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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, 2000
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 (I.R.S. Employer Identification No.)
of 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, PAR VALUE PHILADELPHIA STOCK EXCHANGE
$.01 PER SHARE
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 March 23, 2001 was $3,243,000.
NUMBER OF SHARES OUTSTANDING AT MARCH 23, 2001:
15,181,172 shares of Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
The definitive Proxy Statement for the 2001 Annual Meeting of Stockholders, 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, 2000.
PART I
------
ITEM 1. BUSINESS
--------
GENERAL
Cover-All Technologies Inc. (the "Company" or "Cover-All"), a Delaware
corporation formed in 1971, is a provider of state-of-the-art software products
and services to the property/casualty insurance industry through its
wholly-owned subsidiary, Cover-All Systems, Inc., a Delaware corporation.
Cover-All offers sophisticated software products and services to the
property and casualty insurance industry. The Company focuses on the functions
required to market, rate, issue, print, bill and support the entire life cycle
of insurance policies. The products and services offered combine an in-depth
knowledge of property and casualty insurance with innovative solution designs
utilizing state-of-the-art technology. Products are available fully configured
("off-the-shelf") or customized to specific customer needs utilizing Cover-All's
unique tool set. The software can be licensed for customer use on their own
platforms or can be licensed through an ASP (Application Services Provider)
utilizing third party technology platforms and support.
Cover-All also offers on-going support services, including insurance rate
and rule changes, in a cost-effective manner. These support services include
analyzing the changes, development, quality assurance, documentation and
distribution of insurance rate and rule changes. The Company also provides a
wide range of professional services that support product customization,
conversion from existing systems and data integration with other software or
reporting agencies. The Company derives revenue from software contract licenses
to new and existing customers, service fees from the ASP, continuing maintenance
fees for servicing the product and professional services.
CLASSIC
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. This
software utilizes a unique design that separates the "insurance product
definition" from the actual technology "engines." The elegance of this design
has enabled the Company to stay current with technology innovations while
preserving its "insurance knowledge" investment. This concept has evolved into
what is known today as the Classic product.
The Classic product line is a self-contained full policy life cycle suite
that supports the following functions:
o Data capture and editing
o Rating
o Policy issuance including multiple recipient print
o All policy transactions including quotes, new lines, endorsements,
renewals, audits and cancellations
The Classic product was designed to accommodate all lines of property and
casualty insurance but is especially effective in coping with the complexity and
variability of commercial lines insurance. Cover-All today offers off-the-shelf
support for more than 20 lines of commercial business in virtually all states
and Puerto Rico. Cover-All's extensive experience in creating custom products
combined with its proprietary tool set enables the Company to deliver support
for new insurance products in short time frames.
-2-
A strength of the Classic product is that it has been designed to reduce
the complexity of the insurance process for the user. Classic's user interface
asks the user for only the information necessary for the task at hand. The
product performs complete editing as the data is entered so that errors can be
corrected immediately. The software can run on stand-alone PCs, over a LAN
utilizing a shared database or over the Internet utilizing a browser.
The Classic software was originally developed using the MicroFocus COBOL
language, and the Company upgraded this product line for use in the Windows 95,
Windows 98 and NT operating systems. During 1999, the Classic product was also
upgraded to utilize a graphical user interface ("GUI"). During 2000 it has also
been implemented in an Internet or thin client environment. This feature enables
customers to allow remote access to their customers or partners. The Internet is
also the platform utilized by the ASP offering.
The Classic product is in use in over 60 companies. Total Classic revenues
were $6,772,000 for 2000 as compared to $7,144,000 and $6,708,000 for 1999 and
1998, respectively.
TAS 2000
Since 1993, Cover-All has been developing a second product line known as
Total Administrative Solution ("TAS 2000") and, as of December 31, 2000,
Cover-All has developed a suite of functionality including billing, full policy
life-cycle support, Customer Relationship Management (CRM) and financial and
statistical reporting. These functional components have been built out and
implemented for workers compensation. This product suite, called TAS Comp, is
currently in production at one customer site. These components are also being
marketed separately and are being integrated with the Classic product for
deployment in the ASP and in other new product or service offerings currently
being developed.
The TAS 2000 product is built upon a comprehensive Oracle database designed
to meet the data requirements for an insurance enterprise. The data is organized
around customers and is designed to meet the complex data requirements of the
property/casualty insurance industry. The current TAS 2000 product includes
several functionally rich components including billing, client-management,
agent/broker management, rating, policy issuance and print and
financial/statistical reporting. It also includes a number of application
development tools for property/casualty insurers designed to enable faster
implementation of new or reengineered business processes.
TAS 2000 applications run on commodity priced open computer systems and use
state-of-the-art software technology provided by Oracle Corporation. Total TAS
2000 revenues were $1,191,000 for 2000, $3,884,000 for 1999 and $5,560,000 for
1998.
* * *
In March 1997, 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.
In December 1999, the Company hired Mr. John Roblin as the Company's
President and Chief Executive Officer. In March 2000, Mr. Roblin was elected to
the Board of Directors of the Company and in February 2001, Mr. Roblin was named
Chairman of the Board succeeding Mr. Mark Johnston, who remains a director of
the Company. In addition, the Company named Ms. Ann F. Massey, its Controller,
as Chief Financial Officer in February 2001, replacing Mr. Johnston, who served
as Chief Financial Officer on an interim basis since March 2000. Also in
February 2001, Ms. Maryanne Gallagher was named Chief Operating Officer. In
March 2001, Mr. Frank Orzell was hired to be the Company's Chief Marketing
Officer.
-3-
PRODUCT DESCRIPTION
CLASSIC PRODUCT LINE
The Classic product is a software package that was designed to function on
a variety of technology platforms including PC, client/server and Internet (thin
client). Classic is designed to automate the rating, policy issuance and policy
administration tasks for the property and casualty insurance industry.
Functionality includes data capture/editing, rating, policy issuance and policy
administration (including generation of statistical and financial data) for
quoting, new business, mid-term changes, cancellations, reinstatements and
renewals. The system's print engine creates multiple recipient copies of all
relevant documentation for each of these transactions, including quote
summaries, declaration pages and mandatory and optional manuscript forms. This
product supports full policy life cycle functionality 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 with extensive real time edits
o Policy history - easy policy changes and useful for activities such as
coverage inquiries
o On-line system, screen and field level help
o On-line ISO Commercial Lines Manual Tables and Footnotes
o Easy and direct system navigation
o Standard ISO 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 product technology design was created with an understanding of
the complexity and constantly changing nature of property and casualty
insurance. The Classic product consists of several "engines" that perform driven
by a series of external "rules" or metadata that contain the insurance
specifics. This metadata has been developed over the last 10 years and has been
enhanced and expanded throughout this period. Today this Metadata supports more
than 20 commercial coverages in virtually all states and Puerto Rico as well as
many custom products. Utilizing this proprietary tool set allows Cover-All to
effectively and efficiently modify existing insurance coverages or add new
products in very short time frames.
