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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______.
COMMISSION FILE NUMBER 0-13124
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COVER-ALL TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-2698053
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
18-01 POLLITT DRIVE, FAIR LAWN, NEW JERSEY 07410
(Address of principal executive office) (Zip Code)
(201) 794-4800
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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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: $6,505,000 as of June 30, 2003 based on the closing price on
June 30, 2003.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
15,355,218 shares of common stock, par value $.01 per share, as of March 15, 2004.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting of Stockholders ("Proxy Statement"), to be filed with the
Commission not later than 120 days after the close of the Registrant's fiscal year, are incorporated by reference as described in
Part III.
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this report, including, without
limitation, matters discussed under Item 1- "Business" and Item 7- "Management's
Discussion and Analysis of Financial Condition and Results of Operations," may
constitute forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Certain of these forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates," or "anticipates" or the negative of these terms
or other comparable terminology, or by discussions of strategy, plans or
intentions. Statements contained in this report that are not historical facts
are forward-looking statements. Without limiting the generality of the preceding
statement, all statements in this report concerning or relating to estimated and
projected earnings, margins, costs, expenditures, cash flows, growth rates and
financial results are forward-looking statements. In addition, through our
senior management, from time to time we make forward-looking statements
concerning our expected future operations and performance and other
developments. Such forward-looking statements are necessarily estimates
reflecting our best judgment based upon current information and involve a number
of risks and uncertainties. Other factors may affect the accuracy of these
forward-looking statements and our actual results may differ materially from the
results anticipated in these forward-looking statements. While it is impossible
to identify all such factors, factors that could cause actual results to differ
materially from those estimated by us include, but are not limited to, those
factors or conditions described under Item 1- "Business - Risk Factors" and Item
7- "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates" and general conditions
in the economy and capital markets.
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TABLE OF CONTENTS
PART I
Item 1. Business................................................................................................4
Item 2. Properties.............................................................................................15
Item 3. Legal Proceedings......................................................................................15
Item 4. Submission of Matters to a Vote of Security Holders....................................................15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................16
Item 6. Selected Financial Data................................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................................26
Item 8. Financial Statements and Supplementary Data............................................................26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................26
Item 9A. Controls and Procedures................................................................................26
PART III
Item 10. Directors and Executive Officers of the Registrant.....................................................27
Item 11. Executive Compensation.................................................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................................28
Item 13. Certain Relationships and Related Transactions.........................................................28
Item 14. Principal Accounting Fees and Services.................................................................28
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................28
PART I
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ITEM 1. BUSINESS
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GENERAL
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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, service fees from ASPs,
continuing maintenance fees for servicing the product and professional services.
PRODUCTS
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My Insurance Center
-------------------
In December 2001, we announced the availability of My Insurance Center,
referred to as "MIC," a customizable and configurable Internet enabled software
platform 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, among other things, eliminates redundant
data entry. Information is stored in a client-centric database and becomes
immediately available to other users or functions. MIC may be customized to
generate user alerts when a user-specified condition occurs. Additionally, 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 Insurance 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.
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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. MIC offers fast access, pro-active alerts
and responsiveness.
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 from disparate systems.
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 the user 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 SCALABILITY - MIC can be customized to meet our customer's
growing needs, measured in terms of the numbers of concurrent
users, response times and other variables.
o SECURITY - MIC can be configured to achieve appropriate levels
of security on data transfer over the Internet. MIC is also
designed to adapt to almost any organizational hierarchy and
data level security needs with minimal set-up effort by the
customer.
MIC utilizes technology based on Oracle(R) 9iAS Portal Server, JAVA and
XML. MIC seamlessly integrates MIC Rating and Issuance and other business
components (some of which are newly developed and others are based upon
capabilities formerly offered as part of our Classic and TAS 2000 product lines,
which are described below) and our Customer Insurance Database.
MIC enables us to market the business components 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
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preserving our "insurance knowledge" investment. This concept evolved into what
is known today as the Classic product. During 2003, the Classic Product was
significantly expanded and is now marketed as MIC Rating & Issuance. If existing
Classic customers wish to purchase an upgrade to MIC Rating & Issuance, they may
do so without major conversion of data while retaining their product
customizations.
The Classic product line supports the following functions:
o Data capture and editing
o Rating
o Policy issuance including multiple recipient print
o All policy transactions including quotes, new lines,
endorsements, renewals, audits and cancellations
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
capability also included significant enhancements to our security and
administration functions as well as a number of "usability" enhancements. These
capabilities significantly expand and enhance the "core" rating and issuance
capabilities of Classic. The new product is being marketed as MIC Rating &
Issuance.
The Classic Rating and Policy Issuance Product (now replaced by MIC
Rating and Issuance) 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:
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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
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. We have 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 $6,826,000 for 2003 as compared to $5,719,000 for 2002 and
$5,585,000 for 2001.
TAS 2000
--------
From 1993 until 2003, we developed 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 now being integrated and marketed as part of the My
Insurance Center offerings. Utilizing MIC and existing software business
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 client-server computing. TAS 2000 enabled 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. These same capabilities are part of the design of My Insurance
Center, but MIC has the added advantage of being designed with the capabilities
of newer technologies and the Internet.
The TAS 2000 product line includes the following application modules
which have been or are being moved to the MIC platform:
-7-
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 $698,000 for 2003, $2,423,000 for 2002 and
$678,000 for 2001.
MY INSURANCE CENTER - CONTINUED 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
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The computer software and services industry is highly competitive and
rapidly changing, as current competitors expand their product offerings and new
companies enter the marketplace. 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.
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MARKETING
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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 2004
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. Our consulting staff, business
partners and other third parties also generate sales leads.
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.
Our goal with all of our products and services is to enhance the ease of
implementation, functionality, long-term flexibility and the ability to provide
improved customer service.
Research and development expenses were $533,000, $600,000 and $413,000
for the years ended December 31, 2003, 2002 and 2001, respectively.
BACKLOG
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We had no license, maintenance, professional services or ASP backlog of
unbilled work as of December 31, 2003.
MAJOR CUSTOMERS
- ---------------
Our product line is in use in over 50 companies. For the years ended
December 31, 2003, 2002 and 2001, we had only one customer in any of those years
contribute revenues in excess of 10% of our total revenues. AIGT generated 11%
of all revenues for the year ended December 31, 2003. Accident Fund generated
30% and 11% of our revenues for the years ended December 31, 2002 and 2001,
respectively.
We had no export sales in 2003, 2002 or 2001.
EMPLOYEES
- ---------
We had on average 50 employees during 2003. 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.
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RISK FACTORS
THE FOLLOWING ARE CERTAIN RISK FACTORS THAT CAN AFFECT OUR BUSINESS AND
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION. THERE MAY BE OTHER RISK
FACTORS, AND THIS LIST IS NOT EXHAUSTIVE. WE OPERATE IN A CONTINUALLY CHANGING
BUSINESS ENVIRONMENT, AND NEW RISK FACTORS EMERGE FROM TIME TO TIME. WE CANNOT
PREDICT SUCH NEW RISK FACTORS, NOR CAN WE ASSESS THE IMPACT, IF ANY, OF SUCH NEW
RISK FACTORS ON OUR BUSINESS. 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 ACHIEVED PROFITABILITY, BUT HAVE A HISTORY OF LOSSES AND WE MAY
NOT BE PROFITABLE IN THE FUTURE.
