Item 1. Business
General
Cover-All Technologies Inc. (the "Company"), a Delaware corporation formed in 1971, is a provider of state-of-the-art software products for the property casualty insurance industry through its wholly-owned subsidiary, COVER-ALL Systems, Inc. ("COVER-ALL").
Historically, the Company (formerly Warner Insurance Services, Inc.) also provided services to the automobile insurance industry including underwriting, policy maintenance and claims adjustment which was carried out by its Insurance Services Division ("ISD"). However, in March 1996, the ISD business was transferred to a subsidiary of The Robert Plan Corporation, in connection with the settlement of two lawsuits between the Company and The Robert Plan Corporation and the release of the Company from its obligations under long-term processing contracts with the customers of ISD, and therefore the activities of the ISD are reflected as discontinued operations as more fully described in Note 2 to the Consolidated Financial Statements.
During March 1997, the Company announced several major changes as part of its overall strategy. Mr. Brian Magowan was named Chairman of the Board and Chief Executive Officer and Mr. Mark Johnston was named Chief Financial Officer. Four of the existing Board members resigned and two additional Board members, Messrs. Earl Gallegos and Ian Meredith, were added. Further, the Company raised $3 million of financing through the sale of 12 1/2% Convertible Debentures ("Debentures"), due March 2002. The Debentures are convertible into shares of Common Stock at $1.25 per share and carry certain restrictive covenants. See Note 12 to the Consolidated Financial Statements.
Overview
COVER-ALL offers standard as well as customized software application products together with implementation support services to the property/casualty insurance industry. The Company derives revenue from Software Contract Licenses to new and existing customers and from continuing Maintenance Fees for servicing the product. The Company also provides Professional Consulting Services to customize the software for specific uses.
In December 1989, the Company purchased, through its wholly-owned 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 acquired software has been enhanced and is the Company's "Classic" product line which is one of two current product lines.
The Classic product line is a self-contained rating, issuance and transaction management application system utilized in the property/casualty insurance industry. This software was developed using the Microfocus COBOL language, and the Company has upgraded this product line for use in the Windows 95 operating system. The Company believes that this software product provides cost-effectiveness and flexibility for self-contained Local Area Network ("LAN") systems. The Classic product is in use in over 50 property/casualty insurance companies. Total Classic revenues were $6,593,000 for the year ended December 31, 1997 as compared to $3,655,000 and $2,752,000 for the years ended December 31, 1996 and 1995, respectively.
Since 1993, COVER-ALL has been developing its second product line entitled the Total Administrative Solution ("TAS 2000") and, as of December 31, 1997, COVER-ALL completed several modules. TAS 2000 comprises an architecture and a suite of application development tools for property/casualty insurers designed to enable a client-driven re-engineering of an insurer's business processes. TAS 2000 applications run on commodity priced open computer systems and use state-of-the-art client/server software technology provided by Oracle Corporation. Total TAS 2000 revenues were $1,345,000 for the year ended December 31, 1997, $1,814,000 for the year ended December 31, 1996, and $1,367,000 for the year ended December 31, 1995.
Regarding its software products held for sale, the Company's TAS product line already conforms to "Year 2000" as of December 31, 1997. In 1997, the Classic product line was modified to support the "Year 2000."
Product Description
CLASSIC PRODUCT LINE
The Classic product line is a set of LAN based PC software packages designed to automate the rating and issuance tasks in the property and casualty insurance industry. Functionality includes rating and issuance for new business, mid-term changes, cancellations, reinstatements and renewals. Multiple recipient copies of all relevant documentation for each of these transactions, including quote summaries, declaration pages and mandatory and optional manuscript forms, are printed by the system's print engine. This product life cycle functionality is supported for property and casualty lines of business in a user friendly system.
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 o On-line system level, screen level, and field level help o On-line ISO Commercial Lines Manual Tables and Footnotes o Easy and direct system navigation o Standard Bureau coverages and rates support o Company customized coverages and rates support o Fully automated recipient driven issuance of declaration pages, worksheets, ID card, etc. o Help Desk assistance o Remote diagnostic and fix capabilities
The Classic products were originally brought to the marketplace in the mid 1980's and subsequently have been enhanced to provide greater functionality and to better utilize newer technology. The Classic product line is based upon several specific proprietary design features.
In 1997, the Classic product line was modified to support the "Year 2000." Further, COVER-ALL has upgraded the Classic product line for use in the Windows 95 operating system. This enhancement increases user friendliness and provides customers with an easier integration of peripheral support applications (e.g., imaging, work flow management, etc.).
TAS 2000 PRODUCT LINE
The TAS 2000 product line was developed to be used for client/server Wide Area Network ("WAN") applications in the property/casualty industry. COVER-ALL created the TAS 2000 product line to better position itself to penetrate the larger customer market segment. The client/server architectural concept allows companies to take advantage of the power of distributed processing. The TAS 2000 product line currently includes the following application modules:
o Client Management o End User Tools o Agency Profile Management o Product Developer o Policy Administration
TAS 2000 has Windows compliant GUI to enhance its user friendliness. 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. TAS 2000 is an architecture of open LAN and WAN based modules possessing varying elements of interdependence.
The changing of the century is an issue which has never been faced in the computer industry and poses a massive problem for automation systems previously designed and currently being used. Companies must modify their systems to accommodate a four-digit year in order to properly affect the calculations and sorting routines which provide the core of their data processing accuracy. Although seemingly minor, this change requires finding, analyzing, implementing and testing tens of thousands of isolated incidents within millions of lines of source code. The cost for the industry can
reach into the billions of dollars to affect proper change. The TAS 2000 product line from its inception accommodates the advent of the new century. All of a customer's "date affected" programs must be fully tested for interoperatibility, as must any programs which transfer date sensitive data, to a customer's system, whether by Electronic Data Interchange ("EDI") or other means. Any such program, which has not been correctly changed to address the millennium issue, has the potential to corrupt the customer's database and cause a system failure.
COVER-ALL intends to continue to enhance both of its product lines based on customer needs and changes in technology. COVER-ALL is also committed to maintaining a quality support service program for its customers.
Competitive Products
The Company believes that its products offer customers certain advantages not available from COVER-ALL's competitors. The Classic product line has significant functionality and can accommodate specific customer requirements while retaining a single source integrated core system, thus making the system cost effective. TAS 2000's architecture is distinguished from competitive offerings by the integrated use of Oracle's relational database and the Designer 2000 and Developer 2000 tool sets. The underlying database and language used for the TAS 2000 products are the Oracle Relational Database Management System and the Oracle Cooperative Development Environment products. These products provide an integrated application environment. Through Oracle's tools, these new products take advantage of the power of Oracle Version 7 on over 90 different server platforms. This software allows processing to be centralized, dedicated to specific server(s) or clients or distributed across the network. TAS 2000 product line was developed with an emphasis on quality from the conceptual design stage using Oracle CASE tools through to the physical coding and testing phases.
The Classic product line competes primarily with three competitors who are also actively selling LAN based policy rating and issuance software used by property/casualty insurance companies. TAS 2000 competes primarily with two other systems suppliers.
Marketing
The Company maintains a sales staff at its principal executive offices in Fair Lawn, New Jersey. The Company also utilizes distributors and outside consultants to market its products. 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 technological change. The Company's success will depend, in part, on its ability to keep its products current 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. Due to the Company's financial position, it did not incur research and development expenses in 1997. The Company believes that research and development expenditures will constitute a significant percentage of revenues in the coming year as a result of new contracts.
Research and development expenses for COVER-ALL were $-0-, $1,846,000 and $1,933,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Backlog
Backlog is not applicable to the business of the Company.
Major Customers
The Classic product line is in use in over fifty property/casualty insurance companies while the TAS 2000 product line is currently in use in two property/casualty insurance companies. The Company's revenues from major customers (more than 10 percent of total revenues) for the years ended December 31, 1997, 1996 and 1995 as a percentage of total revenue were as follows:
Customer Year Ended Year Ended Year Ended December 31, December 31, December 31, 1997 1996 1995 ---- ---- ----
Inspire Insurance Solutions 20% Sun Alliance Management Services 27% 16% Glatfelter Insurance Group 13% Millers Insurance Group 13% New Jersey State Medical Underwriters 18% Secura, Inc. 11%
In 1997, 1996 and 1995 export sales were made to a U.K. customer of approximately $500,000, $1,465,000 and $640,000, respectively.
Employees
The Company had approximately 40 employees during 1997. 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.
Discontinued Operations
Insurance Services Division
ISD revenues decreased substantially in 1994 and 1995 because of lower fees attributable to the reduced number of policies and claims being handled on contracts that were winding down or were completed. As a result, ISD suffered losses and operated under considerable uncertainty as a result of pending lawsuits with certain affiliates of The Robert Plan Corporation. In March 1996, the Company entered into a series of agreements which provided for the transfer and discontinuance of its ISD operations and the issuance of the Company's Common Stock and Warrants to certain customers of the ISD business in exchange for the release of the Company from its obligations to provide insurance services to ISD customers and to The Robert Plan Corporation in exchange for the settlement and dismissal of two lawsuits with The Robert Plan Corporation. Effective March 1, 1996 the Company discontinued providing insurance processing services to the automobile insurance industry and reflected those activities as discontinued operations in its Financial Statements. See Note 2 to the Consolidated Financial Statements.
As part of the restructuring transactions (the "Restructuring"), the Company transferred certain assets, employees, contracts and leased premises relating to its ISD business to a subsidiary of The Robert Plan Corporation, which replaced the Company as the provider of insurance services to the ISD customers. In exchange for settling the lawsuits, releasing the Company's obligations to provide insurance services under its contracts and executing mutual releases, the Company issued to certain of the ISD customers and certain parties to the litigation: (a) a total of 3,256,201 shares of the Company's Common Stock, (b) five-year Warrants to purchase up to an additional aggregate of 1,553,125 shares of the Company's Common Stock at $2.00 per share and (c) cash of $2.5 million. The Company had the option, exercisable for a period of six months, to (i) purchase 50% of the aforementioned 3,256,201 shares at a cash price equal to the greater of $3.00 or 50% of the then market price of a share of the Company's Common Stock and (ii) acquire 50% of the 1,553,125 Warrants at a cash price equal to $1.00 per Warrant. On March 31, 1996, the Company assigned its aforementioned repurchase option applicable to the Company's Common Stock and Warrants to Software Investments Limited ("SIL"). SIL subsequently exercised all of the options to purchase the Company's Common Stock and Warrants as discussed in Note 9 to the Consolidated Financial Statements. As a result of the issuance of shares described in Note 9, the antidilution provisions of
the Warrants required an adjustment of shares to 1,725,694 from 1,553,125 and a price adjustment to $1.80 from $2.00 per share. As a result of the issuance of the 12 1/2% Convertible Debentures discussed in Note 12 to the Consolidated Financial Statements, the Warrants were adjusted to the number of shares purchasable and the exercise price.
