ITEM 1. BUSINESS --------
GENERAL - -------
Cover-All Technologies Inc. (the "Company" or "Cover-All"), a Delaware corporation formed in 1971, is a provider of state-of-the-art software products and services to the property/casualty insurance industry through its wholly-owned subsidiary, Cover-All Systems, Inc., a Delaware corporation.
Cover-All offers sophisticated software products and services to the property and casualty insurance industry. The Company focuses on the functions required to market, rate, issue, print, bill and support the entire life cycle of insurance policies. The products and services offered combine an in-depth knowledge of property and casualty insurance with innovative solution designs utilizing state-of-the-art technology. Products are available fully configured ("off-the-shelf") or customized to specific customer needs utilizing Cover-All's unique tool set. The software can be licensed for customer use on their own platforms or can be licensed through an ASP (Application Services Provider) utilizing third party technology platforms and support.
Cover-All also offers on-going support services, including insurance rate and rule changes, in a cost-effective manner. These support services include analyzing the changes, development, quality assurance, documentation and distribution of insurance rate and rule changes.
The Company also provides a wide range of professional services that support product customization, conversion from existing systems and data integration with other software or reporting agencies.
The Company derives revenue from software contract licenses to new and existing customers, service fees from the ASP, continuing maintenance fees for servicing the product and professional services.
MY INSURANCE CENTER - -------------------
In December 2001, the Company announced the availability of My Insurance Center, a customizable and configurable Internet portal that was developed to provide insurance agents, brokers and carriers with leading edge integrated workflows and access to real-time information. My Insurance Center links Cover-All's rating, policy issuance, billing and other components into a fully integrated platform that eliminates redundant data entry. Information is stored in a Client-centric data base and becomes immediately available to other users or functions and, utilizing advanced technologies, MIC generates alerts to users when certain conditions exist. My Insurance Center has also been designed to allow the customer to configure everything from their own look and feel to custom workflow processes. My Insurance Center's design includes security and "single-sign-on" capabilities.
My Insurance Center is available to users on Cover-All's ASP and is also available to be licensed by new and existing customers. Combined with Cover-All's Client-centric database, My Insurance Center enables Cover-All to have an integrated and flexible architecture that is specially designed to enable Cover-All customers to make rapid business and technological changes.
CLASSIC - -------
In December 1989, the Company purchased, through its subsidiary, the assets related to the exclusive proprietary rights to a PC-based software application for policy rating and issuance for property/casualty insurance companies. This software utilizes a unique design that separates the "insurance product definition"
from the actual technology "engines." The sophistication of this design has enabled the Company to stay current with technology innovations while preserving its "insurance knowledge" investment. This concept has evolved into what is known today as the Classic product.
The Classic product line is a self-contained full policy life cycle suite that 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 Full Policy data base aligned with industry standards
The Classic product was designed to accommodate all lines of property and casualty insurance but is especially effective in coping with the complexity and variability of commercial lines insurance. Cover-All today offers off-the-shelf support for more than 20 lines of commercial business in virtually all states and Puerto Rico. Cover-All's extensive experience in creating custom products combined with its proprietary tool set enables the Company to deliver support for new insurance products in short time frames.
Significant new functionality was added to Classic in 2001. Cover-All announced the availability of the Insurance Policy Database (IPD) in December. IPD is designed to provide a sophisticated data repository based upon insurance industry data standards that would enable Classic customers easy and immediate access to their policy information. IPD is also a key component of My Insurance Center as well as enabling Cover-All and its customers to build sophisticated interfaces to other components or systems.
A strength of the Classic product is that it has been designed to reduce the complexity of the insurance process for the user. Classic's user interface asks the user for only the information necessary for the task at hand. The product performs complete editing as the data is entered so that errors can be corrected immediately. The software can run on stand-alone PCs, over a LAN utilizing a shared database or over the Internet utilizing a browser.
The Classic software was originally developed using the MicroFocus COBOL language, and the Company upgraded this product line for use in the Windows 95, Windows 98 and NT operating systems. During 1999, the Classic product was also upgraded to utilize a graphical user interface ("GUI"). During 2000 it has also been implemented in an Internet or thin client environment. This feature enables customers to allow remote access to their customers or partners. The Internet is also the platform utilized by the ASP offering.
The Classic Rating and Policy Issuance Product has been and continues to be enhanced and updated with new technology. The sophisticated design of the product isolates insurance product knowledge from the application itself in datafiles (Metadata). Cover-All has built an extensive knowledge base, estimated at more than 100 person years of effort, in this Metadata that defines the details of virtually hundreds of insurance policy types and coverages for the Classic product.
The Classic product is in use in over 60 companies. Total Classic revenues were $5,585,000 for 2001 as compared to $6,772,000 for 2000 and $7,144,000 for 1999.
TAS 2000 - --------
Since 1993, Cover-All has been developing a second product line known as Total Administrative Solution ("TAS 2000") and, as of December 31, 2000, Cover-All has developed a suite of functionality including billing, full policy life-cycle support, Customer Relationship Management (CRM) and financial and statistical reporting. The entire suite of functional components is fully integrated through a client-centric Oracle(TM) Insurance Enterprise database.
These functional components have been built out and implemented for workers compensation. This product suite, called TAS Comp, is currently in production at one customer site.
These components are also being marketed separately and are being integrated with My Insurance Center and Classic for deployment in the ASP and in other new product or service offerings currently being developed. Utilizing My Insurance Center, Classic and the TAS 2000 components, Cover-All can deliver a fully integrated platform for quoting/rating, policy issuance, policy administration, billing, and reporting.
The TAS 2000 product is built upon a comprehensive Oracle(TM) database designed to meet the data requirements for an insurance enterprise. The data is organized around customers and is designed to meet the complex data requirements of the property/casualty insurance industry. The current TAS 2000 product includes several functionally rich components including billing, client-management, agent/broker management, rating, policy issuance and print and financial/statistical reporting. It also includes a number of application development tools for property/casualty insurers designed to enable faster implementation of new or reengineered business processes.TAS 2000 applications run on commodity priced open computer systems and use state-of-the-art software technology provided by Oracle Corporation. Total TAS 2000 revenues were $678,000 for 2001, $1,191,000 for 2000 and $3,884,000 for 1999.
PRODUCT DESCRIPTION - -------------------
MY INSURANCE CENTER - -------------------
My Insurance Center (MIC) is a sophisticated Internet portal software product that provides comprehensive business processing and an information access platform for the property and casualty insurance industry. The browser-based user interface allows employees, agents and other end-users to personalize their desktops so they see only the information they may need. The technology underlying MIC is the Insurance Policy Database (IPD), a relational database that holds the full transactional data for all lines of Property and Casualty Insurance. IPD has been designed to bring powerful data access and reporting capabilities to the desktop.
MIC offers the following features and benefits:
o DATA INTEGRATION - IPD is an integrated data repository that provides optimum quality information to MIC quickly and inexpensively. Data is shared by multiple systems to help integrate business functions, manage workflow and avoid duplicate data problems.
o APPLICATION INTEGRATION - MIC allows the end user to switch back and forth among applications without having to log in to individual applications increasing their productivity. MIC provides a consolidated view of data from disparate systems and provides hotlinks with single sign-on to connect quickly to the specific module of the specific system.
o BROAD ACCESSIBILITY - MIC is a true Internet portal application which can be accessed over the Internet/Intranet by using any browser on a thin client.
o INTEGRATED DATA REPRESENTATION - Data can be represented from various databases of different types in a single component of MIC. It provides a consolidated view of information and their servers as a "library" with all available information.
o SINGLE SIGN-ON - Using Oracle(R) 9iAS Single Sign-On framework eliminates the need to sign-on to different applications and to remember different user-ids and password{. Users can jump directly to any application from MIC.
o PERSONALIZATION & CUSTOMIZATION - MIC allows each user to personalize his/her view similar to other Internet portals, to meet the needs and the stylistic preferences of each individual user. MIC personalization allows one to hide or show content, filter the content and also change color and page styles. Customization in MIC allows the host to control the accessibility to content for each user and also facilitates change to content in MIC, as business needs change, without additional programming.
o SECURITY - MIC can be configured to be used over SSL to achieve security on data transfer over the internet. It is also designed to adapt almost any organizational hierarchy and data level security needs with minimal effort.
My Insurance Center is built-on Oracle(R)9iAS Portal Server and Cover-All's Portlet Framework.
