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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 33-64164-A
COCONUT CODE, INC.
(Exact name of registrant as specified in its charter)
FLORIDA
(State or jurisdiction of incorporation or organization)
59-2556411
(I.R.S. employer identification No.)
1430 South Federal Highway, Deerfield Beach, Florida 33441
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (954) 481-9331
NOT APPLICABLE
Former name, address and fiscal year if changed since last report
Indicate by check mark whether the 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 such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
The number of shares of common stock , $.01 par value, of the Registrant issued
and outstanding as of October 15, 1998 was 3,588,116.
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<PAGE>
COCONUT CODE, INC.
INDEX TO FORM 10-QSB
Page
Number
------
PART 1 FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Balance Sheet as of September 30, 1998 3
Statements of Operations - For the
Three and Nine Months Ended
September 30, 1998 and 1997 4
Statements of Cash Flows - For the
Nine Months Ended September 30, 1998
and 1997 5
Notes to Consolidated Condensed Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-10
PART 2 OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security
Holders 10-11
Exhibits and Reports on Form 8-K 11
<PAGE>
PART 1. FINANCIAL INFORMATION Page 3
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
September 30, 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 90,884
Accounts receivable (net of allowance for doubtful accounts
of $28,637) 57,456
Inventories 29,120
-----------
Total current assets 177,460
PROPERTY AND EQUIPMENT, (net of accumulated
depreciation of $448,098) 413,502
OTHER ASSETS:
Loans to officers 27,806
Capitalized software development costs (net of accumulated
amortization of $26,458) 62,589
-----------
$ 681,357
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 158,014
Accrued expenses 209,160
Customer deposits 42,743
Deferred revenue 139,969
Current portion of notes payable 29,107
Current portion of leases payable 26,753
-----------
Total current liabilities 605,746
-----------
LONG-TERM PORTION OF NOTES AND LEASE PAYABLE 60,395
-----------
STOCKHOLDERS' EQUITY:
Common stock ($.01 par; 10,000,000 shares
authorized, 3,588,116 issued and outstanding) 35,881
Additional paid-in capital 2,871,566
Accumulated deficit (2,892,231)
-----------
15,216
-----------
$ 681,357
===========
See notes to consolidated financial statements.
<PAGE>
PART 1. FINANCIAL INFORMATION Page 4
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the three For the nine
months ended September 30, months ended September 30,
------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $614,250 $942,449 $1,572,805 $3,227,210
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales 55,476 149,092 262,254 433,234
Selling and marketing 100,064 166,676 396,998 452,083
General and administrative 217,087 291,423 657,388 832,846
Research and development 270,960 281,155 775,365 710,205
Depreciation and amortization 27,000 31,000 81,000 67,375
----------- ----------- ----------- -----------
670,587 919,346 2,173,005 2,495,743
----------- ----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS (56,337) 23,103 (600,200) 731,467
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 202 6,470 936 10,031
Interest expense (4,059) (4,956) (14,560) (18,695)
Other 4,493 2,830 8,125 11,282
----------- ----------- ----------- -----------
636 4,344 (5,499) 2,618
----------- ----------- ----------- -----------
NET (LOSS) INCOME ($55,701) $27,447 ($605,699) $734,085
----------- ----------- ----------- -----------
NET (LOSS) INCOME PER COMMON
SHARE:
Basic and diluted ($0.02) $0.01 ($0.17) $0.20
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic and diluted 3,595,861 3,619,299 3,601,890 3,581,202
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
PART 1. FINANCIAL INFORMATION Page 5
COCONUT CODE, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the nine
months ended September 30,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($605,699) $734,085
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 81,000 67,375
Provision for doubtful accounts -- 115,000
Compensation expense for stock issuances 6,614 68,970
Changes in operating assets and liabilities:
Accounts receivable 431,882 (165,890)
Finance receivables, net 10,968 12,407
Inventories 2,688 3,837
Prepaid expenses 7,392 10,901
Capitalized software development costs 74 (35,061)
Accounts payable 5,830 (107,564)
Accrued expenses 3,559 (30,710)
Customer deposits 20,968 78,212
Deferred revenue 7,572 (7,397)
--------- ---------
Total adjustments 578,547 10,080
--------- ---------
Net cash (used in) provided by operating activities (27,152) 744,165
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (21,721) (248,389)
--------- ---------
Net cash (used in) investing activities (21,721) (248,389)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to officers (27,806) --
Repayment of loans from officers (19,055) (34,945)
Decrease in notes receivable 7,470 --
Proceeds from note and leases payable -- 122,161
Payments on notes and leases payable (51,796) (145,734)
--------- ---------
Net cash (used in) financing activities (91,187) (58,518)
--------- ---------
Net (decrease) increase in cash and equivalents (140,060) 437,258
CASH AND CASH EQUIVALENTS, beginning of period 230,944 95,883
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $90,884 $533,141
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $14,560 $18,695
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
COCONUT CODE, INC. Page 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 information software primarily for the
restaurant and hospitality industry.