Although we have been profitable in each of the years since 2000,
generating net income of approximately $392,000 for 2003, $877,000 for 2002 and
$55,000 for 2001, there can be no assurance that we will be able to maintain
profitability in the future. We incurred net losses of approximately $2,412,000
for 2000 and $2,820,000 for 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 2001 and 2002, we completed two rounds of debt financing through the
sale of 8% convertible debentures due in 2008 ("2008 Debentures") and 2009
("2009 Debentures"), respectively, to Renaissance US Growth & Income Trust PLC,
BFSUS Special Opportunities Trust PLC and certain other investors, with an
aggregate principal amount of $2,500,000. Interest on the unpaid principal
amount of the debentures is payable monthly at the rate of 8% per annum. We made
$200,000 of interest payments on the debentures during the year ended December
31, 2003, and we expect to make interest payments of approximately $198,000
during the year ending in December 31, 2004. The 2008 Debentures mature on July
1, 2008 and the 2009 Debentures mature on September 1, 2009, unless the
debentures are earlier redeemed by us or the holder upon the occurrence of
certain events specified in the debentures or converted into shares of our
common stock at the holder's option at a conversion price of $0.30 per share,
subject to adjustment. We may redeem the debentures for cash at 101% of the
principal amount, together with accrued and unpaid interest through the
redemption date, upon the occurrence of certain events specified in the
debentures. If the 2008 Debentures and the 2009 Debentures are not sooner
redeemed or converted, we will be required to pay, commencing on July 1, 2004
and July 1, 2005, respectively, monthly principal installments in the amount of
ten dollars ($10) per thousand dollars ($1,000) of the then remaining principal
amount of such debentures, and at maturity we will be required to pay the
remaining unpaid principal amount.
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, 2003, we had a net
stockholders' equity of approximately $41,000 and a net working capital of
approximately $177,000.
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TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF
CASH.
Our ability to make payments on and to refinance our indebtedness and to
fund working capital needs and planned capital expenditures will depend on our
ability to generate cash in the future. In addition, our ability to generate
cash, to a certain extent, is subject to general economic, financial,
competitive and other factors that are beyond our control. We cannot assure you
that our business will generate sufficient cash flow from operations, that
currently anticipated cost savings and operating improvements will be realized
on schedule or that future borrowings will be available to us in amounts
sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. If we are unable to repay our indebtedness through cash flow from
operations, we may need to obtain additional financing. We cannot be certain
that we will be able to obtain additional financing on terms favorable to us, or
at all.
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 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
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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 in December of 2006.
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 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
-12-
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 EXISTING CUSTOMERS.
In 2003 and 2002, our software products operations depended primarily on
certain existing customers. One of these customers accounted for approximately
11% of our total revenues in 2003 and another customer accounted for
approximately 30% of our total revenues in 2002. We anticipate that our
operations will continue to depend upon the continuing business of our existing
customers and the ability to attract new customers. As a result, the loss of one
or more of our existing customers or our inability to continue to attract new
customers could significantly and adversely affect our business, operating
results and financial condition.
A DECLINE IN COMPUTER SOFTWARE SPENDING MAY RESULT IN A DECREASE IN OUR
REVENUES OR LOWER OUR GROWTH RATE.
A decline in the demand for computer software among our current and
prospective customers may result in decreased revenues or a lower growth rate
for us because our sales depend, in part, on our customers' level of funding for
new or additional computer software systems and services. Moreover, demand for
our solutions may be reduced by a decline in overall demand for computer
software and services. The current decline in overall technology spending may
cause our customers to reduce or eliminate software and services spending and
cause price erosion for our solutions, which would substantially affect our
sales of new software licenses and the average sales price for these licenses.
Because of these market and economic conditions, we believe there will continue
to be uncertainty in the level of demand for our products and services.
Accordingly, we cannot assure you that we will be able to increase or maintain
our revenues.
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, 2003, we had approximately $21,900,000 of federal net operating tax
loss carryforwards expiring at various dates through 2023. 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.
-13-
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and
new Securities and Exchange Commission regulations, are creating uncertainty for
companies such as ours. To maintain high standards of corporate governance and
public disclosure, we intend to invest substantial resources to comply with
evolving standards. This investment may result in increased general and
administrative expenses and a diversion of management time and attention from
revenue-generating activities.
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 (OTC)
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 THE CONVERSION OF OUR
CONVERTIBLE DEBENTURES AND THE EXERCISE OF OUR WARRANTS.
DEBENTURES. The 2008 Debentures and the 2009 Debentures are currently
convertible into an aggregate of 8,333,333 shares of our common stock. The 2008
Debentures mature on July 1, 2008 and the 2009 Debentures mature on September 1,
2009, unless the debentures are earlier redeemed by us or the holder upon the
occurrence of certain events specified in the debentures or converted into
shares of our common stock at the holder's option at a conversion price of $0.30
per share, subject to adjustment.
The conversion price with the respect to each of the debentures is
subject to adjustment if and whenever we issue additional shares of our common
stock for less than the then current 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 the
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
warrants or employee or director stock options outstanding on the day that the
debentures were issued 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.
The issuance of any shares of our common stock as a consequence of the
conversion of any of the debentures may result in significant dilution to our
stockholders and may depress the market price of your investment. Further, if
the conversion price of the debentures is adjusted, the additional shares of our
common stock that would be issued upon conversion of the debentures as a result
of such adjustment may also result in significant dilution to our stockholders.
-14-
WARRANTS. An aggregate of 640,000 warrants, expiring in 2005, to
purchase such number of shares of our common stock issued to Vault Management
Limited are exercisable at a current exercise price of $0.625 per share, and an
aggregate of 128,572 warrants, expiring in 2007, to purchase such number of
shares of our common stock issued to various investors, including Renaissance US
Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC, are
exercisable at a current exercise price of $0.22 per share. The current exercise
prices of these warrants 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.
The issuance of any additional shares of our common stock as a
consequence of the exercise of any of the warrants may result in significant
dilution to our stockholders and may depress the market price of your
investment. Further, if the exercise price of the warrants is adjusted, the
additional shares of our common stock that would be issued upon exercise of the
warrants as a result of such adjustment may also result in significant dilution
to our stockholders.
OUR STOCK PRICE HAS BEEN VOLATILE.
Quarterly operating results have fluctuated and are likely to continue
to fluctuate significantly. The market price of our common stock has been and
may continue to be highly volatile. Factors that are difficult to predict, such
as quarterly revenues and operating results, limited trading volumes and overall
market performance, will have a significant effect on the price for shares of
our common stock. Revenues and operating results have varied considerably in the
past from period to period and are likely to vary considerably in the future. We
plan product development and other expenses based on anticipated future revenue.
If revenue falls below expectations, financial performance is likely to be
adversely affected because only small portions of expenses vary with revenue. As
a result, period-to-period comparisons of operating results are not necessarily
meaningful and should not be relied upon to predict future performance.
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 $335,000. Currently, we fully utilize this facility.
We believe that our headquarters is well maintained and adequate to meet
our needs in the foreseeable future. We have an option to renew our lease for a
period of five years.
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, 2003.
-15-
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 OTC
Bulletin Board. The quotations below reflect the high and low bid prices for our
common stock since January 1, 2002 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.
2003: HIGH LOW
---- ---
1st Quarter $0.70 $0.25
2nd Quarter 0.70 0.46
3rd Quarter 0.88 0.42
4th Quarter 0.75 0.52
2002: HIGH LOW
---- ---
1st Quarter $0.32 $0.17
2nd Quarter 0.47 0.22
3rd Quarter 0.40 0.23
4th Quarter 0.60 0.17
As of March 15, 2004, there were 551 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 convertible
loan agreements governing the 2008 Debentures and 2009 Debentures currently
prohibit the payment of dividends by us without the prior written consent of the
holders of such debentures.
The closing sales price for our common stock on March 15, 2004 was
$0.70, as reported by the OTC Bulletin Board.
