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, 2002
Commission file number 0-13124
COVER-ALL TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-2698053
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18-01 Pollitt Drive, Fair Lawn, New Jersey 07410
(Address of principal executive office) (Zip Code)
(201) 794-4800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Act. YES |_| NO |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter: $3,704,000 as of June 30, 2002 based on the closing price on June 28,
2002
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 15,335,718 shares of common
stock, par value $.01 per share, as of March 17, 2003
Documents Incorporated by Reference:
The definitive Proxy Statement for the 2003 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, 2002.
PART I
Item 1. BUSINESS
GENERAL
We provide state-of-the-art software products and services to the property
and casualty insurance industry. We were incorporated in Delaware in April 1985
as Warner Computer Systems, Inc. and changed our name to Warner Insurance
Services, Inc. in March 1992. In June 1996, we changed our name to Cover-All
Technologies Inc. Our products and services are offered through our wholly-owned
subsidiary, Cover-All Systems, Inc., also a Delaware corporation.
Our software products and services focus on the functions required to
market, rate, issue, print, bill and support the entire life cycle of insurance
policies. Our products and services combine an in-depth knowledge of property
and casualty insurance with innovative solution designs using state-of-the-art
technology. Our products are either available "off-the-shelf" or customized to
specific customer needs. Our software can be licensed for customer use on their
own platforms or can be licensed through our application services provider,
referred to as "ASP," using third party technology platforms and support.
We also provide a wide range of professional services that support product
customization, conversion from existing systems and data integration with other
software or reporting agencies. We also offer on-going support services
including incorporating recent insurance rate and rule changes in our solutions.
These support services also include analyzing the changes, developments, quality
assurance, documentation and distribution of insurance rate and rule changes.
We earn revenue from software contract licenses to new and existing
customers, service fees from ASPs, continuing maintenance fees for servicing the
product and professional services.
PRODUCTS
MY INSURANCE CENTER
In December 2001, we announced the availability of My Insurance Center,
referred to as "MIC," a customizable and configurable Internet portal that was
developed to provide insurance agents, brokers and carriers with integrated
workflows and access to real-time information. MIC links our rating, policy
issuance, billing and other components of our software products into a
fully-integrated platform that eliminates redundant data entry. Information is
stored in a client-centric database and becomes immediately available to other
users or functions. We work with customers to customize MIC to generate user
alerts when a user-specified condition occurs. MIC has been designed to allow
the customer to configure features according to their own look and feel
preferences and workflow processes. For instance, the browser-based user
interface allows employees, agents and other end-users to personalize their
desktops so they see only the information they need or desire.
MIC is built upon the Customer Information database, referred to as "CI,"
that brings together policy, billing and information from other business
functions into an integrated "customer view" that enables better customer
service and coordination. A key component of CI is the Insurance Policy
Database, referred to as "IPD." IPD is a relational database that holds detailed
policy and policy history data for more than forty lines of commercial property
and casualty insurance, and has been designed to bring powerful data access and
reporting capabilities to the desktop.
MIC is being made available to users through an ASP. Combined with our
client-centric database, MIC has an integrated and flexible architecture that is
designed to enable our customers to make rapid business and technological
changes.
MIC offers the following features and benefits:
o DATA INTEGRATION - IPD is an integrated data repository that
provides information to MIC quickly and inexpensively. Data is
shared by multiple software components to help integrate
business functions, manage workflow and avoid duplicate data
problems.
o APPLICATION INTEGRATION; SINGLE SIGN-ON - MIC allows the end
user to switch back and forth among applications without
having to log in to individual applications, a feature which
increases a user's productivity. MIC provides a consolidated
view of data from different software components and provides
hotlinks so that a customer can connect quickly to the
specific module of the specific system.
o BROAD ACCESSIBILITY - MIC is an Internet application, which
utilizes a sophisticated portal capability.
o INTEGRATED DATA REPRESENTATION - MIC provides a consolidated
view of information.
o PERSONALIZATION AND CUSTOMIZATION - MIC allows each user to
personalize his or her view similar to other Internet portals,
to meet the needs and the stylistic preferences of each
individual user. MIC personalization allows one to hide or
show content, filter the content and also change color and
page styles. Customization in MIC allows the host to control
the accessibility to content for each user and also
facilitates changes to content in MIC as business needs
change, without additional programming.
o SECURITY - MIC can be configured to achieve appropriate levels
of security on data transfer over the Internet. MIC is also
designed to adapt almost any organizational hierarchy and data
level security needs with minimal set-up effort by the
customer.
MIC utilizes Oracle(R) 9iAS Portal Server.
The design of MIC enables us to market the functions of Classic and TAS
2000 (which are described below) in "custom groupings," or as a service in an
ASP environment, depending on customer needs.
THE CLASSIC PRODUCT LINE
In December 1989, we purchased the assets related to the exclusive
proprietary rights to a PC-based software application for policy rating and
issuance for property and casualty insurance companies. This software uses a
unique design that separates the "insurance product definition" from the actual
technology "engines." The sophistication of this design has enabled us to stay
current with technology innovations while preserving our "insurance knowledge"
investment. This concept has evolved into what is known today as the Classic
product.
The Classic product line supports the following functions:
o Data capture and editing
o Rating
o Policy issuance including multiple recipient print
- 2 -
o All policy transactions including quotes, new lines,
endorsements, renewals, audits and cancellations
o Policy database
The Classic product was designed to accommodate all lines of property and
casualty insurance. It is especially effective in coping with the complexity and
variability of commercial lines of insurance. Today we offer off-the-shelf
support for more than 40 lines of commercial business in virtually all states
and Puerto Rico. Our extensive experience in creating custom products combined
with our proprietary tool set enables us to deliver support for new insurance
products in short time frames.
We developed significant new functionality in Classic in 2001 by making
Insurance Policy Database, referred to as "IPD," available to our customers. IPD
is designed to provide a sophisticated data repository based upon insurance
industry data standards that would enable Classic customers easy and immediate
access to their policy information. IPD is also a key component of MIC, and IPD
enables us and our customers to build sophisticated interfaces to other software
components.
We designed the Classic product to reduce the complexity of the insurance
process for the user. 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 local area network, referred to as a "LAN," or over the
Internet using a browser.
We originally developed the Classic software using the MicroFocus COBOL
language, and we upgraded this product line for use in the Windows 95, Windows
98 and NT operating systems. During 1999, we further upgraded the Classic
product to use a graphical user interface. Since 2000, Classic has also been
implemented in an Internet environment, which enables our customers to offer
remote access to their customers or partners. The Internet is also the platform
utilized by our ASP offering. Early implementations over the Internet utilized
Citrix. During the latter part of 2002, we developed a new "presentation layer"
incorporating the latest technologies, such as Java and XML, to provide a very
flexible and robust user interface over the Internet without Citrix. This new
capability is expected to be introduced in 2003.
The Classic Rating and Policy Issuance Product has been and continues to
be enhanced and updated with new technology. The sophisticated design of the
product isolates insurance product knowledge from the application itself in
datafiles, referred to as "Metadata." We have built an extensive knowledge base,
estimated at more than 100 person-years of effort, in this Metadata that defines
the details of virtually hundreds of insurance policy types and coverages for
the Classic product.
The Classic product line brings to the customer the following functions,
features and capabilities:
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 Commercial Lines Manual Tables and Footnotes
o Easy and direct system navigation
o Standard ISO (Insurance Service Office) coverages and rates
support
o Company customized coverages and rates support
o Fully automated recipient-driven issuance of insurance
policies, worksheets, ID cards, etc., including print preview
o Policy database
o Help desk assistance
- 3 -
The design of Classic also allows us to stay current with changes in
technology while re-using the intellectual capital invested in the insurance
rules. Our upgrading the Classic product line to run on a LAN has enabled
multiple users to contribute to the common data store. We have invested in
additional upgrades to newer Internet technologies. We have also integrated this
product to the CI database and MIC. Cover-All has streamlined the support
process with the goal to improve quality to our customers.
The Classic product is in use in over 50 companies. Total Classic revenues
were $5,719,000 for 2002 as compared to $5,585,000 for 2001 and $6,772,000 for
2000.
TAS 2000
Since 1993, we have been developing a second product line supporting
property and casualty insurance known as Total Administrative Solution, referred
to as "TAS 2000." We have developed a suite of functionality within the TAS 2000
product, including billing, full policy life-cycle support, Customer
Relationship Management, referred to as "CRM," and financial and statistical
reporting. The entire suite of functional components is fully integrated through
a client-centric Oracle database.
These components are also being marketed separately and are being
integrated with MIC and Classic for deployment in the ASP and in other new
product or service offerings currently being developed. Utilizing MIC, Classic
and the TAS 2000 components, we can deliver a fully integrated platform for
quoting and rating, policy issuance, policy administration, billing, and
reporting.
The TAS 2000 product line was designed to bring new technology and
additional functional capability to the property and casualty insurance
industry. 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 by the customer. This is designed to
reduce the customer's 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. These functional components
have also been built out and implemented for workers compensation. This product
suite is known as TAS Comp.
All TAS 2000 products were developed to allow companies to take advantage
of the power of distributed processing and the flexibility of the Internet. TAS
2000 enables companies that are growing or want to add greater functionality to
"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 according to the changing demands of
their organizations.
The TAS 2000 product line currently includes the following application
modules:
- 4 -
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 using a browser over the Internet. TAS 2000 can be used on many
different client/server hardware platforms and offers the capability to process
the voluminous transactions that are common to large-scale insurance operations.
Total TAS 2000 revenues were $2,423,000 for 2002, $678,000 for 2001 and
$1,191,000 for 2000.
PRODUCTS AND SERVICES IN DEVELOPMENT
We have, through MIC, Classic and TAS 2000 components, a deep inventory of
insurance software components combined with a sophisticated implementation
platform. We expect to utilize these capabilities to expand and leverage our
ability to respond to broadening marketplace and new customer opportunities with
solutions that address the special needs of carriers, managing general agents,
agents, brokers and third party providers with both off-the-shelf and custom
solutions. Our user interface capabilities of the MIC product are being enhanced
with more functionality as well as the addition of highly sophisticated
web-services and information access tools. We also intend to continue to enhance
our functional components based upon market demand, existing customer needs and
changes in technology (for example, support for personal digital assistants, or
PDAs), especially Internet technologies.
We are also increasing and enhancing our services portfolio. We have
expanded our professional services with conversion and interface offerings. We
are developing new rule-based capabilities to enable us to implement data
exchange services that will save our customers time and effort converting to our
products or linking our products to existing systems. Our ASP will continue to
be enhanced with additional functionality and customer options.
COMPETITION
The computer software and services industry is highly competitive. Because
of our extensive knowledge-base in the insurance industry, however, we believe
that our products offer customers certain advantages not available from our
competitors. Our customers have access to our extensive experience and software
inventory in the area of rating and policy issuance of commercial lines
policies, among the most complex of insurance transactions.
