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EX-23.1 - COVER ALL TECHNOLOGIES INCd26402ex23-1.htm
EX-32.2 - COVER ALL TECHNOLOGIES INCd26402ex32-2.htm
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EX-32.1 - COVER ALL TECHNOLOGIES INCd26402ex32-1.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2009.

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______ to ______.

Commission file number 0-13124

COVER-ALL TECHNOLOGIES INC.

(Exact name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

13-2698053

(I.R.S. Employer Identification No.)

 

 

55 Lane Road, Fairfield, New Jersey

(Address of principal executive office)

07004

(Zip Code)


(973) 461-5200
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations under those Securities.  Yes o No x

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

   Large accelerated filer o

Accelerated filer o

   Non-accelerated filer (Do not check if a smaller reporting company) o

Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $22,419,000.

As of March 15, 2010, there were 24,733,786 shares outstanding of our common stock.

Documents Incorporated by Reference:

Portions of the Registrant’s Proxy Statement for the 2010 Annual Meeting of Stockholders (“Proxy Statement”), to be filed with the Securities and Exchange Commission (the “SEC”) not later than 120 days after the close of the Registrant’s fiscal year, are incorporated by reference as described in Part III.







FORWARD-LOOKING STATEMENTS

Certain of the matters discussed in this report, including, without limitation, matters discussed under Item 1 - “Business”, Item 1A - “Risk Factors” and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievement described or implied by such statements.  Certain of these forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” or “anticipates” or the negative of these terms or other comparable terminology, or by discussions of strategy, objectives, expectations, plans or intentions.  Statements contained in this report that are not historical facts are forward-looking statements.  Without limiting the generality of the preceding statement, all statements in this report concerning or relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements.  In addition, through our senior management, from time to time we make forward-looking statements concerning our expected future operations and performance and other developments.  Such forward-looking statements are necessarily estimates reflecting our best judgment based upon current information and involve a number of risks and uncertainties.  Other factors may affect the accuracy of these forward-looking statements and our actual results may differ materially from the results anticipated in these forward-looking statements.  While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions described under Item 1A - “Risk Factors” and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and general conditions in the economy and capital markets.  Except to the extent required by applicable laws and regulations, we undertake no obligations to update any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.




 





TABLE OF CONTENTS


 



 

 

 

Page

 

PART I

 

ITEM  1.

BUSINESS

1

ITEM 1A.

RISK FACTORS

7

ITEM 1B.

UNRESOLVED STAFF COMMENTS

11

ITEM  2.

PROPERTIES

11

ITEM  3.

LEGAL PROCEEDINGS

11

ITEM  4.

[RESERVED]

11

 

 

PART II

 

ITEM  5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

12

ITEM  6.

SELECTED FINANCIAL DATA

14

ITEM  7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

16

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

27

ITEM  8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

27

ITEM  9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

27

ITEM 9A(T)

CONTROLS AND PROCEDURES

27

ITEM 9B.

OTHER INFORMATION

28

 

 

PART III

 

ITEM  10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

29

ITEM  11.

EXECUTIVE COMPENSATION

30

ITEM  12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

30

ITEM  13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

30

ITEM  14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

30

 

 

PART IV

 

ITEM  15.

EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

31





i





PART I

ITEM 1. BUSINESS

GENERAL

We provide unique, cost-effective business-focused solutions to the property and casualty insurance industry.  Our customers include insurance companies, agents, brokers and managing general agents (MGAs).  Our proprietary technology solutions and services are designed to reduce information technology costs and enable rapid product deployment for our customers.

Our software products and services focus on the functions required to underwrite, rate, quote, issue, print, bill and support the entire lifecycle of insurance policies.  Our products and services combine an in-depth knowledge of property and casualty insurance with an innovative and proprietary platform using state-of-the-art technology.  Our products provide common insurance functionality available on an “off-the-shelf” basis yet also provide flexibility for accommodating a high degree of customization for our customers to compete in the marketplace through differentiation.  Our software is licensed for use on the customer’s data centers or can be provided through our application services provider, referred to as “ASP,” using third party technology platforms and support.

We generate revenue from software contract licenses, professional services fees from ongoing software customization and continuing maintenance fees for technical and regulatory software updates on a monthly basis.  We provide a wide range of professional services that support product customizations, conversion from existing systems, data integration with other software or reporting agencies and other technical services.  We also offer ongoing support services including incorporating recent insurance rates, rules and forms changes.  These support services provide turnkey solutions to our customers as we perform analysis, development, quality assurance, documentation and distribution for delivering changes in a timely fashion.

Our ongoing maintenance and support services, usually through five-year minimum customer contracts, generate significant recurring revenue of approximately 25 to 30 cents for every dollar spent on licensing fees.

We were incorporated in Delaware in April 1985 as Warner Computer Systems, Inc. and changed our name to Warner Insurance Services, Inc. in March 1992.  In June 1996, we changed our name to Cover-All Technologies Inc.  Our products and services are offered through our wholly-owned subsidiary, Cover-All Systems, Inc., also a Delaware corporation.

PRODUCTS

My Insurance Center

In 2001, we announced the creation of My Insurance Center, referred to as “MIC,” a customizable and configurable web-based, data-centric “hub and spoke” software platform built around a shared “information hub” and suite of product components.  MIC is designed for insurance agents, brokers and carriers with integrated workflows and access to real-time information.  By centralizing the data in the MIC platform and using customized components to enable processes, we can quickly build a unique solution for each customer for achieving tangible business results.

MIC is designed to be the platform to serve players throughout the entire insurance value chain, including the insured, agents, brokers, insurance companies and reinsurers.  MIC is scalable to serve both large and small organizations.  MIC can be accessed over the Internet through a browser, with advanced security.  MIC is designed to be deployed globally in the future to adapt to different languages and currencies and to support different insurance products in other countries.

MIC provides an integrated platform with baseline common insurance functions that can be customized by Cover-All for customers’ business needs.  MIC also provides many configuration capabilities that are used by customers for further tailoring the application.  Finally, MIC allows end users to personalize screens and content for meeting their roles and responsibilities.



  

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MIC is designed to fully support STP (Straight-Through-Processing).  MIC enables our customers to utilize our rating, policy issuance, billing and other software components into a fully-integrated platform that, among other things, eliminates redundant data entry.  Information is stored in a client-centric database and becomes immediately available to other users or functions.  MIC may be customized to generate user alerts when a user-specified condition occurs.  Additionally, MIC has been designed to allow the customer to configure features according to their own look and feel preferences and workflow processes.  For instance, the browser-based user interface allows employees, agents and other end users to personalize their desktops so they see only the information they need or desire.  MIC allows our customers to reduce costs, leverage the latest technologies, better manage risk, provide better service to their customers, enter new markets, introduce new products and grow premiums.

We are investing in research and development for evolving the MIC platform to meet customers’ business needs in a rapidly changing marketplace.  We have added new and advanced capabilities to MIC, such as new policy administration platform, workflow management, rules-based underwriting, financial modules for determining profitability by policy, account-centric and policy-centric views, integration with partners’ accounting, claims processing systems and certain other new components.  With these new capabilities, MIC enables us to develop complex and custom products in shorter timeframes for introducing new insurance products into the marketplace.  In 2008, we developed many custom products for different customers and also developed our new workers’ compensation product for all states.

MIC is being made available to users either for in-house implementation or through our ASP.  We also support “Software as a Service” (SaaS) to meet emerging customer requirements.

MIC offers the following benefits to our customers:

·

Straight-Through-Processing – Business acquisition and the processing side of commercial property and casualty insurance is not only complex but it is highly regulated and spans across multiple constituents in the value chain.  Straight-Through-Processing helps customers to reduce expenses, provide faster service times and obtain a higher degree of compliance.  MIC provides Straight-Through-Processing through browser-based accessibility, roles-based security, rules-based underwriting, advanced workflow referrals and comprehensive insurance processing functions such as rating, issuance, printing and statistical coding.

·

Speed To Market – In a highly competitive insurance marketplace, insurers seek to maintain competitive advantage and high profit margins through innovation and introduction of new insurance products.  The information-hub architecture of MIC enables development of complex and custom products in rapid timeframes.

·

Regulatory Compliance – In highly state regulated insurance industry, compliance requires frequent software updates and audit capabilities.  MIC offers better regulatory compliance for our customers by providing regulatory updates, which are delivered on a monthly basis through our support services.

·

Security – MIC provides roles-based security with fine-grained access control, and encryption with data auditing helps enterprise data centers meet their security requirements.

·

Configurability – MIC provides a wide scope of customization to allow MIC to meet customers’ business and operational needs while taking advantage of its baseline common capabilities for achieving cost-effective and rapid implementation.

·

Integration – MIC provides real-time integration with audit logs for seamlessly integrating MIC with other systems in our customers’ technical ecosystem.

·

Openness & Scalability – MIC is based on open technologies such as J2EE, XML, Oracle and Web 2.0 (AJAX, GWT) through which we can deliver technological changes.  MIC is designed to scale “horizontally” without adding significant cost to meet customers’ growing business needs.


MIC Rating & Insurance – The Policy Rating and Issuance Component of MIC

In 1989, we purchased the assets related to the exclusive proprietary rights to a PC-based software application for policy rating and issuance for property and casualty insurance companies.  This software uses a unique design that separates the “insurance product definition” from the actual technology “engines.”  The sophistication of this design has enabled us to stay current with technology innovations while preserving our “insurance knowledge” investment.

The MIC Rating & Issuance component supports the following policy functions:

·

Data capture and editing



  

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·

Rating

·

Policy issuance including multiple recipient print

·

All policy transactions including quotes, new lines, endorsements, renewals, audits and cancellations

·

Statistical coding


MIC Rating & Issuance is designed to accommodate all lines of property and casualty insurance.  It is especially effective in coping with the complexity and variability of commercial lines of insurance.

This flexibility of MIC Rating & Issuance is a competitive advantage, and today we offer off-the-shelf support for more than 40 lines of commercial business in virtually all states and Puerto Rico.  Our extensive experience in creating custom products combined with our proprietary tool set enables us to deliver support for new insurance products in short time frames.

In 2002, we developed a new “presentation layer” incorporating the latest technologies, such as Java and XML, to provide a very flexible and robust user interface over the Internet.  This capability also included significant enhancements to our security and administration functions as well as a number of “usability” enhancements.  These capabilities significantly expand and enhance the “core” rating and issuance capabilities.  The new product has now been fully integrated with MIC and is being sold and marketed as MIC Rating & Issuance.  The MIC Rating & Issuance has been and continues to be enhanced and updated with new technology.  The sophisticated design of the product isolates insurance product knowledge from the application itself in data files, referred to as “Metadata.”  We have built an extensive knowledge base, estimated at more than 100 person-years of effort, in this Metadata that defines the details of virtually hundreds of insurance policy types and coverages for the MIC Rating & Issuance product.

The design of MIC Rating & Issuance also allows us to stay current with changes in technology while re-using the intellectual capital invested in the insurance rules.  Our upgrading the Classic product line to run on an intranet/Internet has enabled multiple users to contribute to the common data store.  We have also integrated this product to IPD and MIC.  We have streamlined the support process with the goal to improve quality to our customers.

The MIC Rating & Issuance product is in use in over 35 companies.

The newly developed policy administration platform of MIC provides the following advanced capabilities:

·

Dynamic data capture for reducing data entry and different views for brokers and underwriters

·

Improved user interface for improving productivity

·

Custom and complex rating algorithm

·

Custom or branded document generation capability

·

Rapid development of new products and changes in existing products

·

Better audit support for compliance checks


My Insurance Center – Functional Capabilities

We have, through MIC, a deep inventory of insurance software components combined with a sophisticated implementation platform.  MIC includes the following critical components:

·

My Insurance Center Portal

·

Enterprise, Customer-centric Oracle database

·

Underwriting Tools

·

End User access to information in real time – Straight-Through-Processing

·

Rating and Issuance

·

Full policy lifecycle support

·

Clear and comprehensive data collection with extensive real time edits

·

Policy history – easy policy changes and useful for activities such as coverage inquiries

·

On-line system, screen and field level look-ups

·

On-line Commercial Lines Manual Tables and Footnotes

·

Easy and direct system navigation

·

Standard ISO (Insurance Service Office)/NCCI coverages and rates support



  

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·

Company customized coverages and rates support

·

Fully automated recipient-driven issuance of insurance policies, worksheets, ID cards, etc., including print preview

·

Policy database

·

Multiple company/program/state/coverage support

·

Templates to reduce data entry time

·

Advanced Billing Capabilities – integrating with NetSuite

·

Claims Repository

·

Customer Relationship Management

·

Agency and Program Management

·

Advanced Administration Tools

·

Access to Web Services and Information Providers

·

Policy Dashboard – premium & loss information

·

Advanced Workflows, Diaries

·

Electronic Underwriting files

·

Compliance Assist, Help Desk

·

Interfaces to “back end” accounting and reporting systems

·

Policy-level Premium and Loss Information for profitability tracking/accounting

·

Quote, Binder, Policy Lifecycle support


We continue to utilize and expand these capabilities to expand and leverage our ability to respond to broadening marketplace and new customer opportunities with solutions that address the special needs of carriers, managing general agents, agents, brokers and third party providers with both off-the-shelf and custom solutions.

We are also increasing and enhancing our services portfolio.  We have expanded our professional services with conversion and interface offerings.  We developed new rules-based capabilities to enable us to implement data exchange services that will save our customers time and effort converting to our products or linking our products to existing systems.  We also have developed a “custom” service offering for customers who desire specially-tailored services, service level agreements and other services that enable them to achieve their business objectives.

In 2007, we extended MIC capabilities by acquiring and integrating the application processing functionality of the brokerage application processing platform of InsureHiTech, a specialty wholesale insurance brokerage for hedge funds, private equity, technology and life science companies.

Our business-focused approach allows customers to accelerate their time to market, solve ongoing business challenges and achieve sustainable competitive advantages during periods of economic uncertainty.

