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UNITED STATES
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, 1999
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 Identification No.)
incorporation or organization)
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:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, NASDAQ SmallCap Market
par value $.01 per share Philadelphia Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
- --------------------------------------------------------------------------------
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. |_|
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at April 4, 2000 was $15,232,000.
Number of shares outstanding at April 4, 2000:
17,041,172 shares of Common Stock, par value $.01 per share.
Documents Incorporated by Reference
The definitive Proxy Statement for the Annual Meeting of Stockholders to be held
June 22, 2000, 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 Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
PART I
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., a Delaware corporation ("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 services, which were 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, as part of a
settlement of two lawsuits between the Company and The Robert Plan Corporation.
This settlement included the release of the Company from its obligations under
long-term processing contracts with the customers of ISD.
During March 1997, the Company announced several major changes as part of
its overall business strategy. Mr. Brian Magowan became Chairman of the Board
and Chief Executive Officer and Mr. Mark Johnston became Chief Financial Officer
on an interim basis. 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 (the "Debentures"), due March 2002. The Debentures are
convertible into shares of common stock at $1.25 per share and carry certain
restrictive covenants. Mr. Johnston served as Chief Financial Officer until
January 1998, when Mr. John R. Nobel joined the Company and replaced Mr.
Johnston as Chief Financial Officer.
On November 15, 1999, Mark Johnston succeeded Brian Magowan as the
Company's Chairman and Chief Executive Officer. In unrelated matters, Steve
Hough, a Director, resigned from the Company's board of directors effective
November 15, 1999, and in December 1999, Peter Lynch resigned as President and
Chief Operating Officer. On December 20, 1999, the Company hired Mr. John Roblin
as the Company's President and Chief Executive Officer and Mark Johnston
continued as the Company's non-executive Chairman. On March 28, 2000, Mr. Roblin
was elected to the Board of Directors of the Company. In addition, Mr. Nobel
departed as Chief Financial Officer in March 2000 and was replaced, on an
interim basis, by Mark Johnston. And in February 2000, the Company engaged John
Carducci to serve as the Company's Chief Software Architect, and in March 2000,
Dalia Ophir, the Company's Chief Technology Officer, departed from the Company.
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.
In December 1989, the Company purchased, through its 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. The Company then enhanced this acquired software and it is known as
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
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Microfocus COBOL language, and the Company has upgraded this product line for
use in the Windows 95, Windows 98 and NT operating systems. The Company believes
that this software product provides cost-effectiveness and flexibility for
self-contained Local Area Network ("LAN") systems. During 1999, the Classic
product was also upgraded to utilize a graphical user interface ("GUI") and to
operate in an Internet or thin client environment. This feature is especially
valuable to customers desiring remote capability. The Classic product is in use
in over 70 companies. Total Classic revenues were $7,144,000 for 1999 as
compared to $6,708,000 and $6,593,000 for 1998 and 1997, respectively.
Since 1993, COVER-ALL has been developing its second product line entitled
the Total Administrative Solution ("TAS 2000") and, as of December 31, 1998,
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 $3,884,000 for 1999, $5,560,000 for
1998 and $1,345,000 for 1997.
Regarding its software products held for sale, the Company's TAS 2000
product line conforms to "Year 2000" as of December 31, 1997. In 1997 and 1998,
the Classic product line was modified to support the "Year 2000."
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:
o Clear and comprehensive data collection
o On-line system level, screen level, and field level help
o On-line ISO Commercial Lines Manual Tables and Footnotes
o Easy and direct system navigation
o Standard Bureau coverages and rates support
o Company customized coverages and rates support
o Fully automated recipient driven issuance of declaration pages,
worksheets, ID card, etc., including print preview
o Help Desk assistance
o 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.
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COVER-ALL has upgraded the Classic product line to utilize a graphical
user interface, or GUI, and modified the system to run as a 32-bit application.
This enhancement increases user friendliness and provides customers with an
easier integration of peripheral support applications (e.g., imaging, work flow
management, etc.). It also includes Internet accessibility.
TAS 2000 PRODUCT LINE
This latest COVER-ALL product line brings new technology and functional
capability to the property and casualty insurance industry. All products were
developed as Client/Server applications using the Oracle Designer 2000 and
Developer 2000 tool sets. The Client/Server architectural concept allows
companies to take advantage of the power of distributed processing. Companies
currently relying on expensive mainframe technology can "rightsize" their
hardware and software while companies in need of greater power can migrate to
more powerful equipment without affecting applications. Whether experiencing
growth or reductions, all customers are free to scale their equipment in
accordance with the changing demands of their organizations.
The TAS 2000 product line currently includes the following application
modules:
o Client Management
o End User Tools
o Agency Profile Management
o Product Developer
o Policy Administration
o Workers Compensation
o Billing, Cash & Commissions
o Statistical Reporting
TAS 2000 has a Windows compliant graphical user interface to enhance its
user friendliness. 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. TAS 2000 is an architecture of open
LAN- and WAN (wide area network)-based modules possessing varying elements of
interdependence.
COVER-ALL created the TAS 2000 product line to better position itself for
penetration within the larger insurance carrier market segment. In that segment
of the market, the demand for advanced processing platforms and architectural
design advantages, together with more comprehensive administrative function,
provide COVER-ALL the opportunity to achieve success.
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. In addition, the Classic product is distinguished from its
competitors in its complete, all-state support of regulatory bureau rates, rules
and forms for commercial lines of property/casualty insurance. 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
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environment. Through Oracle's tools, these new products take advantage of the
power of the Oracle database. This software allows processing to be centralized,
dedicated to specific server(s) or clients or distributed across the network.
TAS 2000 product line was developed with an emphasis on quality from the
conceptual design stage using Oracle CASE (Computer Aided System Engineering)
tools through to the physical coding and testing phases.
The Classic product line competes primarily with three competitors who are
also actively selling LAN-based policy rating and issuance software as well as
Internet software used by property/casualty insurance companies.
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.
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. Due to the
Company's financial position, it did not incur research and development expenses
in 1997. In 1998, the Company resumed research and development expenses, and the
Company continued these expenses in 1999. The Company believes that research and
development expenditures will continue in the coming year.
Research and development expenses for COVER-ALL were $1,009,000,
$1,186,000 and $-0- for the years ended December 31, 1999, 1998 and 1997,
respectively.
Backlog
The Company has a license, professional services and maintenance backlog
of unbilled work of approximately $-0-, $-0- and $4,400,000, respectively, as of
December 31, 1999.
Major Customers
The Classic product line is in use in over 70 companies while the TAS 2000
product line is currently in use in three property/casualty insurance companies.
The Company's revenues from major customers (more than 10 percent of total
revenues) for the years ended December 31, 1999, 1998 and 1997 as a percentage
of total revenue were as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
Customer 1999 1998 1997
- --------------------------- ------------ ------------ ------------
Inspire Insurance Solutions 20%
Sierra Health Services, Inc. 14%
Cornhill Insurance Co. 12% 15%
Employers Reinsurance Corp. 11% 15%
Accident Fund 13%
-5-
In 1999, 1998 and 1997, export sales were made to a U.K. customer of
approximately $1,336,000, $1,900,000 and $500,000, respectively.
Employees
The Company had on average 75 employees during 1999. 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
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 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.
As part of the restructuring transactions in March 1996 (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 contractual obligations to provide insurance services 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 (the "Restructuring Warrants") to
purchase up to an additional 1,553,125 shares of the Company's common stock at
$2.00 per share, and (c) cash of $2.5 million.
Atlantic Employers Insurance Company, then a CIGNA Property and Casualty
company and ISD customer, initially acquired 2,476,547 shares of the Company's
common stock, Restructuring Warrants to purchase 1,181,250 shares and received
$675,000 in cash as part of the Restructuring. Mr. James R. Stallard, then Vice
President of CIGNA Property and Casualty, was designated as a director of the
Company under the terms of the Restructuring.
As part of the Restructuring, the Company had the option, exercisable for
a period of six months (from March 1, 1996), to (i) purchase 50% of the
3,256,201 shares for a certain calculated cash price and (ii) acquire 50% of the
1,553,125 Restructuring Warrants at a cash price equal to $1.00 per warrant. On
March 31, 1996, the Company assigned this repurchase option to Software
Investments Limited ("SIL"), which SIL subsequently exercised. As a result of
the issuance of shares 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.
Also in March 1996, the Company entered into a series of transactions with
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 (the "SIL 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 SIL Warrant ($196,875), and (B)
assigned to SIL the rights it retained in the Restructuring to repurchase within
six months shares of the Company's common stock and its rights to purchase from
the warrantholders Restructuring Warrants to acquire 776,562 shares of the
Company's common stock. As a
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result of the issuance of these shares, the antidilution provisions of the
warrants required an adjustment from 776,562 at $2.00 per share to 862,847
shares at $1.80 per share. SIL exercised these warrants in May 1996, and the
Company received approximately $1.6 million in proceeds from this exercise.
