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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 2005 or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File Number: 0-13124
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COVER-ALL TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-2698053
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18-01 Pollitt Drive, Fair Lawn, New Jersey 07410
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(Address of principal executive offices) (Zip Code)
(201) 794-4800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: [X] No: [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 2, 2005, the registrant had 15,816,084 shares of common stock, par
value $.01 per share, outstanding.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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INDEX TO FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005
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PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2005 (Unaudited)
and December 31, 2004 (Audited)................................... 3
Consolidated Statements of Operations for the three
months ended March 31, 2005 and 2004 (Unaudited).................. 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 2005 and 2004 (Unaudited).................. 6
Notes to Consolidated Financial Statements (Unaudited)............ 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 11
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk................................................. 15
ITEM 4. Controls and Procedures........................................... 15
PART II: OTHER INFORMATION
ITEM 6. Exhibits.......................................................... 17
SIGNATURES................................................................. 18
. . . . . . . . . .
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2005 2004
----------------- -----------------
(UNAUDITED) (AUDITED)
ASSETS:
Current Assets:
Cash and Cash Equivalents......................................... $ 1,219,613 $ 143,624
Accounts Receivable (Less Allowance for Doubtful Accounts
of $25,000 in 2005 and 2004)................................... 1,709,025 3,613,881
Prepaid Expenses.................................................. 573,434 427,991
----------------- -----------------
Total Current Assets.............................................. 3,502,072 4,185,496
----------------- -----------------
Property and Equipment - At Cost:
Furniture, Fixtures and Equipment................................. 1,414,981 1,387,440
Less: Accumulated Depreciation................................... (1,281,899) (1,257,774)
----------------- -----------------
Property and Equipment - Net...................................... 133,082 129,666
----------------- -----------------
Capitalized Software (Less Accumulated Amortization of
$7,453,816 and $7,205,493, respectively).......................... 1,817,002 1,883,448
----------------- -----------------
Deferred Financing Costs (Net of Accumulated Amortization of
$120,237 and $111,619, respectively).............................. 121,074 129,692
----------------- -----------------
Other Assets......................................................... 166,985 59,335
----------------- -----------------
Total Assets...................................................... $ 5,740,215 $ 6,387,637
================= =================
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
3
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2005 2004
----------------- -----------------
(UNAUDITED) (AUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts Payable.................................................. $ 493,877 $ 536,469
Income Taxes Payable.............................................. -- 48,905
Accrued Liabilities............................................... 464,994 829,516
Convertible Debentures ........................................... 271,532 209,426
Convertible Debenture - Related Party............................. 13,175 10,696
Unearned Revenue.................................................. 1,475,053 1,650,143
----------------- -----------------
Total Current Liabilities......................................... 2,718,631 3,285,155
----------------- -----------------
Long-Term Liabilities:
Convertible Debentures............................................ 2,028,985 2,091,092
Convertible Debenture - Related Party............................. 80,973 83,451
----------------- -----------------
Total Long-Term Liabilities....................................... 2,109,958 2,174,543
----------------- -----------------
Total Liabilities................................................. 4,828,589 5,459,698
----------------- -----------------
Commitments and Contingencies........................................ -- --
----------------- -----------------
Stockholders' Equity:
Common Stock, $.01 Par Value, Authorized 75,000,000 Shares;
18,316,084 and 18,248,084 Shares Issued and 15,816,084
and 15,748,084 Shares Outstanding, Respectively................. 183,161 182,481
Capital In Excess Of Par Value....................................... 26,283,656 26,265,976
Accumulated Deficit.................................................. (24,852,191) (24,817,518)
Treasury Stock - At Cost - 2,500,000 Shares.......................... (703,000) (703,000)
----------------- -----------------
Total Stockholders' Equity........................................... 911,626 927,939
----------------- -----------------
Total Liabilities and Stockholders' Equity........................... $ 5,740,215 $ 6,387,637
================= =================
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
4
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
-----------------------------------
2005 2004
--------------- ---------------
REVENUES:
Licenses................................................. $ 566,388 $ 342,750
Maintenance.............................................. 997,025 1,161,490
Professional Services.................................... 299,225 235,620