COMPETITION

The computer software and services industry is highly competitive and rapidly changing, as current competitors expand their product offerings and new companies enter the marketplace.  Because of our extensive knowledge-base in the insurance industry, however, we believe that our products offer customers certain advantages not available from our competitors.  Our customers have access to our extensive experience and software inventory in the area of rating and policy issuance of commercial lines policies, among the most complex of insurance transactions.

There are a number of larger companies, including computer software, services and outsourcing companies, consulting firms, computer manufacturers and insurance companies that have greater financial resources than we have and possess the technological ability to develop software products similar to those we offer.  These companies represent a significant competitive challenge to our business.  Very large insurers that internally develop systems similar to ours may or may not become our major customers for software or services.  We compete on the basis of our insurance knowledge, products, service, price, system functionality and performance and technological advances.

MARKETING

We maintain an in-house sales and marketing staff. We also utilize distributors, outside consultants and other complimentary service providers to market our products.  We redesigned our Internet site and established linkages to portals



  

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and other websites.  We will continue to expand in 2010 as we focus on the Internet as a valuable source of information for current and potential customers interested in our products and services.  We also participate in, display and demonstrate our software products at industry trade shows.  Our consulting staff, business partners and other third parties also generate sales leads.  We also communicate with our existing customers in a variety of ways including an annual Customer Conference.

RESEARCH AND DEVELOPMENT

Our business is characterized by rapid business and technological change.  We believe our success will depend, in part, on our ability to meet the new needs of our customers and the marketplace as well as continuing to enhance our products based on new technologies.  Accordingly, we must maintain ongoing research and development programs to continually add value to our suite of products, as well as any possible expansion of our product lines.

Our goal with all of our products and services is to enhance the ease of implementation, functionality, long-term flexibility and the ability to provide improved customer service.

Research and development expenses were $891,000, $1,035,000 and $510,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

INTELLECTUAL PROPERTY

We currently have no patents or patent applications pending.  We rely on a combination of trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights.

BACKLOG

We had no license, maintenance, professional services or ASP backlog of unbilled work as of December 31, 2009.

MAJOR CUSTOMERS

Our product line is in use in over 35 companies.  For the years ended December 31, 2009, 2008 and 2007, we had four, three and two customers who contributed revenues in excess of 10% of our total revenues for the respective years.  One customer, a unit of American International Group, Inc. (“AIG”), generated approximately 15%, 15% and 19% of our revenues for the years ended December 31, 2009, 2008 and 2007, respectively.  One other customer, a second unit of AIG, generated approximately 12%, 17% and 25% of our revenue for the years ended December 31, 2009, 2008 and 2007, respectively, and one other customer, a third unit of AIG, generated approximately 6% and 27% of our revenue for the years ended December 31, 2009 and 2008, respectively.  Two other customers, neither of which are units of AIG, generated approximately 15% and 11% of our revenues for the year ended December 31, 2009.

Our customer relationship with AIG is governed by a Master Agreement for Software License & Support Services and Professional Services (the “Master Agreement”) which we entered into with an affiliate of AIG.  The grant of any particular software license to any unit of AIG referred above and the provision of any particular support services or professional services are subject to the entry into of separate arrangements with such unit of AIG pursuant to the Master Agreement, including Client Services Addenda and work orders.  We entered into a separate Client Services Addendum with each of the three units of AIG, respectively.  As amended, the Master Agreement and the Client Services Addenda for the second and third of the AIG units referred to above each have a term until September 30, 2012 and will automatically renew for successive one-year terms unless a party delivers a written notice of non-renewal to the other party at least 180 days prior to the expiration of the then current term.  The Client Services Addendum for the first of the AIG units referred to above has a term until March 31, 2010 and, unless the parties mutually agree otherwise, is subject to renewal or non-renewal seven months prior to the expiration date.

The Master Agreement contains the general terms and conditions for us to grant software licenses and provide support services and professional services to the AIG customers.  The related Client Services Addenda and work orders with respect to each of the three units of AIG constitute three separate and independent contractual arrangements, as the Client Services Addenda with the respective units of AIG cover different customers, different software and service components and different fees and payment structures.  There is no cross-default provision in any of these Client Services Addenda, and each of them can be terminated individually without affecting the term of the remaining ones.  Under these arrangements, none of the three units of AIG has any obligation to continue to purchase any additional software license or professional services



  

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from us without a separate agreement between us and the applicable unit of AIG.  Each of the three units of AIG, however, has the obligation to continue to purchase our support services (which include our ASP services) during the applicable contractual term with such unit of AIG.  For the year ended December 31, 2009, the revenues we generated from such continuing support services (including our ASP services) for the three units of AIG represented approximately 11%, 5% and 4%, respectively, of our total revenues, and the total revenues we generated from the three units of AIG represented approximately 15%, 11% and 6%, respectively, of our total revenues.

EMPLOYEES

We had 48 employees, all of whom were full-time employees, as of December 31, 2009.  None of our employees are represented by a labor union, and we have not experienced any work stoppages.  We believe that relations with our employees are good.

AVAILABLE INFORMATION

We are subject to the reporting requirements of the Exchange Act, and the rules and regulations promulgated thereunder, and accordingly file reports, information statements or other information with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, reports of current events on Form 8-K and proxy or information statements.  The public may read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Our website address is www.cover-all.com.  We make available, free of charge, through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.  The information on our website is not incorporated by reference into this report.



  

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ITEM 1A. RISK FACTORS

RISK FACTORS

In addition to the other information described elsewhere in this Annual Report, you should carefully consider the following risk factors, which could materially adversely affect our business, financial condition and results of  operations. The risks described below are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, financial condition and results of operations.

RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY

While we were profitable in 2009, 2008 and 2007, we incurred losses in 2006 and 2005.  Our earnings are volatile, and we may not be profitable in the future.

We incurred a loss of $1,000,000 in 2006 and $1,434,000 in 2005.  Although we generated net income of approximately $3,917,000 in 2009, $4,556,000 in 2008 and $1,231,000 in 2007, there is no assurance that we will be able to maintain profitability in the future.  Our ability to invest in sales and marketing programs, to expand and upgrade our technology infrastructure and to fund our research and development efforts will depend on existing cash balances and our ability to generate cash in the future.  This, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control.  If we are unable to achieve or maintain profitability in the future, we may be unable to fund our liquidity needs.

We may need additional financing in order to continue to develop our business.

We may need additional financing to continue to fund the research and development of our software products and to expand and grow our business generally.  To the extent that we will be required to fund operating losses, our financial position would deteriorate.  If equity securities are issued in connection with a financing, dilution to our stockholders may result, and if additional funds are raised through the incurrence of debt, we may be subject to further restrictions on our operations and finances.  Furthermore, if we do incur additional debt, we may be limiting our ability to repurchase capital stock, engage in mergers, consolidations, acquisitions and asset sales, or alter our lines of business, even though these actions might otherwise benefit our business. As of December 31, 2009, we had net stockholders’ equity of approximately $11,502,000 and net working capital of approximately $7,232,000.

We depend on product development in order to remain competitive in our industry.

We are currently investing resources in product development and expect to continue to do so in the future.  Our future success will depend on our ability to continue to enhance our current product line and to continue to develop and introduce new products that keep pace with competitive product introductions and technological developments, satisfy diverse and evolving insurance industry requirements and otherwise achieve market acceptance.  We may not be successful in continuing to develop and market, on a timely and cost-effective basis, product enhancements or new products that respond to technological advances by others.  In addition, we have in the past experienced delays in the development, introduction and marketing of new and enhanced products, and we may experience similar delays in the future.  Any failure by us to anticipate or respond adequately to changes in technology and insurance industry preferences, or any significant delays in product development or introduction, would significantly and adversely affect our business, operating results and financial condition.

Our products may not achieve market acceptance, which may make it difficult for us to compete.

Our future success will depend upon our ability to increase the number of insurance companies that license our software products.  As a result of the intense competition in our industry and the rapid technological changes which characterize it, our products may not achieve significant market acceptance.  Further, insurance companies are typically characterized by slow decision-making and numerous bureaucratic and institutional obstacles which will make our efforts to significantly expand our customer base difficult.




  

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We depend on key personnel.

Our success depends to a significant extent upon a limited number of members of senior management and other key employees, including John W. Roblin, our Chief Executive Officer, Manish D. Shah, our President and Chief Technology Officer, and Maryanne Gallagher, our Executive Vice President and Chief Operating Officer.  We maintain key man life insurance on Mr. Roblin, Mr. Shah and Ms. Gallagher in the amount of $1,000,000 per individual.  The loss of the service of one or more key managers or other key employees could have a significant and adverse effect upon our business, operating results or financial condition.  In addition, we believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled technical, management, sales and marketing personnel.  Competition for such personnel in the computer software industry is intense.  We may not be succes sful in attracting and retaining such personnel, and the failure to do so could have a material adverse effect on our business, operating results or financial condition.

Our products are affected by rapid technological change and we may not be able to keep up with these changes.

The demand for our products is impacted by rapid technological advances, evolving industry standards in computer hardware and software technology, changing insurance industry requirements and frequent new product introductions and enhancements that address the evolving needs of the insurance industry.  The process of developing software products such as those we offer is extremely complex and is expected to become increasingly complex and expensive in the future with the introduction of new platforms and technologies.  The introduction of products embodying new technologies and the emergence of new industry standards and practices can render existing products obsolete and unmarketable.  Our future success depends upon our ability to anticipate or respond to technological advances, emerging industry standards and practices in a timely and cost-effective manner.  We may not be successful in developin g and marketing new products or enhancements to existing products that respond to technological changes or evolving industry standards.  The failure to respond successfully to these changes and evolving standards on a timely basis, or at all, could have a detrimental effect on our business, operating results and financial condition.

Our market is highly competitive.

Both the computer software and the insurance software systems industries are highly competitive.  There are a number of larger companies, including computer manufacturers, computer service and software companies and insurance companies, that have greater financial resources than we have.  These companies currently offer and have the technological ability to develop software products similar to those offered by us.  These companies present a significant competitive challenge to our business.  Because we do not have the same financial resources as these competitors, we may have a difficult time in the future in competing with these companies.  In addition, very large insurers internally develop systems similar to our systems and as a result, they may not become customers of our software.  We compete on the basis of our insurance knowledge, products, service, price, system functionality and performance and technological advances.  Although we believe we can continue to compete on the basis of these factors, some of our current competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do.  Our current competitors may be able to:

·

undertake more extensive marketing campaigns for their brands and services;

·

devote more resources to product development;

·

adopt more aggressive pricing policies; and

·

make more attractive offers to potential employees and third-party service providers.


We depend upon proprietary technology and we are subject to the risk of third party claims of infringement.

Our success and ability to compete depends in part upon our proprietary software technology.  We also rely on certain software that we license from others.  We rely on a combination of trade secret, copyright and trademark laws, nondisclosure and other contractual agreements and technical measures to protect our proprietary rights.  We currently have no patents or patent applications pending.  Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.  The steps we take to protect our proprietary technology may not prevent misappropriation of our technology, and this protection may not stop competitors from developing products which function or have features similar to our products.

While we believe that our products and trademarks do not infringe upon the proprietary rights of third parties, third parties may claim that our products infringe, or may infringe, upon their proprietary rights.  Any infringement claims, with or



  

8





without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, cause product shipment delays or require us to develop non-infringing technology or enter into royalty or licensing agreements.  Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all.  If a claim of product infringement against us is successful and we fail or are unable to develop non-infringing technology or license the infringed or similar technology, our business, operating results and financial condition could be significantly and adversely affected.

We depend on existing major customers, and the loss of one or more of which could have a material adverse effect on our results of operations and financial condition.

In 2009, 2008 and 2007, our software products operations depended primarily on certain existing major customers.  One of these major customers, a unit of AIG, accounted for approximately 15%, 15% and 19% of our total revenues in 2009, 2008 and 2007, respectively.  One other major customer, a second unit of AIG, accounted for approximately 12%, 17% and 25% of our total revenues in 2009, 2008 and 2007, respectively.  The other customer, a third unit of AIG, generated approximately 6% and 27% of our total revenues for the years ended December 31, 2009 and 2008, respectively.  Two other customers, neither of which are units of AIG, generated approximately 15% and 11% of our revenues in 2009.  We anticipate that our operations will continue to depend upon the continuing business of our existing customers, particularly the major customers, and the ability to attract new customers.  Our contractual arrangements with these units of AIG, however, do not obligate any of them to continue to purchase from us any additional software license or professional services.  Each of the three units of AIG has the obligation to continue to purchase our support services (which include our ASP services) during the applicable contractual term with such unit.  The term with respect to our contractual arrangement to provide these services to the first of the AIG units referred to above will expire on March 31, 2010 and, unless the parties mutually agree otherwise, is subject to renewal or non-renewal seven months prior to the expiration date.  The term with respect to our contractual arrangement to provide these services to the remaining two units of AIG will expire on September 30, 2012 and will automatically renew for successive one-year terms unless a party delivers a written notice of non-renewal to the other party at least 180 days prior to the expiration of the then current term.  For the year ended December 31, 2009, the revenues we generated from such continuing support services (including our ASP services) for the three units of AIG represented approximately 11%, 5% and 4%, respectively, of our total revenues, and the total revenues we generated from the three units of AIG represented approximately 15%, 11% and 6%, respectively.  See “Business – Major Customers”.  The loss of one or more of our existing major customers or our inability to continue to attract new customers could significantly and adversely affect our business, operating results and financial condition.

A decline in computer software spending may result in a decrease in our revenues or lower our growth rate.

A decline in the demand for computer software among our current and prospective customers may result in decreased revenues or a lower growth rate for us because our sales depend, in part, on our customers’ level of funding for new or additional computer software systems and services.  Moreover, demand for our solutions may be reduced by a decline in overall demand for computer software and services.  The current decline in overall technology spending may cause our customers to reduce or eliminate software and services spending and cause price erosion for our solutions, which would substantially affect our sales of new software licenses and the average sales price for these licenses.  Because of these market and economic conditions, we believe there will continue to be uncertainty in the level of demand for our products and services. Accordingly, we cannot assure you that we will be able to increase or maintain our revenues.