Item 2.
Item 2. Properties
The Company's headquarters is located in Fair Lawn, New Jersey where it occupies approximately 36,000 square feet under a lease which expires in 2000 at a current annual rental expense of approximately $400,000.
In addition, the Company also leased a facility with approximately 22,000 square feet in Somerset, New Jersey. This lease was to expire in 2002 but was terminated in December 1996 at a cost of $371,000. This facility was previously used by ISD and the Company did not anticipate utilizing this facility in the near future.
Pursuant to the Restructuring entered into in March 1996 (See Discontinued Operations) the Company's lease for its former principal headquarters has been transferred to The Robert Plan Corporation.
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
The Company is not currently named as a defendant in any lawsuit.
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, 1997.
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Since May 23, 1996, the Company's Common Stock had been traded on The Nasdaq SmallCap Market tier of The Nasdaq Stock Market, initially under the symbol "WISI". As of July 1, 1996, the symbol for the Company's Common Stock on The Nasdaq SmallCap Market tier of The Nasdaq Stock Market was changed to "COVR." As of August 2, 1996, the Company's Common Stock has also been trading on the Philadelphia Stock Exchange under the symbol "CVA."
From March 8, 1996 to March 14, 1996, the Company's Common Stock was traded on the Over the Counter market and from March 15, 1996, to May 22, 1996 was quoted on the NASD OTC Bulletin Board under the symbol "WISI." Prior to March 4, 1996, the Company's Common Stock was traded on the New York Stock Exchange under the symbol "WCP." The quotations below reflect the high and low closing sale prices since January 1, 1995 on the principal trading market on which the Common Stock traded during such period.
High Low
CALENDAR 1997: 1st Quarter $2.375 $1.000 2nd Quarter 2.000 1.125 3rd Quarter 2.875 1.438 4th Quarter 4.875 2.625
CALENDAR 1996: 1st Quarter $5.000 $1.625 2nd Quarter 7.375 3.375 3rd Quarter 6.250 1.500 4th Quarter 2.375 0.875
CALENDAR 1995: 1st Quarter $3.000 $1.500 2nd Quarter 1.750 0.875 3rd Quarter 2.250 1.250 4th Quarter 1.625 1.000
As of March 27, 1998, there were approximately 750 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 closing sale price for the Company's Common Stock on March 27, 1998 was $4.125, as reported by the Nasdaq SmallCap Market.
The Company does not currently anticipate paying any dividends.
Item 6.
Item 6. Selected Financial Data
The following selected financial data of the Company are derived from the consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein.
(1) Includes a $1,165 ($.14 per share) and $3,373 ($.25 per share net of tax) special charge in 1995 and 1994, respectively. (2) Revenues of the discontinued operations (ISD) were $-0-, $-0-, $20,228, $32,893, $8,589 and $68,515, respectively, for each of the periods above.
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 the successful completion of continuing developmental efforts under existing software contracts 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, the continuing favorable responses to the Company's products from existing and potential new
customers, and the Company's ability to complete development and sell and license its products at prices which result in sufficient revenues to realize profits.
Results of Operations
Discontinued Operations
During the years 1994 and 1995, the Company derived most of its revenues from providing full service automobile insurance services (policy processing, policy administration and claims administration) through its ISD business. The Company has also provided state-of-the-art computer products for the property casualty insurance industry through its wholly-owned subsidiary, COVER-ALL.
ISD revenues in 1994 and 1995 primarily consisted of policy administration and claims servicing fees from customers such as Atlantic/Pacific Employers Insurance Company and to a lesser extent, Clarendon National Insurance Company ("Clarendon"), for servicing policies in the New Jersey voluntary and assigned risk markets. The contract with Atlantic/Pacific Employers Insurance Company reached its peak level of activity in 1994 and policy volumes declined sharply in 1995. During 1995 and 1996, Atlantic/Pacific Employers Insurance Company planned to non-renew all of their auto insurance policies in New Jersey in accordance with the accelerated withdrawal order entered into with the New Jersey Department of Insurance in August 1994. In addition, the MTF program had been phasing out since 1994 and, as of March 1, 1996, the Company's contracted activity for the MTF ended.
Revenues earned under the contract with Clarendon involved full service policy administration and claims services for approximately 18 percent of the assigned risk drivers in New Jersey. This activity started in 1993 with the commencement of the New Jersey Personal Automobile Insurance Plan ("PAIP") following the end of New Jersey's direct insurance program provided by its MTF. The Company's service for Clarendon was performed under New Jersey's Limited Assignment Distribution Program ("LAD") which required that servicing carriers such as the Company bear some of the underlying insurance risk of the policies being handled. For this reason, the Company formed a wholly-owned insurance subsidiary, Alerion, and effective January 1, 1994, Alerion reinsured a portion of Clarendon's insurance risk under the PAIP program.
By the end of 1994, the Company decided that risk taking, even as a reinsurer, was not an attractive business strategy, particularly because of the substantial capital required by its insurance subsidiary relative to other Company capital commitments. The Company and Clarendon agreed, therefore, to end the reinsurance arrangement in the fourth quarter of 1994 and "commute" all reinsurance interests and liabilities back to the inception of the agreement, thus eliminating all reinsurance activity of Alerion. This had the effect of reducing revenues by $6.1 million and operating income by $.5 million in the fourth quarter of 1994. Since the Company was no longer willing to share in the underlying insurance risk of PAIP policies, it could not, by law, continue to provide policy administration and claims servicing to Clarendon under the LAD program after 1994.
Most of the Company's insurance services contracts included a variable fee structure based on the loss ratios of the underlying insurance policies which could increase or decrease fee revenues. The Company obtained periodic independent actuarial evaluations of the loss ratios for these programs and adjusted the amount of its revenue when required. Subsequent to December 31, 1994, the Company obtained independent actuarial projections of loss adjustment expenses expected to be incurred in 1995 and beyond with respect to the Company's contractual obligations under its insurance services contracts. As a result of this review, the Company determined that its deferred contract revenues at the end of 1994 should be increased by $4.1 million to adequately cover contract costs and profit margins in 1995 and beyond. This change in accounting estimate was recorded in the fourth quarter of 1994 as a reduction of insurance services revenue.
In the fourth quarter of 1994, ISD wrote off $2.3 million of unamortized capitalized software development costs previously incurred to develop a version of the COVER-ALL system for use in-house to process policies and claims.
As a result of the developments discussed above, ISD was suffering losses and, in addition, was operating under considerable uncertainty because of the pendency of lawsuits with certain affiliates of The Robert Plan Corporation, a customer and subcontractor for the Company. In March 1996, the Company entered into a series of agreements resulting in the settlement and dismissal of the lawsuits and the release of the Company from continuing obligations under contracts for the provision of insurance services to ISD customers. See Note 2 to the Consolidated Financial Statements for a discussion of the various financial elements of those agreements. In essence, the Company no longer offers full service automobile insurance services, and its ISD operations have been transferred to a subsidiary of The Robert Plan Corporation which has replaced the Company as a service provider to such customers.
These agreements have resulted in a net loss for 1996 and 1995 of $392,872 and $749,758, respectively. The additional net loss for 1996 relates to additional loss adjustment expenses (mostly legal fees), pertaining to the discontinued operations, in excess of the amount accrued in 1995. The 1995 net loss includes a provision for estimated ISD losses in 1996 prior to the March 1, 1996 effective date of the Restructuring.
Accordingly, the Company's Consolidated Financial Statements have been restated for all periods to reflect ISD operations as "discontinued operations."
Continuing Operations
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Total revenues were $7,938,000 for the year ended December 31, 1997 as compared to $5,469,000 for the year ended December 31, 1996, an increase of 45%. License fees were $3,940,000 for the year ended December 31, 1997 compared to $1,044,000 in the same period in 1996 due to the sale of additional contracts in 1997. For the year ended December 31, 1997, maintenance revenues were $2,722,000 compared to $2,252,000 in the same period of the prior year due to an increased customer base. Professional services revenue contributed $1,276,000 for the year ended December 31, 1997 compared to $2,172,000 for the year 1996. The decrease was due to approximately $1,000,000 less TAS 2000 fees for custom enhancements in 1997 compared to 1996. A new TAS 2000 contract was signed in the fourth quarter of 1997 and work on custom enhancements was started in December of 1997.
Cost of revenues increased to $5,426,000 for the year ended December 31, 1997 as compared to $4,586,000 for 1996. Increases in capitalized software and license fees amortization accounted for the bulk of the increase.
Research and development expenses in 1997 were $-0- compared to $1,846,000 for the year ended December 31, 1996 due to the Company's restructuring and the decision to focus the Company's resources on selling TAS 2000 modules. In the future, the Company plans to dedicate resources to its ongoing research and development efforts since its success depends on its ability to keep products current based on new technologies.
Sales and marketing expenses increased to $1,900,000 in 1997 compared to $1,125,000 as of December 31, 1996 due mostly to increased sales force and associated benefit costs. The Company allocated additional resources to its sales and marketing group to work on proposals for new contracts.
General and administrative expenses decreased to $2,989,000 in 1997 from $3,627,000 for the year ended December 31, 1996 due to the Company's ongoing efforts to reduce overhead costs.
A loss from discontinued operations of $392,872 was recorded in the year ended December 31, 1996 as a result of additional loss adjustment expenses in excess of the amount anticipated at December 31, 1995.
