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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-13124
COVER-ALL TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-2698053
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18-01 Pollitt Drive, Fair Lawn, New Jersey 07410
(Address of principal executive office) (Zip Code)
(201)794-4800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------ ------------------------
Common Stock, par value $.01
per share Philadelphia Stock Exchange
------------------------- ---------------------------
Securities registered pursuant to Section 12(g) of the
Act:
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Common Stock, par value $.01 per share
-------------------------------------
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 for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY
OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AT APRIL 7, 1997 WAS $16,454,451.
NUMBER OF SHARES OUTSTANDING AT APRIL 7, 1997:
16,720,297 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE.
THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO
BE HELD JUNE 19, 1997, TO BE FILED WITH THE COMMISSION NOT LATER THAN 120
DAYS AFTER THE CLOSE OF THE REGISTRANT'S FISCAL YEAR, HAS BEEN
INCORPORATED BY REFERENCE IN WHOLE OR IN PART FOR PART III, ITEMS 10, 11,
12 AND 13, OF THE DECEMBER 31, 1996 FORM 10-K
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ITEM 1. BUSINESS
------ --------
GENERAL
-------
Cover-All Technologies Inc. (the "Company"), a Delaware corporation
formed in 1971, is a provider of state-of-the-art software products for
the property/casualty insurance industry through its wholly-owned
subsidiary, COVER-ALL Systems, Inc. ("COVER-ALL").
Historically, the Company (formerly Warner Insurance Services, Inc.)
also provided services to the automobile insurance industry including
underwriting, policy maintenance and claims adjustment which was carried
out by its Insurance Services Division ("ISD"). However, in March 1996,
the ISD business was transferred to a subsidiary of The Robert Plan
Corporation, in connection with the settlement of two lawsuits between
the Company and The Robert Plan Corporation and the release of the
Company from its obligations under long-term processing contracts with
the customers of ISD, and therefore the activities of the ISD are
reflected as discontinued operations as more fully described in Note 2 to
the Consolidated Financial Statements.
During March 1997, the Company announced several major changes as
part of its overall strategy. Mr. Brian Magowan was named Chairman of
the Board and Chief Executive Officer and Mr. Mark Johnston was named
Chief Financial Officer. Four of the existing Board members resigned and
two additional Board members, Messrs. Earl Gallegos and Ian Meredith,
were added. Further, the Company raised $3 million of financing through
the sale of 12 1/2% Convertible Debentures ("Debentures"), due March
2002. The Debentures are convertible into shares of Common Stock at
$1.25 per share and carry certain restrictive covenants. See Note 12
to the Consolidated Financial Statements.
OVERVIEW
COVER-ALL offers standard as well as customized software application
products together with implementation support services to the
property/casualty insurance industry. The Company derives revenue from
Software Contract Licenses to new and existing customers and from
continuing Maintenance Fees for servicing the product. The Company also
provides Professional Consulting Services to customize the software for
specific uses.
In December 1989, the Company purchased, through its wholly-owned
subsidiary, the assets related to the exclusive proprietary rights to a
PC-based software application for policy rating and issuance for
property/casualty insurance companies. This acquired software has been
enhanced and is the Company's "Classic" product line which is one of two
current product lines.
The Classic product line is a self-contained rating, issuance and
transaction management application system utilized in the
property/casualty insurance industry. This software was developed using
the Microfocus COBOL language, and the Company has upgraded this product
line for use in the Windows 95 operating system. The Company believes
that this software product provides cost-effectiveness and flexibility
for self-contained Local Area Network ("LAN") systems. The Classic
product is in use in over 45 property/casualty insurance companies. Total
Classic revenues were $3,654,587 for the year ended December 31, 1996 as
compared to $2,752,055 and $1,926,822 for the years ended December 31,
1995 and 1994, respectively.
Since 1993, COVER-ALL has been developing its second product line
entitled the Total Administrative Solution ("TAS 2000") and, as of
December 31, 1996, COVER-ALL completed several modules. TAS 2000
comprises an architecture and a suite of application development tools
for property/casualty insurers designed to enable a client-driven re-
engineering of an insurer's business processes. TAS 2000 applications
run on commodity priced open computer systems and use state-of-the-art
client/server software technology provided by Oracle Corporation. Total
TAS 2000 revenues were $1,814,085 for the year ended December 31, 1996 as
compared to
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$1,366,699 for the year ended December 31, 1995. There were no TAS 2000
revenues for the year ended December 31, 1994.
In 1996, the Company was granted by Care Corporation Limited
("Care") the exclusive license for the Care software systems for use in
the workers' compensation and group health claims administration markets
in Canada, Mexico and Central and South America. The Care software is an
integrated suite of computer applications for the administration of
claims processing of workers' compensation. The software utilizes the
"Open System" environment and, in particular, relational database
technology. The product has been successfully deployed in Australia and
the United States in Third Party Administration ("TPA") and self insured
environments, including city and state government operations as well as
with major private corporations. A feature of the software is the
integration of advanced managed care algorithms and databases.
PRODUCT DESCRIPTION
-------------------
CLASSIC PRODUCT LINE
--------------------
The Classic product line is a set of LAN based PC software packages
designed to automate the rating and issuance tasks in the property and
casualty insurance industry. Functionality includes rating and issuance
for quoting new business, mid-term changes, cancellations, reinstatements
and renewals. Multiple recipient copies of all relevant documentation
for each of these transactions, including quote summaries, declaration
pages and mandatory and optional manuscript forms, are printed by the
system's print engine. This product life cycle functionality is
supported for property and casualty lines of business in a user friendly
system.
The Company believes that the Classic product line brings to the
customer many useful functions, features and capabilities. Some are line
of business specific and some are line of business independent. These
include:
- Clear and comprehensive data collection
- On-line system level, screen level, and field level help
- On-line ISO Commercial Lines Manual Tables and Footnotes
- Easy and direct system navigation
- Standard Bureau coverages and rates support
- Company customized coverages and rates support
- Fully automated recipient driven issuance of declaration pages,
worksheets, ID card, etc.
- Help Desk assistance
- Remote diagnostic and fix capabilities
The Classic products were originally brought to the marketplace in
the mid 1980's and subsequently have been enhanced to provide greater
functionality and to better utilize newer technology. The Classic
product line is based upon several specific proprietary design features.
COVER-ALL has upgraded the Classic product line for use in the Windows 95
operating system. This makes it a Graphical User Interface ("GUI")
application. This enhancement increases user friendliness and provides
customers with an easier integration of peripheral support applications
(e.g., imaging, work flow management, etc.).
TAS 2000 PRODUCT LINE
---------------------
The TAS 2000 product line was developed to be used for client/server
Wide Area Network ("WAN") applications in the property/casualty industry.
COVER-ALL created the TAS 2000 product line to better position itself to
penetrate the larger customer market segment. The client/server
architectural concept allows companies to take advantage of the power of
distributed processing. The TAS 2000 product line currently includes the
following application modules:
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- Client Management
- End User Tools
- Agency Profile Management
- Product Developer
- Policy Administration
The TAS 2000 has Windows compliant GUI to enhance its user
friendliness. The TAS 2000 can be used on many different client/server
hardware platforms and offers capability to process the voluminous
transactions that are common to large scale insurance operations. The
TAS 2000 is an architecture of open LAN and WAN based modules possessing
varying elements of interdependence.
The changing of the century is an issue which has never been faced
in the computer industry and poses a massive problem for automation
systems previously designed and currently being used. Companies must
modify their systems to accommodate a four-digit year in order to
properly affect the calculations and sorting routines which provide the
core of their data processing accuracy. Although seemingly minor, this
change requires finding, analyzing, implementing and testing tens of
thousands of isolated incidents within millions of lines of source code.
The cost for the industry can reach into the millions of dollars to
affect proper change. The TAS 2000 product line already accommodates the
advent of the new century. All of a customer's "date affected" programs
must be fully tested for interoperatibility, as must any programs which
transfer date sensitive data, to a customer's system, whether by
Electronic Data Interchange ("EDI") or other means. Any such program,
which has not been correctly changed to address the millennium issue, has
the potential to corrupt the customer's database and cause a system
failure.
COVER-ALL intends to continue to enhance both of its product lines
based on customer needs and changes in technology. COVER-ALL is also
committed to maintaining a quality support service program for its
customers.
COMPETITIVE PRODUCTS
--------------------
The Company believes that its products offer customers certain
advantages not available from COVER-ALL's competitors. The Classic
product line has significant functionality and can accommodate specific
customer requirements while retaining a single source integrated core
system, thus making the system cost effective. TAS 2000's architecture
is distinguished from competitive offerings by the integrated use of
Oracle's relational database and the Designer 2000 and Developer 2000
tool sets. The underlying database and language used for the TAS 2000
products are the Oracle Relational Database Management System and the
Oracle Cooperative Development Environment products. These products
provide an integrated application environment. Through Oracle's tools,
these new products take advantage of the power of Oracle Version 7 on
over 90 different server platforms. This software allows processing to
be centralized, dedicated to specific server(s) or clients or distributed
across the network. The TAS 2000 product line was developed with an
emphasis on quality from the conceptual design stage using Oracle CASE
tools through to the physical coding and testing phases.
COVER-ALL's competitors for both of its product lines are in most
instances larger and financially stronger than the Company. The Classic
product line competes primarily with three competitors who are also
actively selling LAN based policy rating and issuance software used by
property/casualty insurance companies. The TAS 2000 primary competitors
are two systems' suppliers who are also larger and financially stronger
than the Company.
MARKETING
---------
The Company maintains a sales staff at its principal executive
offices in Fair Lawn, New Jersey. The Company also utilizes distributors
and outside consultants to market its products. The Company also
participates in and displays its software products at trade shows
organized by industry trade groups.
-4-
RESEARCH AND DEVELOPMENT
------------------------
COVER-ALL's business is characterized by rapid technological change.
The Company's success will depend, in part, on its ability to keep its
products current based on new technologies. Accordingly, the Company
must maintain ongoing research and development programs to continually
add value to its suite of products, as well as any possible expansion of
its product lines. The Company believes that research and development
expenditures will continue to constitute a significant percentage of
revenues.
Research and development expenses for COVER-ALL were $1,846,410,
$1,932,920 and $2,499,436 for the years ended December 31, 1996, 1995 and
1994, respectively.
BACKLOG
-------
Backlog is not applicable to the business of the Company.
MAJOR CUSTOMERS
---------------
The Classic product line is in use in over forty-five
property/casualty insurance companies while the TAS 2000 product line is
currently in use in one property/casualty insurance company. The
Company's revenues from major customers (more than 10 percent of total
revenues) for the years ended December 31, 1996, 1995 and 1994 as a
percentage of total revenue were as follows:
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER
CUSTOMER 31, 1996 31, 1995 31, 1994
-------- -------- --------- --------
Sun Alliance Management 27% 16%
Services
Glatfelter Insurance Group 13%
Millers Insurance Group 13% 13%
New Jersey State Medical 18%
Underwriters
Secura, Inc. 11%
Empire Insurance Company 17%
In 1996 and 1995 export sales were made to a U.K. customer of
approximately $1,465,000 and $640,000, respectively.
EMPLOYEES
---------
The Company had over 80 employees during 1996 and 52 employees at
year-end. None of the Company's employees are represented by a labor
union, and the Company has not experienced any work stoppages. The
Company believes that relations with its employees are good.
DISCONTINUED OPERATIONS
-----------------------
INSURANCE SERVICES DIVISION
---------------------------
ISD revenues decreased substantially in 1994 and 1995 because of
lower fees attributable to the reduced number of policies and claims
being handled on contracts that were winding down or were completed. As
a result, ISD suffered losses and operated under considerable uncertainty
as a result of the pendency of lawsuits with certain affiliates of The
Robert Plan Corporation. In March 1996, the Company entered into a
series of agreements which
-5-
provided for the transfer and discontinuance of its ISD operations and
the issuance of the Company's Common Stock and Warrants to certain
customers of the ISD business in exchange for the release of the Company
from its obligations to provide insurance services to ISD customers and
to The Robert Plan Corporation in exchange for the settlement and
dismissal of two lawsuits with The Robert Plan Corporation. Effective
March 1, 1996 the Company discontinued providing insurance processing
services to the automobile insurance industry and reflected those
activities as discontinued operations in its Financial Statements. See
Note 2 to the Consolidated Financial Statements.