The design of Classic also allows Cover-All to stay current with changes in
technology while reusing the intellectual capital represented in the insurance
rules. The Classic product line has also been upgraded to run on a LAN where any
number of users can contribute to the common data store. Over the past few
years, 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.
It is also operating on the Internet in a Citrix environment. The Internet is
also the platform utilized by the ASP offering. The Company is currently
investing in additional upgrades to newer, native Internet technologies as well
as integrating this product to the TAS 2000 database and functionality utilizing
a new rule-driven user interface. Additionally, Cover-All has developed and
implemented a number of processes over the years that streamline the support
process with the goal to improve quality to our customers.
-4-
TAS 2000 PRODUCT LINE
The TAS 2000 product line was designed to bring new technology and
additional functional capability to the property and casualty insurance
industry. The product was built around an Oracle database that has been designed
to meet the needs of an insurance enterprise. The data is organized around
customers and integrates rating, billing, demographic, policy issuance,
statistical and financial reporting functions so that information is only
captured once. This is designed to reduce expenses and errors as well as improve
timeliness and service quality to the customer. The data is accessible for
creating management reports utilizing custom or general-purpose tools. The
functional components are designed to deliver a wide range of capabilities built
with the needs of the insurance enterprise in mind. These functional components
have been built out and implemented for workers compensation, and this product
suite is known as TAS Comp.
All TAS 2000 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 and the flexibility of the thin client and Internet
platforms. Companies utilizing TAS 2000 that are growing or want to utilize
additional functionality can "scale" their technology to more powerful platforms
utilizing the same applications and companies currently relying on expensive
mainframe technology can "rightsize" their hardware and software. TAS 2000
enables customers 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 Enterprise, Customer-centric Oracle database
o Client Management
o End User Tools
o Agency Profile Management
o Policy Administration
o Workers Compensation Rating and Issuance
o Billing, Cash and Commissions
o Statistical Reporting
o Financial Reporting
TAS 2000 has a Windows compliant graphical user interface and is also
available utilizing a browser over the Internet. 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.
Cover-All originally created the TAS 2000 product line to better position itself
for penetration into the larger insurance carrier market segment.
Today, with the advent of the Internet, low cost PC technology and ASP
offerings, demand has broadened for the type of products and services that
Cover-All provides in TAS 2000 and Classic to include smaller carriers, agents,
brokers and Internet "auction" sites. These potential Cover-All customers are
looking for technology solutions that will impact their business such as speed
to market, lower costs and flexible workflows that could enable multiple
distribution channels. These customers are looking for low cost, variable cost
(buy what you need), services (ASP) and solutions that can grow with their
needs. The design of TAS 2000, separate but integrated functional components
built on client/server technology, enables Cover-All to market these functional
components (such as billing) either separately, in "custom groupings" or as a
service in an ASP environment.
-5-
PRODUCTS AND SERVICES IN DEVELOPMENT
Cover-All has, in the Classic and TAS 2000 products, a deep inventory of
insurance software components already available. The Company expects to utilize
these capabilities to expand and leverage its ability to respond to broadening
marketplace and new customer opportunities with solutions that address the
special needs of carriers, MGAs (Managing General Agents), agents, brokers and
third party providers with both off-the-shelf and custom solutions. The user
interface capabilities of Cover-All products are being enhanced with even more
functionality to provide customers with more flexibility to customize workflows
and the "look and feel" of their systems. The Company also intends to continue
to enhance its functional components based upon market demand, existing customer
needs and changes in technology, especially Internet technologies.
Cover-All is also increasing and enhancing its services portfolio. The
Company expects to expand its professional services with conversion and
interface offerings. New rule-based capabilities are in development to enable
Cover-All to implement data exchange services that will save our customers time
and effort converting to Cover-All products or linking Cover-All products to
existing systems. The ASP will continue to be enhanced with additional
functionality and customer options.
COMPETITIVE PRODUCTS
The Company believes that its products offer customers certain advantages
not available from Cover-All's competitors. Cover-All has a broad suite of
products and services available now and is uniquely positioned to appeal to many
different market segments with cost effective, functionally rich, proven
components. 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 very cost effective and easy to
implement. Utilizing the ASP environment, customers can implement new products
or refine their workflows in a low, variable cost way and in very short time
frames. In addition, the Classic product is distinguished from its competitors
in its off-the-shelf, complete, all-state support of regulatory bureau rates,
rules and forms for commercial lines of property/casualty insurance.
The TAS 2000 functional components when linked to the Classic product offer
an integrated, functionally rich, scaleable platform for carriers, agents and
brokers to grow their businesses. TAS 2000's architecture is distinguished from
competitive offerings by the integrated use of Oracle's relational database and
its Designer 2000 and Developer 2000 tool sets. The underlying database and
language used for the TAS 2000 products are the Oracle Relational Database
Management System and the Oracle Cooperative Development Environment products.
These products provide an integrated application environment. Through Oracle's
tools, these new products take advantage of the power of the Oracle database.
This software allows processing to be centralized, dedicated to specific
server(s) or clients or distributed across the network. Additionally, Cover-All
is taking advantage of the latest capabilities of Oracle to implement leading
edge features such as virtual private database that not only better protects the
customers data, it also enables extensive customization while maintaining
control in a central place.
MARKETING
The Company maintains a sales staff at its principal executive offices in
Fair Lawn, New Jersey. The Company also utilizes distributors, outside
consultants and other complimentary service providers to market its products.
The Company is in the process of redesigning its Internet site and establishing
linkages to portals and other web sites. This is an on-going effort that will
expand rapidly in 2001 as the Company focuses on the Internet as the primary
source of information about its products and services. The Company also
participates in and displays its software products at trade shows organized by
industry trade groups.
-6-
RESEARCH AND DEVELOPMENT
Cover-All's business is characterized by rapid business and technological
change. The Company's success will depend, in part, on its ability to meet the
new needs of our customers and the marketplace as well as continuing to enhance
its products 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.
During 2000, the Company focused on delivering the remaining functionality
of TAS 2000. Additional time and effort was spent designing and building an
Internet presentation tool as well as expanded security and print capabilities
that will be utilized in upcoming products. Research and development expenses
for Cover-All were $875,000, $1,009,000 and $1,186,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
BACKLOG
The Company has a license, professional services and maintenance backlog of
unbilled work of approximately $-0-, $-0- and $988,000, respectively, as of
December 31, 2000.
MAJOR CUSTOMERS
The Classic product line is in use in over 60 companies while the TAS 2000
product line is currently in use in one property/casualty insurance company. The
Company's revenues from major customers (more than 10 percent of total revenues)
for the years ended December 31, 2000, 1999 and 1998 as a percentage of total
revenue were as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
CUSTOMER 2000 1999 1998
- ----------------------- ------------ ------------ ------------
Accident Fund 11% 13%
Sierra Health Services, Inc. 14%
Cornhill Insurance Co. 12% 15%
Employers Reinsurance Corp. 11% 15%
In 2000, 1999 and 1998, export sales were made to a U.K. customer of
approximately $284,000, $1,336,000 and $1,900,000, respectively. The Company is
not currently active in the U.K. market.
EMPLOYEES
The Company had on average 60 employees during 2000. 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.