COVER-ALL has commenced marketing efforts in the United Kingdom. A contract for the TAS 2000 product was announced on March 25, 1998 with Cornhill Insurance PLC, a wholly-owned subsidiary of Allianz (one of the largest insurance companies in the world). This licensing and services agreement valued at $4,500,000 encompasses Cover-All's new Total Administrative System (TAS 2000) modules including Policy Administration, Client Management, Agency Management, Billing Cash & Commissions, Statistical Reporting and Pyramid Services' Claims Administration.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Total revenues were $5,469,000 for the year ended December 31, 1996 as compared to $4,119,000 for the year ended December 31, 1995, an increase of 33%. License fees were $1,045,000 for the year ended December 31, 1996 compared to $1,422,000 in the same period in 1995 due to the sale of one additional contract in 1995. For the year ended December 31, 1996, maintenance revenues were $2,252,000 compared to $1,174,000 in the same period of the prior year due to an increased customer base and renegotiations of all contracts resulting in higher fees from customers. Professional services revenue contributed $2,172,000 for the year ended December 31, 1996 compared to $1,523,000 for the year 1995 as a result of new contracts signed and customers requesting additional modifications to existing systems.
Cost of sales increased to $4,586,000 for the year ended December 31, 1996 as compared to $1,330,000 for 1995. Significant increases in capitalized software and license fees amortization, and salary and benefit costs relating to dedication of resources to maintenance and professional services, accounted for the bulk of the increase. In addition, the Company wrote off approximately $500,000 of unamortized capitalized software costs representing certain modules of the TAS 2000 product line not expected to be completed in the near future due to reprioritizing of marketing and development efforts.
Research and development expenses in 1996 decreased slightly to $1,846,000 compared to $1,933,000 for the year ended December 31, 1995 due to personnel reductions in the Engineering Department and the decision to focus the Company's engineering resources on completing several TAS 2000 modules for the marketplace. In the future, the Company will continue to dedicate significant resources to its ongoing research and development efforts since its success depends on its ability to keep products current based on new technologies.
Sales and marketing expenses increased to $1,125,000 in 1996 compared to $465,000 as of December 31, 1995 due mostly to increased sales force and associated benefit costs. The Company allocated additional resources to its sales and marketing group to work on a proposal for a major contract.
General and administrative expenses increased approximately 31% to $3,627,000 in 1996 from $2,760,000 for the year ended December 31, 1995 due to costs incurred in connection with the procurement of the SIL and CARE contracts and additional staffing. In addition, the Company terminated the lease at the Somerset facility for a cost of $371,408 since the anticipated utilization of this facility to house a significant number of new employees to work on a joint venture project with a new customer did not occur.
A loss from discontinued operations of $392,872 was recorded in the year ended December 31, 1996 as a result of additional loss adjustment expenses in excess of the amount anticipated at December 31, 1995.
Liquidity and Capital Resources
At December 31, 1997, the Company had working capital of $1,647,000 compared to a working capital deficit of $1,293,000 in 1996. The improvement in working capital was primarily due to the Company's receiving $3,000,000 from the sale of 12 1/2% convertible debentures to an institutional investor.
On March 31, 1997, the Company sold $3,000,000 of 12 1/2% 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. The Debentures contain certain covenants which restrict the Company's ability to incur indebtedness, grant liens, pay dividends or other defined restricted payments and make investments and acquisitions. The Company cannot redeem the Debentures for two years and thereafter may only call the Debentures if the closing price of the Company's Common Stock for the twenty business days preceding the redemption date exceeds $1.50. The net proceeds from this financing will be used for working capital purposes.
In 1996, the Company was granted by Care Corporation Limited ("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. The Care software is an integrated suite of computer applications for the administration of claims processing of workers' compensation. The product has been successfully deployed in Australia and the United States in Third Party Administration ("TPA") and self insured environments, including city and state government operations as well as with major private corporations. 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, while acquiring worldwide reseller rights (excluding Australia, New Zealand, and the United States).
In consideration for the buy back of the Care Software License by Care, the Company received $500,000 on March 31, 1998, and a $4,500,000 non-interest bearing note, payable in semi-annual installments of $500,000 which, when discounted, results in a principal amount of the note of $3,893,054. The discounted note is collateralized by unencumbered Cover-All stock owned by Care. The number of shares required as collateral will 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 will be 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.
Based on the above, and due to the related party nature of the Care Software License buy back agreement, the Company will record the $1,143,054 difference between the carrying value of the Care Software License of $3,250,000 at December 31, 1997, and the discounted $4,393,054 buy back agreement to capital in excess of par value in the first quarter of 1998.
In March 1996, the Company received $3,022,391 from the sale of Common Stock and Warrants and another $1,553,124 in May 1996 from the sale of additional Common Stock pursuant to a series of transactions with Software Investments Limited and Care Corporation Limited that are described in Note 9 to the Consolidated Financial Statements.
At December 31, 1997, the Company had approximately $3,000,000, $14,000,000 and $7,000,000 of operating tax loss carryforwards expiring in 2012, 2011, and 2010, respectively.
The Company believes that the proceeds from the sale of the Debentures, its current cash balances, the Care buy back, and anticipated cash flows from continuing operations will be sufficient to meet normal operating needs for the continuing COVER-ALL business in 1998.
New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ["FASB"] issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is in the process of determining its preferred format. The adoption of SFAS No. 130 will have no impact on the Company's consolidated results of operations, financial position or cash flows.
In June 1997, the FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for prior periods are required to be restated. The Company is in the process of evaluating the disclosure requirements. The adoption of SFAS No. 131 will have no impact on the Company's consolidated results of operations; financial position or cash flows.
In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, after clearance by the FASB, issued Statement of Position (SOP) 97-2, Software Revenue Recognition. This SOP supersedes SOP 91-1 of the same name and provides the most recent guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997.
SOP 97-2 requires that in arrangements to deliver software or a software system that does not require significant production, modification, or customization, revenue should be recognized when there is persuasive evidence that an arrangement does in fact exist; delivery has occurred; the fee is fixed or determinable; and collectibility is probable. If the software or software system selling contract arrangement, either alone or together with other products or services, requires significant production, modification or customization construction type/production type contract accounting should be used for the entire arrangement. Such accounting would recognize revenues and costs on a contract arrangement as it progresses toward completion, rather than deferred recognition of these items until persuasive evidence of delivery has occurred. In software or software system selling arrangements that consist of multiple elements (that is, additional software products, upgrades/enhancements, rights to exchange or return software, postcontract customer support, or services), and contract accounting does not apply, the fee must be allocated to the various elements based on vendor-specific objective evidence of fair values. In general, if sufficient vendor-specific objective evidence of fair values does not exist, all revenue from the arrangement should be deferred until such sufficient evidence exists, or until all elements have been delivered. The principle difference between SOP 97-2 and its predecessor SOP 91-1 is in the accounting for multiple-element arrangements based on vendor-specific objective evidence of fair values.
Cover-All generally does not sell its products, Classic and TAS, under multiple-element arrangements. Classic and TAS are standard "off the shelf" application program packages, and while these packages may be tailored to meet customer requirements, the core package is the standard product sold. Management does not believe that SOP 97-2 will materially affect the way the Company recognizes revenue.
There is a proposed SOP dated February 11, 1998, which would defer for one year the provision of SOP 97-2 with respect to what constitutes vendor-specific objective evidence of fair value for multiple-element arrangements in which a software element is sold only in combination with postcontract customer support or other service elements. For those multiple-element arrangements, determination of the portion of the sales price allocable to the software element may be based on a reasonable method.
Year 2000 Readiness
The Company is aware of the issues associated with the programing code in existing computer systems as the millennium (Year 2000) approaches. The "Year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to "00." The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The "Year 2000" problem creates risk for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals on financial transactions. Such failures of the Company and/or third parties' computer systems could have a material impact on the Company's ability to conduct its business, and especially to process and account for the transfer of funds electronically.
The Company presently believes that, with modification to existing software and converting to new software, which it has done by purchasing a "Year 2000" ready managerial and financial reporting system (total cost estimated to be approximately $32,000), the "Year 2000" problem will
not pose significant operational problems for the company's computer systems. However, if such modifications and conversions are not completed timely, the "Year 2000" problem may have a material impact on the operations of the Company.
Regarding its software products held for sale, the Company's TAS product line already conforms to the "Year 2000" as of December 31, 1997. In 1997, the Classic product was modified to support the "Year 2000."
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 20.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
At a meeting held on August 4, 1997, the Board of Directors of the Company approved the engagement of Moore Stephens, P.C. as its independent auditors for the fiscal year ending December 31, 1997, to replace Ernst & Young, LLP, who were dismissed as auditors of the Company effective August 4, 1997. The dismissal of Ernst & Young, LLP, was not the result of any disagreements or disputes between the Company and Ernst & Young, LLP. A detailed discussion of the change is included in the Company's Form 8-K filed August 11, 1997.
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 Act of 1934 in connection with the election of directors at the 1998 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, 1997.
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 Page
Report of Independent Auditors 20
Report of Predecessor Independent Auditors 21
Consolidated Balance Sheets - December 31, 1997 and 1996 22
Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995 24
Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995 25
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995 26
Notes to Consolidated Financial Statements 28
(2) Financial Statement Schedule
II - Valuation and qualifying accounts 43
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) 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) Partnership Agreement, dated December 7, 1978, by and among the Registrant, James R. Poole, Ira M. Cantor and Stanley A. Rothenberg [incorporated by reference to Exhibit 10(a) to the Registrant's Registration Statement on Form S-18 (Commission File No. 2-88695-NY) filed on December 30, 1983].
10(b) Employment Agreement, dated as of August 1, 1990, between the Registrant and Bradley J. Hughes [incorporated by reference to Exhibit 10(h) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(c) Employment Agreement, dated as of July 11, 1990, between the Registrant and Theodore I. Botter [incorporated by reference to Exhibit 10(j) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(e)(1) Employment Agreement, dated as of November 1, 1992, between the Registrant and Harvey Krieger [incorporated by reference to Exhibit 10(h) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 28, 1993].
10(e)(2) Amendment to Employment Agreement, dated June 7, 1995, between the Registrant and Harvey Krieger.
10(e)(3) Consulting Agreement, dated as of June 1, 1996, between the Registrant and Harvey Krieger [incorporated by reference to Exhibit 10(e)(3) to the Registrant's Registration Statement on Form S-3 (Commission File No. 0-1324) filed on June 17, 1996].
10(f)(1) Employment Agreement, dated as of March 22, 1994, among COVER-ALL Systems, Inc., Michael G. Repoli and the Registrant [incorporated by reference to Exhibit 10(f)(1) to the Registrant's Annual Report on Form 10-K (Commission File No. 0- 13124) filed on April 17, 1995].