-16-
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected historical financial information as of December
31, 2003 and 2002 and for each of the years ended December 31, 2003, 2002 and
2001, has been derived from and should be read in conjunction with our audited
consolidated financial statements and related notes thereto included elsewhere
in this report. The selected historical consolidated financial information as of
December 31, 2001, 2000 and 1999 and for the years ended December 31, 2000 and
1999 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
- ----------------------------------------------
The following is a summary of selected five-year consolidated financial
data for the years ended December 31, 2003, 2002, 2001, 2000 and 1999:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 7,524 $ 8,142 $ 6,263 $ 7,963 $ 11,028
Income (loss) before income tax................ 392 738 (272) (2,916) (3,255)
Net income (loss).............................. 392 877 55 (2,412) (2,820)
Net income (loss) per share - basic............ 0.03 0.06 0.00 (0.14) (0.17)
Net income (loss) per share - diluted.......... 0.02 0.04 0.00 (0.14) (0.17)
Cash dividends per share....................... $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 1,193 $ 2,063 $ 431 $ 422 $ 1,066
Working capital (deficiency)................... 177 336 (1,114) 78 1,172
Total assets................................... 5,485 5,589 3,417 5,141 9,147
Short-term debt................................ 105 -- 18 64 59
Long-term debt................................. 2,395 2,500 1,800 3,018 3,082
Stockholders' equity (deficit)................. 41 (354) (1,247) (1,370) 2,437
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ---------------------------------------------
The following is a summary of selected quarterly financial data for the
years ended December 31, 2003, 2002 and 2001:
QUARTER
----------------------------------------------------------
1ST 2ND 3RD 4TH
--- --- --- ---
FISCAL 2003:
Total Revenues................................. $ 2,058 $ 1,724 $ 1,773 $ 1,969
Operating Income............................... 312 50 85 83
Net Income..................................... 242 2 32 116
Basic Earnings Per Common Share................ $ 0.02 $ 0.00 $ 0.00 $ 0.01
Diluted Earnings Per Common Share.............. $ 0.01 $ 0.00 $ 0.00 $ 0.01
-17-
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) $ --
-18-
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.
2003 OVERVIEW
- -------------
We are a supplier of software products for the property and casualty
insurance industry, supplying 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, service fees from ASPs,
continuing maintenance fees for servicing the product and professional services.
Total revenue in 2003 decreased to $7,524,000 from $8,142,000 in 2002 due to a
decrease in license revenue, which was partially offset by increases in
maintenance, professional services and ASP services revenue.
The following is an overview of the key components of our revenue and
other important financial data in 2003:
SOFTWARE LICENSES. We signed no new customer licenses in 2003. Our
license revenue in 2003 of $995,000 was from existing customers who chose to
renew, add onto or extend their use of our software. The majority of the license
revenue in 2002 was the result of a license renewal by one major customer. In
2002, we generated $2,180,000 in license revenue.
MAINTENANCE. The increase in maintenance revenue, from $4,389,000 in
2002 to $4,470,000 in 2003, was mainly due to annual increases to existing
customers.
PROFESSIONAL SERVICES. The increase in professional services revenue,
from $1,060,000 in 2002 to $1,457,000 in 2003, was a result of increased demand
for customizations from our current customer base.
ASP. ASP revenue increased from $513,000 in 2002 to $602,000 in 2003,
due to an annual increase in an ASP agreement with an existing customer.
INCOME BEFORE PROVISION FOR INCOME TAXES. Income before provision for
income taxes decreased from $738,000 in 2002 to $392,000 in 2003 primarily due
to reduction in license revenue.
NET INCOME. Net income for 2003 decreased to $392,000 from $877,000 in
2002 as a result of a reduction in new license revenues and no income tax
benefit in 2003. We generated $221,000 in positive cash flow from operations in
2003 and ended the period with $1,193,000 in cash and cash equivalents and
$1,680,000 in accounts receivable.
-19-
We face several challenges to growth in 2004 mainly in the marketing and
selling of our products and services to new customers. In addition, there are
risks related to customers' acceptance and implementation delays which could
affect the timing and amount of license revenue we are able to recognize. In
response to these challenges, we are increasing our sales and marketing effort.
Consequently, we anticipate incurring additional sales and marketing expense in
advance of generating the corresponding revenue.
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.
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
-20-
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
- ---------------------
The following table sets forth, for the periods indicated, certain items
from the consolidated statements of operations expressed as a percentage of
total revenues:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2003 2002 2001
---- ---- ----
REVENUES:
License 13.2% 26.8% 3.9%
Maintenance 59.4 53.9 69.8
Professional Services 19.4 13.0 19.9
Applications Service Provider ("ASP") Services 8.0 6.3 6.4
--------------- --------------- ---------------
TOTAL REVENUES 100.0 100.0 100.0
--------------- --------------- ---------------
COST OF REVENUES:
License 11.5 17.4 21.2
Maintenance 35.7 27.7 41.3
Professional Services 6.0 5.1 11.4
ASP Services 2.2 2.8 3.8
--------------- --------------- ---------------
TOTAL COST OF REVENUES 55.4 53.0 77.7
--------------- --------------- ---------------
DIRECT MARGIN 44.6 47.0 22.3
--------------- --------------- ---------------
OPERATING EXPENSES:
Sales and Marketing 13.1 11.1 20.1
General and Administrative 17.4 17.4 21.8
Research and Development 7.1 7.4 6.6
Provision for Doubtful Accounts -- -- (0.9)
--------------- --------------- ---------------
TOTAL OPERATING EXPENSES 37.6 35.9 47.6
--------------- --------------- ---------------
OPERATING INCOME (LOSS) 7.0 11.1 (25.3)
--------------- --------------- ---------------
OTHER EXPENSE (INCOME):
Interest Expense 2.7 2.0 4.2
Interest Income (0.2) (0.0) (0.2)
Other Expense 0.1 -- --
Other Income (0.8) -- (25.0)
--------------- --------------- ---------------
TOTAL OTHER EXPENSE (INCOME) 1.8 2.0 (21.0)
--------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT 5.2 9.1 (4.3)
--------------- --------------- ---------------
INCOME TAXES BENEFIT -- 1.7 5.2
--------------- --------------- ---------------
NET INCOME (LOSS) 5.2% 10.8% 0.9%
--------------- --------------- ---------------
-21-
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
- -----------------------------------------------------------------------
Revenues
--------
Total revenues were $7,524,000 for the year ended December 31, 2003
compared to $8,142,000 for the year ended December 31, 2002. The reduction was
mainly due to a decrease in license revenue. License fees were $995,000 for the
year ended December 31, 2003 compared to $2,180,000 in the same period in 2002
as a result of a license renewal by a major customer in 2002. The majority of
our software license revenue continues to be from existing customers. For the
year ended December 31, 2003, maintenance revenues were $4,470,000 compared to
$4,389,000 in the same period of the prior year. Professional services revenue
contributed $1,457,000 for the year ended December 31, 2003 compared to
$1,060,000 for the year ended December 31, 2002 as a result of increased demand
for customization from our current customer base. ASP revenues were $602,000 for
the year ended December 31, 2003 compared to $513,000 for the year ended
December 31, 2002.
Cost of revenues decreased by 3% to $4,170,000 for the year ended
December 31, 2003 as compared to $4,317,000 for 2002 as a result of tighter
controls over spending due to lower new software license revenue and
productivity improvements. Non-cash capitalized software amortization was
$522,000 for the year ended December 31, 2003 as compared to $830,000 in 2002.
We capitalized software development costs of $1,027,000 in 2003 compared to
$1,026,000 in 2002.
Expenses
--------
RESEARCH AND DEVELOPMENT. Research and development expenses in 2003 were
$533,000 compared to $600,000 for the year ended December 31, 2002. We are
continuing to enhance the functionality of our products and to refine our
processes in response to customer needs to maintain our competitive position.
SALES AND MARKETING. Sales and marketing expenses increased to $984,000
in 2003 compared to $901,000 in 2002 due to an increase in our marketing and
sales effort to improve the market share of our solution set.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $1,306,000 in 2003 compared to $1,418,000 for the year ended
December 31, 2002 primarily due to savings from productivity efficiencies and
cost controls.
OTHER INCOME. We had other income of $62,000 for the year ended December
31, 2003 compared to none for the year ended December 31, 2002. In 2003, there
was $48,000 related to a settlement in connection with funds held in a bank
account under the name "Warner Insurance Services, Inc." and $14,000 in late
fees collected from customers.
PROVISION FOR DOUBTFUL ACCOUNTS. We had no provision for doubtful
accounts in 2003.
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
-22-
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
We have funded our operations primarily from cash flow from operations
and the proceeds from our 2008 Debentures and 2009 Debentures.
At December 31, 2003, we had cash and cash equivalents of $1,193,000
compared to cash and cash equivalents of $2,063,000 at December 31, 2002. The
decrease in cash and cash equivalents is primarily attributable to the reduction
in new license sales.