We may not get the full benefit of our tax loss carry forwards.

Under the United States Internal Revenue Code, companies that have not been operating profitably are allowed to apply certain of their past losses to offset future taxable income liabilities they may incur once they reach profitability.  These amounts are known as net operating tax loss carryforwards.  At December 31, 2009, we had approximately $16 million of federal net operating tax loss carryforwards expiring at various dates through 2026.  Because of certain provisions of the Tax Reform Act of 1986 related to change of control, however, we may not get the full benefit of these loss carryforwards.  If we are limited from using net operating tax loss carryforwards to offset any of our income, this would increase our taxes owed and reduce our cash for operations.



  

9





RISKS RELATED TO OUR COMMON STOCK

Holders of our common stock may have difficulty in selling those shares.

Our common stock is not traded on any securities exchange.  Our common stock is quoted on the Over-the-Counter (OTC) Bulletin Board.  Securities quoted on the OTC Bulletin Board do not enjoy the same liquidity as securities that trade on a securities exchange.  As a result, you may have difficulty in selling shares of our common stock.  In addition, our common stock is a “penny stock” as that term is defined in the Exchange Act.  Brokers effecting transactions in a “penny stock” are subject to additional customer disclosure and record keeping obligations, including disclosure of the risks associated with low price stocks, stock quote information and broker compensation.  In addition, brokers effecting transactions in a “penny stock” are also subject to additional sales practice requirements under Rule 15g-9 of the Exchange Act including making inquiries into the suitability of “penny stock” investments for each customer or obtaining a prior written agreement for the specific “penny stock” purchase.  Because of these additional obligations, some brokers will not effect transactions in “penny stocks.”

Our stock price has been volatile.

Quarterly operating results have fluctuated and are likely to continue to fluctuate significantly.  The market price of our common stock has been and may continue to be highly volatile.  Factors that are difficult to predict, such as quarterly revenues and operating results, limited trading volumes and overall market performance, will have a significant effect on the price of our common stock.  Revenues and operating results have varied considerably in the past from period to period and are likely to vary considerably in the future.  We plan product development and other expenses based on anticipated future revenue. If revenue falls below expectations, financial performance is likely to be adversely affected because only small portions of expenses vary with revenue.  As a result, period-to-period comparisons of operating results are not necessarily meaningful and should not be relied upon to predict future performance.

Our shares are subject to dilution as a result of the exercise of our warrants.

An aggregate of 100,000 warrants, expiring in 2011, to purchase such number of shares of our common stock were outstanding as of December 31, 2009 and are currently exercisable at a price of $0.35 per share.  The current exercise price of these warrants is subject to adjustment if we issue or sell additional shares of our common stock for less than 95% of the market price on the date of issuance or sale, in which case the exercise price will be reduced to a new exercise price in accordance with the terms of the warrants.  Pursuant to the terms of these warrants, the issuance or sale of additional shares of common stock resulting from the exercise of stock options to be granted in the future to employees or directors pursuant to our existing stock option plans outstanding on the date of the warrant will not trigger any adjustment to the exercise price of the warrants.  The issuance of any additional shares of our common stock as a consequence of the exercise of any of the warrants may result in significant dilution to our stockholders and may depress the market price of our common stock.  Further, if the exercise price of the warrants is adjusted, the additional shares of our common stock that would be issued upon exercise of the warrants as a result of such adjustment may also result in significant dilution to our stockholders.

Provisions of our certificate of incorporation, as amended, and by-laws and Delaware law might discourage, delay or prevent a change of control of or changes in our management and, as a result, depress the trading price of our common stock.

Our certificate of incorporation, as amended (the “Certificate of Incorporation”), and by-laws contain provisions that could discourage, delay or prevent a change in control or changes in our management that our stockholders may deem advantageous.  These provisions:

·

require super-majority voting to amend some provisions in our Certificate of Incorporation and by-laws;

·

establish a staggered board of directors;

·

limit the ability of our stockholders to call special meetings of stockholders;

·

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

·

provide that the board of directors is expressly authorized to make, alter or repeal our by-laws; and

·

establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.



  

10






In addition, we are subject to Section 203 of the Delaware General Corporation Law, which, subject to some exceptions, prohibits “business combinations” between a Delaware corporation and an “interested stockholder,” which is generally defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year period following the date that the stockholder became an interested stockholder.  Section 203 could have the effect of delaying, deferring or preventing a change in control that our stockholders might consider to be in their best interests.

These anti-takeover defenses could discourage, delay or prevent a transaction involving a change in control.  These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.

We may not pay any cash dividends on our common stock.

Declaration and payment of any dividend on our common stock is subject to the discretion of our board of directors.  The timing and amount of dividend payments will be dependent upon factors such as our earnings, financial condition, cash requirements and availability, and restrictions in our credit facilities.  While we paid a special cash dividend on April 7, 2009, the payment of future dividends is not guaranteed or assured.  Accordingly, it is likely that investors may have to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.  

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our headquarters is located in Fairfield, New Jersey, where we occupy approximately 20,000 square feet under a lease that expires at October 31, 2012.  Currently, we fully utilize this facility.  We believe that our headquarters is well maintained and adequate to meet our needs in the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

We are not involved in any legal proceedings, nor are we aware of any proceedings that are pending or threatened which may have a significant effect on our business, financial position, results of operations or liquidity.

ITEM 4. [RESERVED]




  

11





PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK

Our common stock is quoted on the OTC Bulletin Board.  The quotations below reflect the high and low bid prices for our common stock since January 1, 2008 as reported on the OTC Bulletin Board.  The quotations below reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

2009:

High

Low

4th Quarter

$1.45

$0.95

3rd Quarter

1.40

0.95

2nd Quarter

1.10

0.70

1st Quarter

1.33

0.66

 



2008:

High

Low

4th Quarter

$1.15

$0.65

3rd Quarter

1.20

0.72

2nd Quarter

1.22

0.76

1st Quarter

1.38

0.95

 

 

 

As of March 11, 2010, there were 462 holders of record of our common stock.  This number does not include beneficial owners who may hold their shares in street name.

On February 17, 2009, we announced that our board of directors declared a special cash dividend in the amount of $0.03 per share on our common stock.  This dividend was paid on April 7, 2009 to common stockholders of record as of the close of business on March 27, 2009.  Since 1994, we have not otherwise declared or paid any dividends on our common stock.  Our board of directors will review its dividend policy from time to time and will take into account prevailing market conditions and our anticipated uses of cash.

The closing sales price for our common stock on March 11, 2010 was $1.21, as reported by the OTC Bulletin Board.



  

12





PERFORMANCE GRAPH


The graph below compares the cumulative total stockholder returns (including reinvestment of dividends) from the period from December 31, 2004 through December 31, 2009 on an investment of $100 in (i) our common stock, (ii) the Russell MicroCap Index (an index of microcap companies), (iii) an index of peer companies selected by us and used in last year’s Annual Report on Form 10-K (the “Old Peer Group”), and (iv) a new index of peer companies selected by us (the “New Peer Group”), as described below. You should be aware that historical results are not necessarily indicative of future performance.

We have selected the Russell MicroCap Index for comparative purposes.  We believe that, given our current size of operations and market capitalization, the Russell MicroCap Index, which measures the performance of stocks in the micro-cap segment of the U.S. equity securities market, provides an appropriate benchmark against which to measure our stock performance.

The New Peer Group consists of Computer Sciences Corporation, Ebix Inc., Pegasystems Inc. and Sapient Corp.  The Old Peer Group consists of Computer Sciences Corporation, Ebix Inc., Pegasystems Inc. and Forgehouse Inc.  We replaced Forgehouse Inc. with Sapient Corp. in the New Peer Group because we believe that Sapient provides a more meaningful comparison to our business.    




COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among Cover-All Technologies Inc., the Russell MicroCap Index, the New Peer Group and the Old Peer Group



 

December 31,

 

2004

2005

2006

2007

2008

2009

Cover-All Technologies Inc.

$100.00

$  85.94

$123.44

$215.63

$140.63

$180.83

Russell MicroCap Index

$100.00

$102.57

$119.53

$109.97

$  66.23

$  84.42

New Peer Group

$100.00

$  88.42

$  93.49

$  93.02

$  65.92

$115.16

Old Peer Group

$100.00

$  89.89

$  95.65

$  91.01

$  66.96

$116.12


  

13






ITEM 6. SELECTED FINANCIAL DATA

The following selected historical financial information as of December 31, 2009 and 2008, and for each of the years ended December 31, 2009, 2008 and 2007, have been derived from and should be read in conjunction with our audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.  The selected historical consolidated financial information as of December 31, 2007, 2006 and 2005 and for the years ended December 31, 2006 and 2005 have been derived from our audited consolidated financial statements which are not included in this report.

Selected Five-Year Consolidated Financial Data

The following is a summary of selected five-year consolidated financial data as of and for the years ended December 31, 2009, 2008, 2007, 2006 and 2005:

 

Year ended December 31,

 

2009

2008

2007

2006

2005

Statement of Operations Data:

 (in thousands, except per share amounts)

Revenues

$   14,515

$   13,467

$    9,777

$    7,288

$    7,255

Income (loss) before income tax

      3,335

      2,904

      1,245

     (1,000)

     (1,434)

Net income (loss)

      3,917 (1)

      4,556 (2)

      1,231

     (1,000)

     (1,434)

Net income (loss) per share – basic

        0.16

        0.19

       0.06

      (0.06)

      (0.09)

Net income (loss) per share – diluted

        0.16

        0.19

       0.05

      (0.06)

      (0.09)

Cash dividends per share

$      0.03

$        —

$       —

$        —

$        —

 

 

As of December 31,

 

2009

2008

2007

2006

2005

Balance Sheet Data:

 (in thousands)

Cash and cash equivalents

$    4,324

$    4,686

$        11

$       132

$      296       

Working capital (deficiency)

      7,232

      4,806

        545

        (898)

      (237)

Total assets

    14,999

    11,039

     5,864

      3,556

     4,677   

Short-term debt

         —

         —

        262

         339

        247    

Long-term debt

         —

         —

         —

      1,708

     1,927    

Stockholders’ equity (deficit)

    11,502

      7,804

     2,285

     (1,024)

      (265)    

____________________

(1)

Net income for the year ended December 31, 2009 included a deferred income tax benefit of $0.8 million
as a result of the Company’s reversal of a portion of its Deferred Tax Asset valuation allowance.

(2)

Net income for the year ended December 31, 2008 included a deferred income tax benefit of $1.7 million as a result of the Company’s reversal of a portion of its Deferred Tax Asset valuation allowance.




  

14






Selected Quarterly Financial Data (Unaudited)

The following is a summary of selected quarterly financial data for the years ended December 31, 2009 and 2008:

 

2009

 

Q1

Q2

Q3

Q4

 

(in thousands, except per share amounts)

Total revenues

 $ 3,055

 $ 2,739

 $ 2,550

 $ 6,171

Operating income

  4.22

  175

  63

  2,624

Net income

  435

  194

  21

  3,267

Basic earnings per common share

 $   0.02

 $   0.01

 $   0.00

 $   0.13

Diluted earnings per common share

 $   0.02

 $   0.01

 $   0.00

 $   0.13

 

 

 

2008

 

Q1

Q2

Q3

Q4

 

 (in thousands, except per share amounts)

Total revenues

 $ 2,996

 $ 2,510

 $ 4,791

 $ 3,170

Operating income

  568

  287

  1,676

  286

Net income

  580

  292

  1,694

  1,990

Basic earnings per common share

 $   0.02

 $   0.01

 $   0.07

 $   0.08

Diluted earnings per common share

 $   0.02

 $   0.01

 $   0.07

 $   0.08




  

15






ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

2009 OVERVIEW

We are a supplier of software products for the property and casualty insurance industry, supplying a wide range of professional services that support product customization, conversion from existing systems and data integration with other software or reporting agencies.  We also offer on-going support services including incorporating recent insurance rate and rule changes in our solutions.  These support services also include analyzing the changes, developments, quality assurance, documentation and distribution of insurance rate and rule changes.

We earn revenue from software contract licenses, ASP service fees, continuing maintenance fees for servicing the product and professional services.  Total revenue in 2009 increased to $14,515,000 from $13,467,000 in 2008, due to an increase in all license, maintenance and ASP revenue.  

The following is an overview of the key components of our revenue and other important financial data in 2009:

Software Licenses.  We signed three new contracts in 2009. The increase in license revenue, to $4,138,000 in 2009 from $3,802,000 in 2008, was mainly a result of these three new contracts and sales to existing customers in 2009.  In 2009 our growth in license revenue was 9%.  Our new software license revenue is affected by the strength of general economic and business conditions and the competitive position of our software products.  New software license sales are characterized by long sales cycles and intense competition.  Timing of new software license sales can substantially affect our quarterly results.

Maintenance.  Maintenance revenue was $4,987,000 in 2009 compared to $4,151,000 in 2008.  The increase in maintenance revenue in 2009 was mainly due to the annual renewal of existing customers’ maintenance and maintenance from new customer contracts signed in 2008.  Maintenance revenue is influenced primarily by the following factors: the renewal rate from our existing customer base, the amount of new maintenance associated with new license sales and annual price increases.

Professional Services.  The decrease in professional services revenue, to $3,282,000 in 2009 from $3,477,000 in 2008, was a result of decreased demand for new software capabilities and customizations from our current customer base and no significant customization related to new license sales in 2009.  The three new contracts were signed in the later part of 2009 and are expected to generate professional services in 2010.  

ASP Services.  ASP services revenue was $2,108,000 in 2009 compared to $2,037,000 in 2008, due to expanded and extended contractual relationships with two large customers.