CLASSIC PRODUCT LINE --------------------
The Classic product is a software package that was designed to function on a variety of technology platforms including PC, client/server and Internet (thin client). Classic is designed to automate the rating, policy issuance and policy administration tasks for the property and casualty insurance industry. Functionality includes data capture/editing, rating, policy issuance and policy administration (including generation of statistical and financial data) for quoting, new business, mid-term changes, cancellations, reinstatements and renewals. The system's print engine creates multiple recipient copies of all relevant documentation for each of these transactions, including quote summaries, declaration pages and mandatory and optional manuscript forms. This product supports full policy life cycle functionality for property and casualty lines of business in a user-friendly system.
Other optional features include the Insurance Policy Database (IPD) which is an ODBC compliant database built utilizing industry data standards. IPD is delivered with a number of data "views" that make the access to information easy and quick. IPD also facilitates interface to other systems.
The Company believes that the Classic product line brings to the customer many useful functions, features and capabilities. Some are line-of-business specific and some are line-of-business independent. These include:
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 ISO Commercial Lines Manual Tables and Footnotes o Easy and direct system navigation o Standard ISO coverages and rates support o Company customized coverages and rates support o Fully automated recipient driven issuance of declaration pages, worksheets, ID card, etc., including print preview o Full Policy data base aligned with industry standards
o Help Desk assistance o Remote diagnostic and fix capabilities
The Classic product technology design was created with an understanding of the complexity and constantly changing nature of property and casualty insurance. The Classic product consists of several "engines" that perform driven by a series of external "rules" or metadata that contain the insurance specifics. This metadata has been developed over the last 10 years and has been enhanced and expanded throughout this period. Today this Metadata supports more than 20 commercial coverages in virtually all states and Puerto Rico as well as many custom products. Utilizing this proprietary tool set allows Cover-All to effectively and efficiently modify existing insurance coverages or add new products in very short time frames.
The design of Classic also allows Cover-All to stay current with changes in technology while reusing the intellectual capital represented in the insurance rules. The Classic product line has also been upgraded to run on a LAN where any number of users can contribute to the common data store. Over the past few years, Cover-All has upgraded the Classic product line to utilize a graphical user interface, or GUI, and modified the system to run as a 32-bit application. It is also operating on the Internet in a Citrix environment. The Internet is also the platform utilized by the ASP offering. The Company has invested in additional upgrades to newer, native Internet technologies as well as integrating this product to the TAS 2000 database and My Insurance Center. Additionally, Cover-All has developed and implemented a number of processes over the years that streamline the support process with the goal to improve quality to our customers.
TAS 2000 PRODUCT LINE ---------------------
The TAS 2000 product line was designed to bring new technology and additional functional capability to the property and casualty insurance industry. The product was built around an Oracle database that has been designed to meet the needs of an insurance enterprise. 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. This is designed to reduce 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. The functional components are designed to deliver a wide range of capabilities built with the needs of the insurance enterprise in mind. These functional components have been built out and implemented for workers compensation, and this product suite is known as TAS Comp.
All TAS 2000 products were developed as client/server applications using the Oracle Designer 2000 and Developer 2000 tool sets. The client/server architectural concept allows companies to take advantage of the power of distributed processing and the flexibility of the thin client and Internet platforms. Companies utilizing TAS 2000 that are growing or want to utilize additional functionality can "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. TAS 2000 enables customers to scale their equipment in accordance with the changing demands of their organizations.
The TAS 2000 product line currently includes the following application modules:
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 utilizing a browser over the Internet. TAS 2000 can be used on many different client/server hardware platforms and offers capability to process the voluminous transactions that are common to large-scale insurance operations. Cover-All originally created the TAS 2000 product line to better position itself for penetration into the larger insurance carrier market segment.
The design of My Insurance Center, Classic and TAS 2000, which consists of separate but integrated functional components built on client/server and Internet technology, enables Cover-All to market these functional components (such as billing) either separately, in "custom groupings," or as a service in an ASP environment.
PRODUCTS AND SERVICES IN DEVELOPMENT - ------------------------------------
Cover-All has, in My Insurance Center, Classic and TAS 2000 components, a deep inventory of insurance software components combined with a leading edge implementation platform. The combination of these capabilities enables both existing and new customers to obtain custom solutions to their business needs today and enhance their systems as future needs dictate. The Company expects to utilize these capabilities to expand and leverage its ability to respond to broadening marketplace and new customer opportunities with solutions that address the special needs of carriers, MGAs (Managing General Agents), agents, brokers and third party providers with both off-the-shelf and custom solutions. The user interface capabilities of Cover-All's My Insurance Center product are being enhanced with even more functionality as well as the addition of highly sophisticated Web-services and information access tools. The Company also intends to continue to enhance its functional components based upon market demand, existing customer needs and changes in technology (for example, support for PDA's), especially Internet technologies.
Cover-All is also increasing and enhancing its services portfolio. The Company has expanded its professional services with conversion and interface offerings. New rule-based capabilities are in development to enable Cover-All to implement data exchange services that will save our customers time and effort converting to Cover-All products or linking Cover-All products to existing systems. The ASP will continue to be enhanced with additional functionality and customer options.
COMPETITIVE PRODUCTS - --------------------
The computer software and services industry is highly competitive. Because of Cover-All's extensive knowledge of the insurance industry, however, the Company believes that its products offer customers certain advantages not available from Cover-All's competitors. Cover-All customers have access to the Company's 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 the Company and possess the technological ability to develop software products similar to those offered by the Company. These companies represent a significant competitive challenge to the Company's business. Very large insurers that internally develop systems similar to those of the Company may or may not become major customers of the Company for software or services. The Company competes on the basis of its insurance knowledge and products, service, performance, flexibility, ability to customize, system functionality, technology architecture and price.
MARKETING - ---------
The Company maintains a sales staff at its principal executive offices in Fair Lawn, New Jersey. The Company also utilizes distributors, outside consultants and other complimentary service providers to market its products. The Company is in the process of redesigning its Internet site and establishing linkages to portals and other web sites. This is an on-going effort that will expand rapidly in 2002 as the Company focuses on the Internet as the primary source of information about its products and services. The Company also participates in and displays its software products at trade shows organized by industry trade groups.
RESEARCH AND DEVELOPMENT - ------------------------
Cover-All's business is characterized by rapid business and technological change. The Company's success will depend, in part, on its ability to meet the new needs of our customers and the marketplace as well as continuing to enhance its products based on new technologies. Accordingly, the Company must maintain ongoing research and development programs to continually add value to its suite of products, as well as any possible expansion of its product lines.
During 2000, the Company focused on delivering the remaining functionality of TAS 2000. Additional time and effort was spent designing and building an Internet presentation tool as well as expanded security and print capabilities that will be utilized in upcoming products. Research and development expenses for Cover-All were $413,000, $875,000 and $1,009,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
BACKLOG - -------
The Company has no license, professional services and maintenance backlog of unbilled work, as of December 31, 2001.
MAJOR CUSTOMERS - ---------------
The Classic product line is in use in over 60 companies while the TAS 2000 product line is currently in use in one property/casualty insurance company. The Company's revenues from major customers (more than 10 percent of total revenues) for the years ended December 31, 2001, 2000 and 1999 as a percentage of total revenue were as follows:
In 2001, 2000 and 1999, export sales were made to a U.K. customer of approximately $0, $284,000 and $1,336,000, respectively. The Company is not currently active in the U.K. market.
EMPLOYEES - ---------
The Company had on average 50 employees during 2001. None of the Company's employees are represented by a labor union, and the Company has not experienced any work stoppages. The Company believes that relations with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES ----------
The Company's headquarters is located in Fair Lawn, New Jersey where it occupies approximately 21,000 square feet under a lease which expires at May 31, 2005 at a current annual rental expense of approximately $325,000. This facility is currently fully utilized by the Company.
The Company believes that its headquarters is well maintained and adequate to meet its needs in the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
No matters were submitted to a vote of the Company's security holders through the solicitation of proxies or otherwise during the fourth quarter ended December 31, 2001.
PART II -------
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ---------------------------------------------------------------------
Since November 1, 2000, the Company's common stock has been traded in the over-the-counter market on the OTC Bulletin Board under the symbol "COVR.OB". From May 23, 1996 through October 31, 2000, the Company's common stock was traded on The NASDAQ SmallCap Market tier of The NASDAQ Stock Market, and since July 1, 1996, the symbol for the Company's common stock on The NASDAQ SmallCap Market was "COVR." From August 2, 1996 until December 28, 2001, the Company's common stock was also listed on the Philadelphia Stock Exchange under the symbol "CVA."
