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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002 Commission File Number 0-13124
------------------ -------
COVER-ALL TECHNOLOGIES INC.
---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 13-2698053
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
18-01 Pollitt Drive
Fair Lawn, New Jersey 07410
-------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (201) 794-4800
--------------
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 and 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
--- ---
Number of shares outstanding at November 4, 2002:
15,335,718 shares of Common Stock, par value $.01 per share.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002.
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 (Unaudited)
and December 31, 2001 (Audited).................................................. 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2001 (Unaudited)............................. 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 (Unaudited)............................. 6
Notes to Consolidated Financial Statements (Unaudited)........................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 13
Item 3. Qualitative and Quantitative Disclosures
About Market Risk................................................................ 15
Item 4. Controls and Procedures.......................................................... 15
PART II: OTHER INFORMATION..................................................................... 16
Item 2. Changes in Securities and Use of Proceeds........................................ 16
Item 6. Exhibits and Reports on Form 8-K................................................. 16
SIGNATURES..................................................................................... 17
ADDENDUM: SARBANES-OXLEY SECTION 302(a) CERTIFICATIONS
Certification of John Roblin.............................................................. 18
Certification of Ann Massey............................................................... 19
2
PART I: FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
--------------------
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
---------------- ---------------
(UNAUDITED) (AUDITED)
ASSETS:
Current Assets:
Cash and Cash Equivalents......................................... $ 294,536 $ 430,545
Accounts Receivable (Less Allowance for Doubtful Accounts
of $25,000 and $25,000 in 2002 and 2001, respectively)......... 794,026 1,007,194
Other Receivable.................................................. 1,668 5,101
Prepaid Expenses.................................................. 440,676 306,999
---------------- ---------------
Total Current Assets.............................................. 1,530,906 1,749,839
---------------- ---------------
Property and Equipment-- At Cost:
Furniture, Fixtures and Equipment................................. 1,303,006 1,286,122
Less: Accumulated Depreciation................................... (1,133,617) (1,054,968)
---------------- ---------------
Property and Equipment-- Net....................................... 169,389 231,154
---------------- ---------------
Capitalized Software (Less Accumulated Amortization of
$5,461,015 and $4,844,612, respectively).......................... 1,358,791 1,202,818
---------------- ---------------
Deferred Financing Costs (Net of Accumulated Amortization of
$34,054 and $13,364, respectively)................................ 207,256 173,726
---------------- ---------------
Other Assets......................................................... 59,335 59,335
---------------- ---------------
Total Assets...................................................... $ 3,325,677 $ 3,416,872
================ ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
3
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------------- --------------------
(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable.................................................. $ 522,025 $ 582,522
Accrued Liabilities............................................... 302,278 442,524
Obligation Under Capital Lease.................................... -- 17,980
Unearned Revenue.................................................. 1,652,510 1,821,221
--------------- ---------------
Total Current Liabilities......................................... 2,476,813 2,864,247
--------------- ---------------
Long-Term Liabilities:
Convertible Debentures............................................ 2,500,000 1,800,000
--------------- ---------------
Total Long-Term Liabilities....................................... 2,500,000 1,800,000
--------------- ---------------
Total Liabilities................................................. 4,976,813 4,664,247
--------------- ---------------
Commitments and Contingencies........................................ -- --
--------------- ---------------
Stockholders' Equity (Deficit):
Common Stock, $.01 Par Value, Authorized 75,000,000 Shares,
17,835,718 and 17,835,718 Shares Issued and 15,335,718 and
15,335,718 Shares Outstanding, Respectively..................... 178,357 178,357
Capital In Excess of Par Value....................................... 26,147,517 26,130,604
Accumulated Deficit.................................................. (27,274,010) (26,853,336)
Treasury Stock - At Cost - 2,500,000 Shares.......................... (703,000) (703,000)
--------------- ---------------
Total Stockholders' Equity (Deficit)................................. (1,651,136) (1,247,375)
--------------- ---------------
Total Liabilities and Stockholders' Equity (Deficit)................. $ 3,325,677 $ 3,416,872
=============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
4
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
REVENUES:
Licenses.................................. $ 72,000 $ 30,000 $ 408,500 $ 236,000
Maintenance............................... 1,096,332 1,109,082 3,280,971 3,234,269
Professional Services..................... 163,385 258,495 692,448 984,153
Applications Service Provider ("ASP")
Services................................ 132,870 130,881 379,804 265,371
