--------------- ------------ ----------------
Mark E. Wotell (2) President $ 76,096
Christopher L. Wotell (2) Vice President 75,672
Matthew J. Wotell (2) Vice President 72,925
Eugene J. Wotell (2) Vice President 72,925
James W. Rascoe (2) Vice President 72,925
All executive officers
as a group (7 persons) $480,533
--------
(1) The table includes all compensation earned by the named individuals and is
gross of any loans made to the Company in 1996 by the listed officers. The
Company does not provide its executive officers with any personal benefits.
(2) The Registrant has entered into employment contracts with each of the above
named executive officers. See "Management - Employment and Related
Agreements".
Management - Employment and Related Agreements
Each of the executive officers listed in the cash compensation table are
parties to employment and non-compete agreements which expire on July 31, 1998.
The agreements provide for annual salaries of $129,441 for Mark E. Wotell,
$108,805 for Christopher L. Wotell, $105,068 for Matthew J. Wotell, $105,068 for
Eugene J. Wotell and for James W. Rascoe a minimum of $70,000 which increases
over the term of the agreement to $100,000. For 1996 and 1995, each executive
officer, except James W. Rascoe, elected to accept a lesser salary than
specified in their respective agreement and also waived their right to be paid
the difference in the future. Additionally, Mr. Rascoe's agreement provides that
he will receive 25,000 shares of the Company's common stock for every $1,000,000
in sales by the Company of products Mr. Rascoe plans, designs and develops, as
defined in the agreement, up to a maximum of 150,000 shares. Through December
31, 1996, the Company had charged compensation expense and credited accrued
expenses for $60,000 representing the fair market value, as determined by the
Board of Directors, of 150,000 shares of the Company's common stock on December
31, 1996. Such determination was required as the Company's
<PAGE>
Part III. (cont'd.)
Item 10. Executive Compensation (cont'd.)
Management - Employment and Related Agreements (cont'd.)
shares are not, and have not been in the recent past, actively traded. On
January 1, 1997, Mr. Rascoe was issued 150,000 shares of the Company's common
stock under the terms of the agreement. Each of the agreements also include a
provision that the executive officer will not engage in activities in
competition with the Company, as defined in the agreements, so long as they are
employees of the Company and for a period of three years thereafter. The Board
of Directors, in their sole discretion, has the authority to increase at any
time the annual salary of any executive officer.
John E. Abdo, Chairman of the Board, is also a party to an agreement with
the Company which expires on July 31, 1998. The agreement provides for minimum
annual compensation of $100,000 for services rendered by him on behalf of the
Company. Mr. Abdo's annual compensation may be increased at any time by the
Board of Directors of the Company in its sole discretion. The agreement further
provides that Mr. Abdo may not engage in certain activities in competition with
the Company, as defined in the agreement, so long as he is employed by the
Company and for a period of three years thereafter. For 1996 and 1995, Mr. Abdo
elected to receive no compensation under his agreement and also waived his right
to receive the difference in the future.
Shareholders' Agreement
Mark E. Wotell, Christopher L. Wotell, Matthew J. Wotell, Eugene J. Wotell,
Clement E. Wotell, John E. Abdo and Frank J. Abdo are parties to a Shareholders'
Agreement which provides that each party will take such actions and will vote
their shares so as to cause the Board of Directors of the Company to consist of
ten members, four of whom shall be identified by the above named Wotells (the
"Wotells"), four of whom shall be identified by John E. Abdo and Frank J. Abdo
and two of whom shall be mutually agreed upon by the Wotells and John E. Abdo
and Frank J. Abdo. The terms of the agreement provide that the agreement will
terminate upon the earlier of the closing of a public offering, as defined, or
an agreement to terminate the Shareholders' Agreement by the holders of 80% of
the shares of common stock held by the parties to the agreement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 1997, the ownership of the
Company's common stock by (a) each person who is known by the Company to own of
record or beneficially own more than five percent (5%) of the Company's
outstanding common stock, (b) each of the Company's directors, officers and
significant employees and (c) all directors, officers and significant employees
as a group.
<PAGE>
Part III. (cont'd.)
Item 11. Security Ownership of Certain Beneficial Owners and Management
(cont'd.)