The quotations below reflect the high and low bid prices for the Company's common stock since January 1, 2000 as traded on The NASDAQ SmallCap until October 31, 2000 and in the over-the-counter market on the OTC Bulletin Board thereafter. The quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
HIGH LOW 2001: ---- --- 1st Quarter $0.50 $0.23 2nd Quarter 0.46 0.25 3rd Quarter 0.51 0.23 4th Quarter 0.31 0.17
2000: 1st Quarter $1.94 $1.00 2nd Quarter 1.34 0.56 3rd Quarter 0.75 0.41 4th Quarter 0.78 0.19
As of March 18, 2002, there were 592 holders of record of the Company's common stock. This number does not include beneficial owners who may hold their shares in street name.
The Company has not paid any dividends on its common stock and does not anticipate paying any dividends in the foreseeable future. In addition, the purchase agreement governing the 8.00% debentures sold to the Renaissance US Growth and Income Trust PLC, BFS US Special Opportunities Trust PLC and three other private investors including John Roblin, Chairman of the Board, President and Chief Executive Officer of the Company, for an aggregate of $1,800,000 on June 28, 2001, currently prohibits the payment of dividends without the prior written consent of the holders of such debentures.
The closing sales price for the Company's common stock on March 18, 2002 was $0.22, as reported by the OTC Bulletin Board.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA -----------------------
The following selected financial data of the Company have been derived from the audited consolidated financial statements of the Company. The data should be read in conjunction with the audited consolidated financial statements, related notes and other financial information of the Company included herein.
ITEM 7.
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 WITHIN ANTICIPATED TIME FRAMES OR OTHERWISE, THE SUCCESSFUL NEGOTIATION, EXECUTION AND IMPLEMENTATION OF ANTICIPATED NEW SOFTWARE CONTRACTS, THE SUCCESSFUL UTILIZATION OF ADDITIONAL PERSONNEL IN THE MARKETING AND TECHNICAL AREAS AND THE COMPANY'S ABILITY TO COMPLETE DEVELOPMENT AND SELL AND LICENSE ITS PRODUCTS AT PRICES WHICH RESULT IN SUFFICIENT REVENUES TO REALIZE PROFITS.
GENERAL - -------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES - ------------------------------------------
This discussion and analysis of the Company's financial condition and results of operations are based on their consolidated financial statements that have been prepared under accounting principles generally accepted in the United States. The preparation of financial statements requires 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 period. 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 the Company's 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 - -------------------
The Company's revenues are recognized in accordance with SOP 97-2, "Software Revenue Recognition" ["SOP 97-2"], as amended by SOP 98-4, "Deferral of the Effective Date of SOP 97-2, Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2 with Respect to Certain Transactions." Revenue from the sale of software licenses is predominately from standardized software and is recognized when standard software modules are delivered and accepted by the customer, the fee is fixed or determinable and collectibility is probable. Revenue from software maintenance contracts is recognized ratably over the life of the contract. Revenue from professional consulting services is recognized when the service is provided.
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 the Company has 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 estimated economic life of the product. At each balance sheet date, the unamortized capitalized costs of each computer software product is compared to the net realizable value of that product. If an amount of unamortized capitalized costs of a computer software
product is found to exceed the net realizable value of that asset, such amount will be written off. The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support required to satisfy the Company's 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. The Company routinely assesses the financial strength of its customers and based upon factors concerning credit risk, establishes an allowance for uncollectible accounts. Management believes that accounts receivable credit risk exposure beyond such allowance is limited.
RESULTS OF OPERATIONS - ---------------------
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000 - -----------------------------------------------------------------------
Total revenues were $6,263,000 for the year ended December 31, 2001 compared to $7,963,000 for the year ended December 31, 2000, a decrease of 21%. License fees were $298,000 for the year ended December 31, 2001 compared to $1,919,000 in the same period in 2000 as a result of fewer new Classic sales in 2001. For the year ended December 31, 2001, maintenance revenues were $4,716,000 compared to $4,023,000 in the same period of the prior year as a result of new Classic contracts signed in 2000. Professional services revenue contributed $1,249,000 for the year ended December 31, 2001 compared to $2,021,000 for the year ended December 31, 2000 as a result of fewer new Classic sales in 2001.
Cost of revenues decreased to $4,863,000 for the year ended December 31, 2001 as compared to $6,942,000 for 2000 due to staff and other cost reductions in the TAS 2000 division. Non-cash capitalized software amortization was $861,000 for the year ended December 31, 2001 as compared to $899,000 in 2000. The Company capitalized software development costs of $866,000 in 2001 compared to none in 2000.
Research and development expenses in 2001 were $413,000 compared to $875,000 for the year ended December 31, 2000. The Company is continuing to enhance the functionality of its products and to define its processes in response to customer needs.
Sales and marketing expenses increased to $1,264,000 in 2001 compared to $900,000 in 2000. This increase was primarily due to an increase in the sales effort and the hiring of a new chief marketing officer in 2001.
General and administrative expenses decreased to $1,366,000 in 2001 compared to $1,962,000 for the year ended December 31, 2000 primarily as a result of decreased consulting and legal expenses.
Other income was $225,000 for the year ended December 31, 2001 as compared to none in the same period of 2000 due to the settlement of an outstanding customer dispute and a favorable resolution of a liability related to the customer dispute.
Extraordinary gain on extinguishment of debt was $804,000, net of income taxes of $536,000, for the year ended December 31, 2001 as compared to none in the same period of 2000 due to the settlement of $3,000,000 principal amount 12.5% convertible debentures due in 2002 for $1,660,000.
Allowance for Doubtful Accounts increased to $(58,000) in 2001 compared to $(333,000) for the year ended December 31, 2000 due to the collection of one account receivable in 2001 reserved for in 1999 and collections of various accounts receivable in 2000 reserved for in 1999.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999 - -----------------------------------------------------------------------
Total revenues were $7,963,000 for the year ended December 31, 2000 compared to $11,028,000 for the year ended December 31, 1999, a decrease of 28%. License fees were $1,919,000 for the year ended December 31, 2000 compared to $2,638,000 in the same period in 1999 primarily because of no new sales of TAS 2000 in 2000 as a result of the Company making a strategic decision to focus on completing the deliveries to the one TAS 2000 customer and developing an ongoing relationship with that customer, who is now in production. The decrease in revenue is primarily a result of reduced activity in TAS 2000.
For the year ended December 31, 2000, maintenance revenues were $4,023,000 compared to $4,371,000 in the same period of the prior year primarily due to the termination of support services by one Classic customer and reduced TAS 2000 maintenance caused by late deliveries in 1999 and the Company's decision to withdraw from the UK. Professional services revenue contributed $2,021,000 for the year ended December 31, 2000 compared to $4,019,000 for the year ended December 31, 1999 as a result of no new TAS 2000 implementations and the Company's decision to focus on completing its contractual obligations to the existing TAS 2000 commitments.
Cost of revenues decreased to $6,942,000 for the year ended December 31, 2000 as compared to $8,462,000 for 1999 as a result of the Company deciding in 2000 to implement certain measures to eliminate or reduce expenses on activities that were not directly creating value, staff reductions in the TAS 2000 division and combining the support structures for Classic and TAS 2000. Non-cash capitalized software amortization was $899,000 for the year ended December 31, 2000 as compared to $479,000 in 1999. The Company did not capitalize any software development in 2000.
Research and development expenses in 2000 were $875,000 compared to $1,009,000 for the year ended December 31, 1999. Significant effort was expended in 2000 to complete remaining functionality and refine our processes in order to satisfy our customers before we refocused and increased our sales efforts.
Sales and marketing expenses decreased to $900,000 in 2000 compared to $1,778,000 in 1999. This decrease was due to the closing of the UK operation, reallocation of some expenses into general and administrative and turnover in the sales force in 2000.
General and administrative expenses increased to $1,962,000 in 2000 compared to $1,550,000 for the year ended December 31, 1999 primarily as a result of increased legal fees.
Allowance for Doubtful Accounts decreased to $(333,000) in 2000 compared to $1,240,000 for the year ended December 31, 2000 due to collections of various accounts receivable reserved for in 1999 and no new reserves required in 2000.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
At December 31, 2001, the Company had working capital of $(1,114,000) compared to a working capital of $78,000 in 2000.