The 2008 Debentures have an aggregate principal amount of $1,800,000,
and the 2009 Debentures have an aggregate principal amount of $700,000. Interest
on the unpaid principal amount of the debentures
-23-
is payable monthly at the rate of 8% per annum. We made $200,000 of interest
payments on the debentures during the year ended December 31, 2003, and we
expect to make interest payments of approximately $198,000 during the year
ending December 31, 2004. The 2008 Debentures and 2009 Debentures mature on July
1, 2008 and September 1, 2009, respectively, unless the debentures are earlier
redeemed by us or the holder upon the occurrence of certain events specified in
the debentures or converted into shares of our common stock at the holder's
option at a conversion price of $0.30 per share, subject to adjustment. We may
redeem the debentures for cash at 101% of the principal amount, together with
accrued and unpaid interest through the redemption date, upon the occurrence of
certain events specified in the debentures.
If the 2008 Debentures and 2009 Debentures are not sooner redeemed or
converted, we will be required to pay, commencing on July 1, 2004 and July 1,
2005, respectively, monthly principal installments in the amount of ten dollars
($10) per thousand dollars ($1,000) of the then remaining principal amount of
such debentures, and at maturity we will be required to pay the remaining unpaid
principal amount. As of December 31, 2003, we were in compliance with the
financial covenants set forth in the convertible loan agreements governing these
debentures.
At December 31, 2003, we had working capital of $177,000 compared to a
working capital of $336,000 in 2002.
At December 31, 2003, we had approximately $21,900,000 of federal net
operating tax loss carryforwards expiring at various dates through 2023.
We believe that our current cash balances and anticipated cash flows
from operations will be sufficient to meet our normal operating needs for at
least the next twelve months. Material risks to cash flow from operations
include delayed or reduced cash payments accompanying sales of new licenses or a
decline in our services business. There can be no assurance that changes in our
plans or other events affecting our operations will not result in materially
accelerated or unexpected expenditures. In addition, there can be no assurance
that additional capital, if needed, will be available on reasonable terms, if at
all, at such time as we require.
CONTRACTUAL OBLIGATIONS
- -----------------------
The following table summarizes our significant contractual obligations
at December 31, 2003, and the effect such obligations are expected to have on
our liquidity and cash flows in future periods:
PAYMENTS DUE BY PERIOD
----------------------
(Dollars in Thousands)
LESS MORE
THAN THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEAR 2 YEAR 3 YEAR 4 YEAR 5 5 YEARS
- ----------------------------------------- ----- ------ ------ ------ ------ ------ -------
Operating Leases......................... $593 $403 $190 $ -- $ -- $ -- $ --
8% Convertible Debentures due
2008 - principal(1).................... 1,800 105 193 171 151 1,180 --
8% Convertible Debentures due
2008 - interest(1)..................... 527 142 127 113 100 45 --
8% Convertible Debentures due
2009 - principal(1).................... 700 -- 28 76 68 60 468
8% Convertible Debentures due
2009 - interest(1)..................... 270 56 55 50 45 40 24
------ ------ ------ ------ ------ ------ -------
Total..................................... $3,890 $706 $593 $410 $364 $1,325 $492
====== ====== ====== ====== ====== ====== =======
-24-
- --------------------
(1) We issued 8% Convertible Debentures due 2008 with an aggregate principal
amount of $1,800,000 and 8% Convertible Debentures due 2009 with an aggregate
principal amount of $700,000. Interest on the unpaid principal amount of the
debentures is payable monthly at the rate of 8% per annum. We made $200,000 of
interest payments on the debentures during the year ended December 31, 2003, and
we expect to make interest payments of approximately $198,000 during the year
ending December 31, 2004. The 2008 Debentures and 2009 Debentures mature on July
1, 2008 and September 1, 2009, respectively, unless the debentures are earlier
redeemed by us or the holder upon the occurrence of certain events specified in
the debentures or converted into shares of our common stock at the holder's
option at a conversion price of $0.30 per share, subject to adjustment.
Conversion of all of the outstanding debentures would result in the issuance of
an aggregate of 8,333,333 shares of our common stock. We may redeem the
debentures for cash at 101% of the principal amount, together with accrued and
unpaid interest through the redemption date, upon the occurrence of certain
events specified in the debentures. If the 2008 Debentures and 2009 Debentures
are not sooner redeemed or converted, we will be required to pay, commencing on
July 1, 2004 and July 1, 2005, respectively, monthly principal installments in
the amount of ten dollars ($10) per thousand dollars ($1,000) of the then
remaining principal amount of such debentures, and at maturity we will be
required to pay the remaining unpaid principal amount.
OFF-BALANCE-SHEET ARRANGEMENTS
- ------------------------------
As of December 31, 2003, we did not have any significant
off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
In January 2003, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51." FIN 46 was revised in December 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. In general, it is effective for periods
ending on or after March 31, 2004. We believe that we have no unconsolidated
variable interest entities that would be considered under the requirements of
FIN 46.
In April 2003, the FASB issued Statement of Financial Accounting
Standards no. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"), which clarifies accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for contracts entered into or modified after September 30, 2003 and
for hedging relationships designated after September 30, 2003.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity" ("SFAS 150"), which established standards for how
an issuer classifies and measures certain financial instruments. SFAS 150
requires that an issuer classify certain financial instruments as liabilities
(or assets in some circumstances) that were previously classified as equity.
Financial instruments which embody an unconditional obligation requiring the
issuer to redeem or repurchase it by the transfer of assets or by issuing a
variable number of its equity shares must be classified as a liability. SFAS 150
is effective for financial instruments entered into or modified after May 31,
2003 and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003.
We expect that the adoption of the new FASB statements will not have a
significant impact on our financial statements.
-25-
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) of this report are included beginning on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
As of the end of the period covered by this report, 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 the Company's "disclosure controls
and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange
Act). Based upon that evaluation, we 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
disclosed in the our reports filed or submitted under the Exchange Act.
There has been no change in the our internal control over financial
reporting during the quarter ended December 31, 2003 that has materially
affected, or is reasonably likely to materially affect, the our internal control
over financial reporting.
-26-
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item regarding directors of the
registrant will be included in the Proxy Statement under the caption "Election
of Directors" and is incorporated herein by reference.
The information required by this Item concerning our Audit Committee
financial expert will be included in the Proxy Statement and is incorporated
herein by reference.
The information required by this Item concerning our Code of Ethics and
Business Conduct will be included in the Proxy Statement and is incorporated
herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
The following table sets forth certain information, as of March 30,
2004, regarding our executive officers:
NAME AGE POSITION
---- --- --------
John W. Roblin 59 President and Chief Executive Officer
Maryanne Z. Gallagher 42 Chief Operating Officer
Frank R. Orzell 67 Senior Vice President
Ann F. Massey 45 Chief Financial Officer
The biographies of our executive officers are set forth below:
JOHN W. ROBLIN has served as our President and Chief Executive Officer
since December 1999 and as a director since March 2000. He was named Chairman of
the Board of Directors in February 2001. Prior to joining us, Mr. Roblin was
Chief Information Officer and Senior Vice President for CIGNA Property and
Casualty, positions he held since 1998. From 1994 until 1998, he was Chief
Information Officer and Senior Vice President for Advanta Corporation. Prior to
1994, he was the Chief Information Officer at Chubb & Son, USF&G and Traveler's
Personal Lines Division.
MARYANNE Z. GALLAGHER has served as our Chief Operating Officer since
February 2001. Prior to that position, Ms. Gallagher served as our Senior Vice
President since January 2000. From November 1998 until December 1999, Ms.
Gallagher served as our Vice President - Customer Service. Ms. Gallagher joined
us in 1990 and has held various development and support positions in our Classic
division through 1998.
FRANK R. ORZELL has served as our Senior Vice President since April
2002. Mr. Orzell served as our Chief Marketing Officer from March 2001 through
April 2002. Mr. Orzell has served both as management consultant and executive
with some of the world's leading insurance organizations. He participated in all
aspects of information technology from concept to working result, from in-house
development to software acquisition and outsourcing. From 1999 to 2000, Mr.