Number of Shares Percent
Beneficially Owned of Class
------------------ --------
John E. Abdo
1350 N.E. 56th Street
Ft. Lauderdale, FL 33334 1,012,000 28.6%
Mark E. Wotell (1) 313,245 8.9
Christopher L. Wotell (1) 313,245 8.9
Matthew J. Wotell (1) 313,245 8.9
Eugene J. Wotell (1) 313,245 8.9
Clement E. Wotell (1) 313,245 8.9
J. Kenneth Gulden
641 S.W. 16th Street
Boca Raton, FL 33486 202,000 5.7
Frank J. Abdo
1350 N.E. 56th Street
Ft. Lauderdale, FL 33334 101,000 2.9
James W. Rascoe (1) 151,000 4.3
Daniel W. Reese (1) 4,000 .001
All Directors, Officers and
Significant Employees as
a Group 3,036,225 86.0
(1) Unless otherwise indicated, the address of each person is c/o Coconut Code,
Inc., 1430 South Federal Highway, Deerfield Beach, Florida 33441.
Item 12. Certain Relationships and Related Transactions
John E. Abdo, Chairman of the Board, and Frank J. Abdo, a Director of the
Company own a controlling interest in Time Information Systems Inc. ("TIS"). TIS
was licensed by the Company to market and support the Company's products. In
January 1992, the principals of TIS decided to discontinue its activities.
Subsequently, the Company purchased the inventory and equipment of TIS at its
fair market value (approximately $30,000) and agreed to pay TIS, or its
assignees, a 10% commission based
<PAGE>
Part III. (cont'd.)
Item 12. Certain Relationships and Related Transactions (cont'd.)
on sales (net of costs) resulting from customer introductions made by TIS up to
a maximum of $50,000. For 1996 and 1995, no commissions were earned or paid. For
1995, the Company was charged $18,000 for rent pertaining to a portion of office
space occupied off-site of Company facilities by the Company's Chairman. No rent
charges were made in 1996. In 1996, the 1995 rent charge was forgiven.
In July 1990, the Company agreed to pay James W. Rascoe $100,000 for the
development of the software program which runs the Company's TimeWare(R) system.
Amounts earned are payable monthly on the basis of 10% of the net proceeds
received by the Company from TimeWare(R) sales. In 1996, the remaining $7,823
due under this agreement was paid. In addition, the agreement provides that Mr.
Rascoe will receive 25,000 shares of the Company's common stock for every
$1,000,000 in sales by the Company of products he plans, designs and develops,
as defined in the agreement, up to amaximum of 150,000 shares. Through December
31, 1996, the Company charged compensation expense and credited accrued expenses
for $60,000, representing the fair market value, as determined by the Board of
Directors, of 150,000 shares of the Company's common stock on December 31, 1996.
Such determination by the Board was required as the Company's shares are not,
and have not been in the recent past, actively traded. On January 1, 1997, the
Company issued Mr. Rascoe 150,000 shares of the Company's common stock. Mr.
Rascoe is married to the daughter of Clement E. Wotell. Mr. Rascoe became an
employee of the Company on May 10, 1993 and is currently Vice President of
Research and Development.
The Company entered into an agreement with Benihana National Corporation
and Benihana of Tokyo pursuant to which the Company agreed to develop and
install customized versions of the Company's FSMS(R) in several Benihana
restaurants. The development and installations were completed in June 1992.
Pursuant to the agreement, the Company received $120,000 in the form of cash and
notes. At December 31, 1996, no amounts were outstanding under this agreement.
John E. Abdo, the Company's Chairman of the Board, is also a director of
Benihana National Corporation.
The Company believes that all of the transactions between the Company and
its officers, directors and affiliates of the Company were on terms no less
favorable than could have been obtained on an arms-length basis from unrelated
third parties.
<PAGE>
Part III. (cont'd.)
Item 13. Exhibits, Lists and Reports on Form 8-K
The following documents are filed as part of this Form 10-KSB:
1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996 and 1995
Consolidated Statements of Changes in Stockholders' (Deficit) Equity
for the years ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1995
Notes to Consolidated Financial Statements
Item 13. Exhibits, Lists and Reports on Form 8-K
2. Exhibits
Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated by
reference.
Exhibit No. Description
----------- -----------
3.1 Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant
3.3 Copy of Shareholders' Agreement
3.5 Form of Warrant Certificate
6.1 Form of Employment Agreement between the Registrant and John
E. Abdo
6.2 Form of Employment Agreement between the Registrant and Mark
E. Wotell
6.3 Form of Employment Agreement between the Registrant and
Christopher L. Wotell
6.4 Form of Employment Agreement between the Registrant and
Eugene J. Wotell
6.5 Form of Employment Agreement between the Registrant and
Matthew J. Wotell
<PAGE>
Part III. (cont'd.)