Income before Provision for Income Taxes.  Income before provision for income taxes was $3,335,000 in 2009 compared to $2,876,000 in 2008, primarily due to an increase in all license, maintenance and ASP revenue and our continuing and ongoing effort to maintain our expenses in the line with revenues in 2009.  Our growth in revenue of 8% exceeded our growth in expenses of 5%.

Income Tax Benefit.  We recorded income taxes of $205,000 in 2009 which is comprised of New Jersey state tax and Federal alternative minimum tax.  We also recorded an income tax benefit of $787,000 in 2009.

Net Income.  Net income for 2009 was $3,917,000 compared to $4,556,000 in 2008, mainly as a result of a decrease in our Deferred Tax Asset valuation allowance.  Our growth in revenue of 8% exceeded our growth in expenses of 5%.

Cash Flow.  We generated $1,764,000 in positive cash flow from operations in 2009 and ended the year with $4,324,000 in cash and cash equivalents and $5,086,000 in accounts receivable.

We continue to face competition for growth in 2010 mainly in the marketing and selling of our products and services to new customers, caused by a number of factors, including long sales cycles and general economic and business conditions.  In addition, there are risks related to customers’ acceptance and implementation delays which could affect the timing and amount of license revenue we are able to recognize.  However, given the positive response to our new software from existing customers, the significant expansion of our relationship with a very large customer and the introduction of additional



  

16





software capabilities, we are expanding our sales and marketing efforts to both new and existing customers.  Consequently, we continue to incur additional sales and marketing expense in advance of generating the corresponding revenue.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements that have been prepared under accounting principles generally accepted in the United States.  The preparation of financial statements requires our management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.  Actual results could materially differ from those estimates.  We have disclosed all significant accounting policies in Note 1 to the consolidated financial statements included in this annual report on Form 10-K.  The consolidated financial statements and the related notes thereto should be read in conjunction with the following discussion of our critical accounting policies.  Critical accounting policies and estimates are:

·

Revenue Recognition

·

Valuation of Capitalized Software

·

Valuation of Allowance for Doubtful Accounts Receivable


Revenue Recognition

Revenue recognition rules are very complex, and certain judgments affect the application of our revenue policy.  The amount and timing of our revenue is difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter.  In addition to determining our results of operations for a given period, our revenue recognition determines the timing of certain expenses, such as commissions, royalties and other variable expenses.

Our revenues are recognized in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 986-605, “Software Revenue Recognition,” as amended.  Revenue from the sale of software licenses is predominately from standardized software and is recognized when standard software modules are delivered and accepted by the customer, the license term has begun, the fee is fixed or determinable and collectibility is probable.  Revenue from software maintenance contracts and ASP services is recognized ratably over the life of the contract.  Revenue from professional consulting services is recognized when the service is provided.

Amounts invoiced to our customers in excess of recognized revenues are recorded as deferred revenues.  The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues in any given period.

Our revenue is derived from the licensing of our software products, professional services, maintenance and support and ASP services.  We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.

License Revenue

We recognize our license revenue upon delivery, provided collection is determined to be probable and no significant obligations remain.

Services and Support Revenue

Our services and support revenue is composed of professional services (such as consulting services and training) and maintenance and support and ASP services.  Our professional services revenue is recognized when the services are performed.  Our maintenance and support and ASP offerings are recognized ratably over the term of the arrangement.

Multiple Element Arrangement

We enter into revenue arrangements in which a customer may purchase a combination of software, maintenance and support, and professional services (multiple-element arrangements).  When vendor-specific objective evidence (“VSOE”) of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the



  

17





elements.  VSOE of fair value is established by the price charged when that element is sold separately.  For maintenance and support, VSOE of fair value is established by renewal rates when they are sold separately.  For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.

Valuation of Capitalized Software

Costs for the conceptual formulation and design of new software products are expensed as incurred until technological feasibility has been established.  Once technological feasibility has been established, we capitalize costs to produce the finished software products.  Capitalization ceases when the product is available for general release to customers.  Costs associated with product enhancements that extend the original product’s life or significantly improve the original product’s marketability are also capitalized once technological feasibility has been established.  Amortization is calculated on a product-by-product basis as the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic life of the product.  At each balance sheet date, the unamortized capitalized costs of each computer software product is compared to the net realizable value of that product.  If an amount of unamortized capitalized costs of a computer software product is found to exceed the net realizable value of that asset, such amount will be written off.  The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and deploying that product, including the costs of performing maintenance and customer support required to satisfy our responsibility set forth at the time of sale.

Valuation of Allowance for Doubtful Accounts Receivable

Our estimate of the allowance for doubtful accounts is based on historical information, historical loss levels and an analysis of the collectibility of individual accounts.  We routinely assess the financial strength of our customers and, based upon factors concerning credit risk, establish an allowance for uncollectible accounts.  We believe that accounts receivable credit risk exposure beyond such allowance is limited.



  

18





RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items from the consolidated statements of operations expressed as a percentage of total revenues:

 

Year Ended December 31,

 

2009

2008

2007

Revenues:




License

28.5%

28.2%

27.4%

Maintenance

34.4

30.8

32.8

Professional Services

22.6

25.8

23.7

Applications Service Provider (“ASP”) Services

14.5

15.2

16.1

Total Revenues

100.0

100.0

100.0

 




Cost of Revenues:




License

12.5

13.6

11.7

Maintenance

18.5

18.4

28.6

Professional Services

10.9

11.1

13.1

ASP Services

11.6

9.9

4.8

Total Cost of Revenues

53.5

53.0

58.2

Direct Margin

46.5

47.0

41.8

 




Operating Expenses:




Sales and Marketing

6.3

6.6

8.2

General and Administrative

11.5

11.6

14.7

Research and Development

6.1

7.7

5.2

Provision for Doubtful Accounts

0.2

0.5

Total Operating Expenses

23.9

26.1

28.6

 

 

 

 

Operating Income

22.6

20.9

13.2

 




Other (Income) Expense:




Interest Expense

0.1

0.5

Interest Expense - Related Party

0.1

Interest Income

(0.1)

(0.2)

Other Expense

Other Income

(0.3)

(0.3)

Total Other (Income) Expense

(0.4)

(0.4)

0.6

 

 

 

 

Income Before Income Taxes

23.0

21.3

12.6

 




Income Tax Benefit:

4.0

12.5

 




Net Income

27.0%

33.8%

12.6%


YEAR ENDED DECEMBER 31, 2009 COMPARED WITH YEAR ENDED DECEMBER 31, 2008

Revenues

Total revenues were $14,515,000 for the year ended December 31, 2009 compared to $13,467,000 for the year ended December 31, 2008, an increase of 8%.  License fees were $4,138,000 for the year ended December 31, 2009 compared to $3,802,000 in 2008, an increase of 9%, as a result of three new license sales and sales to existing customers in 2009.  For the year ended December 31, 2009, maintenance revenues were $4,987,000 compared to $4,151,000 of the prior year, due to the annual renewal of existing customers’ maintenance and maintenance from new customer contracts signed in 2008.  Professional services revenue contributed $3,282,000 for the year ended December 31, 2009 compared to $3,477,000 for the year ended December 31, 2008 as a result of decreased demand for new software capabilities and customizations from



  

19





our two new customers signed in 2009 and our current customer base.  We expect that the new license sales in 2009 will generate significant additional professional services revenue in 2010.  ASP revenues were $2,108,000 for the year ended December 31, 2009 compared to $2,037,000 for the year ended December 31, 2008 due primarily to an expanded and extended contractual relationship with two large customers.

Cost of sales increased to $7,760,000 for the year ended December 31, 2009 as compared to $7,145,000 for 2008, due to higher salaries and personnel-related expenses associated with staffing changes.  Non-cash capitalized software amortization was $917,000 for the year ended December 31, 2009 as compared to $868,000 in 2008.  We capitalized software development costs of $1,411,000 in 2009 compared to $1,136,000 in 2008.

Expenses

Research and Development.  Research and development expenses were $891,000 for the year ended December 31, 2009 compared to $1,035,000 in 2008, primarily due to our research and development staff working on developing various new software capabilities that were capitalized in 2009.  We intend to continue to maintain our ongoing effort to enhance the functionality of our products and solutions to remain competitive.

Sales and Marketing.  Sales and marketing expenses increased to $906,000 for the year ended December 31, 2009 from $883,000 in 2008, primarily due to costs related to our new website and personnel-related costs.

General and Administrative.  General and administrative expenses were $1,674,000 in 2009 as compared to $1,540,000 in 2008.  The increase in the general and administrative expenses was mainly due to the costs of filing a registration statement with the SEC to register the resale of some of our outstanding shares of common stock.

Other Expense.  We had $1,000 of other expense for the year ended December 31, 2009 compared to $0 for the year ended December 31, 2008.  

Other Income.  We had $45,000 of other income for the year ended December 31, 2009 compared to $40,000 of other income for the year ended December 31, 2008.  

Provision for Doubtful Accounts.  We had $0 provision for doubtful accounts in 2009 compared to $21,000 for 2008, due to the write-off of the account receivable balances of two customers who decided not to purchase our software.

Income Tax Benefit.  We recorded income taxes of $205,000 in 2009 which is comprised of New Jersey state tax and Federal alternative minimum tax.  We also recorded an income tax benefit of $787,000 in 2009.

YEAR ENDED DECEMBER 31, 2008 COMPARED WITH YEAR ENDED DECEMBER 31, 2007

Revenues

Total revenues were $13,467,000 for the year ended December 31, 2008 compared to $9,777,000 for the year ended December 31, 2007, an increase of 38%.  License fees were $3,802,000 for the year ended December 31, 2008 compared to $2,683,000 in 2007, an increase of 42%, as a result of one new customer license sale and sales to existing customers in 2008.  For the year ended December 31, 2008, maintenance revenues were $4,151,000 compared to $3,210,000 of the prior year, due to maintenance revenue generated from new customer license sales in 2007 and 2008, additional license sales to existing customers in 2008 and annual contractual increases in 2008.  Professional services revenue contributed $3,477,000 for the year ended December 31, 2008 compared to $2,316,000 for the year ended December 31, 2007 as a result of increased demand for new software capabilities and customizations from our current customer base and customizations related to new customer license sales in 2007 and 2008.  ASP revenues were $2,037,000 for the year ended December 31, 2008 compared to $1,568,000 for the year ended December 31, 2007 due primarily to an expanded and extended contractual relationship with two large customers.

Cost of sales increased to $7,145,000, for the year ended December 31, 2008 as compared to $5,688,000 for 2007, due to salaries and personnel-related expenses and consulting costs associated with additional staffing needs.  Non-cash capitalized software amortization was $868,000 for the year ended December 31, 2008 as compared to $880,000 in 2007.  We capitalized software development costs of $1,136,000 in 2008 compared to $1,084,000 in 2007.



  

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Expenses

Research and Development.  Research and development expenses increased to $1,035,000 for the year ended December 31, 2008 from $510,000 in 2007, primarily due to the need for our research and development staff to work on various new software capabilities for our new and prospective customers.  We intend to continue to maintain our ongoing effort to enhance the functionality of our products and solutions to remain competitive.

Sales and Marketing.  Sales and marketing expenses increased to $883,000 for the year ended December 31, 2008 from $800,000 in 2007, primarily due to commissions related to the new license sales in 2008 and other personnel related costs.

General and Administrative.  General and administrative expenses were $1,540,000 in 2008 as compared to $1,430,000 in 2007.  The increase in the general and administrative expenses was mainly due to stock-based compensation related to options and restricted stock issued to one of our executives and stock-based compensation to our non-employee directors and bonuses based on 2008 results in 2008.  In 2007, the increase in legal fees was related to a potential acquisition.

Other Income.  We had $40,000 of other income for the year ended December 31, 2008 compared to $0 of other income for the year ended December 31, 2007.  In 2008, other income was related to late fees collected from customers and fees from a third party partnering agreement.

Provision for Doubtful Accounts.  We had $21,000 provision for doubtful accounts in 2008 compared to $51,000 for 2007, due to the closing of one customer in Puerto Rico in 2008.

Income Tax Benefit.  We recorded an income tax benefit of $1,653,000 in the fourth quarter of 2008 as a result of our reversal of a portion of our Deferred Tax Asset valuation allowance, and did not record any income tax benefit in 2007.



  

21





LIQUIDITY AND CAPITAL RESOURCES

Sources of Liquidity

We have funded our operations primarily from cash flow from operations.  Cash from operations results primarily from net income from the income statement plus non-cash expenses (depreciation and amortization) and adjusted for changes in working capital from the balance sheet.

Our largest source of operating cash flows is cash collections from our customers following the purchase or renewal of software licenses, product support agreements and other related services.  Payments from customers for software licenses are generally received at the beginning of the contract term.  Payments from customers for product support and ASP services are generally received in advance on a quarterly basis.  Payments for professional services are generally received 30 days after the services are performed.

At December 31, 2009, we had cash and cash equivalents of $4,324,000 compared to cash and cash equivalents of $4,687,000 at December 31, 2008.  The decrease in cash and cash equivalents is primarily attributable to timing of payments due from new contract sales in 2009.  Three new contracts were signed at the end of 2009 for which payment was due in the early part of 2010.

Cash Flows

Our ability to generate cash has depended on a number of different factors, primarily our ability to continue to secure and retain customers and generate new license sales and related product support agreements.  In order to attract new customers and maintain or grow existing revenue streams, we utilize our existing sources of capital to invest in sales and marketing, technology infrastructure and research and development.

Our ability to continue to control expenses, maintain existing revenue streams and anticipate new revenue will impact the amounts and certainty of cash flows.  We intend to maintain our expenses in line with existing revenue streams from maintenance support, ASP services and professional services.

Balance sheet items that should be considered in assessing our liquidity include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable and accrued liabilities.  Income statement items that should be considered in assessing our liquidity include revenue, cost of revenue (net of depreciation and amortization), operating expenses (net of depreciation and amortization) and other expenses.  Statement of cash flows items that should be considered in assessing our liquidity include net cash flows from operating activities, net cash flows from investing activities and net cash flows from financing activities.