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial statements, the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Certain information and footnote disclosures required by
generally accepted accounting principles for complete financial statements have
been condensed or omitted.
In the opinion of management, the accompanying financial statements include
all adjustments (consisting of only normal, recurring adjustments) considered
necessary for a fair presentation of financial condition, results of operations
and cash flows of the Company. The results of operations for the nine month
period ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the full year. For further information, these financial
statements should be read in conjunction with the Company's 1997 Annual Report
filed as part of the Company's 10-KSB for the year ended December 31, 1997.
2. NET (LOSS) INCOME 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 (loss) income per share are the same
since the Company's stock options and warrants are anti-dilutive.
<PAGE>
COCONUT CODE, INC. Page 7
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTORY STATEMENT
The Private Securities Litigation Reform Act provides a "safe harbor" for
forward-looking statements. Certain statements included in this Form 10-QSB are
forward-looking and 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.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
Net sales for the nine months ended September 30, 1998 were disappointing,
representing a drop of $1,654,000 from the record level of $3,227,000 for the
corresponding period in 1997. The primary cause of the sales decline was the
continuing delay experienced by the Company in releasing its new, Windows based
software. The Company does not have an exact date when the new software will be
ready for distribution, but is working toward and planning for general release
on or about November 30, 1998. As of September 30, 1998, the Company's order
backlog approximated $225,000.
For the first nine months of 1998, operating costs and expenses decreased
$323,000 when compared to the prior year period. The principal reasons for the
decrease were lower cost of sales due to the decrease in sales, lower selling
and marketing and a lower provision for uncollectible receivables, offset in
part by higher spending on research and development.
Because of the drop in sales and with operating expenses at a level to
support a much higher volume of sales, the Company incurred a net loss of
$606,000 for the first nine months of 1998 versus a net profit of $734,000 for
the corresponding 1997 period.
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Net sales for the third quarter of 1998 were $614,000 compared to $942,000
for
<PAGE>
COCONUT CODE, INC. Page 8
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (cont'd.)
the 1997 period. The principal reason for the decrease in sales was the delay
experienced by the Company in introducing its new, Windows based software.
For the quarter ended September 30, 1998, operating costs and expenses
decreased $249,000 versus the comparable 1997 quarter. The primary reasons for
the decrease were lower cost of sales resulting from the decline in sales, lower
selling and marketing expenses and a lower provision required for uncollectible
receivables.
For the 1998 third quarter, the Company incurred a net loss of $56,000
compared to net income of $27,000 for the 1997 quarter.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had a working capital deficit of
$428,000 compared to working capital of $178,000 at December 31, 1997. The
decrease in working capital for the nine month period primarily results from the
net loss caused by the decline in sales.
As of September 30, 1998, the Company had $20,000 outstanding under its
$100,000 three year term loan facility with a bank. This loan matures in March
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 leases are for a term of 48 months, while the third lease is for 36
months. At September 30, 1998, the total amount outstanding under these leases
was $70,000.
In March 1997, the Company borrowed $44,000 from a bank for the purchase of
three automobiles for use by the Company's product support staff in servicing
the Company's major, national account. As of September 30, 1998, $27,000 was
outstanding on the loan which matures in April 2001.
Other than the borrowings described above, the Company's primary source of
funds has been from the sale of its products and services.
Because of the decline in sales and continuing delay experienced in
connection with the release of its new Windows based software, the Company will
find it increasingly difficult to maintain operations at current headcount and
spending levels. In addition, the Company's ability to generate new sales and
improve cash flow will
<PAGE>
COCONUT CODE, INC. Page 9
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (cont'd.)
more than likely be unfavorably impacted if the Company is required to reduce
operating costs and expenses. Accordingly, successful acceptance in the
marketplace of the Company's new, Windows based software is critical to
achieving sufficient cash flow to support the Company's current operations and
ongoing viability.
Year 2000 Compliance
The Company believes that it has addressed the Year 2000 issues in its
proprietary software products and does not anticipate business interruptions
associated with these applications. Third-party software used in conjunction
with the Company's products is in the process of being certified by the
respective vendors to be Year 2000 compliant. Because the Company uses its own
software for its accounting and payroll processing it does not anticipate any
problems since the software is Year 2000 compliant.
The Company is in the process of initiating written communications with
major suppliers to determine the extent to which the Company is exposed to those
third-party vendors failure to address and resolve their own Year 2000 issues.
The Company will seek to obtain the appropriate assurances that those
third-party vendors are, or will be, Year 2000 compliant. While the Company
believes that the information systems of its major suppliers, as they relate to
the Company, will comply with Year 2000 requirements there can be no assurances
that the year 2000 issue will not effect the information systems of the
Company's major vendors or that such effect will not have a material adverse
effect on the Company.
The Company is in the process of estimating the total cost and time which
will be required to address the Year 2000 issue, but does not expect any
material adverse impact on its operations. However, no assurance can be given
that the failure of one or more of its vendors to become Year 2000 compliant
will not have a material adverse effect on the Company's operations.