Item 13. Exhibits, Lists and Reports on Form 8-K (cont'd.)
2. Exhibits
6.6 Form of Employment Agreement between the Registrant and
Clement E. Wotell
6.7 Form of Employment Agreement between the Registrant and
James W. Rascoe
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, there unto duly authorized.
Coconut Code, Inc. (Registrant)
By: /s/ Daniel W. Reese
------------------------------
Daniel W. Reese, Vice President
and Chief Financial Officer
June 9, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of May 30, 1997.
John E. Abdo /s/ John E. Abdo
Chairman of the Board and Director ----------------------------
Mark E. Wotell /s/ Mark E. Wotell
President and Director ----------------------------
Christopher L. Wotell /s/ Christopher L. Wotell
Vice President of Marketing, ----------------------------
Secretary and Director
Matthew J. Wotell /s/ Matthew J. Wotell
Executive Vice President of Sales ----------------------------
and Director
Eugene J. Wotell /s/ Eugene J. Wotell
Vice President of Support Services ----------------------------
and Director
Clement E. Wotell /s/ Clement E. Wotell
Vice President of Production ----------------------------
and Director Emeritus
Frank J. Abdo /s/ Frank J. Abdo
Director ----------------------------
J. Kenneth Gulden /s/ J. Kenneth Gulden
Director ----------------------------
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
TOGETHER WITH REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Management of
Coconut Code, Inc.:
We have audited the accompanying consolidated balance sheets of Coconut Code,
Inc. (a Florida corporation) and subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
(deficit) 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 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 Coconut Code, Inc. and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
April 11, 1997.
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 95,883 $ 242,603
Accounts receivable (net of allowance for doubtful accounts of $153,074
in 1996 and $92,377 in 1995) 274,912 317,714
Inventories 27,274 31,352
Current portion of finance receivables (net of unearned lease income of $4,797
in 1996 and $11,646 in 1995 and allowance for doubtful
accounts of $5,010 in 1996 and $15,851 in 1995) 22,208 50,518
Notes receivable (net of allowance for doubtful accounts of $70,000
in 1996 and $49,000 in 1995) 22,470 72,179
Prepaid expenses 20,644 57,331
---------- ----------
Total current assets 463,391 771,697
---------- ----------
PROPERTY AND EQUIPMENT, net 261,801 250,154
OTHER ASSETS:
Long-term portion of finance receivables (net of unearned lease income of
$16,876 in 1996 and $18,105 in 1995 and allowance for doubtful
accounts of $74,990 in 1996 and $36,654 in 1995) 29,108 52,975
Other assets 15,093 2,293
---------- ----------
$ 769,393 $1,077,119
========== ==========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable $ 235,917 $ 157,831
Accrued expenses 234,537 171,379
Customer deposits 87,392 8,636
Due to related party -- 7,823
Deferred revenue 133,194 100,420
Loans from officers 79,900 44,800
Current portion of note payable 33,324 --
Line of credit 103,000 72,600
---------- ----------
Total current liabilities 907,264 563,489
---------- ----------
LONG-TERM PORTION OF NOTE PAYABLE 45,852 --
COMMITMENTS (Note 8 and 12)
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock ($.01 par, 10,000,000 shares authorized, 3,382,325
issued and outstanding) 33,823 33,823
Additional paid-in capital 2,792,496 2,792,496
Accumulated deficit (3,010,042) (2,312,689)
---------- ----------
(183,723) 513,630
---------- ----------
$ 769,393 $1,077,119
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
NET SALES $ 2,244,015 $ 1,986,992
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 347,842 415,716
Selling and marketing 707,296 847,719
General and administrative 1,055,298 893,196
Research and development 767,046 477,332
Depreciation and amortization 70,004 55,423
----------- -----------
2,947,486 2,689,386
----------- -----------
LOSS FROM OPERATIONS (703,471) (702,394)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 619 14,866
Interest expense (20,464) (10,150)
Other 25,963 29,456
----------- -----------
6,118 34,172
----------- -----------
NET LOSS $ (697,353) $ (668,222)
=========== ===========
NET LOSS PER COMMON SHARE $ (0.21) $ (0.20)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,382,325 3,381,420
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit (Deficit) Equity
------ ------ ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 3,378,325 $ 33,783 $ 2,772,136 ($1,644,467) $ 1,161,452
Net loss -- -- -- (668,222) (668,222)
Sale of common stock 4,000 40 20,360 -- 20,400
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 3,382,325 33,823 2,792,496 (2,312,689) 513,630
Net loss -- -- -- (697,353) (697,353)
