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. AND SUBSIDIARY
1430 SOUTH FEDERAL HIGHWAY
DEERFIELD BEACH, FLORIDA 33441
(954) 481-9331
FOR FISCAL YEAR ENDED: DECEMBER 31, 1997
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: $4,122,473
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, 1997: NO MARKET EXISTS FOR THE
COMPANY'S COMMON STOCK.
NUMBER OF SHARES OUTSTANDING OF REGISTRANT'S COMMON STOCK AS OF MARCH 2, 1998
3,604,509.
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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.
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
2
<PAGE>
Part I. (cont'd.)
Item 1. Description of Business (cont'd.)
Business of Issuer (cont'd.)
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. The majority of sales to single unit operations are handled by
dealers, 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 in the first quarter of 1998.
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,
alternatively, working with the Company's research and development staff, design
their own exact fit applications. For 1997, custom software development revenue
approximated $3,000,000 up from $1,067,000 in 1996. 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.
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).
3
<PAGE>
Part I. (cont'd.)
Item 1. Description of Business (cont'd.)
Business of Issuer (cont'd.)
For the years ended December 31, 1997 and 1996, the Company's expenditures
for research and development approximated $959,000 and $767,000, 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 1997 and 1996, the Company had one customer which accounted for
approximately 65% and 28% of total revenue, respectively.
As of March 2, 1998, the Registrant had 44 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 August 31, 1999. 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.
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 1997.
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 2, 1998 was 260.
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.
4
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Part II. (cont'd.)
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales for the year ended December 31, 1997 were $4,122,000 representing
an increase of 84%, or $1,878,000, over 1996 sales of $2,244,000. The
significant growth in net sales was attributable to the increase in sales of
custom software which were up approximately $2,000,000 over 1996. Partly
offsetting the increase in sales of custom software was a drop in sales of the
Company's DOS-based TimeWare and FSMS(R) products which was primarily due to
customers deferring ordering these products in anticipation of the release of
the Company's new Windows(R) based software. As of December 31, 1997, the
Company had a backlog of orders approximating $267,000.
For 1997, operating costs and expenses rose $452,000 to $3,399,000. The
principal reasons for this increase were higher cost of sales due to the
increase in sales, the addition of research and development staff to work on
custom softwar for national and regional customers and higher general and
administrative expenses lting from growth of the Company. This increase was
partially offset by lower selling and marketing expenses because travel and
related costs were reimbursed by most customers in 1997, whereas in 1996 these
costs were absorbed by the Company. Because of the increase in net sales in
1997, the Company recorded a net profit of $724,000 compared to a net loss of
$697,000 in 1996. While the Company anticipates that the profitable results
reported for 1997 will continue, its ability to sustain and improve upon such
operating results is directly dependent upon (1) its ability to ensure market
acceptance of its products; (2) meeting customer requirements in a timely
manner; and (3) developing enhancements to existing products and introducing new
products which are in the forefront of changing industry standards.
Liquidity and Capital Resources
At December 31, 1997, the Company had working capital of $178,000 compared
to a working capital deficit of $444,000 at December 31, 1996. During 1997, net
cash provided by operations was $529,000, while investing activities,
principally the acquisition of computer hardware, utilized $171,000 of cash.
Financing activities, more fully described below, used $223,000 in cash
primarily for loan repayments, net of new borrowings.
At December 31, 1996, the Company had $103,000 outstanding under its line
of credit with a bank. 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 principal stockholders.
No advances were taken under the line in 1997. On April 29, 1997, the Company
repaid the $103,000 which was outstanding on December 31, 1996. On May 1, 1997,
the credit line expired and was not renewed by the Company.
The Company's three year term loan bears interest at the prime rate plus
one percent (8.5% at December 31, 1997) and requires 36 equal monthly payments
of principal and interest through April 1999. At December 31, 1997 and 1996,
$46,539 and $79,176, respectively, was outstanding under this facility. The loan
matures as follows: $33,324 in 1998 and $13,215 in 1999.
5
<PAGE>
Part II. (cont'd.)
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations (cont'd.)
Liquidity and Capital Resources (cont'd.)
