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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-13124
COVER-ALL TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-2698053
(State(I.R.S. Employer Identification No.)ion or organization)
07410 18-01 Pollitt Drive, Fair Lawn, New Jersey
(Zip Code) (Address of principal executive office)
(201)794-4800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
NASDAQ SmallCap Market
Common Stock, par value $.01 per share Philadelphia Stock Exchange
Securities registered pursuant to Section (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 27, 1998 was $45,970,000.
Number of shares outstanding at March 27, 1998:
16,907,522 shares of Common Stock, par value $.01 per share.
The definitive Proxy Statement for the Annual Meeting of Stockholders to be held
June 18, 1998, to be filed with the Commission not later than 120 days after the
close of the Registrant's fiscal year, has been incorporated by reference in
whole or in part for Part III, Items 10, 11, 12 and 13, of the December 31, 1997
Form 10-K.
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."
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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
3
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.
4
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
5
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. 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. Legal Proceedings
The Company is not currently named as a defendant in any lawsuit.
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. 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
6
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. 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.
(Dollar amounts in thousands except per share data)
Two Months
Ended Year Ended
Years Ended December 31, December 31, October 31,
1997 1996 1995 1994 1993 1993
---- ---- ---- ---- ---- ----
Statements of Operations Data:
Revenues: $7,938 $5,469 $4,119 $1,927 $ 224 $ 1,740
Loss from continuing operations(1 (2,640) (5,608) (3,544) (7,466) (781) (1,943)
(Loss) income from discontinued operations less
applicable income taxes/(benefit) of $-0-, $-0-,
$-0-, ($924), $670 and $3,633, respectively -- -- (7,108) (6,754) 1,158 5,653
Loss on disposal of discontinued operations,
no tax benefit provided -- (393) (750) -- -- --
Net (loss) income (2,640) (6,001) (11,402) (14,220) 377 3,710
Loss per share from continuing operations (.16) (.38) (.41) (.84) (.09) (.21)
Net (loss) income per share(2) (.16) (.40) (1.33) (1.60) .04 .40
Cash dividends per share $ -- $ -- $ -- $ .02 $ .01 $ .03
Balance Sheet Data:
Working capital (deficiency) $1,647 $(1,293) $(8,717)$ 3,110 $12,475 $12,843
Total assets 8,484 8,243 8,369 18,795 22,748 22,443
Short-Term Debt -- -- -- 2,000 -- --
Stockholders' equity (deficit) 2,847 4,911 (6,013) 5,376 20,574 20,541
(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. 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
7
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.
8
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.
9
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
10
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
11
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
12
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. 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. 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.
13
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. 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].
14
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
15
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].
16
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].
17
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.
18
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.
19
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
16
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
17
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
December 31,
1 9 9 7 1 9 9 6
Assets:
Current Assets:
Cash and Cash Equivalents $2,908,167 $ 446,672
Accounts Receivable [Less Allowance for Doubtful Accounts
of $185,610 and $43,870] 1,234,706 1,585,398
Prepaid Expenses 140,783 7,161
---------- -----------
Total Current Assets 4,283,656 2,039,231
---------- -----------
Property and Equipment - At Cost:
Furniture, Fixtures and Equipment 2,625,678 3,072,706
Less: Accumulated Depreciation (2,397,704) (2,662,713)
---------- -----------
Property and Equipment - Net 227,974 409,993
---------- -----------
Software License Held for Sale at December 31, 1997