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996 3,382,325 $ 33,823 $ 2,792,496 ($3,010,042) ($ 183,723)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(697,353) $(668,222)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 70,004 55,423
Provision for doubtful accounts 256,203 120,767
Changes in operating assets and liabilities:
Accounts receivable (164,906) (104,316)
Inventories 4,078 15,787
Finance receivables, net 24,682 45,239
Prepaid expenses 36,687 40,745
Other assets (12,800) 16,642
Accounts payable and customer deposits 156,842 23,954
Accrued expenses and deferred revenue 95,932 138,763
--------- ---------
Total adjustments 466,722 353,004
--------- ---------
Net cash used in operating activities (230,631) (315,218)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (81,651) (94,396)
Decrease in notes receivable 28,709 53,770
--------- ---------
Net cash used in investing activities (52,942) (40,626)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in due to related party (7,823) (12,500)
Increase in loans from officers 35,100 44,800
Borrowings under line of credit 103,000 --
Proceeds from notes payable 27,400 72,600
Payments on note payable (20,824) --
Proceeds from issuance of common stock -- 20,400
--------- ---------
Net cash provided by financing activities 136,853 125,300
--------- ---------
Net decrease in cash and cash equivalents (146,720) (230,544)
CASH AND CASH EQUIVALENTS, beginning of year 242,603 473,147
--------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 95,883 $ 242,603
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 20,464 $ 9,549
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) ORGANIZATION:
Coconut Code, Inc. (the "Company") was organized as a Florida corporation on
April 30, 1984. The Company's principal business is to develop, market and
support accounting and management software primarily for the restaurant and
hospitality industries.
The Company markets its products in the highly competitive software industry
which is characterized by rapid technological changes and, consequently, product
obsolescence which could have an adverse effect on the Company's financial
condition and results of operations. The Company believes that its core products
give it a competitive advantage because of product features not offered by
competitors and, most importantly, that the Company owns and controls its own
code for these products.
At December 31, 1996, the Company had a stockholders' deficit of $183,723 a
working capital deficit of $443,873 and has experienced recurring losses since
inception. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company believes that cash flows generated
primarily from custom software development and the availability under the line
of credit through May 1, 1997 will be sufficient to fund the Company's
operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation-
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Software Leasing Company, ("SLC") whose
sole business is to lease software to customers of the Company. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements-
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Fair Value of Financial Instruments-
Statement of Financial Accounting Standards ("SFAS") No. 107 "Disclosures About
Fair Value of Financial Instruments" requires disclosure of the fair value of
certain financial
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.):
Fair Value of Financial Instruments- (cont'd.)
instruments. Accounts receivable, finance receivables, notes receivable,
accounts payable, accrued expenses, loans from officers, notes payable and line
of credit are reflected in the financial statements at cost which approximates
fair value.
Cash and Cash Equivalents-
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Included in cash and cash
equivalents in the accompanying balance sheets is interest bearing cash
approximating $7,700 and $116,000 at December 31, 1996 and 1995, respectively.
Inventories-
Inventories primarily consist of computer hardware, a component of the Company's
time and attendance system, and are stated at the lower of cost (first-in,
first-out) or market.
Finance Receivables-
All of SLC's leases qualify as direct finance sales-type leases under SFAS No.
13, "Accounting for Leases". The Company records the future minimum lease
payments net of the unearned lease income. The unearned lease income is
amortized into other income to reflect a constant periodic rate of return on the
net investment over the term of the leases, which range from 2 to 5 years. The
interest rates on these leases range from approximately 8% to 16%.
Property and Equipment-
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is charged to operations over the estimated useful lives of the
related assets and is computed using the straight-line method.