10(f)(2) Amendment to Employment Agreement, dated August 10, 1994, among COVER-ALL Systems, Inc., Michael G. Repoli and the Registrant [incorporated by reference to Exhibit 10(f)(2) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(f)(3) Amendment to Employment Agreement, dated January 11, 1995, among COVER-ALL Systems, Inc., Michael G. Repoli and the Registrant [incorporated by reference to
Exhibit 10(f)(3) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(g) Employment Agreement, dated as of January 24, 1996, among COVER-ALL Systems, Inc., the Registrant and Peter C. Lynch [incorporated by reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 11, 1996].
10(h) 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(i) Incentive Stock Option Plan adopted by the Board of Directors of the Registrant on February 22, 1982, and approved by the stockholders in February 1983 as amended on December 16, 1983 and March 31, 1988 [incorporated by reference to Exhibit 10(b) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1989].
10(j) Stock Option Agreement, dated March 22, 1990, between the Registrant and Harvey Krieger [incorporated by reference to Exhibit 10(q) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(k) Stock Option Agreement, dated August 15, 1990, between the Registrant and Bradley J. Hughes [incorporated by reference to Exhibit 10(t) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(l) Stock Option Agreement, dated August 15, 1990, between the Registrant and Theodore I. Botter [incorporated by reference to Exhibit 10(u) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(m)(1) The 1991 Key Employee Stock Option Plan, adopted by the Board of Directors of the Registrant on June 18, 1991, as amended on September 6, 1991 and November 19, 1991 and approved by stockholders on March 18, 1992 [incorporated by reference to Exhibit 4(a) to the Registrant's Registration Statement on Form S-8 (Commission File No. 33-44270) filed on November 26, 1991].
10(m)(2) Form of Incentive Stock Option Agreement under the 1991 Key Employee Stock Plan [incorporated by reference to Exhibit 4(b) to the Registrant's Registration Statement on Form S-8 (Commission File No. 33-44270) filed on November 26, 1991].
10(m)(3) Form of Non-Qualified Stock Option Agreement under the 1991 Key Employee Stock Option Plan [incorporated by reference to Exhibit 4(c) to the Registrant's Registration Statement on Form S-8 (Commission File No. 33-44270) filed on November 26, 1991].
10(m)(4) Form of Stock Option Agreement under the 1991 Key Employee Stock Option Plan dated as of June 21, 1991, between the Registrant and each of Theodore I. Botter, Thomas F. Rocchio, and Harvey Krieger [incorporated by reference to Exhibit 4(d) to the Registrant's Registration Statement on Form S-8 (Commission File No. 33-44270) filed on November 26, 1991].
10(m)(5) Stock Option Agreement, dated as of November 20, 1992, between the Registrant and Bradley J. Hughes [incorporated by reference to Exhibit 10(x)(vi) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 28, 1993].
10(n)(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(n)(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. O-13124) filed on April 17, 1995].
10(o)(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. O-13124) filed on April 17, 1995].
10(o)(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(o)(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(o)(4) The 1995 Employee Stock Option Plan, as amended on April 29, 1997 by the stockholders of the Registrant.
10(p)(1) Indenture of Lease, dated as of July 1, 1994, between Fair Lawn Industrial Park, Inc. and the Registrant for premises located at 17-01 Pollitt Drive, Fair Lawn, New Jersey [incorporated by reference to Exhibit 10(p)(1) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(p)(2) Termination Agreement, dated as of June 30, 1994, among Fair Lawn Industrial Park, Inc., Symtron Systems, Inc., and the Registrant [incorporated by reference to Exhibit 10(p)(2) to the Registrant's Annual Report on Form 10-K (Commission File No. 0- 13124) filed on April 17, 1995].
10(q) 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(r) Lease Agreement, dated as of December 11, 1991, between the Registrant and Aetna Life Insurance Company for premises located at 125 Belmont Drive, Somerset, New Jersey [incorporated by reference to Exhibit 10(ee) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1992].
10(s) Rights Agreement, dated November 17, 1989, between the Registrant and First Fidelity Bank, N.A., as Rights Agent [incorporated by reference to Exhibit 1 to the Registrant's Registration Statement on Form 8-A (Commission File No. 13-2698053) filed on October 20, 1989].
10(t)(i) Severance Agreement, dated as of November 28, 1989, between the Registrant and Harvey Krieger [incorporated by reference to Exhibit 1 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on December 6, 1989].
10(t)(ii) Severance Agreement, dated August 15, 1990, between the Registrant and Bradley J. Hughes [incorporated by reference to Exhibit 10(o)(i) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(t)(iii) Severance Agreement, dated August 15, 1990, between the Registrant and Theodore I. Botter [incorporated by reference to Exhibit 10(t)(i) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(u)(i) Restructuring Agreement, dated as of March 1, 1996, by and among the Registrant, Atlantic Employers Insurance Company, Pacific Employers Insurance Company, Electric Insurance Company, The Robert Plan Corporation, Material Damage Adjustment Corporation, Lion Insurance Company, and National Consumer Insurance Company [incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on March 7, 1996].
10(u)(ii) Form of Warrant issued by the Registrant pursuant to the Restructuring Agreement listed as Exhibit 10(u)(i) above [incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on March 7, 1996].
10(u)(iii) Asset Purchase Agreement, dated as of March 1, 1996, by and among the Registrant, MDA Services, Inc. and The Robert Plan Corporation [incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on March 7, 1996].
10(v)(i) Stock Purchase Agreement, dated as of March 31, 1996, by and among the Registrant, Software Investments Limited and Care Corporation Limited [incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8, 1996].
10(v)(ii) Repurchase Rights Assignment, dated as of March 31, 1996, between the Registrant and Software Investments Limited [incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8, 1996].
10(v)(iii) Warrant, dated as of March 31, 1996, issued by the Registrant to Software Investments Limited [incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8, 1996].
10(v)(iv) 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(w) Settlement Agreement dated April 1, 1996 between the Registrant and Clarendon National Insurance Company [incorporated by reference to Exhibit 10.5 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8, 1996].
10(x) Employment Agreement, dated as of April 1, 1996, between the Registrant and Raul F. Calvo.
10(y) General Release and Termination of Lease Agreement, dated as of December 4, 1996, between the Registrant and Somerset Realty Associates, L.L.C.
10(z)(i) Convertible Note Purchase Agreement, dated as March 14, 1997, between the Registrant, Software Investments Limited, Atlantic Employers Insurance Company and Roger D. Bensen [incorporated by reference to Registrant's Current Report on Form 8-K (Commission File No. 0-13124) filed on March 24, 1997.
*10(z)(ii) Form of 12 1/2% Convertible Note issued by Registrant pursuant to the Convertible Note Purchase Agreement listed as Exhibit 10(z)(i) above.
*10(aa)(i) Debenture Purchase Agreement, dated as of March 31, 1997, between the Registrant and Sirrom Capital Corporation.
*10(aa)(ii)12 1/2% Convertible Debenture Due March 31, 2002, issued by Registrant to Sirrom Capital Corporation.
*10(aa)(iiiAmendment to Stock Purchase Agreement, dated as of March 14, 1997, among the Registrant, Software Investments Limited and Care Corporation Limited.
*10(aa)(iv)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.
10(bb)(i) Exclusive Software License Repurchase Agreement, dated March 31, 1998, by and among the Registrant, COVER-ALL Systems, Inc., Care Corporation Limited and Software Investments Limited.
10(bb)(ii) Secured Promissory Note, dated March 31, 1998, by and between the Registrant, as Holder, and Care Corporation Limited, as Payor.
10(bb)(iii)Pledge Agreement, dated March 31, 1998, by and between the Registrant, as Secured Party, and Care Corporation Limited, as Pledgor.
10(bb)(iv) Reseller Agreement, dated March 31, 1998, by and between Cover-All Systems, Inc. and Care Corporation Limited.
10(bb)(v) Reseller Agreement, dated March 31, 1998, by and between Cover-All Systems, Inc. and Care Corporation Limited.
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].
*23A Consent of Ernst & Young LLP.
*23B Consent of Moore Stephens, P.C.
*27 Financial Data Schedule.
------------------------------ * Filed herewith
(b) Reports on Form 8-K
The Company filed a Form 8-K on January 7, 1997 under Item 5 to reflect the resignation of Harvey Krieger as a director of the Company effective as of December 31, 1996. The Company filed a Form 8-K on March 24, 1997 under Item 5 to reflect the announcement of the closing of a $750,000 bridge financing, the appointment of a new Chief Executive Officer, the election of two new directors and the amendment of the terms of certain software licensing and related agreements. The Company also filed a Form 8-K on April 14, 1997 under Item 5 to reflect the closing of $3 million of permanent financing through the sale of its 12 1/2% Convertible Debentures, due March 31, 2002 to Tandem Capital, Inc. and the resignation of four directors and the appointment of one new director.
The Company filed a Form 8-K on August 11, 1997 under Item 4 to reflect the engagement of Moore Stephens, P.C. as the Company's auditors to replace Ernst & Young, LLP effective August 4, 1997 and under Item 5 to reflect the events of the annual meeting of stockholders.
REPORT OF INDEPENDENT AUDITORS
To the Stockholder and the Board of Directors of Cover-All Technologies Inc.
We have audited the accompanying consolidated balance sheet of Cover-All Technologies Inc. and its subsidiaries as of December 31, 1997, and the related consolidated statements of operations, changes in stockholders' equity [deficit], and cash flows for the year then ended. Our audit also included the financial statement schedule listed in Item 14(a) of this Form 10-K for the year ended December 31, 1997. These consolidated financial statements and financial statement schedule 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 audit.
We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides 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, 1997, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein for the year ended December 31, 1997.
MOORE STEPHENS, P. C. Certified Public Accountants.
Cranford, New Jersey March 31, 1998
REPORT OF INDEPENDENT AUDITORS
The Board of Directors Cover-All Technologies Inc.
We have audited the accompanying consolidated balance sheet of Cover-All Technologies Inc. and its subsidiaries as of December 31, 1996, and the related consolidated statements of operations, changes in stockholders' equity (deficit), and cash flows for the years ended December 31, 1996 and 1995. Our audits also included the financial statement schedule for the years ended December 31, 1996 and 1995 listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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. at December 31, 1996 and the consolidated results of their operations and their cash flows for the years ended December 31, 1996 and 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Hackensack, New Jersey April 11, 1997
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [DEFICIT] - ------------------------------------------------------------------------------
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------
Supplemental Disclosures of Noncash Investing and Financing Activities: Financing: In 1996, the Company in connection with the discontinuance of ISD issued Common Stock and Warrants for $6,978,340 as a result of the restructuring agreement [See Note 2].