Orzell was Vice President of ACE INA where he was responsible for the firm's
global e-business initiatives. In 1999, Mr. Orzell served as Vice President,
Specialty Systems for Cigna Property & Casualty Insurance. From 1998 to 1999,
Mr. Orzell served as Vice President, Financial Services Consulting for The
Concours Group. From 1996 to 1998, Mr. Orzell was Senior Vice President of
Technology Solutions Company. Prior to 1996, he held various senior management
positions with such consulting firms as Booz, Allen & Hamilton, CSC/Index and
Coopers & Lybrand.
-27-
ANN F. MASSEY has served as our Chief Financial Officer since February
2001, as our Secretary since April 1997 and as our Controller since March 1997.
From March 1996 to March 1997, Ms. Massey served as our Assistant Treasurer.
From 1994 until February 1996, Ms. Massey served as Assistant Controller for our
insurance services division. Prior to 1994, Ms. Massey had served as our
Accounting Manager.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
--------------------------------------
The information required by this Item will be included in the Proxy
Statement and is incorporated herein by reference.
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 34.
(2) Financial Statement Schedule
----------------------------
II - Valuation and qualifying accounts..............F-22
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.
-28-
(3) Exhibits
--------
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2 Certificate of Merger of the Company Computer Systems, Inc. (a
New York corporation) into the Registrant, filed on June 11,
1985 [incorporated by reference to Exhibit 2 to the Registrant's
Annual Report on Form 10-K (Commission File No. 0-13124) filed
on January 29, 1986].
3(a) Certificate of Incorporation of the Registrant filed on April
22, 1985 [incorporated by reference to Exhibit 3(a) to the
Registrant's Annual Report on Form 10-K (Commission File No.
0-13124) filed on January 29, 1986].
3(b) Certificate of Amendment of Certificate of Incorporation of the
Registrant filed on May 6, 1987 [incorporated by reference to
Exhibit 3.2 to the Registrant's Registration Statement on Form
S-1 (Commission File No. 33-17533) filed on September 29, 1987].
3(c) Certificate of Amendment of Certificate of Incorporation of the
Registrant filed on March 26, 1990 [incorporated by reference to
Exhibit 3(d) to the Registrant's Quarterly Report on Form 10-Q
(Commission File No. 0-13124) filed on June 14, 1990].
3(d) Certificate of Amendment of Certificate of Incorporation of the
Registrant filed on March 18, 1992 [incorporated by reference to
Exhibit 1 to the Registrant's Current Report on Form 8-K
(Commission File No. 0-13124) filed on March 30, 1992].
3(e) Certificate of Amendment of Certificate of Incorporation of the
Registrant [incorporated by reference to Exhibit 3(e) to the
Registrant's Amendment No. 1 to Registration Statement on Form
S-3 (Commission File No. 0-13124) filed on July 10, 1996].
3(f) Certificate of Amendment of Certificate of Incorporation of the
Registrant filed on July 12, 2000 [incorporated by reference to
Exhibit 3(g) to the Registrant's Quarterly Report on Form 10-Q
(Commission File No. 0-13124) filed on August 11, 2000].
3(g) Bylaws of the Registrant, as amended [incorporated by reference
to Exhibit 3(g) to the Registrant's Amendment No. 1 to
Registration Statement on Form S-3 (Commission file No. 0-13124)
filed on July 10, 1996].
4 Form of Common Stock Certificate of the Registrant [incorporated
by reference to Exhibit 4(a) to the Registrant's Annual Report
on Form 10-K (Commission File No. 0-13124) filed on January 29,
1986].
10(a) Warner Insurance Services, Inc. Tax Saver 401(k) Salary
Reduction Plan adopted May 31, 1985 and restated as of August
11, 1992 [incorporated by reference to Exhibit 10(k) to the
Registrant's Annual Report on Form 10-K (Commission File No.
0-13124) filed on January 28, 1993].
10(b)(1) 1994 Stock Option Plan for Independent Directors adopted by the
Board of Directors of the Registrant on November 10, 1994
[incorporated by reference to Exhibit 10(n)(1) to the
Registrant's Annual Report on Form 10-K (Commission File No.
0-13124) filed on April 17, 1995].
10(b)(2) Form of Stock Option Agreement under the 1994 Stock Option Plan
for Independent Directors [incorporated by reference to Exhibit
10(n)(2) to the Registrant's Annual Report on Form 10-K
(Commission File No. 0-13124) filed on April 17, 1995].
-29-
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].
*10(e)(3) Employment Agreement, dated December 31, 2003, by and between
the Registrant and John Roblin.
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].
-30-
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].
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].
-31-
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].
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.
*31.1 Certification of John Roblin, President and Chief Executive
Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and
15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
*31.2 Certification of Ann F. Massey, Chief Financial Officer,
pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
*32.1 Certification of President and Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ------------------------------------------
* Filed herewith
-32-
(b) Reports on Form 8-K during the fourth quarter of 2003
-----------------------------------------------------
(1) On November 17, 2003, the Company furnished a Current Report on
Form 8-K, under Item 12, attaching a press release reporting its financial
results for the third quarter of 2003.
-33-
COVER-ALL TECHNOLOGIES INC.
- -------------------------------------------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------------------
Page
----
Independent Auditor's Report.................................................................. F-1
Consolidated Balance Sheets - December 31, 2003 and 2002...................................... F-2
Consolidated Statements of Operations - Years Ended December 31, 2003,
2002 and 2001................................................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity [Deficit] -
Years Ended December 31, 2003, 2002 and 2001.................................................. F-6
Consolidated Statements of Cash Flows - Years Ended December 31,
2003, 2002 and 2001........................................................................... F-7
Notes to Consolidated Financial Statements.................................................... F-9
Financial Statement Schedule II -
Valuation and Qualifying Accounts............................................................. F-22
-34-
INDEPENDENT AUDITOR'S REPORT
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 subsidiary as of December 31, 2003 and 2002, and the
related consolidated statements of operations, changes in stockholders' equity
[deficit], and cash flows for each of the three years in the period ended
December 31, 2003. These consolidated financial statements and the 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 the 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 subsidiary as of December 31, 2003 and 2002,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America. Our
audits were 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 12 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," during 2002.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
February 27, 2004
F-1
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
------------
2 0 0 3 2 0 0 2
------- -------
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 1,193,173 $ 2,063,411
Accounts Receivable [Less Allowance for Doubtful Accounts
of $25,000 in 2003 and 2002] 1,680,082 1,021,873
Other Receivables 309 240,672
Prepaid Expenses 353,063 453,007
--------------- ---------------
TOTAL CURRENT ASSETS 3,226,627 3,778,963
--------------- ---------------
PROPERTY AND EQUIPMENT - AT COST:
Furniture, Fixtures and Equipment 1,376,998 1,309,938
Less: Accumulated Depreciation (1,245,631) (1,156,338)
--------------- ---------------
PROPERTY AND EQUIPMENT - NET 131,367 153,600
--------------- ---------------
CAPITALIZED SOFTWARE [LESS ACCUMULATED AMORTIZATION OF
$6,197,478 AND $5,675,257 IN 2003 AND 2002, RESPECTIVELY] 1,903,470 1,398,333
--------------- ---------------
DEFERRED FINANCING COSTS [NET OF ACCUMULATED AMORTIZATION OF
$77,146 AND $42,673 IN 2003 AND 2002, RESPECTIVELY] 164,165 198,638
--------------- ---------------
OTHER ASSETS 59,335 59,335
--------------- ---------------
TOTAL ASSETS $ 5,484,964 $ 5,588,869
=============== ===============
See Notes to Consolidated Financial Statements.