On March 31, 1996, the Company was granted by Care the exclusive license
for the Care software systems for use in the worker's compensation claims
administration markets in Canada, Mexico and Central and South America (the
"Care Software License"). In exchange for this license, the Company issued to
Care 2,500,000 shares of the Company's common stock at $2.00 per share to value
the license at $5,000,000 at March 31, 1996. The license agreement was revised
on March 14, 1997 to provide for the engagement of Care as the Company's
exclusive sales agent for a monthly fee of $10,000 against commissions of 20%.
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 at May 31,
2000 at a current annual rental expense of approximately $400,000. This facility
is currently fully utilized by the Company. The Company is currently negotiating
with the landlord to modify and extend the lease to occupy approximately 21,000
square feet until May 31, 2005. The 15,000 square feet of space expected to be
discontinued consists of warehouse space, and the Company plans to dispose of
certain items currently in such warehouse space and move certain items to an
off-site storage facility in order to accommodate its warehouse needs after May
31, 2000.
The Company believes that its headquarters is well maintained and adequate
to meet its needs in the foreseeable future.
Item 3. Legal Proceedings
On February 23, 2000, COVER-ALL commenced an action against Inspire
Insurance Solutions, Inc., a Texas corporation ("Inspire"), in United States
District Court, District of New Jersey, claiming $1.5 million in damages for
breach of contract stemming from Inspire's failure to make certain maintenance
and support payments to COVER-ALL and its anticipatory repudiation of such
future payments under the contract.
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, 1999.
-7-
PART II
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
"COVR." As of August 2, 1996, the Company's common stock has also been listed on
the Philadelphia Stock Exchange under the symbol "CVA."
The quotations below reflect the high and low closing sales prices for the
Company's common stock since January 1, 1998.
1999: High Low
---- ---
1st Quarter $3.125 $1.750
2nd Quarter 3.000 1.187
3rd Quarter 1.937 1.187
4th Quarter 2.000 0.812
1998:
1st Quarter $4.625 $3.125
2nd Quarter 4.000 2.500
3rd Quarter 3.250 1.250
4th Quarter 2.500 0.938
As of April 4, 2000, there were 629 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 4, 2000 was $1.187, as reported by the Nasdaq SmallCap Market.
The Company has not paid any dividends on its common stock and does not
anticipate paying any dividends in the foreseeable future. In addition, the
purchase agreement governing the Debentures currently prohibits the payment of
dividends without the prior written consent of the holder of the Debentures.
During the year ended December 31, 1999, the Company did not issue any
securities which were not registered under the Securities Act of 1933.
On January 3, 2000, the Company, in a private placement pursuant to
Section 4(2) of the Securities Act of 1933, issued to John Roblin 25,000 shares
of common stock in connection with his becoming President and Chief Executive
Officer of the Company.
-8-
Item 6. Selected Financial Data
The following selected financial data of the Company have been derived
from the audited consolidated financial statements of the Company. The data
should be read in conjunction with the audited consolidated financial
statements, related notes, and other financial information of the Company
included herein.
(Dollar amounts in thousands except per share data)
Years Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Statement of Operations Data:
Revenues: ............................... $ 11,028 $ 12,268 $ 7,938 $ 5,469 $ 4,119
Income (loss) from continuing
operations before income tax(1) ...... (3,255) 548 (2,640) (5,608) (3,544)
Income (loss) from discontinued
Operations less applicable income
Taxes/(benefit) of $-0-, $-0-, $-0-,
$-0- and $-0-, respectively .......... -- -- -- -- (7,108)
Income (loss) on disposal of discontinued
Operations, no tax benefit provided .. -- -- -- (393) (750)
Net income (loss) ....................... (2,820) 918 (2,640) (6,001) (11,402)
Income (loss) per share from continuing
Operations ........................... (.17) .05 (.16) (.38) (.41)
Net income (loss) per share ............. (.17) .05 (.16) (.40) (1.33)
Cash dividends per share ................ $ -- $ -- $ -- $ -- $ --
Balance Sheet Data:
Working capital (deficiency) ............ $ 1,172 $ 4,203 $ 1,647 $ (1,293) $ (8,717)
Total assets ............................ 9,147 11,425 8,484 8,243 8,369
Short-term debt ......................... 59 -- -- -- --
Stockholders' equity (deficit) .......... 2,437 5,217 2,847 4,911 (6,013)
(1) Includes a $1,165 ($.14 per share) special charge in 1995.
-9-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following 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.
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.
-10-
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.
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.
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. 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 of $392,872. The net
loss for 1996 relates to loss adjustment expenses (mostly legal fees) pertaining
to the discontinued operations.
Continuing Operations
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Total revenues were $11,028,000 for the year ended December 31, 1999
compared to $12,268,000 for the year ended December 31, 1998, a decrease of 10%.
License fees were $2,638,000 for the year ended December 31, 1999 compared to
$5,875,000 in the same period in 1998 as a result of no new sales of the TAS
2000 product modules due to the Company's continued focus on completing the
deliveries to the existing TAS 2000 customers. For the year ended December 31,
1999, maintenance revenues were $4,371,000 compared to $3,722,000 in the same
period of the prior year due to an increased Classic customer base. Professional
services revenue contributed $4,019,000 for the year ended December 31, 1999
compared to $2,671,000 for the year 1998 as a result of services completed in
1999 from TAS 2000 contracts signed in 1998.
Cost of revenues increased to $8,462,000 for the year ended December 31,
1999 as compared to $6,462,000 for 1998 due to cost overruns for the TAS 2000
product line. Non-cash capitalized software amortization was $479,000 for the
year ended December 31, 1999 as compared to $785,000 in 1998.
Research and development expenses in 1999 were $1,009,000 compared to
$1,186,000 for the year ended December 31, 1998.
Sales and marketing expenses decreased to $1,778,000 in 1999 compared to
$2,024,000 as of December 31, 1998 due primarily to a reduction in commission
expense as a result of decreased sales.
General and administrative expenses were $1,550,000 in 1999 compared to
$1,480,000 for the year ended December 31, 1998. Allowance for Doubtful Accounts
increased to $1,240,000 in 1999 from $425,000 for the year ended December 31,
1998 due to an increase in bad debt as a result of funds reserved for the one
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TAS 2000 customer that is in breach of contract and for which the Company has
issued a notice of termination.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Total revenues were $12,268,000 for the year ended December 31, 1998
compared to $7,938,000 for the year ended December 31, 1997, an increase of 55%.
License fees were $5,875,000 for the year ended December 31, 1998 compared to
$3,940,000 in the same period in 1997 as a result of sales of TAS 2000 product
modules. For the year ended December 31, 1998, maintenance revenues were
$3,722,000 compared to $2,722,000 in the same period for the prior year due to
an increased customer base. Professional services revenue contributed $2,671,000
for the year ended December 31, 1998 compared to $1,276,000 for the year 1997 as
a result of additional TAS 2000 work.
Cost of revenues increased to $6,462,000 for the year ended December 31,
1998 as compared to $5,426,000 for 1997 as a result of higher sales volume.
Research and development expenses in 1998 were $1,186,000 compared to $-0-
for the year ended December 31, 1997 as a result of development expenses for
billing and statistics modules related to the TAS 2000 product line.
Sales and marketing expenses increased to $2,024,000 in 1998 compared to
$1,900,000 as of December 31, 1997 due to an increased marketing and sales
effort to improve the market share of both of the Company's product lines.
General and administrative expenses decreased to $1,905,000 in 1998 from
$2,989,000 for the year ended December 31, 1997 due to the Company's continued
efforts to reduce overhead costs.
The TAS 2000 product line offers a complete policy and claims
administrative system to property and casualty insurance companies. The newly
developed billing module was released to two customers in June 1998. The TAS
2000 products are being marketed in both the domestic marketplace and in the
United Kingdom.
Liquidity and Capital Resources
At December 31, 1999, the Company had working capital of $1,172,000
compared to a working capital of $4,203,000 in 1998.
On March 31, 1996, the Company was granted by Care the Care Software
License. In exchange for this license, the Company issued to Care 2,500,000
shares of the Company's common stock and the Company recorded a software license
for $5,000,000. 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, or not reached,
the Company had the right to repurchase all or a portion of the shares issued to
Care at $.01 per share.
In the fourth quarter of 1997, the Company made a strategic decision to
allocate its future resources to its TAS 2000 and Classic product lines rather
than the product line obtained via the Care Software License. In this regard, on
March 31, 1998, the Company negotiated and consummated a buy back by Care of the
Care Software License.
For the buy back of the Care Software License by Care, the Company
received $500,000 on March 31, 1998 and a $4,500,000 non-interest bearing
non-recourse (except as to collateral) note payable in semi-annual
-12-
installments of $500,000 which, when discounted, results in a principal amount
of the note of $3,893,054. Due to the related party nature of the Care Software
License buy back agreement, the Company recorded the $1,143,000 difference
between the carrying value of the Care Software License and the discounted
$4,393,000 buy back agreement to capital in excess of par value at March 31,
1998. Upon receipt of the first $500,000 payment under the agreement on March
31, 1998, the Company lifted the aforementioned $.01 per share repurchase
restriction on the 2,500,000 shares.