As part of the restructuring transactions (the "Restructuring"), the
Company transferred certain assets, employees, contracts and leased
premises relating to its ISD business to a subsidiary of The Robert Plan
Corporation, which replaced the Company as the provider of insurance
services to the ISD customers. In exchange for settling the lawsuits,
releasing the Company's obligations to provide insurance services under
its contracts and executing mutual releases, the Company issued to
certain of the ISD customers and certain parties to the litigation: (a)
a total of 3,256,201 shares of the Company's Common Stock, (b) five-year
Warrants to purchase up to an additional aggregate of 1,553,125 shares of
the Company's Common Stock at $2.00 per share and (c) cash of $2.5
million. The Company had the option, exercisable for a period of six
months, to (i) purchase 50% of the aforementioned 3,256,201 shares at a
cash price equal to the greater of $3.00 or 50% of the then market price
of a share of the Company's Common Stock and (ii) acquire 50% of the
1,553,125 Warrants at a cash price equal to $1.00 per Warrant. On March
31, 1996, the Company assigned its aforementioned repurchase option
applicable to the Company's Common Stock and Warrants to Software
Investments Limited ("SIL"). SIL subsequently exercised all of the
options to purchase the Company's Common Stock and Warrants as discussed
in Note 9 to the Consolidated Financial Statements. As a result of the
issuance of shares described in Note 9, the antidilution provisions of
the Warrants required an adjustment of shares to 1,725,694 from 1,553,125
and a price adjustment to $1.80 from $2.00 per share. As a result of the
issuance of the 12 1/2% Convertible Debentures discussed in Note 12 to the
Consolidated Financial Statements, the Warrants may require a further
adjustment to the number of shares purchasable and the exercise price.
In late 1993, the Company established Alerion, a wholly-owned
property/casualty insurance subsidiary. By early 1994, the Company had
funded Alerion with approximately $10 million of cash and securities and
Alerion entered into a reinsurance agreement with Clarendon National
Insurance Company ("Clarendon") to reinsure a portion of the risk on
certain insurance policies written by a primary insurer. In late 1994,
the Company decided to discontinue assuming any underlying insurance
risk. This was accomplished by Alerion commuting all its rights and
obligations under the reinsurance contract back to Clarendon and paying
to Clarendon all amounts received in excess of payments made since the
inception. In 1996, Alerion surrendered its Certificate of Authority to
transact insurance business in New Jersey.
ITEM 2. PROPERTIES
------ ----------
The Company's headquarters is located in Fair Lawn, New Jersey where
it occupies approximately 36,000 square feet under a lease which expires
in 2000 at a current annual rental expense of approximately $400,000.
In addition, the Company also leased a facility with approximately
22,000 square feet in Somerset, New Jersey. This lease was to expire in
2002 but was terminated in December 1996 at a cost of $371,408. This
facility was previously used by ISD and the Company did not anticipate
utilizing this facility in the near future.
Pursuant to the Restructuring entered into in March 1996 (See
Discontinued Operations) the Company's lease for its former principal
headquarters has been transferred to The Robert Plan Corporation.
The Company believes that its headquarters is well maintained and
adequate to meet its needs in the foreseeable future.
-6-
ITEM 3. LEGAL PROCEEDINGS
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In March 1994, Material Damage Adjustment Corporation ("MDA"), a
subsidiary of The Robert Plan Corporation and a subcontractor for the
Company performing claims processing work, instituted an action in the
Superior Court of New Jersey seeking injunctive relief requiring that the
Company turn over to MDA in excess of $1 million that the Company had
withheld from certain claims fees allegedly owed to MDA. This action
arose out of the Company's servicing contract with the Market Transition
Facility of New Jersey ("MTF"). The Company had withheld the funds as a
set off to cover unpaid invoices for data processing services rendered by
the Company for MDA. MDA also added a claim for approximately $2.5
million of surcharge fees paid to the Company by the MTF. The MTF was
brought into the case to resolve disputes between MTF and MDA over
refunds of claims fees paid on claims later closed without payment
("CWP's"). The Company vigorously contested MDA's claims and asserted
counterclaims against MDA to establish the Company's entitlement to the
disputed sums.
In May 1994, the Company filed an action in the Superior Court of
New Jersey against Lion Insurance Company, National Consumer Insurance
Corporation and The Robert Plan Corporation seeking payment of
unsatisfied invoices under an April 1991 agreement totalling
approximately $2.7 million. Under the agreement, the Company agreed to
provide data processing services for a three-year term in support of Lion
Insurance Company's "depopulation pool" automobile insurance business in
New Jersey. Lion Insurance Company is a subsidiary of The Robert Plan
Corporation whose affiliate, National Consumer Insurance Corporation, has
taken over the "depopulation pool" business. The Robert Plan Corporation
guaranteed Lion's performance and payment.
On March 1, 1996, the two lawsuits described above were settled as
part of the overall settlement with certain of the Company's insurance
services customers. The settlement and restructuring transactions are
described in Note 2 to the Consolidated Financial Statements.
On February 2, 1995, Sol M. Seltzer commenced an action in the
Supreme Court of New York against Mr. Krieger, the then Chairman of the
Board and former President of the Company, and each of the other then
members of the Board of Directors. The plaintiff, Sol M. Seltzer, who
purported to sue derivatively on behalf of the Company and COVER-ALL,
sought among other things, compensatory damages in an amount to be
determined at trial and punitive damages in an aggregate amount of $12
million. Sol M. Seltzer was a vice president of the Company and a
director of COVER-ALL until he resigned from such positions in late 1994.
The plaintiff alleged, among other things, breach of fiduciary duty,
waste and mismanagement, as well as alleged wrongful acts by the Board
and the former President, including among other things, self-dealing and
misuse of corporate funds by the former President. The Company, and the
other defendants, contested Mr. Seltzer's claims and on July 23, 1996 won
a motion to dismiss the case. Mr. Seltzer attempted to file a notice of
appeal from the order of dismissal, but failed to do so in a timely
manner. He has since motioned the court to recognize his notice of
appeal and it is anticipated that the court will rule on such motion in
the near future.
On February 6, 1995, the Company commenced an action in the Superior
Court of New Jersey against Sol M. Seltzer, a former vice president of
the Company and a director of COVER-ALL, alleging fraud, mismanagement,
negligent misrepresentation and breach of fiduciary duty with respect to
the development and implementation of COVER-ALL's TAS 2000 software
product. The Company claimed compensatory and punitive damages in an
amount to be determined at trial. The case was largely inactive pending
the motion to dismiss Seltzer's New York action. After the dismissal of
the New York case brought by Seltzer, the Company voluntarily dismissed
the New Jersey case without prejudice.
In addition to the above lawsuits, the Company is named as defendant
in a number of legal actions arising from its operations. All of these
actions have been considered in establishing liabilities. Management and
its legal counsel are of the opinion that these actions will not have
a material adverse effect on the Company's financial position or
results of operations.
-7-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------ ---------------------------------------------------
No matters were submitted to a vote of the Company's security
holders through the solicitation of proxies or otherwise during the
fourth quarter ended December 31, 1996.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
----------- ----------------------------------------------------------
Since May 23, 1996, the Company's Common Stock has been traded on
The Nasdaq SmallCap Market tier of The Nasdaq Stock Market, initially
under the symbol "WISI". As of July 1, 1996, the symbol for the
Company's Common Stock on The Nasdaq SmallCap Market tier of The Nasdaq
Stock Market was changed to "COV". As of August 2, 1996, the Company's
Common Stock has also been trading on the Philadelphia Stock Exchange
under the symbol "CVA."
From March 8, 1996 to March 14, 1996, the Company's Common Stock was
traded on the Over the Counter market and from March 15, 1996, to May 22,
1996 was quoted on the NASD OTC Bulletin Board under the symbol "WISI."
Prior to March 4, 1996, the Company's Common Stock was traded on the New
York Stock Exchange under the symbol "WCP." The quotations below reflect
the high and low closing sale prices since January 1, 1994 on the
principal trading market on which the Common Stock traded during such
period.
HIGH LOW
---- ---
CALENDAR 1996:
1st Quarter $5.000 $1.625
2nd Quarter 7.375 3.375
3rd Quarter 6.250 1.500
4th Quarter 2.375 0.875
CALENDAR 1995:
1st Quarter $3.000 $1.500
2nd Quarter 1.750 0.875
3rd Quarter 2.250 1.250
4th Quarter 1.625 1.000
CALENDAR 1994:
1st Quarter $5.250 $4.125
2nd Quarter 4.250 2.375
3rd Quarter 4.250 2.250
4th Quarter 4.125 2.125
As of April 7, 1997, there were approximately 750 holders of record
of the Company's Common Stock. This number does not include beneficial
owners who may hold their shares in street name. The closing sale price
for the Company's Common Stock on April 7, 1997 was $1.813, as reported
by the Nasdaq SmallCap Market.
The Company does not currently anticipate paying any dividends. The
Company paid quarterly cash dividends of $.01 per share from the first
quarter of 1993 through the second quarter of 1994 but discontinued this
policy in the third quarter of 1994.
-8-
ITEM 6. SELECTED FINANCIAL DATA
------- -----------------------
The following selected financial data of the Company are derived
from the consolidated financial statements. The data should be read in
conjunction with the consolidated financial statements, related notes,
and other financial information included herein.
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
STATEMENTS OF OPERATIONS
DATA:
Revenues: $ 5,469 $ 4,119 $ 1,927
Loss from continuing
operations(1) (5,608) (3,544) (7,466)
(Loss) income from
discontinued operations
less applicable income
taxes/(benefit) of none,
none, ($924), $670,
$3,633 and $2,852,
respectively -- (7,108) (6,754)
Loss on disposal of
discontinued operations,
no tax benefit provided (393) (750)
Net (loss) income (6,001) (11,402) (14,220)
Loss per share from
continuing operations (.38) (.41) (.84)
Net (loss) income per
share(2) (.40) (1.33) (1.60)
Cash dividends per share -- -- $.02
BALANCE SHEET DATA:
Working capital
(deficiency) $(1,293) $(8,717) $ 3,110
Total assets 8,243 8,369 18,795
Short-term debt -- -- 2,000
Stockholders' equity
(deficit) 4,911 (6,013) 5,376
YEARS ENDED OCTOBER 31,
TWO MONTHS -----------------------
ENDED
DECEMBER 31,
1993 1993 1992
---- ---- ----
STATEMENTS OF OPERATIONS
DATA:
Revenues: $ 224 $ 1,740 $ 1,802
Loss from continuing
operations(1) (781) (1,943) (850)
(Loss) income from
discontinued operations
less applicable income
taxes/(benefit) of none,
none, ($924), $670,
$3,633 and $2,852,
respectively 1,158 5,653 4,116
Loss on disposal of
discontinued operations,
no tax benefit provided
Net (loss) income 377 3,710 3,266
Loss per share from
continuing operations (.09) (.21) (.09)
Net (loss) income per
share(2) .04 .40 .36
Cash dividends per share $.01 $.03 --
Balance Sheet Data:
Working capital
(deficiency) $12,475 $12,843 $17,102
Total assets 22,748 22,443 18,544
Short-term debt -- -- --
Stockholders' equity
(deficit) 20,574 20,541 17,637
(1) Includes a $1,165 ($.14 per share) and $3,373 ($.25 per share
net of tax) special charge in 1995 and 1994, respectively.
(2) All per share amounts are based on the increased number of
shares giving retroactive effect to the impact of the five for
four stock split by way of a twenty-five percent (25%) stock
dividend declared on March 18, 1993.
(3) Revenues of the discontinued operations (ISD) were none,
$20,228, $32,893, $8,589, $68,515 and $88,858 respectively, for
each of the periods above.
-9-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
---------------------
DISCONTINUED OPERATIONS
-----------------------
During the years 1994 and 1995, the Company derived most of its
revenues from providing full service automobile insurance services
(policy processing, policy administration and claims administration)
through its ISD business. The Company has also provided state-of-the-art
computer products for the property casualty insurance industry through
its wholly-owned subsidiary, COVER-ALL.