F-2
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
------------
2 0 0 3 2 0 0 2
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT]:
CURRENT LIABILITIES:
Accounts Payable $ 122,146 $ 276,618
Income Taxes Payable -- 90,000
Accrued Liabilities 375,546 723,688
Convertible Debentures 99,484 --
Convertible Debenture - Related Party 5,852 --
Unearned Revenue 2,446,280 2,352,462
--------------- ---------------
TOTAL CURRENT LIABILITIES 3,049,308 3,442,768
LONG-TERM LIABILITIES:
Convertible Debentures 2,300,516 2,400,000
Convertible Debenture - Related Party 94,148 100,000
--------------- ---------------
TOTAL LONG-TERM LIABILITIES 2,394,664 2,500,000
--------------- ---------------
TOTAL LIABILITIES 5,443,972 5,942,768
--------------- ---------------
COMMITMENTS AND CONTINGENCIES -- --
--------------- ---------------
STOCKHOLDERS' EQUITY [DEFICIT]:
Common Stock, $.01 Par Value, Authorized 75,000,000 Shares;
17,846,218 and 17,835,718 Shares Issued and 15,346,218 and
15,335,718 Shares Outstanding in 2003 and 2002, Respectively 178,462 178,357
Capital In Excess of Par Value 26,150,447 26,147,517
Accumulated Deficit (25,584,917) (25,976,773)
Treasury Stock - At Cost - 2,500,000 Shares (703,000) (703,000)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY [DEFICIT] 40,992 (353,899)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY [DEFICIT] $ 5,484,964 $ 5,588,869
=============== ===============
See Notes to Consolidated Financial Statements.
F-3
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------------------------------------------------
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 3 2 0 0 2 2 0 0 1
------- ------- -------
REVENUES:
Licenses $ 995,460 $ 2,180,250 $ 246,500
Maintenance 4,469,608 4,389,331 4,369,890
Professional Services 1,457,325 1,059,837 1,248,893
Application Service Provider ["ASP"] Services 601,627 512,674 397,664
--------------- ---------------- ---------------
TOTAL REVENUES 7,524,020 8,142,092 6,262,947
--------------- ---------------- ---------------
COSTS OF REVENUES:
Licenses 863,680 1,421,895 1,324,399
Maintenance 2,688,232 2,255,119 2,588,438
Professional Services 448,970 415,063 711,809
ASP Services 169,576 225,068 238,358
--------------- ---------------- ---------------
TOTAL COSTS OF REVENUES 4,170,458 4,317,145 4,863,004
--------------- ---------------- ---------------
DIRECT MARGIN 3,353,562 3,824,947 1,399,943
--------------- ---------------- ---------------
OPERATING EXPENSES:
Sales and Marketing 984,121 901,166 1,264,285
General and Administrative 1,306,123 1,417,800 1,365,821
Research and Development 532,922 599,580 413,364
Provision for Doubtful Accounts -- -- (58,161)
--------------- ---------------- ---------------
TOTAL OPERATING EXPENSES 2,823,166 2,918,546 2,985,309
--------------- ---------------- ---------------
OPERATING INCOME [LOSS] 530,396 906,401 (1,585,366)
--------------- ---------------- ---------------
OTHER EXPENSE [INCOME]:
Interest Expense 194,968 161,633 262,127
Interest Expense - Related Party 8,000 8,000 4,099
Interest Income (10,383) (1,060) (14,404)
Other Expense 8,014 -- --
Other Income (62,059) -- (1,565,127)
--------------- ---------------- ---------------
TOTAL OTHER EXPENSE [INCOME] 138,540 168,573 (1,313,305)
--------------- ---------------- ---------------
INCOME [LOSS] BEFORE INCOME TAX BENEFIT 391,856 737,828 (272,061)
INCOME TAX BENEFIT -- 138,735 326,772
--------------- ---------------- ---------------
NET INCOME $ 391,856 $ 876,563 $ 54,711
=============== ================ ===============
See Notes to Consolidated Financial Statements.
F-4
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------------------------------------------------
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 3 2 0 0 2 2 0 0 1
------- ------- -------
BASIC EARNINGS PER COMMON SHARE $ .03 $ .06 $ --
=============== ================ ===============
DILUTED EARNINGS PER COMMON SHARE $ .02 $ .04 $ --
=============== ================ ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR BASIC EARNINGS PER
COMMON SHARE 15,341,000 15,336,000 15,246,000
=============== ================ ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR DILUTED EARNINGS PER
COMMON SHARE 24,246,000 23,733,000 15,246,000
=============== ================ ===============
See Notes to Consolidated Financial Statements.
F-5
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------------------------------------------------
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, 2000 $ 176,812 $ 26,064,149 $ (26,908,047) $ (703,000) $ (1,370,086)
Issuance of 154,546 Shares of
Common Stock [See
Note 10] 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 10] -- 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)
Exercise of 10,500 Stock
Options 105 2,930 -- -- 3,035
Net Income -- -- 391,856 -- 391,856
----------- --------------- --------------- --------------- ---------------
BALANCE AT DECEMBER 31, 2003 $ 178,462 $ 26,150,447 $ (25,584,917) $ (703,000) $ 40,992
=========== =============== =============== =============== ===============
See Notes to Consolidated Financial Statements.
F-6
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------------------------------------------------
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 3 2 0 0 2 2 0 0 1
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from Continuing Operations $ 391,856 $ 876,563 $ 54,711
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 89,293 101,370 146,400
Amortization of Capitalized Software 522,221 830,645 860,801
Amortization of Deferred Financing Costs 34,473 29,309 13,364
Gain on Extinguishment of Convertible Debentures -- -- (1,340,000)
Provision for Uncollectible Accounts -- -- (58,161)
Non-Cash Financing Cost -- 16,913 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (658,209) (14,678) 1,664,262
Prepaid Expenses 99,944 (146,008) (55,727)
Other Receivable 240,363 (235,572) 279,899
Increase [Decrease] in:
Accounts Payable (154,472) (305,904) (440,794)
Taxes Payable (90,000) 90,000 --
Accrued Liabilities (348,142) 281,164 (174,456)
Unearned Revenue 93,818 531,241 32,897
--------------- ---------------- ---------------
NET CASH PROVIDED FROM CONTINUING OPERATING
ACTIVITIES 221,145 2,055,043 983,196
--------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (67,060) (23,816) (65,267)
Capitalized Software Expenditures (1,027,358) (1,026,160) (865,798)
--------------- ---------------- ---------------
NET CASH [USED FOR] INVESTING ACTIVITIES (1,094,418) (1,049,976) (931,065)
--------------- ---------------- ---------------
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
Principal Payments on Capital Lease -- (17,980) (64,434)
Proceeds from Exercise of Stock Options 3,035 -- --
--------------- ---------------- ---------------
NET CASH PROVIDED FROM [USED FOR]
FINANCING ACTIVITIES 3,035 627,799 (43,524)
--------------- ---------------- ---------------
CHANGE IN CASH AND CASH EQUIVALENTS - FORWARD $ (870,238) $ 1,632,866 $ 8,607
See Notes to Consolidated Financial Statements.
F-7
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------------------------------------------------
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 3 2 0 0 2 2 0 0 1
------- ------- -------
CHANGE IN CASH AND CASH EQUIVALENTS - FORWARDED $ (870,238) $ 1,632,866 $ 8,607
CASH AND CASH EQUIVALENTS - BEGINNING OF YEARS 2,063,411 430,545 421,938
--------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS - END OF YEARS $ 1,193,173 $ 2,063,411 $ 430,545
=============== ================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 194,968 $ 161,633 $ 262,127
Interest - Related Party $ 8,000 $ 8,000 $ 4,099
Income Taxes $ 79,900 $ -- $ --
See Notes to Consolidated Financial Statements.
F-8
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Cover-All Technologies Inc., through its wholly-owned
subsidiary, Cover-All Systems, Inc., licenses and maintains its software
products for the property/casualty insurance industry throughout the United
States and Puerto Rico. The subsidiary also provides professional consulting
services to its customers interested in customizing their software.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of Cover-All Technologies Inc. and its wholly-owned subsidiary. All
material intercompany balances and transactions have been eliminated.
USE OF ESTIMATES - Preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 recognized when standardized software modules
are delivered to and accepted by the customer, the fee is fixed or determinable
and collectibility is probable. Revenue from software maintenance contracts and
ASP services are recognized ratably over the lives of the contracts. Revenue
from professional 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 $1,002,000 invested in a money market fund at December 31, 2003 with
Wachovia Capital Markets, LLC. The money market fund invests in certificates of
deposit, banker's acceptances, commercial paper, U.S. treasury notes, bank
notes, short-term corporate debt securities and repurchase agreements backed by
such obligations.