There are a number of larger companies, including computer software,
services and outsourcing companies, consulting firms, computer manufacturers and
insurance companies that have greater financial resources than we have and
possess the technological ability to develop software products similar to those
we offer. These companies represent a significant competitive challenge to our
business. Very large insurers that internally develop systems similar to ours
may or may not become our major customers for software or services. We compete
on the basis of our insurance knowledge, products, service, price, system
functionality and performance and technological advances.
- 5 -
MARKETING
We maintain a sales and marketing staff at our principal executive offices
in Fair Lawn, New Jersey. We also utilize distributors, outside consultants and
other complimentary service providers to market our products. We are continuing
to redesign our Internet site and establish linkages to portals and other web
sites. This is an on-going effort that will expand rapidly in 2003 as we focus
on the Internet as the primary source of information about our products and
services. We also participate in and display and demonstrate our software
products at industry trade shows.
RESEARCH AND DEVELOPMENT
Our business is characterized by rapid business and technological change.
We believe our success will depend, in part, on our ability to meet the new
needs of our customers and the marketplace as well as continuing to enhance our
products based on new technologies. Accordingly, we must maintain ongoing
research and development programs to continually add value to our suite of
products, as well as any possible expansion of our product lines.
Research and development expenses for Cover-All were $600,000, $413,000
and $875,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
BACKLOG
We had no license, professional services or maintenance backlog of
unbilled work as of December 31, 2002.
MAJOR CUSTOMERS
The Classic product line is in use in over 50 companies while the TAS 2000
product line is currently in use in one property and casualty insurance company.
For the years ended December 31, 2002, 2001 and 2000, only one of our customers
contributed revenues in excess of 10% of our total revenues. This customer,
Accident Fund, generated 30%, 11% and 11% of our revenues for the years ended
December 31, 2002, 2001 and 2000, respectively.
We had no export sales in 2001 or 2002. In 2000, export sales of
approximately $284,000 were made to a U.K. customer. We are not currently active
in the U.K. market.
EMPLOYEES
We had on average 50 employees during 2002. None of our employees are
represented by a labor union, and we have not experienced any work stoppages. We
believe that relations with our employees are good.
- 6 -
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following risk factors, as well as other
information described elsewhere in this annual report.
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
WE HAVE A HISTORY OF LOSSES AND WE MAY NOT BE PROFITABLE IN THE FUTURE.
Although we reported a profit of approximately $877,000 for the year 2002
and $55,000 for the year 2001, we incurred losses in years before 2001. For
instance, we incurred net losses of approximately $2,412,000 for the year 2000
and $2,820,000 for the year 1999. We have recently begun to invest significantly
in sales and marketing while continuing our efforts of investing in technology
infrastructure and research and development. As a result, we must generate
significant revenues to achieve and maintain profitability. We may not be able
to sustain profitability on an annual basis in the future.
WE MAY NEED ADDITIONAL FINANCING IN ORDER TO CONTINUE TO DEVELOP OUR
BUSINESS.
In 2002, we completed a debt financing through the sale of additional 8%
convertible debentures due in 2009. We will need additional financing to
continue to fund the research and development of our software products and to
expand and grow our business generally. To the extent that we will be required
to fund operating losses, our financial position would deteriorate. We may not
be able to find significant additional financing at all or on terms favorable to
us. If equity securities are issued in connection with a financing, dilution to
our stockholders may result, and if additional funds are raised through the
incurrence of debt, we may be subject to further restrictions on our operations
and finances. Furthermore, if we do incur additional debt, we may be limiting
our ability to repurchase capital stock, engage in mergers, consolidations,
acquisitions and asset sales, or alter our lines of business, even though these
actions might otherwise benefit our business. As of December 31, 2002, we had a
net stockholders' deficit of approximately $(354,000) and a net working capital
of approximately $336,000.
WE DEPEND ON PRODUCT DEVELOPMENT IN ORDER TO REMAIN COMPETITIVE IN OUR
INDUSTRY.
We are currently investing resources in product development and expect to
continue to do so in the future. Our future success will depend on our ability
to continue to enhance our current product line and to continue to develop and
introduce new products that keep pace with competitive product introductions and
technological developments, satisfy diverse and evolving insurance industry
requirements and otherwise achieve market acceptance. We may not be successful
in continuing to develop and market on a timely and cost-effective basis product
enhancements or new products that respond to technological advances by others,
or that these products will achieve market acceptance.
In addition, we have in the past experienced delays in the development,
introduction and marketing of new and enhanced products, and we may experience
similar delays in the future. Any failure by us to anticipate or respond
adequately to changes in technology and insurance industry preferences, or any
significant delays in product development or introduction, would significantly
and adversely affect our business, operating results and financial condition.
OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE, WHICH MAY MAKE IT
DIFFICULT FOR US TO COMPETE.
Our future success will depend upon our ability to increase the number of
insurance companies that license our software products. As a result of the
intense competition in our industry and the rapid
- 7 -
technological changes which characterize it, our products may not achieve
significant market acceptance. Further, insurance companies are typically
characterized by slow decision-making and numerous bureaucratic and
institutional obstacles which will make our efforts to significantly expand our
customer base difficult.
OUR PRODUCTS ARE AFFECTED BY RAPID TECHNOLOGICAL CHANGE AND WE MAY NOT BE
ABLE TO KEEP UP WITH THESE CHANGES.
The demand for our products is impacted by rapid technological advances,
evolving industry standards in computer hardware and software technology,
changing insurance industry requirements and frequent new product introductions
and enhancements that address the evolving needs of the insurance industry. The
process of developing software products such as those we offer is extremely
complex and is expected to become increasingly complex and expensive in the
future with the introduction of new platforms and technologies. The introduction
of products embodying new technologies and the emergence of new industry
standards and practices can render existing products obsolete and unmarketable.
Our future success depends upon our ability to anticipate or respond to
technological advances, emerging industry standards and practices in a timely
and cost-effective manner. We may not be successful in developing and marketing
new products or enhancements to existing products that respond to technological
changes or evolving industry standards. The failure to respond successfully to
these changes and evolving standards on a timely basis, or at all, could have a
detrimental effect on our business, operating results and financial condition.
OUR MARKET IS HIGHLY COMPETITIVE.
Both the computer software and the insurance software systems industries
are highly competitive. There are a number of larger companies, including
computer manufacturers, computer service and software companies and insurance
companies, that have greater financial resources than we have. These companies
currently offer and have the technological ability to develop software products
similar to those offered by us. These companies present a significant
competitive challenge to our business. Because we do not have the same financial
resources as these competitors, we may have a difficult time in the future in
competing with these companies. In addition, very large insurers internally
develop systems similar to our systems and as a result, they may not become
customers of our software. We compete on the basis of our insurance knowledge,
products, service, price, system functionality and performance and technological
advances. Although we believe we can continue to compete on the basis of these
factors, some of our current competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than we do. Our current competitors may be able
to:
o undertake more extensive marketing campaigns for their brands and
services;
o devote more resources to product development;
o adopt more aggressive pricing policies; and
o make more attractive offers to potential employees and third-party
service providers.
WE DEPEND ON KEY PERSONNEL.
Our success depends to a significant extent upon a limited number of
members of senior management and other key employees, including John Roblin, our
President and Chief Executive Officer, and Maryanne Gallagher, our Chief
Operating Officer. Mr. Roblin's employment contract expires December 31, 2003.
We maintain key man life insurance on Mr. Roblin and Ms. Gallagher in the amount
of $1,000,000 per individual. The loss of the service of one or more key
managers or other key employees could have a significant and adverse effect upon
our business, operating results or financial
- 8 -
condition. In addition, we believe that our future success will depend in large
part upon our ability to attract and retain additional highly skilled technical,
management, sales and marketing personnel. Competition for such personnel in the
computer software industry is intense. We may not be successful in attracting
and retaining such personnel, and the failure to do so could have a material
adverse effect on our business, operating results or financial condition.
WE DEPEND UPON PROPRIETARY TECHNOLOGY AND WE ARE SUBJECT TO THE RISK OF
THIRD PARTY CLAIMS OF INFRINGEMENT.
Our success and ability to compete depends in part upon our proprietary
software technology. We also rely on certain software that we license from
others. We rely on a combination of trade secret, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
our proprietary rights. We currently have no patents or patent applications
pending. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. The steps we take to protect our
proprietary technology may not prevent misappropriation of our technology, and
this protection may not stop competitors from developing products which function
or have features similar to our products.
While we believe that our products and trademarks do not infringe upon the
proprietary rights of third parties, third parties may claim that our products
infringe, or may infringe, upon their proprietary rights. Any infringement
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause product
shipment delays or require us to develop non-infringing technology or enter into
royalty or licensing agreements. Royalty or licensing agreements, if required,
may not be available on terms acceptable to us or at all. If a claim of product
infringement against us is successful and we fail or are unable to develop
non-infringing technology or license the infringed or similar technology, our
business, operating results and financial condition could be significantly and
adversely affected.
WE DEPEND ON MAJOR CUSTOMERS.
In 2002 and 2001, our software products operations depended on certain
major customers. One of these customers accounted for approximately 30% of our
total revenues in 2002 and for approximately 11% of our total revenues in 2001.
We anticipate that our operations will continue to depend upon the continuing
business of this one major customer and the ability to attract other customers.
As a result, the loss of this one major customer or our inability to continue to
attract new customers could significantly and adversely affect our business,
operating results and financial condition.
WE DEPEND ON A KEY SUPPLIER.
We rely on a third party supplier for our claims management solutions in
our product line. The loss of this supplier could materially adversely affect
our business, operating results and financial condition. We are in the process
of identifying other suppliers to decrease our reliance on our current sole
supplier for claims management solutions. We may not find any additional
suppliers for our claims management solutions in our product line.
WE MAY NOT GET THE FULL BENEFIT OF OUR TAX CREDITS.
Under the United States Internal Revenue Code, companies that have not
been operating profitably are allowed to apply certain of their past losses to
offset future taxable income liabilities they may incur once they reach
profitability. These amounts are known as net operating loss carryforwards. At
December 31, 2002, we had approximately $21,700,000 of federal net operating tax
loss carryforwards
- 9 -
expiring at various dates through 2021. Because of certain provisions of the Tax
Reform Act of 1986 related to change of control, however, we may not get the
full benefit of these loss carryforwards. If we are limited from using net
operating loss carryforwards to offset any of our income, this would increase
our taxes owed and reduce our cash for operations.
RISKS RELATED TO OUR COMMON STOCK
HOLDERS OF SHARES OF OUR COMMON STOCK MAY HAVE DIFFICULTY IN SELLING THOSE
SHARES.
Our common stock is not quoted on any market or listed on any securities
exchange. Prices for our common stock are quoted on the Over-the-Counter
Bulletin Board. Securities whose prices are quoted on the OTC Bulletin Board do
not enjoy the same liquidity as securities that trade on a recognized market or
securities exchange. As a result, you may have difficulty in selling shares of
our common stock.
In addition, our common stock is a "penny stock" as that term is defined
in the Securities Exchange Act of 1934. Brokers effecting transactions in a
"penny stock" are subject to additional customer disclosure and record keeping
obligations, including disclosure of the risks associated with low price stocks,
stock quote information, and broker compensation. In addition, brokers effecting
transactions in a "penny stock" are also subject to additional sales practice
requirements under Rule 15g-9 of the Exchange Act including making inquiries
into the suitability of "penny stock" investments for each customer or obtaining
a prior written agreement for the specific "penny stock" purchase. Because of
these additional obligations, some brokers will not effect transactions in
"penny stocks."