ISD revenues in 1994 and 1995 primarily consisted of policy
administration and claims servicing fees from customers such as
Atlantic/Pacific Employers Insurance Company and to a lesser extent,
Clarendon National Insurance Company ("Clarendon"), for servicing
policies in the New Jersey voluntary and assigned risk markets. The
contract with Atlantic/Pacific Employers Insurance Company reached its
peak level of activity in 1994 and policy volumes declined sharply in
1995. During 1995 and 1996, Atlantic/Pacific Employers Insurance Company
planned to non-renew all of their auto insurance policies in New Jersey
in accordance with the accelerated withdrawal order entered into with the
New Jersey Department of Insurance in August 1994. In addition, the MTF
program had been phasing out since 1994 and, as of March 1, 1996, the
Company's contracted activity for the MTF ended.
Revenues earned under the contract with Clarendon involved full
service policy administration and claims services for approximately 18
percent of the assigned risk drivers in New Jersey. This activity
started in 1993 with the commencement of the New Jersey Personal
Automobile Insurance Plan ("PAIP") following the end of New Jersey's
direct insurance program provided by its MTF. The Company's service for
Clarendon was performed under New Jersey's Limited Assignment
Distribution Program ("LAD") which required that servicing carriers such
as the Company bear some of the underlying insurance risk of the policies
being handled. For this reason, the Company formed a wholly-owned
insurance subsidiary, Alerion, and effective January 1, 1994, Alerion
reinsured a portion of Clarendon's insurance risk under the PAIP program.
By the end of 1994, the Company decided that risk taking, even as a
reinsurer, was not an attractive business strategy, particularly because
of the substantial capital required by its insurance subsidiary relative
to other Company capital commitments. The Company and Clarendon agreed,
therefore, to end the reinsurance arrangement in the fourth quarter of
1994 and "commute" all reinsurance interests and liabilities back to the
inception of the agreement, thus eliminating all reinsurance activity of
Alerion. This had the effect of reducing revenues by $6.1 million and
operating income by $.5 million in the fourth quarter of 1994. Since the
Company was no longer willing to share in the underlying insurance risk
of PAIP policies, it could not, by law, continue to provide policy
administration and claims servicing to Clarendon under the LAD program
after 1994.
Most of the Company's insurance services contracts included a
variable fee structure based on the loss ratios of the underlying
insurance policies which could increase or decrease fee revenues. The
Company obtained periodic independent actuarial evaluations of the loss
ratios for these programs and adjusted the amount of its revenue when
required. Subsequent to December 31, 1994, the Company obtained
independent actuarial projections of loss adjustment expenses expected to
be incurred in 1995 and beyond with respect to the Company's contractual
obligations under its insurance services contracts. As a result of this
review, the Company determined that its deferred contract revenues at the
end of 1994 should be increased by $4.1 million to adequately cover
contract costs and profit margins in 1995 and beyond. This change in
accounting estimate was recorded in the fourth quarter of 1994 as a
reduction of insurance services revenue.
-10-
In the fourth quarter of 1994, ISD wrote off $2.3 million of
unamortized capitalized software development costs previously incurred to
develop a version of the COVER-ALL system for use in-house to process
policies and claims.
As a result of the developments discussed above, ISD was suffering
losses and, in addition, was operating under considerable uncertainty
because of the pendency of lawsuits with certain affiliates of The Robert
Plan Corporation, a customer and subcontractor for the Company. In March
1996, the Company entered into a series of agreements resulting in the
settlement and dismissal of the lawsuits and the release of the Company
from continuing obligations under contracts for the provision of
insurance services to ISD customers. See Note 2 to the Consolidated
Financial Statements for a discussion of the various financial elements
of those agreements. In essence, the Company no longer offers full
service automobile insurance services, and its ISD operations have been
transferred to a subsidiary of The Robert Plan Corporation which has
replaced the Company as a service provider to such customers.
These agreements have resulted in a net loss for 1996 and 1995 of
$392,872 and $749,758, respectively. The additional net loss for 1996
relates to additional loss adjustment expenses (mostly legal fees),
pertaining to the discontinued operations, in excess of the amount
accrued in 1995. The 1995 net loss includes a provision for estimated
ISD losses in 1996 prior to the March 1, 1996 effective date of the
Restructuring.
Accordingly, the Company's Consolidated Financial Statements have
been restated for all periods to reflect ISD operations as "discontinued
operations."
CONTINUING OPERATIONS
---------------------
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
-----------------------------------------------------------------------
Total revenues were $5,468,672 for the year ended December 31, 1996
as compared to $4,118,754 for the year ended December 31, 1995, an
increase of 33%. License fees were $1,044,460 for the year ended
December 31, 1996 compared to $1,421,866 in the same period in 1995 due
to the sale of one additional contract in 1995. For the year ended
December 31, 1996, maintenance revenues were $2,252,378 compared to
$1,174,150 in the same period of the prior year due to an increased
customer base and renegotiations of all contracts resulting in higher
fees to customers. Professional services revenue contributed $2,171,834
for the year ended December 31, 1996 compared to $1,522,738 for the year
1995 as a result of new contracts signed and customers requesting
additional modifications to the existing systems.
Cost of sales increased to $4,585,727 for the year ended December
31, 1996 as compared to $1,329,693 for 1995. Significant increases in
capitalized software and license fees amortization, and salary and
benefit costs relating to dedication of resources to maintenance and
professional services, accounted for the bulk of the increase. In
addition, the Company wrote off approximately $500,000 of unamortized
capitalized software costs representing certain modules of the TAS 2000
product line not expected to be completed in the near future due to
reprioritizing of marketing and development efforts.
Research and development expenses in 1996 decreased slightly to
$1,846,410 compared to $1,932,920 for the year ended December 31, 1995
due to personnel reductions in the Engineering Department and the
decision to focus the Company's Engineering resources on completing
several TAS 2000 modules for the marketplace. In the future, the Company
will continue to dedicate significant resources to its ongoing research
and development efforts since its success depends on its ability to keep
products current based on new technologies.
Sales and marketing expenses increased to $1,124,884 in 1996
compared to $465,045 as of December 31, 1995 due mostly to increased
salary and benefit costs. The Company allocated additional resources to
its sales and marketing group to work on a proposal for a major contract.
-11-
General and administrative expenses increased approximately 27% to
$3,519,973 in 1996 from $2,770,186 for the year ended December 31, 1995
due to costs incurred in connection with the procurement of the SIL and
CARE contracts and additional staffing. In addition, the Company
terminated the lease at the Somerset facility for a cost of $371,408
since the anticipated utilization of this facility to house a significant
number of new employees to work on a joint venture project with a new
customer did not occur.
A loss from discontinued operations of $392,872 was recorded in the
year ended December 31, 1996 as a result of additional loss adjustment
expenses in excess of the amount anticipated at December 31, 1995.
The Company is working toward fulfilling long-term objectives. In
the Classic line, COVER-ALL has been positioned to increase market share
in 1997 as a result of the successful completion of the project making it
Windows 95 compliant and maintaining the strengths upon which its current
market acceptance is based.
In 1996, COVER-ALL formed an alliance with ORACLE Corporation
related to the TAS 2000 product to facilitate the advance of both
organizations in the property and casualty insurance marketplace. ORACLE
will provide technical assistance, consultative services as well as sales
direction and support to the TAS 2000 market entry. The Company has
completed some of the major components of the TAS 2000 product. Future
development of additional modules will be customer driven.
COVER-ALL has commenced marketing efforts in the United Kingdom. A
contract for the TAS 2000 product successfully installed in a large
insurer in the United Kingdom is expected to expand in the next year.
This successful installation has increased customer awareness of the TAS
2000 product in the United Kingdom and Europe.
A marketing campaign for the Care software is presently under way in
Canada.
The preceding forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act) are subject to the
occurrence of certain contingencies which may not occur in the time
frames anticipated or otherwise, and, as a result, could cause actual
results to differ materially from such statements. These contingencies
include the successful completion of continuing developmental efforts
under existing software contracts within anticipated time frames or
otherwise, the successful negotiation, execution and implementation of
anticipated new software contracts, the successful utilization of
additional personnel in the marketing and technical areas, the continuing
favorable responses to the Company's products from existing and potential
new customers, and the Company's ability to complete development and sell
and license its products at prices which result in sufficient revenues to
realize profits.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
-----------------------------------------------------------------------
Total revenues were $4,118,754 for the year ended December 31, 1995
as compared with $1,926,822 for the year ended December 31, 1994,
reflecting increasing progress on initial installations of TAS 2000 and
increased fee arrangements for professional support to most customers.
In December 1994, management adopted a plan to reduce the COVER-ALL
marketing and product development costs until revenues increased to
significantly higher levels. The total cash outlay had grown to a level
of approximately $1 million per month but the revenues from customers
continued to lag expectations. The total head count, including employees
and technical consultants, was reduced by approximately one half in the
first quarter of 1995 and a business plan was adopted for 1995 which
would match slowly growing revenues with reduced costs. In addition, the
sales offices in most cities were closed and sales staffing reduced by
over 50 percent.
As a result of this reorganization plan for COVER-ALL, special
charges were reported in the fourth quarter of 1994 to write down a
substantial portion of the unamortized capitalized software development
costs (approximately $2.7 million) and accrue for excess facilities and
other costs ($.6 million). Additional costs were
-12-
incurred in the first quarter of 1995 for executive severance, employee
severance, and write-off of software development costs as the COVER-ALL
reorganization was completed. These 1995 provisions and write-offs,
aggregating $1,165,000, were reflected as special charges in the
Statement of Operations for the quarter ended March 31, 1995.
As described in Note 6 to the Consolidated Financial Statements, no
net income tax benefit is available to the Company with respect to the
loss it incurred in 1995.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At December 31, 1996, the Company had a working capital deficit of
$1,293,128 compared to a working capital deficit of $8,716,643 in 1995.
The improvement in working capital was due to the discharging of
liabilities relating to the discontinued operations through the issuance
of the Company's common stock and warrants with a fair value of
approximately $7 million.
In March 1996, the Company received $3,022,391 from the sale of
Common Stock and Warrants and another $1,553,124 in May 1996 from the
sale of additional Common Stock pursuant to a series of transactions with
Software Investments Limited and Care Corporation Limited that are
described in Note 9 to the Consolidated Financial Statements.
On March 31, 1997, the Company sold $3,000,000 of 12 1/2% Convertible
Debentures due March 2002 (the "Debentures") to an institutional
investor. The Debentures were sold at face value, pay interest quarterly
and are convertible, in whole or in part, into shares of Common Stock of
the Company at $1.25 per share, subject to adjustment. The Debentures
contain certain covenants which restrict the Company's ability to incur
indebtedness, grant liens, pay dividends or other defined restricted
payments and make investments and acquisitions. The Company cannot
redeem the Debentures for two years and thereafter may only call the
Debentures if the closing price of the Company's Common Stock for the
twenty business days preceding the redemption date exceeds $1.50. The
net proceeds from this financing will be used for working capital
purposes.
At December 31, 1996 and 1995 the Company had approximately
$14,000,000 and $7,000,000 of operating tax loss carryforwards expiring
in 2011 and 2010, respectively. The Tax Reform Act of 1986 enacted a
complex set of rules which limit a company's ability to utilize net
operating loss carryforwards and tax credit carryforwards in periods
following an ownership change. These rules define an ownership change as
a greater than 50 percent point change in stock ownership within a
defined testing period which is generally a three-year period. As a
result of stock issued relative to the Restructuring and other stock
which may be issued related to the Debentures (see Note 12 to the
Consolidated Financial Statements) the Company may experience an
ownership change and consequently the Company's utilization of its
net operating losses could be significantly limited.
At this time the Company does not anticipate having to make any
significant investment in software development. The Company believes
that the proceeds from the sale of the Debentures, its current cash
balances and anticipated cash flows from continuing operations will be
sufficient to meet normal operating needs for the continuing COVER-ALL
business in 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------ -------------------------------------------
The financial statements and supplementary data listed in Item
14(a)(1) and (2) are included in this report beginning on page 16.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
-------------------------------------------------
None.
-13-
PART III
--------
The information called for by Part III (Items 10, 11, 12 and 13) of
this Report is hereby incorporated by reference from the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A under
the Securities Act of 1934 in connection with the election of directors
at the 1997 Annual Meeting of Stockholders of the Company, which
definitive Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal
year ended December 31, 1996.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------- ---------------------------------------------------------------
(a) The following are filed as a part of this report.