We had $1,598,000 of repurchase agreements at December 31, 2002, with Wachovia
Bank, N.A. 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. 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. The
amount of cash beyond insured amounts at December 31, 2003 and 2002 was
approximately $1,101,800 and $1,972,100, respectively.
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,
2003, six 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.
We generally do not require collateral for our financial instruments, other than
repurchase agreements.
F-9
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
OTHER CONCENTRATIONS - 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.
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 2003, 2002 and 2001 was $89,293, $101,370 and $146,400, 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 accounts and any resulting gain
or loss is reported in the statement of operations.
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 2003, 2002 and 2001, qualifying
software development costs of $1,027,358, $1,026,160 and $865,798, 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 2003, 2002 and 2001 was $522,221, $830,645 and $860,801,
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 2003, 2002 and 2001 was $150,539, $83,203 and $219,081, respectively.
F-10
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
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.
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. Equity instruments that may dilute earnings per share in the future
are listed in Note 5.
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 because it would be
antidilutive for that year [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. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment to FASB Statement No. 123," to
non-employee stock-based compensation and the pro forma disclosure provisions of
SFAS No. 148 to employee stock-based compensation.
[2] RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ["FASB"] issued FASB
Interpretation No- 46 ["FIN 46"], "Consolidation of Variable Interest Entities -
an interpretation of ARB No. 51. "FIN 46 was revised in December 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. In general it is effective for periods ending on or
after March 31, 2004. We believe that we have no unconsolidated variable
interest entities that would be considered under the requirements of FIN 46.
F-11
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[2] RECENTLY ISSUED ACCOUNTING STANDARDS [CONTINUED]
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"), which clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is
effective for contracts entered into or modified after September 30, 2003 and
for hedging relationships designated after September 30, 2003.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"), which established standards for how an
issuer classifies and measures certain financial instruments. SFAS 150 requires
that an issuer classify certain financial instruments as liabilities (or assets
in some circumstance) that were previously classified as equity. Financial
instruments which embody an unconditional obligation requiring the issuer to
redeem or repurchase it by the transfer of assets or by issuing a variable
number of its equity shares must be classified as a liability. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003.
We expect that the adoption of the new statements will not have a significant
impact on our financial statements.
[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 $331,313, $323,778 and $320,561 for the years ended December
31, 2003, 2002 and 2001, respectively.
Our future minimum rental commitments under the noncancellable operating lease
in effect at December 31, 2003 were as follows: year ending 2004 -- $334,879;
2005 -- $139,533; thereafter -- none.
EMPLOYMENT CONTRACTS - We have an employment contract with one of our executives
with an expiration date of December 31, 2006. This contract may be renewed by
the consent of both parties for an additional one year period. The aggregate
commitment for future salary at December 31, 2003 was approximately $900,000. In
accordance with a previous contract, the executive was issued 25,000 shares of
our common stock in January 2000.
RELATED PARTY TRANSACTIONS - In 2003, 2002 and 2001, we paid Mark Johnston, our
former chairman, total consulting fees plus expenses of approximately $-0-, $-0-
and $100,000, respectively.
F-12
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[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 3 2 0 0 2 2 0 0 1
------- ------- -------
Current:
Federal $ -- $ -- $ --
State -- (90,000) --
------------- ------------- ---------------
Totals -- (90,000) --
------------- ------------- ---------------
Deferred:
Federal -- -- --
State -- 228,735 326,772
------------- ------------- ---------------
Totals -- 228,735 326,772
------------- ------------- ---------------
NET BENEFIT $ -- $ 138,735 $ 326,772
----------- ============= ============= ===============
During 2002 and 2001, we availed ourself of a program offered by the State of
New Jersey whereby we sold state net operating losses of $2,921,267 and
$4,173,333 for $228,735 and $326,772, 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. We did not qualify for the
program in 2003 due to achieving profitability in 2002.
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 3 2 0 0 2 2 0 0 1
------- ------- -------
Computed Federal Statutory [Tax] Benefit $ (133,000) $ (295,000) $ 109,000
Valuation Allowance to Reduce Deferred Tax Asset -- -- (109,000)
Tax Benefit of Federal Net Operating Loss Carryforward 133,000 205,000 --
Sale of State Net Operating Loss Carryforward -- 228,735 326,772
--------------- -------------- ---------------
ACTUAL BENEFIT $ -- $ 138,735 $ 326,772
-------------- =============== ============== ===============
F-13
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[4] INCOME TAXES [CONTINUED]
The components of the net deferred tax asset and liability were as follows:
Years Ended
-----------
December 31,
------------
2 0 0 3 2 0 0 2
------- -------
Deferred Tax Assets - Current:
Accounts Receivable Allowance $ 10,000 $ 10,000
Vacation Accrual -- 10,000
Valuation Allowance (10,000) (20,000)
---------------- ---------------
CURRENT DEFERRED TAX ASSET $ -- $ --
-------------------------- ================ ===============
Deferred Tax Asset [Liability] - Long-Term:
Net Operating Loss Carryforward $ 8,660,000 $ 9,350,000
Stock Options 80,000 80,000
Capitalized Software (760,000) (560,000)
Depreciation and Amortization 15,000 15,000
Valuation Allowance (7,995,000) (8,885,000)
---------------- ---------------
LONG-TERM DEFERRED TAX ASSET $ -- $ --
---------------------------- ================ ===============
The net change during 2003 and 2002 in the total valuation allowance is
$(900,000) and $(1,515,000), respectively.
At December 31, 2003, we had approximately $21,900,000 of federal net operating
tax loss carryforwards expiring at various dates through 2023. 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 8] and the conversion of
outstanding warrants, 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.
[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, 2003, 2002 and 2001, 1,763,025, 2,321,025 and
2,340,525 shares, respectively, were available for grant under the 1995 Employee
Stock Option Plan.
F-14
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
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 directors"]. 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 a "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, 2003, 2002 and 2001, 750,000,
750,000 and 740,000 shares, respectively, were available for grant under the
1994 Stock Option Plan for Independent Directors.
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, 2003,
2002 and 2001, 105,000, 105,000 and 105,000 shares, respectively, were available
for grant under the 1994 Non-Qualified Stock Option Plan for Consultants.
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, 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
Granted 843,000 .34 - .60 4.4 Years .51
Exercised (10,500) .27 - .29 .29
Canceled (18,750) .29 - .63 .54
Expired (266,250) .32 - 1.25 .84
Balance, December 31, 2003 2,903,750 $ .27 - 4.00 2.4 Years $ .75
F-15
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8
- --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
The options granted during 2003 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 843,000 $ .51 $ .32
=============== ============= ===========
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
=============== ============= ===========
Exercisable options at December 31, 2003, 2002 and 2001 were as follows:
Number of Weighted-Average
--------- ----------------
December 31, Exercisable Options Exercise Price
- ------------ ------------------- --------------
2003 2,049,780 $ .86
2002 1,888,740 $ .97
2001 1,635,575 $ 1.13
The following table summarizes information about stock options at December 31, 2003:
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 1,187,750 2.3 Years $ .32 990,360 $ .32
$ .46 - $ .53 570,000 4.8 Years $ .53 1,700 $ .46
$ .60 - $ 1.13 258,000 2.3 Years $ .85 169,720 $ .99
$ 1.25 - $ 1.25 688,000 1.1 Years $ 1.25 688,000 $ 1.25
$ 2.00 - $ 2.00 195,000 1.2 Years $ 2.00 195,000 $ 2.00
$ 4.00 - $ 4.00 5,000 2.2 YEARS $ 4.00 5,000 $ 4.00
-------------- ------------- ----------- ------------- -----------
2,903,750 2.4 Years $ .75 2,049,780 $ .86
============== ============= =========== ============= ===========
F-16
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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 2003, 2002 and 2001 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 2003, 2002 and 2001.