The discounted note is collateralized by unencumbered Cover-All common
stock owned by Care. The number of shares required as collateral will vary, such
that the market value of the shares held as collateral must equal 150% of the
outstanding balance of the note; however, the maximum number of shares of common
stock that Care is required to pledge as collateral was capped at 2,500,000. The
number of shares required as collateral will be adjusted at each payment date
based on the market price of the Company's shares and the balance outstanding on
such date. Based on the market price of the Company's common stock on March 30,
1998, approximately 1,700,000 shares were pledged as collateral. Upon receiving
each of the subsequent note installments of $500,000, the number of shares
required as collateral was recalculated. On March 28, 2000, the Company received
the $500,000 Care note payment due March 31, 2000. Currently, a total of
2,500,000 shares are pledged to the Company as collateral on the note. The
carrying value of the note at December 31, 1999 is $2,709,000, without accrued
interest.
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 (from March 31, 1997) 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 were used for working capital
purposes.
At December 31, 1999, the Company had approximately $2,800,000,
$3,100,000, $10,100,000 and $3,100,000 of federal net operating tax loss
carryforwards expiring in 2019, 2012, 2011 and 2010, respectively.
The Company is seeking alternative financing to insure that its cash
balances will be sufficient to meet its normal operating needs and to continue
to make significant investment in software development in response to its
business opportunities in 2000.
Year 2000 Readiness
The Year 2000 issue ("Y2K") is the result of computer programs that were
written using two digits rather than four to define the applicable year. As a
result, software may recognize a date using the two digits "00" as 1900 rather
than the year 2000. Computer programs that do not recognize the proper date
could generate erroneous data or cause systems to fail. In addition, the Year
2000 problem also affects non-information technologies such as machines,
equipment and other systems that contain embedded microprocessors. The Year 2000
problem could affect the Company's computers, software programs, equipment and
other systems used by the Company as well as such technologies of other
companies with which the Company does business.
To date, the Company's systems and software have not experienced any
material disruption due to the onset of the Year 2000, and the Company is
unaware of any material problems or issues with the operation of its systems and
software as a result of Year 2000 issues. In addition, the Company is unaware of
any material
-13-
problems or issues with critical third party systems and services utilized by
the Company. The Company did not incur any significant additional expense
relating to the Y2K problem. In anticipation of Y2K, the Company installed a
managerial and financial reporting system and a telephone voicemail system which
are warranted to be Y2K ready by their respective vendors. The total cost of
those systems was approximately $58,000.
Based on the results to date of the Year 2000 issues of which the Company
is aware at this time, the Company does not believe Year 2000 problems will have
a material adverse effect on the Company or its operations. No assurance can be
given, however, that the Company has been able to identify all potential Year
2000 problems or that if Year 2000 problems are discovered by the Company in the
future, it will be able to resolve them satisfactorily and at an affordable
cost.
Recent Developments
The Company is restating its first, second and third quarter 1999
financial statements in order to revise its revenues and operating results
contained in those financial statements. These changes were the product of a
recent detailed review of the Company's compliance with its revenue recognition
and capitalization policies undertaken by new management, and this review
uncovered instances where certain costs relating to Cover-All's TAS 2000
development were expensed, rather than appropriately capitalized during these
quarterly periods, and certain revenue relating to one of the TAS 2000
components was prematurely attributed to revenues in the first quarter and
adjusted accordingly. The overall effect of such revisions to the Company's
operating results over the first three quarters of 1999 was an increase in net
income of $324,000 or $0.02 per share; a decrease in revenues of $341,000 and an
increase in stockholders' equity of $324,000.
The Company believes that such revisions were both necessary and
consistent with generally accepted accounting principles, and the revisions in
the Company's books and records are fully reflected in the audited financial
statements included herein. The revisions had the following effects: In the
first quarter, net income (loss) was reduced from $310,000 or $0.02 per share to
$(16,000) or $(0.00) per share; revenues were reduced from $3,471,000 to
$3,130,000 and stockholders' equity was decreased from $5,547,000 to $5,221,000.
In the second quarter; net income (loss) was increased from $23,000 or $0.00 per
share to $251,000 or $0.01 per share and stockholders' equity was decreased from
$5,590,000 to $5,492,000. In the third quarter, net income (loss) was increased
from $(1,326,000) or $(0.08) per share to $(904,000) or $(0.05) per share and
stockholders' equity was increased from $4,264,000 to $4,588,000. Accordingly,
the Company will be amending its Forms 10-Q for the first, second and third
quarterly periods of 1999 to reflect these revisions.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations and changes in the market value of its investments.
Interest Rate Risk. The Company's exposure to market rate risk for changes
in interest rates relates primarily to the Company's investment portfolio. The
Company has not used derivative financial instruments in its investment
portfolio. The Company invests its excess cash in a major bank money market
account. The Company protects and preserves its invested funds by limiting
default, market and reinvestment risk.
Investments in this account carry a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely impacted due to a
rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, the
Company's future investment income may fall short of expectations due to changes
in interest rates or the Company may suffer losses in principal if forced to
sell securities which have declined in market value due to changes in interest
rates.
-14-
Foreign Currency Risk. The Company earned revenues in the U.K. The
Company's international business is subject to risks typical of an international
business, including, but not limited to differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, the Company's
future results could be materially adversely impacted by changes in these or
other factors.
The Company's exposure to foreign exchange rate fluctuations arises from
sales made to a U.K. customer. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
profitability. The effect of foreign exchange rate fluctuations on the Company
in 1999 was a loss of $60,000.
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 F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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 Exchange
Act of 1934 in connection with the election of directors at the 2000 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, 1999.
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
Reference is made to the Index to Financial Statements on Page 20.
(2) Financial Statement Schedule
II - Valuation and qualifying accounts..........................F-25
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.
-15-
(3) Exhibits
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) 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(b)(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(b)(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.
0-13124) filed on April 17, 1995].
10(c)(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. 0-13124) filed on April 17, 1995].
10(c)(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(c)(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].
-16-
10(c)(4) The 1995 Employee Stock Option Plan, as amended on April 29, 1997 by
the stockholders of the Registrant [incorporated by reference to
Exhibit 10(o)(4) to the Registrant's Annual Report on Form 10-K
(Commission File No. 0-13124) filed on March 31, 1998].
10(d) 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(e) 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(f)(1) 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(f)(2) 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(f)(3) 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(g)(1) 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(g)(2) 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(g)(3) 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(g)(4) 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(h) 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(i)(1) 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(i)(2) Form of 12 1/2% Convertible Note issued by Registrant pursuant to
the Convertible Note Purchase Agreement listed as Exhibit 10(z)(i)
above [incorporated by reference to Exhibit 10(z)(ii) to the
Registrant's Form 10-K (Commission File No. 0-13124) filed on April
15, 1997].
10(j)(1) Amendment to Stock Purchase Agreement, dated as of March 14, 1997,
among the Registrant, Software Investments Limited and Care
Corporation Limited [incorporated by
-17-
reference to Exhibit 10(aa)(iii) to the Registrant's Form 10-K
(Commission File No. 0-13124) filed on April 15, 1997].
10(j)(2) 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. [incorporated by reference
to Exhibit 10(aa)(iv) to the Registrant's Form 10-K (Commission File
No. 0-13124) filed on April 15, 1997].
10(k)(1) Debenture Purchase Agreement, dated as of March 31, 1997, between
the Registrant and Sirrom Capital Corporation [incorporated by
reference to Exhibit 10(aa)(i) to the Registrant's Form 10-K
(Commission File No. 0-13124) filed on April 15, 1997].
10(k)(2) 12 1/2% Convertible Debenture Due March 31, 2002, issued by
Registrant to Sirrom Capital Corporation [incorporated by reference
to Exhibit 10(aa)(ii) to the Registrant's Form 10-K (Commission File
No. 0-13124) filed on April 15, 1997].
10(l)(1) Exclusive Software License Repurchase Agreement, dated March 31,
1998, by and among the Registrant, COVER-ALL Systems, Inc., Care
Corporation Limited and Software Investments Limited [incorporated
by reference to Exhibit 10(bb)(i) to the Registrant's Form 10-K
(Commission File No. 0-13124) filed on March 31, 1998].
10(l)(2) Secured Promissory Note, dated March 31, 1998, by and between the
Registrant, as Holder, and Care Corporation Limited, as Payor
[incorporated by reference to Exhibit 10(bb)(ii) to the Registrant's
Form 10-K (Commission File No. 0-13124) filed on March 31, 1998].
10(l)(3) Pledge Agreement, dated March 31, 1998, by and between the
Registrant, as Secured Party, and Care Corporation Limited, as
Pledgor [incorporated by reference to Exhibit 10(bb)(iii) to the
Registrant's Form 10-K (Commission File No. 0-13124) filed on March
31, 1998].
10(l)(4) Reseller Agreement, dated March 31, 1998, by and between Cover-All
Systems, Inc. and Care Corporation Limited [incorporated by
reference to Exhibit 10(bb)(iv) to the Registrant's Form 10-K
(Commission File No. 0-13124) filed on March 31, 1998].
10(l)(5) Reseller Agreement, dated March 31, 1998, by and between Cover-all
Systems, Inc. and Care Corporation Limited [incorporated by
reference to Exhibit 10(bb)(v) to the Registrant's Form 10-K
(Commission File No. 0-13124) filed on March 31, 1998].