(1) Financial Statements
--------------------
Page
----
Report of Independent Auditors 15
Consolidated Balance Sheets December 31, 1996 and 1995 16
Consolidated Statements of Operations Years ended December 31, 1996,
1995 and 1994 18
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1996, 1995 and 1994 19
Consolidated Statements of Cash Flows Years ended December 31, 1996,
1995 and 1994 21
Notes to Consolidated Financial Statements 24
(2) Financial Statement Schedule
----------------------------
II Valuation and qualifying accounts 39
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedules, or because the information required is included in the
financial statements and notes thereto.
(3) Exhibits
--------
See pages 40 to 44.
(b) Reports on Form 8-K
-------------------
None.
-14-
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Cover-All Technologies Inc.
We have audited the accompanying consolidated balance sheets of Cover-All
Technologies Inc. (formerly Warner Insurance Services, Inc.) as of
December 31, 1996 and 1995 and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for
the years ended December 31, 1996, 1995, and 1994. Our audits also
included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Cover-All Technologies Inc. at December 31, 1996 and 1995 and
the consolidated results of its operations and its cash flows for the
years ended December 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young, LLP
----------------------
Ernst & Young LLP
Hackensack, New Jersey
April 11, 1997
-15-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 446,672 $1,576,745
Accounts receivable, less
allowance for doubtful
accounts of $43,870 and none 1,585,398 1,763,890
Income taxes receivable -- 2,300,000
Prepaid expenses 7,161 5,355
---------- ----------
Total current assets 2,039,231 5,645,990
---------- ----------
Property and equipment, at cost:
Furniture, fixtures and
equipment 3,072,706 3,095,529
Less accumulated depreciation (2,662,713) (2,369,873)
---------- ----------
Property and equipment-net 409,993 725,656
---------- ----------
Software license, less
amortization of $750,000 4,250,000 --
Capitalized software, less
amortization of $1,005,964 and
$489,227 1,477,950 1,510,782
Other assets 66,181 486,726
---------- ----------
$ 8,243,355 $8,369,154
========= ============
-16-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -(CONTINUED)
December 31, December 31,
1996 1995
---------- ----------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 536,172 $ 955,060
Accrued liabilities 1,614,612 4,123,641
Unearned revenue 1,181,575 635,564
Liabilities in excess of assets
of ISD business discontinued -- 8,648,368
in 1996 ---------- ----------
Total current liabilities 3,332,359 14,362,633
---------- ----------
Deferred income taxes -- 20,000
---------- ----------
Commitments and contingencies
(Notes 4 and 5)
Stockholders' equity (deficit):
Common Stock, $.01 par value:
authorized 30,000,000 shares,
issued 17,351,883 and 9,194,890
shares 173,519 91,949
Capital in excess of par value 27,258,352 10,414,253
Accumulated deficit (19,953,668) (13,952,474)
Treasury stock at cost-633,986 (2,567,207) (2,567,207)
shares ---------- ----------
Total stockholders' equity 4,910,996 (6,013,479)
(deficit) ---------- ----------
$ 8,243,355 $ 8,369,154
---------- ----------
---------- ----------
See accompanying notes.
-17-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
---------- ---------- ----------
Revenues:
Licenses $ 1,044,460 $ 1,421,866 $ 1,184,860
Maintenance 2,252,378 1,174,150 548,116
Professional services 2,171,834 1,522,738 193,846
---------- ---------- ----------
5,468,672 4,118,754 1,926,822
---------- ---------- ----------
Costs and expenses:
Cost of sales 4,585,727 1,329,693 675,119
Research and
development 1,846,410 1,932,920 2,499,436
Sales and marketing 1,124,884 465,045 1,584,902
General and
administrative 3,519,973 2,770,186 5,107,161
Special charges -- 1,165,000 3,373,000
---------- ---------- ----------
11,076,994 7,662,844 13,239,618
---------- ---------- ----------
Loss from continuing
operations before
income tax (benefit) (5,608,322) (3,544,090) (11,312,796)
Income tax (benefit) -- -- (3,846,351)
---------- ---------- ----------
Loss from continuing
operations (5,608,322) (3,544,090) (7,466,445)
Loss from discontinued
operations,
less applicable
income tax (benefit)
of none, none, and
$(923,649),
respectively -- (7,107,987) (6,753,637)
Loss on disposal of
discontinued
operations, (392,872) (749,758) --
without tax benefit ---------- ---------- ----------
Net loss $ 6,001,194) $(11,401,835) $(14,220,082)
---------- ---------- ----------
---------- ---------- ----------
Loss per share from
continuing operations $(0.38) $(0.41) $(0.84)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share $(0.40) $(1.33) $(1.60)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number
of common shares
outstanding 14,865,757 8,559,307 8,868,926
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes.
-18-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
RETAINED
CAPITAL EARNINGS
COMMON IN EXCESS (ACCUMULATED
STOCK OF PAR VALUE DEFICIT)
---------- ---------- ----------
BALANCE AT DECEMBER 31, 1993 $91,317 $10,229,608 $11,846,300
Sale of 33,748 shares of
Common Stock under employee
stock purchase plans 337 76,948 --
Sale of 21,875 shares of
Common Stock under stock
option plans 219 95,438 --
Purchase of treasury stock --
108,900 shares -- -- --
Net loss -- -- (14,220,082)
Payment of cash dividends -- -- (176,857)
Loan to officer/stockholder
exchanged for 268,111
shares of Treasury Stock -- -- --
in January 1995 ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1994 91,873 10,401,994 (2,550,639)
Sale of 7,567 shares of
Common Stock under employee
stock purchase plan 76 12,259 --
Net loss -- -- (11,401,835)
---------- ---------- ----------
BALANCE AT DECEMBER 31, 1995 91,949 10,414,253 (13,952,474)
Sale of 125,187
shares of Common Stock under
stock option plans 1,252 370,562 --
Issuance of 3,256,201 shares
of Common Stock under the
Restructuring Agreement 32,562 6,479,840 --
Total
Treasury Stockholders'
Stock Equity
(Deficit)
----------- --------------
BALANCE AT DECEMBER 31, 1993 $(1,592,793) $20,574,432
Sale of 33,748 shares of
Common Stock under employee
stock purchase plans -- 77,285
Sale of 21,875 shares of
Common Stock under stock
option plans -- 95,657
Purchase of treasury stock --
108,900 shares (338,657) (338,657)
Net loss -- (14,220,082)
Payment of cash dividends -- (176,857)
Loan to officer/stockholder
exchanged for 268,111
shares of Treasury Stock (635,757) (635,757)
in January 1995 ---------- ----------
BALANCE AT DECEMBER 31, 1994 (2,567,207) 5,376,021
Sale of 7,567 shares of
Common Stock under employee
stock purchase plan -- 12,335
-- (11,401,835)
Net loss ---------- ----------
BALANCE AT DECEMBER 31, 1995 (2,567,207) (6,013,479)
Sale of 125,187
shares of Common Stock under
stock option plans -- 371,814
Issuance of 3,256,201 shares
of Common Stock under the
Restructuring Agreement -- 6,512,402
-19-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT) -- CONTINUED
RETAINED
CAPITAL EARNINGS
COMMON IN EXCESS (ACCUMULATED
STOCK OF PAR VALUE DEFICIT)
---------- ---------- ----------
Issuance of five-year
warrants to purchase up
to an aggregate of 1,725,694
shares of Common Stock under the
Restructuring Agreement -- 465,938 --
Sale of 1,412,758 shares of
Common Stock to Software
Investments Limited ("SIL") 14,128 2,811,388 --
Sale of five year warrants to
purchase an aggregate of
196,875 shares of Common Stock
to SIL -- 196,875 --
Issuance of 2,500,000 shares of
Common Stock to Care
Corporation Limited 25,000 4,975,000 --
Exercise of five-year warrants to
purchase 862,847 shares of
Common Stock 8,628 1,544,496 --
-- -- (6,001,194)
Net loss ---------- ---------- ----------
$173,519 $27,258,352 $(19,953,668)
BALANCE AT DECEMBER 31, 1996 ========== ========== ==========
Total
Treasury Stockholders'
Stock Equity
(Deficit)
----------- ----------------
Issuance of five-year
warrants to purchase up
to an aggregate of 1,725,694
shares of Common Stock
under the Restructuring
Agreement -- 465,938
Sale of 1,412,758 shares of
Common Stock to Software
Investments Limited ("SIL") -- 2,825,516
Sale of five year warrants to
purchase an aggregate of
196,875 shares of Common Stock
to SIL -- 196,875
Issuance of 2,500,000 shares of
Common Stock to Care
Corporation Limited -- 5,000,000
Exercise of five-year warrants to
purchase 862,847 shares of
Common Stock -- 1,553,124
-- (6,001,194)
Net loss ---------- ----------
$(2,567,207) $4,910,996
BALANCE AT DECEMBER 31, 1996 ========== ==========
See accompanying notes.
-20-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
Cash flows from operating
activities:
Net loss from continuing
operations $(5,608,322) $(3,544,090) $(7,466,445)
Adjustments to reconcile
net loss to net cash
provided from (used for)
operating activities:
Depreciation and
amortization 341,798 365,129 538,751
Amortization and write-off
of capitalized software
and software license 2,101,576 489,227 3,313,023
Loss on disposal of
securities - 86,223 465,195
Accounts receivable 178,492 (1,374,169) (129,603)
Income taxes receivable 2,300,000 (163,972) (2,136,028)
Deferred income taxes (20,000) 2,800,000 (3,180,000)
Prepaid expenses (1,806) (2,646) 410
Other assets 420,545 (3,776) (60,506)
Accounts payable (418,888) 161,561 733,471
Accrued liabilities (2,449,304) 3,123,208 540,671
Unearned revenue 546,011 513,447 590,338
---------- ---------- ----------
Net cash (used for)
provided from continuing
operating activities (2,609,898) 2,450,142 (6,790,723)
---------- ---------- ----------
Loss from discontinued
operations - (7,107,987) (6,753,637)
Loss on disposal of
discontinued operations (392,872) (749,758) -
Decrease (increase) in
net assets of discontinued
operations (1,670,028) (82,238) 11,208,695
---------- ---------- ----------
Net cash (used for)
provided from
discontinued activities (2,062,900) (7,939,983) 4,455,058
---------- ---------- ----------
-21-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
Cash flows from
investing activities:
Proceeds from sale of
fixed maturity
investments - $ 3,786,277 $ 18,271,905
Purchase of fixed
maturity investments - - (12,661,482)
Capital expenditures (85,860) (139,818) (269,345)
Capitalized software
expenditures (1,318,744) (1,000,009) (3,350,981)
---------- ---------- ----------
Net cash (used for)
provided from investing
activities (1,404,604) 2,646,450 1,990,097
---------- ---------- ----------
Cash flows from
financing activities:
Credit line borrowings - - 4,500,000
Payments on credit lines - (2,000,000) (2,500,000)
Dividends to
stockholders - - (176,857)
Net proceeds from
issuance of common
stock 4,947,329 12,335 172,942
Payment for purchase of
treasury shares - - (974,414)
---------- ---------- ----------
Net cash provided from
(used for) financing
activities 4,947,329 (1,987,665) 1,021,671
---------- ---------- ----------
Change in cash and
cash equivalents (1,130,073) (4,831,056) 676,103
Cash and cash equivalents
beginning of year 1,576,745 6,407,801 5,731,698
---------- ---------- ----------
Cash and cash equivalents
end of year $ 446,672 $ 1,576,745 $ 6,407,801
========== ========== ==========
-22-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -(CONTINUED)
Supplemental disclosures of noncash investing and financing activities:
Financing:
---------
The Company in connection with the discontinuance of ISD issued Common
Stock and Warrants for $6,978,340 as a result of the restructuring
agreement. (See Note 2.)
Investing:
---------
The Company acquired a software license from Care by issuing Common Stock
valued at $5,000,000. (See Note 9.)
See accompanying notes.
-23-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------
DESCRIPTION OF BUSINESS
-----------------------
COVER-ALL Technologies Inc. (formerly Warner Insurance Services,
Inc.), through its wholly-owned subsidiary, COVER-ALL Systems, Inc.