Applications Service Provider ("ASP") Services........... 224,250 154,198
--------------- ---------------
TOTAL REVENUES........................................... 2,086,888 1,894,058
--------------- ---------------
COST OF REVENUES:
Licenses................................................. 436,354 322,856
Maintenance.............................................. 701,767 632,636
Professional Services.................................... 118,971 121,251
ASP Services............................................. 30,847 24,207
--------------- ---------------
TOTAL COST OF REVENUES................................... 1,287,939 1,100,950
--------------- ---------------
DIRECT MARGIN............................................ 798,949 793,108
--------------- ---------------
OPERATING EXPENSES:
Sales and Marketing...................................... 312,594 291,339
General and Administrative............................... 309,803 302,242
Research and Development................................. 199,877 151,740
--------------- ---------------
TOTAL OPERATING EXPENSES................................. 822,274 745,321
--------------- ---------------
OPERATING INCOME (LOSS).................................. (23,325) 47,787
--------------- ---------------
OTHER INCOME (EXPENSE):
Interest Expense......................................... (46,271) (47,868)
Interest Expense - Related Party......................... (2,062) (1,995)
Interest Income.......................................... 2,319 2,243
Other Income............................................. 34,666 2,704
--------------- ---------------
TOTAL OTHER INCOME (EXPENSE)............................. (11,348) (44,916)
--------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT).............. (34,673) 2,871
INCOME TAXES (BENEFIT)........................................ -- --
--------------- ---------------
NET (LOSS) INCOME............................................. $ (34,673) $ 2,871
=============== ===============
BASIC EARNINGS (LOSS) PER COMMON SHARE........................ $ (0.00) $ 0.00
=============== ===============
DILUTED EARNINGS (LOSS) PER COMMON SHARE...................... $ (0.00) $ 0.00
=============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR BASIC EARNINGS (LOSS)
PER COMMON SHARE......................................... 15,757,000 15,348,000
=============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING FOR DILUTED EARNINGS (LOSS)
PER COMMON SHARE......................................... 15,757,000 24,417,000
=============== ===============
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
5
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
------------------------------------
2005 2004
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss).................................................... $ (34,673) $ 2,871
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided From (Used For) Operating Activities:
Depreciation.................................................. 24,125 23,518
Amortization of Capitalized Software.......................... 248,323 243,275
Amortization of Deferred Financing Costs...................... 8,618 8,618
Non-Cash Financing Cost....................................... -- --
Changes in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable........................................... 1,904,856 399,415
Prepaid Expenses.............................................. (145,443) (10,556)
Other Assets.................................................. (107,650) 277
Increase (Decrease) in:
Accounts Payable.............................................. (42,592) 92,680
Taxes Payable................................................. (48,905) --
Accrued Liabilities........................................... (364,522) (1,660)
Unearned Revenue.............................................. (175,090) (491,373)
---------------- ----------------
Net Cash Provided From Operating Activities.......................... 1,267,047 267,065
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures................................................. (27,541) (6,501)
Capitalized Software Expenditures.................................... (181,877) (355,665)
---------------- ----------------
Net Cash Used For Investing Activities............................... (209,418) (362,166)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Exercise of Stock Options.............................. 18,360 2,858
---------------- ----------------
Net Cash Provided From Financing Activities.......................... 18,360 2,858
---------------- ----------------
CHANGE IN CASH AND CASH EQUIVALENTS....................................... 1,075,989 (92,243)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD........................... 143,624 1,193,173
---------------- ----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD................................. $ 1,219,613 $ 1,100,930
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIODS FOR:
Interest........................................................... $ 46,271 $ 47,868
Interest - Related Party........................................... 2,062 1,995
Income Taxes....................................................... -- --
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
6
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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[1] GENERAL
For a summary of significant accounting policies, refer to Note 1 of Notes to
Consolidated Financial Statements included in Cover-All Technologies Inc.'s (the
"Company") Annual Report on Form 10-K for the year ended December 31, 2004.
While the Company believes that the disclosures herein presented are adequate to
make the information not misleading, these consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest annual report. Certain amounts
for the prior period have been reclassified to conform with the current period's
financial statement presentation. The financial statements include on a
consolidated basis the results of its subsidiary. All material intercompany
transactions and balances have been eliminated.