During 1997, the Company entered into three capital lease obligations
aggregating $104,034 for the purchase of computer equipment for use by the
Company. Two of the leases are for a term of 48 months, while the term of the
third lease is for 36 months. Each lease requires an equal monthly payment
comprised of principal and interest. At December 31, 1997, $87,377 was
outstanding under these leases. The leases mature as follows: $24,286 in 1998;
$26,061 in 1999; $29,857 in 2000; and, $7,173 in 2001.
In March 1997, the Company entered into three loans in the aggregate amount
of $44,124 for the purchase of three automobiles for use by the Company's
product support staff in servicing the Company's major national account. The
loans have an interest rate of approximately 9.0% and require equal monthly
payments comprised of principal and interest. At December 31, 1997, $34,135 was
outstanding under these loans. The loans mature as follows: $9,270 in 1998;
$10,098 in 1999; $11,148 in 2000; and, $3,619 in 2001.
Other than the line of credit and other borrowings described above, the
Company's primary source of funds in 1996 and 1997 has been from the sale of
products and services.
During 1997 and 1996, the Company's significant capital expenditures were
for upgrading the Company's personal 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, 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.
Recently Issued Accounting Pronouncements
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share". 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.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information.
SFAS No. 130 establishes standards for the reporting and disclosure of
comprehensive income and its components which will be presented in association
with a company's financial statements. Comprehensive income is defined as the
change in a business enterprise's equity during a period arising from
transactions, events or circumstances relating to non-owner sources, such as
foreign currency translation
6
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Part II. (cont'd.)
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations (cont'd.)
Liquidity and Capital Resources (cont'd.)
Recently Issued Accounting Pronouncements (cont'd.)
adjustments and unrealized gains or losses on available-for-sale securities.
Comprehensive income includes all changes in equity during a period except those
changes resulting from investments by or distributions to owners. SFAS No. 130
is effective as of March 31, 1998.
SFAS No. 131 establishes standards for the way that public companies report
selected information about operating segments in annual and interim financial
reports to shareholders. It also establishes standards for related disclosures
about an enterprise's business segments, products, services, geographic areas
and major customers. SFAS No. 131, which supercedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise, but retains the requirement to
report information about major customers and requires a public company to report
financial and descriptive information about its reportable operating segments.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. SFAS No. 131 requires that a public company
report a measure of segment profit or loss, certain specific revenue and expense
items and segment assets. SFAS No. 131 is effective as of December 31, 1998.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued SOP 97-2, Software
Revenue Recognition. SOP 97-2 supercedes SOP 91-1. Sop 97-2 requires companies
to defer revenue and profit recognition if four required criteria of a sale are
not met. In addition, SOP 97-2 requires that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades, post
product purchase customer support, installation or training.
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.
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
7
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Part II. (cont'd.)
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations (cont'd.)
Liquidity and Capital Resources (cont'd.)
Other Factors That May Affect Future Operating Results (cont'd.)
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. Because 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 products 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.
Year 2000 Compliance
The Company does not believe that it has material exposure to its own
information systems year 2000 compliance. purchased the Company's DOS based
products which will enable such products to comply with year 2000 requirements.
The Company's Windows based products already contain features to comply with
year 2000 requirements. The Company does not believe that it will encounter
significant difficulties with respect to year 2000 compliance issues that its
major vendors may experience because the products that the Company obtains from
its major vendors are generally not year 2000 date sensitive. The Company does
not expect that its vendors' year 2000 difficulties, to the extent that they
exist, will have a significant effect on the Company.
8
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Item II. (cont'd.)
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
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 54 Chairman of the Board
Mark E. Wotell 51 President and Director
Matthew J. Wotell 46 Executive Vice President of
Sales and Director
Christopher L. Wotell 45 Vice President of Marketing
and Director
Eugene J. Wotell 42 Vice President Support
Services and Director
Clement E. Wotell 77 Vice President of Production
and Director Emeritus
Frank J. Abdo 49 Director
J. Kenneth Gulden 57 Director
James W. Rascoe 36 Vice President of Research
and Development
Daniel W. Reese 50 Vice President and Chief
Financial Officer
9
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Part III. (cont'd.)
Item 9. Directors, Executive Officers, Promoters and Control Persons (cont'd.)
Business Experience of Directors, Executive Officers and Significant
Employees
John E. Abdo has served as Chairman of the Board of the Company since 1991.