10(l)(6) Letter Agreement amending Secured Promissory Note of Care
Corporation Limited ("Care"), dated as of September 29, 1999, and
Pledge Agreement, by and between Care and the Company, dated as of
March 31, 1998 [incorporated by reference to Exhibit 10(ee) to the
Registrant's Form 10-Q (Commission File No. 0-13124) filed on
November 15, 1999].
10(l)(7) Amendment to Pledge Agreement, dated as of November 12, 1999, by and
between Care Corporation Limited and the Registrant [incorporated by
reference to Exhibit 10(ff) to the Registrant's Form 10-Q
(Commission File No. 0-13124) filed on November 15, 1999].
10(m)(1) Employment Agreement, dated as of January 1, 1998, by and between
the Registrant and Dalia Ophir [incorporated by reference to Exhibit
99.1 to the Registrant's Form 8-K (Commission File No. 0-13124)
filed on May 14, 1998].
10(m)(2) Employment Agreement, dated as of March 1, 1998, by and between the
Registrant and Peter C. Lynch [incorporated by reference to Exhibit
99.2 to the Registrant's Form 8-K (Commission File No. 0-13124)
filed on May 14, 1998].
10(m)(3) Services Agreement, dated as of March 1, 1998, by and between the
Registrant and Turnbury Associates [incorporated by reference to
Exhibit 99.3 to the Registrant's Form 8-K (Commission File No.
0-13124) filed on May 14, 1998].
*10(n) Separation and Release Letter Agreement, dated February 28, 2000, by
and between the Registrant and Brian Magowan.
10(o)(1) Employment Agreement, dated as of March 1, 1999, by and between the
Registrant and Peter C. Lynch [incorporated by reference to Exhibit
10(dd)(i) to the Registrant's Form 10-K (Commission File No.
0-13124) filed on March 31, 1999].
-18-
10(o)(2) Employment Agreement, dated February 19, 1999, by and between the
Registrant and John R. Nobel [incorporated by reference to Exhibit
10(dd)(ii) to the Registrant's Form 10-K (Commission File No.
0-13124) filed on March 31, 1999].
*10(o)(3) Employment Agreement, dated December 20, 1999, by and between the
Registrant and John Roblin.
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 Moore Stephens, P.C.
*27 Financial Data Schedule.
- --------------------
* Filed herewith
(b) Reports on Form 8-K
Current Report on Form 8-K dated November 24, 1999, regarding the
announcement (a) of the Registrant's earnings information and
results of operations for the Registrant's third quarter, (b) that
Mark Johnston succeeded Brian Magowan as the Registrant's Chairman
and Chief Executive Officer, and (c) that Summit Bank had terminated
its revolving line of credit with the Registrant.
-19-
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors ............................................. F-1
Consolidated Balance Sheets - December 31, 1999 and 1998 ................... F-2
Consolidated Statements of Operations - Years ended December 31,
1999, 1998 and 1997 ........................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1999, 1998 and 1997 ............................... F-5
Consolidated Statements of Cash Flows - Years ended December 31, 1999,
1998 and 1997 .............................................................. F-6
Notes to Consolidated Financial Statements ................................. F-8
20
REPORT OF INDEPENDENT AUDITORS
To the Stockholder and the Board of Directors of
Cover-All Technologies Inc.
We have audited the accompanying consolidated balance sheets of
Cover-All Technologies Inc. and its subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in Item 14(a) of this Form 10-K for each of the three years
ended December 31, 1999. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement 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 consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated 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. and its subsidiaries as of December 31,
1999 and 1998, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein for the
years ended December 31, 1999, 1998 and 1997.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 20, 2000
F-1
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,065,793 $ 2,286,610
Accounts Receivable [Less Allowance for Doubtful Accounts
of $1,730,249 and $476,000 in 1999 and 1998, Respectively] 2,368,272 3,493,192
Note Receivable - Related Party 959,344 947,413
Deferred Tax Asset -- 400,000
Prepaid Expenses 365,194 231,442
Accrued Interest - Related Party Note Receivable 40,656 52,587
------------ ------------
Total Current Assets 4,799,259 7,411,244
------------ ------------
Property and Equipment - At Cost:
Furniture, Fixtures and Equipment 3,191,154 2,760,070
Less: Accumulated Depreciation (2,749,589) (2,557,313)
------------ ------------
Property and Equipment - Net 441,565 202,757
------------ ------------
Note Receivable - Related Party [Net of Unearned Interest
of $250,477 and $436,853 in 1999 and 1998, Respectively] 1,749,523 2,563,147
------------ ------------
Capitalized Software [Less Accumulated Amortization of
$3,084,571 and $2,605,581 in 1999 and 1998, Respectively] 2,097,060 1,187,378
------------ ------------
Other Assets 59,335 60,910
------------ ------------
Total Assets $ 9,146,742 $ 11,425,436
============ ============
See Notes to Consolidated Financial Statements.
F-2
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 1,085,395 $ 896,417
Accrued Liabilities 886,850 1,447,025
Obligation Under Capital Lease 59,497 --
Unearned Revenue 1,595,217 865,094
------------ ------------
Total Current Liabilities 3,626,959 3,208,536
------------ ------------
Long-Term Liabilities:
Obligation Under Capital Lease 82,416 --
Convertible Debentures 3,000,000 3,000,000
------------ ------------
Total Long-Term Liabilities 3,082,416 3,000,000
------------ ------------
Total Liabilities 6,709,375 6,208,536
------------ ------------
Commitments and Contingencies -- --
------------ ------------
Stockholders' Equity:
Common Stock, $.01 Par Value, Authorized 30,000,000 Shares,
Issued 17,003,672 and 16,983,672 Shares in 1999 and 1998,
Respectively 170,037 169,837
Capital In Excess of Par Value 26,763,197 26,723,397
Accumulated Deficit (24,495,867) (21,676,334)
------------ ------------
Total Stockholders' Equity 2,437,367 5,216,900
------------ ------------
Total Liabilities and Stockholders' Equity $ 9,146,742 $ 11,425,436
============ ============
See Notes to Consolidated Financial Statements.
F-3
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
---------------------------------------------
D e c e m b e r 3 1,
---------------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Revenues:
Licenses $ 2,638,190 $ 5,875,369 $ 3,940,000
Maintenance 4,371,273 3,721,993 2,722,000
Professional Services 4,018,684 2,670,720 1,275,573
------------ ------------ ------------
Total Revenues 11,028,147 12,268,082 7,937,573
------------ ------------ ------------
Costs of Revenues:
Licenses 5,689,998 3,741,154 1,814,907
Maintenance 1,621,056 1,741,528 2,570,512
Professional Services 1,150,883 978,927 1,040,581
------------ ------------ ------------
Total Costs of Revenues 8,461,937 6,461,609 5,426,000
------------ ------------ ------------
Direct Margin 2,566,210 5,806,473 2,511,573
------------ ------------ ------------
Operating Expenses:
Sales and Marketing 1,778,026 2,024,186 1,900,000
General and Administrative 1,550,040 1,479,537 2,816,729
Research and Development 1,008,770 1,186,164 --
Allowance for Doubtful Accounts 1,239,843 425,246 172,190
------------ ------------ ------------
Total Operating Expenses 5,576,679 5,115,133 4,888,919
------------ ------------ ------------
Operating [Loss] Income (3,010,469) 691,340 (2,377,346)
------------ ------------ ------------
Interest Expense [Income]:
Interest Expense 389,939 377,924 300,593
Interest Income - Related Party [Imputed] (186,375) (117,506) --
Interest Income (19,505) (116,782) (37,569)
------------ ------------ ------------
Total Interest Expense [Income] 184,059 143,636 263,024
------------ ------------ ------------
Foreign Currency Transaction [Loss] (60,071) -- --
------------ ------------ ------------
[Loss] Income Before Income Tax Benefit (3,254,599) 547,704 (2,640,370)
Income Tax Benefit 435,066 370,000 --
------------ ------------ ------------
Net [Loss] Income $ (2,819,533) $ 917,704 $ (2,640,370)
============ ============ ============
Basic and Diluted Earnings [Loss] Per Common
Share $ (.17) $ .05 $ (.16)
============ ============ ============
Weighted Average Number of Common Shares
Outstanding for Basic Earnings [Loss] Per
Common Share 16,998,000 16,940,000 16,731,000
============ ============ ============
See Notes to Consolidated Financial Statements.