In the opinion of management, the accompanying consolidated financial statements
include all adjustments which are necessary to present fairly the Company's
consolidated financial position as of March 31, 2005, and the results of their
operations for the three month periods ended March 31, 2005 and 2004, and their
cash flows for the three month periods ended March 31, 2005 and 2004. Such
adjustments are of a normal and recurring nature. The results of operations for
the three month periods ended March 31, 2005 and 2004 are not necessarily
indicative of the results to be expected for a full year.
[2] 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"), respectfully, 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. 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 governing the
issuance of the debentures 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. The $16,913 estimated fair market value of the warrants has been charged
to financing costs.
As of March 31, 2005, we were in compliance with the financial covenants of the
convertible loan agreements.
7
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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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
============
[3] EARNINGS PER SHARE DISCLOSURES
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations:
FOR THE THREE MONTHS ENDED
MARCH 31, 2005
------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- --------------- ---------------
Basic EPS:
Income (Loss) Available to Common
Stockholders...................................... $ (34,673) 15,756,673 $ (0.00)
Interest Reversal Convertible Debentures
(Net of Tax)....................................... -- -- --
Effect of Dilutive Securities:
Exercise of Options................................ -- -- --
Exercise of Warrants............................... -- -- --
Conversion of Convertible Debentures............... -- -- --
--------------- --------------- ---------------
Diluted EPS:
Income (Loss) Available to Common Stockholders
Plus Assumed Conversions......................... $ (34,673) 15,756,673 $ (0.00)
=============== =============== ===============
The Company's options and warrants were not included in the computation of EPS
for the period ended March 31, 2005 because to do so would be antidilutive. The
Company's convertible debt does not affect the EPS calculation for the period
ended March 31, 2005 because it would be antidilutive.
FOR THE THREE MONTHS ENDED
MARCH 31, 2004
------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
--------------- --------------- ---------------
Basic EPS:
Income Available to Common
Stockholders...................................... $ 2,871 15,348,410 $ 0.00
Interest Reversal Convertible Debentures
(Net of Tax)....................................... 30,000 -- --
Effect of Dilutive Securities:
Exercise of Options................................ -- 651,992 --
Exercise of Warrants............................... -- 82,950 --
Conversion of Convertible Debentures............... -- 8,333,333 --
--------------- --------------- ---------------
Diluted EPS:
Income Available to Common Stockholders
Plus Assumed Conversions......................... $ 32,871 24,416,685 $ 0.00
=============== =============== ===============
8
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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Options to purchase 1,013,000 shares of common stock at prices ranging from
$1.13 to $4.00 per share were outstanding at March 31, 2004, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common shares for the period
($.62).
[4] STOCK OPTION AND STOCK PURCHASE PLANS
We have adopted several stock-based compensation plans that provide for the
grant of options to our employees and non-employee directors. All options under
these plans vest over terms of zero to three years. Options may be granted as
incentive or non-qualified stock options and are exercisable at a price and time
as determined by the Board of Directors on the grant date.
We account for stock-based employee compensation using the intrinsic value
method in accordance with APB Opinion No. 25 and related interpretations which
generally require that the amount of compensation cost that must be recognized,
if any, is the quoted market price of the stock on the measurement date, which
is generally the grant date, less the amount the grantee is required to pay to
acquire the stock. Alternatively, Statement of Financial Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," employs fair value-based
measurement and generally results in the recognition of compensation expense for
all stock-based awards to employees. SFAS No. 123 does not require an entity to
adopt those provisions, but, rather, permits continued application of APB
Opinion No. 25. We have elected not to adopt the recognition and measurement
provisions of SFAS No. 123 and continue to account for our stock-based employee
compensation plans under APB Opinion No. 25 and related interpretations. In
accordance with APB Opinion No. 25, compensation is generally recorded for
stock-based employee compensation grants based on the excess of the market value
of the common stock on the measurement date over the exercise price. If the
exercise price of the stock-based compensation is equal to or exceeds the market
price of our common stock on the grant date, no compensation expense is
recorded.
For the three months ended March 31, 2005 and 2004, the Company was not required
to record compensation expense for stock option grants.