Mr. Abdo is also President and Chief Executive Officer of The Abdo Companies,
Inc., formerly known as 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, Mr. Abdo was elected to the Board of Directors
of BankAtlantic, a Federal Savings Bank ("BankAtlantic") and currently serves as
Vice Chairman of the Board. In 1987, Mr. Abdo became a member of the Board of
Directors and Vice Chairman of BFC Financial Corporation, the controlling
shareholder of BankAtlantic Bancorp., Inc. In 1994, Mr. Abdo was elected to the
Board of Directors and named Vice Chairman of the newly incorporated
BankAtlantic Bancorp., Inc., the holding company for BankAtlantic. Since 1990,
Mr. Abdo has also been a Director of Benihana National Corporation, the
International Japanese Steakhouse. He is the brother of Frank J. Abdo.
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.
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.
10
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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.)
Frank J. Abdo has served on the Board of Directors for the Company since
1991. Mr. Abdo is the Executive Vice President of The Abdo Companies, Inc.,
formerly known as 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.
11
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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, 1997 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 $79,385
Christopher L. Wotell (2) Vice President 79,970
Matthew J. Wotell (2) Vice President 79,580
Eugene J. Wotell (2) Vice President 79,970
James W. Rascoe (2) Vice President 84,970
--------
All executive officers
as a group (7 persons) $526,645
========
(1) The table includes all compensation earned by the named individuals,
except James W. Rascoe, who also earned $60,000 in non-cash
compensation in connection with his receipt of 150,000 shares of the
Company's common stock under the terms of his employment contract. 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 1997 and 1996, 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 shares are not, and
have not been in the recent past, actively traded. On January 1, 1997, Mr.
Rascoe was issued 150,000 shares
12
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Part III. (cont'd.)
Item 10. Executive Compensation (cont'd.)
Management - Employment and Related Agreements (cont'd.)
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 1997 and 1996, 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.
13
<PAGE>
Part III. (cont'd.)
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 2, 1998, 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.
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
14
<PAGE>
Part III. (cont'd.)
Item 12. Certain Relationships and Related Transactions (cont'd.)
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 on sales (net of costs) resulting from customer introductions
made by TIS up to a maximum of $50,000. For 1997 and 1996, no commissions were
earned or paid.
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 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 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.
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, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31, 1997
and 1996
Consolidated Statements of Changes in Stockholders' (Deficit) Equity for the
years ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1997
and 1996
Notes to Consolidated Financial Statements
15
<PAGE>
Part III. (cont'd.)
Item 13. Exhibits, Lists and Reports on Form 8-K (cont'd.)
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
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
16
<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
March 31, 1998
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 March 31, 1998.
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 ---------------------
17
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
TOGETHER WITH REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Coconut Code, Inc.:
We have audited the accompanying consolidated balance sheets of Coconut Code,
Inc. (a Florida corporation) and subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit) 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, 1997 and 1996 and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 24, 1998.
F-1
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 230,944 $ 95,883
Accounts receivable (net of allowance for doubtful accounts of $139,306
in 1997 and $153,074 in 1996) 489,338 274,912
Inventories 31,808 27,274
Current portion of finance receivables (net of unearned lease income of $3,848
in 1997 and $4,797 in 1996 and allowance for doubtful
accounts of $17,500 in 1997 and $5,010 in 1996) 8,517 22,208
Notes receivable (net of allowance for doubtful accounts of $85,000
in 1997 and $70,000 in 1996) 7,470 22,470
Prepaid expenses 7,392 20,644
----------- -----------
Total current assets 775,469 463,391
PROPERTY AND EQUIPMENT, net 472,781 261,801
OTHER ASSETS:
Long-term portion of finance receivables (net of unearned lease income of
$15,726 in 1997 and $16,876 in 1996 and allowance for doubtful
accounts of $88,150 in 1997 and $74,990 in 1996) 2,451 29,108
Other assets 62,663 15,093
----------- -----------
$ 1,313,364 $ 769,393
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 152,184 $ 235,917
Accrued expenses 205,601 234,537
Customer deposits 21,775 87,392
Deferred maintenance revenue 132,397 133,194
Loans from officers 19,055 79,900