------------- ------------- ------------- -------------
TOTAL REVENUES............................ 1,464,587 1,528,458 4,761,723 4,719,793
------------- ------------- ------------- -------------
COST OF REVENUES:
Licenses.................................. 319,435 338,344 925,424 1,046,810
Maintenance............................... 570,012 628,629 1,585,590 2,012,481
Professional Services..................... 68,969 172,326 319,311 549,880
ASP Services.............................. 77,204 75,055 162,907 163,651
------------- ------------- ------------- -------------
TOTAL COST OF REVENUES.................... 1,035,620 1,214,354 2,993,232 3,772,822
------------- ------------- ------------- -------------
DIRECT MARGIN............................. 428,967 314,104 1,768,491 946,971
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Sales and Marketing....................... 186,337 306,758 696,759 977,675
General and Administrative................ 348,420 334,268 930,404 1,038,269
Research and Development.................. 204,881 105,882 444,697 312,079
Allowance for Doubtful Accounts........... -- 25,000 -- (58,162)
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES.................. 739,638 771,908 2,071,860 2,269,861
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS)................... (310,671) (457,804) (303,369) (1,322,890)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Other Income.............................. -- -- -- 225,127
Interest Expense.......................... (43,927) (38,786) (118,109) (228,019)
Interest Income........................... 65 1,405 804 14,255
------------- ------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSE).............. (43,862) (37,381) (117,305) 11,363
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAX
BENEFIT................................. (354,533) (495,185) (420,674) (1,311,527)
INCOME TAX BENEFIT............................. -- -- -- 536,000
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEMS..................................... $ (354,533) $ (495,185) $ (420,674) $ (775,527)
EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF
DEBT (NET OF INCOME TAX OF $536,000)...... -- -- -- 804,000
------------- ------------- ------------- -------------
NET INCOME (LOSS).............................. $ (354,533) $ (495,185) $ (420,674) $ 28,473
============= ============= ============= =============
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON
SHARE BEFORE EXTRAORDINARY ITEMS.......... $ (0.02) $ (0.03) $ (0.03) $ (0.05)
============= ============= ============= =============
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON
SHARE..................................... $ (0.02) $ (0.03) $ (0.03) $ 0.00
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR BASIC
EARNINGS (LOSS) PER COMMON SHARE.......... 15,336,000 15,284,000 15,336,000 15,216,000
============= ============= ============= =============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
5
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)................................................... $ (420,674) $ 28,473
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided From (Used For) Operating Activities:
Depreciation................................................. 78,649 112,655
Amortization of Capitalized Software......................... 616,403 685,624
Amortization of Deferred Financing Costs..................... 20,690 6,682
Gain on Extinguishment of Convertible Debentures............. -- (1,340,000)
Provision for Uncollectible Accounts......................... -- (58,162)
Non-cash Financing Cost...................................... 16,913 --
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable.......................................... 213,168 1,502,581
Prepaid Expenses............................................. (133,677) 42,958
Other Receivable............................................. 3,433 285,000
Increase (Decrease) in:
Accounts Payable............................................. (60,497) (251,020)
Accrued Liabilities.......................................... (140,246) (280,771)
Unearned Revenue............................................. (168,711) (112,887)
------------- -------------
Net Cash Provided From Operating Activities......................... 25,451 621,133
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures................................................ (16,884) (65,266)
Capitalized Software Expenditures................................... (772,376) (665,634)
------------- -------------
Net Cash (Used For) Provided From Investing Activities.............. (789,260) (730,900)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Convertible Debentures................................ 700,000 1,800,000
Payment on Convertible Debentures................................... -- (1,660,000)
Deferred Financing Costs............................................ (54,220) (187,089)
Net Proceeds from Issuance of Common Stock.......................... -- 68,000
Principal Payments on Capital Lease................................. (17,980) (47,841)
------------- -------------
Net Cash Provided From (Used For) Financing Activities.............. 627,800 (26,930)
------------- -------------
CHANGE IN CASH AND CASH EQUIVALENTS....................................... (136,009) (136,697)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD........................... 430,545 421,938
------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD................................. $ 294,536 $ 285,241
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIODS FOR:
Interest............................................................ $ 118,109 $ 228,019
Income Taxes........................................................ -- --
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
6
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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[1] GENERAL
For a summary of significant accounting policies, refer to Note 1 of Notes to
Consolidated Financial Statements included in Cover-All Technologies Inc.'s (the
"Company") Annual Report on Form 10-K for the year ended December 31, 2001.