Had compensation cost for the stock-based employee compensation plans been
determined based on the fair values of awards on the grant date, estimated using
the Black-Scholes option pricing model, which would be consistent with the
method described in SFAS No. 123, the Company's reported net income (loss) and
earnings (loss) per share would have been reduced to the pro forma amounts shown
below:
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2005 2004
---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Income (Loss) as Reported........................... $ (35) $ 3
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................................... $ 26 $ 25
Pro Forma Net Income (Loss)............................. $ (61) $ (22)
Basic Earnings (Loss) Per Share as Reported............. $ (0.00) $ 0.00
Pro Forma Basic Earnings (Loss) Per Share............... $ (0.00) $ 0.00
Diluted Earnings (Loss) Per Share as Reported........... $ (0.00) $ 0.00
Pro Forma Diluted Earnings (Loss) Per Share............. $ (0.00) $ 0.00
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transaction and Disclosure - An
Amendment of FASB Statement No. 123." This Statement
9
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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provides alternative accounting for stock-based employee compensation and
requires prominent disclosures in both annual and interim financial statements
about the method used in reporting results. We have elected not to adopt the
recognition and measurement provisions of SFAS No. 123 and continue to account
for our stock-based employee compensation plans under APB Opinion No. 25 and
related interpretations and, therefore, the transaction provisions will not have
an impact on our financial position or results of operations. The required
expanded interim disclosures are provided above.
10
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CERTAIN OF THE MATTERS DISCUSSED IN THIS REPORT, INCLUDING, WITHOUT
LIMITATION, MATTERS DISCUSSED UNDER THIS ITEM 2, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES
LITIGATION REFORM ACT) AND ARE SUBJECT TO THE OCCURRENCE OF CERTAIN
CONTINGENCIES WHICH MAY NOT OCCUR IN THE TIME FRAMES ANTICIPATED OR OTHERWISE,
AND, AS A RESULT, COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH
STATEMENTS. IN ADDITION TO OTHER FACTORS AND MATTERS DISCUSSED ELSEWHERE IN THIS
REPORT ON FORM 10-Q AND IN OUR FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON MARCH 25, 2005, AND OTHER PERIODIC REPORTS FILED, THESE RISKS,
UNCERTAINTIES AND CONTINGENCY INCLUDE, BUT ARE NOT LIMITED TO, 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, AND OTHER BUSINESS FACTORS BEYOND OUR
CONTROL.
OVERVIEW
We are a supplier of software products for the property and casualty
insurance industry, supplying a wide range of professional services that support
product customization, conversion from existing systems and data integration
with other software or reporting agencies. We also offer on-going support
services including incorporating recent insurance rate and rule changes in our
solutions. These support services also include analyzing the changes,
developments, quality assurance, documentation and distribution of insurance
rate and rule changes.
We earn revenue from software contract licenses, service fees from ASPs,
continuing maintenance fees for servicing the product and professional services.
Total revenue for the three months ended March 31, 2005 increased to $2,087,000
from $1,894,000 for the three months ended March 31, 2004, mainly due to an
increase in license revenue.
The following is an overview of the key components of our revenue and
other important financial data for the three and nine months ended March 31,
2005:
SOFTWARE LICENSES. We signed license upgrades with several existing
customers in the first three months of 2005. Our license revenue in the three
months ended March 31, 2005 of $566,000 was from existing customers who chose to
renew, add onto or extend their use of our software. For the three months ended
March 31, 2004, we generated $343,000 in license revenue.
MAINTENANCE. Maintenance revenue was $997,000 in the three months ended
March 31, 2005 compared to $1,161,000 in the same period in 2004. The decrease
in the first three months of 2005 was mainly due to the loss of several
customers.
PROFESSIONAL SERVICES. The increase in professional services revenue,
from $236,000 in the three months ended March 31, 2004 to $299,000 in the same
period of 2005, was a result of increased demand for customizations from our
current customer base.
ASP SERVICES. ASP services revenue was $225,000 in the first three
months of 2005 compared to $154,000 in the same period in 2004.
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES. Income (loss) before
provision for income taxes was $(35,000) in the three months ended March 31,
2005 compared to $2,900 in the same period of 2004 primarily due to a reduction
in maintenance revenue.
NET INCOME (LOSS). Net income (loss) for the three months ended March
31, 2005 decreased to $(35,000) from $2,900 in the same period of 2004 as a
result of a reduction in maintenance revenue.