Current portion of notes payable 42,594 33,324
Current portion of leases payable 24,286 --
Line of credit -- 103,000
----------- -----------
Total current liabilities 597,892 907,264
----------- -----------
LONG-TERM PORTION OF NOTES AND LEASES PAYABLE 101,171 45,852
----------- -----------
COMMITMENTS (Note 11)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock ($.01 par, authorized 10,000,000 shares; issued and
outstanding 3,621,009 in 1997 and 3,382,325 in 1996) 36,210 33,823
Additional paid-in capital 2,864,623 2,792,496
Accumulated deficit (2,286,532) (3,010,042)
----------- -----------
614,301 (183,723)
----------- -----------
$ 1,313,364 $ 769,393
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-2
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET SALES $ 4,122,473 $ 2,244,015
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 546,416 347,842
Selling and marketing 600,913 707,296
General and administrative 1,184,235 1,055,298
Research and development 959,452 767,046
Depreciation and amortization 108,471 70,004
----------- -----------
3,399,487 2,947,486
----------- -----------
INCOME (LOSS) FROM OPERATIONS 722,986 (703,471)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 10,521 619
Interest expense (24,067) (20,464)
Other 14,070 25,963
----------- -----------
524 6,118
----------- -----------
NET INCOME (LOSS) $ 723,510 $ (697,353)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic and diluted $ 0.20 $ (0.21)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted 3,590,993 3,382,325
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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)
Share award to Vice President of Development 150,000 1,500 58,500 -- 60,000
Incentive stock grant awards 88,659 887 87,772 -- 88,659
Deferred compensation on incentive stock grant awards -- -- (74,307) -- (74,307)
Exercise of redeemable stock purchase warrant 25 -- 162 -- 162
Net income -- -- -- 723,510 723,510
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 3,621,009 $ 36,210 $ 2,864,623 ($2,286,532) $ 614,301
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 723,510 $(697,353)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 108,471 70,004
Provision for doubtful accounts 233,642 256,203
Compensation expense for stock issuances 14,352 --
Changes in operating assets and liabilities:
Accounts receivable (407,419) (164,906)
Inventories (4,534) 4,078
Finance receivables, net 14,698 24,682
Prepaid expenses 13,252 36,687
Other assets (47,570) (12,800)
Accounts payable and customer deposits (149,350) 156,842
Accrued expenses and deferred revenue 30,267 95,932
--------- ---------
Total adjustments (194,191) 466,722
--------- ---------
Net cash provided by (used in) operating activities 529,319 (230,631)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (171,292) (81,651)
Decrease in notes receivable -- 28,709
--------- ---------
Net cash used in investing activities (171,292) (52,942)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in due to related party -- (7,823)
(Repayment of) proceeds from loans from officers (60,845) 35,100
(Repayment of) borrowings under line of credit (103,000) 103,000
Proceeds from notes and leases payable -- 27,400
Payments on notes and leases payable (59,283) (20,824)
Proceeds from issuance of common stock 162 --
--------- ---------
Net cash (used in) provided by financing activities (222,966) 136,853
--------- ---------
Net increase (decrease) in cash and cash equivalents 135,061 (146,720)
CASH AND CASH EQUIVALENTS, beginning of year 95,883 242,603
--------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 230,944 $ 95,883
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 24,067 $ 20,464
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred during the twelve month period ended
December 31, 1997 amounted to $104,035. Notes payable for fixed asset
purchases during the period amounted to $44,124.
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
COCONUT CODE, INC. AND SUBSISIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(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.
(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 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 "Disclosure
About Fair Value of Financial Instruments requires disclosure of the fair value
of certain financial
F-6
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.):
Fair Value of Financial Instruments (cont'd.)-
instruments. Accounts receivable, finance receivables, notes receivable,
accounts payable, 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 consolidated balance sheets is interest bearing
cash approximating $118,000 and $7,700 at December 31, 1997 and 1996,
respectively.
Inventories-
Inventories consist of computer equipment, 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.
F-7
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.):
Property and Equipment (cont'd.)-
The estimated useful lives of property and equipment are as follows:
Years
-----
Computer equipment 5
Office equipment 5-7
Leasehold improvements 5
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 $62,575 and
$12,800 at December 31, 1997 and 1996, respectively. Capitalized costs are
amortized over the period of benefit, generally three years. No amortization has
been recorded in fiscal 1997 or 1996 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 carry
forwards, are recognized to the extent that realization of such benefits are
more likely than not.
