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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 2004 or
|_| 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
---------------------------------
COVER-ALL TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-2698053
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18-01 Pollitt Drive, Fair Lawn, New Jersey 07410
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(Address of principal executive offices) (Zip Code)
(201) 794-4800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 3, 2004, the registrant had 15,367,968 shares of common stock, par
value $.01 per share, outstanding.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2004
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PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004 (Unaudited)
and December 31, 2003 (Audited)................................... 3
Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003 (Unaudited).................. 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003 (Unaudited).................. 6
Notes to Consolidated Financial Statements (Unaudited)............ 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 11
ITEM 3. Qualitative and Quantitative Disclosures
About Market Risk................................................. 15
ITEM 4. Controls and Procedures........................................... 15
PART II: OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.................................. 16
SIGNATURES ............................................................. 17
. . . . . . . . . .
-2-
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
(UNAUDITED) (AUDITED)
ASSETS:
Current Assets:
Cash and Cash Equivalents.................... $ 1,100,930 $ 1,193,173
Accounts Receivable (Less Allowance for
Doubtful Accounts of $25,000 and $25,000
in 2004 and 2003, respectively)........... 1,280,667 1,680,082
Other Receivable............................. 309 309
Prepaid Expenses............................. 363,619 353,063
------------ ------------
Total Current Assets......................... 2,745,525 3,226,627
------------ ------------
Property and Equipment - At Cost:
Furniture, Fixtures and Equipment............. 1,383,499 1,376,998
Less: Accumulated Depreciation............... (1,269,149) (1,245,631)
------------ ------------
Property and Equipment - Net.................. 114,350 131,367
------------ ------------
Capitalized Software (Less Accumulated
Amortization of $6,440,753 and
$6,197,478, respectively).................... 2,015,860 1,903,470
------------ ------------
Deferred Financing Costs (Net of
Accumulated Amortization of $85,764 and
$77,146, respectively)....................... 155,547 164,165
------------ ------------
Other Assets.................................... 59,058 59,335
------------ ------------
Total Assets................................. $ 5,090,340 $ 5,484,964
============ ============
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
-3-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2004 2003
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(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current Liabilities:
Accounts Payable............................ $ 214,826 $ 122,146
Accrued Liabilities......................... 373,886 375,546
Convertible Debentures ..................... 147,021 99,484
Convertible Debentures - Related Party...... 8,648 5,852
Unearned Revenue............................ 1,954,907 2,446,280
------------ ------------
Total Current Liabilities................... 2,699,288 3,049,308
------------ ------------
Long-Term Liabilities:
Convertible Debentures...................... 2,252,979 2,300,516
Convertible Debentures - Related Party...... 91,352 94,148
------------ ------------
Total Long-Term Liabilities................. 2,344,331 2,394,664
------------ ------------
Total Liabilities........................... 5,043,619 5,443,972
------------ ------------
Commitments and Contingencies.................. -- --
------------ ------------
Stockholders' Equity:
Common Stock, $.01 Par Value, Authorized
75,000,000 Shares; 17,855,468 and
17,846,218 Shares Issued and 15,355,468
and 15,346,218 Shares Outstanding,
Respectively.............................. 178,555 178,462
Capital In Excess of Par Value................. 26,153,212 26,150,447
Accumulated Deficit............................ (25,582,046) (25,584,917)
Treasury Stock - At Cost - 2,500,000 Shares.... (703,000) (703,000)
------------ ------------
Total Stockholders' Equity..................... 46,721 40,992
------------ ------------
Total Liabilities and Stockholders' Equity..... $ 5,090,340 $ 5,484,964
============ ============
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
-4-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
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REVENUES:
Licenses.................................. $ 342,750 $ 230,500
Maintenance............................... 1,161,490 1,121,343
Professional Services..................... 235,620 541,000
Applications Service Provider ("ASP")
Services................................ 154,198 165,500
------------ ------------
TOTAL REVENUES............................ 1,894,058 2,058,343
------------ ------------
COST OF REVENUES:
Licenses.................................. 322,856 207,924
Maintenance............................... 632,636 665,720
Professional Services..................... 121,251 147,179
ASP Services.............................. 24,207 61,107
------------ ------------