It has been reported that the potential exists for significant litigation
associated with the Year 2000 issue, however, it is unclear whether, or to what
degree, the Company may be affected by such litigation. Major uncertainty exists
within the software industry as to the possible impact associated with Year 2000
compliance.
The Company intends to develop a contingency plan based on the results of
its assessment of the impact of Year 2000 on its vendors and customers. The
contingency plan will address the most likely worst case scenario and is
targeted for completion by the second quarter of 1999.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS No. 130 is effective as
of March 31, 1998 and SFAS No. 131 as of December 31, 1998. The Company adopted
SFAS No. 130 as of January 1, 1998 and such adoption did not have an impact on
the disclosures herein as comprehensive loss is equal to net loss for the three
months ended March 31, 1998. SFAS No. 131 will not have an impact on the
Company's annual or interim financial statements or disclosures since the
Company currently operates in only one business segment.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits". This statement is effective
for fiscal years beginning after December 15, 1997. Since the Company does not
currently sponsor a defined benefit pension plan or defined benefit
postretirement plan, the disclosures required by SFAS No. 132 will presently not
be required to be made by the Company.
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP")
<PAGE>
COCONUT CODE, INC. Page 10
MANAGEMENT'S ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (cont'd.)
Recently Issued Accounting Pronouncements (cont'd.)
97-2, Software Revenue Recognition. SOP 97-2 supercedes SOP 91-1. SOP 97-2
requires companies to defer revenue and profit recognition unless four required
criteria of a sale are met. In addition, SOP 97-2 requires that revenue
recognized from software arrangements be allocated to each element of the
arrangement based on the relative fair values of the elements, such as software
products, upgrades, enhancements, post-contract customer support, installation
or training. SOP 97-2 is effective for all transactions entered into in fiscal
years beginning after December 15, 1997 and has been adopted by the Company
effective January 1, 1998. The adoption of SOP 97-2 did not have a material
impact on the Company's financial position, results of operations or cash flows
for the nine months ended September 30, 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP is effective for
fiscal years beginning after December 15, 1998. The SOP requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. The
SOP also requires that certain costs, as defined, related to an internal-use
computer software development project be expensed as incurred, while certain
other costs incurred at the latter stage of the project be capitalized and
amortized over the estimated useful life of the software. It is expected that
SOP 98-1 will not have a material impact on the Company.
PART 2. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On October 1, 1998, the Company held its 1998 Annual Meeting of
Shareholders at which shareholders approved the one item up for vote which was
the election of a Board of Directors consisting of five directors (J. Kenneth
Gulden, Acting Chairman, Mark E. Wotell President, Matthew J. Wotell, Executive
Vice President of Sales, Christopher L. Wotell, Vice President of Marketing and
Eugene J. Wotell, Vice President of Support Services). Each of the nominees has
served as a director of the Company during the immediately preceding twelve
month period.
Previously, the Board was comprised of seven directors. Prior to the 1998
Annual Meeting of Shareholders, the Company's Chairman and a director, John E.
<PAGE>
COCONUT CODE, INC. Page 11
PART 2. OTHER INFORMATION (cont'd.)
Item 4. Submission of Matters to a Vote of Security Holders (cont'd.)
Abdo and his brother, Frank. J. Abdo, a director, informed the other Board
members that they would not be candidates for reelection to the Board. Mr. Abdo
indicated that he felt the Company's best interests would be served by seeking a
new Chairman with expertise in the software industry. To facilitate the search,
Mr. Abdo indicated he would resign effective immediately so that the position
would be vacant during recruiting. Mr. Abdo indicated to the other Board members
that he believed he would be most effective for the Company as a nonworking,
significant shareholder. Mr. Abdo said that he would assist the Board in finding
a new Chairman. In the interim, the Board has recommended that J. Kenneth
Gulden, a current director and running for reelection, be named Acting Chairman
of the Board. Of the shares voted, approximately 100% voted in the affirmative
for reelection of directors.
Item 6. Exhibits and Reports on Form 8-K
None
<PAGE>
COCONUT CODE, INC. Page 12
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned there
unto duly authorized.
COCONUT CODE, INC.
------------------
(Registrant)
Date: November 12, 1998 BY: /s/ Daniel W. Reese III
-----------------------
Daniel W. Reese III
Vice President and Chief Financial officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 90,884
<SECURITIES> 0
<RECEIVABLES> 86,093
<ALLOWANCES> 28,637
<INVENTORY> 29,120
<CURRENT-ASSETS> 177,460
<PP&E> 861,600
<DEPRECIATION> 448,098
<TOTAL-ASSETS> 681,357
<CURRENT-LIABILITIES> 605,746
<BONDS> 0
0
0
<COMMON> 35,881
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 681,657
<SALES> 614,250
<TOTAL-REVENUES> 614,250
<CGS> 55,476
<TOTAL-COSTS> 670,587
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,059
<INCOME-PRETAX> (55,701)
<INCOME-TAX> 0
<INCOME-CONTINUING> (55,701)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (55,701)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
