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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, 2004.
|_| 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.
(Exact name of Registrant as specified in its charter)
DELAWARE 13-2698053
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18-01 POLLITT DRIVE, FAIR LAWN, NEW JERSEY 07410
(Address of principal executive office) (Zip Code)
(201) 794-4800
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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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: $7,870,000 as of June 30, 2004 based on the closing price on June 30,
2004.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 15,748,084 shares of common
stock, par value $.01 per share, as of March 14, 2005.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the 2005 Annual Meeting of
Stockholders ("Proxy Statement"), to be filed with the Securities and Exchange
Commission (the "SEC") 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 .........................................................16
Item 3. Legal Proceedings...................................................16
Item 4. Submission of Matters to a Vote of Security Holders ................16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities...................17
Item 6. Selected Financial Data ............................................18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..........................................20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......... 27
Item 8. Financial Statements and Supplementary Data ........................27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ...........................................27
Item 9A. Controls and Procedures ............................................27
Item 9B. Other Information ..................................................28
PART III
Item 10. Directors and Executive Officers of the Registrant .................29
Item 11. Executive Compensation .............................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management .....30
Item 13. Certain Relationships and Related Transactions .....................30
Item 14. Principal Accounting Fees and Services .............................30
PART IV
Item 15. Exhibits, Financial Statement Schedules ............................30
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PART I
ITEM 1. BUSINESS
GENERAL
We provide state-of-the-art software products and services to the
property and casualty insurance industry. We were incorporated in Delaware in
April 1985 as Warner Computer Systems, Inc. and changed our name to Warner
Insurance Services, Inc. in March 1992. In June 1996, we changed our name to
Cover-All Technologies Inc. Our products and services are offered through our
wholly-owned subsidiary, Cover-All Systems, Inc., also a Delaware corporation.
Our software products and services focus on the functions required to
market, rate, issue, print, bill and support the entire life cycle of insurance
policies. Our products and services combine an in-depth knowledge of property
and casualty insurance with innovative solution designs using state-of-the-art
technology. Our products are either available "off-the-shelf" or customized to
specific customer needs. Our software can be licensed for customer use on their
own platforms or can be licensed through our application services provider,
referred to as "ASP," using third party technology platforms and support.
We also provide a wide range of professional services that support
product customization, conversion from existing systems and data integration
with other software or reporting agencies. We also offer on-going support
services including incorporating recent insurance rate and rule changes in our
solutions. These support services also include analyzing the changes,
developments, quality assurance, documentation and distribution of insurance
rate and rule changes.
We earn revenue from software contract licenses, service fees from ASPs,
continuing maintenance fees for servicing the product and professional services.
PRODUCTS
MY INSURANCE CENTER
In December 2001, we announced the availability of My Insurance Center,
referred to as "MIC," a customizable and configurable Internet-enabled software
platform and suite of product components that was developed to provide insurance
agents, brokers and carriers with integrated workflows and access to real-time
information.
MIC enables our customers to license our rating, policy issuance,
billing and other software components 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 either for in-house implementation
or through our ASP. Combined with our client-centric database, MIC has an
integrated and flexible architecture 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. Multiple software components share data
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,
increasing a user's productivity. MIC provides a
consolidated view of data from different software
components and provides "hotlinks" enabling a customer
to connect quickly to the specific module of the
specific system. MIC offers the user fast access,
pro-active alerts and real-time 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 grow with our customer's 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) 9i Application Server, Oracle
9i Database, J2EE 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 / MIC RATING & ISSUANCE
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 and 2004, this concept
further evolved and the Classic product was significantly expanded and is now
sold and marketed as MIC Rating & Issuance. Most of our Classic customers have
upgraded to this new product: MIC Rating & Issuance.
The Classic/MIC Rating & Issuance product 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 original 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.
This flexibility has been retained in MIC Rating & Issuance, and 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 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 enables us and our customers to build sophisticated interfaces
to other software components. Today MIC Rating & Issuance is sold and marketed
as a web-based solution with an integrated database, and we no longer refer to
the integrated database "IPD" as a stand-alone component.
We designed the Classic/MIC Rating & Issuance 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 is designed to operate over an intranet on a server 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.
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. 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 sold and marketed as MIC Rating & Issuance. In
early 2003, we developed capabilities for MIC Rating & Issuance to run on a
Linux platform, a change designed to reduce operating costs for our customers.
The Classic Rating and Policy Issuance Product (now replaced by MIC
Rating & Issuance) has been and continues to be enhanced and updated with new
technology. The sophisticated design of the product
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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 MIC Rating & Issuance product line brings to the customer the
following functions, features and capabilities:
o Clear and comprehensive data collection with extensive real time
edits
o Policy history - easy policy changes and useful for activities
such as coverage inquiries
o On-line system, screen and field level help
o On-line Commercial Lines Manual Tables and Footnotes
o Easy and direct system navigation
o Standard ISO (Insurance Service Office) coverages and rates
support
o Company customized coverages and rates support
o Fully automated recipient-driven issuance of insurance policies,
worksheets, ID cards, etc., including print preview
o Policy database
o Help desk assistance
The design of MIC Rating & Issuance 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 an
intranet/Internet 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 IPD and MIC. We have streamlined the
support process with the goal to improve quality to our customers.
The Classic/MIC Rating & Issuance product is in use in over 40
companies. Total Classic/MIC Rating & Issuance revenues were $8,648,000 for
2004, as compared to $6,826,000 for 2003 and $5,719,000 for 2002.
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.
Some of 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 in the 1990's 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.
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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:
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 $626,000 for 2004, $698,000 for 2003 and
$2,423,000 for 2002.
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, new
capabilities offered by Web Services as well as changes in technology (for
example, support for personal digital assistants, or PDAs), especially Internet
technologies. We are also developing integration and inter-connection
capabilities for MIC to exchange data with third party systems which should
bring significant benefit to our customers by reducing data entry and reducing
the exposure to errors & omissions liability.
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. We also have developed a
"custom" service offering for customers who desire specially-tailored services,
service level agreements and other services that enable them to achieve their
business objectives. Our ASP will also continue to be enhanced with additional
functionality and customer options.
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COMPETITION
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.
MARKETING
We maintain an in-house sales and marketing staff. 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 we will continue to expand in 2005 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 $760,000, $533,000 and $600,000
for the years ended December 31, 2004, 2003 and 2002, respectively.
BACKLOG
We had no license, maintenance, professional services or ASP backlog of
unbilled work as of December 31, 2004.
MAJOR CUSTOMERS
Our product line is in use in over 40 companies. For the years ended
December 31, 2004, 2003 and 2002, we had only one customer in any of those years
contribute revenues in excess of 10% of our total revenues. AIGT generated 31%
and 11% of our revenues for the years ended December 31, 2004 and 2003,
respectively. Accident Fund generated 30% of our revenues for the year ended
December 31, 2002.
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We had no export sales in 2004, 2003 or 2002.
EMPLOYEES
We had on average 50 employees during 2004. 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.
AVAILABLE INFORMATION
Our website address is WWW.COVER-ALL.COM. We make available, free of
charge, through our website our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the SEC. The information on our website is
not incorporated by reference into this report.
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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 $767,000 for 2004, $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 continue to invest
significantly in sales and marketing while furthering 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. 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 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. We are required to repay principal on the
2008 Debentures and 2009 Debentures, commencing July 1, 2004 and July 1, 2005,
respectively, in monthly installments 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. In
2004, the holders of the 2008 Debentures elected to convert all of their monthly
principal installments due in 2004, totaling $105,335, under such debentures
into shares of our common stock at the conversion price of $0.30 per share in
lieu of receiving such installment payments in cash. In connection with this
conversion, we issued to the holders of the 2008 Debentures an aggregate of
351,116 shares of our common stock. We made an aggregate of $198,000 of interest
payments on the debentures during 2004, and we expect to make interest payments
of approximately $183,000 in the aggregate during 2005.