OUR SHARES ARE SUBJECT TO DILUTION AS A RESULT OF EXERCISE OF OUR WARRANTS
AND THE CONVERSION OF OUR CONVERTIBLE DEBENTURES.
Warrants. Our warrants issued to Vault Management Limited expiring 2005
are exercisable at an initial exercise price of $0.625, and our warrants issued
to various investors, which include Renaissance, expiring 2007 are exercisable
at an initial price of $0.22. These initial exercise prices are subject to
adjustment if and whenever we issue or sell additional shares of our common
stock for less than 95% of the market price on the date of issuance or sale, in
which case the exercise price will be reduced to a new exercise price in
accordance with the terms of the warrant. Pursuant to the terms of these
warrants, the issuance or sale of additional shares of common stock resulting
from (1) the exercise of stock options to be granted in the future to employees
or directors pursuant to our existing stock option plans or (2) the exercise of
any convertible security, in either case outstanding on the date of the warrant,
will not trigger any adjustment to the exercise price of the warrants.
Debentures. Our 8% convertible debentures due 2008 are initially
convertible into 6,000,000 shares of our common stock. Our 8% convertible
debentures due 2009 are initially convertible into 2,333,333 shares of common
stock. This initial conversion price is subject to adjustment if and whenever we
issue additional shares of our common stock for less than the initial conversion
price per share, in which case the conversion price will be reduced to a new
conversion price equal to the price per share of the additional stock issued.
Pursuant to the terms of these debentures, the issuance or sale of additional
shares of our common stock resulting from (1) the conversion of any of the
debentures, (2) the exercise of presently outstanding warrants or employee or
director stock options or (3) the exercise of stock options
to be granted in the future to employees or directors pursuant to our existing
stock option plans, will not trigger any adjustment to the conversion price of
the debentures.
- 10 -
The issuance of any additional shares of common stock as a consequence of
an adjustment to the exercise price of the warrants or an adjustment to the
conversion price of the debentures may result in significant dilution to our
stockholders and may depress the market price of your investment.
Item 2. PROPERTIES
Our headquarters is located in Fair Lawn, New Jersey where we occupy
approximately 21,000 square feet under a lease which expires at May 31, 2005.
The current annual rental expense for the lease of our headquarters is
approximately $333,000. Currently, we fully utilize this facility.
We believe that our headquarters is well maintained and adequate to meet
our needs in the foreseeable future.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders through the
solicitation of proxies or otherwise during the fourth quarter ended December
31, 2002.
- 11 -
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades in the over-the-counter market on the
Over-the-Counter Bulletin Board. The quotations below reflect the high and low
bid prices for the Company's common stock since January 1, 2001 as traded in the
over-the-counter market on the OTC Bulletin Board. The quotations below reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
HIGH LOW
2002: ---- ---
1st Quarter $0.32 $0.17
2nd Quarter 0.47 0.22
3rd Quarter 0.40 0.23
4th Quarter 0.60 0.17
2001:
1st Quarter $0.50 $0.23
2nd Quarter 0.46 0.25
3rd Quarter 0.51 0.23
4th Quarter 0.31 0.17
As of March 17, 2003, there were 574 holders of record of our common
stock. This number does not include beneficial owners who may hold their shares
in street name.
We have not paid any dividends on our common stock and do not anticipate
paying any dividends in the foreseeable future. In addition, the purchase
agreement governing the 8.00% debentures sold to the Renaissance US Growth and
Income Trust PLC, BFS US Special Opportunities Trust PLC and three other private
investors including John Roblin, Chairman of the Board, President and Chief
Executive Officer of our company, for an aggregate of $2,500,000 on June 28,
2001, as amended on August 21, 2002, currently prohibits the payment of
dividends without the prior written consent of the holders of such debentures.
The closing sales price for our common stock on March 17, 2003 was $0.60,
as reported by the OTC Bulletin Board.
- 12 -
Item 6. SELECTED FINANCIAL DATA
The following selected historical financial information as of December 31,
2002 and 2001 and for each of the years ended December 31, 2002, 2001 and 2000,
has been derived from and should be read in conjunction with our consolidated
financial statements and related notes thereto included elsewhere in this
report. The selected historical consolidated financial information as of
December 31, 2000, 1999 and 1998 and for the years ended December 31, 1999 and
1998, have been derived from our audited consolidated financial statements,
which are not included in this report. All dollar amounts below are expressed in
thousands, except per share data.
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA (AUDITED)
Year ended December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- -------- -------
STATEMENT OF OPERATIONS DATA:
Revenues .................................... $ 8,142 $ 6,263 $ 7,963 $ 11,028 $12,268
Income (loss) before income tax ............. 738 (272) (2,916) (3,255) 548
Net income (loss) ........................... 877 55 (2,412) (2,820) 918
Net income (loss) per share - basic ......... .06 .00 (.14) (.17) .05
Net income (loss) per share - diluted ....... .04 .00 (.14) (.17) .05
Cash dividends per share .................... $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA:
Working capital (deficiency) ................ $ 336 $(1,114) $ 78 $ 1,172 $ 4,203
Total assets ................................ 5,589 3,417 5,141 9,147 11,425
Short-term debt ............................. -- 18 64 59 --
Stockholders' equity (deficit) .............. (354) (1,247) (1,370) 2,437 5,217
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the years
ended December 31, 2002, 2001 and 2000:
Quarter
----------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
FISCAL 2002:
Total Revenues .............................. $ 1,737 $ 1,560 $ 1,465 $ 3,380
Operating Income (Loss) ..................... 119 (111) (311) 1,209
Net Income (Loss) ........................... 82 (148) (355) 1,298
Basic Earnings (Loss) Per Common Share ...... $ 0.01 $ (0.01) $ (0.02) $ 0.08
======== ======== ======== ========
Diluted Earnings (Loss) Per Common Share .... $ 0.01 $ (0.01) $ (0.02) $ 0.06
======== ======== ======== ========
Quarter
----------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
FISCAL 2001:
Total Revenues .............................. $ 1,694 $ 1,497 $ 1,528 $ 1,544
Operating Income (Loss) ..................... (236) 629 (458) (262)
Net Income (Loss) ........................... (98) 621 (495) 27
Basic and Diluted Earnings (Loss) Per
Common Share .......................... $ (0.01) $ 0.04 $ (0.03) $ --
======== ======== ======== ========
- 13 -
Quarter
----------------------------------------------
1st 2nd 3rd 4th
--- --- --- ---
FISCAL 2000:
Total Revenues .............................. $ 2,279 $ 1,555 $ 2,233 $ 1,896
Operating Income (Loss) ..................... (725) (907) (137) (876)
Net Income (Loss) ........................... (778) (999) (215) (420)
Basic and Diluted Earnings (Loss) Per
Common Share .......................... $ (0.05) $ (0.06) $ (0.01) $ (0.02)
======== ======== ======== ========
- 14 -
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 development of new products, the successful
negotiation, execution and implementation of anticipated new software contracts,
the successful addition of personnel in the marketing and technical areas and
our ability to complete development and sell and license our products at prices
which result in sufficient revenues to realize profits.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements that have been
prepared under accounting principles generally accepted in the United States.
The preparation of financial statements requires our management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could
materially differ from those estimates. We have disclosed all significant
accounting policies in Note 1 to the consolidated financial statements included
in this Form 10-K. The consolidated financial statements and the related notes
thereto should be read in conjunction with the following discussion of our
critical accounting policies. Critical accounting policies and estimates are:
o Revenue Recognition
o Valuation of Capitalized Software
o Valuation of Allowance for Doubtful Accounts Receivable
REVENUE RECOGNITION
Revenue recognition rules are very complex, and certain judgments affect
the application of our revenue policy. The amount and timing of our revenue is
difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause our operating results to vary significantly from quarter to
quarter. In addition to determining our results of operations for a given
period, our revenue recognition determines the timing of certain expenses, such
as commissions, royalties and other variable expenses.
Our revenues are recognized in accordance with SOP 97-2, "Software Revenue
Recognition," as amended by SOP 98-4, "Deferral of the Effective Date of SOP
97-2, Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2 with
Respect to Certain Transactions." 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.
Amounts invoiced to our customers in excess of recognized revenues are
recorded as deferred revenues. The timing and amounts invoiced to customers can
vary significantly depending on specific contract terms and can therefore have a
significant impact on deferred revenues in any given period.
- 15 -
CAPITALIZED SOFTWARE
Costs for the internal development of new software products and
substantial enhancements to existing software products are expensed as incurred
until technological feasibility has been established, at which time any
additional costs are capitalized. As we have completed our software development
concurrently with the establishment of technological feasibility, we have
commenced capitalizing these costs. Amortization is calculated on a
product-by-product basis as the greater of the amount computed using (a) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product. At each
balance sheet date, the unamortized capitalized costs of each computer software
product is compared to the net realizable value of that product. If an amount of
unamortized capitalized costs of a computer software product is found to exceed
the net realizable value of that asset, such amount will be written off. The net
realizable value is the estimated future gross revenues from that product
reduced by the estimated future costs of completing and disposing of that
product, including the costs of performing maintenance and customer support
required to satisfy our responsibility set forth at the time of sale.
VALUATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Our estimate of the allowance for doubtful accounts is based on historical
information, historical loss levels and an analysis of the collectibility of
individual accounts. We routinely assess the financial strength of our customers
and, based upon factors concerning credit risk, establish an allowance for
uncollectible accounts. We believe that accounts receivable credit risk exposure
beyond such allowance is limited.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
REVENUES
Total revenues were $8,142,000 for the year ended December 31, 2002
compared to $6,263,000 for the year ended December 31, 2001, an increase of 30%.
License fees were $2,180,000 for the year ended December 31, 2002 compared to
$246,000 in the same period in 2001 as a result of a license renewal by a major
customer in 2002. The rate of entering into license agreements with new
customers has slowed due in large part to continued weakness in technology
capital spending by our target customers. For the year ended December 31, 2002,
maintenance revenues were $4,389,000 compared to $4,370,000 in the prior year.
Professional services revenue contributed $1,060,000 for the year ended December
31, 2002 compared to $1,249,000 for the year ended December 31, 2001 as a result
of fewer new customer sales in 2002. The decrease in license agreements with new
customers has adversely impacted our professional services revenue as we derive
a substantial portion of our professional service revenue from implementation of
new software license agreements. ASP revenues were $513,000 for the year ended
December 31, 2002 compared to $398,000 for the year ended December 31, 2001.
Cost of revenues decreased by 11% to $4,317,000 for the year ended
December 31, 2002 as compared to $4,863,000 for 2001 due to reduced staff costs,
cost containment efforts and productivity improvements. Non-cash capitalized
software amortization was $830,000 for the year ended December 31, 2002 as
compared to $861,000 in 2001. We capitalized software development costs of
$1,026,000 in 2002 compared to $866,000 in 2001.