While the Company believes that the disclosures herein presented are adequate to
make the information not misleading, these consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest annual report. Certain amounts
for the prior period have been reclassified to conform with the current period's
financial statement presentation. The financial statements include on a
consolidated basis the results of all subsidiaries. All material intercompany
transactions have been eliminated.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments which are necessary to present fairly the Company's
consolidated financial position as of September 30, 2002, and the results of
their operations for the three and nine month periods ended September 30, 2002
and 2001, and their cash flows for the nine month periods ended September 30,
2002 and 2001. Such adjustments are of a normal and recurring nature. The
results of operations for the three and nine month periods ended September 30,
2002 and 2001 are not necessarily indicative of the results to be expected for a
full year.
[2] CONVERTIBLE DEBENTURES
On March 31, 1997, the Company sold $3,000,000 of 12.5% Convertible Debentures
due March 2002 to an institutional investor. The debentures were sold at face
value, paid interest quarterly and were convertible, in whole or in part, into
shares of common stock of the Company at $1.25 per share, subject to adjustment.
On June 28, 2001, the Company raised $1,800,000 through a private placement of
8.00% convertible debentures with investors headed by the Renaissance Capital
Group, Inc. ("Renaissance") of Dallas, Texas. An aggregate of $1,400,000 was
sold to the Renaissance US Growth and Income Trust PLC (traded on the London
Stock Exchange) and BFS US Special Opportunities Trust PLC, which are managed by
Renaissance. Also, an aggregate of $400,000 was sold to three other private
investors including John Roblin, Chairman of the Board, President and Chief
Executive Officer of the Company. The related financing costs incurred of
$187,090 in connection with establishing these debentures have been deferred and
are being amortized over the life of the debt.
Immediately upon its receipt of the funds, the Company used $1,660,000 of the
proceeds to fully settle its $3,000,000 principal amount 12.5% convertible
debentures, due in 2002. The remainder of the funds raised from the transaction
were to be used for working capital purposes. The Company recognized an
extraordinary gain on the extinguishment of debt of $804,000, net of income
taxes of $536,000, in June 2001. The new debentures, maturing in 2008, are
convertible into shares of the Company's common stock initially at $0.50 per
share, subject to adjustment in accordance with the terms of the parties'
respective loan agreements. Pursuant to the terms of the convertible debentures
issued in June 2001, the issuance of an additional $700,000 of 8.00% convertible
debentures in August 2002 (discussed below) caused a reduction in the conversion
price of those convertible debentures from $.50 per share to $0.30 per share.
As of September 30, 2001 and December 31, 2001, the Company was not in
compliance with the financial covenants of the Convertible Loan Agreements
pursuant to which an aggregate of $1.8 million of 8% convertible debentures were
issued and sold by the Company in June 2001 (as amended to date, the "Loan
Agreements"). On September 30, 2001, the Company received Limited Waivers to the
Loan Agreements under which the holders waived the Company's non-compliance that
existed up through and including September 30, 2001 under the financial covenant
in the Loan Agreements. On December 31, 2001, the Company received a similar
waiver to the Loan Agreements under which the holders waived the Company's
non-compliance that existed up through and including December 31, 2001.
In March 2002, the holders under the Loan Agreements agreed to an amendment of
the Loan Agreements pursuant to which one of the financial covenants was amended
for the quarters ending March 31, June 30 and September 30, 2002. As
consideration for such amendments, the Company issued to such holders an
aggregate of 128,572 warrants to purchase such number of shares of the Company's
Common Stock at an exercise price of $0.22 per
7
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
share. The warrants shall expire in five years and shall become exercisable in
equal installments on each of March 31, 2002, June 30, 2002 and September 30,
2002, respectively. The $16,913 estimated fair market value of the warrants have
been charged to deferred financing costs and will be amortized over the
amendment period.