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,
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acquisitions and asset sales, or alter our lines of business, even though these
actions might otherwise benefit our business. As of December 31, 2004, we had a
net stockholders' equity of approximately $928,000 and a net working capital of
approximately $900,000.
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
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depends upon our ability to anticipate or respond to technological advances,
emerging industry standards and practices in a timely and cost-effective manner.
We may not be successful in developing and marketing new products or
enhancements to existing products that respond to technological changes or
evolving industry standards. The failure to respond successfully to these
changes and evolving standards on a timely basis, or at all, could have a
detrimental effect on our business, operating results and financial condition.
OUR MARKET IS HIGHLY COMPETITIVE.
Both the computer software and the insurance software systems industries
are highly competitive. There are a number of larger companies, including
computer manufacturers, computer service and software companies and insurance
companies, that have greater financial resources than we have. These companies
currently offer and have the technological ability to develop software products
similar to those offered by us. These companies present a significant
competitive challenge to our business. Because we do not have the same financial
resources as these competitors, we may have a difficult time in the future in
competing with these companies. In addition, very large insurers internally
develop systems similar to our systems and as a result, they may not become
customers of our software. We compete on the basis of our insurance knowledge,
products, service, price, system functionality and performance and technological
advances. Although we believe we can continue to compete on the basis of these
factors, some of our current competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than we do. Our current competitors may be able
to:
o undertake more extensive marketing campaigns for their brands
and services;
o devote more resources to product development;
o adopt more aggressive pricing policies; and
o make more attractive offers to potential employees and
third-party service providers.
WE DEPEND ON KEY PERSONNEL.
Our success depends to a significant extent upon a limited number of
members of senior management and other key employees, including John W. 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.
-13-
While we believe that our products and trademarks do not infringe upon
the proprietary rights of third parties, third parties may claim that our
products infringe, or may infringe, upon their proprietary rights. Any
infringement claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
product shipment delays or require us to develop non-infringing technology or
enter into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all. If a claim
of product infringement against us is successful and we fail or are unable to
develop non-infringing technology or license the infringed or similar
technology, our business, operating results and financial condition could be
significantly and adversely affected.
WE DEPEND ON EXISTING CUSTOMERS.
In 2004 and 2003, our software products operations depended primarily on
certain existing customers. One of these customers accounted for approximately
31% and 11% of our total revenues in 2004 and 2003, respectively. 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 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, 2004, 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.
-14-
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. As of December 31, 2004, the 2008 Debentures and the 2009
Debentures were convertible into an aggregate of 7,982,217 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.
-15-
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 presently located in Fair Lawn, New Jersey where we
occupy approximately 21,000 square feet under a lease which expires at May 31,
2005. Currently, we fully utilize this facility.
On March 3, 2005 we signed an 89-month lease for approximately 20,000
square feet of office space located in Fairfield, New Jersey. This will serve as
our new headquarters.
We believe that each of our current and new headquarters is well
maintained and adequate to meet our needs in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders through the
solicitation of proxies or otherwise during the fourth quarter ended December
31, 2004.
-16-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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, 2003 as traded in the over-the-counter market on
the OTC Bulletin Board. The quotations below reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
HIGH LOW
2004: ---- ---
1st Quarter $0.80 $0.51
2nd Quarter 0.77 0.52
3rd Quarter 0.62 0.31
4th Quarter 0.62 0.30
HIGH LOW
2003: ---- ---
1st Quarter $0.70 $0.25
2nd Quarter 0.70 0.46
3rd Quarter 0.88 0.42
4th Quarter 0.75 0.52
As of March 14, 2005, there were 539 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 14, 2005 was
$0.45, as reported by the OTC Bulletin Board.
In July 2004 and September 2004, the holders of the 2008 Debentures
elected to convert an aggregate of $90,780 and $14,555, respectively, in
principal of such debentures, representing all of their monthly installments of
principal due in 2004 under such debentures (in lieu of receiving such
installment payments in cash), for shares of our common stock at the conversion
price of $0.30 per share. In connection with this conversion, we issued to the
holders of the 2008 Debentures aggregate of 302,600 and 48,516 shares of our
common stock in July 2004 and September 2004, respectively. No cash proceeds
were received by us in connection with the partial conversion of the 2008
Debentures. The shares of our common stock issued upon the conversion of the
debentures were issued exempt from registration in reliance on Section 3(a)(9)
of the Securities Act of 1933 as an exchange of securities by an issuer with its
existing security holders where no commission or other remuneration was paid or
given directly or indirectly for soliciting such exchange.
-17-
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial information as of December
31, 2004 and 2003, and for each of the years ended December 31, 2004, 2003 and
2002, have 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, 2002, 2001 and 2000 and for the years ended December 31, 2001 and
2000 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, 2004, 2003, 2002, 2001 and 2000:
YEAR ENDED DECEMBER 31,
---------------------------------------
2004 2003 2002 2001 2000
------- ------- ------- ------- -------
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $9,274 $7,524 $8,142 $6,263 $7,963
Income (loss) before income tax....... 816 392 738 (272) (2,916)
Net income (loss)..................... 767 392 877 55 (2,412)
Net income (loss) per share - basic... 0.05 0.03 0.06 0.00 (0.14)
Net income (loss) per share - diluted. 0.04 0.02 0.04 0.00 (0.14)
Cash dividends per share.............. $ -- $ -- $ -- $ -- $ --
BALANCE SHEET DATA:
Cash and cash equivalents............. $ 144 $1,193 $2,063 $ 431 $ 422
Working capital (deficiency).......... 900 177 336 (1,114) 78
Total assets.......................... 6,388 5,485 5,589 3,417 5,141
Short-term debt....................... 220 105 -- 18 64
Long-term debt........................ 2,175 2,395 2,500 1,800 3,018
Stockholders' equity (deficit)........ 928 41 (354) (1,247) (1,370)
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the
years ended December 31, 2004, 2003 and 2002:
QUARTER
--------------------------------------
1ST 2ND 3RD 4TH
--------- --------- --------- --------
2004:
Total Revenues............................ $ 1,894 $1,927 $ 1,640 $ 3,813
Operating Income (Loss)................... 50 (112) (300) 1,357
Net Income (Loss)......................... 3 (161) (350) 1,275
Basic Earnings (Loss) Per Common Share.... $ 0.00 $(0.01) $ (0.02) $ 0.08
Diluted Earnings (Loss) Per Common Share.. $ 0.00 $(0.01) $ (0.02) $ 0.07
-18-
QUARTER
--------------------------------------
1ST 2ND 3RD 4TH
--------- --------- --------- --------
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
QUARTER
--------------------------------------
1ST 2ND 3RD 4TH
--------- --------- --------- --------
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
-19-
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.
2004 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 our
software licensed through our application services provider ("ASP"), continuing
maintenance fees for servicing our products and professional services. Total
revenue in 2004 increased to $9,274,000 from $7,524,000 in 2003 due to an
increase in license and ASP services revenue, which was partially offset by a
decrease in maintenance and professional services revenue.
The following is an overview of the key components of our revenue and
other important financial data in 2004:
SOFTWARE LICENSES. We signed one new customer license in 2004. Our
license revenue in 2004 and 2003 of $3,435,000 and $995,000, respectively, was
mainly from existing customers who chose to upgrade, renew, add onto or extend
their use of our software.
MAINTENANCE. The decrease in maintenance revenue, from $4,470,000 in
2003 to $4,356,000 in 2004, was mainly due to the loss of several existing
customers.
PROFESSIONAL SERVICES. The decrease in professional services revenue,
from $1,457,000 in 2003 to $866,000 in 2004, was a result of decreased demand
for customizations from our current customer base.
ASP. ASP revenue increased from $602,000 in 2003 to $617,000 in 2004,
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 increased from $392,000 in 2003 to $816,000 in 2004 primarily due
to an increase in license revenue.
NET INCOME. Net income for 2004 increased to $767,000 from $392,000 in
2003 as a result of an increase in license revenues.