F-4
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [DEFICIT]
- --------------------------------------------------------------------------------
Total
-----
Capital in Stockholders'
---------- -------------
Excess of Accumulated Treasury Equity
--------- ----------- -------- ------
Common Stock Par Value Deficit Stock [Deficit]
------------ ---------- ------- ----- -------
Balance at December 31, 1996 $ 173,519 $ 27,258,352 $(19,953,668) $ (2,567,207) $ 4,910,996
Exercise of 73,225 Stock Options 732 140,233 -- -- 140,965
Retirement of 633,986 Shares of
Treasury Stock (6,340) (2,560,867) -- 2,567,207 --
Compensation Expense for Stock
Options Issued Below Fair Value -- 435,313 -- -- 435,313
Net [Loss] -- -- (2,640,370) -- (2,640,370)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 167,911 25,273,031 (22,594,038) -- 2,846,904
Exercise of 192,550 Stock Options 1,926 307,312 -- -- 309,238
Buy Back of Software License by
Related Party [See Note 8] -- 1,143,054 -- -- 1,143,054
Net Income -- -- 917,704 -- 917,704
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 169,837 26,723,397 (21,676,334) -- 5,216,900
Exercise of 20,000 Stock Options 200 39,800 -- -- 40,000
Net [Loss] -- -- (2,819,533) -- (2,819,533)
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 $ 170,037 $ 26,763,197 $(24,495,867) $ -- $ 2,437,367
============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements.
F-5
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
-----------------------------------------
D e c e m b e r 3 1,
-----------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Cash Flows from Operating Activities:
[Loss] Income from Continuing Operations $(2,819,533) $ 917,704 $(2,640,370)
Adjustments to Reconcile Net [Loss] Income to Net
Cash Provided from [Used for] Operating Activities:
Depreciation 192,276 159,609 182,374
Amortization of Capitalized Software and Software
License 478,990 784,724 1,814,893
Provision for Uncollectible Accounts 1,239,843 425,246 172,190
Noncash Compensation Expense on Granting
of Stock Options -- -- 435,313
Imputed Interest Income (198,307) (117,506) --
Deferred Tax Asset 400,000 (400,000) --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (114,923) (2,683,732) 178,502
Prepaid Expenses (133,752) (90,659) (133,622)
Accrued Interest - Related Party Note Receivable 11,931 (52,587) --
Other Assets 1,575 (1,575) 6,846
Increase [Decrease] in:
Accounts Payable 188,978 325,108 116,429
Accrued Liabilities (560,175) (171,651) (77,228)
Unearned Revenue 730,123 417,961 (734,442)
----------- ----------- -----------
Net Cash [Used For] Continuing Operating
Activities (582,974) (487,358) (679,115)
----------- ----------- -----------
Cash Flows from Investing Activities:
Repayment of Note Receivable - Related Party 1,000,000 1,000,000 --
Proceeds from Sale of Equipment -- -- 3,640
Capital Expenditures (252,062) (134,392) (3,995)
Capitalized Software Expenditures (1,388,672) (1,309,045) --
----------- ----------- -----------
Net Cash Provided from [Used For] Investing
Activities (640,734) (443,437) (355)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from Bridge Financing -- -- 750,000
Payments on Bridge Financing -- -- (750,000)
Proceeds from Convertible Debentures -- -- 3,000,000
Principal Payments on Capital Lease (37,109) -- --
Proceeds from Exercise of Stock Options 40,000 309,238 140,965
----------- ----------- -----------
Net Cash Provided from Financing Activities 2,891 309,238 3,140,965
----------- ----------- -----------
Change in Cash and Cash Equivalents - Forward $(1,220,817) $ (621,557) $ 2,461,495
See Notes to Consolidated Financial Statements.
F-6
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Y e a r s e n d e d
-----------------------------------------
D e c e m b e r 3 1,
-----------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Change in Cash and Cash Equivalents - Forwarded $(1,220,817) $ (621,557) $ 2,461,495
Cash and Cash Equivalents - Beginning of Years 2,286,610 2,908,167 446,672
----------- ----------- -----------
Cash and Cash Equivalents - End of Years $ 1,065,793 $ 2,286,610 $ 2,908,167
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 389,939 $ 377,924 $ 206,843
Income Taxes $ -- $ -- $ --
Supplemental Disclosures of Noncash Investing and Financing Activities:
In 1997, the Company retired 633,986 shares of its common stock previously
held in the treasury.
In 1998, the Company negotiated a buyback by Care of the Care Software
License for $500,000 and a $4,500,000 non-interest bearing note which, when
discounted, results in a principal amount of the note of $3,893,054. The
difference between the carrying value of the Software License at the time of the
transaction [$3,250,000] and the present value of the note and the cash received
[$4,393,054] was charged to additional paid-in capital [See Note 8].
During 1999, the Company entered into a capital lease for computer
equipment totaling $179,022.
See Notes to Consolidated Financial Statements.
F-7
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
Description of Business - Cover-All Technologies Inc., through its wholly-owned
subsidiaries, licenses and maintains its software products for the
property/casualty insurance industry throughout the United States, Puerto Rico
and the United Kingdom. COVER-ALL Systems, Inc., a subsidiary, also provides
professional consulting services to its customers interested in customizing
their software.
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 subsidiaries [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
predominately from standardized software and is recognized when standard
software modules are delivered and accepted by the customer, the fee is fixed or
determinable and collectibility is probable. 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.
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.
The Company has $619,000 and $915,000 of repurchase agreements at December 31,
1999 and 1998, respectively, with First Union National Bank. The Company
requires that repurchase agreements be collateralized by a least an equal amount
of U.S. Treasury securities or U.S. Government agency securities. These
agreements are usually placed on an overnight basis.
Risk Concentrations - Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of cash and cash
equivalents and trade accounts receivable. The amount of cash at risk at
December 31, 1999 and 1998 was approximately $917,900 and $1,115,600,
respectively. The Company generally does not require collateral for its
financial instruments.
The Company places its cash and cash equivalents 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 approximately 54% of the Company's trade accounts
receivable portfolio. The Company routinely assesses the financial strength of
its customers and based upon factors concerning credit risk, establishes an
allowance for uncollectible accounts. Management believes that accounts
receivable credit risk exposure beyond such allowance is limited.
The Company has exposure to foreign currency exchange rate fluctuations arising
from sales made to a U.K. customer. The Company has approximately $127,000 and
$150,000 subject to such risk at December 31, 1999 and 1998, respectively.
F-8
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
Impairment - Long-lived assets of the Company are reviewed at least annually as
to whether their carrying value has become impaired pursuant to Statement of
Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No 121
requires long-lived assets, if impaired, to be remeasured at fair value,
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Management also reevaluates the periods of
amortization of long-lived assets to determine whether events and circumstances
warrant revised estimates of useful lives.
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. Depreciation
expense in 1999, 1998 and 1997 was $192,276, $159,609 and $182,374,
respectively.
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 account and any resulting gain
or losses reported as income and expense.
Capitalized Software - During 1999 and 1998, qualifying software development
costs of $1,388,672 and $1,309,045, respectively, were capitalized and are
amortized over a three-year period at the greater of the ratio that current
gross revenues for a product bear to the total of current and anticipated future
gross revenues for that product or the straight-line method over the remaining
estimated economic life of the product. There were no software development costs
capitalized during 1997. Amortization expense in 1999, 1998 and 1997 was
$478,990, $784,724, and $1,814,893, respectively.
Software License - As more fully described in Note 8, in March of 1996, the
Company acquired a software license [the "Care Software License"] by issuing
2,500,000 shares of its common stock and began amortizing such license over a
five-year period. In the fourth quarter of 1997, the Company made a strategic
decision to allocate its future resources to its TAS and Classic product lines
rather than the product line obtained via the Care Software License. In this
regard, on March 31, 1998, the Company negotiated the sale of the Care Software
License back to the original seller of the license. The Company also acquired
the worldwide reseller rights [excluding Australia, New Zealand and the United
States] to the Care Software.
Advertising Expense - It is the Company's policy to expense advertising costs as
incurred. Advertising expense in 1999, 1998 and 1997 was $291,979, $168,209 and
$56,361, respectively.
Income Taxes - Pursuant to SFAS No. 109, "Accounting for Income Taxes," income
tax expense [or benefit] for the year is the sum of deferred tax expense [or
benefit] and income taxes currently payable [or refundable]. Deferred tax
expense [or benefit] is the change during the year in a company's deferred tax
liabilities and assets. Deferred tax liabilities and assets are determined based
on differences between financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
F-9
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
Income [Loss] Per Share - Basic earnings [loss] per share is computed by
dividing income [loss] available to common stockholders by the weighted average
number of common shares outstanding during the period. SFAS No. 128 also
requires a dual presentation of basic and diluted earnings per share on the face
of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on per share amounts [i.e., increasing earnings per share or reducing
loss per share]. The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants. The Company's options and warrants were not included in the
computation of loss per share for 1999 and 1997 because to do so would have been
antidilutive for these years, however, some of the Company's options and
warrants did dilute basic earnings per share in 1998 [See Notes 6 and 14].
The dilutive effect of convertible debt is reflected in diluted earnings per
share by the application of the if-converted method. The convertible debt did
not have a dilutive effect in 1998 because the amount of interest [net of tax]
on a per share basis is less than basic earnings per share. The Company's
convertible debt does not affect the loss per share calculation for 1999 and
1997 because it would be antidilutive for those years [See Notes 6 and 14]. The
convertible debt could potentially dilute basic earnings per share in the
future.
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. The Company
applies the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" to non-employee stock-based compensation and the pro forma
disclosure provisions of SFAS No. 123 to employee stock-based compensation.