In December 31, 2009, we had working capital of $7,232,000 compared to working capital of $4,806,000 at December 31, 2008.  This increase in our working capital resulted primarily from an increase in license, maintenance and ASP revenue in 2009.  Net cash provided from operating activities totaled approximately $1,764,000 in 2009 compared to approximately $5,919,000 in 2008.  In 2009, cash flow from operating activities represented the Company’s principal source of cash and results primarily from net income (loss), less non-cash expense and changes in working capital.  The Company had a significant increase in its accounts receivable in 2008 due to the license sale to one large customer offset by non-cash expenses and payment of liabilities.

In 2009, net cash used for investing activities was approximately $1,413,000 compared to approximately $1,360,000 in 2008.  We expect capital expenditures and capital software expenditures to continue to be funded by cash generated from operations.  We use cash to invest in capital and other assets to support our growth.

In 2009, net cash provided from (used for) financing activities was approximately $(713,000) compared to approximately $116,000 in 2008.  The cash provided from (used for) financing activities in 2009 consisted of dividends paid to common stockholders and proceeds from the exercise of stock options and warrants.  The cash provided from financing activities in 2008 consisted of proceeds from the exercise of stock options and warrants and included the purchase of treasury stock related to our share repurchase plan.



  

22





Funding Requirements

Our primary uses of cash are for personnel-related expenditures, facilities and technology costs.

We do not anticipate any large capital expenditures that will require us to seek new sources of capital.  We lease computer equipment for terms of three years in order to have the latest available technology to serve our customers and develop new products.

On June 18, 2008, we announced that the Board of Directors authorized a share buyback plan of up to 1,000,000 shares of the Company’s common stock, in accordance with Rule 10b-18 of the Exchange Act.

In 2008, the Company purchased an aggregate of 201,870 shares of the Company’s common stock on the open market at an average purchase price of $0.82 per share for a total purchase price of approximately $164,894.

On February 17, 2009, we announced that our board of directors declared a special cash dividend in the amount of $0.03 per share on our common stock.  This dividend was paid on April 7, 2009 to common stockholders of record as of the close of business on March 27, 2009.  The Company also announced that in light of its decision to declare a special cash dividend, the Board of Directors has determined that the Company will suspend its common stock buyback plan until further notice.

We prepare monthly cash flow projections on a rolling twelve-month basis based on a detailed review of anticipated receipts and revenue from licenses, maintenance, ASP and professional services.  We also perform a detailed review of our disbursements, including fixed costs, variable costs, legal costs, payroll costs and other specific payments, on a rolling  twelve-month basis.  

We believe that our current cash balances and anticipated cash flows from operations will be sufficient to meet our normal operating needs for at least the next twelve months.  We do not anticipate any material changes in our sources of and needs for capital.  Our ability to fund our working capital needs and address planned capital expenditures will depend on our ability to generate cash in the future.  We anticipate generating future working capital through sales to new customers and continued sales and services to our existing customers.

Our future liquidity and capital resource requirements will depend on many factors, including but not limited to the following trends and uncertainties we face:

·

Our ability to generate cash is subject to general economic, financial, competitive and other factors beyond its control.

·

Our need to invest resources in product development in order to continue to enhance our current product, develop new products, attract and retain customers and keep pace with competitive product introductions and technological developments.

·

We experience intense competition in our industry and continuing technological changes.

·

Insurance companies typically are slow in making decisions and have numerous bureaucratic and institutional obstacles, which can make our efforts to attain new customers difficult.

·

We compete with a number of larger companies who have greater resources than those of ours.  We compete on the basis of insurance knowledge, products, services, price, technological advances and system functionality and performance.

·

Our operations depend upon the continuing business of our existing customers and our ability to attract new customers.

·

A decline in software spending in the insurance industry could result in a decrease in our revenue.


Material risks to cash flow from operations include delayed or reduced cash payments accompanying sales of new licenses or a decline in our services business.  There can be no assurance that changes in our plans or other events affecting our operations will not result in materially accelerated or unexpected expenditures.

We do not expect for there to be a change in the mix or relative cost of our sources of capital.



  

23





Net Operating Tax Loss Carryforwards

At December 31, 2009, we had approximately $16,000,000 of federal net operating tax loss carryforwards expiring at various dates through 2026.  The Tax Reform Act of 1986 enacted a complex set of rules which limits a company’s ability to utilize net operating tax loss carryforwards and tax credit carryforwards in periods following an ownership change.  These rules define ownership change as a greater than 50 percent point change in stock ownership within a defined testing period, which is generally a three-year period.  As a result of stock which may be issued by us from time to time or the result of other changes in ownership of our outstanding stock, we may experience an ownership change and consequently our utilization of net operating tax loss carryforwards could be significantly limited.

CONTRACTUAL OBLIGATIONS

The following table summarizes our significant contractual obligations at December 31, 2009:

Payments due by period

(in thousands)


Contractual Obligations

       Total

  Less than
  1 Year

        1-3
        Years

        3-5
        Years

 More
 than
 5 Years

Operating Leases

$  1,360

$  502

$  858

$  —

$  —

Total

$  1,360

$  502

$  858

$  —

$  —


We lease one facility in Fairfield, New Jersey, which lease expires at October 31, 2012.  We also lease various telephone and computer equipment.

OFF-BALANCE-SHEET ARRANGEMENTS

During the fiscal year ended December 31, 2009, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K promulgated under the Exchange Act.

RECENTLY ISSUED ACCOUNTING STANDARDS

On July 1, 2009, the FASB issued an accounting pronouncement establishing the ASC as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities.  This pronouncement was effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities.  On the effective date, all non-SEC accounting and reporting standards were superseded.  

 FASB ASC 260, “Earnings Per Share.” On January 1, 2009, we adopted new authoritative accounting guidance under FASB ASC 260, “Earnings Per Share,” which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.

FASB ASC 715, “Compensation - Retirement Benefits.” New authoritative accounting guidance under ASC 715, “Compensation - Retirement Benefits,” provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under ASC 715, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The disclosures required by ASC 715 will be included in our financial statements beginning with the financial statements for the year-ended December 31, 2009.

FASB ASC 805, “Business Combinations.” On January 1, 2009, new authoritative accounting guidance under ASC 805, “Business Combinations,” became applicable to our accounting for business combinations closing on or after January 1, 2009. ASC 805 applies to all transactions and other events in which one entity obtains control over one or more other



  

24





businesses. ASC 805 requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under previous accounting guidance whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. ASC 805 requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under prior accounting guidance. Assets acquired and liabilities assumed in a business combination that arise from contingencies are to be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC 450, “Contingencies.” Under ASC 805, the requirements of ASC 420, “Exit or Disposal Cost Obligations,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of ASC 450, “Contingencies.”

FASB ASC 810, “Consolidation.” New authoritative accounting guidance under ASC 810, “Consolidation,” amended prior guidance to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Under ASC 810, a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, ASC 810 requires consolidated net income  to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. The new authoritative accounting guidance under ASC 810 became effective for us on January 1, 2009 and did not have a significant impact on our financial statements.

Further new authoritative accounting guidance under ASC 810 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 will be effective January 1, 2010 and is not expected to have a significant impact on our financial statements.

FASB ASC 815, “Derivatives and Hedging.” New authoritative accounting guidance under ASC 815, “Derivatives and Hedging,” amends prior guidance to amend and expand the disclosure requirements for derivatives and hedging activities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under ASC 815, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, the new authoritative accounting guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The new authoritative accounting guidance under ASC 815 became effective for us on January 1, 2009 and did not have a significant impact on our financial statements.

FASB ASC 820, “Fair Value Measurements and Disclosures.” New authoritative accounting guidance under ASC 820, ”Fair Value Measurements and Disclosures,” affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new accounting guidance amended prior guidance to expand certain disclosure requirements. The Corporation adopted the new authoritative accounting guidance under ASC 820 during the first quarter of 2009. Adoption of the new guidance did not significantly impact our financial statements.

Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar



  

25





liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC 820, such as an income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The forgoing new authoritative accounting guidance under ASC 820 was effective for our financial statements beginning October 1, 2009 and is not expected to have a significant impact on our financial statements.

FASB ASC 825, “Financial Instruments.” New authoritative accounting guidance under ASC 825, “Financial Instruments,” requires an entity to provide disclosures about the fair value of financial instruments in interim financial information and amends prior guidance to require those disclosures in summarized financial information at interim reporting periods.

FASB ASC 855, “Subsequent Events.” New authoritative accounting guidance under ASC 855, “Subsequent Events,” establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC 855 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The new authoritative accounting guidance under ASC 855 became effective for our financial statements for periods ending after June 15, 2009 and did not have a significant impact on our financial statements.

FASB ASC 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC 860, “Transfers and Servicing,” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC 860 will be effective January 1, 2010 and is not expected to have a significant impact on our financial statements.

FASB ASC 605, “Revenue Recognition for Multiple-Element Arrangements.”  In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements (A Consensus of the FASB Emerging Issues Task Force) (ASU 2009-13), which amends existing accounting standards for revenue recognition for multiple-element arrangements. To the extent a deliverable within a multiple-element arrangement is not accounted for pursuant to other accounting standards, including ASC 985-605, Software-Revenue Recognition, ASU 2009-13 establishes a selling price hierarchy that allows for the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple element arrangement where neither vendor-specific objective evidence nor third-party evidence is available for that deliverable. ASU 2009-13 is to be applied prospectively for revenue arrangements entered into or materially modified in our first quarter of 2012. Early adoption is permitted. If we were to adopt prior to the first quarter of 2012, we must apply ASU 2009-13 retrospectively to the beginning of the fiscal year of adoption or to all periods presented. We are currently evaluating the impact of the pending adoption of ASU 2009-13 on our consolidated financial statements.

FASB ASC 605, “Revenue Recognition for Certain Arrangements that Include Software Elements.”  In October 2009, the FASB issued Accounting Standards Update 2009-14, Revenue Recognition (Topic 605)—Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-14 excludes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of ASC 605-985, Software-Revenue Recognition. ASU 2009-14 shall be applied on a prospective basis to revenue arrangements entered into or materially modified in our first quarter of 2012. Early adoption is permitted. If we were to adopt prior to the first quarter of 2012, we must apply ASU 2009-14 retrospectively to the beginning of the fiscal year of adoption or to all periods presented. We are currently evaluating the impact of the pending adoption of ASU 2009-14 on our consolidated financial statements.

Variable Interest Entities.  In June 2009, the FASB issued a new accounting standard that amends the evaluation criteria to identify the primary beneficiary of a variable interest entity as provided pursuant to existing accounting standards and requires ongoing reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. We will



  

26





adopt this new accounting standard in 2011 and are currently evaluating the impact of its pending adoption on our consolidated financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company and this Item is not applicable to us.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data listed in Item 15(a)(1) and (2) of this report are included beginning on page F-1 herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. (T)  CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act).  Based upon that evaluation, we concluded that our disclosure controls and procedures are effective in timely alerting our management to material information relating to us (including our consolidated subsidiaries) required to be disclosed in our reports filed or submitted under the Exchange Act.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Exchange Act defines internal control over financial reporting in Rule 13a-15(f) and 15d-15(f) as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

·

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

·

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

·

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the consolidated financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009.  In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations, or COSO, of the Treadway Commission in “Internal Control – Integrated Framework.”



  

27





Based upon its assessment, management concluded that, as of December 31, 2009, the Company’s internal control over financial reporting is effective based upon those criteria.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There has been no change in our internal control over financial reporting during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.



  

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item regarding directors of the registrant will be included in the Proxy Statement under the caption “Election of Directors” and is incorporated herein by reference.

The information required by this Item concerning our Audit Committee financial expert will be included in the Proxy Statement and is incorporated herein by reference.

The information required by this Item concerning our Code of Ethics and Business Conduct will be included in the Proxy Statement and is incorporated herein by reference.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information, as of March 11, 2010, regarding our executive officers:

Name

Age

Position

John W. Roblin

65

Chairman of the Board of Directors and Chief Executive Officer

Manish D. Shah

38

Director, President and Chief Technology Officer

Maryanne Z. Gallagher

48

Executive Vice President and Chief Operating Officer

Ann F. Massey

51

Chief Financial Officer and Secretary


The biographies of our executive officers are set forth below:

John W. Roblin has served as our Chief Executive Officer since December 1999 and as a director since March 2000.  He was named Chairman of the Board of Directors in February 2001.  He served as our President from December 1999 to November 2008.  Prior to joining us, Mr. Roblin was Chief Information Officer and Senior Vice President for CIGNA Property and Casualty, positions he held since 1998.  From 1994 until 1998, he was Chief Information Officer and Senior Vice President for Advanta Corporation.  Prior to 1994, he was the Chief Information Officer at Chubb & Son, USF&G and Traveler’s Personal Lines Division.

Manish D. Shah has served as a member of our Board and as our President since November 2008 and has served as our Chief Technology Officer since May 2004.  Prior to his promotion to the position of our President, he served as our Executive Vice President since May 2008.  Mr. Shah served as our Director of Technology from December 2002 through May 2004 and served as our technology consultant from September 2000 through December 2001.  He graduated with Honors from the Columbia University Executive MBA Program in May 2008.  Prior to joining us, Mr. Shah held several technology management positions at various companies such as Andersen Consulting, P&O Nedlloyd and Tata Consultancy Services in different industries for over 10 years.

Maryanne Z. Gallagher has served as our Executive Vice President and Chief Operating Officer since May 2008 and February 2001, respectively.  Prior to holding the position of Chief Operating Officer, she served as our Senior Vice President since January 2000.  From November 1998 until December 1999, Ms. Gallagher served as our Vice President - Customer Service.  Ms. Gallagher joined us in 1990 and has held various development and support positions in our Classic division through 1998.