On June 21, 2000, the Company entered into an agreement with Vault Management Limited ("Vault") to purchase between 640,000 and 1,600,000 shares of the Company's common stock at $.625 per share, which
was the closing price per share of the Company's common stock on May 30, 2000, the date the agreement was reached.
The agreement would generate a minimum of $400,000 and a maximum of $1 million in proceeds to the Company. The proceeds would be used for general working capital purposes.
The agreement also called for the equivalent number of the Company's detachable five-year warrants to be issued to Vault at an exercise price of $.625 per share. The agreement provided that Vault shall have the option to make payments beyond the required $400,000 in $200,000 installments each on August 31, 2000, October 31, 2000 and November 30, 2000. Vault did not exercise its option to make a payment of $200,000 on any of August 31, 2000, October 31, 2000 or November 30, 2000. The decision not to exercise Vault's options was mutually agreed upon by Vault and the Company.
As part of the Vault transaction, the Company also agreed to modify the terms of the Care note such that the semi-annual principal payment of $500,000 due and payable on September 30, 2000 shall be due and payable as to $250,000 on September 30, 2000 and as to $250,000 on December 31, 2000. The Company received the $250,000 payment on September 29, 2000. The Company did not receive the payment due on December 31, 2000. At the time of the Vault transaction, Mr. Mark Johnston was the Company's Chairman and Interim Chief Financial Officer and also a director of both Vault and Care.
On June 28, 2001, the Company raised $1,800,000 through a private placement of 8.00% convertible debentures with investors headed by the Renaissance Capital Group, Inc. of Dallas, Texas. An aggregate of $1,400,000 was sold to the Renaissance US Growth and Income Trust PLC (traded on the London Stock Exchange) and BFS US Special Opportunities Trust PLC, which are managed by Renaissance. Also, an aggregate of $400,000 was sold to three other private investors including John Roblin, Chairman of the Board, President and Chief Executive Officer of the Company.
Immediately upon its receipt of the funds, the Company used $1,660,000 of the proceeds to fully settle its $3,000,000 principal amount 12.5% convertible debentures, due in 2002. The remainder of the funds raised from the transaction were to be used for working capital purposes. The new debentures, maturing in 2008, are convertible into shares of the Company's common stock, $.01 par value per share, initially at $0.50 per share, subject to adjustment in accordance with the terms of the parties' respective loan agreements. The Company recognized an extraordinary gain on the extinguishment of debt of $804,000, net of income taxes of $536,000, in June 2001.
At December 31, 2001, the Company had approximately $26,500,000 of federal net operating tax loss carryforwards expiring at various dates through 2016.
The Company believes that its current cash balances and anticipated cash flows from operations will be sufficient to meet its normal operating needs in 2002.
RECENTLY ISSUED ACCOUNTING STANDARDS - ------------------------------------
In August 2001, the Financial Accounting Standards Board ("FASB") approved SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). The Statement requires that long-lived assets to be disposed of other than by sale be considered held and used until they are disposed of. SFAS No. 144 requires that long-lived assets to be disposed of by sale be accounted for under the requirements of SFAS No. 121. SFAS No. 121 requires that such assets be measured at the lower of carrying amounts or fair value less cost to sell and to cease depreciation (amortization). SFAS No. 144 requires a probability-weighted cash flow estimation approach in situations where alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range of possible
future cash flow amounts are estimated. As a result, discontinued operations will no longer be measured on a net realizable basis, and future operating losses will no longer be recognized before they occur. Additionally, goodwill will be removed from the scope of SFAS No. 144. As a result goodwill will no longer be required to be allocated to long-lived assets to be tested for impairment. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. We are currently in the process of evaluating the effect this new standard will have on its consolidated financial position or results of operations.
On August 15, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will be effective for financial statements issued for fiscal years beginning after June 15, 2002. An entity shall recognize the cumulative effect of adoption of SFAS No. 143 as a change in accounting principle. The Company is not currently affected by this Statement's requirements.
In June 2001, the FASB issued SFAS No. 141 ("SFAS 141"), "Business Combinations", and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", collectively referred to as the "Standards". SFAS 141 supersedes Accounting Principles Board Opinion (APB) No. 16, "Business Combinations". SFAS 141 (1) requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (2) provides specific criteria for the initial recognition and measurement of intangible assets apart from goodwill and (3) requires that unamortized negative goodwill be written off immediately as an extraordinary gain. SFAS 142 supersedes APB 17, "Intangible Assets," and is effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. SFAS 142 (1) prohibits the amortization of goodwill and indefinite-lived intangible assets, (2) requires testing of goodwill and indefinite-lived intangible assets on an annual basis for impairment (and more frequently if the occurrence of an event or circumstance indicates an impairment), (3) requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill and (4) removes the forty-year limitation on the amortization period of intangible assets that have finite lives. The provisions of the Standards also apply to equity-method investments made both before and after June 30, 2001. SFAS 141 requires that the unamortized deferred credit related to an excess over cost arising from an investment acquired prior to July 1, 2001 accounted for using the equity method (equity-method negative goodwill), must be written-off immediately and recognized as the cumulative effect of a change in accounting principle. Equity-method negative goodwill arising from equity investments made after June 30, 2001 must be written-off immediately and recorded as an extraordinary gain. The adoption of SFAS 141 did not have a material impact on the Company's consolidated financial statements. The Company will adopt SFAS 142 on January 1, 2002. The Company does not believe that the adoption of the SFAS 142 will have a significant impact on its results of operations or financial position.
The FASB is also considering the rescission of SFAS 4, "Recording Gains or Losses for Extinguishment of Debt." When finally issued the pronouncement may prohibit classification of such gains or losses as extraordinary items.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------------------------
The Company is exposed to the impact of interest rate changes and changes in the market value of its investments.
INTEREST RATE RISK. The Company's exposure to market rate risk for changes in interest rates relates primarily to the Company's investment portfolio. The Company has not used derivative financial instruments
in its investment portfolio. The Company invests its excess cash in a major bank money market account. The Company protects and preserves its invested funds by limiting default, market and reinvestment risk.
Investments in this account carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates or the Company may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------
The financial statements and supplementary data listed in Item 14(a)(1) and (2) are included in this report beginning on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE --------------------
None.
PART III --------
The information called for by Part III (Items 10, 11, 12 and 13) of this Report is hereby incorporated by reference from the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the election of directors at the 2002 Annual Meeting of Stockholders of the Company, which definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year ended December 31, 2001.
PART IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ---------------------------------------------------------------
(a) THE FOLLOWING ARE FILED AS A PART OF THIS REPORT.
(1) FINANCIAL STATEMENTS
Reference is made to the Index to Financial Statements on Page 23.
(2) FINANCIAL STATEMENT SCHEDULE
II - Valuation and qualifying accounts........................
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules, or because the information required is included in the financial statements and notes thereto.
(3) EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- -----------
2 Certificate of Merger of the Company Computer Systems, Inc. (a New York corporation) into the Registrant, filed on June 11, 1985 [incorporated by reference to Exhibit 2 to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 29, 1986].
3(a) Certificate of Incorporation of the Registrant filed on April 22, 1985 [incorporated by reference to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 29, 1986].
3(b) Certificate of Amendment of Certificate of Incorporation of the Registrant filed on May 6, 1987 [incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 33-17533) filed on September 29, 1987].
3(c) Certificate of Amendment of Certificate of Incorporation of the Registrant filed on March 26, 1990 [incorporated by reference to Exhibit 3(d) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on June 14, 1990].
3(d) Certificate of Amendment of Certificate of Incorporation of the Registrant filed on March 18, 1992 [incorporated by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K (Commission File No. 0-13124) filed on March 30, 1992].
3(e) Certificate of Amendment of Certificate of Incorporation of the Registrant [incorporated by reference to Exhibit 3(e) to the Registrant's Amendment No. 1 to Registration Statement on Form S-3 (Commission File No. 0-13124) filed on July 10, 1996].
3(f) Certificate of Amendment of Certificate of Incorporation of the Registrant filed on July 12, 2000 [incorporated by reference to Exhibit 3(g) to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 11, 2000].
3(g) Bylaws of the Registrant, as amended [incorporated by reference to Exhibit 3(g) to the Registrant's Amendment No. 1 to Registration Statement on Form S-3 (Commission file No. 0-13124) filed on July 10, 1996].