There are 768,572 warrants outstanding at December 31, 2003. The exercise price
for all the warrants issued and outstanding as of December 31, 2003 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, 2002 768,572 $ .22 - .62 2.80 Years $ 0.56
Granted -- --
------------ ----------
BALANCE, DECEMBER 31, 2003 768,572 $ .22 - .62 1.80 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 $.32, $.15 and $.20 during 2003, 2002 and 2001, 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 3 2 0 0 2 2 0 0 1
------- ------- -------
Risk-Free Interest Rate 3.00% 3.00% 3.00%
Expected Life 4.0 Years 3.0 Years 4.0 Years
Expected Volatility 79% 81% 86%
Expected Dividends None None None
F-17
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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 3 2 0 0 2 2 0 0 1
------- ------- -------
Net Income as Reported $ 392 $ 877 $ 55
Deduct: Amount by which Stock-Based Employee
Compensation as Determined under Fair Value
Based Method for all Awards Exceeds the Compensation
as Determined under the Intrinsic Value Method $ 37 $ 18 $ 180
Pro Forma Net Income [Loss] $ 355 $ 859 $ (125)
Basic Earnings Per Share as Reported $ .03 $ .06 $ --
Pro Forma Basic Earnings [Loss] Per Share $ .02 $ .04 $ (.01)
[6] BASIC 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 3 2 0 0 2 2 0 0 1
------- ------- -------
Numerator:
Net Income $ 391,856 $ 876,563 $ 54,711
Effect of Dilutive Securities:
Interest Reversal Convertible Debentures [Net of Tax] 120,000 120,000 --
Incentive Bonus Adjustment [Net of Tax Benefit] -- (12,000) --
------------ ------------ ------------
NUMERATOR FOR DILUTED EARNINGS PER COMMON SHARE $ 511,856 $ 984,563 $ 54,711
----------------------------------------------- ============ ============ ============
Denominator:
Weighted Average Number of Common Shares
Outstanding for Basic Earnings Per Common Share 15,341,000 15,336,000 15,246,000
Effect of Dilutive Securities:
Exercise of Options 495,250 26,500 18,226
Exercise of Warrants 76,250 37,000 --
Conversion of Convertible Debentures 8,333,500 8,333,500 --
------------ ------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER
------------------------------------
COMMON SHARE 24,246,000 23,733,000 15,264,226
------------ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ .03 $ .06 $ --
- ------------------------------- ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE $ .02 $ .04 $ --
- --------------------------------- ============ ============ ============
Equity instruments that may dilute earnings per share in the future are listed
in Note 5.
Options to purchase 1,146,000 shares of common stock at prices ranging from $.60
to $4.00 per share were outstanding at December 31, 2003, 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.
F-18
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- --------------------------------------------------------------------------------
[7] SUPPLEMENTAL DATA
Accrued liabilities consist of the following:
Years ended
-----------
December 31,
------------
2 0 0 3 2 0 0 2
------- -------
Accrued Payroll, Benefits, Temporary Help and Consulting $ 54,568 $ 464,614
Accrued Professional Fees 195,043 204,552
Other 125,935 54,522
-------------- -------------
TOTALS $ 375,546 $ 723,688
------ ============== =============
[8] 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 "2008 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 12]. The balance of the funds raised from the transaction were used for
working capital purposes. The 2008 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 which the holders waived our non-compliance that
existed up through and including December 31, 2001.
F-19
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- --------------------------------------------------------------------------------
[8] CONVERTIBLE DEBENTURES [CONTINUED]
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
2007 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 have been charged to deferred financing costs
and will be amortized over the amendment period.
On August 21, 2002, we, by amendment to the 2001 Debentures, raised an
additional $700,000 through the sale of 8.00% convertible debentures due 2009
[the "2009 Debentures"] to Renaissance US Growth and Income Trust PLC and BFS US
Special Opportunities Trust PLC. The funds raised from the transaction were used
for working capital purposes. The 2009 Debentures are convertible into shares of
our common stock initially at $0.30 per share, subject to adjustment. The
related financing costs incurred of $54,220 in connection with establishing the
2009 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 2009 Debentures caused a reduction in the conversion price
of the 2008 Debentures from $0.50 per share to $0.30 per share.
The 2008 Debentures and 2009 Debentures mature on July 1, 2008 and September 1,
2009, respectively, unless the debentures are earlier redeemed by us or the
holder upon the occurrence of certain events specified in the debentures or
converted into shares of our common stock at the holder's option.
We may redeem the debentures for cash at 101% of the principal amount, together
with accrued and unpaid interest through the redemption date, upon the
occurrence of certain events specified in the debentures.
If the 2008 Debentures and 2009 Debentures are not sooner redeemed or converted,
we will be required to pay, commencing on July 1, 2004 and July 1, 2005,
respectively, monthly principal installments in the amount of ten dollars ($10)
per thousand dollars ($1,000) of the then remaining principal amount of such
debentures, and at maturity we will be required to pay the remaining unpaid
principal amount.
As of December 31, 2003, we were in compliance with the financial covenants of
the Convertible Loan Agreements.
Principal payments due on the convertible debentures are as follows:
2004 $ 105,336
2005 220,122
2006 247,061
2007 218,991
2008 1,240,210
Thereafter 468,280
-------------
TOTAL $ 2,500,000
----- =============
[9] 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 an annual maximum
of $12,000 for the year ended December 31, 2003. We match $.50 for each $1.00 of
the first 5% of pay employees elect to defer. Expenses associated with this plan
in 2003, 2002 and 2001 were approximately $61,700, $56,400 and $43,800,
respectively.
F-20
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- --------------------------------------------------------------------------------
[10] STOCKHOLDERS' EQUITY [DEFICIT]
During 2002, we issued an aggregate of 128,572 warrants to purchase such number
of shares of our common stock in exchange for an amendment to the convertible
loan agreements governing our 2008 Debentures pursuant to which one of the
financial covenants was amended for the quarters ending March 31, June 30 and
September 30, 2002 [See Note 8]. 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 our common stock in exchange for
services rendered in connection with the debt restructuring described in Note 8.
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.
[11] 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 at December 31, 2003 and 2002.
[12] 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.
[13] SEGMENT INFORMATION
As of January 1, 2003, we merged the management teams and infrastructures of our
two business units, Classic and TAS 2000, into one comprehensive unit. As a
result, we will no longer separately assess the performance of these products.
[14] MAJOR CUSTOMERS
For the year ended December 31, 2003, sales to one customer amounted to
approximately 11% of revenues. For the years ended December 31, 2002 and 2001,
sales to another individual customer amounted to approximately 30% and 11%,
respectively.
. . . . . . . . . .
F-21
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
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, 2003 $ 5,675,257 $ 522,221 $ -- $ 6,197,478
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
Allowance for Doubtful Accounts:
Year Ended December 31, 2003 $ 25,000 $ -- $ -- $ 25,000
Year Ended December 31, 2002 $ 25,000 $ -- $ -- $ 25,000
Year Ended December 31, 2001 $ 1,805,168 $ (58,161) $ 1,722,007 $ 25,000
F-22
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 29, 2004 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 and March 29, 2004
- ----------------------------------- Chief Executive Officer
John Roblin (Principal Executive Officer)
/s/ Ann F. Massey Chief Financial Officer, Controller and March 29, 2004
- ----------------------------------- Secretary (Principal Financial Officer
Ann F. Massey and Principal Accounting Officer)
/s/ Russell Cleveland Director March 29, 2004
- -----------------------------------
Russell Cleveland
/s/ Earl Gallegos Director March 29, 2004
- -----------------------------------
Earl Gallegos
/s/ Mark D. Johnston Director March 29, 2004
- -----------------------------------
Mark D. Johnston
/s/ Robert A. Marshall Director March 29, 2004
- -----------------------------------
Robert A. Marshall
-35-
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10(e)(3) Employment Agreement, dated December 31, 2003, by and between
the Registrant and John Roblin.
23 Consent of Moore Stephens, P.C.
31.1 Certification of John Roblin, President and Chief Executive
Officer, pursuant to Securities Exchange Act Rules 13a-14(a)
and 15d-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Ann F. Massey, Chief Financial Officer,
pursuant to Securities Exchange Act Rules 13a-14(a) and
15d-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of President and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.