In 1997, the Company retired 633,986 shares of its Common Stock previously held in the treasury.
Investing: In 1996, the Company acquired a software license valued at $5,000,000 from Care by issuing 2,500,000 of its Common Stock crediting Common Stock for $25,000 and capital in excess of par value for $4,975,000 [See Note 9].
In 1997, the Company retired property and equipment having a net book value of $447,383.
The Accompanying Notes are an Integral Part of These 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. [formerly Warner Insurance Services, Inc.], through its wholly-owned subsidiary, COVER-ALL Systems, Inc. ["COVER-ALL"], licenses and maintains its software products to the property/casualty insurance industry throughout the United States, Puerto Rico and the United Kingdom. COVER-ALL also provides professional consulting services to its customers interested in customizing their software.
Insurance Company - In late 1993, the Company obtained approval from the New Jersey Department of Insurance to form Alerion Insurance Company of New Jersey ["Alerion"]. Alerion entered into a reinsurance agreement with Clarendon National Insurance Company ["Clarendon"] to assume a portion of Clarendon's risk in the New Jersey Assigned Risk Program. The subsidiary was initially capitalized with $10 million. During the fourth quarter of 1994, the Company decided to discontinue assuming any underlying insurance risk. This was accomplished by Alerion commuting all its rights and obligations under the reinsurance contract back to Clarendon and paying to Clarendon all amounts received in excess of payments made since the inception of the reinsurance contract in January 1994. In 1996, Alerion surrendered its Certificate of Authority to transact insurance business in New Jersey.
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 subsidiary [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 - Revenue from the sale of software licenses is recognized when modules are provided to and accepted by the customer. 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.
Concentrations of Credit Risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable.
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. Three major customers accounted for approximately 53% of the Company's trade accounts receivable portfolio. The Company performs ongoing credit evaluations of its customers but does not require collateral. The Company maintains allowances for potential credit losses.
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.
Routine maintenance and repair costs are charged to expense as incurred and renewals and improvements that extend the useful life of the assets are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is reported as income or expense.
Capitalized Software and Related License - Qualifying software development costs are capitalized and amortized over a three-year period. There were no software development costs capitalized during 1997. During the fourth quarter of 1996, the Company wrote off approximately $500,000 of unamortized software development costs representing certain modules of the TAS 2000 product line not expected to be completed in the near future due to reprioritizing of marketing and development efforts. This write off is reflected in cost of revenues in 1996.
As more fully described in Note 9, in March of 1996, the Company acquired a software license [the "Care Software License"] by issuing 2,500,000 shares of its common stock and began amortizing such license over a five-year period. 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 the Care Software License back to the original seller of the license. The Company also acquired the worldwide reseller rights (excluding Australia, New Zealand, and the United States).
Advertising Expense - It is the Company's policy to expense advertising costs as incurred. Advertising expense in 1997, 1996 and 1995 was $56,361, $128,803 and $73,495, respectively.
Research and Development - No research and development costs were incurred for the year ended December 31, 1997. For the years ended December 31, 1996 and 1995, $1,846,410 and $1,932,920, respectively, was expensed for research and development of new software products. These expenses are in addition to software development costs in 1996 and 1995 which are capitalized and then amortized over their expected useful lives. See capitalized software and related license above.
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 basis 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.
Net Loss Per Share - The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ["SFAS"] No. 128, Earnings per Share, which is effective for financial statements issued for periods ending after December 15, 1997. Accordingly, earnings per share data in the financial statements for the year ended December 31, 1997, have been calculated in accordance with SFAS No. 128. Prior periods loss per share data have been recalculated and it was determined that no adjustment was necessary.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3 - ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
Net Loss Per Share [Continued] - SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, Earnings per Share, and replaces its primary earnings per share with a new basic earnings per share representing the amount of earnings for the period available to each share of common stock outstanding during the reporting period. Basic earnings [loss] per share is computed by dividing income [loss] available to common stockholders by the weighted average number of common shares outstanding during the period. SFAS No. 128 also requires a dual presentation of basic and diluted earnings per share on the face of the statement of operations for all companies with complex capital structures. Diluted earnings per share reflects the amount of earnings for the period available to each share of common stock outstanding during the reporting period, while giving effect to all dilutive potential common shares that were outstanding during the period, such as common shares that could result from the potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion, exercise, or contingent issuance of securities that would have an antidilutive effect on per share amounts (i.e., increasing earnings per share or reducing loss per share). The dilutive effect of outstanding options and warrants and their equivalents are reflected in dilutive earnings per share by the application of the treasury stock method which recognizes the use of proceeds that could be obtained upon exercise of options and warrants in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common stock at the average market price during the period. Options and warrants will have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants. The Company's options and warrants were not included in the computation of loss per share because to do so would have been antidilutive for the periods presented, however, such options and warrants could potentially dilute basic earnings per share in the future.
The dilutive effect of convertible debt is reflected in dilutive earnings per share by the application of the if-converted method. Convertible debt will have a dilutive effect only when the amount of interest (net of tax) on a per share basis is less than basic earnings per share. The Company's convertible debt does not affect the loss per share calculation because it would be antidilutive for the year ended December 31, 1997, however, such 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.
Presentation - Certain items have been reclassified from the prior year to conform with the current year's presentation.
[2] Discontinued Operations
Insurance Services Division ["ISD"] revenues decreased substantially in 1994 and 1995 because of lower fees attributable to the reduced number of policies and claims being handled on contracts that were winding down or were completed. As a result, ISD had been suffering losses and operating under considerable uncertainty as a result of the pendency of lawsuits with certain affiliates of The Robert Plan Corporation ["The Robert Plan Corporation"] as described in Note 4. In March 1996, the Company entered into a series of agreements which provided for the transfer and discontinuance of its ISD operations and the issuance of the Company's Common Stock and Warrants to certain customers of the ISD business in exchange for the release of the Company from its obligations to provide insurance services to ISD customers and to The Robert Plan Corporation in exchange for the settlement and dismissal of lawsuits with The Robert Plan Corporation. Effective March 1, 1996 the Company has discontinued providing insurance processing services to the automobile insurance industry and has reflected those activities as discontinued operations in its Financial Statements.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4 - ------------------------------------------------------------------------------
[2] Discontinued Operations [Continued]
As part of the restructuring transactions [the "Restructuring"], the Company transferred certain assets, employees, contracts and leased premises relating to its ISD business to a subsidiary of The Robert Plan Corporation, which has replaced the Company as the provider of insurance services to the ISD customers. In exchange for settling the lawsuits, releasing the Company's obligations to provide insurance services under its contracts and executing the mutual releases, the Company issued to certain of the ISD customers and certain parties to the litigation: (a) a total of 3,256,201 shares of the Company's Common Stock, (b) five-year Warrants to purchase up to an additional aggregate of 1,553,125 shares of the Company's Common Stock at $2.00 per share and (c) cash of $2.5 million. The holders of these securities can request the Company to register these securities with such registration costs to be paid by the Company. The Company had the option, exercisable for a period of six months [from March 1, 1996], to (i) purchase 50% of the aforementioned 3,256,201 shares at a cash price equal to the greater of $3.00 or 50% of the then market price of a share of the Company's Common Stock and (ii) acquire 50% of the 1,553,125 Warrants at a cash price equal to $1.00 per Warrant. On March 31, 1996, the Company assigned its aforementioned repurchase option applicable to the Company's Common Stock and Warrants to Software Investment Limited ["SIL"], which SIL subsequently exercised, as discussed in Note 9. As a result of the issuance of shares described in Note 9, the antidilution provisions of the Warrants required an adjustment of shares to 1,725,694 from 1,553,125 and a price adjustment to $1.80 from $2.00 per share.
The discontinuance of ISD resulted in a loss on disposal of discontinued operations of $392,872 in 1996 and $749,758 in 1995.
The Consolidated Statement of Operations for 1995 has been restated to report the net results of the ISD operations as loss from discontinued operations. The results of ISD are summarized as follows:
Year ended December 31, 1995
Net Revenues $ 20,228,212 ============
Loss from Operations Before Income Taxes $ (7,107,987) Income Taxes/[Benefit] -- ------------
Loss from Discontinued Operations $ (7,107,987) ============
[3] Special Charges
In December 1994, management instituted a plan to down-size the COVER-ALL organization and reduce the rate of product development to a level consistent with the reduced level of customer installations planned for 1995. Costs of $1,165,000 were incurred and written off in the first quarter of 1995 for executive and other severance costs as well as additional software development costs and have been reflected as special charges in the 1995 Statement of Operations.
[4] Litigation
In March 1994, Material Damage Adjustment Corporation ["MDA"], a subsidiary of The Robert Plan Corporation and a subcontractor for the Company performing claims processing work, instituted an action in the Superior Court of New Jersey seeking injunctive relief requiring that the Company turn over to MDA in excess of $1 million that the Company had withheld from certain claims fees allegedly owed to MDA. This action arose out of the Company's servicing contract with the Market Transition Facility of New Jersey ["MTF"]. The Company had withheld the funds as a set off to cover unpaid invoices for data processing services rendered by the Company for MDA. MDA also added a claim for approximately $2.5 million of surcharge fees paid to the Company by the MTF. The MTF was brought into the case to resolve disputes between MTF and MDA over refunds of claims fees paid on claims later closed without payment. The Company vigorously contested MDA's claims and asserted counterclaims against MDA to establish the Company's entitlement to the disputed sums.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5 - ------------------------------------------------------------------------------
[4] Litigation [Continued]
In May 1994, the Company filed an action in the Superior Court of New Jersey against Lion Insurance Company, National Consumer Insurance Corporation, and The Robert Plan Corporation seeking payment of unsatisfied invoices under an April 1991 agreement totaling approximately $2.7 million. Under the agreement, the Company agreed to provide data processing services for a three-year term in support of Lion Insurance Company's "depopulation pool" automobile insurance business in New Jersey. Lion Insurance Company is a subsidiary of The Robert Plan Corporation whose affiliate, National Consumer Insurance Corporation, has taken over the "depopulation pool" business. The Robert Plan Corporation guaranteed Lion's performance and payment.