- 16 -
EXPENSES
Research and Development. Research and development expenses in 2002 were
$600,000 compared to $413,000 for the year ended December 31, 2001. The increase
in research and development expenses is primarily due to increased staff and
staff-related expenses. Research and development expenses are essential in
maintaining our competitive position. We are continuing to enhance the
functionality of our products and to define our processes in response to
customer needs.
Sales and Marketing. Sales and marketing expenses decreased to $901,000 in
2002 compared to $1,264,000 in 2001. This decrease was primarily due to in-house
production of advertising materials.
General and Administrative. General and administrative expenses increased
to $1,418,000 in 2002 compared to $1,366,000 for the year ended December 31,
2001 primarily due to an increase in expenses related to employee compensation
and a decrease in consulting and legal expenses in 2002.
Other Income. We had no other income for the year ended December 31, 2002
compared to $1,565,000 of other income for the year ended December 31, 2001. In
2001, there was a $225,000 settlement of an outstanding customer dispute, a
favorable resolution of a liability related to the customer dispute and a gain
on extinguishment of debt of $1,340,000, due to the settlement of $3,000,000
principal amount 12.5% convertible debentures due in 2002 for $1,660,000.
Provision for Doubtful Accounts. We had no provision for doubtful accounts
in 2002 compared to an allowance for doubtful accounts of $(58,000) for the year
ended December 31, 2001 due to the collection of one account receivable in 2001
reserved for in 1999.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
REVENUES
Total revenues were $6,263,000 for the year ended December 31, 2001
compared to $7,963,000 for the year ended December 31, 2000, a decrease of 21%.
License fees were $246,000 for the year ended December 31, 2001 compared to
$1,889,000 in the same period in 2000 as a result of fewer new Classic sales in
2001. For the year ended December 31, 2001, maintenance revenues were $4,370,000
compared to $3,963,000 in the prior year as a result of new Classic contracts
signed in 2000. Professional services revenue contributed $1,249,000 for the
year ended December 31, 2001 compared to $2,021,000 for the year ended December
31, 2000 as a result of fewer new Classic sales in 2001. ASP revenues were
$398,000 for the year ended December 31, 2001 compared to $90,000 for the year
ended December 31, 2000.
Cost of revenues decreased to $4,863,000 for the year ended December 31,
2001 as compared to $6,942,000 for 2000 due to staff and other cost reductions
in the TAS 2000 division. Non-cash capitalized software amortization was
$861,000 for the year ended December 31, 2001 as compared to $899,000 in 2000.
The Company capitalized software development costs of $866,000 in 2001 compared
to none in 2000.
EXPENSES
Research and Development. Research and development expenses in 2001 were
$413,000 compared to $875,000 for the year ended December 31, 2000. The Company
is continuing to enhance the functionality of its products and to define its
processes in response to customer needs.
- 17 -
Sales and Marketing. Sales and marketing expenses increased to $1,264,000
in 2001 compared to $900,000 in 2000. This increase was primarily due to an
increase in the sales effort and the hiring of a new chief marketing officer in
2001.
General and Administrative. General and administrative expenses decreased
to $1,366,000 in 2001 compared to $1,962,000 for the year ended December 31,
2000 primarily as a result of decreased consulting and legal expenses.
Other Income. Other income was $1,565,000 for the year ended December 31,
2001 as compared to none in the same period of 2000 due to the settlement of an
outstanding customer dispute and a favorable resolution of a liability related
to the customer dispute and a gain on extinguishment of debt was $1,340,000 due
to the settlement of $3,000,000 principal amount 12.5% convertible debentures
due in 2002 for $1,660,000.
Provision for Doubtful Accounts. Provision for doubtful accounts increased
to $(58,000) in 2001 compared to $(333,000) for the year ended December 31, 2000
due to the collection of one account receivable in 2001 reserved for in 1999 and
collections of various accounts receivable in 2000 reserved for in 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily from cash flow from operations and
the proceeds from our convertible debentures due in 2008 and our convertible
debentures due in 2009. As of December 31, 2002, we were in compliance with the
financial covenants set forth in the Convertible Loan Agreements.
At December 31, 2002, we had working capital of $336,000 compared to a
working capital of $(1,114,000) in 2001.
At December 31, 2002, we had approximately $21,700,000 of federal net
operating tax loss carryforwards expiring at various dates through 2021.
We believe that our current cash balances and anticipated cash flows from
operations will be sufficient to meet our normal operating needs in 2003.
RECENTLY ISSUED ACCOUNTING STANDARDS
On April 30, 2002, the "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 no 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 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.
- 18 -
FASB has issued SFAS No. 146, "Accounting for Exit or Disposal
Activities." SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
["EITF"] of the FASB has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity [including Certain Costs Incurred in a Restructuring]." The scope of
SFAS No. 146 also included (1) costs related to terminating a contract that is
not a capital lease and (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual deferred
compensation contract. SFAS No. 146 will be effective for exit or disposal
activities initiated after December 31, 2002. SFAS No. 146 had no impact on our
results of operations or financial position for 2002.
The FASB has issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions," which is effective for certain transactions arising on or after
October 1, 2002. SFAS No. 147 will have no impact on us.
The FASB has issued SFAS No. 148 "Accounting for Stock-Based Compensation
- - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The Company has adopted the disclosure requirements of SFAS No. 148. The
Company currently accounts for stock-based employee compensation in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, the alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation mandated by SFAS No. 148 are not applicable to us at this
time.
FASB Interpretation No. 45 ["FIN 45"], "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107
and rescission of FASN Interpretation No. 34," was issued in November 2002. FIN
45 elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year end. The disclosure requirements in FIN 45 are effective
for financial statements of interim or annual periods ending after December 15,
2002.
FASB Interpretation No. 46 ["FIN 46"], "Consolidation of Variable
Interest Entities - an interpretation of ARB No. 51," was issued in January
2003. FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. FIN 46 applies immediately to variable
interest entities created after January 31, 2003 and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. We believes that we have no unconsolidated
variable interest entities that would be considered under the requirements of
FIN 46.
- 19 -
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of interest rate changes and changes in the
market value of our investments.
INTEREST RATE RISK. Our exposure to market rate risk for changes in
interest rates relates primarily to our investment portfolio. We have not used
derivative financial instruments in our investment portfolio. We invest our
excess cash in a major bank money market account. We protect and preserve our
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, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if forced to sell securities which
have declined in market value due to changes in interest rates.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data listed in Item 15(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 2003 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, 2002.
Item 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of filing this Annual Report on Form
10-K, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and our
Chief Financial Officer, of the effectiveness of the design and operation of our
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 our disclosure controls and procedures are effective in
timely alerting them to material information relating to us (including our
consolidated subsidiaries) required to be included in our periodic SEC filings.
Subsequent to the date of that evaluation, there have been no significant
changes in our 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.
- 20 -
PART IV
Item 15. 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 26.
(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.
(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].
- 21 -
4 Form of Common Stock Certificate of the Registrant [incorporated
by reference to Exhibit 4(a) to the Registrant's Annual Report on
Form 10-K (Commission File No. 0-13124) filed on January 29,
1986].
10(a) Warner Insurance Services, Inc. Tax Saver 401(k) Salary Reduction
Plan adopted May 31, 1985 and restated as of August 11, 1992
[incorporated by reference to Exhibit 10(k) to the Registrant's
Annual Report on Form 10-K (Commission File No. 0-13124) filed on
January 28, 1993].
10(b)(1) 1994 Stock Option Plan for Independent Directors adopted by the
Board of Directors of the Registrant on November 10, 1994
[incorporated by reference to Exhibit 10(n)(1) to the
Registrant's Annual Report on Form 10-K (Commission File No.
0-13124) filed on April 17, 1995].
10(b)(2) Form of Stock Option Agreement under the 1994 Stock Option Plan
for Independent Directors [incorporated by reference to Exhibit
10(n)(2) to the Registrant's Annual Report on Form 10-K
(Commission File No. 0-13124) filed on April 17, 1995].
10(c)(1) The 1995 Employee Stock Option Plan, adopted by the Board of
Directors of the Registrant on March 22, 1995 [incorporated by
reference to Exhibit 10(o)(1) to the Registrant's Annual Report
on Form 10-K (Commission File No. 0-13124) filed on April 17,
1995].
10(c)(2) Form of Incentive Stock Option Agreement under the 1995 Employee
Stock Option Plan [incorporated by reference to Exhibit 10(o)(2)
to the Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on April 17, 1995].
10(c)(3) Form of Non-Qualified Stock Option Agreement under the 1995
Employee Stock Option Plan [incorporated by reference to Exhibit
10(o)(3) to the Registrant's Annual Report on Form 10-K
(Commission File No. 0-13124) filed on April 17, 1995].
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)(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(d)(2) Modification to Lease, dated February 23, 1994, by and between
the Registrant and Polevoy Associates [incorporated by reference
to Exhibit 10(e)(2) to the Registrant's Annual Report on Form
10-K (Commission File No. 0-13124) filed on April 30, 2001].
10(d)(3) Second Modification to Lease, dated April 12, 2000, by and
between the Registrant and Polevoy Associates [incorporated by
reference to Exhibit 10(e)(3) to the Registrant's Annual Report
on Form 10-K (Commission File No. 0-13124) filed on April 30,
2001].
10(e)(1) 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(e)(2) 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 February 8, 2001].
- 22 -
10(f)(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(f)(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].
10(g)(1) Convertible Loan Agreement, dated June 28, 2001, by and among the
Company, Renaissance US Growth & Income Trust PLC, a public
limited company registered in England and Wales, BFSUS Special
Opportunities Trust PLC, a public limited company registered in
England and Wales, as lenders, and Renaissance Capital Group,
Inc., a Texas corporation, as agent [incorporated by reference to
Exhibit 10(q)(1) to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on July 11, 2001].
10(g)(2) Convertible Debenture No. 1, dated June 28, 2001, issued to
Renaissance US Growth & Income [incorporated by reference to
Exhibit 10(q)(2) to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on July 11, 2001].
10(g)(3) Convertible Debenture No. 2, dated June 28, 2001, issued to BFSUS
Special Opportunities Trust PLC [incorporated by reference to
Exhibit 10(q)(3) to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on July 11, 2001].
10(g)(4) Pledge Agreement, dated as of June 28, 2001, between the Company,
Renaissance US Growth & Income Trust PLC and BFSUS Special
Opportunities Trust PLC [incorporated by reference to Exhibit
10(q)(4) to the Registrant's Form 8-K (Commission File No.
0-13124) filed on July 11, 2001].
10(g)(5) Security Agreement, dated as of June 28, 2001, among the Company,
Renaissance US Growth & Income Trust PLC and BFSUS Special
Opportunities Trust PLC [incorporated by reference to Exhibit
10(q)(5) to the Registrant's Form 8-K (Commission File No.
0-13124) filed on July 11, 2001].
10(g)(6) Subsidiary Guaranty, dated as of June 28, 2001, by Cover-All
Systems, Inc. in favor of Renaissance US Growth & Income Trust
PLC and BFSUS Special Opportunities Trust PLC [incorporated by
reference to Exhibit 10(q)(6) to the Registrant's Form 8-K
(Commission File No. 0-13124) filed on July 11, 2001].