[Less Accumulated Amortization of $1,750,000 and $750,000]3,250,000 4,250,000
--------- -----------
Capitalized Software [Less Accumulated Amortization of $1,820,857
and $1,005,964] 663,057 1,477,950
Other Assets 59,335 66,181
---------- -----------
Total Assets $8,484,022 $ 8,243,355
========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
18
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
December 31,
1 9 9 7 1 9 9 6
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 571,309 $ 536,172
Accrued Liabilities 1,618,676 1,614,612
Unearned Revenue 447,133 1,181,575
---------- -----------
Total Current Liabilities 2,637,118 3,332,359
---------- -----------
Convertible Debentures 3,000,000 --
---------- -----------
Total Liabilities 5,637,118 3,332,359
---------- -----------
Commitments and Contingencies -- --
Stockholders' Equity:
Common Stock, $.01 Par Value, Authorized 30,000,000
Shares, Issued 16,791,122 and 17,351,883 Shares,
1997 and 1996, respectively 167,911 173,519
Capital In Excess of Par Value 25,273,031 27,258,352
Accumulated Deficit (22,594,038) (19,953,668)
Treasury Stock - At Cost - 633,986 Shares -- (2,567,207)
---------- -----------
Total Stockholders' Equity 2,846,904 4,910,996
---------- -----------
Total Liabilities and Stockholders' Equity $8,484,022 $ 8,243,355
========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
19
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
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
------- ------- -------
Revenues:
Licenses $3,940,000 $ 1,044,460 $ 1,421,866
Maintenance 2,722,000 2,252,378 1,174,150
Professional Services 1,275,573 2,171,834 1,522,738
---------- ----------- -----------
Total Revenues 7,937,573 5,468,672 4,118,754
---------- ----------- -----------
Costs and Expenses:
Cost of Revenues 5,426,000 4,585,727 1,329,693
Research and Development -- 1,846,410 1,932,920
Sales and Marketing 1,900,000 1,124,884 465,045
General and Administrative 2,988,919 3,627,351 2,760,298
Special Charges -- -- 1,165,000
---------- ----------- -----------
Total Costs and Expenses 10,314,919 11,184,372 7,652,956
---------- ----------- -----------
Operating Loss (2,377,346) (5,715,700) (3,534,202)
---------- ----------- -----------
Interest Expense [Income]:
Interest Expense 300,593 1,924 15,220
Interest Income (37,569) (109,302) (5,332)
---------- ----------- -----------
Interest Expense [Income] 263,024 (107,378) 9,888
---------- ----------- -----------
Loss from Continuing Operations (2,640,370) (5,608,322) (3,544,090)
Loss from Discontinued Operations, Without Tax
Benefit -- -- (7,107,987)
Loss on Disposal of Discontinued Operations,
Without Tax Benefit -- (392,872) (749,758)
---------- ----------- -----------
Net Loss $(2,640,370) $(6,001,194)$(11,401,835)
=========== =========== ============
Loss Per Common Share from Continuing
Operations $ (0.16) $ (0.38)$ (0.41)
========== =========== ===========
Net Loss Per Common Share $ (0.16) $ (0.40)$ (1.33)
========== =========== ===========
Weighted Average Number of Common Shares
Outstanding 16,794,000 14,866,000 8,559,000
========== =========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
20
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [DEFICIT]
- ------------------------------------------------------------------------------
Retained Total
Capital Earnings Stockholders'
in Excess [Accumulated Treasury Equity
Common Stock of Par Value Deficit] Stock [Deficit]
------------ ------------ ------------ ----------- -------------
Balance at December 31, 1994 $ 91,873 $10,401,994 $(2,550,639) $(2,567,207) $ 5,376,021
Sale of 7,567 Shares of Common
Stock under Employee Stock
Purchase Plan 76 12,259 -- -- 12,335
Net Loss -- -- (11,401,835) -- (11,401,835)
-------- ----------- ----------- ---------- -----------
Balance at December 31, 1995 91,949 10,414,253 (13,952,474) (2,567,207) (6,013,479)
Sale of 125,187 Shares of Common
Stock under Stock Option Plans 1,252 370,562 -- -- 371,814
Issuance of 3,256,201 Shares of
Common Stock under the
Restructuring Agreement 32,562 6,479,840 -- -- 6,512,402
Issuance of Five-year Warrants to
Purchase up to an Aggregate of
1,725,694 Shares of Common
Stock under the Restructuring
Agreement -- 465,938 -- -- 465,938
Sale of 1,412,758 Shares of Common
Stock to Software Investments
Limited ["SIL"] 14,128 2,811,388 -- -- 2,825,516
Sale of Five Year Warrants to
Purchase an Aggregate of 196,875
Shares of Common Stock to SIL -- 196,875 -- -- 196,875
Issuance of 2,500,000 Shares of
Common Stock to Care
Corporation Limited 25,000 4,975,000 -- -- 5,000,000
Exercise of Five-year Warrants to