On March 1, 1996, the two lawsuits described above were settled as part of the overall settlement with certain of the Company's insurance services customers. The settlement and restructuring transactions are described in Note 2.
On February 2, 1995, Sol M. Seltzer commenced an action in the Supreme Court of New York against Mr. Krieger, the then Chairman of the Board and former President of the Company, and each of the other then members of the Board of Directors. The plaintiff, Sol M. Seltzer, who purported to sue derivatively on behalf of the Company and COVER-ALL, sought among other things, compensatory damages in an amount to be determined at trial and punitive damages in an aggregate amount of $12 million. Sol M. Seltzer was a vice president of the Company and a director of COVER-ALL until he resigned from such positions in late 1994. The plaintiff alleged, among other things, breach of fiduciary duty, waste and mismanagement, as well as alleged wrongful acts by the Board and the former President, including among other things, self-dealing and misuse of corporate funds by the former President. The Company, and the other defendants, contested Mr. Seltzer's claims and on July 23, 1996 won a motion to dismiss the case. Mr. Seltzer filed a Notice of Appeal; however, the Notice of Appeal initially was rejected for defects of form. Subsequently, Mr. Seltzer was granted leave to file a corrected Notice of Appeal and did so on or about November 26, 1996. However, Mr. Seltzer's time to "perfect" his appeal ran out on or about August 26, 1997. Accordingly, the appeal is dismissible for failure to prosecute and the Company considers this matter resolved.
On February 6, 1995, the Company commenced an action in the Superior Court of New Jersey against Sol M. Seltzer, a former vice president of the Company and a director of COVER-ALL, alleging fraud, mismanagement, negligence, misrepresentation, and breach of fiduciary duty with respect to the development and implementation of COVER-ALL's TAS 2000 software product. The Company claimed compensatory and punitive damages in an amount to be determined at trial. The case was largely inactive pending the motion to dismiss Seltzer's New York action. After the dismissal of the New York case brought by Seltzer, the Company voluntarily dismissed the New Jersey case without prejudice.
The Company is not currently named as a defendent in any lawsuit.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6 - ------------------------------------------------------------------------------
[5] Commitments, Contingencies and Other
Operating Leases - The Company leases office space in Fair Lawn, NJ, where it occupies approximately 36,000 square feet, under a lease which expires in 2000. 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 for COVER-ALL office space was $311,240, $334,170 and $174,710, for the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's future minimum rental commitments under its noncancellable operating lease in effect at December 31, 1997 follows: years ending December 31, 1998 -- $400,000; 1999 -- $400,000; 2000 -- $170,000; thereafter -- NONE.
Employment Contracts - The Company has employment contracts with certain of its executives with various dates of expiration through the year ending December 31, 1998. Certain of the contracts are automatically renewable from year to year. The aggregate annual commitment for future salaries at December 31, 1997 was approximately $650,000.
Related Party Transactions - A director of the Company in 1995 and 1996 and for part of 1997 is a partner in a law firm with which the Company incurred legal expenses of approximately $290,000, $600,000 and $360,000, in 1997, 1996 and 1995, respectively. An attorney associated with the Chairman provides legal services to the Company. The Company incurred approximately $82,000 in legal costs with this attorney in 1997.
Letter of Credit - At December 31, 1994, the Company had an outstanding letter of credit for $1,000,000 with First Fidelity Bank, N.A., NJ, which guaranteed a performance bond issued in connection with the Company's contract with the JUA/MTF, an ISD customer. In February 1995, this letter of credit was replaced by a $1,000,000 letter of credit issued by Chase Manhattan Bank N.A. which was collateralized by $1,000,000 that was placed in a restricted account. The letter of credit expired in February 1996 and the $1,000,000 of cash collateral was returned to the Company.
Major Customers - The Company had a portion of its revenues from one customer in 1997 and three customers in 1996 and 1995 as follows:
Y e a r s e n d e d D e c e m b e r 31, Customer 1 9 9 7 1 9 9 6 1 9 9 5 -------- ------- ------- -------
Inspire Insurance Solutions 20% -- -- Sun Alliance Management Services -- 27% 16% Glatfelter Insurance Group -- 13% -- Millers Insurance Group -- 13% -- New Jersey State Medical Underwriters -- -- 18% Secura, Inc. -- -- 11%
In 1997, 1996 and 1995 export sales were made to a U.K. customer of approximately $500,000, $1,465,000 and $640,000, respectively.
Credit Lines - At December 31, 1994, the Company had outstanding $2 million in short-term borrowings against its $4 million secured credit line with a bank. In 1995 the Company repaid the $2 million and the credit line was withdrawn.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7 - ------------------------------------------------------------------------------
[6] Income Taxes
An analysis of the components of the income tax provision is as follows:
Y e a r s e n d e d D e c e m b e r 31, 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- ------- Current: Federal $ -- $ -- $(2,800,000) State -- -- -- -------- --------- ----------
Totals -- -- (2,800,000) -------- --------- ----------
Deferred: Federal -- -- 2,800,000 State -- -- -- -------- --------- ----------
Totals -- -- 2,800,000 -------- --------- ----------
Totals $ -- $ -- $ -- ------ ======== ========= ==========
The income tax provision [benefit] for continuing operations differs from the amount computed by applying the statutory federal income tax rate as follows:
Y e a r s e n d e d D e c e m b e r 31, 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- -------
Computed Federal Statutory Tax [Benefit] $(900,000)$(1,781,000)$(1,204,991) Valuation Allowance to Reduce Deferred Tax Asset 900,000 1,781,000 1,204,991 -------- ---------- ----------- Actual Provision [Benefit] $ -- $ -- $ -- -------------------------- ========= ========== ===========
The components of the net deferred tax asset and liability were as follows:
D e c e m b e r 31, -------------------------- 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- ------- Deferred Tax Assets - Current: Deferred Revenue $ -- $ -- $1,185,000 Reserve for Contract Adjustments -- -- 2,075,000 Bad Debts 74,000 18,000 186,000 Reserve for Loss on Disposal 185,000 414,000 300,000 Other - Net 13,000 36,000 31,000 Valuation Allowance (272,000) (468,000) (3,777,000) --------- ---------- ----------
Current Deferred Tax Asset $ -- $ -- $ -- -------------------------- ========= ========== ==========
Deferred Tax Asset [Liability] - Long-Term: Net Operating Loss Carryforward $9,500,000 $8,421,000 $2,790,000 Capitalized Software (265,000) (590,000) (600,000) Depreciation and Amortization 91,000 200,000 200,000 Valuation Allowance (9,326,000)(8,031,000) (2,410,000) ---------- ---------- ----------
Long-Term Deferred Tax Liability $ -- $ -- $ (20,000) -------------------------------- ========= ========== ==========
The net change during 1997 in the total valuation allowance is $1,099,000.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8 - ------------------------------------------------------------------------------
[6] Income Taxes [Continued]
At December 31, 1997, the Company had approximately $3,000,000, $14,000,000 and $7,000,000 of operating tax loss carryforwards expiring in 2012, 2011, and 2010, respectively. 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 issued relative to the Restructuring and other stock which may be issued related to the Debentures [see Note 12] the Company may experience an ownership change and consequently the Company's utilization of its net operating losses could be significantly limited.
[7] Stock Option and Stock Purchase Plans
In March 1995, the Company adopted the 1995 Employee Stock Option Plan, which was ammended in April 1997. Options for the purchase of up to 2,000,000 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, 1997, 1996 and 1995, 341,775, 210,175 and 482,325 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"]. 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, 1997, 1996 and 1995, 240,000, 240,000 and 260,000 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 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, 1997, 1996 and 1995, 105,000, 105,000 and 105,000 shares, respectively, were available for grant.
In June 1991, the Company adopted the Key Employee Stock Option Plan [the "KESO Plan"]. Options for the purchase of up to 721,875 shares may be granted by the Board of Directors to key employees of the Company at an exercise price determined by the type of option granted. Options may be granted as incentive or non-qualified stock options with a term of not more than ten years from the date of grant. At December 31, 1997, 1996 and 1995, 319,938, 279,938 and 229,938 shares, respectively, were available for grant.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9 - ------------------------------------------------------------------------------
[7] Stock Option and Stock Purchase Plans [Continued]
A summary of the changes in outstanding Common Stock options for all outstanding plans is as follows:
Weighted-Average Remaining Weighted-Average Shares Per Share Contractual Life Exercise Price
Balance, December 31, 1994 453,350 $2.63 - 10.00 2.9 years $ 4.17
Granted 462,225 1.13 - 3.75 2.1 years 1.80 Canceled (225,608) 3.13 - 10.00 3.87
Balance, December 31, 1995 689,967 1.13 - 10.00 2.3 years $ 2.66
Granted 337,250 2.00 - 5.25 2.9 years 3.20 Exercised (125,187) 1.75 - 3.53 2.97 Canceled (233,205) 1.75 - 10.00 3.75
Balance, December 31, 1996 668,825 1.13 - 5.25 2.6 years $ 2.49
Granted 1,410,000 1.25 - 3.81 3.9 years 1.48 Exercised (73,225) 1.75 - 2.00 1.93 Canceled (186,600) 1.38 - 5.25 2.08
Balance, December 31 1997 1,819,000 1.13 - 5.00 3.4 years $ 1.70
The options granted during 1997 are distributed as follows, relative to the difference between the exercise price and the stock price at grant date:
Number Weighted-AverageWeighted-Average Granted Exercise Price Fair Value
Exercise Price Above Stock Price 100,000 $ 2.00 $ .74 Exercise Price at Stock Price 215,000 1.72 1.10 Exercise Price Below Stock Price 1,095,000 1.38 1.38 ----------- --------- -------
Totals 1,410,000 $ 1.48 $ 1.29 ------ =========== ========= =======
Exercisable options at December 31, 1997, 1996 and 1995 were as follows:
Number of Weighted-Average December 31, Exercisable Options Exercise Price
1997 1,582,334 $ 1.69 1996 351,909 $ 2.29 1995 302,675 $ 1.69
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10 - ------------------------------------------------------------------------------
[7] Stock Option and Stock Purchase Plans [Continued]
The following table summarizes information about stock options at December 31, 1997:
In 1985, the Board of Directors authorized, and the stockholders approved, the adoption of an Employee Stock Purchase Plan [the "Purchase Plan"]. An aggregate of 344,531 shares of the Company's Common Stock could be issued under the Purchase Plan. As of December 31, 1995, 207,681 shares were issued under the Purchase Plan which was terminated in March 1995.