Reclassifications - Certain 1998 balances have been reclassified to conform with
the 1999 presentation.
[2] Litigation
In the normal course of business, the Company is exposed to a number of asserted
and unasserted potential claims. Management, after review and consultation with
counsel, believes it has meritorious defenses and considers that any liabilities
from these matters would not materially affect the consolidated financial
position, liquidity or results of operations of the Company.
F-10
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[3] Obligation Under Capital Lease
In April 1999, the Company acquired equipment under the provisions of a
long-term lease. For financial reporting purposes, minimum lease payments
relating to the equipment have been capitalized. The lease expires in April
2002. As of December 31, 1999, the leased equipment under capital lease had a
cost of $179,022 and accumulated depreciation of $20,888.
Amortization expense on lease assets which is included in depreciation expense
for the years ended December 31, 1999, 1998 and 1997 was $20,888, $-0- and $-0-,
respectively.
The future minimum lease payments under capital lease and the net present value
of the future minimum lease payments as of December 31, 1999, for the next five
years and in the aggregate are as follows:
2000 $ 68,700
2001 68,700
2002 18,234
2003 --
2004 --
----------
Total Minimum Lease Payments 155,634
Amount Representing Interest 13,721
----------
Present Value of Net Minimum Lease Payments 141,913
Less: Current Portion 59,497
----------
Long-Term Capital Lease Obligation $ 82,416
==========
[4] Commitments, Contingencies and Related Party Transactions
Operating Leases - The Company leases approximately 36,000 square feet of office
space under a lease which expires in May 2000. The lease includes escalation
clauses for increased real estate taxes, insurance and maintenance expenses. The
lease provides for a renewal period of five years.
Rent expense was $289,720, $296,014 and $311,240 for the years ended December
31, 1999, 1998 and 1997, respectively.
The Company's future minimum rental commitments under its noncancellable
operating lease in effect at December 31, 1999 follows: year ending 2000 --
$207,407; 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,
2001. Certain of the contracts are automatically renewable from year to year.
The aggregate annual commitment for future salaries at December 31, 1999 was
approximately $445,000.
F-11
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[4] Commitments, Contingencies and Related Party Transactions [Continued]
Related Party Transactions - A director of the Company for part of 1997 is a
partner in a law firm with which the Company incurred legal expenses of
approximately $290,000 in 1997. An attorney associated with the former Chairman
provides legal services to the Company for which the Company incurred
approximately $15,000, $84,000 and $82,000 in legal costs during 1999, 1998 and
1997, respectively.
In 1997, the Company had entered into (i) an agreement with a consulting firm,
in which the former Chairman is a managing partner, to engage the former
Chairman and Chief Executive Officer of the Company, pursuant to which, the
Company will pay the consulting firm $12,500 per month, plus expenses, five-year
options to purchase 400,000 shares of Common Stock, exercisable at $1.25 per
share and a bonus payment of $100,000, (ii) an agreement to engage a director of
the Company as Chief Financial Officer of the Company on an interim basis by
granting him five-year options to purchase 195,000 shares of Common Stock,
exercisable at $2.00 per share, representing 30,000 shares for each month during
which he was engaged to act as Chief Financial Officer through the end of his
contract term of September 30, 1997, and paid him $37,500 through the end of the
fiscal year for continuation of his services as interim Chief Financial Officer,
and (iii) a consulting agreement with a director of the Company, with a term
engagement through January 15, 1998, and providing compensation consisting of a
five-year option to purchase 25,000 shares of Common Stock, exercisable at $1.25
per share, with respect to each month during which he performs consulting
services and an additional 250,000 shares of Common Stock, exercisable at $1.25
per share, as a result of the Company achieving certain sales goals in the 1997
fiscal year.
In 1998, the Company had renewed its agreement with the consulting firm,
pursuant to which the Company paid the consulting firm for the services of the
former Chairman and Chief Executive Officer $12,500 per month, plus expenses and
a bonus payment of $50,000. In November 1999, the former Chairman and Chief
Executive Officer resigned.
In 1999, a director of the Company provided project management services for a
fee of approximately $307,000 and the Company paid the current Chairman total
consulting fees plus expenses of approximately $58,000.
[5] Income Taxes
An analysis of the components of the income tax provision [benefit] is as
follows:
Y e a r s e n d e d
----------------------------------
D e c e m b e r 31,
----------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Current:
Federal $ -- $ 545,400 $ --
State -- 91,000 --
Utilization of Net Operating Loss Carryforward -- (606,400) --
--------- --------- --------
Totals -- 30,000 --
--------- --------- --------
Deferred:
Federal 340,000 (340,000) --
State (775,066) (60,000) --
--------- --------- --------
Totals (435,066) (400,000) --
--------- --------- --------
Net [Benefit] $(435,066) $(370,000) $ --
========= ========= ========
F-12
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[5] Income Taxes [Continued]
During 1999, the Company availed itself of a program offered by the State of New
Jersey whereby it sold state net operating losses of $11,178,111 for net
proceeds of $835,066.
The income tax provision [benefit] for continuing operations differs from the
amount computed by applying the statutory federal income tax rate as follows:
Y e a r s e n d e d
------------------------------------------
D e c e m b e r 31,
------------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Computed Federal Statutory Tax [Benefit] $(1,110,000) $ 186,000 $ (900,000)
Valuation Allowance to Reduce Deferred Tax Asset 1,110,000 -- 900,000
Related Party Gain Charged to Paid-in Capital -- 388,638 --
Alternative Minimum Tax Liability -- 30,000 --
Utilization of Net Operating Loss Carryforward -- (574,638) --
Increase [Reduction] in Deferred Tax Valuation
Allowance 400,000 (400,000) --
Sale of State Net Operating Loss Carryforward (835,066) -- --
----------- ----------- -----------
Actual Provision [Benefit] $ (435,066) $ (370,000) $ --
=========== =========== ===========
The components of the net deferred tax asset and liability were as follows:
Y e a r s e n d e d
------------------------------------------
D e c e m b e r 31,
------------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Deferred Tax Assets - Current:
Net Operating Loss Carryforward $ -- $ 154,000 $ --
Accounts Receivable Allowance 630,000 157,000 74,000
Reserve for Loss on Disposal 32,000 108,000 185,000
Vacation Accrual 10,000 21,000 13,000
Related Party Gain -- (40,000) --
Valuation Allowance (672,000) -- (272,000)
----------- ----------- -----------
Current Deferred Tax Asset $ -- $ 400,000 $ --
=========== =========== ===========
Deferred Tax Asset [Liability] - Long-Term:
Net Operating Loss Carryforward $ 8,240,000 $ 8,000,000 $ 9,000,000
Stock Options 128,000 128,000 174,000
Capitalized Software (840,000) (475,000) (265,000)
Depreciation and Amortization 70,000 81,000 91,000
Related Party Gain -- (156,000) --
Valuation Allowance (7,598,000) (7,578,000) (9,000,000)
----------- ----------- -----------
Long-Term Deferred Tax Liability $ -- $ -- $ --
=========== =========== ===========
The net change increase [decrease] during 1999 and 1998 in the total valuation
allowance is $692,000 and $(1,694,000), respectively.
F-13
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[5] Income Taxes [Continued]
At December 31, 1999, the Company had approximately $2,800,000, $3,100,000,
$10,100,000 and $3,100,000 of federal net operating tax loss carryforwards
expiring in 2019, 2012, 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 10] the Company may experience an ownership change and consequently the
Company's utilization of its net operating loss carryforwards could be
significantly limited.
[6] Stock Option and Stock Purchase Plans
In March 1995, the Company adopted the 1995 Employee Stock Option Plan, which
was amended in April, 1997. Options for the purchase of up to 2,000,000 shares
may be granted by the Board of Directors to employees of the Company at an
exercise price determined by the Board of Directors on 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, 1999, 1998 and 1997, 16,775, 201,775
and 341,775 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, 1999, 1998,
1997, 240,000, 240,000 and 240,000 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
up to 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, 1999, 1998 and 1997, 105,000, 105,000 and 105,000 shares, respectively, 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. The Plan was canceled in April 1997 and 12,500 options remain
outstanding at December 31, 1999.