("COVER-ALL"), licenses and maintains its software products to the
property/casualty insurance industry throughout the United States, Puerto
Rico and the United Kingdom. COVER-ALL also provides professional
consulting services to its customers interested in customizing their
software. In 1996, COVER-ALL was granted by Care Corporation Limited
("Care") the exclusive license for the Care software systems for use in
the workers' compensation and group health claims administration markets
in Canada, Mexico and Central and South America.
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles and include the accounts of
Cover-All Technologies Inc. and its wholly-owned subsidiary (the
"Company"). All material intercompany balances and transactions have
been eliminated.
USE OF ESTIMATES
----------------
Preparation of the 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 assets and 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.
REVENUE RECOGNITION
-------------------
Revenue from the sale of software licenses is recognized as modules
and modifications are provided and accepted by the customer. Revenue
from software maintenance contracts is recognized ratably over the life
of the contract. Revenue from professional consulting services is
recognized when the service is provided.
CONCENTRATIONS OF CREDIT RISK
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and trade
accounts receivable.
The Company places its temporary cash investments with high credit
quality institutions to limit its credit exposure. The Company believes
no significant concentration of credit risk exists with respect to these
investments. Concentrations of credit risk with respect to trade
accounts receivable are limited due to the wide variety of customers,
principally major insurance companies, who are dispersed across many
geographic regions. Three major customers accounted for a significant
portion of the Company's trade accounts receivable portfolio. The
Company performs ongoing credit evaluations of its customers but does not
require collateral. The Company maintains allowances for potential
credit losses.
INSURANCE COMPANY
-----------------
In late 1993, the Company obtained approval from the New Jersey
Department of Insurance to form Alerion Insurance Company of New Jersey
("Alerion"). Alerion entered into a reinsurance agreement with Clarendon
National Insurance Company ("Clarendon") to assume a portion of
Clarendon's risk in the New Jersey Assigned Risk Program. The subsidiary
was initially capitalized with $10 million. During the fourth quarter of
-24-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1994, the Company decided to discontinue assuming any underlying
insurance risk. This was accomplished by Alerion commuting all its
rights and obligations under the reinsurance contract back to Clarendon
and paying to Clarendon all amounts received in excess of payments made
since the inception of the reinsurance contract in January 1994. In
1996, Alerion surrendered its Certificate of Authority to transact
insurance business in New Jersey.
MARKETABLE SECURITIES
---------------------
As of January 1, 1994, the Company adopted the provisions of the
Statement of Financial Accounting Standards 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No.
115 requires that investments in fixed maturity securities and those
equity securities with readily determinable market values be classified
into one of three categories: held-to-maturity, trading or available-
for-sale. Classification of investments is based upon management's
current intent. The impact of adoption was not material to the Company.
All of the Company's fixed maturity securities, which consist of
municipal, state, and mortgage-backed securities with original maturities
in excess of three months, have been categorized as available-for-sale
and recorded at their fair value at December 31, 1994. Unrealized
depreciation of the securities available for sale at December 31, 1994
($237,737) was recorded as a realized loss in 1994 because the
securities, which were held by the Company's insurance subsidiary, were
either sold, or expected to be sold in early 1995 in connection with the
liquidation or sale of the insurance subsidiary.
CASH AND CASH EQUIVALENTS
-------------------------
The Company considers all highly liquid investments, with a maturity
of three months or less when purchased, to be cash equivalents.
PROPERTY AND EQUIPMENT
----------------------
Furniture, fixtures and equipment are carried at cost. Depreciation
is recorded on the straight-line method over three to ten years, which
approximates the estimated useful lives of the assets.
Routine maintenance and repair costs are charged to expense as
incurred and renewals and improvements that extend the useful life of the
assets are capitalized. Upon sale or retirement, the cost and related
accumulated depreciation are eliminated from the respective accounts and
any resulting gain or loss is reported as income or expense.
CAPITALIZED SOFTWARE
--------------------
Certain software development costs are being capitalized and
amortized over a three-year period. The software license (see Note 9) is
being amortized over a five-year period. In the fourth quarter of 1994,
the Company wrote down the unamortized capitalized software costs by
approximately $2.7 million (see Note 3). In addition, during the fourth
quarter of 1996, the Company wrote off approximately $500,000 of
unamortized software development costs representing certain modules of
the TAS 2000 product line not expected to be completed in the near future
due to reprioritizing of marketing and development efforts. This write
off is reflected in cost of sales in 1996.
-25-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME TAXES
------------
Deferred income tax assets and liabilities are recognized for the
expected future tax effects attributable to temporary differences between
the financial reporting and tax basis of assets and liabilities. Such
differences relate primarily to: the application of different
depreciation methods for tax versus financial reporting purposes; the
amortization of capitalized software costs for financial statement
purposes and the current write-off for tax purposes; revenue recognition
and the alternative minimum tax credit carryover. Cash (received) paid
for income taxes was: 1996 -($2,375,000), 1995 -($2,600,000), and 1994 -
$1,375,000.
RESEARCH AND DEVELOPMENT
------------------------
For the years ended December 31, 1996, 1995 and 1994, $1,846,410,
$1,932,920 and $2,499,436, respectively, was expensed for research and
development of new software products. These expenses are in addition to
software development costs which are capitalized and then amortized over
their expected useful lives.
NET LOSS PER SHARE
------------------
Net loss per share is based on the weighted average number of common
shares and, where applicable, common share equivalents outstanding during
the periods.
STOCK-BASED COMPENSATION
------------------------
The Company follows Accounting Principles Board Opinion No. 25.
"Accounting for Stock Issued to Employees" ("APB No. 25") with regard to
the accounting for its employee stock options. Under APB No. 25,
compensation expense is recognized only when the exercise price of
options is below the market price of the underlying stock on the date of
grant.
RECLASSIFICATIONS
-----------------
Certain amounts in the 1995 and 1994 Consolidated Financial
Statements have been reclassified to conform with the 1996 presentation.
NOTE 2--DISCONTINUED OPERATIONS
-------------------------------
Insurance Services Division ("ISD") revenues decreased substantially
in 1994 and 1995 because of lower fees attributable to the reduced number
of policies and claims being handled on contracts that were winding down
or were completed. As a result, ISD had been suffering losses and
operating under considerable uncertainty as a result of the pendency of
lawsuits with certain affiliates of The Robert Plan Corporation ("The
Robert Plan Corporation") as described in Note 4. In March 1996, the
Company entered into a series of agreements which provided for the
transfer and discontinuance of its ISD operations and the issuance of the
Company's Common Stock and Warrants to certain customers of the ISD
business in exchange for the release of the Company from its obligations
to provide insurance services to ISD customers and to The Robert Plan
Corporation in exchange for the settlement and dismissal of lawsuits with
The Robert Plan Corporation. Effective March 1, 1996 the Company has
discontinued providing insurance processing services to the automobile
insurance industry and has reflected those activities as discontinued
operations in its Financial Statements.
-26-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As part of the restructuring transactions (the "Restructuring"), the
Company transferred certain assets, employees, contracts and leased
premises relating to its ISD business to a subsidiary of The Robert Plan
Corporation, which has replaced the Company as the provider of insurance
services to the ISD customers. In exchange for settling the lawsuits,
releasing the Company's obligations to provide insurance services under
its contracts and executing the mutual releases, the Company issued to
certain of the ISD customers and certain parties to the litigation: (a)
a total of 3,256,201 shares of the Company's Common Stock, (b) five-year
Warrants to purchase up to an additional aggregate of 1,553,125 shares of
the Company's Common Stock at $2.00 per share and (c) cash of $2.5
million. The holders of these securities can request the Company to
register these securities with such registration costs to be paid by the
Company. The Company had the option, exercisable for a period of six
months (from March 1, 1996), to (i) purchase 50% of the aforementioned
3,256,201 shares at a cash price equal to the greater of $3.00 or 50% of
the then market price of a share of the Company's Common Stock and (ii)
acquire 50% of the 1,553,125 Warrants at a cash price equal to $1.00 per
Warrant. On March 31, 1996, the Company assigned its aforementioned
repurchase option applicable to the Company's Common Stock and Warrants
to Software Investment Limited ("SIL"), which SIL subsequently exercised,
as discussed in Note 9. As a result of the issuance of shares described
in Note 9, the antidilution provisions of the Warrants required an
adjustment of shares to 1,725,694 from 1,553,125 and a price adjustment
to $1.80 from $2.00 per share.
Assets and liabilities of the discontinued ISD operations,
classified separately in the Consolidated Balance Sheets, are summarized
as follows:
December 31,
1995
----------
Cash $ 2,487,500
Accounts receivable 18,722,178
Other current assets 155,370
Property and equipment, net 1,674,639
Capitalized software, net 81,494
Other assets 21,017
Accounts payable (459,111)
Accrued expenses (10,771,406)
Unearned contract revenue (20,560,049)
----------
Net liabilities $ (8,648,368)
==========
The discontinuance of ISD resulted in a $392,872 loss in 1996 and a
$749,758 loss in 1995.
The Consolidated Statements of Operations have been restated for all
periods to report the net results of the ISD operations as loss from
discontinued operations. The results of ISD are summarized as follows:
-27-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
---------- ----------
NET REVENUES $20,228,212 $32,892,898
Loss from
operations before
income taxes (7,107,987) (7,677,286)
Income taxes/(benefit) - (923,649)
---------- ----------
Loss from
discontinued $(7,107,987) $(6,753,637)
operations ========== ==========
NOTE 3--SPECIAL CHARGES
In March 1994, the Company adopted a plan to implement a tax-free
spin-off of 100% of the stock of COVER-ALL on a pro rata basis to the
Company's stockholders. On November 11, 1994, the Company announced that
its Board of Directors had voted to retain COVER-ALL, thereby canceling
the spin-off plan. Prior to 1995 COVER-ALL revenues came from licensing
of its Classic software product line and services. Since 1993 COVER-ALL
has been developing a suite of computer applications for property and
casualty insurers entitled the Total Administration Solution ("TAS
2000"). TAS 2000 is designed to enable a client-driven re-engineering of
the insurer's business programs. TAS 2000 applications run on commodity
priced open computer systems and use state-of-the-art client/server
technology provided by Oracle Corporation.
In December 1994, management instituted a plan to down-size the
COVER-ALL organization and reduce the rate of product development to a
level consistent with the reduced level of customer installations planned
for 1995. As a result, unamortized software development costs related to
modules of the TAS 2000 application for which the development process had
been curtailed were written down by $2,733,000 and provision of $640,000
was made at December 31, 1994 for excess facilities and equipment
appropriate for the smaller organization. Costs of $1,165,000 were
incurred and written off in the first quarter of 1995 for executive and
other severance costs as well as additional software development costs.
These write-offs and provisions were reflected as special charges in
the 1995 and 1994 Statements of Operations.
NOTE 4--LITIGATION
In March 1994, Material Damage Adjustment Corporation ("MDA"), a
subsidiary of The Robert Plan Corporation and a subcontractor for the
Company performing claims processing work, instituted an action in the
Superior Court of New Jersey seeking injunctive relief requiring that the
Company turn over to MDA in excess of $1 million that the Company had
withheld from certain claims fees allegedly owed to MDA. This action
arose out of the Company's servicing contract with the Market Transition
Facility of New Jersey ("MTF"). The Company had withheld the funds as a
set off to cover unpaid invoices for data processing services rendered by
the Company for MDA. MDA also added a claim for approximately $2.5
million of surcharge fees paid to the Company by the MTF. The MTF was
brought into the case to resolve disputes between MTF and MDA over
refunds of claims fees paid on claims later closed without payment
("CWP's"). The Company vigorously contested MDA's claims and asserted
counterclaims against MDA to establish the Company's entitlement to the
disputed sums.
-28-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In May 1994, the Company filed an action in the Superior Court of
New Jersey against Lion Insurance Company, National Consumer Insurance
Corporation, and The Robert Plan Corporation seeking payment of
unsatisfied invoices under an April 1991 agreement totalling
approximately $2.7 million. Under the agreement, the Company agreed to
provide data processing services for a three-year term in support of Lion
Insurance Company's "depopulation pool" automobile insurance business in
New Jersey. Lion Insurance Company is a subsidiary of The Robert Plan
Corporation whose affiliate, National Consumer Insurance Corporation, has
taken over the "depopulation pool" business. The Robert Plan Corporation
guaranteed Lion's performance and payment.