Ann F. Massey has served as our Chief Financial Officer since February 2001, as our Secretary since April 1997 and as our Controller since March 1997.  From March 1996 to March 1997, Ms. Massey served as our Assistant Treasurer.  From 1994 until February 1996, Ms. Massey served as Assistant Controller for our insurance services division.  Prior to 1994, Ms. Massey had served as our Accounting Manager.



  

29






ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this Item will be included in the Proxy Statement and is incorporated herein by reference.



  

30





PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a)

The following documents are filed as a part of this report.

(1)

Financial Statements

Reference is made to the Index to Financial Statements on Page 32 of this report.

(2)

Financial Statement Schedule

II - Valuation and Qualifying Accounts — F-27


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.

See Exhibit Index.




  

31





COVER-ALL TECHNOLOGIES INC.


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 

Page

Report of Independent Registered Public Accounting Firm

F-1  

Consolidated Balance Sheets - December 31, 2009 and 2008

F-2  

Consolidated Statements of Operations - Years Ended December 31, 2009, 2008 and 2007

F-4  

Consolidated Statements of Changes in Stockholders’ Equity - Years Ended December 31, 2009, 2008 and 2007

F-6  

Consolidated Statements of Cash Flows - Years Ended December 31, 2009, 2008 and 2007

F-7  

Notes to Consolidated Financial Statements

F-9  

Financial Statement Schedule II - Valuation and Qualifying Accounts

F-27






  

32






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of
Cover-All Technologies Inc.


We have audited the accompanying consolidated balance sheets of Cover-All Technologies Inc. and its subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2009.  These consolidated financial statements and the consolidated financial statement schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cover-All Technologies Inc. and its subsidiary as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.  Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is the responsibility of Cover-All Technologies Inc.’s management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic consolidated financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.

/s/ MSPC


Certified Public Accountants and Advisors,

A Professional Corporation


New York, New York

March 19, 2010





  

F-1





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


 

December 31,

 

2009

2008

Assets:

 

 

 

 

Current Assets:

 

 

 

 

Cash and Cash Equivalents

$

4,324,446

 

$

4,686,470

Accounts Receivable [Less Allowance for Doubtful Accounts

 

 

 

 

of $25,000 in 2009 and 2008]

 

5,086,482

 

2,055,815

Prepaid Expenses

 

415,491

 

334,804

Deferred Tax Asset

 

806,750

 

840,000

 

 

 

 

 

Total Current Assets

 

10,633,169

 

 

7,917,089

 

 

 

 

 

Property and Equipment - At Cost:

 

 

 

 

Furniture, Fixtures and Equipment

 

624,266

 

623,547

Less: Accumulated Depreciation

 

371,329

 

 

300,164

 

 

 

 

 

Property and Equipment - Net

 

252,937

 

323,383

 

 

 

 

 

Capitalized Software [Less Accumulated Amortization of

 

 

 

 

$11,966,365 and $11,049,157 in 2009 and 2008, Respectively]

 

2,341,960

 

1,848,111

 

 

 

 

 

Deferred Tax Asset

 

1,660,750

 

840,000

 

 

 

 

 

Other Assets

 

110,151

 

110,151

 

 

 

 

 

Total Assets

$

14,998,967

 

$

11,038,734


See Notes to Consolidated Financial Statements.




  

F-2





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED BALANCE SHEETS


 

 

December 31,

 

 

2009

 

2008

Liabilities and Stockholders’ Equity:

 

 

 

 

Current Liabilities:

 

 

 

 

Accounts Payable

$

208,814

 

$

227,007

Accrued Liabilities

 

1,275,058

 

1,061,065

Taxes Payable

 

139,035

 

--

Deferred Charges

 

27,510

 

22,503

Unearned Revenue

 

1,750,303

 

 

1,800,485

 

 

 

 

 

Total Current Liabilities

 

3,400,720

 

3,111,060

 

 

 

 

 

Long-Term Liabilities:

 

 

 

 

Deferred Charges

 

96,333

 

123,844

 

 

 

 

 

Total Liabilities

 

3,497,053

 

3,234,904

 

 

 

 

 

Commitments and Contingencies

 

--

 

--

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

Common Stock, $.01 Par Value, Authorized 75,000,000 Shares;
24,885,656 and 24,690,227 Shares Issued and 24,683,786 and
24,488,357 Shares Outstanding in 2009 and 2008, Respectively

 

248,856

 

246,902

 

 

 

 

 

Capital In Excess of Par Value

 

29,703,254

 

29,185,646

 

 

 

 

 

Accumulated Deficit

 

(18,285,302)

 

(21,463,824)

 

 

 

 

 

Treasury Stock - At Cost - 201,870 Shares

 

(164,894)

 

(164,894)

 

 

 

 

 

Total Stockholders’ Equity

 

11,501,914

 

7,803,830

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

$

14,998,967

 

$

11,038,734


See Notes to Consolidated Financial Statements.



  

F-3





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS



 

          Years Ended

 

          December  31,

 

 

2009

 

2008

 

2007

Revenues:

 

 

 

 

 

 

Licenses

$

4,138,252

$   3,802,293

$  2,682,840

Maintenance

 

4,987,218

 

4,150,909

 

    3,210,423

Professional Services

 

3,281,973

 

3,476,877

 

    2,316,211

Application Service Provider [“ASP”] Services

 

2,107,949

 

2,037,180

 

    1,567,843

 

 

 

 

 

 

 

Total Revenues

 

14,515,392

 

13,467,259

 

    9,777,317

 

 

 

 

 

 

 

Costs of Revenues:

 

 

 

 

 

 

Licenses

 

1,808,449

 

1,830,909

 

    1,142,824

Maintenance

 

2,685,549

 

2,476,645

 

    2,796,465

Professional Services

 

1,577,075

 

1,501,525

 

    1,278,004

ASP Services

 

1,689,194

 

1,335,505

 

       470,781

 

 

 

 

 

 

 

Total Costs of Revenues

 

7,760,267

 

7,144,584

 

    5,688,074

 

 

 

 

 

 

 

Direct Margin

 

6,755,125

 

6,322,675

 

    4,089,243

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

Sales and Marketing

 

906,074

 

883,428

 

       800,322

General and Administrative

 

1,674,445

 

1,540,044

 

    1,429,757

Research and Development

 

890,951

 

1,035,014

 

       509,629

Provision for Doubtful Accounts

 

--

 

20,770

 

         50,661

 

 

 

 

 

 

 

Total Operating Expenses

 

3,471,470

 

3,479,256

 

    2,790,369

 

 

 

 

 

 

 

Operating Income

 

3,283,655

 

2,843,419

 

    1,298,874

 

 

 

 

 

 

 

Other [Income] Expense:

 

 

 

 

 

 

Interest Expense

 

--

 

9,469

 

         49,782

Interest Expense - Related Party

 

--

 

2,615

 

           5,579

Interest Income

 

(6,172)

 

(31,952)

 

               (9)

Other Expense

 

616

 

              --

 

              --

Other Income

 

(45,370)

 

(40,405)

 

    --

 

 

 

 

 

 

 

Total Other [Income] Expense

 

(50,926)

 

(60,273)

 

         55,352

 

 

 

 

 

 

 

Income Before Income Taxes

 

3,334,581

 

2,903,692

 

    1,243,522

 

 

 

 

 

 

 

Income Taxes [Benefit] Expense

 

(582,325)

 

(1,652,634)

 

         12,085

 

 

 

 

 

 

 

Net Income

$

3,916,906

$    4,556,326

$  1,231,437

 


See Notes to Consolidated Financial Statements.





  

F-4






COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF OPERATIONS


 

Years Ended

 

December 31,

 

 

2009

 

 

2008

 

 

2007

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

$

.16

 

$

.19

 

$

.06

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Common Share

$

.16

 

$

.19

 

$

.05

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares

 

 

 

 

 

 

 

 

Outstanding for Basic Earnings Per

 

 

 

 

 

 

 

 

Common Share

 

 24,591,000

 

 

23,794,000

 

 

 21,806,000

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares

 

 

 

 

 

 

 

 

Outstanding for Diluted Income Earnings Per

 

 

 

 

 

 

 

 

Common Share [See Note 6]

 

25,057,000

 

 

24,203,000

 

 

 23,463,000


See Notes to Consolidated Financial Statements.






  

F-5





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY [DEFICIT]


 

Common Stock

 

Capital in
Excess of
Par Value

 

Accumulated
Deficit

Treasury
Stock

 

Total
Stockholders’
Equity
[Deficit]

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2007

$

194,915

 

$

26,735,207

 

$

(27,251,587)

$

 (703,000)

 

$    (1,024,465)

 

Exercise of 250,715 Stock

 

 

 

 

 

 

 

 

 

 

 

 

Options and Warrants

 

2,507

 

 

70,279

 

 

--

 

--

 

72,786

Conversion of $1,785,024 of

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Debt

 

59,501

 

 

1,725,523

 

 

--

 

--

 

1,785,024

Retirement of 2,500,000 Shares

 

 

 

 

 

 

 

 

 

 

 

 

of Treasury Stock

 

(25,000

)

 

(678,000

)

 

--

 

703,000

 

--

Non-Cash Stock Based

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

--

 

 

220,650

 

 

--

 

--

 

220,650

Net Income

 

--

 

 

--

 

 

1,231,437

 

--

 

 

1,231,437

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2007

 

231,923

 

 

28,073,659

 

 

(26,020,150)

 

--

 

2,285,432

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of 540,539 Stock Options

 

5,405

 

 

275,945

 

 

--

 

--

 

281,350

Grant of 83,169 Shares of

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock to

 

 

 

 

 

 

 

 

 

 

 

 

Non-Employee Directors

 

832

 

 

83,168

 

 

--

 

--

 

84,000

Conversion of $62,265 of

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Debt

 

8,742

 

 

253,523

 

 

--

 

--

 

262,265

Purchase of 201,870 Shares of

 

 

 

 

 

 

 

 

 

 

 

 

Treasury Stock

 

--

 

 

--

 

 

--

 

(164,894)

 

(164,894)

Non-Cash Stock Based

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

--

 

 

499,351

 

 

--

 

--

 

499,351

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

--

 

 

--

 

 

4,556,326

 

--

 

4,556,326

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2008

 

246,902

 

 

29,185,646

 

 

(21,463,824)

 

(164,894)

 

7,803,830

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of 26,429 Stock

 

 

 

 

 

 

 

 

 

 

 

 

Options and Warrants

 

264

 

 

13,036

 

 

--

 

--

 

13,300

Vesting of 75,000 Shares of

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock to One of

 

 

 

 

 

 

 

 

 

 

 

 

Our Executives [See Note 3]

 

750

 

 

(750

)

 

--

 

--

 

--

Grant of 84,000 Shares of

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock to Non-

 

 

 

 

 

 

 

 

 

 

 

 

Employee Directors

 

840

 

 

83,160

 

 

--

 

--

 

84,000

Grant of 10,000 Shares of

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock to Our

 

 

 

 

 

 

 

 

 

 

 

 

Investor Relations Firm

 

100

 

 

12,400

 

 

--

 

--

 

12,500

Non-Cash Stock Based

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

--

 

 

409,762

 

 

--

 

--

 

409,762

Dividends Paid to Common

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders

 

--

 

 

--

 

 

(738,384)

 

--

 

(738,384)

Net Income

 

--

 

 

--

 

 

3,916,906

 

--

 

3,916,906

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2009

$

248,856

 

$

29,703,254

 

$

(18,285,302)

 

$

 (164,894)

 

$    11,501,914


See Notes to Consolidated Financial Statements.



  

F-6





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS


 

Years Ended

 

December 31,

 

 

2009

 

2008

 

2007

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net Income

$

3,916,906

$

4,556,326

$

1,231,437

 

Adjustments to Reconcile Net Income to Net

 

 

 

 

 

 

 

Cash Provided by Operating Activities:

 

 

 

 

 

 

 

Bad Debt Expense

 

--

 

20,770

 

50,661

 

Depreciation

 

72,165

 

70,706

 

45,770

 

Amortization of Capitalized Software

 

917,207

 

868,405

 

879,656

 

Amortization of Deferred Financing Costs

 

--

 

26,273

 

34,473

 

Amortization of Stock Based Compensation

 

409,762

 

583,351

 

220,650

 

Shares Provided for Services

 

96,500

 

--

 

--

 

Deferred Tax Benefit

 

(787,500

)

(1,680,000

)

--

 

Write-off of Leasehold Improvement

 

616

 

--

 

--

 

 

 

 

 

 

 

 

 

Changes in Assets and Liabilities:

 

 

 

 

 

 

 

[Increase] Decrease in:

 

 

 

 

 

 

 

Accounts Receivable

 

(3,030,667

)

1,595,836

 

(2,367,013

)

Prepaid Expenses

 

(80,688

)

(41,408

)

28,976

 

Increase [Decrease] in:

 

 

 

 

 

 

 

Accounts Payable

 

(18,193

)

(352,439

)

119,567

 

Accrued Liabilities

 

213,993

 

(19,070

)

470,625

 

Taxes Payable

 

139,035

 

--

 

--

 

Deferred Charges

 

(22,503

)

(22,503

)

2,531

 

Unearned Revenue

 

(50,182

)

312,940

 

189,964

 

 

 

 

 

 

 

 

 

Net Cash Provided from Operating Activities

 

1,776,451

 

5,919,187

 

907,297

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Capital Expenditures

 

(2,335

)

(224,542

)

(16,826

 

Capitalized Software Expenditures

 

(1,411,057

)

(1,135,545

)

(1,084,190

)

 

 

 

 

 

 

 

 

Net Cash Used for Investing Activities

 

(1,413,392

)

(1,360,087

)

(1,101,016

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Dividends Paid to Common Stockholders

 

(738,383

)

--

 

--

 

Proceeds from Exercise of Stock Options, Restricted

 

 

 

 

 

 

 

Stock and Warrants

 

13,300

 

281,350

 

72,786

 

Purchase of Treasury Stock

 

--

 

(164,894

)

--

 

 

 

 

 

 

 

 

 

Net Cash Provided from [Used for]

 

 

 

 

 

 

 

Financing Activities

 

(725,083

)

116,456

 

 72,786

 

 

 

 

 

 

 

 

 

Increase [Decrease] in Cash and Cash Equivalents

 

(362,024

)

4,675,556

 

(120,933

)

 

 

 

 

 

 

 

 

Cash and Cash Equivalents - Beginning of Years

 

4,686,470

 

10,914

 

131,847

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents - End of Years

$

4,324,446

$

4,686,470

$

10,914

 

 

 

 

 

 

 

 

 



See Notes to Consolidated Financial Statements.