We continue to face several challenges to growth in 2005 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.
-20-
In response to these challenges, we are continuing to increase our sales and
marketing effort. Consequently, we continue to 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
license term has begun, 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.
VALUATION OF CAPITALIZED SOFTWARE
Costs for the internal development of new software products and
substantial enhancements to existing software products are expensed as incurred
until technological feasibility has been established, at which time any
additional costs are capitalized. As we have completed our software development
concurrently with the establishment of technological feasibility, we have
commenced capitalizing these costs. Amortization is calculated on a
product-by-product basis as the greater of the amount computed using (a) the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product. At each
balance sheet date, the unamortized capitalized costs of each computer software
product is compared to the net
-21-
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,
------------------------
2004 2003 2002
---- ---- ----
REVENUES:
License 37.0% 13.2% 26.8%
Maintenance 47.0 59.4 53.9
Professional Services 9.3 19.4 13.0
Applications Service Provider ("ASP") Services 6.7 8.0 6.3
------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0
------ ------ ------
COST OF REVENUES:
License 16.2 11.5 17.4
Maintenance 29.9 35.7 27.7
Professional Services 4.7 6.0 5.1
ASP Services 1.4 2.2 2.8
------ ------ ------
TOTAL COST OF REVENUES 52.2 55.4 53.0
------ ------ ------
DIRECT MARGIN 47.8 44.6 47.0
------ ------ ------
OPERATING EXPENSES:
Sales and Marketing 13.6 13.1 11.1
General and Administrative 15.1 17.4 17.4
Research and Development 8.2 7.1 7.4
Provision for Doubtful Accounts 0.2 -- --
------ ------ ------
TOTAL OPERATING EXPENSES 37.1 37.6 35.9
------ ------ ------
OPERATING INCOME 10.7 7.0 11.1
------ ------ ------
OTHER EXPENSE (INCOME):
Interest Expense 2.0 2.6 1.9
Interest Expense - Related Party 0.1 0.1 0.1
Interest Income 0.0 (0.2) (0.0)
Other Expense 0.0 0.1 --
Other Income (0.2) (0.8) --
------ ------ ------
TOTAL OTHER EXPENSE (INCOME) 1.9 1.8 2.0
------ ------ ------
INCOME BEFORE INCOME TAXES (BENEFIT) 8.8 5.2 9.1
------ ------ ------
INCOME TAXES (BENEFIT) 0.5 -- (1.7)
------ ------ ------
NET INCOME 8.3% 5.2% 10.8%
------ ------ ------
-22-
YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003
REVENUES
Total revenues were $9,274,000 for the year ended December 31, 2004
compared to $7,524,000 for the year ended December 31, 2003, an increase of 23%.
License fees were $3,435,000 for the year ended December 31, 2004 compared to
$995,000 in the same period in 2003 as a result of a license renewal by a major
customer in 2004. The rate of entering into license agreements with new
customers has slowed due in large part to continued weakness in technology
capital spending by our target customers. For the year ended December 31, 2004,
maintenance revenues were $4,356,000 compared to $4,470,000 in the prior year
due to the loss of several customers. Professional services revenue contributed
$866,000 for the year ended December 31, 2004 compared to $1,457,000 for the
year ended December 31, 2003 as a result of decreased demand for customizations
from our current customer base, which to a certain extent can be attributed to
the conversion from Classic to MIC Rating & Issuance. 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
$617,000 for the year ended December 31, 2004 compared to $602,000 for the year
ended December 31, 2003.
Cost of revenues increased to $4,836,000 for the year ended December 31,
2004 as compared to $4,170,000 for 2003 due to reduced staff-related expenses.
Non-cash capitalized software amortization was $1,008,000 for the year ended
December 31, 2004 as compared to $522,000 in 2003. We capitalized software
development costs of $988,000 in 2004 compared to $1,027,000 in 2003.
EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses in 2004 were
$760,000 compared to $533,000 for the year ended December 31, 2003. 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 increased to
$1,257,000 in 2004 compared to $984,000 in 2003. This increase was primarily due
to an increase in staffing and advertising and promotion expenses in 2004.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $1,404,000 in 2004 compared to $1,306,000 for the year ended
December 31, 2003 primarily due to an increase in expenses related to employee
compensation in 2004, including the addition of in-house counsel and earned
bonuses.
OTHER INCOME. We had $17,000 of other income for the year ended December
31, 2004 compared to $62,000 of other income for the year ended December 31,
2003. In 2004, the $17,000 of other income was related to late fees collected
from customers. In 2003, $48,000 of other income was related to a settlement in
connection with funds held in a bank account under the name "Warner Insurance
Services, Inc." and $14,000 of other income was for late fees collected from
customers.
PROVISION FOR DOUBTFUL ACCOUNTS. We had a $22,000 provision for doubtful
accounts in 2004. We had no provision for doubtful accounts in 2003.
-23-
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 $62,000 of other income for the year ended December
31, 2003 compared to none for the year ended December 31, 2002. In 2003, the
$48,000 of other income was related to a settlement in connection with funds
held in a bank account under the name "Warner Insurance Services, Inc." and
$14,000 of other income was for late fees collected from customers.
PROVISION FOR DOUBTFUL ACCOUNTS. We had no provision for doubtful
accounts in 2003 or 2002.
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, 2004, we had cash and cash equivalents of $144,000
compared to cash and cash equivalents of $1,193,000 at December 31, 2003. The
decrease in cash and cash equivalents was primarily attributable to the
reduction in new license sales.
-24-
At December 31, 2004, the 2008 Debentures had an aggregate outstanding
principal amount of $1,695,000, and the 2009 Debentures had an aggregate
outstanding principal amount of $700,000. We made an aggregate of $198,000 of
interest payments on the debentures during 2004, and we expect to make interest
payments of approximately $183,000 in the aggregate during 2005.
As of December 31, 2004, we were in compliance with the financial
covenants set forth in the convertible loan agreements governing these
debentures.
We are required to repay principal on the 2008 Debentures and 2009
Debentures, commencing July 1, 2004 and July 1, 2005, respectively, in monthly
installments 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.
In 2004, the holders of the 2008 Debentures elected to convert all of
their monthly principal installments due in 2004, totaling $105,335, under such
debentures into shares of our common stock at the conversion price of $0.30 per
share in lieu of receiving such installment payments in cash.
At December 31, 2004, we had working capital of $900,000 compared to a
working capital of $177,000 at December 31, 2003.
At December 31, 2004, 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.
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CONTRACTUAL OBLIGATIONS
The following table summarizes our significant contractual obligations
at December 31, 2004, 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......................... $195 $195 $ -- $ -- $ -- $ -- $ --
8% Convertible Debentures due
2008 - principal(1).................... 1,695 193 171 151 1,180 -- --
8% Convertible Debentures due
2008 - interest(1)..................... 385 127 113 100 45 -- --
8% Convertible Debentures due
2009 - principal(1).................... 700 28 76 68 60 468 --
8% Convertible Debentures due
2009 - interest(1)..................... 214 55 50 45 40 24 --
--------- --------- --------- --------- --------- --------- ---------
Total.................................... $3,189 $598 $410 $364 $1,325 $492 $ --
========= ========= ========= ========= ========= ========= =========
- ----------------------------------------------------------
(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. We are required to repay principal on the 2008
Debentures and 2009 Debentures, commencing July 1, 2004 and July 1, 2005,
respectively, in monthly installments 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. In
2004, the holders of the 2008 Debentures elected to convert all of their monthly
principal installments due in 2004, totaling $105,335, under such debentures
into shares of our common stock at the conversion price of $0.30 per share in
lieu of receiving such installment payments in cash. 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.