On March 1, 1996, the two lawsuits described above were settled as
part of the overall settlement with certain of the Company's insurance
services customers. The settlement and restructuring transactions are
described in Note 2.
On February 2, 1995, Sol M. Seltzer commenced an action in the
Supreme Court of New York against Mr. Krieger, the then Chairman of the
Board and former President of the Company, and each of the other then
members of the Board of Directors. The plaintiff, Sol M. Seltzer, who
purported to sue derivatively on behalf of the Company and COVER-ALL,
sought among other things, compensatory damages in an amount to be
determined at trial and punitive damages in an aggregate amount of $12
million. Sol M. Seltzer was a vice president of the Company and a
director of COVER-ALL until he resigned from such positions in late 1994.
The plaintiff alleged, among other things, breach of fiduciary duty,
waste and mismanagement, as well as alleged wrongful acts by the Board
and the former President, including among other things, self-dealing and
misuse of corporate funds by the former President. The Company, and the
other defendants, contested Mr. Seltzer's claims and on July 23, 1996 won
a motion to dismiss the case. Mr. Seltzer attempted to file a notice of
appeal from the order of dismissal, but failed to do so in a timely
manner. He has since motioned the court to recognize his notice of
appeal and it is anticipated that the court will rule on such motion in
the near future.
On February 6, 1995, the Company commenced an action in the Superior
Court of New Jersey against Sol M. Seltzer, a former vice president of
the Company and a director of COVER-ALL, alleging fraud, mismanagement,
negligence, misrepresentation, and breach of fiduciary duty with respect
to the development and implementation of COVER-ALL's TAS 2000 software
product. The Company claimed compensatory and punitive damages in an
amount to be determined at trial. The case was largely inactive pending
the motion to dismiss Seltzer's New York action. After the dismissal of
the New York case brought by Seltzer, the Company voluntarily dismissed
the New Jersey case without prejudice.
In addition to the above lawsuits, the Company is named as defendant
in a number of legal actions arising from its operations. All of these
actions have been considered in establishing liabilities. Management and
its legal counsel are of the opinion that these actions will not have a
material adverse effect on the financial position or results of
operations.
NOTE 5--COMMITMENTS, CONTINGENCIES AND OTHER
OPERATING LEASES
The Company leases office space in Fair Lawn, NJ, where it occupies
approximately 36,000 square feet, under a lease which expires in 2000.
The current annual rental expense is approximately $400,000. The lease
includes escalation clauses for increased real estate taxes, insurance
and maintenance expenses. The lease provides for a renewal period of
five years.
-29-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Rent expense for COVER-ALL office space was $334,170, $174,710, and
$265,363, for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company's future minimum rental commitments under its
noncancellable operating lease in effect at December 31, 1996 follows:
years ending December 31, 1997 -$400,000; 1998 -$400,000; 1999 -$400,000;
2000 -$170,000; thereafter -NONE.
EMPLOYMENT CONTRACTS
The Company has employment contracts with certain of its executives
with various dates of expiration through the year ending December 31,
1998. Certain of the contracts are automatically renewable from year to
year. The aggregate annual commitment for future salaries at December
31, 1996 was approximately $675,000.
RELATED PARTY TRANSACTIONS
A director of the Company is a partner in a law firm with which the
Company incurred legal expenses of approximately $600,000, $360,000 and
$500,000 in 1996, 1995 and 1994, respectively.
LETTER OF CREDIT
At December 31, 1994, the Company had an outstanding letter of
credit for $1,000,000 with First Fidelity Bank, N.A., NJ, which
guaranteed a performance bond issued in connection with the Company's
contract with the JUA/MTF, an ISD customer. In February 1995, this
letter of credit was replaced by a $1,000,000 letter of credit issued by
Chase Manhattan Bank N.A. which was collateralized by $1,000,000 that was
placed in a restricted account. The letter of credit expired in February
1996 and the $1,000,000 of cash collateral was returned to the Company.
MAJOR CUSTOMERS
COVER-ALL had a substantial portion of its revenues from three
customers in 1996 and 1995 and two customers in 1994 as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
CUSTOMER 1996 1995 1994
---------- ---------- ---------- ----------
Sun Alliance Management Services 27% 16%
Glatfelter Insurance Group 13%
Millers Insurance Group 13% 13%
New Jersey State Medical
Underwriters 18%
Secura, Inc. 11%
Empire Insurance Company 17%
In 1996 and 1995 export sales were made to a U.K. customer of
approximately $1,465,000 and $640,000, respectively.
-30-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CREDIT LINES
At December 31, 1994, the Company had outstanding $2 million in
short-term borrowings against its $4 million secured credit line with a
bank. In 1995 the Company repaid the $2 million and the credit line was
withdrawn. Cash paid during the periods for interest was: 1996 -none,
1995 -none, and 1994 -$199,120.
NOTE 6--INCOME TAXES
An analysis of the components of the income tax provision and the
classification between continuing and discontinued operations is as
follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
Current:
Federal $ -- $(2,800,000) $(2,050,000)
-- -- 460,000
State ---------- ---------- ----------
-- (2,800,000) (1,590,000)
---------- ---------- ----------
Deferred:
Federal -- 2,800,000 (3,110,000)
-- $ -- ( 70,000)
State ---------- ---------- ----------
-- 2,800,000 (3,180,000)
---------- ---------- ----------
$ -- $ -- $(4,770,000)
Total ========== ========== ==========
Income taxes (benefit):
Continuing operations $ -- $ -- $(3,846,351)
-- $ -- (923,649)
Discontinued operations ---------- ---------- ----------
Total income taxes $ -- $ -- $(4,770,000)
(benefit) ========== ========== ==========
-31-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The income tax provision (benefit) for continuing operations differs
from the amount computed by applying the statutory federal income tax
rate as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
Computed federal
statutory tax (benefit) $(1,781,000) $(1,204,991) $(3,846,351)
Valuation allowance to
reduce deferred tax asset 1,781,000 1,204,991 --
---------- ---------- ----------
Total $ -- $ -- $(3,846,351)
========== ========== ==========
The components of the net deferred tax asset and liability were as
follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
Deferred tax assets current:
Deferred revenue $ -- $(1,185,000 $(4,000,000
Reserve for contract adjustments -- 2,075,000 1,300,000
Bad debts 18,000 186,000 188,000
Reserve for loss on disposal 414,000 300,000 --
Other net 36,000 31,000 112,000
(468,000) (3,777,000) (2,350,000)
Valuation allowance ---------- ---------- ----------
$ -- $ -- $(3,250,000
Current deferred tax asset ========== ========== ==========
Deferred tax asset (liability) -
long-term:
Net operating loss carryforward $8,421,000 $2,790,000 $ --
Capitalized software (590,000) (600,000) (460,000)
Depreciation and amortization 200,000 200,000 (10,000)
(8,031,000) (2,410,000) --
Valuation allowance ---------- ---------- ----------
$ -- $ (20,000) $ (470,000)
Long-term deferred tax liability ========== ========== ==========
-32-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1996 and 1995 the Company had approximately
$14,000,000 and $7,000,000 of operating tax loss carryforwards expiring
in 2011 and 2010, respectively. The Tax Reform Act of 1986 enacted a
complex set of rules which limit a company's ability to utilize net
operating loss carryforwards and tax credit carryforwards in periods
following an ownership change. These rules define an ownership change as
a greater than 50 percent point change in stock ownership within a
defined testing period which is generally a three-year period. As a
result of stock issued relative to the Restructuring and other stock
which may be issued related to the Debentures (see Note 12) the Company
may experience an ownership change and consequently the Company's
utilization of its net operating losses could be significantly limited.
NOTE 7--STOCK OPTION AND STOCK PURCHASE PLANS
In March 1995, the Company adopted the 1995 Employee Stock Option
Plan. Options for the purchase of up to 600,000 shares may be granted by
of the Board of Directors to employees of the Company at an exercise
price determined by the Board of Directors or the date of grant. Options
may be granted as incentive or non-qualified stock options with a term of
not more than ten years. At December 31, 1996 and 1995, 210,175 and
482,325 shares, respectively, were available for grant.
On November 15, 1994 the Company adopted the 1994 Stock Option Plan
for Independent Directors. Options for the purchase of up to 300,000
shares may be granted to directors of the Company who are not employees
("non-employee director"). Each non-employee director who is serving on
"Date of Grant" shall automatically be granted an option to purchase
10,000 shares of Common Stock at the fair market value of Common Stock on
the date the option is granted. Dates of Grant are November 15, 1994,
1999, 2004, and 2009 for non-employee directors serving on November 15,
1994. For individuals who become non-employee directors after November
15, 1994, such directors' Dates of Grant will be the date such individual
becomes a director and the fifth, tenth and fifteenth anniversaries of
such date. Options are exercisable in full 6 months after the applicable
date of grant and expire 5 years after the date of grant. At December
31, 1996, and 1995, 240,000 and 260,000 shares, respectively, were
available for grant.
In October 1994, the Company adopted the 1994 Non-Qualified Stock
Option Plan for Consultants. Options for the purchase of up to 200,000
shares may be granted by the Board of Directors to any individual who has
entered into a written consulting contract with the Company. The non-
qualified stock options will have a 5 year term from date of grant and
will be exercisable at a price and time as determined by the Board of
Directors on the date of grant. At December 31, 1996 and 1995, 105,000
shares were available for grant.
In June 1991, the Company adopted the Key Employee Stock Option Plan
(the "KESO Plan"). Options for the purchase of up to 721,875 shares may
be granted by the Board of Directors to key employees of the Company at
an exercise price determined by the type of option granted. Options may
be granted as incentive or non-qualified stock options with a term of not
more than ten years from the date of grant. At December 31, 1996 and
1995, 279,938 and 229,938 shares, respectively, were available for grant.
-33-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the changes in outstanding Common Stock options for all
outstanding plans is as follows:
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
CONTRACTUAL EXERCISE
SHARES PER SHARE LIFE PRICE
------ -------- ---- -----
Balance, December 31, 1993 567,739 $2.29 - 10.40 -- $4.71
Granted 222,000 2.63 - 4.38 2.9 years 3.53
Exercised (021,875) 3.53 -- 3.53
(314,514) 2.29 - 10.40 -- 4.59
Canceled ---------- ---------- ---------- --------
Balance, December 31, 1994 453,350 2.63 - 10.00 2.9 years 4.17
Granted 462,225 1.13 - 3.75 2.1 years 1.80
(225,608) 3.13 - 10.00 -- 3.87
Canceled ---------- ---------- ---------- --------
Balance, December 31, 1995 689,967 1.13 - 10.00 2.3 years 2.66
Granted 337,250 2.00 - 5.25 2.9 years 3.20
Exercised (125,187) 1.75 - 3.53 -- 2.97
(233,205) 1.75 - 10.00 -- 3.75
Canceled ---------- ---------- ---------- --------
Balance, December 31, 1996 668,825 $1.13 - 5.25 2.6 years $2.49
At December 31, 1996 under the above plans, 351,909 shares were
exercisable.
In 1985, the Board of Directors authorized, and the stockholders
approved, the adoption of an Employee Stock Purchase Plan (the "Purchase
Plan"). An aggregate of 344,531 shares of the Company's Common Stock
could be issued under the Purchase Plan. As of December 31, 1995,
207,681 shares were issued under the Purchase Plan which was terminated
in March 1995.
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
for stock options issued to employees in accounting for its stock option
plans. The exercise price for all stock options issued during 1996 and
1995 was equal to the market price of the Company's stock at the date of
grant. Accordingly, no compensation expense has been recognized for the
Company's stock-based compensation plans.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options. The weighted average fair
value of stock options granted to employees used in determining pro forma
amounts is estimated at $1.95 and $.94 during 1996 and 1995,
respectively.