4 Form of Common Stock Certificate of the Registrant [incorporated by reference to Exhibit 4(a) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 29, 1986].
10(a) Warner Insurance Services, Inc. Tax Saver 401(k) Salary Reduction Plan adopted May 31, 1985 and restated as of August 11, 1992 [incorporated by reference to Exhibit 10(k) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 28, 1993].
10(b)(1) 1994 Stock Option Plan for Independent Directors adopted by the Board of Directors of the Registrant on November 10, 1994 [incorporated by reference to Exhibit 10(n)(1) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(b)(2) Form of Stock Option Agreement under the 1994 Stock Option Plan for Independent Directors [incorporated by reference to Exhibit 10(n)(2) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(c)(1) The 1995 Employee Stock Option Plan, adopted by the Board of Directors of the Registrant on March 22, 1995 [incorporated by reference to Exhibit 10(o)(1) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(c)(2) Form of Incentive Stock Option Agreement under the 1995 Employee Stock Option Plan [incorporated by reference to Exhibit 10(o)(2) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(c)(3) Form of Non-Qualified Stock Option Agreement under the 1995 Employee Stock Option Plan [incorporated by reference to Exhibit 10(o)(3) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(c)(4) The 1995 Employee Stock Option Plan, as amended on April 29, 1997 by the stockholders of the Registrant [incorporated by reference to Exhibit 10(o)(4) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on March 31, 1998].
10(d)(1) Lease Agreement, dated as of March 2, 1990, between the Registrant and Polevoy Associates for premises located at 18-01 Pollitt Drive, Fair Lawn, New Jersey [incorporated by reference to Exhibit 10(z) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(d)(2) Modification to Lease, dated February 23, 1994, by and between the Registrant and Polevoy Associates [incorporated by reference to Exhibit 10(e)(2) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 30, 2001].
10(d)(3) Second Modification to Lease, dated April 12, 2000, by and between the Registrant and Polevoy Associates [incorporated by reference to Exhibit 10(e)(3) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 30, 2001].
10(e) Exclusive Software License Agreement, dated as of March 31, 1996, by and among the Registrant, Care Corporation Limited and Cover-All Systems, Inc. [incorporated by reference to Exhibit 10.4 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8, 1996].
10(f)(1) Amendment to Stock Purchase Agreement, dated as of March 14, 1997, among the Registrant, Software Investments Limited and Care Corporation Limited [incorporated by reference to Exhibit 10(aa)(iii) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 15, 1997].
10(f)(2) Amendment to Exclusive Software License Agreement, dated as of March 14, 1997, among the Registrant, Care Corporation Limited and, for certain purposes, Cover-All Systems, Inc. [incorporated by reference to Exhibit 10(aa)(iv) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 15, 1997].
10(g)(1) Reseller Agreement, dated March 31, 1998, by and between Cover-All Systems, Inc. and Care Corporation Limited [incorporated by reference to Exhibit 10(bb)(iv) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on March 31, 1998].
10(g)(2) Reseller Agreement, dated March 31, 1998, by and between Cover-all Systems, Inc. and Care Corporation Limited [incorporated by reference to Exhibit 10(bb)(v) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on March 31, 1998].
10(g)(3) Letter Agreement, dated as of June 9, 2000, from the Registrant amending Secured Promissory Note of Care Corporation Limited, dated as of March 31, 1998 [incorporated by reference to Exhibit 10(1)(8) to the Registrant's Quarterly Report on Form 10-Q/A (Commission File No. 0-13124) filed on August 24, 2000].
10(h) Separation and Release Letter Agreement, dated February 28, 2000, by and between the Registrant and Brian Magowan [incorporated by reference to Exhibit 10(n) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 14, 2000].
10(i)(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(i)(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(j)(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(j)(2) Stock Purchase Agreement, dated as of June 9, 2000, between the Registrant and Vault Management Limited [incorporated by reference to Exhibit 10(p)(2) to the Registrant's Quarterly Report on Form 10-Q/A (Commission File No. 0-13124) filed on August 24, 2000].
10(k)(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(k)(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(k)(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(k)(4) Pledge Agreement, dated as of June 28, 2001, between the Company, Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(q)(4) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(k)(5) Security Agreement, dated as of June 28, 2001, among the Company, Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(q)(5) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(k)(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(k)(7) Subsidiary Security Agreement, dated as of June 28, 2001, among Cover-All Systems, Inc. in favor of Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(q)(7) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(l)(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(l)(2) Convertible Debenture No. 3, dated June 28, 2001, issued to John Roblin [incorporated by reference to Exhibit 10(r)(2) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(l)(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(l)(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(l)(5) Security Agreement, dated as of June 28, 2001, among the Company, John Roblin, Arnold Schumsky and Stuart Sternberg [incorporated by reference to Exhibit 10(r)(5) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(l)(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(l)(7) Subsidiary Security Agreement, dated as of June 28, 2001, among Cover-All Systems, Inc. in favor of John Roblin, Arnold Schumsky and Stuart Sternberg [incorporated by reference to Exhibit 10(r)(7) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(l)(8) Limited Waiver to Convertible Loan Agreements, dated as of September 30, 2001, by Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC [incorporated by reference to Exhibit 10(r)(8) to the Registrant's Form 10-Q (Commission File No. 0-13124) filed on November 14, 2001].
*10(l)(9) Limited Waiver to Convertible Loan Agreements, dated as of December 31, 2001, by Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC.
10(m)(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(m)(2) Lock-Up Agreement, dated June 28, 2001 by and among Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC, as lenders, and Renaissance Capital Group, Inc., as agent, and Maryanne Z. Gallagher [incorporated by reference to Exhibit 10(s)(2) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(m)(3) Lock-Up Agreement, dated June 28, 2001, by and among Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC, as lenders, and Renaissance Capital Group, Inc., as agent, and Frank Orzell [incorporated by reference to Exhibit 10(s)(3) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(m)(4) Lock-Up Agreement, dated June 28, 2001 by and among Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC, as lenders, and Renaissance Capital Group, Inc., as agent, and Ann Massey [incorporated by reference to Exhibit 10(s)(4) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
10(n) Settlement Agreement, dated June 29, 2001, by and between the Company and FINOVA Mezzanine Capital Inc. [incorporated by reference to Exhibit 10(t) to the Registrant's Form 8-K (Commission File No. 0-13124) filed on July 11, 2001].
21 Subsidiaries of the Registrant [incorporated by reference to Exhibit 21 to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 11, 1996].
*23 Consent of Moore Stephens, P.C.
- ------------------------------
* Filed herewith
(b) REPORTS ON FORM 8-K
None.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and the Board of Directors of Cover-All Technologies Inc.
We have audited the accompanying consolidated balance sheets of Cover-All Technologies Inc. and its subsidiaries as of December 31, 2001 and 2000, 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, 2001. These consolidated financial statements and consolidated financial statement schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cover-All Technologies Inc. and its subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is the responsibility of Cover-All Technologies Inc.'s management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
MOORE STEPHENS, P. C. Certified Public Accountants.
New York, New York March 15, 2002
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES - --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
See Notes to Consolidated Financial Statements.
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In December 2000, Care defaulted on its obligation to pay to the Company its semi-annual principal payment owed under the promissory note dated March 31, 1998. As result of Care's default, the Company wrote off the outstanding balance of the Care note as of December 31, 2000. In accordance with the terms of the agreement, the Company recorded the pledged 2,500,000 shares of its common stock received from Care as treasury stock valued at approximately $703,000 based upon the market price of the shares. The difference between the value of treasury stock and the outstanding balance of the Care note as of December31, 2000, was recorded as a loss of $262,870 in the fourth quarter of 2000 and $1,143,054 was charged to additional paid-in capital [See Note 8].
During 1999, the Company entered into a capital lease for computer equipment totaling $179,022.
See Notes to Consolidated Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Cover-All Technologies Inc., through its wholly-owned subsidiaries, licenses and maintains its software products for the property/casualty insurance industry throughout the United States and Puerto Rico. Cover-All Systems, Inc., a subsidiary, also provides professional consulting services to its customers interested in customizing their software.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements are prepared on the basis of generally accepted accounting principles and include the accounts of Cover-All Technologies Inc. and its wholly-owned subsidiaries [the "Company"]. All material intercompany balances and transactions have been eliminated.