ITEM 2. PROPERTIES
----------
The Company's headquarters is located in Fair Lawn, New Jersey where it
occupies approximately 21,000 square feet under a lease which expires at May 31,
2005 at a current annual rental expense of approximately $323,000. This facility
is currently fully utilized by the Company. The Company previously occupied
36,000 square feet at the same location under a lease that expired on May 31,
2000 with an annual rental expense of approximately $400,000. The 15,000 square
feet of space discontinued consisted of
-7-
warehouse space, and the Company disposed of certain items in such warehouse
space and moved 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 January 11, 2001, the Company agreed to settle its lawsuit with Inspire
Insurance Solutions, Inc., a Texas corporation ("Inspire"), originally filed on
February 23, 2000, by Cover-All in United States District Court, District of New
Jersey. Inspire agreed to pay Cover-All a certain sum and return immediately to
Cover-All the licensed materials provided by Cover-All pursuant to the license
agreement.
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, 2000.
-8-
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
Since November 1, 2000, the Company's common stock has been traded in the
over-the-counter market on the OTC Bulletin Board under the symbol "COVR.OB".
From May 23, 1996 through October 31, 2000, the Company's common stock was
traded on The NASDAQ SmallCap Market tier of The NASDAQ Stock Market, and since
July 1, 1996, the symbol for the Company's common stock on The NASDAQ SmallCap
Market was "COVR." As of August 2, 1996, the Company's common stock has also
been listed on the Philadelphia Stock Exchange and it currently trades under the
symbol "CVA."
The quotations below reflect the high and low bid prices for the Company's
common stock since January 1, 1999. The quotations below reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
2000: HIGH LOW
---- ---
1st Quarter $1.938 $1.000
2nd Quarter 1.344 0.563
3rd Quarter 0.750 0.406
4th Quarter 0.781 0.188
1999:
1st Quarter $3.125 $1.750
2nd Quarter 3.000 1.187
3rd Quarter 1.937 1.187
4th Quarter 2.000 0.812
As of March 23, 2001, there were 605 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 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.
The closing sales price for the Company's common stock on March 23, 2001
was $0.255, as reported by the OTC Bulletin Board.
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.
-9-
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,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- --------- --------
STATEMENT OF OPERATIONS DATA:
Revenues: $ 7,963 $11,028 $12,268 $ 7,938 $ 5,469
Income (loss) from continuing
operations before income tax................ (2,916) (3,255) 548 (2,640) (5,608)
Income (loss) on disposal of discontinued
operations, no tax benefit provided......... -- -- -- -- (393)
Net income (loss).............................. (2,412) (2,820) 918 (2,640) (6,001)
Income (loss) per share from continuing
operations.................................. (.14) (.17) .05 (.16) (.38)
Net income (loss) per share.................... (.14) (.17) .05 (.16) (.40)
Cash dividends per share....................... $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA:
Working capital (deficiency)................... $ 78 $1,172 $ 4,203 $ 1,647 $(1,293)
Total assets................................... 5,141 9,147 11,425 8,484 8,243
Short-term debt................................ 64 59 -- -- --
Stockholders' equity (deficit)................. (1,370) 2,437 5,217 2,847 4,911
-10-
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, AMONG OTHER THINGS, RISKS
ASSOCIATED WITH INCREASED COMPETITION, CUSTOMER DECISIONS, THE SUCCESSFUL
COMPLETION OF CONTINUING DEVELOPMENTAL 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 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
- ---------------------
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
- -----------------------------------------------------------------------
Total revenues were $7,963,000 for the year ended December 31, 2000
compared to $11,028,000 for the year ended December 31, 1999, a decrease of 28%.
License fees were $1,919,000 for the year ended December 31, 2000 compared to
$2,638,000 in the same period in 1999 primarily because of no new sales of TAS
2000 in 2000 as a result of the Company making a strategic decision to focus on
completing the deliveries to the one TAS 2000 customer and developing an ongoing
relationship with that customer, who is now in production. The decrease in
revenue is primarily a result of reduced activity in TAS 2000.
For the year ended December 31, 2000, maintenance revenues were $4,023,000
compared to $4,371,000 in the same period of the prior year primarily due to the
termination of support services by one Classic customer and reduced TAS 2000
maintenance caused by late deliveries in 1999 and the Company's decision to
withdraw from the UK. Professional services revenue contributed $2,021,000 for
the year ended December 31, 2000 compared to $4,019,000 for the year ended
December 31, 1999 as a result of no new TAS 2000 implementations and the
Company's decision to focus on completing its contractual obligations to the
existing TAS 2000 commitments.
Cost of revenues decreased to $6,942,000 for the year ended December 31,
2000 as compared to $8,462,000 for 1999 as a result of the Company deciding in
2000 to implement certain measures to eliminate or reduce expenses on activities
that were not directly creating value, staff reductions in the TAS 2000 division
and combining the support structures for Classic and TAS 2000. Non-cash
capitalized software amortization was $899,000 for the year ended December 31,
2000 as compared to $479,000 in 1999. The Company did not capitalize any
software development in 2000.
Research and development expenses in 2000 were $875,000 compared to
$1,009,000 for the year ended December 31, 1999. Significant effort was expended
in 2000 to complete remaining functionality and refine our processes in order to
satisfy our customers before we refocused and increased our sales efforts.
Sales and marketing expenses decreased to $900,000 in 2000 compared to
$1,778,000 in 1999. This decrease was due to the closing of the UK operation,
reallocation of some expenses into general and administrative and turnover in
the sales force in 2000.
General and administrative expenses increased to $1,962,000 in 2000
compared to $1,550,000 for the year ended December 31, 1999 primarily as a
result of increased legal fees.
-11-
Allowance for Doubtful Accounts decreased to $(333,000) in 2000 compared to
$1,240,000 for the year ended December 31, 2000 due to collections of various
accounts receivable reserved for in 1999 and no new reserves required in 2000.
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
TAS 2000 customer that, at the time, had a dispute with the Company.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At December 31, 2000, the Company had working capital of $78,000 compared
to a working capital of $1,172,000 in 1999.
On March 31, 1996, the Company was granted by Care Corporation Limited
("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 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.
-12-
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 installments of $500,000
which, when discounted, resulted 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 was collateralized by unencumbered Cover-All stock
owned by Care and a Care affiliate, Software Investments Limited ("SIL"). The
number of shares required as collateral was to 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 was
required to pledge as collateral was capped at 2,500,000. The number of shares
required as collateral was to 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 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. The Company received the subsequent payments due under the note,
including the payment due by September 30, 2000. In November 1999, the Board of
Directors decided that due to the 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 to Care's history of making each of the $500,000
payments on the promissory note in a timely manner, it would be in the best
interest 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 connection with the investment by Vault
Management Limited (see Note 11 to the Company's financial statements), one-half
of the payment due September 30, 2000 was deferred until December 31, 2000.
Care failed to make the scheduled payment of $250,000 due December 31,
2000, and on January 16, 2001, the Company announced that Care had defaulted on
its obligation to pay the Company its semi-annual principal payment owed under
the promissory note dated March 31, 1998. The Company exercised its right to
accelerate all remaining amounts due under the note, which totaled $2,250,000.