On August 21, 2002, the Company, by amendment to the Loan Agreements, raised an
additional $700,000 through a private placement of 8% convertible debentures
with Renaissance. An aggregate of $700,000 was sold to Renaissance US Growth and
Income Trust PLC and BFSUS Special Opportunities Trust PLC. The funds raised
from the transaction will be used for working capital purposes. The new
debentures, maturing in 2009, are convertible into shares of the Company's
common stock, initially at $0.30 per share, subject to adjustments in accordance
with the terms of the debentures. The related financing costs incurred of
$54,220 in connection with establishing these debentures have been deferred and
are being amortized over the life of the debt.
As of September 30, 2002, the Company was not in compliance with the financial
covenants of the Loan Agreements. On September 30, 2002, the Company received
Limited Waivers to the Loan Agreements under which the holders waived the
Company's non-compliance that existed up through and including September 30,
2002 under the financial covenants in the Loan Agreements.
[3] SEGMENT INFORMATION
At March 31, 2000, the Company merged the management teams and infrastructures
of its two business units, Classic and TAS, to improve customer service. The
Company will continue to separately assess the performance of each of these
products.
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)
THREE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------------------------
CLASSIC TAS CONSOLIDATED
-------------- --------------- ------------------
Revenues..................................... $ 1,303 $ 162 $ 1,465
Operating Profit (Loss)...................... (41) (270) (311)
Interest Income.............................. -- -- --
Interest Expense............................. 39 5 44
Depreciation and Amortization................ 93 161 254
Capital Expenditures......................... 3 -- 3
Capitalized Software Expenditures............ 197 -- 197
Income (Loss) before Income Tax Benefit...... (80) (275) (355)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------------------------
CLASSIC TAS CONSOLIDATED
-------------- --------------- ------------------
Revenues..................................... $ 4,155 $ 607 $ 4,762
Operating Profit (Loss)...................... 443 (746) (303)
Interest Income.............................. 1 -- 1
Interest Expense............................. 104 14 118
Depreciation and Amortization................ 220 496 716
Capital Expenditures......................... 16 1 17
Capitalized Software Expenditures............ 772 -- 772
Income (Loss) before Income Tax Benefit...... 340 (761) (421)
8
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------------------------
CLASSIC TAS CONSOLIDATED
-------------- --------------- ------------------
Revenues..................................... $ 1,339 $ 189 $ 1,528
Operating Profit (Loss)...................... 171 (629) (458)
Interest Income.............................. 1 -- 1
Interest Expense............................. 34 5 39
Depreciation and Amortization................ 24 255 279
Capital Expenditures......................... 4 -- 4
Capitalized Software Expenditures............ -- 167 167
Income (Loss) before Income Tax Benefit...... 138 (633) (495)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------------------------
CLASSIC TAS CONSOLIDATED
-------------- --------------- ------------------
Revenues..................................... $ 4,203 $ 517 $ 4,720
Operating Profit (Loss)...................... 599 (1,922) (1,323)
Interest Income.............................. 13 1 14
Interest Expense............................. 204 24 228
Depreciation and Amortization................ 62 743 805
Capital Expenditures......................... 59 6 65
Capitalized Software Expenditures............ -- 666 666
Income (Loss) before Income Tax Benefit...... 408 (1,719) (1,311)
9
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
[4] EARNINGS PER SHARE DISCLOSURES
The following is a reconciliation of the numerator and denominator of the basic
and diluted earnings per share ("EPS") computations:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ------------------ --------------
Basic EPS:
Income Available to Common
Stockholders...................................... $(354,533) 15,335,718 $ (0.02)
Effect of Dilutive Securities:
Options............................................ -- -- --
Warrants........................................... -- -- --
---------- ---------- ----------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions......................... $(354,533) 15,335,718 $ (0.02)
========== ========== ==========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ------------------ --------------
Basic EPS:
Income Available to Common
Stockholders...................................... $(420,674) 15,335,718 $ (0.03)
Effect of Dilutive Securities:
Options............................................ -- -- --
Warrants........................................... -- -- --
---------- ---------- ----------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions......................... $(420,674) 15,335,718 $ (0.03)
========== ========== ==========
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ------------------ --------------
Basic EPS:
Income Available to Common
Stockholders...................................... $(495,185) 15,283,643 $ (0.03)
Effect of Dilutive Securities:
Options............................................ -- -- --
Warrants........................................... -- -- --
---------- ---------- ----------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions......................... $(495,185) 15,283,643 $ (0.03)
========== ========== ==========
10
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ------------------ --------------
Basic EPS:
Income Available to Common
Stockholders...................................... $ 28,473 15,215,704 $ 0.00
Effect of Dilutive Securities:
Options............................................ -- 4,228 --
Warrants........................................... -- -- --
---------- ---------- ----------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions......................... $ 28,473 15,219,932 $ 0.00
========== ========== ==========
The Company's options and warrants were not included in the computation of EPS
for the periods ended September 30, 2002 because to do so would be antidilutive.