OFF-BALANCE-SHEET ARRANGEMENTS
As of December 31, 2004, we did not have any significant
off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation
S-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 152 "Accounting for Real Estate Time-Sharing Transactions - An
amendment of SFAS No. 66 and 67." This Statement amends Statement of Financial
Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate," to
reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in American Institute of Certified
Public Accountants Statement of Position (SOP) 04-2, "Accounting for Real Estate
Time-Sharing Transactions." This Statement also amends SFAS No. 67, "Accounting
for Costs and Initial Rental Operations of Real Estate Projects," to state the
guidance for
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(a) incidental costs and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to guidance in SOP 04-2. SFAS No. 152 is
effective for financial statements for fiscal years beginning after June 15,
2005. Adoption of this Statement is not expected to have a material impact on
our financial statements.
In November 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment to APBO No. 29." This Statement amends
Accounting Principles Board Opinion ("APBO") No. 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This is effective for fiscal periods beginning after June 15,
2005. Adoption of this Statement is not expected to have a material impact on
our financial statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
("SFAS No. 123R"). SFAS No. 123R requires companies to recognize in the income
statement the grant date fair value of stock options and other equity-based
compensation issued to employees. SFAS No. 123R eliminates the intrinsic
value-based method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations, that we currently use. SFAS
No. 123R requires us to adopt the new accounting provisions beginning on July 1,
2005. The adoption of this Statement is not expected to have a material impact
on our financial statements.
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,
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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, 2004 that has materially
affected, or is reasonably likely to materially affect, the our internal control
over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
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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,
2005, regarding our executive officers:
NAME AGE POSITION
----- --- ---------
John W. Roblin 60 President and Chief Executive Officer
Maryanne Z. Gallagher 43 Chief Operating Officer
Frank R. Orzell 68 Senior Vice President
Ann F. Massey 46 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 holding 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. 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.
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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
(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
37.
(2) FINANCIAL STATEMENT SCHEDULE
II - Valuation and qualifying accounts..............F-23
All other schedules are omitted since the required information
is not present or is not present in amounts sufficient to
require submission of the schedules, or because the information
required is included in the financial statements and notes
thereto.
(3) EXHIBITS.
The following is a list of exhibits required by Item 601 of Regulation
S-K filed as part of this Form 10-K. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parentheses.
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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].
10(c)(1)+ The 1994 Non-Qualified 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 Form 10-K (Commission File No. 0-13124) filed on
April 17, 1995].
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10(c)(2)+ 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)(3)+ 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)(4)+ 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)(5)+ 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(c)(6)+ The 1995 Employee Stock Option Plan, as amended on June 22, 2000
by the stockholders of the Company [incorporated by reference to
Exhibit 10(c)(5) to the Registrant's Quarterly Report on Form
10-Q (Commission File No. 0-13124) filed on May 13, 2002].
10(c)(7)+ Summary of 2005 Non-Employee Director Compensation dated March
23, 2005 [incorporated by reference to Exhibit 99.1 the
Registrant's Form 8-K (Commission File No. 0-13124) filed on
March 24, 2005].
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(d)(4)* Lease Agreement, dated March 3, 2005, by and between the
Registrant and Fairfield 80 Venture, LLC.
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 [incorporated by reference to Exhibit
10(e)(3) to the Registrant's 10-K (Commission File No. 0-13124)
filed on March 29, 2004].
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
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Quarterly Report on Form 10-Q/A (Commission File No. 0-13124)
filed on August 24, 2000].
10(g)(1) Convertible Loan Agreement, dated June 28, 2001, by and among the
Company, Renaissance US Growth & Income Trust PLC, a public
limited company registered in England and Wales, BFSUS Special
Opportunities Trust PLC, a public limited company registered in
England and Wales, as lenders, and Renaissance Capital Group,
Inc., a Texas corporation, as agent [incorporated by reference to
Exhibit 10(q)(1) to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on July 11, 2001].
10(g)(2) Convertible Debenture No. 1, dated June 28, 2001, issued to
Renaissance US Growth & Income [incorporated by reference to
Exhibit 10(q)(2) to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on July 11, 2001].
10(g)(3) Convertible Debenture No. 2, dated June 28, 2001, issued to BFSUS
Special Opportunities Trust PLC [incorporated by reference to
Exhibit 10(q)(3) to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on July 11, 2001].
10(g)(4) Pledge Agreement, dated as of June 28, 2001, between the Company,
Renaissance US Growth & Income Trust PLC, BFSUS Special
Opportunities Trust PLC and Renaissance Capital Group, Inc.
[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 (with IP Schedule), dated as of June 28, 2001,
among the Company, Renaissance US Growth & Income Trust PLC,
BFSUS Special Opportunities Trust PLC and Renaissance Capital
Group, Inc. [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 (with IP Schedule), dated as of
June 28, 2001, among Cover-All Systems, Inc. and Renaissance US
Growth & Income Trust PLC, BFSUS Special Opportunities Trust PLC
and Renaissance Capital Group, Inc. [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(g)(8) Security Agreement, dated as of June 28, 2001, among the
Registrant, Renaissance US Growth & Income Trust PLC, BFSUS
Special Opportunities Trust PLC and Renaissance Capital Group,
Inc. [incorporated by reference to Exhibit 10(g)(8) to the
Registrant's Form 10-K/A (Commission File No. 0-13124) filed on
August 17, 2004].
10(g)(9) Subsidiary Security Agreement, dated as of June 28, 2001, among
Cover-All Systems, Inc. and Renaissance US Growth & Income Trust
PLC, BFSUS Special Opportunities Trust PLC and Renaissance
Capital Group, Inc. [incorporated by reference to [Exhibit 10(g)(
)] to the Registrant's Form 10-K/A (Commission File No. 0-13124)
filed on August 17, 2004].
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].
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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 (with Schedule I), 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 (with Schedule I), dated as of June
28, 2001, among Cover-All Systems, Inc. and John Roblin, Arnold
Schumsky and Stuart Sternberg [incorporated by reference to
Exhibit 10(r)(7) to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on July 11, 2001].
10(h)(8) Security Agreement, dated as of June 28, 2001, among the Company,
John Roblin, Arnold Schumsky and Stuart Sternberg [incorporated
by reference to Exhibit 10(h)(8) to the Registrant's Form 10-K/A
(Commission File No. 0-13124) filed on August 17, 2004].
10(h)(9) Subsidiary Security Agreement, dated as of June 28, 2001, among
Cover-All Systems, Inc. and John Roblin, Arnold Schumsky and
Stuart Sternberg [incorporated by reference to Exhibit 10(h)(9)
to the Registrant's Form 10-K/A (Commission File No. 0-13124)
filed on August 17, 2004].
10(h)(10) 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)(11) 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(h)(12) Limited Waiver to Convertible Loan Agreements, dated as of
September 30, 2002, by Renaissance US Growth & Income Trust PLC
and BFSUS Special Opportunities Trust PLC [incorporated by
reference to Exhibit 10(o)(5) to the Registrant's Form 10-Q
(Commission File No. 0-13124) filed on November 13, 2002].
10(h)(13) Intercreditor Agreement, dated as of June 28, 2001, among
Renaissance US Growth & Income Trust PLC, BFSUS Special
Opportunities Trust PLC, and the other debenture holders who are
signatories to this Agreement [incorporated by reference to
Exhibit 10(h)(13) to the Registrant's Form 10-K/A (Commission
File No. 0-13124) filed on August 17, 2004].
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
-34-
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 R. 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 F. Massey [incorporated by reference to Exhibit
10(s)(4) to the Registrant's Form 8-K (Commission File No.
0-13124) filed on July 11, 2001].
10(i)(5) First Amendment to Convertible Loan Agreements, dated as of March
30, 2002, by and among the Company, Renaissance US Growth &
Income Trust PLC, BFSUS Special Opportunities Trust PLC and
Renaissance Capital Group, Inc. [incorporated by reference to
Exhibit 10(l)(10) to the Registrant's Quarterly Report on Form
10-Q (Commission File No. 0-13124) filed on May 13, 2002].
10(i)(6) Form of Warrant issued by the Company to each of the holders
under the Convertible Loan Agreements [incorporated by reference
to Exhibit 10(l)(11) to the Registrant's Quarterly Report on Form
10-Q (Commission File No. 0-13124) filed on May 13, 2002].