10(g)(7) Subsidiary Security Agreement, dated as of June 28, 2001, among
Cover-All Systems, Inc. in favor of Renaissance US Growth &
Income Trust PLC and BFSUS Special Opportunities Trust PLC
[incorporated by reference to Exhibit 10(q)(7) to the
Registrant's Form 8-K (Commission File No. 0-13124) filed on July
11, 2001].
10(h)(1) Convertible Loan Agreement, dated June 28, 2001, by and among the
Company, John Roblin, Arnold Schumsky and Stuart Sternberg, and
Stuart Sternberg, as agent [incorporated by reference to Exhibit
10(r)(1) to the Registrant's Form 8-K (Commission File No.
0-13124) filed on July 11, 2001].
10(h)(2) Convertible Debenture No. 3, dated June 28, 2001, issued to John
Roblin [incorporated by reference to Exhibit 10(r)(2) to the
Registrant's Form 8-K (Commission File No. 0-13124) filed on July
11, 2001].
10(h)(3) Convertible Debenture No. 4, dated June 28, 2001, issued to
Arnold Schumsky [incorporated by reference to Exhibit 10(r)(3) to
the Registrant's Form 8-K (Commission File No. 0-13124) filed on
July 11, 2001].
- 23 -
10(h)(4) Convertible Debenture No. 5, dated June 28, 2001, issued to
Stuart Sternberg [incorporated by reference to Exhibit 10(r)(4)
to the Registrant's Form 8-K (Commission File No. 0-13124) filed
on July 11, 2001].
10(h)(5) Security Agreement, dated as of June 28, 2001, among the Company,
John Roblin, Arnold Schumsky and Stuart Sternberg [incorporated
by reference to Exhibit 10(r)(5) to the Registrant's Form 8-K
(Commission File No. 0-13124) filed on July 11, 2001].
10(h)(6) Subsidiary Guaranty, dated as of June 28, 2001, by Cover-All
Systems, Inc. in favor of John Roblin, Arnold Schumsky and Stuart
Sternberg [incorporated by reference to Exhibit 10(r)(6) to the
Registrant's Form 8-K (Commission File No. 0-13124) filed on July
11, 2001].
10(h)(7) Subsidiary Security Agreement, dated as of June 28, 2001, among
Cover-All Systems, Inc. in favor of John Roblin, Arnold Schumsky
and Stuart Sternberg [incorporated by reference to Exhibit
10(r)(7) to the Registrant's Form 8-K (Commission File No.
0-13124) filed on July 11, 2001].
10(h)(8) Limited Waiver to Convertible Loan Agreements, dated as of
September 30, 2001, by Renaissance US Growth & Income Trust PLC
and BFSUS Special Opportunities Trust PLC [incorporated by
reference to Exhibit 10(r)(8) to the Registrant's Form 10-Q
(Commission File No. 0-13124) filed on November 14, 2001].
10(h)(9) Limited Waiver to Convertible Loan Agreements, dated as of
December 31, 2001, by Renaissance US Growth & Income Trust PLC
and BFSUS Special Opportunities Trust PLC [incorporated by
reference to Exhibit 10(l)(9) to the Registrant's Form 10-K
(Commission File No. 0-13124) filed on March 29, 2002].
10(i)(1) Lock-Up Agreement, dated June 28, 2001, by and among Renaissance
US Growth & Income Trust PLC and BFSUS Special Opportunities
Trust PLC, as lenders, and Renaissance Capital Group, Inc., as
agent, and John Roblin [incorporated by reference to Exhibit
10(s)(1) to the Registrant's Form 8-K (Commission File No.
0-13124) filed on July 11, 2001].
10(i)(2) Lock-Up Agreement, dated June 28, 2001 by and among Renaissance
US Growth & Income Trust PLC and BFSUS Special Opportunities
Trust PLC, as lenders, and Renaissance Capital Group, Inc., as
agent, and Maryanne Z. Gallagher [incorporated by reference to
Exhibit 10(s)(2) to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on July 11, 2001].
10(i)(3) Lock-Up Agreement, dated June 28, 2001, by and among Renaissance
US Growth & Income Trust PLC and BFSUS Special Opportunities
Trust PLC, as lenders, and Renaissance Capital Group, Inc., as
agent, and Frank Orzell [incorporated by reference to Exhibit
10(s)(3) to the Registrant's Form 8-K (Commission File No.
0-13124) filed on July 11, 2001].
10(i)(4) Lock-Up Agreement, dated June 28, 2001 by and among Renaissance
US Growth & Income Trust PLC and BFSUS Special Opportunities
Trust PLC, as lenders, and Renaissance Capital Group, Inc., as
agent, and Ann Massey [incorporated by reference to Exhibit
10(s)(4) to the Registrant's Form 8-K (Commission File No.
0-13124) filed on July 11, 2001].
10(j) Settlement Agreement, dated June 29, 2001, by and between the
Company and FINOVA Mezzanine Capital Inc. [incorporated by
reference to Exhibit 10(t) to the Registrant's Form 8-K
(Commission File No. 0-13124) filed on July 11, 2001].
- 24 -
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.
*99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
*99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
- ----------
* Filed herewith
(b) Reports on Form 8-K
None.
- 25 -
COVER-ALL TECHNOLOGIES INC.
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Page
Report of Independent Auditor .......................................... F-1
Consolidated Balance Sheets - December 31, 2002 and 2001................ F-2
Consolidated Statements of Operations - Years Ended December 31, 2002,
2001 and 2000........................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity [Deficit] -
Years Ended December 31, 2002, 2001 and 2000............................ F-6
Consolidated Statements of Cash Flows - Years Ended December 31,
2002, 2001 and 2000..................................................... F-7
Notes to Consolidated Financial Statements.............................. F-9
Financial Statement Schedule II -
Valuation and Qualifying Accounts....................................... F-25
- 26 -
REPORT OF INDEPENDENT AUDITOR
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, 2002 and 2001, 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,
2002. These consolidated financial statements and consolidated financial
statement schedule referred to below 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, 2002 and
2001, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statements is the responsibility of Cover-All Technologies Inc.'s management and
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
As discussed in Note 2 and Note 14 to the financial statements, the Company
adopted FASB No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB No. 13, and Technical Corrections," during 2002.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
February 26, 2003
F-1
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31,
------------
2 0 0 2 2 0 0 1
----------- -----------
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 2,063,411 $ 430,545
Accounts Receivable [Less Allowance for Doubtful Accounts
of $25,000 and $25,000 in 2002 and 2001, Respectively] 1,021,873 1,007,194
Other Receivables 240,672 5,101
Prepaid Expenses 453,007 306,999
----------- -----------
TOTAL CURRENT ASSETS 3,778,963 1,749,839
----------- -----------
PROPERTY AND EQUIPMENT - AT COST:
Furniture, Fixtures and Equipment 1,309,938 1,286,122
Less: Accumulated Depreciation (1,156,338) (1,054,968)
----------- -----------
PROPERTY AND EQUIPMENT - NET 153,600 231,154
----------- -----------
CAPITALIZED SOFTWARE [LESS ACCUMULATED AMORTIZATION OF
$5,675,257 AND $4,844,612 IN 2002 AND 2001, RESPECTIVELY] 1,398,333 1,202,818
----------- -----------
DEFERRED FINANCING COSTS [NET OF ACCUMULATED AMORTIZATION OF
$42,673 AND $13,364] 198,638 173,726
----------- -----------
OTHER ASSETS 59,335 59,335
----------- -----------
TOTAL ASSETS $ 5,588,869 $ 3,416,872
=========== ===========
See Notes to Consolidated Financial Statements.
F-2
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31,
------------
2 0 0 2 2 0 0 1
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT]:
CURRENT LIABILITIES:
Accounts Payable $ 276,618 $ 582,522
Income Taxes Payable 90,000 --
Accrued Liabilities 723,688 442,524
Obligation Under Capital Lease -- 17,980
Unearned Revenue 2,352,462 1,821,221
------------ ------------
TOTAL CURRENT LIABILITIES 3,442,768 2,864,247
LONG-TERM LIABILITIES:
Convertible Debentures 2,500,000 1,800,000
------------ ------------
TOTAL LIABILITIES 5,942,768 4,664,247
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
------------ ------------
STOCKHOLDERS' EQUITY [DEFICIT]:
Common Stock, $.01 Par Value, Authorized 75,000,000 Shares;
17,835,718 Shares Issued and 15,335,718 Shares Outstanding
in 2002 and 2001 178,357 178,357
Capital In Excess of Par Value 26,147,517 26,130,604
Accumulated Deficit (25,976,773) (26,853,336)
Treasury Stock - At Cost - 2,500,000 Shares (703,000) (703,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY [DEFICIT] (353,899) (1,247,375)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT] $ 5,588,869 $ 3,416,872
============ ============
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 2 2 0 0 1 2 0 0 0
----------- ----------- -----------
REVENUES:
Licenses $ 2,180,250 $ 246,500 $ 1,889,016
Maintenance 4,389,331 4,369,890 3,963,304
Professional Services 1,059,837 1,248,893 2,020,822
Application Service Provider ["ASP"] Services 512,674 397,664 90,030
----------- ----------- -----------
TOTAL REVENUES 8,142,092 6,262,947 7,963,172
----------- ----------- -----------
COSTS OF REVENUES:
Licenses 1,421,895 1,324,399 2,820,038
Maintenance 2,255,119 2,588,438 3,124,188
Professional Services 415,063 711,809 926,599
ASP Services 225,068 238,358 71,511
----------- ----------- -----------
TOTAL COSTS OF REVENUES 4,317,145 4,863,004 6,942,336
----------- ----------- -----------
DIRECT MARGIN 3,824,947 1,399,943 1,020,836
----------- ----------- -----------
OPERATING EXPENSES:
Sales and Marketing 901,166 1,264,285 899,607
General and Administrative 1,417,800 1,365,821 1,961,716
Research and Development 599,580 413,364 875,114
Provision for Doubtful Accounts -- (58,161) (333,222)
Loss on Default of Note Receivable - Related Party -- -- 262,870
----------- ----------- -----------
TOTAL OPERATING EXPENSES 2,918,546 2,985,309 3,666,085
----------- ----------- -----------
OPERATING INCOME [LOSS] 906,401 (1,585,366) (2,645,249)
----------- ----------- -----------
OTHER EXPENSE [INCOME]:
Interest Expense 169,633 266,226 385,003
Interest Income - Related Party [Imputed] -- -- (109,401)
Interest Income (1,060) (14,404) (8,633)
Other Income [See Note 14] -- (1,565,127) --
----------- ----------- -----------
TOTAL OTHER EXPENSE [INCOME] 168,573 (1,313,305) 266,969
----------- ----------- -----------
FOREIGN CURRENCY TRANSACTION LOSS -- -- (3,898)
----------- ----------- -----------
INCOME [LOSS] BEFORE INCOME TAX BENEFIT 737,828 (272,061) (2,916,116)
INCOME TAX BENEFIT 138,735 326,772 503,936
----------- ----------- -----------
NET INCOME [LOSS] $ 876,563 $ 54,711 $(2,412,180)
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-4
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 2 2 0 0 1 2 0 0 0
---------------- ---------------- ----------------
BASIC EARNINGS [LOSS] PER COMMON SHARE $ .06 $ -- $ (.14)
================ ================ ================
DILUTED EARNINGS [LOSS] PER COMMON SHARE $ .04 $ -- $ (.14)
================ ================ ================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR BASIC EARNINGS [LOSS] PER
COMMON SHARE 15,336,000 15,246,000 17,386,000
================ ================ ================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR DILUTED EARNINGS [LOSS] PER
COMMON SHARE 23,733,000 15,246,000 17,386,000
================ ================ ================
See Notes to Consolidated Financial Statements.