The Company's convertible debt does not affect the EPS calculation for the
periods ended September 30, 2002 because it would be antidilutive.
Options to purchase 2,567,750 shares of common stock at prices ranging from $.34
to $4.00 per share were outstanding at September 30, 2001, but were not included
in the computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares for the period
($.34). The Company's convertible debt does not affect the EPS calculation for
the periods ended September 30, 2001 because it would be antidilutive.
[5] OTHER INCOME
Other income is comprised of a settlement of an outstanding customer dispute and
a favorable resolution of a liability related to the customer dispute.
[6] EXTRAORDINARY ITEMS
On June 28, 2001, the Company settled its $3,000,000 principal amount 12.5%
convertible debentures due in 2002 for $1,660,000. The transaction resulted in
an extraordinary gain of $804,000, net of income taxes of $536,000. Earnings per
share for the extraordinary gain was $.05.
11
ITEM 2:
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Total revenues for the three months ended September 30, 2002 were $1,465,000 as
compared to $1,528,000 for the same period in 2001. License fees were $72,000
for the three months ended September 30, 2002 compared to $30,000 in the same
period in 2001, as a result of new product sales in the third quarter of 2002.
For the three months ended September 30, 2002, maintenance revenues were
$1,096,000 compared to $1,109,000 in the same period of the prior year.
Professional services revenue contributed $163,000 in the three months ended
September 30, 2002 compared to $258,000 in the third quarter of 2001. For the
three months ended September 30, 2002, ASP revenues were $133,000 as compared to
$131,000 in the same period in the prior year. Total Classic revenues were
$1,303,000 for the three months ended September 30, 2002 as compared to
$1,339,000 for the three months ended September 30, 2001. Total TAS 2000
revenues were $162,000 for the three months ended September 30, 2001 as compared
to $189,000 for the three months ended September 30, 2001. For the nine months
ended September 30, 2002, total revenues were $4,762,000 compared to $4,720,000
in the same period of the prior year. Total Classic revenues were $4,155,000 for
the nine months ended September 30, 2002 as compared to $4,203,000 in the same
period in 2001. Total TAS 2000 revenues were $607,000 for the first nine months
of 2002 as compared to $517,000 in the same period in 2001.
Cost of sales decreased to $1,036,000 and $2,993,000 for the three and nine
months ended September 30, 2002 as compared to $1,214,000 and $3,773,000 for the
same periods in 2001 due to staff and other cost reductions in the TAS 2000
division. Non-cash capitalized software amortization was $223,000 and $616,000
for the three and nine months ended September 30, 2002 as compared to $236,000
and $686,000 in the same periods in 2001. The Company capitalized $197,000 and
$772,000 of software development costs in the three and nine months ended
September 30, 2002 as compared to $167,000 and $666,000 in the same periods in
2001.
Research and development expenses were $205,000 and $445,000 for the three and
nine months ended September 30, 2002 compared to $106,000 and $312,000 for the
same periods in 2001. The Company is continuing to enhance the functionality of
its products and to refine its processes in response to customer needs.
Sales and marketing expenses were $186,000 and $697,000 for the three and nine
months ended September 30, 2002 as compared to $307,000 and $978,000 in the same
periods of 2001, primarily due to a decrease in advertising and promotion
expenses in 2002.