10(i)(7) Second Amendment to the Convertible Loan Agreements and First
Amendment to Intercreditor Agreement, dated as of August 21,
2002, 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(o)(1) to the
Registrant's Form 8-K (Commission File No. 0-13124) filed on
August 23, 2002].
10(i)(8) First Amendment to 8.00% Convertible Debentures, dated as of
August 21, 2002, 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, and John Roblin, Arnold Schumsky and
Stuart Sternberg, as additional lenders, and Stuart Sternberg, as
agent for the additional lenders [incorporated by reference to
Exhibit 10(o)(2) to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on August 23, 2002].
10(i)(9) Form of 8.00% Convertible Debentures, dated August 21, 2002,
issued by the Registrant to Renaissance US Growth & Income Trust
PLC and BFSUS Special Opportunities Trust PLC [incorporated by
reference to Exhibit 10(o)(3) to the Registrant's Form 8-K
(Commission File No. 0-13124) filed on August 23, 2002].
10(i)(10) Acknowledgment, Agreement and Reaffirmation of Guarantors, dated
as of August 21, 2002, 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(o)(4) to the Registrant's Form 8-K (Commission File No.
0-13124) filed on August 23, 2002].
10(i)(11) First Amendment to 8.00% Convertible Debentures Due 2009 and
Second Amendment to 8.00% Convertible Debentures Due 2008, dated
as of June 29, 2004 [incorporated by reference to Exhibit
10(i)(11) to the Registrant's Quarterly Report on Form 10-Q
(Commission File No. 0-13124) filed on August 13, 2004.]
-35-
10(i)(12) Third Amendment to the Convertible Loan Agreements, dated as of
June 29, 2004, by and among the Company, Renaissance US Growth &
Income Trust PLC, BFSUS Special Opportunities Trust PLC and
Renaissance Capital Group, Inc. [incorporated by reference to
Exhibit 10(i)(12) to the Registrant's Quarterly Report on Form
10-Q (Commission File No. 0-13124) filed on August 13, 2004.]
10(i)(13) Form of Revised 8.00% Convertible Debenture Due 2008
[incorporated by reference to Exhibit 10(i)(13) to the
Registrant's Quarterly Report on Form 10-Q (Commission File No.
0-13124) filed on August 13, 2004.]
10(i)(14) Form of Revised 8.00% Convertible Debenture Due 2009
[incorporated by reference to Exhibit 10(i)(14) to the
Registrant's Quarterly Report on Form 10-Q (Commission File No.
0-13124) filed on August 13, 2004.]
10(i)(15) Limited Waiver to Convertible Loan Agreements, dated as of
September 30, 2004, by and between Renaissance US Growth
Investment Trust PLC and BFSUS Special Opportunities Trust PLC
[incorporated by reference to Exhibit 10(i)(15) to the
Registrant's Quarterly Report on Form 10-Q (Commission File No.
0-13124) filed on November 15, 2004.]
21 Subsidiaries of the Registrant [incorporated by reference to
Exhibit 21 to the Registrant's 10-K (Commission File No. 0-13124)
filed on April 11, 1996].
23* Consent of Moore Stephens, P.C.
31.1* Certification of John W. 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.
+ Denotes a management contract or compensatory plan or arrangement.
-36-
COVER-ALL TECHNOLOGIES INC.
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Page
----
Report of Independent Registered Public Accounting Firm................. F-1
Consolidated Balance Sheets - December 31, 2004 and 2003................ F-2
Consolidated Statements of Operations - Years Ended December 31, 2004,
2003 and 2002........................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity [Deficit] -
Years Ended December 31, 2004, 2003 and 2002............................ F-6
Consolidated Statements of Cash Flows - Years Ended December 31,
2004, 2003 and 2002..................................................... F-7
Notes to Consolidated Financial Statements.............................. F-9
Financial Statement Schedule II -
Valuation and Qualifying Accounts....................................... F-23
-37-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2004. 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 consolidated financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, 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, 2004 and 2003,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of America. Our
audit was made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The schedule listed in the index to
consolidated 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
consolidated financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated 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
consolidated financial statements taken as a whole.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
March 11, 2005
F-1
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31,
------------
2 0 0 4 2 0 0 3
------- -------
ASSETS:
CURRENT ASSETS:
Cash and Cash Equivalents $ 143,624 $ 1,193,173
Accounts Receivable [Less Allowance for Doubtful Accounts
of $25,000 in 2004 and 2003] 3,613,881 1,680,082
Other Current Assets -- 309
Prepaid Expenses 427,991 353,063
--------------- ---------------
TOTAL CURRENT ASSETS 4,185,496 3,226,627
--------------- ---------------
PROPERTY AND EQUIPMENT - AT COST:
Furniture, Fixtures and Equipment 1,387,440 1,376,998
Less: Accumulated Depreciation (1,257,774) (1,245,631)
--------------- ---------------
PROPERTY AND EQUIPMENT - NET 129,666 131,367
--------------- ---------------
CAPITALIZED SOFTWARE [LESS ACCUMULATED AMORTIZATION OF
$7,205,493 AND $6,197,478 IN 2004 AND 2003, RESPECTIVELY] 1,883,448 1,903,470
--------------- ---------------
DEFERRED FINANCING COSTS [NET OF ACCUMULATED AMORTIZATION OF
$111,619 AND $77,146 IN 2004 AND 2003, RESPECTIVELY] 129,692 164,165
--------------- ---------------
OTHER ASSETS 59,335 59,335
--------------- ---------------
TOTAL ASSETS $ 6,387,637 $ 5,484,964
=============== ===============
See Notes to Consolidated Financial Statements.