F-5
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, 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 10] 6,400 393,600 -- -- 400,000
Loss on Default of Care Note
[See Note 7] -- (1,143,054) -- -- (1,143,054)
Recording of 2,500,000 Shares
of Common Stock following
Default of Care Note
[See Note 7] -- -- -- (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)
Issuance of 154,546 Shares of
Common Stock [See
Note 12] 1,545 66,455 -- -- 68,000
Net Income -- -- 54,711 -- 54,711
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2001 178,357 26,130,604 (26,853,336) (703,000) (1,247,375)
Issuance of 128,572 Warrants
[See Note 12] -- 16,913 -- -- 16,913
Net Income -- -- 876,563 -- 876,563
------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2002 $ 178,357 $ 26,147,517 $(25,976,773) $ (703,000) $ (353,899)
============ ============ ============ ============ ============
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 2 2 0 0 1 2 0 0 0
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income [Loss] from Continuing Operations $ 876,563 $ 54,711 $(2,412,180)
Adjustments to Reconcile Net Income [Loss] to Net
Cash Provided by [Used for] Operating Activities:
Depreciation 101,370 146,400 152,238
Amortization of Capitalized Software 830,645 860,801 899,240
Amortization of Deferred Financing Costs 29,309 13,364 --
Gain on Extinguishment of Convertible Debentures -- (1,340,000) --
Provision for Uncollectible Accounts -- (58,161) (333,222)
Imputed Interest Income -- -- (150,057)
Loss on Default of Note Receivable - Related Party -- -- 262,870
Non-Cash Financing Cost 16,913 -- --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (14,678) 1,664,262 88,200
Prepaid Expenses (146,008) (55,727) 113,920
Accrued Interest - Related Party Note Receivable -- -- 40,656
Other Receivable (235,572) 279,899 (285,000)
Increase [Decrease] in:
Accounts Payable (305,904) (440,794) (62,079)
Taxes Payable 90,000 -- --
Accrued Liabilities 281,164 (174,456) (269,870)
Unearned Revenue 531,241 32,897 193,107
----------- ----------- -----------
NET CASH PROVIDED FROM [USED FOR] CONTINUING
OPERATING ACTIVITIES 2,055,043 983,196 (1,762,177)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of Note Receivable - Related Party -- -- 750,000
Capital Expenditures (23,816) (65,267) (22,961)
Capitalized Software Expenditures (1,026,160) (865,798) --
----------- ----------- -----------
NET CASH [USED FOR] PROVIDED FROM INVESTING
ACTIVITIES (1,049,976) (931,065) 727,039
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Convertible Debentures 700,000 1,800,000 --
Payment on Convertible Debentures -- (1,660,000) --
Deferred Financing Costs (54,221) (187,090) --
Net Proceeds from the Issuance of Common Stock -- 68,000 431,250
Principal Payments on Capital Lease (17,980) (64,434) (59,498)
Proceeds from Exercise of Stock Options -- -- 19,531
----------- ----------- -----------
NET CASH PROVIDED FROM [USED FOR]
FINANCING ACTIVITIES 627,799 (43,524) 391,283
----------- ----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS - FORWARD $ 1,632,866 $ 8,607 $ (643,855)
See Notes to Consolidated Financial Statements.
F-7
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 2 2 0 0 1 2 0 0 0
----------- ----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS - FORWARDED $ 1,632,866 $ 8,607 $ (643,855)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEARS 430,545 421,938 1,065,793
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEARS $ 2,063,411 $ 430,545 $ 421,938
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 169,633 $ 266,226 $ 385,003
Income Taxes $ -- $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In December 2000, Care Corporation Limited ["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 a 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
2,500,000 shares of its common stock pledged as collateral under the promissory
note and 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 7].
See Notes to Consolidated Financial Statements.
F-8
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. 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 - Our revenues are recognized in accordance with SOP 97-2,
"Software Revenue Recognition" ["SOP 97-2"], as amended by SOP 98-4, "Deferral
of the Effective Date of SOP 97-2, Software Revenue Recognition" and SOP 98-9,
"Modification of SOP 97-2 with Respect to Certain Transactions." 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 - We consider all highly liquid investments, with a
maturity of three months or less when purchased, to be cash equivalents.
We had $1,598,000 and $291,000 of repurchase agreements at December 31, 2002 and
2001, respectively, with First Union National Bank. The repurchase agreements
are collateralized by at 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 us 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, 2002 and 2001 was approximately $1,972,100 and $502,100,
respectively. We generally do not require collateral for its financial
instruments, other than repurchase agreements.
We place our cash and cash equivalents with high credit quality institutions to
limit credit exposure. We believe 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. As of December 31, 2002, seven customers accounted for
approximately 54% of our trade accounts receivable portfolio. We routinely
assess the financial strength of customers and, based upon factors concerning
credit risk, we establish an allowance for uncollectible accounts. Management
believes that accounts receivable credit risk exposure beyond such allowance is
limited.
F-9
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
IMPAIRMENT - In August 2001, the Financial Accounting Standards Board ["FASB"]
approved Statement of Financial Accounting Standards ["SFAS"] No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." 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 measured at the lower of carrying
amounts or fair value less cost to sell and cease depreciation [amortization].
SFAS No. 144 recommends 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. 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 [unless they qualify as a reporting unit] 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. We adopted SFAS No. 144 on January 1, 2002.
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 2002, 2001 and 2000 was $101,370, $146,400 and $152,238,
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 are reported as income and expense.
CAPITALIZED SOFTWARE - Costs for the internal development of new software
products and substantial enhancements to existing software products are expensed
as incurred until technological feasibility has been established, at which time
any additional costs are capitalized. As we have completed software development
concurrently with the establishment of technological feasibility, we have
commenced capitalizing these costs. Software development costs are our only
research and development expenditures. During 2002, 2001 and 2000, qualifying
software development costs of $1,026,160, $865,798 and $-0-, respectively, were
capitalized and are being 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 2002, 2001 and 2000 was $830,645, $860,801 and $899,240,
respectively. At each balance sheet date, the unamortized capitalized costs of
each computer software product are compared to the net realizable value of that
product. If an amount of unamortized capitalized costs of a computer software
product is found to exceed the net realizable value of that asset, such amount
will be written off. The net realizable value is the estimated future gross
revenues from that product reduced by the estimated future costs of completing
and disposing of that product, including the costs of performing maintenance and
customer support required to satisfy our responsibility set forth at the time of
sale.
ADVERTISING EXPENSE - We expense advertising costs as incurred. Advertising
expense in 2002, 2001 and 2000 was $83,203, $219,081 and $132,297, 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 bases 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-10
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
INCOME [LOSS] PER SHARE - We have adopted the provisions of SFAS No. 128. 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. Our options and warrants were not included in the computation of loss
per share for 2000 because to do so would have been antidilutive.
The dilutive effect of convertible debt is reflected in diluted earnings per
share by the application of the if-converted method. Our convertible debt does
not affect the income [loss] per share calculation for 2001 and 2000 because it
would be antidilutive for those years [See Note 6]. The convertible debt could
potentially dilute basic earnings per share in future periods.
STOCK-BASED COMPENSATION - We follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" [APB No. 25] with regard to the
accounting for our 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. We apply 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.
[2] RECENTLY ISSUED ACCOUNTING STANDARDS
On April 30, 2002, the "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 no be used to classify those gains and losses. Statement 64
amended Statement 4 and is no longer necessary because Statement 4 has been
rescinded [See Note 14].
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 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.
F-11
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[2] RECENTLY ISSUED ACCOUNTING STANDARDS [CONTINUED]
FASB has issued SFAS No. 146, "Accounting for Exit or Disposal Activities." SFAS
No. 146 addresses significant issues regarding the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including restructuring activities that are currently accounted for pursuant to
the guidance that the Emerging Issues Task Force ["EITF"] of the FASB as set
forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity [including Certain
Costs Incurred in a Restructuring]." The scope of SFAS No. 146 also includes (1)
costs related to terminating a contract that is not a capital lease and (2)
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS No. 146 will
be effective for exit or disposal activities initiated after December 31, 2002.
SFAS No. 146 had no impact on our results of operations or financial position
for 2002.
The FASB has issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions," which is effective for certain transactions arising on or after
October 1, 2002. SFAS No. 147 will have no impact on us.
The FASB has issued SFAS No. 148 "Accounting for Stock-Based Compensation -
Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company has adopted the disclosure requirements of SFAS No. 148. The Company
currently accounts for stock-based employee compensation in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, the alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation mandated by SFAS No. 148 are not applicable to us at this
time.
FASB Interpretation No. 45 ["FIN 45"], "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of
FASN Interpretation No. 34," was issued in November 2002. FIN 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. The initial recognition and initial measurement provisions of
FIN 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002, irrespective of the guarantor's fiscal year end. The
disclosure requirements in FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. We have made the
disclosures required by FIN 45.
FASB Interpretation No. 46 ["FIN 46"], "Consolidation of Variable Interest
Entities - an interpretation of ARB No. 51," was issued in January 2003. FIN 46
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. FIN 46 applies immediately to variable interest entities
created after January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. We believe that we have no unconsolidated variable
interest entities that would be considered under the requirements of FIN 46.
F-12
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[3] COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
OPERATING LEASES - We lease 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 $323,778, $320,561 and $308,853 for the years ended December
31, 2002, 2001 and 2000, respectively.
Our future minimum rental commitments under its noncancellable operating lease
in effect at December 31, 2002 were as follows: year ending 2003 -- $333,271,
2004 -- $333,271, 2005 -- $138,863, 2006 -- $-0-, 2007 -- $-0-; thereafter --
none.
EMPLOYMENT CONTRACTS - We have an employment contract with one of our 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, 2002 was approximately $278,000. In
accordance with a previous contract, the executive was issued 25,000 shares of
our common stock in January 2000.
RELATED PARTY TRANSACTIONS - In 2002, 2001 and 2000, we paid Mark Johnston total
consulting fees plus expenses of approximately $-0-, $100,000 and $247,000,
respectively [See Notes 7, 9 and 10 for additional related party disclosures].