11
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CASH FLOW. We generated $1,267,000 in positive cash flow from operations
in the first three months of 2005 and ended the period with $1,220,000 in cash
and cash equivalents and $1,709,000 in accounts receivable.
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. In response to these challenges, we have increased our sales and
marketing effort. Consequently, we are incurring additional sales and marketing
expense in advance of generating the corresponding revenue.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the consolidated statements of operations expressed as a percentage of
total revenues:
THREE MONTHS
ENDED MARCH 31,
------------------------------
2005 2004
-------------- --------------
REVENUES:
License 27.1% 18.1%
Maintenance 47.8 61.4
Professional Services 14.3 12.4
Applications Service Provider ("ASP") Services 10.8 8.1
-------------- --------------
TOTAL REVENUES 100.0 100.0
-------------- --------------
COST OF REVENUES:
License 20.9 17.0
Maintenance 33.6 33.4
Professional Services 5.7 6.4
ASP Services 1.5 1.3
-------------- --------------
TOTAL COST OF REVENUES 61.7 58.1
-------------- --------------
DIRECT MARGIN 38.3 41.9
-------------- --------------
OPERATING EXPENSES:
Sales and Marketing 15.0 15.4
General and Administrative 14.8 15.9
Research and Development 9.6 8.0
-------------- --------------
TOTAL OPERATING EXPENSES 39.4 39.3
-------------- --------------
OPERATING INCOME (LOSS) (1.1) 2.6
-------------- --------------
OTHER EXPENSE (INCOME):
Interest Expense 2.3 2.6
Interest Income (0.1) (0.1)
Other Income (1.6) (0.1)
-------------- --------------
TOTAL OTHER EXPENSE (INCOME) 0.6 2.4
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (1.7) 0.2
-------------- --------------
INCOME TAXES -- --
-------------- --------------
NET INCOME (LOSS) (1.7)% 0.2%
-------------- --------------
12
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
Total revenues for the three months ended March 31, 2005 were $2,087,000
as compared to $1,894,000 for the same period in 2004. License fees were
$566,000 for the three months ended March 31, 2005 compared to $343,000 in the
same period in 2004, primarily due to license upgrades signed with several
existing customers. For the three months ended March 31, 2005, maintenance
revenues were $997,000 compared to $1,161,000 in the same period of the prior
year primarily due to the loss of several customers. Professional services
revenue contributed $299,000 in the three months ended March 31, 2005 compared
to $236,000 in the first quarter of 2004, as a result of on increase in demand
for customization from our current customer base. For the three months ended
March 31, 2005, ASP revenues were $225,000 as compared to $154,000 in the same
period for the prior year.
Cost of sales increased to $1,288,000 for the three months ended March
31, 2005 as compared to $1,101,000 for the same period in 2004 due to staff
related expenses. Non-cash capitalized software amortization was $248,000 for
the three months ended March 31, 2005 as compared to $243,000 for the same
period in 2004. The Company capitalized $182,000 of software development costs
in the first three months of 2005 as compared to $356,000 in the same period in
2004.
Research and development expenses were $200,000 for the three months
ended March 31, 2005 compared to $152,000 for the same period in 2004, primarily
due to the ongoing effort to enhance the functionality of our products and
solutions.
Sales and marketing expenses were $313,000 for the three months ended
March 31, 2005 as compared to $291,000 in the same period of 2004 primarily due
to an increase in a marketing and sales effort to improve the market share of
our solutions set.
General and administrative expenses were $310,000 in the three months
ended March 31, 2005 as compared to $302,000 in the same period in 2004 mainly
due to directors fees paid in 2005.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations primarily from cash flow from operations
and the proceeds from our 2008 Debentures and 2009 Debentures.
At March 31, 2005, we had cash and cash equivalents of $1,220,000
compared to cash and cash equivalents of $1,101,000 at March 31, 2004. The
increase in cash and cash equivalents is primarily attributable to the increase
in license sales.
The 2008 Debentures were issued with an aggregate principal amount of
$1,800,000, and the 2009 Debentures were issued with an aggregate principal
amount of $700,000. Interest on the unpaid principal amount of the debentures is
payable monthly at the rate of 8% per annum. The 2008 Debentures and 2009
Debentures mature on July 1, 2008 and September 1, 2009, respectively, unless
the debentures are earlier redeemed by us or the holder upon the occurrence of
certain events specified in the debentures or converted into shares of our
common stock at the holder's option at a conversion price of $0.30 per share,
subject to adjustment. We may redeem the debentures for cash at 101% of the
principal amount, together with accrued and unpaid interest through the
redemption date, upon the occurrence of certain events specified in the
debentures.