USE OF ESTIMATES - Preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION - The Company's revenues are recognized in accordance with SOP 97-2, "Software Revenue Recognition" ["SOP 97-2"], as amended by SOP 98-4, "Deferral of the Effective Date of SOP 97-2, Software Revenue Recognition" and SOP 98-9, "Modification of SOP 97-2 with Respect to Certain Transactions." Revenue from the sale of software licenses is predominately from standardized software and is recognized when standard software modules are delivered and accepted by the customer, the fee is fixed or determinable and collectibility is probable. Revenue from software maintenance contracts is recognized ratably over the life of the contract. Revenue from professional consulting services is recognized when the service is provided.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments, with a maturity of three months or less when purchased, to be cash equivalents.
The Company has $291,000 and $78,000 of repurchase agreements at December 31, 2001 and 2000, respectively, with First Union National Bank. The repurchase agreements are collateralized by at least an equal amount of U.S. Treasury securities or U.S. Government agency securities. These agreements are usually placed on an overnight basis.
RISK CONCENTRATIONS - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The amount of cash beyond insured amounts at December 31, 2001 and 2000 was approximately $502,100 and $243,500, respectively. The Company generally does not require collateral for its financial instruments, other than repurchase agreements.
The Company places its cash and cash equivalents with high credit quality institutions to limit its credit exposure. The Company believes no significant concentration of credit risk exists with respect to these investments. Concentrations of credit risk with respect to trade accounts receivable are limited due to the wide variety of customers, principally major insurance companies, who are dispersed across many geographic regions. As of December 31, 2001, seven customers accounted for approximately 52% of the Company's trade accounts receivable portfolio. The Company routinely assesses the financial strength of its customers and based upon factors concerning credit risk, establishes an allowance for uncollectible accounts. Management believes that accounts receivable credit risk exposure beyond such allowance is limited.
IMPAIRMENT - Long-lived assets of the Company are reviewed at least annually as to whether their carrying value has become impaired pursuant to Statement of Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No 121 requires long-lived assets, if impaired, to be remeasured at fair value, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Management also reevaluates the periods of amortization of long-lived assets to determine whether events and circumstances warrant revised estimates of useful lives.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2 - --------------------------------------------------------------------------------
[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 2001, 2000 and 1999 was $146,400, $152,238 and $192,276, respectively.
Routine maintenance and repair costs are charged to expense as incurred and renewals and improvements that extend the useful life of the assets are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective account and any resulting gain or losses reported as income and expense.
CAPITALIZED SOFTWARE - Costs for the internal development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs are capitalized. As the Company has completed its software development concurrently with the establishment of technological feasibility, it has commenced capitalizing these costs. Software development costs are the Company's only research and development expenditures. During 2001, 2000 and 1999, qualifying software development costs of $865,798, $-0- and $1,388,672, respectively, were capitalized and are 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 2001, 2000 and 1999 was $860,801, $899,240 and $478,990, respectively.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 the Company's responsibility set forth at the time of sale.
ADVERTISING EXPENSE - It is the Company's policy to expense advertising costs as incurred. Advertising expense in 2001, 2000 and 1999 was $219,081, $132,297 and $291,979, 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.
INCOME [LOSS] PER SHARE - The Company has adopted the provisions of SFAS No. 128. Basic earnings [loss] per share is computed by dividing income [loss] available to common stockholders by the weighted average number of common shares outstanding during the period. SFAS No. 128 also requires a dual presentation of basic and diluted earnings per share on the face of the statement of operations for all companies with complex capital structures. Diluted earnings per share reflects the amount of earnings for the period available to each share of common stock outstanding during the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period, such as common shares that could result from the potential exercise or conversion of securities into common stock.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 - --------------------------------------------------------------------------------
[1] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]
INCOME [LOSS] PER SHARE [CONTINUED] - 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. The Company's options and warrants were not included in the computation of loss per share for 2000 and 1999 because to do so would have been antidilutive for these years.
The dilutive effect of convertible debt is reflected in diluted earnings per share by the application of the if-converted method. The Company's convertible debt does not affect the income [loss] per share calculation for 2001, 2000 and 1999 because it would be antidilutive for those years [See Note 6]. The convertible debt could potentially dilute basic earnings per share in the future.
STOCK-BASED COMPENSATION - The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" [APB No. 25] with regard to the accounting for its employee stock options. Under APB No. 25, compensation expense is recognized only when the exercise price of options is below the market price of the underlying stock on the date of grant. The Company applies the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" to non-employee stock-based compensation and the pro forma disclosure provisions of SFAS No. 123 to employee stock-based compensation.
[2] RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB") approved SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). The Statement requires that long-lived assets to be disposed of other than by sale be considered held and used until they are disposed of. SFAS No. 144 requires that long-lived assets to be disposed of by sale be accounted for under the requirements of SFAS No. 121. SFAS No. 121 requires that such assets be measured at the lower of carrying amounts or fair value less cost to sell and to cease depreciation (amortization). SFAS No. 144 requires a probability-weighted cash flow estimation approach in situations where alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or a range of possible future cash flow amounts are estimated. As a result, discontinued operations will no longer be measured on a net realizable basis, and future operating losses will no longer be recognized before they occur. Additionally, goodwill will be removed from the scope of SFAS No. 144. As a result goodwill will no longer be required to be allocated to long-lived assets to be tested for impairment. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. We are currently in the process of evaluating the effect this new standard will have on its consolidated financial position or results of operations.
On August 15, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations ("SFAS No. 143"). SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will be effective for financial statements issued for fiscal years beginning after June 15, 2002. An entity shall recognize the cumulative effect of adoption of SFAS No. 143 as a change in accounting principle. The Company is not currently affected by this Statement's requirements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 - --------------------------------------------------------------------------------
[2] RECENTLY ISSUED ACCOUNTING STANDARDS [CONTINUED]
In June 2001, the FASB issued SFAS No. 141 ("SFAS 141"), "Business Combinations", and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", collectively referred to as the "Standards". SFAS 141 supersedes Accounting Principles Board Opinion (APB) No. 16, "Business Combinations". SFAS 141 (1) requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, (2) provides specific criteria for the initial recognition and measurement of intangible assets apart from goodwill and (3) requires that unamortized negative goodwill be written off immediately as an extraordinary gain. SFAS 142 supersedes APB 17, "Intangible Assets," and is effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. SFAS 142 (1) prohibits the amortization of goodwill and indefinite-lived intangible assets, (2) requires testing of goodwill and indefinite-lived intangible assets on an annual basis for impairment (and more frequently if the occurrence of an event or circumstance indicates an impairment), (3) requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill and (4) removes the forty-year limitation on the amortization period of intangible assets that have finite lives. The provisions of the Standards also apply to equity-method investments made both before and after June 30, 2001. SFAS 141 requires that the unamortized deferred credit related to an excess over cost arising from an investment acquired prior to July 1, 2001 accounted for using the equity method (equity-method negative goodwill), must be written-off immediately and recognized as the cumulative effect of a change in accounting principle. Equity-method negative goodwill arising from equity investments made after June 30, 2001 must be written-off immediately and recorded as an extraordinary gain. The adoption of SFAS 141 did not have a material impact on the Company's consolidated financial statements. The Company will adopt SFAS 142 on January 1, 2002. The Company does not believe that the adoption of the SFAS 142 will have a significant impact on its results of operations or financial position.
The FASB is also considering the rescission of SFAS 4, "Recording Gains or Losses for Extinguishment of Debt." When finally issued, the pronouncement may prohibit classification of such gains or losses as extraordinary items.
[3] OBLIGATION UNDER CAPITAL LEASE
In April 1999, the Company acquired equipment under the provisions of a long-term lease. For financial reporting purposes, minimum lease payments relating to the equipment have been capitalized. The lease expires in April 2002. As of December 31, 2001, the leased equipment under capital lease had a cost of $179,022 and accumulated depreciation of $92,504.
Amortization expense on lease assets which is included in depreciation expense for the years ended December 31, 2001, 2000 and 1999 was $35,808, $35,808 and $20,888, respectively.
The future minimum lease payments under capital lease and the net present value of the future minimum lease payments as of December 31, 2001, for the next five years and in the aggregate are as follows:
2002 $ 18,234 2003 -- 2004 -- 2005 -- 2006 -- --------------- Total Minimum Lease Payments 18,234 Amount Representing Interest 254 ---------------
Present Value of Net Minimum Lease Payments 17,980 Less: Current Portion 17,980 ---------------
LONG-TERM CAPITAL LEASE OBLIGATION $ -- ---------------------------------- ===============
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 - --------------------------------------------------------------------------------
[4] COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
OPERATING LEASES - The Company leases approximately 21,000 square feet of office space under a lease which expires in May 2005. The lease includes escalation clauses for increased real estate taxes, insurance and maintenance expenses. The lease provides for a renewal period of five years.