F-8
<PAGE>
COCONUT CODE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.):
Income Taxes (cont'd.):
At December 31, 1996, the Company had available tax loss carry forwards of
approximately $2,317,000 expiring during the years 2008 through 2011. For the
year ended December 31, 1997, the Company generated a pretax profit of $723,510
and utilized approximately $723,000 of available tax loss carryforward to offset
income taxes otherwise payable. At December 31, 1997, the Company had available
tax loss carry forwards which expire as follows:
Year Amount
---- ------
2009 $227,952
2010 668,222
2011 697,353
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 Income (Loss) Per Share:
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share" which simplifies the accounting for earnings per share by
requiring 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 net income (loss) per share are the same since
the Company's stock options and warrants are anti-dilutive.
Revenue Recognition-
In accordance with the provisions of Statement of Position 97-2, "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.
F-9
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd.):
Revenue Recognition (cont'd.)-
The Company enters into maintenance agreements which provide for post-sale
product support. Revenue related to post-sale maintenance agreements 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 technological feasibility. These costs primarily consist of wages paid
to employees for the development of the Company's products.
New Accounting Pronouncements-
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". These statements, which are effective
for fiscal years beginning after December 15, 1997, modify or expand disclosures
and will have no impact on the Company's consolidated financial position,
results of operations or cash flows.
(3) FINANCE RECEIVABLES:
Future minimum rentals on finance receivables consist of the following at
December 31, 1997:
1998 $ 29,865
1999 38,157
2000 68,170
---------
136,192
Less: Unearned lease income (19,574)
---------
Finance receivables 116,618
Less: Allowance for doubtful
accounts (105,650)
---------
Finance receivables, net $ 10,968
=========
F-10
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(4) NOTES RECEIVABLE:
The Company has notes receivable from certain customers and related parties as
discussed in Note 7. The notes bear interest ranging from 8% to 10% and require
principal payments in the amount of $92,470. At December 31, 1997, the Company
has provided an allowance for doubtful accounts against notes receivable in the
amount of $85,000.
(5) PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1997 and 1996:
1997 1996
---- ----
Computer equipment $611,353 $395,093
Office equipment 155,446 105,284
Automobiles 44,124 --
Leasehold improvements 28,956 20,051
-------- --------
839,879 520,428
Less: Accumulated depreciation (367,098) (258,627)
-------- --------
$472,781 $261,801
======== ========
(6) ACCRUED EXPENSES:
Accrued expenses consist of the following at December 31, 1997 and 1996:
1997 1996
---- ----
Wages $ 82,799 $ 66,819
State, local and payroll taxes 113,701 98,617
Commission -- 60,000
Other accrued expenses 9,101 9,101
-------- --------
$205,601 $234,537
======== ========
F-11
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(7) RELATED PARTY TRANSACTIONS:
During 1996 and 1995, certain officers of the Company loaned $35,100 and
$44,800, respectively, to the Company for working capital requirements. During
1997, $60,845 of principal was repaid on these loans leaving a balance
outstanding at December 31, 1997 of $19,055.
(8) BORROWINGS:
At December 31, 1996, the Company had $103,000 outstanding under its $300,000
line of credit with a bank. 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 the Company's three
principal stockholders. On April 29, 1997, the Company repaid the $103,000 which
was outstanding at December 31, 1996. On May 1, 1997, the line of credit expired
and was not renewed by the Company.
The Company's three year term loan bears interest at the prime rate plus one
percent (8.5% at December 31, 1997) and requires 36 equal monthly payments
comprised of principal and interest through April 1999. At December 31, 1997 and
1996, $46,539 and $79,176, respectively, was outstanding under this facility.
The loan matures as follows: $33,324 in 1998 and $13,215 in 1999.
During 1997, the Company entered into three capital lease obligations
aggregating $104,034 for the purchase of computer equipment for use by the
Company. Two of the leases are for a term of 48 months, while the term of the
third lease is 36 months. Each lease requires an equal monthly payment comprised
of principal and interest. At December 31, 1997, $87,377 was outstanding under
these leases. The leases mature as follows: $24,286 in 1998; $26,061 in 1999;
$29,857 in 2000; and $7,173 in 2001.
In March 1997, the Company entered into three loans in the aggregate amount of
$44,124 for the purchase of three automobiles for use by the Company's product
support staff in servicing the Company's major national account. The loans have
an
F-12
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(8) BORROWINGS (cont'd.):
interest rate of approximately 9.0% and require a monthly payment comprised of
principal and interest. At December 31, 1997, $34,135 was outstanding under this
loan. The loan matures as follows: $9,270 in 1998; $10,098 in 1999; $11,148 in
2000; and $3,619 in 2001.