The estimated useful lives of property and equipment are as follows:
Years
-----
Computer equipment 5
Office equipment 5-7
Leasehold improvements 5
-2-
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.):
Software Development Costs-
In accordance with SFAS No. 86, "Accounting for the Cost of Capitalized Software
to be Sold, Leased or Otherwise Marketed," the Company examines its software
development costs after technological feasibility has been established to
determine the amount of capitalization that is required. Included in "Other
Assets" in the accompanying balance sheets are capitalized costs of $12,800 and
- -0- at December 31, 1996 and 1995, respectively. Capitalized costs are amortized
over the period of benefit, generally three years. No amortization has been
recorded in fiscal 1996 or 1995 as capitalized costs relate to products for
which no revenue has been recognized.
In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". SFAS No. 121
establishes accounting standards for the impairment of long-lived assets and
certain identifiable intangibles to be disposed of. Adoption of SFAS No. 121 did
not have a material effect on the Company's financial condition or results of
operations.
Income Taxes-
Deferred tax assets and liabilities reflect the future tax consequences of the
differences between the financial reporting and tax bases of assets and
liabilities using tax rates in effect for the year in which differences are
expected to reverse. Future tax benefits, such as net operating loss
carryforwards, are recognized to the extent that realization of such benefits is
more likely than not.
In 1996 and 1995, the Company generated loss carryforwards for both book and tax
purposes. At December 31, 1996, the available tax loss carryforward is
approximately $2,317,000 which expires as follows:
Year Amount
---- ------
2008 $273,894
2009 $677,568
2010 $668,222
2011 $697,353
-3-
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.):
Income Taxes- (cont'd.)
Because realization of the net operating loss carryforward is not more likely
than not, a valuation allowance in the same amount has been established and,
accordingly, no deferred tax asset is reflected in the accompanying consolidated
balance sheets.
Net Loss Per Share-
Net loss per share is equal to net loss divided by the weighted average number
of shares of common stock outstanding. Common stock equivalents, which consist
of warrants and stock options issued to employees and directors, are not
included in the determination of net loss per share in 1996 and 1995 since they
would be antidilutive.
In February 1997, The Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" which requires adoption for periods ending after December
15, 1997. SFAS No. 128 simplifies the accounting for earnings per share by
requiring the presentation of basic earnings per share including only
outstanding common stock and diluted earnings per share including the effect of
dilutive common stock equivalents. The Company's basic and diluted earnings per
share are the same since the Company's common stock equivalents are
antidilutive. In addition, the Company's basic and diluted earnings per share
are the same as that computed under APB No. 15, "Earnings Per Share", as
presented in the accompanying statements of operations. SFAS No. 128 must be
adopted for periods ending after December 15, 1997 and be retroactively
reflected in the financial statements.
Revenue Recognition-
In accordance with the provisions of Statement of Position 91-1, "Software
Revenue Recognition," revenue from software and hardware sales is recognized
when the product is installed by Company authorized personnel at the customer's
facility. Revenue on fixed fee software development contracts is recognized
using the percentage-of-completion method.
The Company enters into maintenance agreements which provide for post-sale
customer support. Revenue related to post-sale support activities is amortized
over the terms of the related support contract, generally 12 months.
Research and Development Costs-
Research and development costs are expensed as incurred until the product
reaches
-4-
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.):
Research and Development Costs- (cont'd.)
technological feasibility. These costs primarily consist of wages paid to
employees for the development of the Company's software.
(3) FINANCE RECEIVABLES:
Future minimum rentals on finance receivables consist of the following at
December 31, 1996:
1997 $ 32,015
1998 22,128
1999 38,157
2000 60,689
---------
152,989
Less: Unearned lease income (21,673)
---------
Leases receivable 131,316
Less: Allowance for doubtful
accounts (80,000)
---------
Leases receivable, net $ 51,316
---------
(4) NOTES RECEIVABLE:
The Company has notes receivable from certain customers and related parties as
discussed in Note 8. The notes bear interest ranging from 8% to 10% and require
payments through 1997 in the aggregate principal amount of $92,470.