F-2
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31,
------------
2 0 0 4 2 0 0 3
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 536,469 $ 122,146
Income Taxes Payable 48,905 --
Accrued Liabilities 829,516 375,546
Convertible Debentures 209,426 99,484
Convertible Debenture - Related Party 10,696 5,852
Unearned Revenue 1,650,143 2,446,280
--------------- ---------------
TOTAL CURRENT LIABILITIES 3,285,155 3,049,308
--------------- ---------------
LONG-TERM LIABILITIES:
Convertible Debentures 2,091,092 2,300,516
Convertible Debenture - Related Party 83,451 94,148
--------------- ---------------
TOTAL LONG-TERM LIABILITIES 2,174,543 2,394,664
--------------- ---------------
TOTAL LIABILITIES 5,459,698 5,443,972
--------------- ---------------
COMMITMENTS AND CONTINGENCIES -- --
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 Par Value, Authorized 75,000,000 Shares;
18,248,084 and 17,846,218 Shares Issued and 15,748,084 and
15,346,218 Shares Outstanding in 2004 and 2003, Respectively 182,481 178,462
Capital In Excess of Par Value 26,265,976 26,150,447
Accumulated Deficit (24,817,518) (25,584,917)
Treasury Stock - At Cost - 2,500,000 Shares (703,000) (703,000)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 927,939 40,992
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,387,637 $ 5,484,964
=============== ===============
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 4 2 0 0 3 2 0 0 2
------- ------- -------
REVENUES:
Licenses $ 3,435,353 $ 995,460 $ 2,180,250
Maintenance 4,355,730 4,469,608 4,389,331
Professional Services 866,186 1,457,325 1,059,837
Application Service Provider ["ASP"] Services 616,792 601,627 512,674
--------------- ---------------- ---------------
TOTAL REVENUES 9,274,061 7,524,020 8,142,092
--------------- ---------------- ---------------
COSTS OF REVENUES:
Licenses 1,504,587 863,680 1,421,895
Maintenance 2,773,481 2,688,232 2,255,119
Professional Services 431,815 448,970 415,063
ASP Services 126,315 169,576 225,068
--------------- ---------------- ---------------
TOTAL COSTS OF REVENUES 4,836,198 4,170,458 4,317,145
--------------- ---------------- ---------------
DIRECT MARGIN 4,437,863 3,353,562 3,824,947
--------------- ---------------- ---------------
OPERATING EXPENSES:
Sales and Marketing 1,256,589 984,121 901,166
General and Administrative 1,403,729 1,306,123 1,417,800
Research and Development 760,120 532,922 599,580
Provision for Doubtful Accounts 22,400 -- --
--------------- ---------------- ---------------
TOTAL OPERATING EXPENSES 3,442,838 2,823,166 2,918,546
--------------- ---------------- ---------------
OPERATING INCOME 995,025 530,396 906,401
--------------- ---------------- ---------------
OTHER EXPENSE [INCOME]:
Interest Expense 191,357 194,968 161,633
Interest Expense - Related Party 8,584 8,000 8,000
Interest Income (3,840) (10,383) (1,060)
Other Expense -- 8,014 --
Other Income (17,380) (62,059) --
--------------- ---------------- ---------------
TOTAL OTHER EXPENSE 178,721 138,540 168,573
--------------- ---------------- ---------------
INCOME BEFORE INCOME TAXES EXPENSE [BENEFIT] 816,304 391,856 737,828
INCOME TAXES EXPENSE [BENEFIT] 48,905 -- (138,735)
--------------- ---------------- ---------------
NET INCOME $ 767,399 $ 391,856 $ 876,563
=============== ================ ===============
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 4 2 0 0 3 2 0 0 2
------- ------- -------
BASIC EARNINGS PER COMMON SHARE $ .05 $ .03 $ .06
=============== ================ ===============
DILUTED EARNINGS PER COMMON SHARE $ .04 $ .02 $ .04
=============== ================ ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR BASIC EARNINGS PER
COMMON SHARE 15,515,000 15,341,000 15,336,000
=============== ================ ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR DILUTED EARNINGS PER
COMMON SHARE 23,995,000 24,246,000 23,733,000
=============== ================ ===============
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 JANUARY 1, 2002 $ 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
Exercise of 50,750 Stock
Options 508 13,705 -- -- 14,213
Conversion of $105,335 of
Convertible Debt [See Note
10] 3,511 101,824 -- -- 105,335
Net Income -- -- 767,399 -- 767,399
----------- --------------- --------------- --------------- ---------------
BALANCE AT DECEMBER 31, 2004 $ 182,481 $ 26,265,976 $ (24,817,518) $ (703,000) $ 927,939
=========== =============== =============== =============== ===============
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 4 2 0 0 3 2 0 0 2
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from Continuing Operations $ 767,399 $ 391,856 $ 876,563
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation 74,819 89,293 101,370
Amortization of Capitalized Software 1,008,015 522,221 830,645
Amortization of Deferred Financing Costs 34,473 34,473 29,309
Provision for Doubtful Accounts 22,400 -- --
Non-Cash Financing Cost -- -- 16,913
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (1,956,198) (658,209) (14,678)
Prepaid Expenses (74,927) 99,944 (146,008)
Other Current Assets 309 240,363 (235,572)
Increase [Decrease] in:
Accounts Payable 414,322 (154,472) (305,904)
Taxes Payable 48,905 (90,000) 90,000
Accrued Liabilities 453,969 (348,142) 281,164
Unearned Revenue (796,137) 93,818 531,241
--------------- ---------------- ---------------
NET CASH [USED FOR] PROVIDED FROM CONTINUING
OPERATING ACTIVITIES (2,651) 221,145 2,055,043
--------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (73,118) (67,060) (23,816)
Capitalized Software Expenditures (987,993) (1,027,358) (1,026,160)
--------------- ---------------- ---------------
NET CASH [USED FOR] INVESTING ACTIVITIES (1,061,111) (1,094,418) (1,049,976)
--------------- ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Convertible Debentures -- -- 700,000
Deferred Financing Costs -- -- (54,221)
Principal Payments on Capital Lease -- -- (17,980)
Proceeds from Exercise of Stock Options 14,213 3,035 --
--------------- ---------------- ---------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 14,213 3,035 627,799
--------------- ---------------- ---------------
CHANGE IN CASH AND CASH EQUIVALENTS - FORWARD $ (1,049,549) $ (870,238) $ 1,632,866
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 4 2 0 0 3 2 0 0 2
------- ------- -------
CHANGE IN CASH AND CASH EQUIVALENTS - FORWARDED $ (1,049,549) $ (870,238) $ 1,632,866
CASH AND CASH EQUIVALENTS - BEGINNING OF YEARS 1,193,173 2,063,411 430,545
--------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS - END OF YEARS $ 143,624 $ 1,193,173 $ 2,063,411
=============== ================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the years for:
Interest $ 191,357 $ 194,968 $ 161,633
Interest - Related Party $ 8,584 $ 8,000 $ 8,000
Income Taxes $ -- $ 79,900 $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES:
In 2004, the holders of the 2008 Debentures elected to convert all of
their monthly principal installments due in 2004, totaling $105,335, under such
debentures into shares of our common stock at the conversion price of $0.30 per
share in lieu of receiving such installment payments in cash. In connection with
this conversion, we issued to the holders of the 2008 Debentures an aggregate of
351,116 shares of our common stock. We made an aggregate of $198,000 of interest
payments on the debentures during 2004.
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 - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect 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 license term has begun, 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.
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, 2004 and 2003 was
approximately $98,660 and $1,101,800, 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,
2004, one customer accounted for approximately 67% 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
doubtful 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 OF LONG-LIVED ASSETS - We review our long-lived assets and
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. When such factors and circumstances exist, we compare the projected
undiscounted future cash flows associated with the future use and disposal of
the related asset or group of assets to their respective carrying amounts.
Impairment, if any, is measured as the excess of the carrying amount over the
fair value based on market value (when available) or discounted expected cash
flows of those assets, and is recorded in the period in which the determination
is made.
STOCK-BASED COMPENSATION - We account for stock-based compensation utilizing the
intrinsic value method in accordance with the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees" and related Interpretations. Accordingly, no compensation expense is
recognized because the exercise prices of these employee stock options equal or
exceed the estimated fair market value of the underlying stock on the dates of
grant.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment". SFAS No. 123R is a revision of SFAS No. 123, "Accounting for Stock
Based Compensation", and supersedes APB 25. Among other items, SFAS 123R
eliminates the use of APB 25 and the intrinsic value method of accounting, and
requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments, based on the grant date fair value of
those awards, in the financial statements. The effective date of SFAS 123R is
the first reporting period beginning after June 15, 2005, which is third quarter
2005 for calendar year companies, although early adoption is allowed. SFAS 123R
requires companies to adopt its requirements using a "modified prospective"
method. Under the "modified prospective" method, compensation cost is recognized
in the financial statements beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after that date,
and based on the requirements of SFAS 123 for all unvested awards granted prior
to the effective date of SFAS 123R. The "modified retrospective" method also
permits entities to restate financial statements of previous periods based on
proforma disclosures made in accordance with SFAS 123.
We currently utilize a standard option pricing model (i.e., Black-Scholes) to
measure the fair value of stock options granted to employees. While SFAS 123R
permits entities to continue to use such a model, the standard also permits the
use of a "lattice" model. We have not yet determined which model we will use to
measure the fair value of employee stock options upon the adoption of SFAS 123R.
SFAS 123R also requires that the benefits associated with the tax deductions in
excess of recognized compensation cost be reported as a financing cash flow,
rather than as an operating cash flow as required under current literature. We
have not yet determined what effect, if any, this change will have on future
periods.
We currently expect to adopt SFAS 123R effective July 1, 2005; however, we have
not yet determined which of the aforementioned adoption methods we will use.
F-10
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #3
- --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
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 2004, 2003 and 2002 was $74,819, $89,293 and $101,370, 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 2004, 2003 and 2002, qualifying
software development costs of $987,993, $1,027,358 and $1,026,160, 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 2004, 2003 and 2002 was $1,008,015, $522,221 and
$830,645, 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 2004, 2003 and 2002 was $166,731, $150,539 and $83,203, respectively.