TOTAL COST OF REVENUES.................... 1,100,950 1,081,930
------------ ------------
DIRECT MARGIN............................. 793,108 976,413
------------ ------------
OPERATING EXPENSES:
Sales and Marketing....................... 291,339 200,657
General and Administrative................ 299,538 303,086
Research and Development.................. 151,740 160,344
------------ ------------
TOTAL OPERATING EXPENSES.................. 742,617 664,087
------------ ------------
OPERATING INCOME.......................... 50,491 312,326
------------ ------------
OTHER INCOME (EXPENSE):
Interest Expense.......................... (47,868) (48,455)
Interest Expense - Related Party.......... (1,995) (1,973)
Interest Income........................... 2,243 4,419
------------ ------------
TOTAL OTHER INCOME (EXPENSE).............. (47,620) (46,009)
------------ ------------
INCOME BEFORE INCOME TAXES................ 2,871 266,317
INCOME TAXES................................... -- 23,968
------------ ------------
NET INCOME..................................... $ 2,871 $ 242,349
============ ============
BASIC EARNINGS PER COMMON SHARE................ $ .00 $ .02
============ ============
DILUTED EARNINGS PER COMMON SHARE.............. $ .00 $ .01
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR BASIC EARNINGS
PER COMMON SHARE.......................... 15,348,000 15,336,000
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR DILUTED EARNINGS
PER COMMON SHARE.......................... 24,417,000 23,993,000
============ ============
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
-5-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income...................................... $ 2,871 $ 242,349
Adjustments to Reconcile Net Income to
Net Cash Provided From (Used For) Operating
Activities:
Depreciation................................ 23,518 20,502
Amortization of Capitalized Software........ 243,275 120,307
Amortization of Deferred Financing Costs.... 8,618 8,618
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable......................... 399,415 (30,323)
Prepaid Expenses............................ (10,556) 102,695
Other Receivable............................ -- 240,672
Other Assets................................ 277 --
Increase (Decrease) in:
Accounts Payable............................ 92,680 (195,633)
Taxes Payable............................... -- 23,968
Accrued Liabilities......................... (1,660) (394,460)
Unearned Revenue............................ (491,373) (514,106)
------------ ------------
Net Cash (Used For) Provided From Operating
Activities..................................... 267,065 (375,411)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures............................ (6,501) (41,050)
Capitalized Software Expenditures............... (355,665) (151,302)
------------ ------------
Net Cash (Used For) Provided From Investing
Activities..................................... (362,166) (192,352)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Exercise of Stock Options......... 2,858 135
------------ ------------
Net Cash Provided From (Used For) Financing
Activities..................................... 2,858 135
------------ ------------
CHANGE IN CASH AND CASH EQUIVALENTS............... (92,243) (567,628)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD... 1,193,173 2,063,411
------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD......... $ 1,100,930 $ 1,495,783
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
CASH PAID DURING THE PERIODS FOR:
Interest........................................ $ 47,868 $ 48,455
Interest - Related Party........................ 1,995 1,973
Income Taxes.................................... -- --
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
-6-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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[1] GENERAL
For a summary of significant accounting policies, refer to Note 1 of Notes to
Consolidated Financial Statements included in Cover-All Technologies Inc.'s (the
"Company") Quarterly Report on Form 10-K for the year ended December 31, 2003.
While the Company believes that the disclosures herein presented are adequate to
make the information not misleading, these consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest annual report. Certain amounts
for the prior period have been reclassified to conform with the current period's
financial statement presentation. The financial statements include on a
consolidated basis the results of its subsidiary. All material intercompany
transactions and balances have been eliminated.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments which are necessary to present fairly the Company's
consolidated financial position as of March 31, 2004, and the results of their
operations for the three month periods ended March 31, 2004 and 2003, and their
cash flows for the three month periods ended March 31, 2004 and 2003. Such
adjustments are of a normal and recurring nature. The results of operations for
the three month periods ended March 31, 2004 and 2003 are not necessarily
indicative of the results to be expected for a full year.
[2] 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. 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.
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 were 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
-7-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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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.