Purchase 862,847 Shares of
Common Stock 8,628 1,544,496 -- -- 1,553,124
Net Loss -- -- (6,001,194) -- (6,001,194)
-------- ----------- ----------- ---------- -----------
Balance at December 31, 1996 173,519 27,258,352 (19,953,668) (2,567,207) 4,910,996
Exercise of 73,225 Stock Options 732 140,233 -- -- 140,965
Retirement of 633,986 Shares of
Treasury Shares (6,340) (2,560,867) -- 2,567,207 --
Compensation Expense for Stock
Options Issued Below Fair Value -- 435,313 -- -- 435,313
Net Loss -- -- (2,640,370) -- (2,640,370)
-------- ----------- ----------- ---------- -----------
Balance at December 31, 1997 $167,911 $25,273,031 $(22,594,038) $ -- $ 2,846,904
======== =========== ============= ========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
21
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
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
------- ------- -------
Cash Flows from Operating Activities:
Loss from Continuing Operations $(2,640,370) $(5,608,322) $(3,544,090)
Adjustments to Reconcile Net Loss to Net Cash
Provided from [Used for] Operating Activities:
Depreciation 182,374 341,798 365,129
Amortization of Capitalized Software and Software
License 1,814,893 2,101,576 489,227
Provision for Uncollectible Accounts 172,190 43,870 --
Noncash Compensation Expense on Granting
of Stock Options 435,313 -- --
Loss on Disposal of Securities -- -- 86,223
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 178,502 134,622 (1,374,169)
Income Taxes Receivable -- 2,300,000 (163,972)
Deferred Income Taxes -- (20,000) 2,800,000
Prepaid Expenses (133,622) (1,806) (2,646)
Other Assets 6,846 420,545 (3,776)
Increase [Decrease] in:
Accounts Payable 116,429 (418,888) 161,561
Accrued Liabilities (77,228) (2,449,304) 3,123,208
Unearned Revenue (734,442) 546,011 513,447
---------- ----------- -----------
Net Cash [Used For] Provided from Continuing
Operating Activities - Forward (679,115) (2,609,898) 2,450,142
---------- ----------- -----------
Loss from Discontinued Operations -- -- (7,107,987)
Loss on Disposal of Discontinued Operations -- (392,872) (749,758)
Decrease [Increase] in Net Assets of Discontinued
Operations -- (1,670,028) (82,238)
---------- ----------- -----------
Net Cash Used For Discontinued Activities -
Forward -- (2,062,900) (7,939,983)
---------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from Sale of Fixed Maturity Investments -- -- 3,786,277
Proceeds from Sale of Equipment 3,640 -- --
Capital Expenditures (3,995) (85,860) (139,818)
Capitalized Software Expenditures -- (1,318,744) (1,000,009)
---------- ----------- -----------
Net Cash [Used For] Provided from Investing
Activities - Forward $ (355) $(1,404,604) $ 2,646,450
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
22
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
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
------- ------- -------
Net Cash [Used For] Provided from Continuing
Operating Activities - Forwarded $ (679,115) $(2,609,898) $ 2,450,142
---------- ----------- -----------
Net Cash Used For Discontinued Activities -
Forwarded -- (2,062,900) (7,939,983)
---------- ----------- -----------
Net Cash [Used For] Provided from Investing
Activities - Forwarded (355) (1,404,604) 2,646,450
---------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from Bridge Financing 750,000 -- --
Payments on Bridge Financing (750,000) -- --
Proceeds from Convertible Debentures 3,000,000 -- --
Payments on Credit Lines -- -- (2,000,000)
Net Proceeds from Issuance of Common Stock -- 4,947,329 12,335
Proceeds from Exercise of Stock Options 140,965 -- --
---------- ----------- -----------
Net Cash Provided from [Used For] Financing
Activities 3,140,965 4,947,329 (1,987,665)
---------- ----------- -----------
Change in Cash and Cash Equivalents 2,461,495 (1,130,073) (4,831,056)
Cash and Cash Equivalents - Beginning of Years 446,672 1,576,745 6,407,801
---------- ----------- -----------
Cash and Cash Equivalents - End of Years $2,908,167 $ 446,672 $ 1,576,745
========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 206,843 $ 1,924 $ 15,220
Income Taxes [Received] $ -- $(2,375,000) $(2,600,000)
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.
23
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.
24
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.
25
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.
26
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.
27
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
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[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.