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 of certain options issued during 1997 was below the market price at the date of grant. Accordingly, compensation expense of $435,313 was recorded in 1997. The exercise price for all stock options issued during 1996 and 1995 was equal to 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 1996 and 1995.
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 $1.29, $1.95 and $.94 during 1997, 1996 and 1995, respectively.
Pro forma information regarding net loss and net 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:
D e c e m b e r 3 1, ------------------------------------ 1 9 9 7 1 9 9 6 1 9 9 5 ------- ------- -------
Risk-Free Interest Rate 6.70% 6.29% 6.74% Expected Life 3.8 Years 3.3 Years 3.6 Years Expected Volatility 88% 89% 70% Expected Dividends None None None
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11 - ------------------------------------------------------------------------------
[7] Stock Option and Stock Purchase Plans [Continued]
The pro forma amounts are indicated below [in thousands, except per share amounts]:
[8] Common Stock
On November 17, 1989, the Company adopted a Stockholder Rights Plan and declared a dividend distribution of one Right for each outstanding share of Common Stock. Under certain conditions, each Right shall initially entitle the registered holder thereof to purchase one-fifth of one share of Common Stock at a purchase price of $10.00, subject to adjustment. The Rights will be exercisable only if (i) a person or group has acquired, or obtained the right to acquire 15% or more of the outstanding shares of Common Stock (other than a person that acquires the stock directly from the Company in a transaction that the Company's independent Directors determine to be in the best interests of the Company and its stockholders] or (ii) following the commencement of a tender offer or exchange offer for 15% or more of the then outstanding shares of Common Stock. Each Right will entitle its holder to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property, or other securities of the Company] having a value equal to two times the purchase price of the Right under certain circumstances, including the acquisition of 20% of the outstanding Common Stock. All rights holders, except the acquiror, may purchase a number of shares of Common Stock equal to $10.00 (subject to adjustment under the terms of the Rights Plan] divided by 50% of the market price of the Company's Common Stock on the date which is ten days after a public announcement by the Company that a person or group has acquired, or obtained the right to acquire, 15% or more of the outstanding shares of Common Stock. In the event that the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation, the rights holders may purchase the acquiror's shares at the similar discount.
The Company may redeem the Rights at $.01 each until ten days following the date on which a person or group of affiliated persons has acquired, or obtained the right to acquire, the beneficial ownership of 15% or more of the outstanding shares of Common Stock. The Rights will expire on December 4, 1999 unless earlier redeemed by the Company.
[9] Sale of Stock and Warrants, and Purchase and Sale of Care Software License
On March 31, 1996, the Company entered into a series of transactions with Software Investments Limited ["SIL"] and Care Corporation Limited ["Care"] whereby the Company:
[A] sold to SIL for total proceeds of $3,022,391: (i) 1,412,758 shares of the Company's Common Stock for $2.00 per share and (ii) five-year warrants to purchase an aggregate of 196,875 shares of the Company's Common Stock exercisable at $2.00 per share for $1.00 per warrant ($196,875). As a result of the issuance of the 12 1/2% Convertible Debentures discussed in Note 12, the warrants required an adjustment of shares to 206,152 and a price adjustment to $1.91 per share. As of December 31, 1997, no warrants had been exercised.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12 - ------------------------------------------------------------------------------
[9] Sale of Stock and Warrants, and Purchase and Sale of Care Software License [Continued]
[B] assigned to SIL the rights it retained in the Restructuring [see Note 2] to repurchase within six months 1,628,100 shares of the Company's Common Stock for the greater of $3.00 per share or 50 percent of the then market price of the Company's Common Stock and its rights to purchase from the warrant holders for $1.00 per share five-year warrants to acquire 776,562 shares of the Company's Common Stock at $2.00 per share. As a result of the issuance of the above mentioned shares, the antidilution provisions of the Warrants required an adjustment from 776,562 shares at $2.00 per share to 862,847 shares at $1.80 per share. As a result of the issuance of the 12 1/2% Convertible Debentures discussed in Note 12, the Warrants may require a further adjustment to the number of shares purchasable and the exercise price.
On May 1, 1996, SIL acquired 1,628,100 shares of the Company's Common Stock at $3.00 per share, and at $1.00 per Warrant, 862,847 Warrants to acquire 862,847 shares of the Company's Common Stock at $1.80 per share. SIL exercised these Warrants on May 6, 1996, resulting in the Company receiving $1,553,124 in additional equity.
In addition, 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 using the $2.00 per share price in [A] above 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 has 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.
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, payable in semi-annual installments of $500,000 which, when discounted, results in a principal amount of the note of $3,893,054. The discounted note is collateralized by unencumbered Cover-All stock owned by Care. The number of shares required as collateral will 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 will be 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. The Company also acquired worldwide reseller rights (excluding Australia, New Zealand, and the United States.
In separate but related agreements, Care agreed to grant to the Company certain non-exclusive re-seller rights to the Care software, and the Company agreed to grant to Care certain non-exclusive re-seller rights to the Classic and TAS software.
Based on the above, and due to the related party nature of the Care Software License buy back agreement, the Company will record the $1,143,054 difference between the carrying value of the Care Software License and the discounted $4,393,054 buy back agreement to capital in excess of par value in the first quarter of 1998.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13 - ------------------------------------------------------------------------------
[10] Quarterly Financial Data [Unaudited]
Summarized quarterly financial data is as follows:
[Dollar amounts in thousands except per share data]
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14 - ------------------------------------------------------------------------------
[11] Supplemental Data
Accrued liabilities consist of the following: Years ended December 31, 1 9 9 7 1 9 9 6 ------- ------- Accrued Payroll, Benefits, Temporary Help, Consulting and Severance $ 358,447 $ 371,186 Accrued Expenses of the Discontinued Operations Not Assumed by The Robert Plan Corporation 461,506 1,036,736 Accrued Software Costs 312,764 -- Accrued Interest Costs 93,750 -- Accrued Professional Fees 150,000 -- Other 242,209 206,690 ---------- -----------
Totals $1,618,676 $ 1,614,612 ------ ========== ===========
[12] Convertible Debentures
On March 14, 1997, the Company obtained $750,000 in bridge financing through the sale of 12 1/2% Convertible Notes to three major stockholders. The principal and accrued interest on the bridge financing was repaid in full on March 31, 1997 out of the proceeds from the permanent financing discussed below.
On March 31, 1997, the Company sold $3,000,000 of 12 1/2% 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. Neither the debentures nor the shares of Common Stock issuable upon any conversion of such debentures have been registered under the Securities Act of 1933 or any applicable state securities law. The Debentures contain certain covenants which restrict the Company's ability to incur indebtedness, grant liens, pay dividends or other defined restricted payments and make investments and acquisitions. The Company cannot redeem the Debentures for two years and thereafter may only call the Debentures if the closing price of the Company's Common Stock for the twenty business days preceding the redemption date exceeds $1.50. The net proceeds from this permanent financing were used to repay the bridge financing and the remainder is being used for working capital purposes.
[13] 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 $9,500. The Company matches $.50 for each $1.00 of the first 5% of pay employees elect to defer. Expenses associated with this plan in 1997, 1996 and 1995 were approximately $47,900, $21,100 and $18,400, respectively.
[14] Fair Value of Financial Instruments
In assessing the fair value of its cash and cash equivalents, trade receivables and trade payables 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 $3,050,000.
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15 - ------------------------------------------------------------------------------
[15] New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ["FASB"] issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company is in the process of determining its preferred format. The adoption of SFAS No. 130 will have no impact on the Company's consolidated results of operations, financial position or cash flows.
In June 1997, the FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosures for prior periods are required to be restated. The Company is in the process of evaluating the disclosure requirements. The adoption of SFAS No. 131 will have no impact on the Company's consolidated results of operations; financial position or cash flows.
In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, after clearance by the FASB, issued Statement of Position (SOP) 97-2, Software Revenue Recognition. This SOP supersedes SOP 91-1 of the same name and provides the most recent guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997.
SOP 97-2 requires that in arrangements to deliver software or a software system that does not require significant production, modification, or customization, revenue should be recognized when there is persuasive evidence that an arrangement does in fact exist; delivery has occurred; the fee is fixed or determinable; and collectibility is probable. If the software or software system selling contract arrangement, either alone or together with other products or services, requires significant production, modification or customization construction type/production type contract accounting should be used for the entire arrangement. Such accounting would recognize revenues and costs on a contract arrangement as it progresses toward completion, rather than deferred recognition of these items until persuasive evidence of delivery has occurred. In software or software system selling arrangements that consist of multiple elements (that is, additional software products, upgrades/enhancements, rights to exchange or return software, postcontract customer support, or services), and contract accounting does not apply, the fee must be allocated to the various elements based on vendor-specific objective evidence of fair values. In general, if sufficient vendor-specific objective evidence of fair values does not exist, all revenue from the arrangement should be deferred until such sufficient evidence exists, or until all elements have been delivered. The principle difference between SOP 97-2 and its predecessor SOP 91-1 is in the accounting for multiple-element arrangements based on vendor-specific objective evidence of fair values.
Cover-All generally does not sell its products, Classic and TAS, under multiple-element arrangements. Classic and TAS are standard "off the shelf" application program packages, and while these packages may be tailored to meet customer requirements, the core package is the standard product sold. Management does not believe that SOP 97-2 will materially affect the way the Company recognizes revenue.
There is a proposed SOP dated February 11, 1998, which would defer for one year the provision of SOP 97-2 with respect to what constitutes vendor-specific objective evidence of fair value for multiple-element arrangements in which a software element is sold only in combination with postcontract customer support or other service elements. For those multiple-element arrangements, determination of the portion of the sales price allocable to the software element may be based on a reasonable method.
. . . . . . . . . .
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS - ------------------------------------------------------------------------------
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) 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) Partnership Agreement, dated December 7, 1978, by and among the Registrant, James R. Poole, Ira M. Cantor and Stanley A. Rothenberg [incorporated by reference to Exhibit 10(a) to the Registrant's Registration Statement on Form S-18 (Commission File No. 2- 88695-NY) filed on December 30, 1983].