(5) PREPAID EXPENSES:
Prepaid expenses consist of the following at December 31, 1996 and 1995:
1996 1995
---- ----
Prepaid rent $ -- $15,718
Brochures, videos and information booklets 4,226 4,078
Prepaid sales agent commissions 8,990 13,038
Other prepaid expenses 7,428 24,497
------- -------
$20,644 $57,331
------- -------
-5-
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(6) PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1996 and 1995:
1996 1995
---- ----
Computer equipment $ 395,093 $ 317,555
Office equipment 105,284 101,171
Leasehold improvements 20,051 20,051
--------- ---------
520,428 438,777
Less: Accumulated depreciation (258,627) (188,623)
--------- ---------
$ 261,801 $ 250,154
--------- ---------
(7) ACCRUED EXPENSES:
Accrued expenses consist of the following at December 31, 1996 and 1995:
1996 1995
---- ----
Wages $ 66,819 $ 54,942
State, local and payroll taxes 98,617 94,310
Commissions 60,000 6,526
Other accrued expenses 9,101 15,601
-------- --------
$234,537 $171,379
-------- --------
(8) RELATED PARTY TRANSACTIONS:
In July 1990, the Company agreed to pay a relative of certain stockholders and
officers of the Company $100,000 for the development of the Company's
TimeWare(R) software program. The agreement provides for payments to be made
amounting to ten percent of the net proceeds received by the Company from the
sale of each TimeWare(R) package in any given month. At December 31, 1996 and
1995, the remaining balance outstanding was $ -0- and $7,823, respectively.
Included in notes receivable in the accompanying balance sheets are two notes
from employees. These notes, in the amounts of $4,207 and $2,850 at December 31,
1996, bear interest at 8% with repayment being made through payroll and
commission deductions.
-6-
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(8) RELATED PARTY TRANSACTIONS (cont'd.):
The Company's Chairman of the Board together with another director of the
Company own a controlling interest in Time Information Systems, Inc. ("TIS"),
which was licensed by the Company to market and support the Company's products.
In 1992, TIS discontinued its activities and, subsequently, the Company
purchased TIS's inventory and equipment at fair market value (approximately
$30,000) and agreed to pay TIS a 10% commission on sales (net of cost) resulting
from customer introductions made by TIS up to a maximum of $50,000. No amounts
were paid by the Company in 1996 or 1995 under this agreement.
Under an agreement entered into with Benihana National Corporation and Benihana
of Tokyo, the Company, in June 1992, developed and installed several customized
versions of the Company's back office accounting software in Benihana
restaurants. Pursuant to the agreement, the Company received $120,000 in the
form of cash and notes. At December 31, 1996 and 1995, $ -0- and $24,340,
respectively was outstanding on the notes. The Company's Chairman of the Board
is also a director of Benihana National Corporation.
During 1995, the Company was charged $18,000 for rent pertaining to a portion of
office space occupied off-site of Company facilities by the Company's Chairman.
In 1996, the 1995 rent charges were forgiven.
During 1996 and 1995, certain officers of the Company loaned $35,100 and
$44,800, respectively, to the Company for working capital requirements. These
loans bear interest at 12% for both 1996 and 1995. It is the Company's intent to
repay the majority of these loans by the end of 1997.
(9) BORROWINGS:
The Company has a $300,000 line of credit with a bank. The line of credit
expires on May 1, 1997. Advances under the line bear interest at the prime rate
(8.25% at December 31, 1996) plus one percent and are secured by the Company's
accounts receivable and the personal guarantees of three of the Company's
principal stockholders. In 1996, $103,000 in advances were drawn under this line
and remain outstanding at December 31, 1996.
On January 30, 1995, the Company obtained a $100,000 term loan with a bank. The
loan arrangement requires interest only payments, at the prime rate plus one
percent, until the principal amount outstanding is converted to a three year
term loan. At December 31, 1995, $72,600 was outstanding under this facility. In
February 1996, the
-7-
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(9) BORROWINGS (cont'd.):
Company borrowed the remaining $27,400. All borrowings under this facility were
used primarily to finance the purchase of computer hardware for use by the
Company's research and development staff in the design of its new Windows(R)
based software. In February 1996, the $100,000 balance outstanding under this
facility was converted to a three year term loan bearing interest at the prime
rate plus one percent and requiring 36 equal monthly payments comprised of
principal and interest through March 1999. As of December 31, 1996, $79,176 of
principal was outstanding on the term loan. The term loan matures as follows:
$33,324 in 1997, $33,324 in 1998 and $12,528 in 1999.