[4] 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 2 2 0 0 1 2 0 0 0
--------- --------- ---------
Current:
Federal $ -- $ -- $ --
State (90,000) -- --
Utilization of Net Operating Loss Carryforward -- -- --
--------- --------- ---------
Totals (90,000) -- --
--------- --------- ---------
Deferred:
Federal -- -- --
State 228,735 326,772 503,936
--------- --------- ---------
Totals 228,735 326,772 503,936
--------- --------- ---------
NET BENEFIT $ 138,735 $ 326,772 $ 503,936
----------- ========= ========= =========
During 2002, 2001 and 2000, we availed ourself of a program offered by the State
of New Jersey whereby we sold state net operating losses of $2,921,267,
$4,173,333 and $6,439,122, respectively, for $228,735, $326,772 and $503,936,
respectively. As of December 31, 2002, the amount due to us under the program
was $228,735 which is classified with other receivables and was collected in
January 2003.
F-13
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[4] INCOME TAXES [CONTINUED]
The income tax 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 2 2 0 0 1 2 0 0 0
--------- --------- ---------
Computed Federal Statutory [Tax] Benefit $(295,000) $ 109,000 $ 928,000
Valuation Allowance to Reduce Deferred Tax Asset -- (109,000) (928,000)
Tax Benefit of Federal Net Operating Loss Carryforward 205,000 -- --
Sale of State Net Operating Loss Carryforward 228,735 326,772 503,936
--------- --------- ---------
ACTUAL BENEFIT $ 138,735 $ 326,772 $ 503,936
-------------- ========= ========= =========
The components of the net deferred tax asset and liability were as follows:
Years ended
------------
December 31,
------------
2 0 0 2 2 0 0 1
------------ ------------
Deferred Tax Assets - Current:
Accounts Receivable Allowance $ 10,000 $ 10,000
Vacation Accrual 10,000 10,000
Valuation Allowance (20,000) (20,000)
------------ ------------
CURRENT DEFERRED TAX ASSET $ -- $ --
-------------------------- ============ ============
Deferred Tax Asset [Liability] - Long-Term:
Net Operating Loss Carryforward $ 9,350,000 $ 10,750,000
Stock Options 80,000 90,000
Capitalized Software (560,000) (480,000)
Depreciation and Amortization 15,000 40,000
Valuation Allowance (8,885,000) (10,400,000)
------------ ------------
LONG-TERM DEFERRED TAX ASSET $ -- $ --
---------------------------- ============ ============
The net change during 2002 and 2001 in the total valuation allowance is
$(1,515,000) and $1,061,000, respectively.
At December 31, 2002, we had approximately $21,700,000 of federal net operating
tax loss carryforwards expiring at various dates through 2021. The Tax Reform
Act of 1986 enacted a complex set of rules which limits 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 which may be
issued by us from time to time, including the stock which may be issued related
to our outstanding convertible debentures [See Note 9] and the conversion of the
warrants we issued to Vault Management Limited [See Note 10], or the result of
other changes in ownership of our outstanding stock, we may experience an
ownership change and consequently our utilization of net operating loss
carryforwards could be significantly limited.
F-14
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS
In March 1995, we 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 our employees 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, 2002, 2001 and 2000, 2,321,025, 2,340,525 and
3,230,275 shares, respectively, were available for grant.
On November 15, 1994, we adopted the 1994 Stock Option Plan for Independent
Directors. Options for the purchase of up to 300,000 shares may be granted to
our directors who are not employees ["non-employee director"]. The Plan was
amended in June 2000 to increase the aggregate number of shares of common stock
available for grant 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, 2002, 2001 and 2000, 750,000,
740,000 and 710,000 shares, respectively, were available for grant.
In October 1994, we 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 us. 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, 2002,
2001 and 2000, 105,000, 105,000 and 105,000 shares, respectively, were available
for grant.
A summary of the changes in outstanding common stock options for all outstanding
plans is as follows:
Exercise Weighted-Average
-------- ----------------
Price Remaining Weighted-Average
----- --------- ----------------
Shares Per Share Contractual Life Exercise Price
------ --------- ---------------- --------------
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
Granted 949,000 .23 - .34 4.1 Years .32
Exercised -- -- --
Canceled (64,250) .63 - 1.94 1.22
Expired (25,000) 4.50 - 5.00 4.60
Balance, December 31, 2001 2,346,750 $ .23 - 4.00 2.30 Years $ .90
Granted 195,000 .27 - .29 2.3 Years .27
Canceled (50,500) .23 - .63 .39
Expired (135,000) .32 - 2.13 1.14
Balance, December 31, 2002 2,356,250 $ .23 - 4.00 2.3 Years $ .84
F-15
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
The options granted during 2002 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 195,000 $.27 $.15
======= ==== ====
The options granted during 2001 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 949,000 $.32 $.20
======= ==== ====
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
======= ==== ====
Exercisable options at December 31, 2002, 2001 and 2000 were as follows:
Number of Weighted-Average
--------- ----------------
December 31, Exercisable Options Exercise Price
- ------------ ------------------- --------------
2002 1,888,740 $ .97
2001 1,635,575 $ 1.13
2000 1,258,000 $ 1.43
The following table summarizes information about stock options at December 31,
2002:
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
- --------------- ------ ---------------- -------------- ------ --------------
$ .23 - $ .34 1,088,250 3.0 Years $ .32 620,740 $ .32
$ .63 - $1.13 275,000 1.4 Years $ .85 275,000 $ .85
$ 1.25 - $1.25 793,000 1.9 Years $ 1.25 793,000 $ 1.25
$ 2.00 - $2.00 195,000 2.2 Years $ 2.00 195,000 $ 2.00
$ 4.00 - $4.00 5,000 3.3 Years $ 4.00 5,000 $ 4.00
--------- --------- ----------- --------- -----------
2,356,250 2.3 Years $ .84 1,888,740 $ .97
========= ========= =========== ========= ===========
F-16
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
We apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations, for stock options issued to employees
in accounting for our stock option plans. The exercise price for all stock
options issued during 2002, 2001 and 2000 were equal to or greater than the
market price of our stock at the date of grant. Accordingly, no compensation
expense has been recognized for our stock-based compensation plans for fiscal
years 2002, 2001 and 2000.
There are 768,572 warrants outstanding at December 31, 2002. The exercise price
for all the warrants issued and outstanding as of December 31, 2002 were equal
to or greater than the market price of our stock at the date of grant.
A summary of the changes in outstanding warrants is as follows:
Outstanding Exercise Weighted-Average
and Exercisable Price Remaining Weighted-Average
Warrants Per Warrant Contractual Life Exercise Price
Balance, December 31, 2001 640,000 $.62 - .62 2.50 Years $0.62
Granted 128,575 $.22 - .22 4.25 Years 0.22
Balance, December 31, 2002 768,572 $.22 - .62 2.80 Years $0.56
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
our 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 our employee stock options. The weighted average fair value of stock
options granted to employees used in determining pro forma amounts is estimated
at $.15, $.20 and $.58 during 2002, 2001 and 2000, respectively.
Pro forma information regarding net income or loss and net income or loss per
share has been determined as if we had accounted for our 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 2 2 0 0 1 2 0 0 0
------- ------- -------
Risk-Free Interest Rate 3.00% 3.00% 6.30%
Expected Life 3.0 Years 4.0 Years 4.0 Years
Expected Volatility 81% 86% 81%
Expected Dividends None None None
F-17
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
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 2 2 0 0 1 2 0 0 0
------- ------- -------
Net Income [Loss] as Reported $ 877 $ 55 $ (2,412)
Pro Forma Net Income [Loss] $ 859 $ (125) $ (2,657)
Earnings [Loss] Per Share as Reported $ .06 $ -- $ (.14)
Pro Forma Earnings [Loss] Per Share $ .04 $ (.01) $ (.14)
[6] 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 2 2 0 0 1 2 0 0 0
------- ------- -------
Numerator:
Net Income [Loss] $ 876,563 $ 54,711 $ (2,412,180)
Effect of Dilutive Securities:
Interest Reversal Convertible Debentures [Net of Tax] 120,000 -- --
Incentive Bonus Adjustment [Net of Tax Benefit] (12,000) -- --
------------ ------------ ------------
NUMERATOR FOR DILUTED EARNINGS [LOSS]
-------------------------------------
PER COMMON SHARE $ 984,563 $ 54,711 $ (2,412,180)
---------------- ============ ============ ============
Denominator:
Weighted Average Number of Common Shares Outstanding
for Basic Earnings [Loss] Per Common Share 15,336,000 15,246,000 17,386,000
Effect of Dilutive Securities:
Exercise of Options 26,500 18,226 --
Exercise of Warrants 37,000 -- --
Conversion of Convertible Debentures 8,333,500 -- --
------------ ------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER
------------------------------------
COMMON SHARE 23,733,000 15,264,226 17,386,000
------------ ============ ============ ============
BASIC EARNINGS [LOSS] PER COMMON SHARE $ .06 $ -- $ (.14)
- -------------------------------------- ============ ============ ============
DILUTED EARNINGS [LOSS] PER COMMON SHARE $ .04 $ -- $ (.14)
- ---------------------------------------- ============ ============ ============
Equity instruments that may dilute earnings per share in the future are listed
in Note 5.
Options to purchase 2,112,000 shares of common stock at prices ranging from $.31
to $4.00 per share were outstanding at December 31, 2002, but were not included
in the computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common shares.
[7] SALE OF STOCK AND WARRANTS, AND PURCHASE AND SALE OF CARE SOFTWARE LICENSE
On March 31, 1996, we were granted by Care Corporation Limited ["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, we issued to Care 2,500,000 shares
of our common stock at $2.00 per share to value the license as $5,000,000 at
March 31, 1996. The license agreement was revised on March 14, 1997, and we
engaged Care as our exclusive
F-18
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- --------------------------------------------------------------------------------
[7] SALE OF STOCK AND WARRANTS, AND PURCHASE AND SALE OF CARE SOFTWARE LICENSE
[CONTINUED]
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,
we had the right to repurchase all or portions of the shares issued to Care at
$.01 per share.
In the fourth quarter of 1997, we made a strategic decision to allocate future
resources to the TAS and Classic product lines rather than the product line
obtained via the Care Software License. In this regard, on March 31, 1998, we
negotiated a buy back by Care of the Care Software License.
For the buy back of Care Software License by Care, we 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 and a Care
affiliate, Software Investments Limited ["SIL"]. 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 shares and the balance outstanding on the date. Based on the market
price of 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, we 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 our 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 our best interest to
agree to allow Care to cap the number of shares of our common stock required to
be pledged to us pursuant to the pledge agreement to 2,500,000.
Based on the above, and due to the related party nature of the Care Software
License buy back agreement, we 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 10],
one-half of the payment due September 30, 2000 on the Care note 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, we announced that Care had
defaulted on its obligation to pay us our semi-annual principal payment owed
under the promissory note dated March 31, 1998. We exercised our right to
accelerate all remaining amounts due under the note, which totaled $2,250,000.