At December 31, 2003, 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
================
[3] EARNINGS PER SHARE DISCLOSURES
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations:
FOR THE THREE MONTHS ENDED
MARCH 31, 2004
-------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -------------
Basic EPS:
Income Available to Common
Stockholders..................... $ 2,871 15,348,410 $ 0.00
Interest Reversal Convertible
Debentures (Net of Tax).......... 30,000 -- --
Effect of Dilutive Securities:
Exercise of Options.............. -- 651,992 --
Exercise of Warrants............. -- 82,950 --
Conversion of Convertible
Debentures..................... -- 8,333,333 --
------------- ------------- -------------
Diluted EPS:
Income Available to Common
Stockholders Plus Assumed
Conversions.................... $ 32,871 24,416,685 $ 0.00
============= ============= =============
Options to purchase 1,013,000 shares of common stock at prices ranging from
$1.13 to $4.00 per share were outstanding at March 31, 2004, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares for the period
($.62).
-8-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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FOR THE THREE MONTHS ENDED
MARCH 31, 2004
-------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- -------------
Basic EPS:
Income Available to Common
Stockholders..................... $242,349 15,336,218 $ 0.02
Interest Reversal Convertible
Debentures (Net of Tax).......... 30,000 -- --
Effect of Dilutive Securities:
Exercise of Options............... -- 255,987 --
Exercise of Warrants.............. -- 67,081 --
Conversion of Convertible
Debentures...................... -- 8,333,333 --
------------- ------------- -------------
Diluted EPS:
Income Available to Common
Stockholders Plus Assumed
Conversions..................... $272,349 23,992,619 $ 0.01
============= ============= =============
Options to purchase 1,285,750 shares of common stock at prices ranging from $.60
to $4.00 per share were outstanding at March 31, 2003, but were not included in
the computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares for the period ($.46).
[4] STOCK OPTION AND STOCK PURCHASE PLANS
We have adopted several stock-based compensation plans that provide for the
grant of options to our employees and non-employee directors. All options under
these plans vest over terms of zero to three years. Options may be granted as
incentive or non-qualified stock options and are exercisable at a price and time
as determined by the Board of Directors on the grant date.
We account for stock-based employee compensation using the intrinsic value
method in accordance with APB Opinion No. 25 and related interpretations which
generally require that the amount of compensation cost that must be recognized,
if any, is the quoted market price of the stock on the measurement date, which
is generally the grant date, less the amount the grantee is required to pay to
acquire the stock. Alternatively, Statement of Financial Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," employs fair value-based
measurement and generally results in the recognition of compensation expense for
all stock-based awards to employees. SFAS No. 123 does not require an entity to
adopt those provisions, but, rather, permits continued application of APB
Opinion No. 25. We have elected not to adopt the recognition and measurement
provisions of SFAS No. 123 and continue to account for our stock-based employee
compensation plans under APB Opinion No. 25 and related interpretations. In
accordance with APB Opinion No. 25, compensation is generally recorded for
stock-based employee compensation grants based on the excess of the market value
of the common stock on the measurement date over the exercise price. If the
exercise price of the stock-based compensation is equal to or exceeds the market
price of our common stock on the grant date, no compensation expense is
recorded.
For the three months ended March 31, 2004 and 2003, the Company was not required
to record compensation expense for stock option grants.
Had compensation cost for the stock-based employee compensation plans been
determined based on the fair values of awards on the grant date, estimated using
the Black-Scholes option pricing model, which would be consistent with the
method described in SFAS No. 123, the Company's reported net income (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts shown
below:
-9-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
--------------------------------------
2004 2003
---------------- ----------------
(in thousands,
except per share amounts)
Net Income as Reported.................... $ 3 $ 242
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........... $ 25 $ 56
Pro Forma Net (Loss) Income............... $ (22) $ 186
Basic Earnings Per Share as Reported...... $ 0.00 $ 0.02
Pro Forma Basic Earnings Per Share........ $ 0.00 $ 0.01
Diluted Earnings Per Share as Reported.... $ 0.00 $ 0.01
Pro Forma Diluted Earnings Per Share...... $ 0.00 $ 0.01
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transaction and Disclosure - An
Amendment of FASB Statement No. 123." This Statement provides alternative
accounting for stock-based employee compensation and requires prominent
disclosures in both annual and interim financial statements about the method
used in reporting results. The Company has elected not to adopt the recognition
and measurement provisions of SFAS No. 123 and continues to account for its
stock-based employee compensation plans under APB Opinion No. 25 and related
interpretations and, therefore, the transaction provisions will not have an
impact on the Company's financial position or results of operations. The
required expanded interim disclosures are provided above.