The pledge agreement between the Company and Care provided that in the event of
a default by Care, the Company can look to and proceed against for payment
Care's 2,500,000 shares of the Company's common stock pledged to and held by the
Company as collateral on the note. In addition, the Company announced that
pursuant to the pledge agreement, the Company on January 16, 2001 transferred
and registered in its name the 2,500,000 shares of the Company's common stock
owned by Care.
The balance of the undiscounted Care note at December 31, 2000 was
$2,250,000, of which $1,250,000 was classified as currently due. The discounted
long-term portion of the Care note at December 31, 2000 of $1,000,000 was
approximately $859,000, net of unearned interest of approximately $141,000. As a
result of Care's default, the Company wrote off the undiscounted current and
discounted long-term portions of the note for these amounts. The Company
recorded 2,500,000 shares of its common stock received from Care as treasury
stock valued at $703,000, based upon the market price of the shares on January
16, 2001. The difference between the value of the treasury stock and the
undiscounted current and discounted long-term portions of the note of
approximately $1,406,000 was recorded as a loss of approximately $263,000 in the
fourth quarter of 2000 and approximately $1,143,000 to capital in excess of par
value at December 31, 2000 to offset the same amount recorded in March 31, 1998.
-13-
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.
On June 21, 2000, the Company entered into an agreement with Vault
Management Limited ("Vault") to purchase between 640,000 and 1,600,000 shares of
the Company's common stock at $.625 per share, which was the closing price per
share of the Company's common stock on May 30, 2000, the date the agreement was
reached.
The agreement would generate a minimum of $400,000 and a maximum of $1
million in proceeds to the Company. The proceeds would be used for general
working capital purposes.
The agreement also called for the equivalent number of the Company's
detachable five-year warrants to be issued to Vault at an exercise price of
$.625 per share. The agreement provided that Vault shall have the option to make
payments beyond the required $400,000 in $200,000 installments each on August
31, 2000, October 31, 2000 and November 30, 2000. Vault did not exercise its
option to make a payment of $200,000 on any of August 31, 2000, October 31, 2000
or November 30, 2000. The decision not to exercise Vault's options was mutually
agreed upon by Vault and the Company.
As part of the Vault transaction, the Company also agreed to modify the
terms of the Care note such that the semi-annual principal payment of $500,000
due and payable on September 30, 2000 shall be due and payable as to $250,000 on
September 30, 2000 and as to $250,000 on December 31, 2000. The Company received
the $250,000 payment on September 29, 2000. The Company did not receive the
payment due on December 31, 2000. At the time of the Vault transaction, Mr. Mark
Johnson was the Company's Chairman and Interim Chief Financial Officer and also
a director of both Vault and Care.
At December 31, 2000, the Company had approximately $1,900,000, $2,400,000,
$3,100,000, $10,100,000 and $3,100,000 of federal net operating tax loss
carryforwards expiring in 2020, 2019, 2012, 2011 and 2010, respectively.
The Company believes that its current cash balances and anticipated cash
flows from operations will be sufficient to meet its normal operating needs in
2001.
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
-14-
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.
FOREIGN CURRENCY RISK. The Company earned revenues in the U.K. in the first
quarter of 2000. The Company currently has no international business. The
Company's international business was 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 arose from
sales made to a U.K. customer. As exchange rates vary, these results, when
translated, could have varied from expectations and adversely impacted overall
expected profitability. The effect of foreign exchange rate fluctuations on the
Company in 2000 was a loss of $4,000.
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 2001 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, 2000.
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 21.
(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) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed on July 12, 2000 [incorporated by
reference to Exhibit 3(g) to the Registrant's Quarterly Report
on Form 10-Q (Commission File No. 0-13124) filed on August 11,
2000].
3(g) 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].
-16-
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].
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)(1) 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(e)(2) Modification to Lease, dated February 23, 1994, by and between
the Registrant and Polevoy Associates.
*10(e)(3) Second Modification to Lease, dated April 12, 2000, by and
between the Registrant and Polevoy Associates.
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(f)(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].
-17-
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 Annual Report on 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 reference to Exhibit
10(aa)(iii) to the Registrant's Annual Report on 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 Annual Report on 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 Annual Report on 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 Annual
Report on 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 Annual Report on 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 Annual Report on Form 10-K (Commission File No.
0-13124) filed on March 31, 1998].
-18-
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 Annual Report on 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 Annual Report on 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 Annual Report on 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(1)(8) Letter Agreement, dated as of June 9, 2000, from the
Registrant amending Secured Promissory Note of Care
Corporation Limited, dated as of March 31, 1998 [incorporated
by reference to Exhibit 10(1)(8) to the Registrant's Quarterly
Report on Form 10-Q/A (Commission File No. 0-13124) filed on
August 24, 2000].
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
[incorporated by reference to Exhibit 10(n) to the
Registrant's Annual Report on Form 10-K (Commission File No.
0-13124) filed on April 14, 2000].
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 Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
March 31, 1999].
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 Annual Report on 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 [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 14, 2000].
10(o)(4) Employment Agreement, dated January 25, 2001, by and between
the Registrant and John Roblin [incorporated by reference to
Exhibit 99.2 to the Registrant's Form 8-K (Commission File No.
0-13124) filed on January 8, 2001].
-19-
10(p)(1) Form of Warrant issued by the Registrant to Vault Management
Limited [incorporated by reference to Exhibit 10(p)(1) to the
Registrant's Quarterly Report on Form 10-Q/A (Commission File
No. 0-13124) filed on August 24, 2000].
10(p)(2) Stock Purchase Agreement, dated as of June 9, 2000, between
the Registrant and Vault Management Limited [incorporated by
reference to Exhibit 10(p)(2) to the Registrant's Quarterly
Report on Form 10-Q/A (Commission File No. 0-13124) filed on
August 24, 2000].
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.
- ------------------------------
* Filed herewith
(b) Reports on Form 8-K
-------------------
Current Report on Form 8-K, dated January 17, 2001, regarding the
announcement that (a) Care Corporation Limited had defaulted on its
scheduled payment to the Registrant on its note to the Registrant, (b)
the Registrant had exercised its right to accelerate all remaining
amounts due under the note, totaling $2,250,000, and (c) the Registrant
transferred 2,500,000 shares of its common stock owned by Care and
pledged to the Registrant as collateral under the note.
Current Report on Form 8-K, dated February 8, 2001, regarding the
announcement that John Roblin was named Chairman of the Company,
replacing Mark Johnston, who will continue as a director, and that Ann
Massey was named Chief Financial Officer of the Company, replacing Mr.
Johnston, who was Interim Chief Financial Officer since March 2000.