  

F-7





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


CONSOLIDATED STATEMENTS OF CASH FLOWS




Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

Cash paid during the years for:

 

 

 

 

 

 

Interest

$

--

$

9,469

$

49,782

Interest - Related Party

$

--

$

2,615

$

5,579

Income Taxes

$

66,140

$

27,367

$

12,085


Supplemental Disclosures of Non-Cash Financing Activities:

On June 25, 2008, John Roblin, our Chairman and Chief Executive Officer, and certain other investors elected to convert all of the unpaid principal amount due on convertible debentures in their possession, totaling $262,265, into an aggregate of 874,217 shares of our common stock at the conversion price of $0.30 per share.  We made an aggregate of $10,000 of interest payments on the debentures during 2008.

In March 2007, the RENN Funds, the holders of certain convertible debentures, elected to convert all of their remaining unpaid principal amount due, totaling $1,631,601, into an aggregate of 5,438,670 shares of our common stock at the conversion price of $0.30 per share.  In June 2007, other holders of our convertible debentures elected to convert an aggregate of $33,617 in principal of such debentures into a total of 112,055 shares of our common stock at the conversion price of $0.30 per share.  We made an aggregate of $52,000 of interest payments on these debentures during 2007.

During 2007, the holders of certain convertible debentures elected to convert an aggregate of $119,807 in principal of such debentures, representing their monthly installments of principal under such debentures (in lieu of necessary such installment payments in cash), for an aggregate of 399,358 shares of our common stock at the conversion price of $0.30 per share.

During 2007, we cancelled 2,500,000 shares of Treasury Stock that had been previously repurchased for $703,000.

See Notes to Consolidated Financial Statements.




  

F-8





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


[1] Summary of Significant Accounting Policies

Description of Business - Cover-All Technologies Inc., through its wholly-owned subsidiary, Cover-All Systems, Inc., licenses and maintains its software products for the property/casualty insurance industry throughout the United States and Puerto Rico.  The subsidiary also provides professional consulting services to its customers interested in customizing their software.

Principles of Consolidation - The consolidated financial statements include the accounts of Cover-All Technologies Inc. and its wholly-owned subsidiary.  All material intercompany balances and transactions have been eliminated.

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Revenue Recognition - Our revenues are recognized in accordance with Accounting Standards Codification (“ASC”) 986-605, “Software Revenue Recognition.”  Revenue from the sale of software licenses is recognized when standardized software modules are delivered to and accepted by the customer, the license term has begun, the fee is fixed or determinable and collectibility is probable.  Revenue from software maintenance contracts and ASP services are recognized ratably over the lives of the contracts.  Revenue from professional services is recognized when the service is provided.

We enter into revenue arrangements in which a customer may purchase a combination of software, maintenance and support, and professional services (multiple-element arrangements).  When vendor-specific objective evidence (“VSOE”) of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements.  VSOE of fair value is established by the price charged when that element is sold separately.  For maintenance and support, VSOE of fair value is established by renewal rates, when they are sold separately.  For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.

Cash and Cash Equivalents - We consider all highly liquid investments, with a maturity of three months or less when purchased, to be cash equivalents.

Risk Concentrations - Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable.  We place our cash and cash equivalents with high credit quality institutions to limit credit exposure.  We believe no significant concentration of credit risk exists with respect to these deposits.  Management believes that the amount of cash beyond insured amounts at December 31, 2009 is not at significant risk.

Concentrations of credit risk with respect to trade accounts receivable are limited due to the wide variety of customers principally major insurance companies, who are dispersed across many geographic regions. As of December 31, 2009, three customers accounted for approximately 71% of our trade accounts receivable portfolio.  As of December 31, 2008, three customers accounted for approximately 64% of our trade accounts receivable portfolio two of which were units of American International Group, Inc. which comprised 42% of our trade accounts receivable portfolio.  We routinely assess the financial strength of customers and, based upon factors concerning credit risk, we establish an allowance for doubtful accounts.  Management believes that accounts receivable credit risk exposure beyond such allowance is limited.




  

F-9






COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2


[1] Summary of Significant Accounting Policies [Continued]

Impairment of Long-Lived Assets - We review our long-lived assets and identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the future use and disposal of the related asset or group of assets to their respective carrying amounts.  Impairment, if any, is measured as the excess of the carrying amount over the fair value based on market value (when available) or discounted expected cash flows of those assets, and is recorded in the period in which the determination is made.

Stock-Based Compensation – We follow the guidance of ASC 718, “Accounting for Stock Options and Other Stock-Based Compensation.”  ASC 718 requires companies to record compensation expense for share-based awards issued to employees and directors in exchange for services provided. The amount of the compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods. Our share-based awards include stock options and restricted stock awards. Prior to our adoption of ASC 718, we applied the intrinsic value method to calculate the compensation expense for share-based awards. Historically, we have generally set the exercise price for our stock options equal to the market value on the grant date. As a result, the options generally had no intrinsic value on their grant dates, and we did not record any compensation expense unless the terms of the options were subsequently modified. For restricted stock awards, the calculation of compensation expense is the same.

We originally adopted ASC 718 using the modified prospective transition method, which requires the application of the accounting standard to all share-based awards issued on or after January 1, 2006 and any outstanding share-based awards that were issued but not vested as of January 1, 2006. For the year ended December 31, 2009, we recognized $506,162 of stock-based compensation expense in our consolidated financial statements.  For the year ended December 31, 2008, we recognized $583,351 of stock-based compensation expense in our consolidated financial statements.  For the year ended December 31, 2007, we recognized $220,650 of stock-based compensation expense in our consolidated financial statements. We recognized expense because we had (a) stock options granted prior to January 1, 2006 that had not yet vested as of January 1, 2006 and (b) stock options and restricted stock granted subsequent to January 1, 2006.

The estimated fair value underlying our calculation of compensation expense for stock options is based on the Black-Scholes pricing model. ASC 718 requires forfeitures of share-based awards to be estimated at the time of grant and revised, if necessary, in subsequent periods if our estimates change based on the actual amount of forfeitures we have experienced.




  

F-10





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3




[1] Summary of Significant Accounting Policies [Continued]

Property and Equipment - Furniture, fixtures and equipment are carried at cost.  Depreciation is recorded on the straight-line method over three to ten years, which approximates the estimated useful lives of the assets.  Depreciation expense in 2009, 2008 and 2007 was $72,165, $70,706 and $45,770, respectively.

Routine maintenance and repair costs are charged to expense as incurred and renewals and improvements that extend the useful life of the assets are capitalized.  Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is reported in the statement of operations.

Capitalized Software - Costs for the conceptual formulation and design of new software products are expensed as incurred until technological feasibility has been established.  Once technological feasibility has been established, we capitalize costs to produce the finished software products. Capitalization ceases when the product is available for general release to customers. Costs associated with product enhancements that extend the original product’s life or significantly improve the original product’s marketability are also capitalized once technological feasibility has been established. Amortization is calculated on a product-by-product basis as the greater of the amount computed using (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining economic life of the product. At each balance sheet date, the unamortized capitalized costs of each computer software product is compared to the net realizable value of that product. If an amount of unamortized capitalized costs of a computer software product is found to exceed the net realizable value of that asset, such amount will be written off. The net realizable value is the estimated future gross revenues from that product reduced by the estimated future costs of completing and deploying that product, including the costs of performing maintenance and customer support required to satisfy our responsibility set forth at the time of sale.

Advertising Expense - We expense advertising costs as incurred.  Advertising expense in 2009, 2008 and 2007 was $121,460, $79,166 and $47,897, respectively.

Income Taxes – As defined by ASC 740, “Accounting for Income Taxes,” income tax expense [or benefit] for the year is the sum of deferred tax expense [or benefit] and income taxes currently payable [or refundable].  Deferred tax expense [or benefit] is the change during the year in a company’s deferred tax liabilities and assets.  Deferred tax liabilities and assets are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Earnings Per Share - We follow the provisions of ASC 260, “Earnings per Share.”  Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period.  ASC 260 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.



  

F-11





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4


[1] Summary of Significant Accounting Policies [Continued]

Earnings Per Share [Continued] - The computation of diluted earnings per share does not assume conversion, exercise or contingent issuance of securities that would have an antidilutive effect on per share amounts [i.e., increasing earnings per share or reducing loss per share].  The dilutive effect of outstanding options and warrants and their equivalents are reflected in dilutive earnings per share by the application of the treasury stock method which recognizes the use of proceeds that could be obtained upon exercise of options and warrants in computing diluted earnings per share.  It assumes that any proceeds would be used to purchase common stock at the average market price during the period. Options and warrants will have a dilutive effect only when the average market price of the common stock during the period exceeds the exercise price of the options or warrants.  Equity instruments that may dilute earnings per share in the future are listed in Note 5.

The dilutive effect of convertible debt is reflected in diluted earnings per share by the application of the if-converted method.  The convertible debt could potentially dilute basic earnings per share in future periods.

Deferred Charges - The Company’s lease on its premises provides for periodic increases over the lease term.  Pursuant to ASC 840, Accounting for Leases, the Company records rent expense on a straight-line basis.  The effect of this difference is recorded as deferred charges.

Fair Value of Financial Instruments - Generally accepted accounting principles require disclosing the fair value of financial instruments to the extent practicable for financial instruments, which are recognized or unrecognized in the balance sheet.  The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.  In assessing the fair value of these financial instruments, the Company used a variety of methods and assumptions, which were based on estimates of market conditions and risks existing at that time.  For certain instruments, including the cash accounts receivable, accounts payable and accrued expenses, it was estimated that the carrying amount approximated fair value for the majority of these instruments because of their short maturity.  The fair value of property and equipment is estimated to approximate their net book value.

[2] Recently Issued Accounting Standards

On July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement establishing the ASC as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities.  This pronouncement was effective for financial statements issued for interim and annual periods ending after September 15, 2009, for most entities.  On the effective date, all non-SEC accounting and reporting standards were superseded.

FASB ASC 260, “Earnings Per Share.” On January 1, 2009, we adopted new authoritative accounting guidance under ASC 260, “Earnings Per Share,” which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.



  

F-12





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5


[2] Recently Issued Accounting Standards [Continued]

FASB ASC 715, “Compensation - Retirement Benefits.”  New authoritative accounting guidance under ASC 715, “Compensation - Retirement Benefits,” provides guidance related to an employer’s disclosures about plan assets of defined benefit pension or other post-retirement benefit plans. Under ASC 715, disclosures should provide users of financial statements with an understanding of how investment allocation decisions are made, the factors that are pertinent to an understanding of investment policies and strategies, the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The disclosures required by ASC 715 will be included in our financial statements beginning with the financial statements for the year-ended December 31, 2009.

FASB ASC 805, “Business Combinations.” On January 1, 2009, new authoritative accounting guidance under ASC 805, “Business Combinations,” became applicable to our accounting for business combinations closing on or after January 1, 2009. ASC 805 applies to all transactions and other events in which one entity obtains control over one or more other businesses. ASC 805 requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under previous accounting guidance whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. ASC 805 requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under prior accounting guidance. Assets acquired and liabilities assumed in a business combination that arise from contingencies are to be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC 450, “Contingencies.” Under ASC 805, the requirements of ASC 420, “Exit or Disposal Cost Obligations,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of ASC 450, “Contingencies.”

FASB ASC 810, “Consolidation.” New authoritative accounting guidance under ASC 810, “Consolidation,” amended prior guidance to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Under ASC 810, a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, ASC 810 requires consolidated net income  to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. The new authoritative accounting guidance under ASC 810 became effective for us on January 1, 2009 and did not have a significant impact on our financial statements.




  

F-13





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6


[2] Recently Issued Accounting Standards [Continued]

Further new authoritative accounting guidance under ASC 810 amends prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 will be effective January 1, 2010 and is not expected to have a significant impact on our financial statements.

FASB ASC 815, “Derivatives and Hedging.” New authoritative accounting guidance under ASC 815, “Derivatives and Hedging,” amends prior guidance to amend and expand the disclosure requirements for derivatives and hedging activities to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under ASC 815, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. To meet those objectives, the new authoritative accounting guidance requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The new authoritative accounting gui dance under ASC 815 became effective for us on January 1, 2009 and did not have a significant impact on our financial statements.

FASB ASC 820, “Fair Value Measurements and Disclosures.” New authoritative accounting guidance under ASC 820,”Fair Value Measurements and Disclosures,” affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction, and clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ASC 820 requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. The new accounting guidance amended prior guidance to expand certain disclosure requirements. The Corporation adopted the new authoritative accounting guidance under ASC 820 during the first quarter of 2009. Adoption of the new guidance did not significantly impact our financial statements.

Further new authoritative accounting guidance (Accounting Standards Update No. 2009-5) under ASC 820 provides guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles of ASC 820, such as an income approach or market approach. The new authoritative accounting guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The forgoing new authoritative accounting guidance under ASC 820 became effective for our financial statements beginning October 1, 2009 and did not have a significant impact on our financial statements.