-10-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CERTAIN OF THE MATTERS DISCUSSED IN THIS REPORT, INCLUDING, WITHOUT
LIMITATION, MATTERS DISCUSSED UNDER THIS ITEM 2, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT) AND 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.
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 for the three months ended March 31, 2004 decreased to $1,894,000
from $2,058,000 for the three months ended March 31, 2003 due to a decrease in
professional services revenue, which was partially offset by increases in
license and maintenance revenue.
The following is an overview of the key components of our revenue and
other important financial data for the three months ended March 31, 2004:
SOFTWARE LICENSES. We signed no new customer licenses in the three
months ended March 31, 2004. Our license revenue in the three months ended March
31, 2004 of $343,000 was from existing customers who chose to renew, add onto or
extend their use of our software. In the first three months of 2003, we
generated $231,000 in license revenue.
MAINTENANCE. The increase in maintenance revenue, from $1,121,000 in the
first quarter of 2003 to $1,161,000 in the same period in 2004, was mainly due
to annual increases to existing customers.
PROFESSIONAL SERVICES. The decrease in professional services revenue,
from $541,000 in the three months ended March 31, 2003 to $236,000 in the same
period of 2004, was a result of decreased demand for customizations from our
current customer base.
ASP SERVICES. ASP services revenue decreased from $165,000 in the first
three months of 2003 to $154,000 in the same period in 2004, due to the loss of
one ASP customer.
INCOME BEFORE PROVISION FOR INCOME TAXES. Income before provision for
income taxes decreased from $266,000 in the first three months of 2003 to $2,900
in the same period of 2004 primarily due to reduction in professional services
revenue and an increase in sales and marketing expenses.
NET INCOME. Net income for the three months ended March 31, 2004
decreased to $2,900 from $242,000 in the same period of 2003 as a result of a
reduction in professional services revenue and an increase in sales and
marketing expenses.
CASH FLOW. We generated $267,000 in positive cash flow from operations
in the first three months of 2004 and ended the period with $1,101,000 in cash
and cash equivalents and $1,281,000 in accounts receivable.
-11-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
We continue to 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 have increased our sales and
marketing effort. Consequently, we are incurring additional sales and marketing
expense in advance of generating the corresponding revenue.
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:
THREE MONTHS
ENDED MARCH 31,
-----------------------------------
2004 2003
-------------- --------------
REVENUES:
License 18.1% 11.2%
Maintenance 61.4 54.5
Professional Services 12.4 26.3
Applications Service Provider
("ASP") Services 8.1 8.0
-------------- --------------
TOTAL REVENUES 100.0 100.0
-------------- --------------
COST OF REVENUES:
License 17.0 10.1
Maintenance 33.4 32.3
Professional Services 6.4 7.2
ASP Services 1.3 3.0
-------------- --------------
TOTAL COST OF REVENUES 58.1 52.6
-------------- --------------
DIRECT MARGIN 41.9 47.4
-------------- --------------
OPERATING EXPENSES:
Sales and Marketing 15.4 9.8
General and Administrative 15.8 14.7
Research and Development 8.0 7.8
-------------- --------------
TOTAL OPERATING EXPENSES 39.2 32.3
-------------- --------------
OPERATING INCOME 2.7 15.1
-------------- --------------
OTHER EXPENSE (INCOME):
Interest Expense 2.6 2.4
Interest Income (0.1) (0.2)
-------------- --------------
TOTAL OTHER EXPENSE (INCOME) 2.5 2.2
-------------- --------------
INCOME BEFORE INCOME TAXES 0.2 12.9
-------------- --------------
INCOME TAXES -- 1.1
-------------- --------------
NET INCOME 0.2% 11.8%
-------------- --------------
-12-
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Total revenues for the three months ended March 31, 2004 were $1,894,000
as compared to $2,058,000 for the same period in 2003. License fees were
$343,000 for the three months ended March 31, 2004 compared to $231,000 in the
same period in 2003. For the three months ended March 31, 2004, maintenance
revenues were $1,161,000 compared to $1,121,000 in the same period of the prior
year. Professional services revenue contributed $236,000 in the three months
ended March 31, 2004 compared to $541,000 in the first quarter of 2003, as a
result of decrease in demand for customization from our current customer base.