(9) STOCKHOLDERS' EQUITY (DEFICIT):
In September 1993, the Company commenced an SB-1 public offering for the sale of
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 1998 upon 30 days
notice to holders. Holders of the warrants may exercise any time prior to
September 1998.
On January 1, 1997, the Company issued its Vice President of Research and
Development 150,000 shares of the Company's common stock under the terms of his
employment agreement described in Note 11. 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 common stock as of 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.
F-13
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(10) STOCK OPTIONS AND INCENTIVE STOCK GRANTS:
During 1996, the Company was required to adopt SFAS No. 123, "Accounting for
Stock- Based Compensation" (SFAS No. 123). SFAS No. 123 allows a company to
measure compensation expense in connection with stock option plans and other
stock based arrangements using a fair value based method, or to continue to use
an intrinsic value based method which generally does not result in a
compensation cost. 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 fair market price on the date of grant and, accordingly, no
compensation expense has been recorded for any stock option grant. Had the fair
value based method been adopted consistent with the provisions of SFAS No. 123,
the Company's 1997 and 1996 net income (loss) and net income (loss) per share
would have been the same as currently reported.
Under the Company's 1994 Stock Option Plan (the "Plan") an aggregate of 300,000
common shares are available for 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 Option Price Weighted- Average
of Shares Low High Exercise Price
--------- --- ---- --------------
Balance, December 31, 1995 311,750 5.10 7.75 $6.50
Granted during 1996 -0- -0-
Canceled during 1996 (213,000) 5.10 7.75 6.43
-------
Balance, December 31, 1996 98,750 5.10 7.75 6.43
Granted during 1997 90,008 -- 7.75 7.75
Canceled during 1997 (3,000) -- 7.75 7.75
-------
Balance, December 31, 1997 185,758 5.10 7.75 7.18
-------
F-14
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(10) STOCK OPTIONS AND INCENTIVE STOCK GRANTS (cont'd.):
The following table summarizes information about stock options at December 31,
1997:
Range of Exercise Weighted-Average Weighted-Average
Prices Shares Remaining Contractual Life Exercise Price
------- ------ -------------------------- ----------------
$5.10 45,250 8 years $5.10
7.75 53,500 9 years 7.75
7.75 87,008 9.5 years 7.75
-------------- ------- --------- -----
$5.10 to $7.75 185,758 8.8 years $7.18
-------------- ------- --------- -----
No options were exercisable at December 31, 1997 or 1996.
On April 30, 1997 and September 1, 1997, the Company granted 86,159 and 2,500
incentive stock grants, valued by the Company's Board of Directors at $1.00 per
share, to certain key employees of the Company. The grants become 100% vested at
the conclusion of the four year period immediately following the date of grant.
Employees do not vest any portion of the grants prior to the end of this four
year period, and nonvested grants revert to the Company should an employee
terminate employment. The estimated fair value of the grants amounting to
$88,659 has been recorded as an issuance of common stock with an offsetting
deferred compensation equity account. Such deferred compensation is included in
additional paid-in capital in the accompanying consolidated balance sheets and
is being amortized to operating costs and expenses over the vesting period of
the grants.
(11) COMMITMENTS:
The Company leases its Florida office space pursuant to an operating lease which
requires fixed monthly rental payments. Rent expense for 1997 and 1996 was
$116,476 and $123,339, respectively.
F-15
<PAGE>
COCONUT CODE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(11) COMMITMENTS (cont'd.):
At December 31, 1997, the future minimum rental payments under operating leases
was as follows:
Year Amount
---- ------
1998 $115,400
1999 54,500
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. 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. As
described in Note 9, on January 1, 1997, 150,000 shares of the Company's common
stock were issued to the Vice President of Research and Development under the
terms of the employment agreement.
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 1997 and 1996, 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.
(12) MAJOR CUSTOMER:
During 1997 and 1996, one customer accounted for more than 10% of the Company's
net sales. Sales to this customer in 1997 and 1996 represented approximately 65%
and 28%, respectively. As of December 31, 1997 and 1996 this customer accounted
for approximately 63% and 8% of gross accounts receivable.
F-16
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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