F-14
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------
[6] Stock Option and Stock Purchase Plans [Continued]
A summary of the changes in outstanding common stock options for all outstanding
plans is as follows:
Weighted-Average
----------------
Remaining Weighted-Average
--------- ----------------
Shares Per Share Contractual Life Exercise Price
------ --------- ---------------- --------------
Balance, December 31, 1996 668,825 1.13 - 5.25 2.6 years $ 2.49
Granted 1,410,000 1.25 - 3.81 3.9 years 1.48
Exercised (73,225) 1.75 - 2.00 1.93
Canceled (186,600) 1.38 - 5.25 2.08
Balance, December 31, 1997 1,819,000 1.13 - 5.00 3.4 years $ 1.70
Granted 315,000 2.50 - 4.00 1.4 years 3.27
Exercised (192,550) 1.25 - 2.25 1.61
Canceled (175,000) 4.00 - 5.00 4.14
Expired (185,950) 1.13 - 2.00 1.54
Balance, December 31, 1998 1,580,500 1.25 - 5.00 2.8 years $ 1.77
Granted 275,000 1.25 - 1.75 4.9 years 1.30
Exercised (20,000) 2.00 - 2.00 2.00
Expired (90,000) 1.38 - 2.00 1.93
Balance, December 31, 1999 1,745,500 1.25 - 5.00 3.1 years $ 1.68
The options granted during 1999 are distributed as follows, relative to the
difference between the exercise price and the stock price at grant date:
Number Weighted-Average Weighted-Average
------ ---------------- ----------------
Granted Exercise Price Fair Value
------- -------------- ----------
Exercise Price at Stock Price 275,000 $ 1.30 $ .92
============= ============= ===========
The options granted during 1998 are distributed as follows, relative to the
difference between the exercise price and the stock price at grant date:
Number Weighted-Average Weighted-Average
------ ---------------- ----------------
Granted Exercise Price Fair Value
------- -------------- ----------
Exercise Price Above Stock Price 150,000 $ 4.00 $ 1.88
Exercise Price at Stock Price 165,000 2.61 1.31
--------------- ------------- -----------
Totals 315,000 $ 3.27 $ 1.58
=============== ============= ===========
F-15
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[6] Stock Option and Stock Purchase Plans [Continued]
The options granted during 1997 are distributed as follows, relative to the
difference between the exercise price and the stock price at grant date:
Number Weighted-Average Weighted-Average
------ ---------------- ----------------
Granted Exercise Price Fair Value
------- -------------- ----------
Exercise Price Above Stock Price 100,000 $ 2.00 $ .74
Exercise Price at Stock Price 215,000 1.72 1.10
Exercise Price Below Stock Price 1,095,000 1.38 1.38
--------------- ------------- -----------
Totals 1,410,000 $ 1.48 $ 1.29
=============== ============= ===========
Exercisable options at December 31, 1999, 1998 and 1997 were as follows:
Number of Weighted-Average
--------- ----------------
December 31, Exercisable Options Exercise Price
- ------------ ------------------- --------------
1999 1,598,833 $ 1.71
1998 1,566,500 $ 1.76
1997 1,582,334 $ 1.69
The following table summarizes information about stock options at December 31,
1999:
Exercisable
-----------
Outstanding Stock Options Stock Options
----------------------------------------------------- ----------------------------------
Weighted-Average
----------------
Range of Remaining Weighted-Average Weighted-Average
-------- --------- ---------------- ----------------
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- ------ ---------------- -------------- ------ --------------
$ 1.25 - $1.75 1,258,000 2.8 Years $ 1.30 1,116,333 $ 1.29
$ 1.94 - $2.50 387,500 1.3 Years $ 2.21 387,500 $ 2.21
$ 3.75 - $5.00 100,000 2.0 Years $ 4.54 95,000 $ 4.59
-------------- --------- ----------- ------------- -----------
1,745,500 2.5 Years $ 1.68 1,598,833 $ 1.71
============== ========= =========== ============= ===========
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 of
certain options issued during 1997 was below the market price at the date of
grant. Accordingly, compensation expense of $435,313 was recorded in 1997. The
exercise price for all stock options issued during 1999 and 1998 was equal to or
greater than 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 for fiscal years 1999 and 1998.
F-16
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- --------------------------------------------------------------------------------
[6] Stock Option and Stock Purchase Plans [Continued]
There are approximately 1,100,000 warrants outstanding at December 31, 1998, at
a weighted-average exercise price of $1.76.
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 $.92, $1.58 and $1.29 during 1999, 1998 and 1997,
respectively.
Pro forma information regarding net income or loss and net income or loss per
share has been determined as if the Company had accounted for its employee stock
options under the fair value method prescribed under 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:
D e c e m b e r 3 1,
-----------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Risk-Free Interest Rate 5.97% 5.60% 6.70%
Expected Life 3.0 Years 2.0 Years 3.8 Years
Expected Volatility 81% 85% 88%
Expected Dividends None None None
The pro forma amounts are indicated below [in thousands, except per share
amounts]:
Y e a r s e n d e d
------------------------------------
D e c e m b e r 31,
------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Net [Loss] Income as Reported $ (2,820) $ 918 $ (2,640)
Pro Forma Net [Loss] Income $ (2,915) $ 784 $ (3,787)
Earnings [Loss] Per Share as Reported $ (.17) $ .05 $ (.16)
Pro Forma [Loss] Earnings Per Share $ (.17) $ .04 $ (.23)
F-17
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- --------------------------------------------------------------------------------
[7] Common Stock
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 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 were not redeemed by the Company and expired
on December 4, 1999 .
[8] Sale of Stock and Warrants, and Purchase and Sale of Care Software License
On March 31, 1996, the Company entered into a series of transactions with
Software Investments Limited ["SIL"] and Care Corporation Limited ["Care"] [SIL
and Care are entities related by common ownership] 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). As a result of
the issuance of the 12 1/2% Convertible Debentures discussed in Note 10, the
warrants required an adjustment of shares to 206,152 and a price adjustment to
$1.91 per share. As of December 31, 1999, no warrants had been exercised.
[B] assigned to SIL the rights to repurchase within six months of March 1, 1996,
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 10, the
Warrants were adjusted to the number of shares purchasable and the exercise
price.
F-18
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- --------------------------------------------------------------------------------
[8] Sale of Stock and Warrants, and Purchase and Sale of Care Software License
[Continued]
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
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 using the $2.00 per share price in [A] above to value the
license as $5,000,000 at March 31, 1996. The license 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, or not reached, under the license agreement, the Company had
the right to repurchase all or portions of the shares issued to Care at $.01 per
share. The Company also acquired worldwide reseller rights [excluding Australia,
New Zealand and the United States] to the Care Software.
In the fourth quarter of 1997, the Company made a strategic decision to allocate
its future resources to its TAS and Classic product lines rather than the
product line obtained via the Care Software License. In this regard, on March
31, 1998, the Company negotiated a buy back by Care of the Care Software
License.
For the buy back of Care Software License by Care, the Company received $500,000
on March 31, 1998, and a $4,500,000 non-interest bearing note, [the "Care Note"]
payable in semi-annual installments of $500,000 which, when discounted at 6%,
results in a principal amount of the note of $3,893,054. The discounted note is
collateralized by unencumbered Cover-All stock owned by Care. The number of
shares required as collateral will vary, such that the market value of the
shares held as collateral must equal 150% of the outstanding balance. The number
of shares required as collateral will be adjusted at each payment date based on
the market price of the Company's shares and the balance outstanding on the
date. Based on the market price of the Company's stock on March 30, 1998,
approximately 1,700,000 shares were pledged as collateral. Upon receipt of the
first $500,000 payment under the agreement on March 31, 1998, the Company lifted
the aforementioned $.01 per share stock repurchase restriction on the 2,500,000
shares. In November 1999, the Board of Directors decided that due to the undue
hardship placed upon Care by the pledged share requirement of the pledge
agreement given the then current price of the Company's common stock, and
because of Care's history of making each of the $500,000 payments on the
promissory note in a timely manner, that it would be in the best interests of
the Company to agree to allow Care to cap the number of shares of the Company's
common stock required to be pledged to the Company pursuant to the pledge
agreement to 2,500,000.
In separate but related agreements, Care agreed to grant to the Company certain
non-exclusive re-seller rights to the Care software, and the Company agreed to
grant to Care certain non-exclusive re-seller rights to the Classic and TAS
software.
Based on the above, and due to the related party nature of the Care Software
License buy back agreement, the Company has recorded the $1,143,054 difference
between the carrying value of the Care Software License at December 31, 1997 of
$3,250,000 and the discounted $4,393,054 buy back agreement amount to capital in
excess of par value.
F-19
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- --------------------------------------------------------------------------------
[8] Sale of Stock and Warrants, and Purchase and Sale of Care Software License
[Continued]
The balance of the undiscounted Care Note at December 31, 1999, is $3,000,000,
of which $1,000,000 is classified as currently due, including implicit interest
accrued of $40,656. The undiscounted long-term portion of the Care Note at
December 31, 1999, of $2,000,000 is shown at $1,749,523 net of unearned interest
of $250,477.
[9] Supplemental Data
Accrued liabilities consist of the following:
Years ended
-----------
December 31,
------------
1 9 9 9 1 9 9 8
------- -------
Accrued Payroll, Benefits, Temporary Help and Consulting $ 405,015 $ 751,907
Reserve for Loss on Disposal 79,570 270,538
Accrued Software Costs -- 103,959
Accrued Interest Costs 93,750 93,750
Accrued Professional Fees 140,000 124,800
Income Taxes Currently Payable -- 30,000
Other 168,515 72,071
---------- ----------
Totals $ 886,850 $1,447,025
========== ==========
[10] Convertible Debentures
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. Neither the debentures nor the shares of Common Stock issuable
upon any conversion of such debentures have been registered under the Securities
Act of 1933 or any applicable state securities law. 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 permanent financing were used to
repay the bridge financing and the remainder is being used for working capital
purposes.