We are required to pay, commencing on July 1, 2004 and July 1, 2005,
respectively, monthly principal installments in the amount of ten dollars ($10)
per thousand dollars ($1,000) of the then remaining principal amount of such
debentures, and at maturity we will be required to pay the remaining unpaid
principal amount.
In 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 shares of our common stock at the
conversion price of $0.30 per share.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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At March 31, 2005, we had working capital of $783,000 compared to
working capital of $46,000 at March 31, 2004.
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 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.
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.
OFF-BALANCE SHEET TRANSACTIONS
We do not maintain any off-balance sheet transactions, arrangements,
obligations or other relationships with unconsolidated entities or others that
are reasonably likely to have a material current or future effect on our
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The SEC has issued cautionary advice to elicit more precise disclosure
in this Item 2, MD&A, about accounting policies management believes are most
critical in portraying our financial results and in requiring management's most
difficult subjective or complex judgments.
The preparation of financial documents in conformity with accounting
principles generally accepted in the United States of America requires
management to make judgments and estimates. On an on-going basis, we evaluate
our estimates, the most significant of which include establishing allowances for
doubtful accounts, a valuation allowance for our deferred tax assets and
determining the recoverability of our long-lived assets. The basis for our
estimates are historical experience and various assumptions that are believed to
be reasonable under the circumstances, given the available information at the
time of the estimate, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
available from other sources. Actual results may differ from the amounts
estimated and recorded in our financial statements.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
o Revenue Recognition
o Valuation of Capitalized Software
o Valuation of Allowance for Doubtful Accounts Receivable
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
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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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.
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 its software development
concurrently with the establishment of technological feasibility, it has
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 economic life of the product. At each balance sheet
date, the unamortized capitalized costs of each computer software product is
compared to the net realizable value of that product. If an amount of
unamortized capitalized costs of a computer software product is found to exceed
the net realizable value of that asset, such amount will be written off. The net
realizable value is the estimated future gross revenues from that product
reduced by the estimated future costs of completing and disposing of that
product, including the costs of performing maintenance and customer support
required to satisfy our responsibility set forth at the time of sale.
VALUATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
Management's 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. Management believes that
accounts receivable credit risk exposure beyond such allowance is limited.
ITEM 3. 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 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of the Company's "disclosure controls
and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934, as amended). Based upon that evaluation, our Chief Executive Officer
and our Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission (the "SEC") rules and forms, and include
controls and procedures designed to ensure that information required to be
disclosed by us in such reports is accumulated and communicated to our
management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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There has been no change in our internal control over financial
reporting during the quarter ended March 31, 2005 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
* * * * * * * * *
Statements in this Form 10-Q, other than statements of historical information
are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks which may cause the
Company's actual results in future periods to differ materially from expected
results. Those risks include, among others, 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, and other business factors beyond our
control. Those and other risks are described in the Company's filings with the
SEC over the last 12 months, including our Form 10-K filed with the SEC on March
25, 2005, copies of which are available from the SEC or may be obtained upon
request from the Company.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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PART II: OTHER INFORMATION
ITEM 6. EXHIBITS.
EXHIBIT
NO. DESCRIPTION
10(e)(4)+ Letter Agreement, dated May 11, 2005, between the Company and
John Roblin
31.1 Chief Executive Officer Certification pursuant to Section
13a-15(e) of the Securities Exchange Act.
31.2 Chief Financial Officer Certification pursuant to Section
13a-15(e) of the Securities Exchange Act.
32.1 Certification of John W. Roblin pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Ann F. Massey pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
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+ Denotes a management contract or compensatory plan or arrangement.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVER-ALL TECHNOLOGIES INC.
Date: May 13, 2005 By: /s/ John W. Roblin
--------------------------------------------
John W. Roblin, Chairman of the Board of
Directors, President and Chief Executive
Officer
Date: May 13, 2005 By: /s/ Ann F. Massey
--------------------------------------------
Ann F. Massey, Chief Financial Officer
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