The Pledge Agreement between us and Care provided that in the event of a default
by Care, we can look to and proceed against Care for payment. Care's 2,500,000
shares of our common stock were pledged to and held by us as collateral on the
Care note. In addition, we announced that, pursuant to the Pledge Agreement, on
January 16, 2001, we transferred and registered in our name the 2,500,000 shares
of our 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 $858,924, net of
unearned interest of $141,076. As a result of Care's default, we wrote off the
undiscounted current and discounted long-term portions of the Care note for
these amounts. We recorded 2,500,000 shares of our 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.
F-19
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- --------------------------------------------------------------------------------
[8] SUPPLEMENTAL DATA
Accrued liabilities consist of the following:
Years ended
December 31,
------------
2 0 0 2 2 0 0 1
-------- --------
Accrued Payroll, Benefits, Temporary Help and Consulting $464,614 $204,236
Accrued Professional Fees 204,552 183,637
Other 54,522 54,651
-------- --------
Totals $723,688 $442,524
------ ======== ========
[9] CONVERTIBLE DEBENTURES
On March 31, 1997, we sold $3,000,000 of 12.5% Convertible Debentures due March
2002 [the "1997 Debentures"] to an institutional investor. The 1997 Debentures
were sold at face value, pay interest quarterly and were convertible, in whole
or in part, into shares of our common stock at $1.25 per share, subject to
adjustment.
On June 28, 2001, we raised $1,800,000 through a private placement of 8.00%
convertible debentures due 2008 [the "2001 Debentures"] with investors headed by
the Renaissance Capital Group, Inc. of Dallas, Texas pursuant to Convertible
Loan Agreements entered to with each of the investors. 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, our Chairman of the Board, President
and Chief Executive Officer. 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 receipt of the funds, we used $1,660,000 of the proceeds to
fully settle the remaining principal amount of the 1997 Debentures. We
recognized a gain on the extinguishment of debt of $1,340,000 in June 2001 [See
Note 14]. The balance of the funds raised from the transaction were used for
working capital purposes. The 2001 Debentures are convertible into shares of our
common stock, initially at $0.50 per share, subject to adjustment in accordance
with the terms of the parties' respective loan agreements.
As of September 30, 2001 and December 31, 2001, we were not in compliance with
the financial covenants of the Convertible Loan Agreements. On September 30,
2001, we received limited waivers to the Convertible Loan Agreements under which
the holders waived our non-compliance that existed up through and including
September 30, 2001 under the financial covenant in the Convertible Loan
Agreements. On December 31, 2001, we received a similar waiver to the
Convertible Loan Agreements under which the holders waived our non-compliance
that existed up through and including December 31, 2001.
In March 2002, the holders under the Convertible Loan Agreements agreed to amend
one of the financial covenants for the quarters ending March 31, June 30 and
September 30, 2002. As consideration for such amendments, we issued to such
holders an aggregate of 128,572 warrants to purchase such number of shares of
our common stock at an exercise price of $0.22 per share. The warrants expire in
five years and became exercisable in equal monthly 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 has been charged to deferred
financing costs and will be amortized over the amendment period.
F-20
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- --------------------------------------------------------------------------------
[9] CONVERTIBLE DEBENTURES [CONTINUED]
On August 21, 2002, we, by amendment to the 2001 Debentures, 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 were used for working capital purposes. The 2002 Debentures
are convertible into shares of our common stock initially at $0.30 per share,
subject to adjustments. The related financing costs incurred of $54,220 in
connection with establishing the 2002 Debentures have been deferred and are
being amortized over the life of the debt. The Convertible Loan Agreements
currently prohibit the payment of dividends without written consent of the
holders.
The issuance of the 2002 Debentures caused a reduction in the conversion price
of the 2001 Debentures from $0.50 per share to $0.30 per share.
As of December 31, 2002, we were in compliance with the financial covenants of
the Convertible Loan Agreements.
Our convertible debentures mature as follows:
Maturity Principal Due
-------- -------------
2001 Debentures 2008 $ 1,800,000
2002 Debentures 2009 700,000
------------
$ 2,500,000
============
[10] SALE OF STOCK AND WARRANTS, VAULT MANAGEMENT LIMITED
On June 21, 2000, we entered into an agreement with Vault Management Limited
["Vault"] to purchase between 640,000 and 1,600,000 shares of our common stock
at $.625 per share, which was the closing price per share of our 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 us. The proceeds would be used for general working capital
purposes.
The agreement also called for the equivalent number of our 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
us.
As part of the Vault transaction, we 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. We received the $250,000 payment on
September 29, 2000. We did not receive the payment due on December 31, 2000 [See
Note 7]. Mr. Mark Johnston, our Chairman and Interim Chief Financial Officer at
the time, was a director of both Vault and Care.
F-21
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- --------------------------------------------------------------------------------
[11] 401(K) PLAN
After completing a year of service and working 1,000 hours, employees age 21 and
over are eligible to participate in our Tax Saver 401(k) Salary Reduction Plan.
Employees can save a percentage of pay on a pre-tax basis to a annual maximum of
$11,000 for the year ended December 31, 2002. We match $.50 for each $1.00 of
the first 5% of pay employees elect to defer. Expenses associated with this plan
in 2002, 2001 and 2000 were approximately $56,400, $43,800 and $77,400,
respectively.
[12] STOCKHOLDERS' EQUITY [DEFICIT]
During 2002, we issued 128,572 warrants to purchase such number of shares of our
common stock in exchange for an amendment to the convertible loan agreements
pursuant to which one of the financial covenants was amended for the quarters
ending March 31, June 30 and September 30, 2002 [See Note 9]. The $16,913
estimated fair market value of the warrants have been charged to deferred
financing costs and capital in excess of par value.
During 2001, we issued 154,546 shares of common stock in exchange for services
rendered in connection with the debt restructuring described in Note 9. The cost
of $68,000 for the services have been included in deferred financing costs, and
capital in excess of par value has been increased by $66,455, representing the
excess of the cost of the services over the par value of the common stock
issued.
[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 our 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 our
convertible debentures, based on current rates and terms at which we could
borrow funds, is approximately $2,500,000 and $1,800,000 at December 31, 2002
and 2001, respectively.
[14] RECLASSIFICATION OF EXTRAORDINARY GAIN IN 2001
We adopted the provisions of FASB No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB No. 13, and Technical Corrections," during 2002
and, accordingly, the $804,000 [previously reported net of tax of $536,000]
extinguishment of debt recorded in 2001 as an extraordinary gain has been
reclassified to other income in the accompanying 2001 statement of operations.
Tax presentation on the transaction was also reclassified such that the gain is
now reported as $1,340,000. Additionally, other income includes a settlement of
an outstanding customer dispute and a favorable resolution of a liability
related to the customer dispute in the amount of $225,127.
[15] SEGMENT INFORMATION
At March 31, 2000, we merged the management teams and infrastructures of our two
business units to improve customer service. We will continue to separately
assess the performance of each of these products.
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-22
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
- --------------------------------------------------------------------------------
[15] SEGMENT INFORMATION [CONTINUED]
The following financial information is reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources. Interest income and interest expense are allocated based on revenues.
(Dollars in Thousands)
Year ended December 31, 2002
------------------------------------
Classic TAS Consolidated
------- --- ------------
Revenues $5,719 $2,423 $8,142
Operating Profit 819 87 906
Interest Expense 119 51 170
Interest Income 1 -- 1
Depreciation and Amortization 469 492 961
Capital Expenditures 17 7 24
Capitalized Software Expenditures 1,026 -- 1,026
Total Assets 3,926 1,663 5,589
(Dollars in Thousands)
Year ended December 31, 2001
------------------------------------
Classic TAS Consolidated
------- --- ------------
Revenues $5,585 $ 678 $6,263
Operating Profit [Loss] 902 (2,487) (1,585)
Interest Expense 237 29 266
Interest Income 13 1 14
Depreciation and Amortization 85 936 1,021
Capital Expenditures 58 7 65
Capitalized Software Expenditures -- 866 866
Total Assets 3,047 370 3,417
(Dollars in Thousands)
Year ended December 31, 2000
------------------------------------
Classic TAS 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
F-23
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16
- --------------------------------------------------------------------------------
[15] SEGMENT INFORMATION [CONTINUED]
MAJOR CUSTOMERS - The Company had a portion of its revenues from one major
customer in 2002, 2001 and 2000.
Y e a r s e n d e d
------------------------------------------------------------------------------------
D e c e m b e r 3 1,
------------------------------------------------------------------------------------
Customer 2 0 0 2 2 0 0 1 2 0 0 0
-------- ------- ------- -------
Classic TAS Classic TAS Classic TAS
------- --- ------- --- ------- ---
Accident Fund $ -- $2,422,844 $ -- $ 678,147 $ -- $ 905,475
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 2 2 0 0 1 2 0 0 0
------- ------- -------
United Kingdom $ -- $ -- $ 284
United States 8,142 6,263 7,679
------ ------ ------
Total Sales $8,142 $6,263 $7,963
----------- ====== ====== ======
. . . . . . . . . .
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, 2002 $ 4,844,612 $ 830,645 $ -- $ 5,675,257
Year Ended December 31, 2001 $ 3,983,811 $ 860,801 $ -- $ 4,844,612
Year Ended December 31, 2000 $ 3,084,571 $ 899,240 $ -- $ 3,983,811
Allowance for Doubtful Accounts:
Year Ended December 31, 2002 $ 25,000 $ -- $ -- $ 25,000
Year Ended December 31, 2001 $ 1,805,168 $ (58,161) $ 1,722,007 $ 25,000
Year Ended December 31, 2000 $ 1,730,249 $ (333,222) $ (408,141) $ 1,805,168
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 28, 2003 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, President March 28, 2003
- -------------------------- and Chief Executive Officer
John Roblin (Principal Executive Officer)
/s/ Ann F. Massey Chief Financial Officer, March 28, 2003
- -------------------------- Controller and Secretary
Ann F. Massey (Principal Financial Officer and
Principal Accounting Officer)
/s/ Russell Cleveland Director March 28, 2003
- --------------------------
Russell Cleveland
/s/ Earl Gallegos Director March 28, 2003
- --------------------------
Earl Gallegos
/s/ Mark D. Johnston Director March 28, 2003
- --------------------------
Mark D. Johnston
/s/ Robert A. Marshall Director March 28, 2003
- --------------------------
Robert A. Marshall
CERTIFICATION OF CHIEF EXECUTIVE OFFICER ACCOMPANYING ANNUAL REPORT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John Roblin, certify that:
1. I have reviewed this annual report on Form 10-K of Cover-All
Technologies Inc.;
2. Based on my knowledge, this annual 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual
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 annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of disclosure controls and procedures based on our
evaluation 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:
(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
annual report whether 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: March 28, 2003
/s/ John Roblin
- -------------------------------------------
Name: John Roblin
Title: Chairman and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER ACCOMPANYING ANNUAL REPORT
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ann F. Massey, certify that:
1. I have reviewed this annual report on Form 10-K of Cover-All
Technologies Inc.;
2. Based on my knowledge, this annual 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual
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 annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of disclosure controls and procedures based on our
evaluation 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:
(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
annual report whether 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: March 28, 2003
/s/ Ann F. Massey
- ------------------------------
Name: Ann F. Massey
Title: Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
23 Consent of Moore Stephens, P.C.
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act