Rent expense was $320,561, $308,853 and $289,720 for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company's future minimum rental commitments under its noncancellable operating lease in effect at December 31, 2001 were as follows: year ending 2002 - -- $325,250, 2003 -- $325,250, 2004 -- $325,250, 2005 -- $135,521, 2006 -- $-0-; thereafter -- none.
EMPLOYMENT CONTRACTS - The Company has an employment contract with one of its executives with an expiration date of December 31, 2003. This contract may be renewed by the consent of both parties for an additional two year period. The aggregate commitment for future salary at December 31, 2001 was approximately $542,000. In accordance with a previous contract, the executive was issued 25,000 shares of the Company's common stock in January 2000.
RELATED PARTY TRANSACTIONS - An attorney associated with a former Chairman provided legal services to the Company for which the Company incurred approximately $-0-, $-0- and $15,000 in legal costs during 2001, 2000 and 1999, respectively.
In 1998, the Company had an agreement with a consulting firm, in which a former Chairman was Managing Partner, pursuant to which the Company paid the consulting firm for the services of the former Chairman $12,500 per month, plus expenses and a bonus payment of $50,000. In November 1999, the former Chairman resigned and Mark Johnston, a director of the Company, was appointed Chairman.
In 1999, a director of the Company provided project management services for a fee of approximately $307,000.
In 2001, 2000 and 1999, the Company paid Mark Johnston total consulting fees plus expenses of approximately $100,000, $247,000 and $58,000, respectively [See Notes 8 and 11 for additional related party disclosures].
[5] INCOME TAXES
An analysis of the components of the income tax provision [benefit] is as follows:
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 - --------------------------------------------------------------------------------
[5] INCOME TAXES [CONTINUED]
During 2001, 2000 and 1999, the Company availed itself of a program offered by the State of New Jersey whereby it sold state net operating losses of $4,173,333, $6,439,122 and $11,178,111, respectively, for $326,772, $503,936 and $835,066, respectively. As of December 31, 2000, the amount due to the Company under the program was $285,000 which is classified as other receivable and was collected in February 2001.
The income tax [provision] benefit for continuing operations differs from the amount computed by applying the statutory federal income tax rate as follows:
The components of the net deferred tax asset and liability were as follows:
The net change increase during 2001 and 2000 in the total valuation allowance is $1,061,000 and $1,089,000, respectively.
At December 31, 2001, the Company had approximately $26,500,000 of federal net operating tax loss carryforwards expiring at various dates through 2016. The Tax Reform Act of 1986 enacted a complex set of rules which limit 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 the Company from time to time, including the stock which may be issued related to the Company's outstanding convertible debentures [See Note 10] and the conversion of the Company's warrants issued to Vault [See Note 11], or the result of other changes in ownership of the Company's outstanding stock, the Company may experience an ownership change and consequently the Company's utilization of its net operating loss carryforwards could be significantly limited.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7 - --------------------------------------------------------------------------------
[6] STOCK OPTION AND STOCK PURCHASE PLANS
In March 1995, the Company 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 employees of the Company 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, 2001, 2000 and 1999, 2,340,525, 3,230,275 and 16,775 shares, respectively, were available for grant.
On November 15, 1994 the Company adopted the 1994 Stock Option Plan for Independent Directors. Options for the purchase of up to 300,000 shares may be granted to directors of the Company who are not employees ["non-employee director"]. The Plan was amended in June 2000 to increase the aggregate number of shares of common stock from 300,000 to 750,000. Each non-employee director who is serving on "Date of Grant" shall automatically be granted an option to purchase 10,000 shares of Common Stock at the fair market value of Common Stock on the date the option is granted. Dates of Grant are November 15, 1994, 1999, 2004, and 2009 for non-employee directors serving on November 15, 1994. For individuals who become non-employee directors after November 15, 1994, such directors' Dates of Grant will be the date such individual becomes a director and the fifth, tenth and fifteenth anniversaries of such date. Options are exercisable in full 6 months after the applicable date of grant and expire 5 years after the date of grant. At December 31, 2001, 2000 and 1999, 740,000, 710,000 and 240,000 shares, respectively, were available for grant.
In October 1994, the Company 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 the Company. 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, 2001, 2000 and 1999, 105,000, 105,000 and 105,000 shares, respectively, were available for grant.
A summary of the changes in outstanding common stock options for all outstanding plans is as follows:
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8 - --------------------------------------------------------------------------------
[6] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
The options granted during 2001 are distributed as follows, relative to the difference between the exercise price and the stock price at grant date:
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9 - --------------------------------------------------------------------------------
[6] STOCK OPTION AND STOCK PURCHASE PLANS [CONTINUED]
The Company applies Accounting Principles Board Opinion No.25, Accounting for Stock Issued to Employees, and related interpretations, for stock options issued to employees in accounting for its stock option plans. The exercise price for all stock options issued during 2001, 2000 and 1999 was equal to or greater than the market price of the Company's stock at the date of grant. Accordingly, no compensation expense has been recognized for the Company's stock-based compensation plans for fiscal years 2001, 2000 and 1999.
There are approximately 640,000 warrants outstanding at December 31, 2001, at a weighted-average exercise price of $.63.
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 the Company's 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 its employee stock options. The weighted average fair value of stock options granted to employees used in determining pro forma amounts is estimated at $.20, $.58 and $.92 during 2001, 2000 and 1999, respectively.
Pro forma information regarding net income or loss and net income or loss per share has been determined as if the Company had accounted for its 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:
The pro forma amounts are indicated below [in thousands, except per share amounts]:
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10 - --------------------------------------------------------------------------------
[7] EARNINGS PER SHARE DISCLOSURES
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share ["EPS"] computations.
Equity instruments that may dilute earnings per share in the future are listed in Note 6.
Options to purchase 2,266,750 shares of common stock at prices ranging from $.31 to $4.00 per share were outstanding at December 31, 2001, but were not included in the computation of diluted EPS because the options's exercise price was greater than the average market price of the common shares.
[8] SALE OF STOCK AND WARRANTS, AND PURCHASE AND SALE OF CARE SOFTWARE LICENSE
On March 31, 1996, the Company was granted by Care the exclusive license for the Care software systems for use in the workers' compensation claims administration markets in Canada, Mexico and Central and South America. In exchange for this license, the Company issued to Care 2,500,000 shares of the Company's Common Stock at $2.00 per share to value the license as $5,000,000 at March 31, 1996. The license agreement was revised on March 14, 1997, and the Company engaged Care as its exclusive sales agent for a monthly fee of $10,000 against commissions of 20%. Depending upon the level of revenue reached, or not reached, under the license agreement, the Company had the right to repurchase all or portions of the shares issued to Care at $.01 per share.
In the fourth quarter of 1997, the Company made a strategic decision to allocate its future resources to its TAS and Classic product lines rather than the product line obtained via the Care Software License. In this regard, on March 31, 1998, the Company negotiated a buy back by Care of the Care Software License.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11 - --------------------------------------------------------------------------------
[8] SALE OF STOCK AND WARRANTS, AND PURCHASE AND SALE OF CARE SOFTWARE LICENSE [CONTINUED]
For the buy back of Care Software License by Care, the Company received $500,000 on March 31, 1998, and a $4,500,000 non-interest bearing note, [the "Care Note"] payable in semi-annual installments of $500,000 which, when discounted at 6%, resulted in a principal amount of the note of $3,893,054. The discounted note was collateralized by unencumbered Cover-All stock owned by Care and a Care affiliate, Software Investments Limited ["SIL"]. The number of shares required as collateral would vary, such that the market value of the shares held as collateral must equal 150% of the outstanding balance. The number of shares required as collateral was adjusted at each payment date based on the market price of the Company's shares and the balance outstanding on the date. Based on the market price of the Company's stock on March 30, 1998, approximately 1,700,000 shares were pledged as collateral. Upon receipt of the first $500,000 payment under the agreement on March 31, 1998, the Company lifted the aforementioned $.01 per share stock repurchase restriction on the 2,500,000 shares. In November 1999, the Board of Directors decided that due to the undue hardship placed upon Care by the pledged share requirement of the pledge agreement given the then current price of the Company's common stock, and because of Care's history of making each of the $500,000 payments on the promissory note in a timely manner, that it would be in the best interests of the Company to agree to allow Care to cap the number of shares of the Company's common stock required to be pledged to the Company pursuant to the pledge agreement to 2,500,000.