For the three months ended March 31, 2004, ASP revenues were $154,000 as
compared to $165,000 in the same period for the prior year.
Cost of sales increased to $1,101,000 for the three months ended March
31, 2004 as compared to $1,082,000 for the same period in 2003 due to staff
related expenses. Non-cash capitalized software amortization was $243,000 for
the three months ended March 31, 2004 as compared to $120,000 for the same
period in 2003. The Company capitalized $356,000 of software development costs
in the first three months of 2004 as compared to $151,000 in the same period in
2003.
Research and development expenses were $152,000 for the three months
ended March 31, 2004 compared to $160,000 for the same period in 2003. We are
continuing to enhance the functionality of its products and to refine its
processes in response to customer needs.
Sales and marketing expenses were $291,000 for the three months ended
March 31, 2004 as compared to $201,000 in the same period of 2003 primarily due
to an increase in a marketing and sales effort to improve the market share of
our solutions set.
General and administrative expenses were $300,000 in the three months
ended March 31, 2004 as compared to $303,000 in the same period in 2003
primarily due to our continuing efforts to reduce overhead costs.
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 March 31, 2004, we had cash and cash equivalents of $1,101,000
compared to cash and cash equivalents of $1,496,000 at March 31, 2003. The
decrease in cash and cash equivalents is primarily attributable to the reduction
in professional services 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 is payable monthly at the rate
of 8% per annum. We made $50,000 of interest payments on the debentures during
the first three months of 2004 and 2003. 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 March 31, 2004, we were in compliance with the financial
covenants set forth in the convertible loan agreements governing these
debentures.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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At March 31, 2004, we had working capital of $46,237 compared to
$536,000 at March 31, 2003.
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.
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.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to the impact of interest rate changes and
changes in the market value of its investments.
INTEREST RATE RISK. The Company's exposure to market rate risk for
changes in interest rates relates primarily to the Company's investment
portfolio. The Company has not used derivative financial instruments in its
investment portfolio. The Company invests its excess cash in a major bank money
market account. The Company protects and preserves its invested funds by
limiting default, market and reinvestment risk.
Investments in this account carry a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely impacted due to a
rise in interest rates, while floating rate securities may produce less income
than expected if interest rates fall. Due in part to these factors, the
Company's future investment income may fall short of expectations due to changes
in interest rates or the Company may suffer losses in principal if forced to
sell securities which have declined in market value due to changes in interest
rates.
ITEM 4. CONTROLS AND PROCEDURES.
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
of 1934, as amended). Based upon that evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission (the "SEC") rules and forms, and include
controls and procedures designed to ensure that information required to be
disclosed by us in such reports is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in our internal control over financial
reporting during the quarter ended March 31, 2004 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
* * * * * * * * *
Statements in this Form 10-Q, other than statements of historical information
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks which may cause the
Company's actual results in future periods to differ materially from expected
results. Those risks include, among others, risk associated with increased
competition, customer decisions, delays in productivity programs and new product
introductions, and other business factors beyond the Company's control. Those
and other risks are described in the Company's filings with the SEC over the
last 12 months, copies of which are available from the SEC or may be obtained
upon request from the Company.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
*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 John W. Roblin 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 Ann Massey pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
---------------------------
* Filed herewith
(b) REPORTS ON FORM 8-K.
A Current Report on Form 8-K was furnished March 30, 2004, reporting
under Item 12, "Results of Operations and Financial Condition,"
Cover-All Technologies Inc.'s results for the year and quarter ended
December 31, 2003.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVER-ALL TECHNOLOGIES INC.
Date: May 12, 2004 By: /s/ John Roblin
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John Roblin, Chairman of the Board of Directors,
President and Chief Executive Officer
Date: May 12, 2004 By: /s/ Ann Massey
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Ann Massey, Chief Financial Officer
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