-34-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pro forma information regarding net loss and net loss per share has
been determined as if the Company had accounted for its employee stock
options under the fair value method prescribed under Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock
Based Compensation. The fair value of these options was estimated at the
date of grant using the Black-Scholes option-pricing model for the pro
forma amounts with the following weighted average assumptions:
December 31, December 31,
1996 1995
---------- ----------
Risk-free interest rate . . 6.29% 6.74%
Expected life . . . . . . . 3.3 years 3.6 years
Expected volatility . . . . 89% 70%
Expected dividends . . . . None None
The pro forma amounts are indicated below (in thousands, except per
share amounts):
Year Ended December 31,
----------------------
1996 1995
---- ----
Net loss as reported . . . $( 6,001) $(11,402)
Pro forma net loss . . . . $( 6,166) $(11,660)
Loss per share as reported $( .40) $(1.33)
Pro forma loss per share . $( .41) $(1.36)
NOTE 8--COMMON STOCK
The Company made a series of loans in 1994, 1993 and 1992
aggregating $635,757 at December 31, 1994, to its former President in
exchange for a demand note receivable with interest at 1% over the bank's
prime rate. Effective January 6, 1995, the Board of Directors approved
the receipt of 268,111 shares of the Company's Common Stock, which were
added to treasury shares, in full satisfaction for the repayment of these
loans by the former President. The cost of $2.37 per common share for
this treasury stock was $.37 per share less than the closing bid price of
the Company's Common Stock on January 6, 1995. This receivable at
December 31, 1994 was reflected in treasury stock as a reduction of
stockholders' equity.
On November 17, 1989, the Company adopted a Stockholder Rights Plan
and declared a dividend distribution of one Right for each outstanding
share of Common Stock. Under certain conditions, each Right shall
initially entitle the registered holder thereof to purchase one-fifth of
one share of Common Stock at a purchase price of $10.00, subject to
adjustment. The Rights will be exercisable only if (i) a person or group
has acquired, or obtained the right to acquire 15% or more of the
outstanding shares of Common Stock (other than a person that acquires the
stock directly from the Company in a transaction that the Company's
independent Directors determine to be in the best interests of the
Company and its stockholders) or (ii) following the commencement of a
tender offer or exchange offer for 15% or more of the then outstanding
shares of Common Stock. Each Right will entitle its holder to receive,
upon exercise, Common Stock (or, in certain circumstances, cash,
property, or other securities of the Company) having a value equal to two
times the purchase price of the Right under certain circumstances,
including the acquisition of 20% of the outstanding Common Stock. All
rights holders, except the acquiror, may purchase a number of shares of
Common Stock equal to $10.00 (subject to adjustment under the terms of
the Rights
-35-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Plan) divided by 50% of the market price of the Company's Common Stock
on the date which is ten days after a public announcement by the
Company that a person or group has acquired, or obtained the right to
acquire, 15% or more of the outstanding shares of Common Stock. In the
event that the Company is acquired in a merger or other business
combination transaction in which the Company is not the surviving
corporation, the rights holders may purchase the acquiror's shares at the
similar discount.
The Company may redeem the Rights at $.01 each until ten days
following the date on which a person or group of affiliated persons has
acquired, or obtained the right to acquire, the beneficial ownership of
15% or more of the outstanding shares of Common Stock. The Rights will
expire on December 4, 1999 unless earlier redeemed by the Company.
NOTE 9--SALE OF STOCK AND WARRANTS
On March 31, 1996, the Company entered into a series of transactions
with Software Investments Limited ("SIL") and Care Corporation Limited
("Care") whereby the Company:
(A) sold to SIL for total proceeds of $3,022,391: (i) 1,412,758
shares of the Company's Common Stock for $2.00 per share and (ii) five-
year warrants to purchase an aggregate of 196,875 shares of the Company's
Common Stock exercisable at $2.00 per share for $1.00 per warrant
($196,875).
(B) assigned to SIL the rights it retained in the Restructuring
(see Note 2) to repurchase within six months 1,628,100 shares of the
Company's Common Stock for the greater of $3.00 per share or 50 percent
of the then market price of the Company's Common Stock and its rights to
purchase from the warrant holders for $1.00 per share five-year warrants
to acquire 776,562 shares of the Company's Common Stock at $2.00 per
share. As a result of the issuance of the above mentioned shares, the
antidilution provisions of the Warrants required an adjustment from
776,562 shares at $2.00 per share to 862,847 shares at $1.80 per share.
As a result of the issuance of the 12 1/2% Convertible Debentures
discussed in Note 12, the Warrants may require a further adjustment to
the number of shares purchasable and the exercise price.
On May 1, 1996, SIL acquired 1,628,100 shares of the Company's
Common Stock at $3.00 per share, and at $1.00 per Warrant, 862,847
Warrants to acquire 862,847 shares of the Company's Common Stock at $1.80
per share. SIL exercised these Warrants on May 6, 1996, resulting in the
Company receiving $1,553,124 in additional equity.
In addition, on March 31, 1996, the Company was granted by Care the
exclusive license for the Care software systems for use in the workers'
compensation and group health claims administration markets in Canada,
Mexico and Central and South America. In exchange for this license, the
Company issued to Care 2,500,000 shares of the Company's Common Stock.
The agreement was revised on March 14, 1997 and the Company engaged Care
as its exclusive sales agent for a monthly fee of $10,000 against
commissions of 20%. Depending upon the level of revenue reached, the
Company will have the right to repurchase portions of the shares issued
to Care at $.01 per share based upon the level of revenues actually
achieved. Under certain circumstances, based upon aggregate net sales in
excess of $10 million from a maximum of two separate sales during such
three-year period, the Company may be required to grant Care five-year
warrants to buy an additional 1,000,000 shares of the Company's Common
Stock at $2.00 per share.
-36-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
(Dollar amounts in thousands except per share data)
QUARTER
--------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
YEAR ENDED DECEMBER 31, 1996:
Revenues $ 1,120 $ 1,897 $ 1,052 $ 1,400
Loss from continuing operations(1) (798) (1,280) (2,046) (1,484)
Loss on disposal of discontinued
operations -- -- (393) --
Net loss (798) (1,280) (2,439) (1,484)
Loss per share from continuing
operations ($0.07) ($0.08) ($0.12) ($0.10)
Net loss per share ($0.07) ($0.08) ($0.15) ($0.10)
YEAR ENDED DECEMBER 31, 1995:
Revenues 1,054 925 1,136 1,004
Loss from continuing operations(1) (2,158) (280) (388) (718)
Loss from discontinued operations (1,330) (3,103) (1,128) (1,547)
Loss on disposal of discontinued
operations -- -- -- (750)
Net loss (3,488) (3,383) (1,516) (3,015)
Loss per share from continuing
operations ($0.25) ($0.03) ($0.05) ($0.08)
Net loss per share ($0.41) ($0.40) ($0.18) ($0.34)
YEAR ENDED DECEMBER 31, 1994:
Revenues 484 630 155 658
Loss from continuing operations(1) (905) (1,531) (1,671) (3,359)
(Loss) income from discontinued
operations (1,951) 1,252 1,911 (7,966)
Net (loss) income (2,856) (279) 240 (11,325)
Loss per share from continuing
operations ($0.10) ($0.17) ($0.19) ($0.38)
Net (loss) income per share ($0.32) ($0.03) $0.03 ($1.28)
(1) The first quarter of 1995 and the fourth quarter of 1994 were
adversely affected by the special charges as described in Note
3.
-37-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11--SUPPLEMENTAL DATA
Accrued liabilities consist of the following:
DECEMBER 31,
------------
1996 1995
---- ----
Accrued payroll, benefits
temporary help, consulting
and severance $ 371,186 $ 229,623
Reserve for contract costs
and adjustments -- 200,000
Reserve for loss on disposal
of discontinued operations -- 749,758
Accrued expenses of the
discontinued operations not
assumed by The Robert Plan
Corporation 1,036,736 2,839,702
206,690 104,558
Other ---------- ----------
$1,614,612 $4,123,641
Total ========== ==========
NOTE 12--SUBSEQUENT EVENTS
On March 14, 1997, the Company obtained $750,000 in bridge financing
through the sale of 12 1/2% Convertible Notes to three major stockholders.
The principal and accrued interest on the bridge financing was repaid in
full on March 31, 1997 out of the proceeds from the financing discussed
below.
On March 31, 1997, the Company sold $3,000,000 of 12 1/2% Convertible
Debentures due March 2002 (the "Debentures") to an institutional
investor. The Debentures were sold at face value, pay interest quarterly
and are convertible, in whole or in part, into shares of Common Stock of
the Company at $1.25 per share, subject to adjustment. The Debentures
contain certain covenants which restrict the Company's ability to incur
indebtedness, grant liens, pay dividends or other defined restricted
payments and make investments and acquisitions. The Company cannot
redeem the Debentures for two years and thereafter may only call the
Debentures if the closing price of the Company's Common Stock for the
twenty business days preceding the redemption date exceeds $1.50. The
net proceeds from the permanent financing were used to repay the bridge
financing and the remainder will be used for working capital purposes.
-38-
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE AT
BEGINNING DEDUCTIONS END
OF PERIOD ADDITIONS (1) OF PERIOD
--------- --------- ------------- ------
Accumulated amortization of
capitalized software and
software license:
Year Ended December 31,
1996 $ 489,227 $2,101,576 $834,839 $1,755,964
Year Ended December 31,
1995 $ -- $ 489,227 $ -- $ 489,227
Year Ended December 31,
1994 $1,388,601 $3,313,023 $4,701,624 $ --
(1) Represents primarily a write-off of $506,000 of capitalized software
costs in 1996 and reduction of fully amortized software in 1994.
-39-
EXHIBIT NO. DESCRIPTION
----------- ------------
2 Certificate of Merger of the Company Computer Systems, Inc.
(a New York corporation) into the Registrant, filed on June
11, 1985 [incorporated by reference to Exhibit 2 to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on January 29, 1986].
3(a) Certificate of Incorporation of the Registrant filed on
April 22, 1985 [incorporated by reference to Exhibit 3(a)
to the Registrant's Annual Report on Form 10-K (Commission
File No. 0-13124) filed on January 29, 1986].
3(b) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed on May 6, 1987 [incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 33-17533) filed
on September 29, 1987].
3(c) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed on March 26, 1990 [incorporated by
reference to Exhibit 3(d) to the Registrant's Quarterly
Report on Form 10-Q (Commission File No. 0-13124) filed on
June 14, 1990].
3(d) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed on March 18, 1992 [incorporated by
reference to Exhibit 1 to the Registrant's Current Report
on Form 8-K (Commission File No. 0-13124) filed on March
30, 1992].
3(e) Certificate of Amendment of Certificate of Incorporation of
the Registrant [incorporated by reference to Exhibit 3(e)
to the Registrant's Amendment No. 1 to Registration
Statement on Form S-3 (Commission File No. 0-13124) filed
on July 10, 1996].
3(f) Bylaws of the Registrant, as amended [incorporated by
reference to Exhibit 3(g) to the Registrant's Amendment No.
1 to Registration Statement on Form S-3 (Commission file
No. 0-13124) filed on July 10, 1996].
4 Form of Common Stock Certificate of the Registrant
[incorporated by reference to Exhibit 4(a) to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on January 29, 1986].
10(a) Partnership Agreement, dated December 7, 1978, by and among
the Registrant, James R. Poole, Ira M. Cantor and Stanley
A. Rothenberg [incorporated by reference to Exhibit 10(a)
to the Registrant's Registration Statement on Form S-18
(Commission File No. 2-88695-NY) filed on December 30,
1983].
10(b) Employment Agreement, dated as of August 1, 1990, between
the Registrant and Bradley J. Hughes [incorporated by
reference to Exhibit 10(h) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1991].
10(c) Employment Agreement, dated as of July 11, 1990, between
the Registrant and Theodore I. Botter [incorporated by
reference to Exhibit 10(j) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1991].
10(e)(1) Employment Agreement, dated as of November 1, 1992, between
the Registrant and Harvey Krieger [incorporated by
reference to Exhibit 10(h) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 28, 1993].
10(e)(2) Amendment to Employment Agreement, dated June 7, 1995,
between the Registrant and Harvey Krieger.
-40-
10(e)(3) Consulting Agreement, dated as of June 1, 1996, between the
Registrant and Harvey Krieger [incorporated by reference to
Exhibit 10(e)(3) to the Registrant's Registration Statement
on Form S-3 (Commission File No. 0-1324) filed on June 17,
1996].