10(b) Employment Agreement, dated as of August 1, 1990, between the Registrant and Bradley J. Hughes [incorporated by reference to Exhibit 10(h) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(c) Employment Agreement, dated as of July 11, 1990, between the Registrant and Theodore I. Botter [incorporated by reference to Exhibit 10(j) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(e)(1) Employment Agreement, dated as of November 1, 1992, between the Registrant and Harvey Krieger [incorporated by reference to Exhibit 10(h) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 28, 1993].
10(e)(2) Amendment to Employment Agreement, dated June 7, 1995, between the Registrant and Harvey Krieger.
10(e)(3) Consulting Agreement, dated as of June 1, 1996, between the Registrant and Harvey Krieger [incorporated by reference to Exhibit 10(e)(3) to the Registrant's Registration Statement on Form S-3 (Commission File No. 0-1324) filed on June 17, 1996].
10(f)(1) Employment Agreement, dated as of March 22, 1994, among COVER-ALL Systems, Inc., Michael G. Repoli and the Registrant [incorporated by reference to Exhibit 10(f)(1) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(f)(2) Amendment to Employment Agreement, dated August 10, 1994, among COVER-ALL Systems, Inc., Michael G. Repoli and the Registrant [incorporated by reference to Exhibit 10(f)(2) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(f)(3) Amendment to Employment Agreement, dated January 11, 1995, among COVER-ALL Systems, Inc., Michael G. Repoli and the Registrant [incorporated by reference to Exhibit 10(f)(3) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(g) Employment Agreement, dated as of January 24, 1996, among COVER-ALL Systems, Inc., the Registrant and Peter C. Lynch [incorporated by reference to Exhibit 10(g) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 11, 1996].
10(h) 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(i) Incentive Stock Option Plan adopted by the Board of Directors of the Registrant on February 22, 1982, and approved by the stockholders in February 1983 as amended on December 16, 1983 and March 31, 1988 [incorporated by reference to Exhibit 10(b) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1989].
10(j) Stock Option Agreement, dated March 22, 1990, between the Registrant and Harvey Krieger [incorporated by reference to Exhibit 10(q) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(k) Stock Option Agreement, dated August 15, 1990, between the Registrant and Bradley J. Hughes [incorporated by reference to Exhibit 10(t) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(l) Stock Option Agreement, dated August 15, 1990, between the Registrant and Theodore I. Botter [incorporated by reference to Exhibit 10(u) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(m)(1) The 1991 Key Employee Stock Option Plan, adopted by the Board of Directors of the Registrant on June 18, 1991, as amended on September 6, 1991 and November 19, 1991 and approved by stockholders on March 18, 1992 [incorporated by reference to Exhibit 4(a) to the Registrant's Registration Statement on Form S-8 (Commission File No. 33-44270) filed on November 26, 1991].
10(m)(2) Form of Incentive Stock Option Agreement under the 1991 Key Employee Stock Plan [incorporated by reference to Exhibit 4(b) to the Registrant's Registration Statement on Form S-8 (Commission File No. 33-44270) filed on November 26, 1991].
10(m)(3) Form of Non-Qualified Stock Option Agreement under the 1991 Key Employee Stock Option Plan [incorporated by reference to Exhibit 4(c) to the Registrant's Registration Statement on Form S-8 (Commission File No. 33-44270) filed on November 26, 1991].
10(m)(4) Form of Stock Option Agreement under the 1991 Key Employee Stock Option Plan dated as of June 21, 1991, between the Registrant and each of Theodore I. Botter, Thomas F. Rocchio, and Harvey Krieger [incorporated by reference to Exhibit 4(d) to the Registrant's Registration Statement on Form S-8 (Commission File No. 33-44270) filed on November 26, 1991].
10(m)(5) Stock Option Agreement, dated as of November 20, 1992, between the Registrant and Bradley J. Hughes [incorporated by reference to Exhibit 10(x)(vi) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 28, 1993].
10(n)(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(n)(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. O-13124) filed on April 17, 1995].
10(o)(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. O-13124) filed on April 17, 1995].
10(o)(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(o)(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(o)(4) The 1995 Employee Stock Option Plan, as amended on April 29, 1997 by the stockholders of the Registrant.
10(p)(1) Indenture of Lease, dated as of July 1, 1994, between Fair Lawn Industrial Park, Inc. and the Registrant for premises located at 17-01 Pollitt Drive, Fair Lawn, New Jersey [incorporated by reference to Exhibit 10(p)(1) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(p)(2) Termination Agreement, dated as of June 30, 1994, among Fair Lawn Industrial Park, Inc., Symtron Systems, Inc., and the Registrant [incorporated by reference to Exhibit 10(p)(2) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].
10(q) 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(r) Lease Agreement, dated as of December 11, 1991, between the Registrant and Aetna Life Insurance Company for premises located at 125 Belmont Drive, Somerset, New Jersey [incorporated by reference to Exhibit 10(ee) to the Registrant's Annual Report on Form 10- K (Commission File No. 0-13124) filed on January 24, 1992].
10(s) Rights Agreement, dated November 17, 1989, between the Registrant and First Fidelity Bank, N.A., as Rights Agent [incorporated by reference to Exhibit 1 to the Registrant's
Registration Statement on Form 8-A (Commission File No. 13-2698053) filed on October 20, 1989].
10(t)(i) Severance Agreement, dated as of November 28, 1989, between the Registrant and Harvey Krieger [incorporated by reference to Exhibit 1 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on December 6, 1989].
10(t)(ii) Severance Agreement, dated August 15, 1990, between the Registrant and Bradley J. Hughes [incorporated by reference to Exhibit 10(o)(i) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(t)(iii) Severance Agreement, dated August 15, 1990, between the Registrant and Theodore I. Botter [incorporated by reference to Exhibit 10(t)(i) to the Registrant's Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 24, 1991].
10(u)(i) Restructuring Agreement, dated as of March 1, 1996, by and among the Registrant, Atlantic Employers Insurance Company, Pacific Employers Insurance Company, Electric Insurance Company, The Robert Plan Corporation, Material Damage Adjustment Corporation, Lion Insurance Company, and National Consumer Insurance Company [incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on March 7, 1996].
10(u)(ii) Form of Warrant issued by the Registrant pursuant to the Restructuring Agreement listed as Exhibit 10(u)(i) above [incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on March 7, 1996].
10(u)(iii) Asset Purchase Agreement, dated as of March 1, 1996, by and among the Registrant, MDA Services, Inc. and The Robert Plan Corporation [incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on March 7, 1996].
10(v)(i) Stock Purchase Agreement, dated as of March 31, 1996, by and among the Registrant, Software Investments Limited and Care Corporation Limited [incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8, 1996].
10(v)(ii) Repurchase Rights Assignment, dated as of March 31, 1996, between the Registrant and Software Investments Limited [incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8, 1996].
10(v)(iii) Warrant, dated as of March 31, 1996, issued by the Registrant to Software Investments Limited [incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8, 1996].
10(v)(iv) 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(w) Settlement Agreement dated April 1, 1996 between the Registrant and Clarendon National Insurance Company [incorporated by reference to Exhibit 10.5 to the Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8, 1996].
*10(x) Employment Agreement, dated as of April 1, 1996, between the Registrant and Raul F. Calvo.
*10(y) General Release and Termination of Lease Agreement, dated as of December 4, 1996, between the Registrant and Somerset Realty Associates, L.L.C.
10(z)(i) Convertible Note Purchase Agreement, dated as March 14, 1997, between the Registrant, Software Investments Limited, Atlantic Employers Insurance Company and Roger D. Bensen [incorporated by reference to Registrant's Current Report on Form 8-K (Commission File No. 0-13124) filed on March 24, 1997.
*10(z)(ii) Form of 12 1/2% Convertible Note issued by Registrant pursuant to the Convertible Note Purchase Agreement listed as Exhibit 10(z)(i) above.
*10(aa)(i) Debenture Purchase Agreement, dated as of March 31, 1997, between the Registrant and Sirrom Capital Corporation.
*10(aa)(ii)12 1/2% Convertible Debenture Due March 31, 2002, issued by Registrant to Sirrom Capital Corporation.
*10(aa)(iiiAmendment to Stock Purchase Agreement, dated as of March 14, 1997, among the Registrant, Software Investments Limited and Care Corporation Limited.
*10(aa)(iv)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. 10(bb)(i) Exclusive Software License Repurchase Agreement, dated March 31, 1998, by and among the Registrant, COVER-ALL Systems, Inc., Care Corporation Limited and Software Investments Limited.
10(bb)(ii) Secured Promissory Note, dated March 31, 1998, by and between the Registrant, as Holder, and Care Corporation Limited, as Payor.
10(bb)(iii)Pledge Agreement, dated March 31, 1998, by and between the Registrant, as Secured Party, and Care Corporation Limited, as Pledgor.
10(bb)(iv) Reseller Agreement, dated March 31, 1998, by and between Cover-All Systems, Inc. and Care Corporation Limited.
10(bb)(v) Reseller Agreement, dated March 31, 1998, by and between Cover-All Systems, Inc. and Care Corporation Limited.
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 Ernst & Young LLP.
*27 Financial Data Schedule.
------------------------------ * Filed herewith
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 31, 1998 By: /s/ Brian Magowan --------------------------------- Brian Magowan Chairman of the Board of Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signatures Title Date
/s/ Brian Magowan - --------------------------- Brian Magowan Chairman of the Board of Directors March 31, 1998 Chief Executive Officer and Director (Principal Executive Officer)
/s/ John R. Nobel Chief Financial Officer March 31, 1998 - --------------------------- John R. Nobel
/s/ Earl Gallegos - --------------------------- Earl Gallegos Director March 31, 1998
/s/ Ian Meredith - --------------------------- Ian Meredith Director March 31, 1998
/s/ James R. Stallard - --------------------------- James R. Stallard Director March 31, 1998
/s/ Mark D. Johnston - --------------------------- Mark D. Johnston Director March 31, 1998
/s/ Steven Hough - --------------------------- Steven Hough Director March 31, 1998
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 31, 1998 By:______________________________ Brian Magowan Chairman of the Board of Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signatures Title Date
Brian Magowan Chairman of the Board of Directors March 31, 1998 Chief Executive Officer and Director (Principal Executive Officer)
Chief Financial Officer March 31, 1998 John R. Nobel
Earl Gallegos Director March 31, 1998
Ian Meredith Director March 31, 1998
James R. Stallard Director March 31, 1998
Mark D. Johnston Director March 31, 1998
Steven Hough Director March 31, 1998