-20-
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Auditors...............................................F-1
Consolidated Balance Sheets - December 31, 2000 and 1999.....................F-2
Consolidated Statements of Operations - Years ended
December 31, 2000, 1999 and 1998.............................................F-4
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 2000, 1999 and 1998.............................................F-5
Consolidated Statements of Cash Flows - Years ended December 31, 2000,
1999 and 1998................................................................F-6
Notes to Consolidated Financial Statements...................................F-8
-21-
REPORT OF INDEPENDENT AUDITORS
To the Stockholders 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, 2000 and
1999, 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, 2000. 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, 2000. 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 auditing standards
generally accepted in the United States of America. 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,
2000 and 1999, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. 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, 2000, 1999 and 1998.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
March 5, 2001
F-1
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
2 0 0 0 1 9 9 9
------- -------
Assets:
Current Assets:
Cash and Cash Equivalents $ 421,938 $ 1,065,793
Accounts Receivable [Less Allowance for Doubtful Accounts
of $1,805,168 and $1,730,249 in 2000 and 1999, Respectively] 2,613,295 2,368,272
Note Receivable - Related Party -- 959,344
Other Receivable 285,000 --
Prepaid Expenses 251,272 365,194
Accrued Interest - Related Party Note Receivable -- 40,656
--------------- ---------------
Total Current Assets 3,571,505 4,799,259
--------------- ---------------
Property and Equipment - At Cost:
Furniture, Fixtures and Equipment 3,213,623 3,191,154
Less: Accumulated Depreciation (2,901,335) (2,749,589)
--------------- ---------------
Property and Equipment - Net 312,288 441,565
--------------- ---------------
Note Receivable - Related Party [Net of Unearned Interest
of $-0- and $250,477 in 2000 and 1999, Respectively] -- 1,749,523
--------------- ---------------
Capitalized Software [Less Accumulated Amortization of
$3,983,811 and $3,084,571 in 2000 and 1999, Respectively] 1,197,821 2,097,060
--------------- ---------------
Other Assets 59,335 59,335
--------------- ---------------
Total Assets $ 5,140,949 $ 9,146,742
=============== ===============
See Notes to Consolidated Financial Statements.
F-2
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------
2 0 0 0 1 9 9 9
------- -------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 1,023,316 $ 1,085,395
Accrued Liabilities 616,980 886,850
Obligation Under Capital Lease 64,435 59,497
Unearned Revenue 1,788,324 1,595,217
--------------- ---------------
Total Current Liabilities 3,493,055 3,626,959
--------------- ---------------
Long-Term Liabilities:
Obligation Under Capital Lease 17,980 82,416
Convertible Debentures 3,000,000 3,000,000
--------------- ---------------
Total Long-Term Liabilities 3,017,980 3,082,416
--------------- ---------------
Total Liabilities 6,511,035 6,709,375
--------------- ---------------
Commitments and Contingencies -- --
--------------- ---------------
Stockholders' Equity:
Common Stock, $.01 Par Value, Authorized 75,000,000 Shares,
17,681,172 and 17,003,672 Shares Issued and 15,181,172 and
17,003,672 Shares Outstanding in 2000 and 1999, Respectively 176,812 170,037
Capital In Excess of Par Value 26,064,149 26,763,197
Accumulated Deficit (26,908,047) (24,495,867)
Treasury Stock - At Cost - 2,500,000 Shares (703,000) --
--------------- ---------------
Total Stockholders' Equity (1,370,086) 2,437,367
--------------- ---------------
Total Liabilities and Stockholders' Equity $ 5,140,949 $ 9,146,742
=============== ===============
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,
---------------------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Revenues:
Licenses $ 1,919,046 $ 2,638,190 $ 5,875,369
Maintenance 4,023,304 4,371,273 3,721,993
Professional Services 2,020,822 4,018,684 2,670,720
--------------- ---------------- ---------------
Total Revenues 7,963,172 11,028,147 12,268,082
--------------- ---------------- ---------------
Costs of Revenues:
Licenses 2,820,038 5,689,998 3,741,154
Maintenance 3,195,699 1,621,056 1,741,528
Professional Services 926,599 1,150,883 978,927
--------------- ---------------- ---------------
Total Costs of Revenues 6,942,336 8,461,937 6,461,609
--------------- ---------------- ---------------
Direct Margin 1,020,836 2,566,210 5,806,473
--------------- ---------------- ---------------
Operating Expenses:
Sales and Marketing 899,607 1,778,026 2,024,186
General and Administrative 1,961,716 1,550,040 1,479,537
Research and Development 875,114 1,008,770 1,186,164
Allowance for Doubtful Accounts (333,222) 1,239,843 425,246
Loss on Default of Note Receivable - Related Party 262,870 -- --
--------------- ---------------- ---------------
Total Operating Expenses 3,666,085 5,576,679 5,115,133
--------------- ---------------- ---------------
Operating [Loss] Income (2,645,249) (3,010,469) 691,340
--------------- ---------------- ---------------
Interest Expense [Income]:
Interest Expense 385,003 389,939 377,924
Interest Income - Related Party [Imputed] (109,401) (186,375) (117,506)
Interest Income (8,633) (19,505) (116,782)
--------------- ---------------- ---------------
Total Interest Expense 266,969 184,059 143,636
--------------- ---------------- ---------------
Foreign Currency Transaction [Loss] (3,898) (60,071) --
--------------- ---------------- ---------------
[Loss] Income Before Income Tax Benefit (2,916,116) (3,254,599) 547,704
Income Tax Benefit 503,936 435,066 370,000
--------------- ---------------- ---------------
Net [Loss] Income $ (2,412,180) $ (2,819,533) $ 917,704
=============== ================ ===============
Basic and Diluted Earnings [Loss] Per Common
Share $ (.14) $ (.17) $ .05
=============== ================ ===============
Weighted Average Number of Common Shares
Outstanding for Basic Earnings [Loss] Per
Common Share 17,386,000 16,998,000 16,940,000
=============== ================ ===============
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, 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
Exercise of 12,500 Stock Options 125 19,406 -- -- 19,531
Issuance of 25,000 Shares 250 31,000 -- -- 31,250
Issuance of 640,000 Shares of Common
Stock Under the Vault Agreement
[See Note 11] 6,400 393,600 -- -- 400,000
Loss on Default of Care Note
[See Note 8] -- (1,143,054) -- -- (1,143,054)
Recording of 2,500,000 Shares of
Common Stock following Default of
Care Note [See Note 8] -- -- -- (703,000) (703,000)
Net [Loss] -- -- (2,412,180) -- (2,412,180)
----------- --------------- --------------- --------------- ---------------
Balance at December 31, 2000 $ 176,812 $26,064,149 $ (26,908,047) $ (703,000) $ (1,370,086)
=========== =========== =============== ================ ===============
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,
---------------------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Cash Flows from Operating Activities:
[Loss] Income from Continuing Operations $ (2,412,180) $ (2,819,533) $ 917,704
Adjustments to Reconcile Net [Loss] Income to Net
Cash [Used for] Operating Activities:
Depreciation 152,238 192,276 159,609
Amortization of Capitalized Software and Software
License 899,240 478,990 784,724
Provision for Uncollectible Accounts (333,222) 1,239,843 425,246
Imputed Interest Income (150,057) (198,307) (117,506)
Deferred Tax Asset -- 400,000 (400,000)
Loss on Default of Note Receivable - Related Party 262,870 -- --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 88,200 (114,923) (2,683,732)
Prepaid Expenses 113,922 (133,752) (90,659)
Accrued Interest - Related Party Note Receivable 40,656 11,931 (52,587)
Other Receivable (285,000) -- --
Other Assets -- 1,575 (1,575)
Increase [Decrease] in:
Accounts Payable (62,079) 188,978 325,108
Accrued Liabilities (269,870) (560,175) (171,651)
Unearned Revenue 193,107 730,123 417,961
--------------- ---------------- ---------------
Net Cash [Used For] Continuing Operating
Activities (1,762,177) (582,974) (487,358)
--------------- ---------------- ---------------
Cash Flows from Investing Activities:
Repayment of Note Receivable - Related Party 750,000 1,000,000 1,000,000
Capital Expenditures (22,961) (252,062) (134,392)
Capitalized Software Expenditures -- (1,388,672) (1,309,045)
--------------- ---------------- ---------------
Net Cash Provided from [Used For] Investing
Activities 727,039 (640,734) (443,437)
--------------- ---------------- ---------------
Cash Flows from Financing Activities:
Net Proceeds from the Issuance of Common Stock 431,250 -- --
Principal Payments on Capital Lease (59,498) (37,109) --
Proceeds from Exercise of Stock Options 19,531 40,000 309,238
--------------- ---------------- ---------------
Net Cash Provided from Financing Activities 391,283 2,891 309,238
--------------- ---------------- ---------------
Change in Cash and Cash Equivalents - Forward $ (643,855) $ (1,220,817) $ (621,557)
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,
---------------------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Change in Cash and Cash Equivalents - Forwarded $ (643,855) $ (1,220,817) $ (621,557)
Cash and Cash Equivalents - Beginning of Years 1,065,793 2,286,610 2,908,167
--------------- ---------------- ---------------
Cash and Cash Equivalents - End of Years $ 421,938 $ 1,065,793 $ 2,286,610
=============== ================ ===============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 385,003 $ 389,939 $ 377,924
Income Taxes $ -- $ -- $ --
Supplemental Disclosures of Noncash Investing and Financing Activities:
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, resulted 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.