(10) STOCKHOLDERS' (DEFICIT) EQUITY:
In September 1993, the Company commenced an SB-1 public offering for the sale of
up to 10,000 units at $510 per unit. Each unit consisted of 100 shares of $.01
par value common stock with restricted transferability and twenty-five
redeemable warrants to purchase twenty-five shares of common stock. Each warrant
entitles the holder to purchase, during the three year period commencing on the
distribution date of the units, as defined in the Prospectus, one share of
common stock at a per share price of $6.50. If the Company completes another
public offering, as defined in the Prospectus, the Company may redeem the
warrants at $.01 per warrant at any time prior to September 1997 upon 30 days
notice to holders. Holders of the warrants may exercise any time prior to
September 1997.
In 1995, the Company sold 4,000 shares of common stock to private investors
resulting in proceeds to the Company of $20,400.
(11) STOCK OPTIONS:
The Company adopted the proforma disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation," in 1996. However, the Company did not
have to disclose the pro-forma effect of 1995 stock option grants since they
were cancelled in 1996. The Company has elected to continue using Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for employee stock options. Each stock option has an exercise price
equal to the market price on the date of grant and, accordingly, no compensation
expense has been recorded for any stock option grant.
In October 1994, the stockholders of the Company approved the 1994 Stock Option
Plan (the "Plan") under which an aggregate of 330,000 common shares are
available for
-8-
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(11) STOCK OPTIONS (cont'd.):
issuance. Under the Plan, incentive stock options and nonqualified stock options
may be granted to purchase common shares at exercise prices not less than fair
market value at the date of grant. Incentive stock options are available for
grant only to employees of the Company, while nonqualified options may be
granted to both employees and certain nonemployees of the Company. The terms of
each option agreement are determined by the Board of Directors.
Stock option activity is as follows:
Number Weighted Average
of Shares Exercise Price
--------- --------------
Balance, December 31, 1994 152,200 $ 5.10
Granted during 1995 165,250 7.75
Cancelled during 1995 (5,700) 5.33
-------
Balance, December 31, 1995 311,750 6.50
Granted during 1996 -0- -0-
Cancelled during 1996 (213,000) 6.43
-------
Balance, December 31, 1996 98,750 6.43
-------
No options were exercisable as of December 31, 1996 and 1995.
(12) COMMITMENTS:
The Company leases its Florida office space pursuant to an operating lease which
requires fixed monthly rental payments. Rent expense for 1996 and 1995 was
$123,339 and $78,816, respectively.
At December 31, 1996, the future minimum rental payments under operating leases
was as follows:
Year Amount
---- ------
1997 $106,356
1998 8,563
The members of the Wotell family and the Company's Vice President of Research
and Development, a relative of the Wotell family, are parties to employment and
non-compete agreements with the Company. The agreements provide for minimum
annual salaries of $129,441 for Mark E. Wotell, $108,805 for Christopher L.
Wotell, $105,068 for Matthew J.
-9-
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(12) COMMITMENTS (cont'd.):
Wotell, $105,068 for Eugene J. Wotell, $82,267 for Clement E. Wotell and a
minimum annual salary of $70,000 increasing to $100,000 by July 31, 1998 for the
Vice President of Research and Development. Additionally, the Vice President of
Research and Development's agreement provides that he will receive 25,000 shares
of the Company's common stock for every $1,000,000 in sales by the Company of
products he plans, designs and develops, as defined in the agreement, up to a
maximum of 150,000 shares. Through December 31, 1996, the Company charged
compensation expense and credited accrued expenses for $60,000, representing the
fair market value, as determined by the Board of Directors, of 150,000 shares of
the Company's common stock on December 31, 1996. Such determination by the Board
was required as the Company's shares are not, and have not been in the recent
past, actively traded. On January 1, 1997, the Company issued the Vice President
of Research and Development 150,000 shares of the Company's common stock.
The annual compensation of each of the parties to the employment and non-compete
agreements may be increased at any time by the Board of Directors at its sole
discretion. In 1996 and 1995, each of the parties to the employment and
non-compete agreements elected to accept annual compensation less than the
amount specified in their respective agreement and also waived their right to
receive the difference in the future. The agreements further provide that each
party to the agreement may not compete with the Company as long as such party is
employed by the Company and for a period of three years thereafter.
(13) MAJOR CUSTOMER:
During 1996, one customer accounted for more than 10% of the Company's total net
sales. Sales to this customer represented approximately 28% of net sales for
1996 and as of December 31, 1996, approximately 8% of gross accounts receivable.
For 1995, no customer accounted for more than 10% of net sales.
-10-
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<PERIOD-START> JAN-01-1996
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