Based on the above, and due to the related party nature of the Care Software License buy back agreement, the Company recorded the $1,143,054 difference between the carrying value of the Care Software License at December 31, 1997 of $3,250,000 and the discounted $4,393,054 buy back agreement amount to capital in excess of par value.
In connection with the investment by Vault Management Limited [see Note 11], one-half of the payment due September 30, 2000 on the Care note was deferred until December 31, 2000. Care failed to make the scheduled payment of $250,000 due December 31, 2000 and on January 16, 2001, the Company announced that Care had defaulted on its obligation to pay the Company its semi-annual principal payment owed under the promissory note dated March 31, 1998. The Company exercised its right to accelerate all remaining amounts due under the note, which totaled $2,250,000. The Pledge Agreement between the Company and Care provided that in the event of a default by Care, the Company can look to and proceed against Care for payment. Care's 2,500,000 shares of the Company's common stock were pledged to and held by the Company as collateral on the Care note. In addition, the Company announced that, pursuant to the Pledge Agreement, the Company on January 16, 2001 transferred and registered in its name the 2,500,000 shares of the Company's common stock owned by Care.
The balance of the undiscounted Care note at December 31, 2000 was $2,250,000, of which $1,250,000 was classified as currently due. The discounted long-term portion of the Care note at December 31, 2000 of $1,000,000 was $858,924, net of unearned interest of $141,076. As a result of Care's default, the Company wrote off the undiscounted current and discounted long-term portions of the Care note for these amounts. The Company recorded 2,500,000 shares of its common stock received from Care as treasury stock valued at the cost of $703,000. The difference between the value of the treasury stock and the undiscounted current and discounted long-term portions of the Care note of $1,405,924 was recorded as a loss of $262,870 in the fourth quarter of 2000 and $1,143,054 to capital in excess of par value at December 31, 2000 to offset the same amount recorded in March 31, 1998.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12 - --------------------------------------------------------------------------------
[9] SUPPLEMENTAL DATA
Accrued liabilities consist of the following:
[10] CONVERTIBLE DEBENTURES
On March 31, 1997, the Company sold $3,000,000 of 12.5% Convertible Debentures due March 2002 [the "Debentures"] to an institutional investor. The Debentures were sold at face value, pay interest quarterly and are convertible, in whole or in part, into shares of Common Stock of the Company at $1.25 per share, subject to adjustment.
On June 28, 2001, the Company raised $1,800,000 through a private placement of 8.00% convertible debentures with investors headed by the Renaissance Capital Group, Inc. of Dallas, Texas. An aggregate of $1,400,000 was sold to the Renaissance US Growth and Income Trust PLC (traded on the London Stock Exchange) and BFS US Special Opportunities Trust PLC, which are managed by Renaissance. Also, an aggregate of $400,000 was sold to three other private investors including John Roblin, Chairman of the Board, President and Chief Executive Officer of the Company. 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. Amortization expense for the year ended December 31, 2001 was $13,364.
Immediately upon its receipt of the funds, the Company used $1,660,000 of the proceeds to fully settle its $3,000,000 principal amount 12.5% convertible debentures, due in 2002. The remainder of the funds raised from the transaction were to be used for working capital purposes. The new debentures, maturing in 2008, are convertible into shares of the Company's common stock, $.01 par value per share, initially at $0.50 per share, subject to adjustment in accordance with the terms of the parties' respective loan agreements. The Company recognized an extraordinary gain on the extinguishment of debt of $804,000, net of income taxes of $536,000, in June 2001.
As of September 30, 2001 and December 31, 2001, the Company was not in compliance with the financial covenants of the Convertible Loan Agreements pursuant to which an aggregate of $1.8 million of 8% convertible debentures were issued and sold by the Company in June 2001. On September30, 2001, the Company received Limited Waivers to the Loan Agreements under which the holders waived the Company's non-compliance that existed up through and including September 30, 2001 under the financial covenant in the Loan Agreements. On December 31, 2001, the Company received a similar waiver to the Loan Agreements under which the holders waived the Company's non-compliance that existed up through and including December 31, 2001.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13 - --------------------------------------------------------------------------------
[11] SALE OF STOCK AND WARRANTS, VAULT MANAGEMENT LIMITED
On June 21, 2000, the Company entered into an agreement with Vault Management Limited ["Vault"] to purchase between 640,000 and 1,600,000 shares of the Company's common stock at $.625 per share, which was the closing price per share of the Company's common stock on May 30, 2000, the date the agreement was reached.
The agreement would generate a minimum of $400,000 and a maximum of $1 million in proceeds to the Company. The proceeds would be used for general working capital purposes.
The agreement also called for the equivalent number of the Company's detachable five-year warrants to be issued to Vault at an exercise price of $.625 per share. The agreement provided that Vault shall have the option to make payments beyond the required $400,000 in $200,000 installments each on August 31, 2000, October 31, 2000 and November 30, 2000. Vault did not exercise its option to make a payment of $200,000 on August 31, 2000, October 31, 2000 or November 30, 2000. The decision not to exercise Vault's options was mutually agreed upon by Vault and the Company.
As part of the Vault transaction, the Company also agreed to modify the terms of the Care Note such that the semi-annual principal payment of $500,000 due and payable on September 30, 2000 shall be due and payable as to $250,000 on September 30, 2000 and as to $250,000 on December 31, 2000. The Company received the $250,000 payment on September 29, 2000. The Company did not receive the payment due on December 31, 2000 [See Note 8]. Mr. Mark Johnston, the Company's Chairman and Interim Chief Financial Officer at the time, was a director of both Vault and Care.
[12] 401(K) PLAN
After completing a year of service and working 1,000 hours, employees age 21 and over are eligible to participate in the Company's Tax Saver 401(k) Salary Reduction Plan. Employees can save 1% to 15% of pay on a pre-tax basis to a current annual maximum of $11,000. The Company matches $.50 for each $1.00 of the first 5% of pay employees elect to defer. Expenses associated with this plan in 2001, 2000 and 1999 were approximately $43,800, $77,400 and $70,300, respectively.
[13] STOCKHOLDERS' EQUITY [DEFICIT]
During 2001, the Company issued 154,546 shares of common stock in exchange for services rendered in connection with the debt restructuring described in Note 10. 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.
[14] 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 its 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 its convertible debentures, based on current rates and terms at which the Company could borrow funds, is approximately $1,800,000 and $3,000,000 at December 31, 2001 and 2000, respectively.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14 - --------------------------------------------------------------------------------
[15] OTHER INCOME
Other income is comprised of a settlement of an outstanding customer dispute and a favorable resolution of a liability related to the customer dispute.
[16] SEGMENT INFORMATION
At March 31, 2000, the Company merged the management teams and infrastructures of its two business units to improve customer service. The Company will continue to separately assess the performance of each of these products.
At December 31, 1999, the Company's two business units had distinct management teams and infrastructures that offered different products and services which were evaluated separately in assessing performance and allocating resources. These business units have been reflected as two reportable segments, Classic and TAS.
CLASSIC - The Classic product line is a self-contained rating, issuance and transaction management application system utilized in the property/casualty insurance industry.
TAS - TAS 2000 comprises an architecture and suite of application development tools for property/casualty insurers designed to enable a client-driven re-engineering of an insurer's business processes.
The following financial information is reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources. Interest income and interest expense are allocated based on revenues.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15 - --------------------------------------------------------------------------------
[16] SEGMENT INFORMATION [CONTINUED]
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16 - --------------------------------------------------------------------------------
[17] SELECTED QUARTERLY FINANCIAL DATA [UNAUDITED] [CONTINUED]
. . . . . . . . . .
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
COVER-ALL TECHNOLOGIES INC.
Date: March 29, 2002 By: /s/ John Roblin -------------------------------- John Roblin Chairman of the Board of Directors, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
EXHIBIT INDEX
10(l)(9) Limited Waiver to Convertible Loan Agreements, dated as of December 31, 2001, by Renaissance US Growth & Income Trust PLC and BFSUS Special Opportunities Trust PLC.
23 Consent of Moore Stephens, P.C.