[11] 401(k) Plan
After completing a year of service and working 1,000 hours, employees age 21 and
over are eligible to participate in the Company's Tax Saver 401(k) Salary
Reduction Plan. Employees can save 1% to 15% of pay on a pre-tax basis to a
current annual maximum of $10,500. The Company matches $.50 for each $1.00 of
the first 5% of pay employees elect to defer. Expenses associated with this plan
in 1999, 1998 and 1997 were approximately $70,300, $53,200 and $47,900,
respectively.
F-20
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- --------------------------------------------------------------------------------
[12] Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. In
assessing the fair value of its cash and cash equivalents, trade receivables and
accounts payables and accrued expenses, management concluded that the carrying
amount of these financial instruments approximates fair value because of their
short maturities. Management estimates that the carrying amount of its
convertible debentures, based on current rates and terms at which the Company
could borrow funds, is approximately $3,000,000 and $3,290,000 at December 31,
1999 and 1998, respectively. The carrying amount of the Care Note [see Note 8]
was discounted at its inception [March 31, 1998] at 6% based on the Company's
assessment of alternative sources of investments and the risk factors involved
with the Care Note. The Company's assessment of these factors at December 31,
1999, would not significantly change the interest rate used to originally
discount the Care Note, and therefore management believes the carrying amount
approximates its fair value at December 31, 1999.
[13] Segment Information
At December 31, 1999, the Company's two business units have distinct management
teams and infrastructures that offer different products and services which are
evaluated separately in assessing performance and allocating resources. These
business units have been reflected as two reportable segments, Classic and TAS.
Classic - The Classic product line is a self-contained rating, issuance and
transaction management application system utilized in the property/casualty
insurance industry.
TAS - TAS 2000 comprises an architecture and suite of application development
tools for property/casualty insurers designed to enable a client-driven
re-engineering of an insurer's business processes.
Care - As more fully discussed in Note 8, in 1996, the Company was granted by
Care Corporation Limited the exclusive license for the Care software systems for
use in the worker's 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. In the fourth quarter of 1997, the Company
made a strategic decision to allocate its future resources to its TAS 2000 and
Classic product lines rather than the product line via the Care software
license. In this regard, on March 31, 1998, the Company negotiated and
consummated a buy back by Care of Care software license.
F-21
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
- --------------------------------------------------------------------------------
[13] Segment Information [Continued]
The following financial information is reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources. Interest income and interest expense are allocated based on revenues.
(Dollars in Thousands)
Year ended December 31, 1999
------------------------------------------------------
Classic TAS Care Consolidated
------- --- ---- ------------
Revenues $ 7,144 $ 3,884 $ -- $ 11,028
Operating Profit [Loss] 1,922 (4,932) -- (3,010)
Interest Expense 244 146 -- 390
Interest Income 129 77 -- 206
Depreciation and Amortization 63 608 -- 671
Capital Expenditures 74 357 -- 431
Capitalized Software Expenditures -- 1,389 -- 1,389
Total Assets 5,925 3,222 -- 9,147
(Dollars in Thousands)
Year ended December 31, 1998
------------------------------------------------------
Classic TAS Care Consolidated
------- --- ---- ------------
Revenues $ 6,708 $ 5,560 $ -- $ 12,268
Operating Profit [Loss] 2,039 (1,096) (252) 691
Interest Expense 207 161 -- 378
Interest Income 128 106 -- 234
Depreciation and Amortization 113 831 -- 944
Income Tax Benefit 146 121 -- 370
Capital Expenditures 61 73 -- 134
Capitalized Software Expenditures -- 1,309 -- 1,309
Total Assets 6,247 5,178 -- 11,425
Year ended December 31, 1997
------------------------------------------------------
Classic TAS Care Consolidated
------- --- ---- ------------
Revenues $ 6,593 $ 1,345 $ -- $ 7,938
Operating Profit [Loss] 335 (1,576) (1,136) (2,377)
Interest Expense 250 51 -- 301
Interest Income 32 6 -- 38
Depreciation and Amortization 165 832 1,000 1,997
Capital Expenditures 4 -- -- 4
Total Assets 4,347 887 3,250 8,484
F-22
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
- --------------------------------------------------------------------------------
[13] Segment Information [Continued]
Major Customers - The Company had a portion of its revenues from three major
customers in 1999, four major customers in 1998 and one major customer in 1997:
Y e a r s e n d e d
---------------------------------------------------------------------------
D e c e m b e r 3 1,
---------------------------------------------------------------------------
Customer 1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Classic TAS Classic TAS Classic TAS
------- --- ------- --- ------- ---
Inspire Insurance Solutions $ -- $ -- $ -- $ -- $1,583,332 $ --
Accident Fund -- -- -- 1,654,623 -- --
Cornhill Insurance Co. -- 1,335,559 -- 1,892,468 -- --
Employers Reinsurance Corp. 1,245,777 -- 1,438,840 400,000 -- --
Sierra Insurance Co. -- 1,558,572 -- 1,001,420 -- --
The following table presents revenues by country based on the location of the
use of the product or service:
(Dollars in Thousands)
Y e a r s e n d e d
---------------------------------------
D e c e m b e r 3 1,
---------------------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
United Kingdom $ 1,336 $ 1,900 $ 500
United States 9,692 10,368 7,438
------- ------- -------
Total Sales $11,028 $12,268 $ 7,938
======= ======= =======
[14] Earnings Per Share Disclosures
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ["EPS"] computations.
1 9 9 9 1 9 9 8 1 9 9 7
------- ------- -------
Numerator:
Net [Loss] Income $ (2,819,533) $ 917,704 $ (2,640,370)
Effect of Dilutive Securities:
Options -- -- --
Warrants -- -- --
------------ ------------ ------------
Numerator for Diluted Earnings [Loss] Per Share $ (2,819,533) $ 917,704 $ (2,640,370)
============ ============ ============
Denominator:
Weighted Average Number of Common Shares Outstanding
for Basic Earnings [Loss] Per Common Share 16,998,000 16,940,000 16,731,000
Effect of Dilutive Securities:
Options -- 689,625 --
Warrants -- 366,050 --
------------ ------------ ------------
Denominator for Diluted Earnings [Loss] Per
Common Share 16,998,000 17,995,675 16,731,000
============ ============ ============
Basic and Diluted Earnings [Loss] Per Share $ (.17) $ .05 $ (.16)
============ ============ ============
F-23
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17
- --------------------------------------------------------------------------------
[14] Earnings Per Share Disclosures [Continued]
Options to purchase 100,000 shares of common stock at prices ranging from $3.50
to $5.00 per share were outstanding at December 31, 1998, but were not included
in the computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares $(2.62).
[15] New Authoritative Accounting Pronouncements
The Financial Accounting Standard Board ["FASB"] has issued Statement of
Financial Accounting Standards No. 133 ["SFAS No. 133, "], "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
SFAS No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and how it its
designated, for example, gain or losses related to changes in the fair value of
a derivative not designated as a hedging instrument is recognized in earnings in
the period of the change, while certain types of hedges may be initially
reported as a component of other comprehensive income [outside earnings] until
the consummation of the underlying transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods.
The Company does not currently have any derivative instruments and is not
currently engaged in any hedging activities. In June 1999, the FASB issued SFAS
No. 137 which deferred the effective date of SFAS No. 133 to fiscal quarters
beginning after June 30, 2000.
. . . . . . . . . .
F-24
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
Balance at
----------
Beginning Balance at
--------- ----------
of Period Additions Deductions End of Period
--------- --------- ---------- -------------
Accumulated amortization of
capitalized software and
software license:
Year Ended December 31, 1999 $ 2,605,581 $ 478,990 $ -- $ 3,084,571
Year Ended December 31, 1998 $ 3,570,857 $ 784,724 $ 1,750,000 $ 2,605,581
Year Ended December 31, 1997 $ 1,755,964 $ 1,814,893 $ -- $ 3,570,857
Allowance for Doubtful Accounts:
Year Ended December 31, 1999 $ 476,000 $ 1,239,843 $ (14,406) $ 1,730,249
Year Ended December 31, 1998 $ 185,610 $ 425,246 $ 134,856 $ 476,000
Year Ended December 31, 1997 $ 43,870 $ 172,190 $ 30,450 $ 185,610
F-25
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 14, 2000 By: /s/ John Roblin
--------------------------------------------
John Roblin
President 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/ Mark D. Johnston Chairman of the Board of April 14, 2000
- -------------------------- Directors and Interim Chief
Mark D. Johnston Financial Officer (Principal
Financial Officer)
/s/ John Roblin President, Chief Executive Officer April 14, 2000
- -------------------------- and Director (Principal Executive
John Roblin Officer)
/s/ Earl Gallegos Director April 14, 2000
- --------------------------
Earl Gallegos
Director April ___, 2000
- --------------------------
Ian J. Meredith
/s/ James R. Stallard Director April 14, 2000
- --------------------------
James R. Stallard
EXHIBIT INDEX
10(n) Separation and Release Letter Agreement, dated February 28,
2000, by and between the Registrant and Brian Magowan.
10(o)(3) Employment Agreement, dated as of December 20, 1999, by and
between the Registrant and John Roblin.
23 Consent of Moore Stephens, P.C.
27 Financial Data Schedule.