In December 2000, Care defaulted on its obligation to pay to the Company
its semi-annual principal payment owed under the promissory note dated March 31,
1998. As result of Care's default, the Company wrote off the outstanding balance
of the Care note as of December 31, 2000. In accordance with the terms of the
agreement, the Company recorded the pledged 2,500,000 shares of its common stock
received from Care as treasury stock valued at approximately $703,000 based upon
the market price of the shares. The difference between the value of treasury
stock and the outstanding balance of the Care note as of December 31, 2000, was
recorded as a loss of $262,870 in the fourth quarter of 2000 and $1,143,054 was
charged to additional paid-in capital [See Note 8].
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 and Puerto
Rico. 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 $78,000 and $619,000 of repurchase agreements at December 31,
2000 and 1999, 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 beyond insured
amounts at December 31, 2000 and 1999 was approximately $243,500 and $917,900,
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. Six customers
accounted for approximately 51% 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 had exposure to foreign currency exchange rate fluctuations arising
from sales made to a U.K. customer. The Company has approximately $-0- and
$127,000 subject to such risk at December 31, 2000 and 1999, 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 2000, 1999 and 1998 was $152,238, $192,276 and $159,609,
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 2000, 1999 and 1998, qualifying software
development costs of $-0-, $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. Amortization expense
in 2000, 1999 and 1998 was $899,240, $478,990, and $784,724, respectively.
Advertising Expense - It is the Company's policy to expense advertising costs as
incurred. Advertising expense in 2000, 1999 and 1998 was $132,297, $291,979 and
$168,209, 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 2000 and 1999 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 15].
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 2000 and
1999 because it would be antidilutive for those years [See Notes 6 and 15]. 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 2000 and 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, 2000, the leased equipment under capital lease had a
cost of $179,022 and accumulated depreciation of $56,696.
Amortization expense on lease assets which is included in depreciation expense
for the years ended December 31, 2000, 1999 and 1998 was $35,808, $20,888 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, 2000, for the next five
years and in the aggregate are as follows:
2001 $ 68,700
2002 18,234
2003 --
2004 --
2005 --
---------------
Total Minimum Lease Payments 86,934
Amount Representing Interest 4,519
---------------
Present Value of Net Minimum Lease Payments 82,415
Less: Current Portion 64,435
---------------
Long-Term Capital Lease Obligation $ 17,980
===============
[4] Commitments, Contingencies and Related Party Transactions
Operating Leases - The Company leases approximately 21,000 square feet of office
space under a lease which expires in May 2005. 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 $308,853, $289,720 and $296,014 for the years ended December
31, 2000, 1999 and 1998, respectively.
The Company's future minimum rental commitments under its noncancellable
operating lease in effect at December 31, 2000 follows: year ending 2001 --
$322,849, 2002 -- $ 322,849, 2003 -- $322,849, 2004 -- $322,849, 2005 --
$134,520; thereafter -- none.
Employment Contracts - The Company has renegotiated an employment contract with
one of its executives with an expiration date of December 31, 2003. This
contract may be renewed by the consent of both parties for an additional two
year period. The aggregate commitment for future salary at December 31, 2000 was
approximately $794,000. In accordance with the previous contract, the executive
was issued 25,000 shares of the Company's common stock in January 2000.
Related Party Transactions - An attorney associated with the former Chairman
provided legal services to the Company for which the Company incurred
approximately $-0-, $15,000 and $84,000 in legal costs during 2000, 1999 and
1998, respectively.
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 [Continued] - 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 and Mark Johnston, a director of the Company was
appointed Chairman.
In 1999, a director of the Company provided project management services for a
fee of approximately $307,000 and the Company paid the former Chairman total
consulting fees plus expenses of approximately $58,000.
In 2000, the Company paid the former Chairman total consulting fees plus
expenses of approximately $247,000. [See Notes 8 and 11 for Additional Related
Party Disclosures.]
[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,
----------------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
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 (503,936) (775,066) (60,000)
------------- ------------- ---------------
Totals (503,936) (435,066) (400,000)
------------- ------------- ---------------
Net [Benefit] $ (503,936) $ (435,066) $ (370,000)
============= ============= ===============
F-12
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[5] Income Taxes [Continued]
During 2000 and 1999, the Company availed itself of a program offered by the
State of New Jersey whereby it sold state net operating losses of $6,439,122 and
$11,178,111, respectively for $503,936 and $835,066, respectively. As of
December 31, 2000, the amount due to the Company under the program was $285,000
which is classified as other receivable and was collected in February 2001.