INCOME TAXES - Pursuant to SFAS No. 109, "Accounting for Income Taxes," income
tax expense [or benefit] for the year is the sum of deferred tax expense [or
benefit] and income taxes currently payable [or refundable]. Deferred tax
expense [or benefit] is the change during the year in a company's deferred tax
liabilities and assets. Deferred tax liabilities and assets are determined based
on differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
F-11
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #4
- --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
EARNINGS PER SHARE - We have adopted the provisions of SFAS No. 128. Basic
earnings per share is computed by dividing income 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. The convertible debt could
potentially dilute basic earnings per share in future periods.
[2] RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 152 "Accounting for Real Estate
Time-Sharing Transactions - An amendment of SFAS No. 66 and 67." This Statement
amends SFAS No. 66. "Accounting for Sales of Real Estate," to reference the
financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
"Accounting for Real Estate Time-Sharing Transactions." This Statement also
amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real
Estate Projects," to state the guidance for (a) incidental costs and (b) costs
incurred to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to
guidance in SOP 04-2. SFAS No. 152 is effective for financial statements for
fiscal years beginning after June 15, 2005. Adoption of this Statement is not
expected to have a material impact on our financial statements.
F-12
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #5
- --------------------------------------------------------------------------------
[2] RECENTLY ISSUED ACCOUNTING STANDARDS [CONTINUED]
In November 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- - an amendment to APBO No. 29." This Statement amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This is effective for fiscal periods beginning after June 15,
2005. Adoption of this Statement is not expected to have a material 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 [See Note 14].
Rent expense was $341,756, $331,313 and $323,778 for the years ended December
31, 2004, 2003 and 2002, respectively.
Our future minimum rental commitments under the noncancellable operating lease
in effect at December 31, 2004 were as follows: year ending 2005 -- $139,785;
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, 2004 was approximately $600,000. In
accordance with a previous contract, the executive was issued 25,000 shares of
our common stock in January 2000.
[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 4 2 0 0 3 2 0 0 2
------- ------- -------
Current:
Federal $ -- $ -- $ --
State 48,905 -- 90,000
------------- ------------- ---------------
Totals 48,905 -- 90,000
------------- ------------- ---------------
Deferred:
Federal -- -- --
State -- -- (228,735)
------------- ------------- ---------------
Totals -- -- (228,735)
------------- ------------- ---------------
NET INCOME TAXES PROVISION [BENEFIT] $ 48,905 $ -- $ (138,735)
------------------------------------ ============= ============= ===============
During 2002, we availed ourself of a program offered by the State of New Jersey
whereby we sold state net operating losses of $2,921,267 for $228,735. 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 and 2004 due to achieving profitability in 2002
and 2003.
F-13
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #6
- --------------------------------------------------------------------------------
[4] INCOME TAXES [CONTINUED]
The income tax [benefit] for continuing operations differs from the amount
computed by applying the statutory federal income tax rate as follows:
Y E A R S E N D E D
-------------------------------------------------
D E C E M B E R 31,
-------------------------------------------------
2 0 0 4 2 0 0 3 2 0 0 2
------- ------- -------
Computed Federal Statutory Tax [Benefit] $ 278,000 $ 133,000 $ 295,000
Valuation Allowance to Reduce Deferred Tax Asset -- -- --
Tax Benefit of Federal Net Operating Loss Carryforward (278,000) (133,000) (205,000)
Sale of State Net Operating Loss Carryforward -- -- (228,735)
Effect of State Taxes [Net of Federal Benefit] 48,905 -- --
--------------- -------------- ---------------
ACTUAL TAX [BENEFIT] $ 48,905 $ -- $ (138,735)
-------------------- =============== ============== ===============
The components of the net deferred tax asset and liability were as follows:
YEARS ENDED
DECEMBER 31,
2 0 0 4 2 0 0 3
------- -------
Deferred Tax Assets - Current:
Accounts Receivable Allowance $ 10,000 $ 10,000
Vacation Accrual -- --
Valuation Allowance (10,000) (10,000)
--------------- --------------
CURRENT DEFERRED TAX ASSET $ -- $ --
-------------------------- =============== ==============
Deferred Tax Asset [Liability] - Long-Term:
Net Operating Loss Carryforward $ 8,660,000 $ 8,660,000
Stock Options 80,000 80,000
Capitalized Software (750,000) (760,000)
Depreciation and Amortization 15,000 15,000
Valuation Allowance (8,005,000) (7,995,000)
--------------- --------------
LONG-TERM DEFERRED TAX ASSET $ -- $ --
---------------------------- =============== ==============
A 100% valuation allowance has been established due to the uncertainty about the
realization of the deferred tax asset. The net change during 2004 and 2003 in
the total valuation allowance is $10,000 and $(900,000), respectively.
At December 31, 2004, 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.
F-14
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #7
- --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS
In March 1995, we adopted the 1995 Employee Stock Option Plan, which was amended
in April 1997 and June 2000. Options for the purchase of up to 5,000,000 shares
may be granted by the Board of Directors to our employees at an exercise price
determined by the Board of Directors on the date of grant. Options may be
granted as incentive or non-qualified stock options with a term of not more than
ten years. At December 31, 2004, 2003 and 2002, 1,784,525, 1,763,025 and
2,321,025 shares, respectively, were available for grant under the 1995 Employee
Stock Option Plan.
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, 2004, 2003 and 2002, 750,000,
750,000 and 750,000 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, 2004,
2003 and 2002, -0-, 105,000 and 105,000 shares, respectively, were available for
grant under the 1994 Non-Qualified Stock Option Plan for Consultants. This Plan
expired in October 2004.
F-15
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #8
- --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
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, 2001 2,346,750 $ .23 - 4.00 2.3 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
Granted 10,000 .31 - .31 2.7 Years .31
Exercised (50,750) .26 - .31 .28
Canceled (31,500) .46 - .60 .58
Expired -- -- --
Balance, December 31, 2004 2,831,500 $ .23 - 4.00 1.7 Years $ .76
The options granted during 2004 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 10,000 $ .31 $ .31
=============== ============= ===========
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
=============== ============= ===========
F-16
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #9
- --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
Exercisable options at December 31, 2004, 2003 and 2002 were as follows:
NUMBER OF WEIGHTED-AVERAGE
DECEMBER 31, EXERCISABLE OPTIONS EXERCISE PRICE
- ------------ ------------------- --------------
2004 2,442,589 $ .80
2003 2,049,780 $ .86
2002 1,888,740 $ .97
The following table summarizes information about stock options at December 31,
2004:
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 1,147,000 1.4 Years $ .32 1,075,134 $ .32
$ .46 - $ .53 562,500 3.8 Years $ .53 281,675 $ .53
$ .60 - $ 1.13 234,000 1.3 Years $ .88 197,780 $ .93
$ 1.25 - $ 1.25 688,000 1.2 Years $ 1.25 688,000 $ 1.25
$ 2.00 - $ 2.00 195,000 .2 Years $ 2.00 195,000 $ 2.00
$ 4.00 - $ 4.00 5,000 1.2 YEARS $ 4.00 5,000 $ 4.00
-------------- ------------- ----------- ------------- -----------
2,831,500 1.7 Years $ .76 2,442,589 $ .80
============== ============= =========== ============= ===========
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 2004, 2003 and 2002 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 2004, 2003 and 2002.