General and administrative expenses were $348,000 and $930,000 in the three and
nine months ended September 30, 2002 as compared to $334,000 and $1,038,000 in
the same periods in 2001, primarily due to a decrease in consulting and legal
expenses in the first nine months of 2002.
Other income was none for the three and nine months ended September 30, 2002 as
compared to none and $225,000 in the same periods of 2001 due to the settlement
of an outstanding customer dispute and a favorable resolution of a liability
related to the customer dispute in 2001.
Extraordinary gain on extinguishment of debt was none for the three and nine
months ended September 30, 2002 as compared to none and $804,000, net of income
taxes of $536,000, in the same periods of 2001 due to the settlement of
$3,000,000 principal amount 12.5% convertible debentures due in 2002 for
$1,660,000.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 2002, the Company had a working capital deficit of $(946,000)
compared to a working capital deficit of $(1,156,000) in 2001.
On August 21, 2002, the Company raised $700,000 of permanent financing through
the sale of its 8% convertible debentures with Renaissance. An aggregate of
$700,000 was sold to Renaissance US Growth and Income Trust PLC and BFSUS
Special Opportunities Trust PLC, which are managed by Renaissance. The funds
raised from the
12
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
transaction will be used for working capital purposes. The new debentures,
maturing in 2009, are convertible into shares of the Company's common stock,
initially at $.30 per share, subject to adjustment in accordance with the terms
of the debentures.
The Company believes that its current cash balances and anticipated cash flows
from operations will be sufficient to meet normal operating needs for the
Company in 2002.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
On April 30, 2002, the Financial Accounting Standards Board ("FASB") issued
Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections."
Statement 145 rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of any income tax effect. As a result the criteria in
Opinion No. 30 will now be used to classify those gains and losses. Statement 64
amended Statement 4 and is no longer necessary because Statement 4 has been
rescinded.
Statement 145 amended Statement 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. This amendment is
consistent with the FASB's goal of requiring similar accounting treatment for
transactions that have similar economic effects.
This Statement also makes technical corrections to existing pronouncements.
While those corrections are not substantive in nature, in some instances, they
may change accounting practice.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities."
The Company expects that the adoption of these new statements will not have a
significant impact on its financial statements. It is not possible to quantify
the impact until the newly issued statements have been further studied.
In August 2001, the Financial Accounting Standards Board ("FASB") approved SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144"). The Statement requires that long-lived assets to be disposed of other
than by sale be considered held and used until they are disposed of. SFAS No.
144 requires that long-lived assets to be disposed of by sale be accounted for
under the requirements of SFAS No. 121. SFAS No. 121 requires that such assets
be measured at the lower of carrying amounts or fair value less cost to sell and
to cease depreciation (amortization). SFAS No. 144 requires a
probability-weighted cash flow estimation approach in situations where
alternative courses of action to recover the carrying amount of a long-lived
asset are under consideration or a range of possible future cash flow amounts
are estimated. As a result, discontinued operations will no longer be measured
on a net realizable basis, and future operating losses will no longer be
recognized before they occur. Additionally, goodwill will be removed from the
scope of SFAS No. 144. As a result goodwill will no longer be required to be
allocated to long-lived assets to be tested for impairment. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The Company is
not currently affected by this Statement's requirements.
On August 15, 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 requires that the fair
value of a liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 will be effective for
financial statements issued for fiscal years beginning after June 15, 2002. An
entity shall recognize the cumulative effect of adoption of SFAS No. 143 as a
change in accounting principle. The Company is not currently affected by this
Statement's requirements.