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,
----------------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Computed Federal Statutory Tax [Benefit] $ (928,000) $ (1,110,000) $ 186,000
Valuation Allowance to Reduce Deferred Tax Asset 928,000 1,110,000 --
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 (503,936) (835,066) --
--------------- -------------- ---------------
Actual Provision [Benefit] $ (503,936) $ (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,
----------------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Deferred Tax Assets - Current:
Net Operating Loss Carryforward $ -- $ -- $ 154,000
Accounts Receivable Allowance 722,000 630,000 157,000
Reserve for Loss on Disposal -- 32,000 108,000
Vacation Accrual 10,000 10,000 21,000
Related Party Gain -- -- (40,000)
Valuation Allowance (732,000) (672,000) --
--------------- ------------- ---------------
Current Deferred Tax Asset $ -- $ -- $ 400,000
=============== ============= ===============
Deferred Tax Asset [Liability] - Long-Term:
Net Operating Loss Carryforward $ 9,030,000 $ 8,240,000 $ 8,000,000
Stock Options 90,000 128,000 128,000
Capitalized Software (554,000) (840,000) (475,000)
Depreciation and Amortization 61,000 70,000 81,000
Related Party Gain -- -- (156,000)
Valuation Allowance (8,627,000) (7,598,000) (7,578,000)
--------------- ------------- ---------------
Long-Term Deferred Tax Liability $ -- $ -- $ --
=============== ============= ===============
The net change increase during 2000 and 1999 in the total valuation allowance is
$1,089,000 and $692,000, respectively.
F-13
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[5] Income Taxes [Continued]
At December 31, 2000, the Company had approximately $1,900,000, $2,400,000,
$3,100,000, $10,100,000 and $3,100,000 of federal net operating tax loss
carryforwards expiring in 2020, 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 and June 2000. Options for the purchase of up to
5,000,000 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, 2000, 1999 and 1998, 3,230,275,
16,775 and 201,775 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"]. The Plan was amended in June 2000 to increase the aggregate number
of shares of common stock from 300,000 to 750,000. 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, 2000, 1999 and 1998, 710,000,
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, 2000, 1999 and 1998, 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 no options remain outstanding
at December 31, 2000.
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, 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
Granted 537,000 .63 - 1.25 2.9 years .95
Exercised (12,500) 1.56 - 1.56 1.56
Canceled (783,000) .63 - 5.00 1.84
Balance, December 31, 2000 1,487,000 .63 - 5.00 2.2 Years $ 1.34
The options granted during 2000 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 537,000 $ .95 $ .58
=============== ================ ==============
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]
Exercisable options at December 31, 2000, 1999 and 1998 were as follows:
Number of Weighted-Average
December 31, Exercisable Options Exercise Price
- ------------ ------------------- --------------
2000 1,258,000 $ 1.43
1999 1,598,833 $ 1.71
1998 1,566,500 $ 1.76
The following table summarizes information about stock options at December 31,
2000:
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
--------------- ------ ---------------- -------------- ------ --------------
$ .63 - $1.13 309,000 3.3 Years $ .83 152,500 $ 1.03
$ 1.25 - $1.25 933,000 2.1 Years $ 1.25 860,500 $ 1.25
$ 1.94 - $2.13 215,000 1.2 Years $ 2.00 215,000 $ 2.00
$ 4.00 - $5.00 30,000 1.3 Years $ 4.50 30,000 $ 4.50
- -------------- --------- --------- --------- --------- ---------
1,487,000 2.2 Years $ 1.34 1,258,000 $ 1.43
========= ========= ========= ========= =========
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, for stock options issued
to employees in accounting for its stock option plans. The exercise price for
all stock options issued during 2000, 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 2000, 1999 and 1998.
There are approximately 1,749,000 warrants outstanding at December 31, 2000, at
a weighted-average exercise price of $1.34.
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 $.58, $.92 and $1.58 during 2000, 1999 and 1998,
respectively.
F-16
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[6] Stock Option and Stock Purchase Plans [Continued]
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,
----------------------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Risk-Free Interest Rate 6.30% 5.97% 5.60%
Expected Life 4.0 Years 3.0 Years 2.0 Years
Expected Volatility 81% 81% 85%
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,
-------------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Net [Loss] Income as Reported $ (2,412) $ (2,820) $ 918
Pro Forma Net [Loss] Income $ (2,657) $ (2,915) $ 784
[Loss] Earnings Per Share as Reported $ (.14) $ (.17) $ .05
Pro Forma [Loss] Earnings Per Share $ (.14) $ (.17) $ .04
[7] Earnings Per Share Disclosures
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ["EPS"] computations.
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
Numerator:
Net [Loss] Income $ (2,412,180) $ (2,819,533) $ 917,704
Effect of Dilutive Securities:
Options -- -- --
Warrants -- -- --
-------------- -------------- -------------
Numerator for Diluted Earnings [Loss] Per Share $ (2,412,180) $ (2,819,533) $ 917,704
============== ============== =============
Denominator:
Weighted Average Number of Common Shares Outstanding
for Basic Earnings [Loss] Per Common Share 17,386,000 16,998,000 16,940,000
Effect of Dilutive Securities:
Options -- -- 689,625
Warrants -- -- 366,050
-------------- -------------- -------------
Denominator for Diluted Earnings [Loss] Per
Common Share 17,386,000 16,998,000 17,995,675
============== ============== =============
Basic and Diluted Earnings [Loss] Per Share $ (.14) $ .(17) $ .05
============== ============== =============
F-17
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[7] 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).
Equity instruments that may dilute earnings per share in the future are listed
in Note 6.
[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, 2000, 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.
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.
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]
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%,
resulted in a principal amount of the note of $3,893,054. The discounted note
was collateralized by unencumbered Cover-All stock owned by Care. The number of
shares required as collateral would 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 was 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 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.
In connection with the investment by Vault Management Limited [see Note 11],
one-half of the payment due September 30, 2000 was deferred until December 31,
2000. Care failed to make the scheduled payment of $250,000 due December 31,
2000 and on January 16, 2001, the Company announced that Care had defaulted on
its obligation to pay the Company its semi-annual principal payment owed under
the promissory note dated March 31, 1998. The Company exercised its right to
accelerate all remaining amounts due under the note, which totaled $2,250,000.
The Pledge Agreement between the Company and Care provided that in the event of
a default by Care, the Company can look to and proceed against Care for payment.
Care's 2,500,000 shares of the Company's common stock, $.01 par value per share,
were pledged to and held by the Company as collateral on the Care note. In
addition, the Company announced that, pursuant to the Pledge Agreement, the
Company on January 16, 2001 transferred and registered in its name the 2,500,000
shares of the Company's common stock owned by Care.
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, 2000 was $2,250,000,
of which $1,250,000 was classified as currently due. The discounted long-term
portion of the Care note at December 31, 2000 of $1,000,000 was $858,924, net of
unearned interest of $141,076. As a result of Care's default, the Company wrote
off the undiscounted current and discounted long-term portions of the Care note
for these amounts. The Company recorded 2,500,000 shares of its common stock
received from Care as treasury stock valued at the cost of $703,000. The
difference between the value of the treasury stock and the undiscounted current
and discounted long-term portions of the Care note of $1,405,924 was recorded as
a loss of $262,870 in the fourth quarter of 2000 and $1,143,054 to capital in
excess of par value at December 31, 2000 to offset the same amount recorded in
March 31, 1998.