10(f)(1) Employment Agreement, dated as of March 22, 1994, among
COVER-ALL Systems, Inc., Michael G. Repoli and the
Registrant [incorporated by reference to Exhibit 10(f)(1)
to the Registrant's Annual Report on Form 10-K (Commission
File No. 0-13124) filed on April 17, 1995].
10(f)(2) Amendment to Employment Agreement, dated August 10, 1994,
among COVER-ALL Systems, Inc., Michael G. Repoli and the
Registrant [incorporated by reference to Exhibit 10(f)(2)
to the Registrant's Annual Report on Form 10-K (Commission
File No. 0-13124) filed on April 17, 1995].
10(f)(3) Amendment to Employment Agreement, dated January 11, 1995,
among COVER-ALL Systems, Inc., Michael G. Repoli and the
Registrant [incorporated by reference to Exhibit 10(f)(3)
to the Registrant's Annual Report on Form 10-K (Commission
File No. 0-13124) filed on April 17, 1995].
10(g) Employment Agreement, dated as of January 24, 1996, among
COVER-ALL Systems, Inc., the Registrant and Peter C. Lynch
[incorporated by reference to Exhibit 10(g) to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on April 11, 1996].
10(h) Warner Insurance Services, Inc. Tax Saver 401(k) Salary
Reduction Plan adopted May 31, 1985 and restated as of
August 11, 1992 [incorporated by reference to Exhibit 10(k)
to the Registrant's Annual Report on Form 10-K (Commission
File No. 0-13124) filed on January 28, 1993].
10(i) Incentive Stock Option Plan adopted by the Board of
Directors of the Registrant on February 22, 1982, and
approved by the stockholders in February 1983 as amended on
December 16, 1983 and March 31, 1988 [incorporated by
reference to Exhibit 10(b) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1989].
10(j) Stock Option Agreement, dated March 22, 1990, between the
Registrant and Harvey Krieger [incorporated by reference to
Exhibit 10(q) to the Registrant's Annual Report on Form 10-
K (Commission File No. 0-13124) filed on January 24, 1991].
10(k) Stock Option Agreement, dated August 15, 1990, between the
Registrant and Bradley J. Hughes [incorporated by reference
to Exhibit 10(t) to the Registrant's Annual Report on Form
10-K (Commission File No. 0-13124) filed on January 24,
1991].
10(l) Stock Option Agreement, dated August 15, 1990, between the
Registrant and Theodore I. Botter [incorporated by
reference to Exhibit 10(u) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1991].
10(m)(1) The 1991 Key Employee Stock Option Plan, adopted by the
Board of Directors of the Registrant on June 18, 1991, as
amended on September 6, 1991 and November 19, 1991 and
approved by stockholders on March 18, 1992 [incorporated by
reference to Exhibit 4(a) to the Registrant's Registration
Statement on Form S-8 (Commission File No. 33-44270) filed
on November 26, 1991].
10(m)(2) Form of Incentive Stock Option Agreement under the 1991 Key
Employee Stock Plan [incorporated by reference to Exhibit
4(b) to the Registrant's Registration Statement on Form S-8
(Commission File No. 33-44270) filed on November 26, 1991].
-41-
10(m)(3) Form of Non-Qualified Stock Option Agreement under the 1991
Key Employee Stock Option Plan [incorporated by reference
to Exhibit 4(c) to the Registrant's Registration Statement
on Form S-8 (Commission File No. 33-44270) filed on
November 26, 1991].
10(m)(4) Form of Stock Option Agreement under the 1991 Key Employee
Stock Option Plan dated as of June 21, 1991, between the
Registrant and each of Theodore I. Botter, Thomas F.
Rocchio, and Harvey Krieger [incorporated by reference to
Exhibit 4(d) to the Registrant's Registration Statement on
Form S-8 (Commission File No. 33-44270) filed on November
26, 1991].
10(m)(5) Stock Option Agreement, dated as of November 20, 1992,
between the Registrant and Bradley J. Hughes [incorporated
by reference to Exhibit 10(x)(vi) to the Registrant's
Annual Report on Form 10-K (Commission File No. 0-13124)
filed on January 28, 1993].
10(n)(1) 1994 Stock Option Plan for Independent Directors adopted by
the Board of Directors of the Registrant on November 10,
1994 [incorporated by reference to Exhibit 10(n)(1) to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on April 17, 1995].
10(n)(2) Form of Stock Option Agreement under the 1994 Stock Option
Plan for Independent Directors [incorporated by reference
to Exhibit 10(n)(2) to the Registrant's Annual Report on
Form 10-K (Commission File No. O-13124) filed on April 17,
1995].
10(o)(1) The 1995 Employee Stock Option Plan, adopted by the Board
of Directors of the Registrant on March 22, 1995
[incorporated by reference to Exhibit 10(o)(1) to the
Registrant's Annual Report on Form 10-K (Commission File
No. O-13124) filed on April 17, 1995].
10(o)(2) Form of Incentive Stock Option Agreement under the 1995
Employee Stock Option Plan [incorporated by reference to
Exhibit 10(o)(2) to the Registrant's Annual Report on Form
10-K (Commission File No. 0-13124) filed on April 17,
1995].
10(o)(3) Form of Non-Qualified Stock Option Agreement under the 1995
Employee Stock Option Plan [incorporated by reference to
Exhibit 10(o)(3) to the Registrant's Annual Report on Form
10-K (Commission File No. 0-13124) filed on April 17,
1995].
10(p)(1) Indenture of Lease, dated as of July 1, 1994, between Fair
Lawn Industrial Park, Inc. and the Registrant for premises
located at 17-01 Pollitt Drive, Fair Lawn, New Jersey
[incorporated by reference to Exhibit 10(p)(1) to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on April 17, 1995].
10(p)(2) Termination Agreement, dated as of June 30, 1994, among
Fair Lawn Industrial Park, Inc., Symtron Systems, Inc., and
the Registrant [incorporated by reference to Exhibit
10(p)(2) to the Registrant's Annual Report on Form 10-K
(Commission File No. 0-13124) filed on April 17, 1995].
10(q) Lease Agreement, dated as of March 2, 1990, between the
Registrant and Polevoy Associates for premises located at
18-01 Pollitt Drive, Fair Lawn, New Jersey [incorporated by
reference to Exhibit 10(z) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1991].
10(r) Lease Agreement, dated as of December 11, 1991, between the
Registrant and Aetna Life Insurance Company for premises
located at 125 Belmont Drive, Somerset, New Jersey
[incorporated by reference to Exhibit 10(ee) to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on January 24, 1992].
-42-
10(s) Rights Agreement, dated November 17, 1989, between the
Registrant and First Fidelity Bank, N.A., as Rights Agent
[incorporated by reference to Exhibit 1 to the Registrant's
Registration Statement on Form 8-A (Commission File No. 13-
2698053) filed on October 20, 1989].
10(t)(i) Severance Agreement, dated as of November 28, 1989, between
the Registrant and Harvey Krieger [incorporated by
reference to Exhibit 1 to the Registrant's Form 8-K
(Commission File No. 0-13124) filed on December 6, 1989].
10(t)(ii) Severance Agreement, dated August 15, 1990, between the
Registrant and Bradley J. Hughes [incorporated by reference
to Exhibit 10(o)(i) to the Registrant's Annual Report on
Form 10-K (Commission File No. 0-13124) filed on January
24, 1991].
10(t)(iii) Severance Agreement, dated August 15, 1990, between the
Registrant and Theodore I. Botter [incorporated by
reference to Exhibit 10(t)(i) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1991].
10(u)(i) Restructuring Agreement, dated as of March 1, 1996, by and
among the Registrant, Atlantic Employers Insurance Company,
Pacific Employers Insurance Company, Electric Insurance
Company, The Robert Plan Corporation, Material Damage
Adjustment Corporation, Lion Insurance Company, and
National Consumer Insurance Company [incorporated by
reference to Exhibit 10.1 to the Registrant's Form 8-K
(Commission File No. 0-13124) filed on March 7, 1996].
10(u)(ii) Form of Warrant issued by the Registrant pursuant to the
Restructuring Agreement listed as Exhibit 10(u)(i) above
[incorporated by reference to Exhibit 10.2 to the
Registrant's Form 8-K (Commission File No. 0-13124) filed
on March 7, 1996].
10(u)(iii) Asset Purchase Agreement, dated as of March 1, 1996, by and
among the Registrant, MDA Services, Inc. and The Robert
Plan Corporation [incorporated by reference to Exhibit 10.3
to the Registrant's Form 8-K (Commission File No. 0-13124)
filed on March 7, 1996].
10(v)(i) Stock Purchase Agreement, dated as of March 31, 1996, by
and among the Registrant, Software Investments Limited and
Care Corporation Limited [incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on April 8, 1996].
10(v)(ii) Repurchase Rights Assignment, dated as of March 31, 1996,
between the Registrant and Software Investments Limited
[incorporated by reference to Exhibit 10.2 to the
Registrant's Form 8-K (Commission File No. 0-13124) filed
on April 8, 1996].
10(v)(iii) Warrant, dated as of March 31, 1996, issued by the
Registrant to Software Investments Limited [incorporated by
reference to Exhibit 10.3 to the Registrant's Form 8-K
(Commission File No. 0-13124) filed on April 8, 1996].
10(v)(iv) Exclusive Software License Agreement, dated as of March 31,
1996, by and among the Registrant, Care Corporation Limited
and COVER-ALL Systems, Inc. [incorporated by reference to
Exhibit 10.4 to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on April 8, 1996].
10(w) Settlement Agreement dated April 1, 1996 between the
Registrant and Clarendon National Insurance Company
[incorporated by reference to Exhibit 10.5 to the
Registrant's Form 8-K (Commission File No. 0-13124) filed
on April 8, 1996].
*10(x) Employment Agreement, dated as of April 1, 1996, between
the Registrant and Raul F. Calvo.
-43-
*10(y) General Release and Termination of Lease Agreement, dated
as of December 4, 1996, between the Registrant and Somerset
Realty Associates, L.L.C.
10(z)(i) Convertible Note Purchase Agreement, dated as March 14,
1997, between the Registrant, Software Investments Limited,
Atlantic Employers Insurance Company and Roger D. Bensen
[incorporated by reference to Registrant's Current Report
on Form 8-K (Commission File No. 0-13124) filed on March
24, 1997.
*10(z)(ii) Form of 12 1/2% Convertible Note issued by Registrant
pursuant to the Convertible Note Purchase Agreement listed
as Exhibit 10(z)(i) above.
*10(aa)(i) Debenture Purchase Agreement, dated as of March 31, 1997,
between the Registrant and Sirrom Capital Corporation.
*10(aa)(ii) 12 1/2% Convertible Debenture Due March 31, 2002, issued by
Registrant to Sirrom Capital Corporation.
*10(aa)(iii) Amendment to Stock Purchase Agreement, dated as of March
14, 1997, among the Registrant, Software Investments
Limited and Care Corporation Limited.
*10(aa)(iv) Amendment to Exclusive Software License Agreement, dated as
of March 14, 1997, among the Registrant, Care Corporation
Limited and, for certain purposes, Cover-All Systems, Inc.
21 Subsidiaries of the Registrant [incorporated by reference
to Exhibit 21 to the Registrant's Annual Report on Form 10-
K (Commission File No. 0-13124) filed on April 11, 1996].
*23 Consent of Ernst & Young LLP.
*27 Financial Data Schedule.
______________________________
* Filed herewith
-44-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
COVER-ALL TECHNOLOGIES INC.
Date: April 15, 1997 By: /s/ Brian Magowan
-----------------
Brian Magowan
Chairman of the Board of
Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
SIGNATURES TITLE DATE
---------- ---------- ----------
/s/ Brian Magowan Chairman of the Board April 15, 1997
-------------------- of Directors and Chief
Brian Magowan Executive Officer and
Director (Principal
Executive Officer)
/s/ Mark D. Johnston Chief Financial April 15, 1997
-------------------- Officer and
Mark D. Johnston Director
/s/ Earl Gallegos Director April 15, 1997
--------------------
Earl Gallegos
/s/ Ian Meredith Director April 15, 1997
--------------------
Ian Meredith
/s/ James R. Stallard Director April 15, 1997
--------------------
James R. Stallard
-45-