13
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
In June 2001, the FASB issued SFAS No. 141 ("SFAS 141"), "Business
Combinations," and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets,"
collectively referred to as the "Standards." SFAS 141 supersedes Accounting
Principles Board Opinion (APB) No. 16, "Business Combinations." SFAS 141 (1)
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) provides specific criteria for
the initial recognition and measurement of intangible assets apart from goodwill
and (3) requires that unamortized negative goodwill be written off immediately
as an extraordinary gain. SFAS 142 supersedes APB 17, "Intangible Assets," and
is effective for fiscal years beginning after December 15, 2001. SFAS 142
primarily addresses the accounting for goodwill and intangible assets subsequent
to their initial recognition. SFAS 142 (1) prohibits the amortization of
goodwill and indefinite-lived intangible assets, (2) requires testing of
goodwill and indefinite-lived intangible assets on an annual basis for
impairment (and more frequently if the occurrence of an event or circumstance
indicates an impairment), (3) requires that reporting units be identified for
the purpose of assessing potential future impairments of goodwill and (4)
removes the forty-year limitation on the amortization period of intangible
assets that have finite lives. The provisions of the Standards also apply to
equity-method investments made both before and after June 30, 2001. SFAS 141
requires that the unamortized deferred credit related to an excess over cost
arising from an investment acquired prior to July 1, 2001 accounted for using
the equity method (equity-method negative goodwill), must be written-off
immediately and recognized as the cumulative effect of a change in accounting
principle. Equity-method negative goodwill arising from equity investments made
after June 30, 2001 must be written-off immediately and recorded as an
extraordinary gain. The adoption of SFAS 141 did not have a material impact on
the Company's consolidated financial statements. The Company has adopted SFAS
142 on January 1, 2002. The Company does not believe that the adoption of the
SFAS 142 will have a significant impact on its results of operations or
financial position.
14
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
-----------------------------------------------------------
The Company is exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in the market value of its investments.
INTEREST RATE RISK. The Company's exposure to market rate risk for changes in
interest rates relates primarily to the Company's investment portfolio. The
Company has not used derivative financial instruments in its investment
portfolio. The Company invests its excess cash in a major bank money market
account. The Company protects and preserves its invested funds by limiting
default, market and reinvestment risk.
Investments in this account carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Company's
future investment income may fall short of expectations due to changes in
interest rates or the Company may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES.
------------------------
Within the 90 days prior to the date of filing this Quarterly Report on Form
10-Q, the Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and the Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic SEC filings.
Subsequent to the date of that evaluation, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, nor were any corrective actions required
with regard to significant deficiencies and material weaknesses.
* * * * * * * * *
Statements in this Form 10-Q, other than statements of historical information
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks which may cause the
Company's actual results in future periods to differ materially from expected
results. Those risks include, among others, risk associated with increased
competition, customer decisions, delays in productivity programs and new product
introductions, and other business factors beyond the Company's control. Those
and other risks are described in the Company's filings with the Securities and
Exchange Commission ("SEC") over the last 12 months, copies of which are
available from the SEC or may be obtained upon request from the Company.
15
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------------------------------------------
In August 2002, the Company issued $700,000 in aggregate principal amount of its
8.00% Convertible Debentures due 2009 to Renaissance Capital Growth & Income
Trust PLC and BFSUS Special Opportunities Trust PLC. The debentures are
convertible into shares of the Company's common stock initially at $.30 per
share, subject to adjustment according to their terms. The funds raised from the
transaction will be used for general working capital purposes. The sale of the
debentures was exempt from registration under Section 4(2) of the Securities Act
of 1933 because the offer and sales were made to a limited number of investors
in a private transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits.
---------
10(o)(5) Limited Waiver to Convertible Loan Agreements, dated as of
September 30, 2002, by Renaissance US Growth & Income Trust
PLC and BFSUS Special Opportunities Trust PLC.
99.1 Certification of John W. Roblin pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification of Ann Massey pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K.
---------------------
On August 23, 2002, the Company filed a Form 8-K under Item 5 to disclose
the announcement of the consummation of the sale and issuance to certain
lenders of an aggregate of $700,000 of 8% Convertible Debentures, due
2009.
16
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVER-ALL TECHNOLOGIES INC.
Date: November 13, 2002 By: /s/ John Roblin
------------------------------------
John Roblin, Chairman of the Board
of Directors, President and Chief
Executive Officer
Date: November 13, 2002 By: /s/ Ann Massey
------------------------------------
Ann Massey, Chief Financial Officer
17
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, John Roblin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cover-All
Technologies Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ John Roblin
- -----------------------------------
John Roblin
President and Chief Executive Officer
18
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
I, Ann Massey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cover-All
Technologies Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this quarterly
report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal controls;
and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Ann Massey
- -------------------------------
Ann Massey
Chief Financial Officer
19