[9] Supplemental Data
Accrued liabilities consist of the following:
Years ended
December 31,
------------
2 0 0 0 1 9 9 9
------- -------
Accrued Payroll, Benefits, Temporary Help and Consulting $ 230,874 $ 405,015
Reserve for Loss on Disposal -- 79,570
Accrued Interest Costs 93,750 93,750
Accrued Professional Fees 185,923 140,000
Other 106,433 168,515
---------------- ---------------
Totals $ 616,980 $ 886,850
================ ===============
[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 [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
permanent financing were used to repay the bridge financing and the remainder
was used for working capital purposes.
[11] Sale of Stock and Warrants, Vault Management Limited
On June 21, 2000, the Company entered into an agreement with Vault Management
Limited ["Vault"] to purchase between 640,000 and 1,600,000 shares of the
Company's common stock at $.625 per share, which was the closing price per share
of the Company's common stock on May 30, 2000, the date the agreement was
reached.
The agreement would generate a minimum of $400,000 and a maximum of $1 million
in proceeds to the Company. The proceeds would be used for general working
capital purposes.
F-20
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
[11] Sale of Stock and Warrants, Vault Management Limited [Continued]
The agreement also called for the equivalent number of the Company's detachable
five-year warrants to be issued to Vault at an exercise price of $.625 per
share. The agreement provided that Vault shall have the option to make payments
beyond the required $400,000 in $200,000 installments each on August 31, 2000,
October 31, 2000 and November 30, 2000. Vault did not exercise its option to
make a payment of $200,000 on August 31, 2000, October 31, 2000 or November 30,
2000. The decision not to exercise Vault's options was mutually agreed upon by
Vault and the Company.
As part of the Vault transaction, the Company also agreed to modify the terms of
the Care Note such that the semi-annual principal payment of $500,000 due and
payable on September 30, 2000 shall be due and payable as to $250,000 on
September 30, 2000 and as to $250,000 on December 31, 2000. The Company received
the $250,000 payment on September 29, 2000. The Company did not receive the
payment due on December 31, 2000 [See Note 8]. Mr. Mark Johnston, the Company's
Chairman and Interim Chief Financial Officer at the time, was a director of both
Vault and Care.
[12] 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 2000, 1999 and 1998 were approximately $77,400, $70,300 and $53,200,
respectively.
[13] 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 $3,000,000 at December 31,
2000 and 1999, 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.
[14] Segment Information
At March 31, 2000, the Company merged the management teams and infrastructures
of its two business units to improve customer service. The Company will continue
to separately assess the performance of each of these products.
At December 31, 1999, the Company's two business units had distinct management
teams and infrastructures that offered different products and services which
were 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.
F-21
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
[14] Segment Information [Continued]
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.
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, 2000
-----------------------------------------------------------
Classic TAS Care Consolidated
Revenues $ 6,772 $ 1,191 $ -- $ 7,963
Operating Profit [Loss] 1,787 (4,432) -- (2,645)
Interest Expense 327 58 -- 385
Interest Income (100) (18) -- (118)
Depreciation and Amortization 59 992 -- 1,051
Capital Expenditures 12 11 -- 23
Capitalized Software Expenditures -- -- -- --
Total Assets 4,372 769 -- 5,141
(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
F-22
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
[14] Segment Information [Continued]
Major Customers - The Company had a portion of its revenues from one major
customer in 2000, three major customers in 1999 and four major customers in
1998:
Y e a r s e n d e d
-------------------------------------------------------------------------------
D e c e m b e r 3 1,
-------------------------------------------------------------------------------
Customer 2 0 0 0 1 9 9 9 1 9 9 8
-------- ------- ------- -------
Classic TAS Classic TAS Classic TAS
------- --- ------- --- ------- ---
Accident Fund $ -- $ 905,475 $ -- $ -- $ -- $ 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,
-------------------------------------------
2 0 0 0 1 9 9 9 1 9 9 8
------- ------- -------
United Kingdom $ 284 $ 1,336 $ 1,900
United States 7,679 9,692 10,368
-------------- ------------ -------------
Total Sales $ 7,963 $ 11,028 $ 12,268
============== ============ =============
[15] Selected Quarterly Financial Data [Unaudited]
The following is a summary of the selected quarterly financial data for the
year ended December 31, 2000:
Quarter
-----------------------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
Fiscal 2000:
Total Revenues $2,279 $1,555 $2,233 $1,896
Operating [Loss] (725) (907) (137) (876)
Net [Loss] (778) (999) (215) (420)
Basic and Diluted Earnings [Loss] Per
Common Share $(0.05) $(0.06) $(0.01) $(0.02)
====== ====== ====== ======
F-23
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17
[16] New Authoritative Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ["SFAS 133"],"Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 [as amended by SFAS 138 in June
2000] establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that the
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. In July 1999, the Financial Account Standards Board
issued SFAS No. 137 ["SFAS 137"], "Accounting for Derivative Instruments and
Hedging Activities-Deferral of Effective Date of SFAS 133." SFAS 137 deferred
the effective date of SFAS 133 until the first quarter of fiscal years beginning
after June 15, 2000. The Company does not currently hold derivative instruments
or engage in hedging activities. The Company expects the adoption of SFAS 133,
SFAS 137 and SFAS 138 will not have a material impact on its financial
statements and related disclosures.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ["SAB 101"], "Revenue Recognition in Financial Statements." SAB
101 provides guidance on applying accounting principles generally accepted in
the United States to revenue recognition in financial statements and is
effective in the fourth quarter of all fiscal years beginning after December 15,
1999. The Company's accounting policies are consistent with the requirements of
SAB 101, so the implementation of SAB 101 did not have an impact on the
Company's operating results.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ["FIN 44"], "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of APB Opinion No. 25. FIN 44 is
effective for transactions occurring after July 1, 2000. The application of FIN
44 did not have a material impact on the Company's financial statements.
. . . . . . . . . .
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, 2000 $ 3,084,571 $ 899,240 $ -- $ 3,983,811
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
Allowance for Doubtful Accounts:
Year Ended December 31, 2000 $ 1,730,249 $ (333,222) $ (408,141) $ 1,805,168
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
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: March 30, 2001 By: /s/ John Roblin
-----------------------------------------
John Roblin
Chairman of the Board of Directors,
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/ John Roblin Chairman of the Board of Directors, March 30, 2001
- ------------------------------------ President and Chief Executive Officer
John Roblin (Principal Executive Officer)
/s/ Ann F. Roblin Chief Financial Officer and March 30, 2001
- ------------------------------------ Controller (Principal Financial
Ann F. Massey Officer and Principal Accounting
Officer)
/s/ Earl Gallegos Director March 28, 2001
- ------------------------------------
Earl Gallegos
/s/ Mark D. Johnston Director March 30, 2001
- ------------------------------------
Mark D. Johnston
/s/ Ian J. Meredith Director March 27, 2001
- ------------------------------------
Ian J. Meredith
/s/ James R. Stallard Director March 28, 2001
- ------------------------------------
James R. Stallard
EXHIBIT INDEX
10(e)(2) Modification to Lease, dated February 23, 1994, by and between
the Registrant and Polevoy Associates.
10(e)(3) Second Modification to Lease, dated April 12, 2000, by and
between the Registrant and Polevoy Associates.
23 Consent of Moore Stephens, P.C.