There were 768,572 warrants outstanding at December 31, 2004. The exercise price
for all the warrants issued and outstanding as of December 31, 2004 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
Granted -- --
------------ -----------
BALANCE, DECEMBER 31, 2004 768,572 $ .22 - .62 .80 Years $ 0.56
-------------------------- ============ ===========
F-17
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #10
- --------------------------------------------------------------------------------
[5] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
Exercisable options at December 31, 2004, 2003 and 2002 were as follows:
NUMBER OF WEIGHTED-AVERAGE
DECEMBER 31, EXERCISABLE OPTIONS EXERCISE PRICE
- ------------ ------------------- --------------
2004 2,442,589 $ .80
2003 2,049,780 $ .86
2002 1,888,740 $ .97
The following table summarizes information about stock options at December 31,
2004:
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 1,147,000 1.4 Years $ .32 1,075,134 $ .32
$ .46 - $ .53 562,500 3.8 Years $ .53 281,675 $ .53
$ .60 - $1.13 234,000 1.3 Years $ .88 197,780 $ .93
$ 1.25 - $1.25 688,000 1.2 Years $ 1.25 688,000 $ 1.25
$ 2.00 - $2.00 195,000 .2 Years $ 2.00 195,000 $ 2.00
$ 4.00 - $4.00 5,000 1.2 YEARS $ 4.00 5,000 $ 4.00
-------------- ------------- ----------- ------------- -----------
2,831,500 1.7 Years $ .76 2,442,589 $ .80
============== ============= =========== ============= ===========
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 was estimated
at $.31, $.32 and $.15 during 2004, 2003 and 2002, 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 4 2 0 0 3 2 0 0 2
------- ------- -------
Risk-Free Interest Rate 3.90% 3.00% 3.00%
Expected Life 3.0 Years 4.0 Years 3.0 Years
Expected Volatility 78% 79% 81%
Expected Dividends None None None
F-18
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #11
- --------------------------------------------------------------------------------
[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 4 2 0 0 3 2 0 0 2
------- ------- -------
Net Income as Reported $ 767 $ 392 $ 877
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 $ 101 $ 37 $ 18
Pro Forma Net Income $ 666 $ 355 $ 859
Basic Earnings Per Share as Reported $ .04 $ .03 $ .06
Pro Forma Basic Earnings Per Share $ .03 $ .02 $ .04
[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 4 2 0 0 3 2 0 0 2
------- ------- -------
Numerator:
Net Income $ 767,399 $ 391,856 $ 876,563
Effect of Dilutive Securities:
Interest Reversal Convertible Debentures [Net of Tax] 118,800 120,000 120,000
Incentive Bonus Adjustment [Net of Tax Benefit] -- -- (12,000)
-------------- -------------- --------------
NUMERATOR FOR DILUTED EARNINGS PER COMMON SHARE $ 886,199 $ 511,856 $ 984,563
----------------------------------------------- ============== ============== ==============
Denominator:
Weighted Average Number of Common Shares
Outstanding for Basic Earnings Per Common Share 15,515,000 15,341,000 15,336,000
Effect of Dilutive Securities:
Exercise of Options 424,000 495,250 26,500
Exercise of Warrants 73,000 76,250 37,000
Conversion of Convertible Debentures 7,983,000 8,333,500 8,333,500
-------------- -------------- --------------
DENOMINATOR FOR DILUTED EARNINGS PER
------------------------------------
COMMON SHARE 23,995,000 24,246,000 23,733,000
------------ ============== ============== ==============
BASIC EARNINGS PER COMMON SHARE $ .05 $ .03 $ .06
- ------------------------------- ============== ============== ==============
DILUTED EARNINGS PER COMMON SHARE $ .04 $ .02 $ .04
- --------------------------------- ============== ============== ==============
Equity instruments that may dilute earnings per share in the future are listed
in Note 5.
Options to purchase 1,682,000 shares of common stock at prices ranging from $.53
to $4.00 per share were outstanding at December 31, 2004, 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-19
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #12
- --------------------------------------------------------------------------------
[7] SUPPLEMENTAL DATA
Accrued liabilities consist of the following:
YEARS ENDED
DECEMBER 31,
------------
2 0 0 4 2 0 0 3
------- -------
Accrued Payroll, Benefits, Temporary Help and Consulting $ 332,253 $ 54,568
Accrued Professional Fees 188,199 195,043
Other 309,064 125,935
---------------- ---------------
TOTALS $ 829,516 $ 375,546
------ ================ ===============
[8] CONVERTIBLE DEBENTURES
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, (including John
Roblin, our Chairman of the Board, President and Chief Executive Officer) 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. 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 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. 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. We are required to repay
principal on the 2008 Debentures and 2009 Debentures, commencing July 1, 2004
and July 1, 2005, respectively, in monthly installments 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. In 2004, the holders of the 2008 Debentures elected to convert
all of their monthly principal installments due in 2004, totaling $105,335,
under such debentures into shares of our common stock at the conversion price of
$0.30 per share in lieu of receiving such installment payments in cash. In
connection with this conversion, we issued to the holders of the 2008 Debentures
an aggregate of 351,116 shares of our common stock. We made an aggregate of
$198,000 of interest payments on the debentures during 2004.
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 has been charged to financing costs.
As of December 31, 2004, we were in compliance with the financial covenants of
the Convertible Loan Agreements.
F-20
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #13
- --------------------------------------------------------------------------------
[8] CONVERTIBLE DEBENTURES [CONTINUED]
At December 31, 2004, principal payments due on the convertible debentures were
as follows:
2005 $ 220,122
2006 247,061
2007 218,991
2008 1,240,210
Thereafter 468,281
----------------
TOTAL $ 2,394,665
----- ================
[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 $13,000 for the year ended December 31, 2004. We match $.50 for each $1.00 of
the first 5% of pay employees elect to defer. Expenses associated with this plan
in 2004, 2003 and 2002 were approximately $76,000, $61,700 and $56,400,
respectively.
[10] STOCKHOLDERS' EQUITY
During 2004, the holders of the 2008 Debentures elected to convert an aggregate
of $105,335 in principal of such debentures, representing their monthly
installments of principal under such debentures (in lieu of receiving such
installment payments in cash), for 351,116 shares of our common stock at the
conversion price of $0.30 per share [See Note 8].
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 has been charged to 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 $2,400,000 and $2,500,000 at December 31, 2004
and 2003.
F-21
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, SHEET #14
- --------------------------------------------------------------------------------
[12] 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 no longer separately assess the performance of these products.
[13] MAJOR CUSTOMERS
For the years ended December 31, 2004 and 2003, sales to one customer amounted
to approximately 31% and 11% of revenues, respectively. For the year ended
December 31, 2002, sales to another individual customer amounted to
approximately 30% of revenues.
[14] SUBSEQUENT EVENTS
On March 3, 2005, we signed an eighty-nine month lease for approximately 20,000
square fee of office space located in Fairfield, New Jersey. This will serve as
our new headquarters.
. . . . . . . . . .
F-22
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, 2004 $ 6,197,478 $ 1,008,015 $ -- $ 7,205,493
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
Allowance for Doubtful Accounts:
Year Ended December 31, 2004 $ 25,000 $ -- $ -- $ 25,000
Year Ended December 31, 2003 $ 25,000 $ -- $ -- $ 25,000
Year Ended December 31, 2002 $ 25,000 $ -- $ -- $ 25,000
F-23
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 25, 2005 By: /s/ John W. Roblin
-------------------------------------
John W. 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 W. Roblin Chairman of the Board, President March 25, 2005
- -----------------------
John W. Roblin and Chief Executive Officer
(Principal Executive Officer)
/s/ Ann F. Massey Chief Financial Officer, Controller March 25, 2005
- -----------------------
Ann F. Massey and Secretary (Principal Financial
Officer and Principal Accounting
Officer)
/s/ Russell Cleveland Director March 25, 2005
- -----------------------
Russell Cleveland
/s/ Earl Gallegos Director March 25, 2005
- -----------------------
Earl Gallegos
/s/ Mark D. Johnston Director March 25, 2005
- -----------------------
Mark D. Johnston
/s/ Robert A. Marshall Director March 25, 2005
- -----------------------
Robert A. Marshall
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10(d)(4) Lease Agreement, dated March 3, 2005, by and between the
Registrant and Fairfield 80 Venture, LLC.
23 Consent of Moore Stephens, P.C.
31.1 Certification of John W. 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.