  

F-14





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7


[2] Recently Issued Accounting Standards [Continued]

FASB ASC 825 “Financial Instruments.” New authoritative accounting guidance under ASC 825,”Financial Instruments,” requires an entity to provide disclosures about the fair value of financial instruments in interim financial information and amends prior guidance to require those disclosures in summarized financial information at interim reporting periods.

FASB ASC 855, “Subsequent Events.” New authoritative accounting guidance under ASC 855, “Subsequent Events,” establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. ASC 855 defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The new authoritative accounting guidance under ASC 855 became effective for our financial statements for periods ending after June 1 5, 2009 and did not have a significant impact on our financial statements.

FASB ASC 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC 860, “Transfers and Servicing,” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC 860 will be effective January 1, 2010 and is not expected to have a significant impact on our financial statements.

FASB ASC 605, “Revenue Recognition for Multiple-Element Arrangements.”  In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Revenue Recognition (605) Multiple-Deliverable Revenue Arrangements (A Consensus of the FASB Emerging Issues Task Force) (ASU 2009-13), which amends existing accounting standards for revenue recognition for multiple-element arrangements. To the extent a deliverable within a multiple-element arrangement is not accounted for pursuant to other accounting standards, including ASC 985-605, Software-Revenue Recognition, ASU 2009-13 establishes a selling price hierarchy that allows for the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple element arrangement where neither vendor-specific objective evidence nor third-party evidence is available for that deliverable. ASU 2009-13 is to be applied prospectively for reven ue arrangements entered into or materially modified in our first quarter of 2012. Early adoption is permitted. If we were to adopt prior to the first quarter of 2012, we must apply ASU 2009-13 retrospectively to the beginning of the fiscal year of adoption or to all periods presented. We are currently evaluating the impact of the pending adoption of ASU 2009-13 on our consolidated financial statements.




  

F-15





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8


[2] Recently Issued Accounting Standards [Continued]

FASB ASC 605, “Revenue Recognition for Certain Arrangements that Include Software Elements.”  In October 2009, the FASB issued Accounting Standards Update 2009-14, Revenue Recognition (605)—Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That Include Software Elements (ASU 2009-14). ASU 2009-14 excludes tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of ASC 605-985, Software-Revenue Recognition. ASU 2009-14 shall be applied on a prospective basis to revenue arrangements entered into or materially modified in our first quarter of fiscal 2012. Early adoption is permitted. If we were to adopt prior to the first quarter of fiscal 2012, we must apply ASU 2009-14 retrospectively to the beginning of the fiscal year of adoption or to all periods presented. We are currently evaluating the impact of the pending adoption of ASU 2009-14 on our consolidated financial statements.

Variable Interest Entities.  In June 2009, the FASB issued a new accounting standard that amends the evaluation criteria to identify the primary beneficiary of a variable interest entity as provided pursuant to existing accounting standards and requires ongoing reassessments of whether an enterprise is the primary beneficiary of the variable interest entity. We will adopt this new accounting standard in fiscal 2011 and are currently evaluating the impact of its pending adoption on our consolidated financial statements.




  

F-16





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9


[3] Commitments, Contingencies and Related Party Transactions

Operating Leases - We lease approximately 20,000 square feet of office space under a lease which expires in October 2012.

Rent expense was $442,816, $403,507 and $389,930 for the years ended December 31, 2009, 2008 and 2007, respectively.

Our future minimum lease commitments under the noncancellable operating leases for rental of our office space in effect at December 31, 2009 were as follows:

Year Ending

 

 

December 31,

 

 

2010

$

405,567

2011

 

430,602

2012

 

358,835

Thereafter

 

--

 

 

 

Total

$

1,195,004


Employment Contracts - Effective January 1, 2010, we have an employment contract with one of our executives with an expiration date of December 31, 2011.  The aggregate commitment for future salary at December 31, 2009 was approximately $700,000.  The contract also includes a bonus based on the performance of the Company.  The contract also grants 150,000 stock options and 150,000 shares of restricted stock on the effective date.  We had an employment contract with one of our executives with an expiration date of December 31, 2009.  The aggregate commitment for future salary at December 31, 2008 was approximately $325,000.  The aggregate commitment for future salary at December 31, 2007 was approximately $650,000.  The contract also included a bonus based on the performance of the Company.  The contract also granted 72,463 stock options and 150,000 shares of restricted stock on the effective date.

[4] Income Taxes

An analysis of the components of the income tax provision is as follows:

 

Years Ended

 

December 31,

 

2009

      2008

        2007

Current:

 

 

 

 

 

 

Federal

$

106,412

$

21,849

$

    --

State

 

98,763

 

5,517

 

12,085

 

 

 

 

 

 

 

Totals

 

205,175

 

27,366

 

12,085

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

Federal

 

(787,500)

 

(1,680,000)

 

--

State

 

--

 

--

 

--

 

 

 

 

 

 

 

Totals

 

(787,500)

 

(1,680,000)

 

--

 

 

 

 

 

 

 

Income Tax [Benefit] Expense

$

(582,325)

$

(1,652,634)

$

12,085






  

F-17





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10


[4] Income Taxes [Continued]

The income tax for continuing operations differs from the amount computed by applying the statutory federal income tax rate as follows:

 

 

Years  Ended

 

 

December 31,

 

 

2009

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

Computed Federal Statutory Tax

 

$

1,133,758

 

$

987,255

 

$

422,797

Valuation Allowance Adjustment to Deferred Tax Asset

 

 

(787,500

)

 

(1,680,000

)

 

--

Tax Benefit of Federal Net Operating Loss Carryforward

 

 

(928,583

)

 

(959,889

)

 

(410,712)

 

 

 

 

 

 

 

 

 

 

Actual Tax

 

$

(582,325

)

$

(1,652,634

)

$

12,085


The components of the net deferred tax asset and liability were as follows:

 

 

Years Ended

 

 

December 31,

 

 

2009

 

2008

 

Deferred Tax Assets - Current:

 

 

 

 

 

 

 

    Accounts Receivable Allowance

 

$

10,000

 

$

10,000

 

    Vacation Accrual

 

 

10,000

 

 

17,000

 

    Net Operating Loss Carryforward

 

 

786,750

 

 

813,000

 

 

 

 

 

 

 

 

 

    Current Deferred Tax Asset

 

$

806,750

 

$

840,000

 

 

 

 

 

 

 

 

 

Deferred Tax Asset [Liability] - Long-Term:

 

 

 

 

 

 

 

    Net Operating Loss Carryforward

 

$

6,232,000

 

$

7,293,000

 

    Capitalized Software

 

 

(937,000

)

 

(739,000

)

    Depreciation and Amortization

 

 

29,000

 

 

28,000

 

    Valuation Allowance

 

 

(3,663,250

)

 

(5,742,000

)

 

 

 

 

 

 

 

 

    Long-Term Deferred Tax Asset

 

$

1,660,750

 

$

840,000

 


We adjusted our Deferred Tax Asset Valuation Allowance as of December 31, 2009 by decreasing the allowance by $787,500.  This amount represents the tax benefit, which is based upon anticipated profitability that we have determined to be more likely than not to be realized in future periods.  The net change during 2009 in the total valuation allowance was $2,078,750.

We adjusted our Deferred Tax Asset Valuation Allowance as of December 31, 2008 by decreasing the allowance by $1,680,000.  This amount represents the tax benefit, which is based upon anticipated profitability that we have determined to be more likely than not to be realized in future periods.  The net change during 2008 in the total valuation allowance was $2,498,000.

At December 31, 2009, we had approximately $16,000,000 of federal net operating tax loss carryforwards expiring at various dates through 2026.  The Tax Reform Act of 1986 enacted a complex set of rules which limits a company’s ability to utilize net operating loss carryforwards and tax credit carryforwards in periods following an ownership change.  These rules define an ownership change as a greater than 50 percent point change in stock ownership within a defined testing period which is generally a three-year period.  As a result of stock which may be issued by us from time to time, and the conversion of outstanding warrants, or the result of other changes in ownership of our outstanding stock, we may experience an ownership change and consequently our utilization of net operating loss carryforwards could be significantly limited.




  

F-18





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11


[5] Stock-Based Compensation

Stock Options

In June 2005, we adopted the 2005 Stock Incentive Plan (which was amended in 2006 and in 2008).  Options and stock awards for the purchase of up to 5,000,000 shares may be granted by the Board of Directors to our employees and consultants at an exercise or grant price determined by the Board of Directors on the date of grant.  Options may be granted as incentive or nonqualified stock options with a term of not more than ten years.  The 2005 Plan allows the Board of Directors to grant restricted or unrestricted stock awards or awards denominated in stock equivalent units, securities or debentures convertible into common stock, or any combination of the foregoing and may be paid in common stock or other securities, in cash, or in a combination of common stock or other securities and cash.  At December 31, 2009 and 2008, an aggregate of 3,192,537 and 3,552,537 shares, respectively, were available for grant under the 2005 Stock Incentive Plan.

On November 15, 1994, we adopted the 1994 Stock Option Plan for Independent Directors which we amended in 2000.  Options for the purchase of up to 750,000 shares may be granted to our directors who are not employees [“non-employee directors”].  Each non-employee director who is serving on a “Date of Grant” shall automatically be granted an option to purchase 10,000 shares of common stock at the fair market value of common stock on the date the option is granted.  Dates of Grant are November 15, 1994, 1999, 2004, and 2009 for non-employee directors serving on November 15, 1994.  For individuals who become non-employee directors after November 15, 1994, such directors’ Dates of Grant will be the date such individual becomes a director and the fifth, tenth and fifteenth anniversaries of such date.  Options are exercisable in full six months after the applicable date of grant and expire five years after the date of grant.  At December 31, 2009, 2008 and 2007, 750,000, 750,000 and 750,000 shares, respectively, were available for grant under the 1994 Stock Option Plan for Independent Directors.

A summary of the changes in outstanding common stock options for all outstanding plans is as follows:

 

Shares

 

Exercise

Price

Per Share

 

Weighted-Average
Remaining

Contractual Life

 

 

Weighted-Average
Exercise Price

Balance, January 1, 2007

2,018,000

 

$

0.27 - 2.00

 

1.8 Years

 

$    .93

 

 

 

 

 

 

 

 

 

 

Granted

880,000

 

 

0.79 - 1.40

 

4.3 Years

 

 

1.05

Exercised

(115,000

)

 

0.27 - 0.61

 

 

 

 

.37

Canceled

--

 

 

--

 

 

 

 

--

Expired

(250,000

)

 

1.25 - 1.25

 

 

 

 

1.25

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2007

2,533,000

 

$

0.34 - 2.00

 

2.1 Years

 

$    .97

 

 

 

 

 

 

 

 

 

 

Granted

347,463

 

 

0.85 - 1.38

 

4.5 Years

 

 

.96

Exercised

(625,000

)

 

0.34 - 0.60

 

 

 

 

.52

Canceled

--

 

 

--

 

 

 

 

--

Expired

(758,000

)

 

1.25 - 2.00

 

 

 

 

1.42





  

F-19





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12


[5] Stock-Based Compensation [Continued]

 

Shares

 

 

Exercise

Price

Per Share

 

Weighted-Average
Remaining
Contractual Life

 

Weighted-Average Exercise Price

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2008

1,497,463

 

$

0.36 - 1.40

 

3.4 Years

 

$

.92

 

 

 

 

 

 

 

 

 

 

Granted

360,000

 

 

1.00 - 1.05

 

4.2 Years

 


1.01

Exercised

(55,000

)

 

0.61 - 1.16

 

 

 


.66

Canceled

--

 

 

--

 

 

 


--

Expired

--

 

 

--

 

 

 


--

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2009

1,802,463

 

$

0.36 - 1.40

 

2.8 Years

 

$

.95


The options granted during 2009 are distributed as follows, relative to the difference between the exercise price and the stock price at grant date:

 

 

Number

Granted

 

Weighted-Average

Exercise Price

 

Weighted-Average

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise Price at Stock Price

 

360,000

 

$

1.01

 

$

.66


The options granted during 2008 are distributed as follows, relative to the difference between the exercise price and the stock price at grant date:

 

 

Number

Granted

 

Weighted-Average

Exercise Price

 

Weighted-Average

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise Price at Stock Price

 

347,463

 

$

.96

 

$

.96


The options granted during 2007 are distributed as follows, relative to the difference between the exercise price and the stock price at grant date:

 

 

Number

Granted

 

Weighted-Average

Exercise Price

 

Weighted-Average

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise Price at Stock Price

 

880,000

 

$

1.05

 

$

1.05


Exercisable options at December 31, 2009, 2008 and 2007 were as follows:

 

 

Number of

Exercisable Options

 

Weighted-Average

Exercise Price

December 31,

 

 

2009

 

1,145,463


$

.86

2008

 

699,152


$

.70

2007

 

1,756,326


$

.94



  

F-20





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13


[5] Stock-Based Compensation [Continued]

The following table summarizes information about stock options at December 31, 2009:

 

 

 

 

Outstanding Stock Options

 

 

Exercisable

Stock Options

 

 

 

 

 

 

Range of

Exercise Prices

 

 

Shares

 

Weighted-Average

Remaining

Contractual Life

 

Weighted-Average

Exercise Price

 

Shares

 

Weighted-Average

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

$

.36 - $  .41

 

 

 220,000

 

1.6 Years

 

$

.41

 

 

 220,000

 

$

.41

$

.79 - $1.05

 

 

 1,135,000

 

3.1 Years

 

$

.87

 

 

 725,500

 

$

.85

$

1.38 - $1.40

 

 

447,463

 

2.7 Years

 

$

1.40

 

 

199,963

 

$

1.39

 

 

 

 

1,802,463

 

2.8 Years

 

$

.95

 

 

1,145,463

 

$

.86


Warrants

There were 100,000 warrants outstanding at December 31, 2009.  The exercise prices for all the warrants issued and outstanding as of December 31, 2009 were equal to or greater than the market price of our stock at the date of grant.

A summary of the changes in outstanding warrants is as follows:

 

 

 

Outstanding

and Exercisable

Warrants

 

Exercise

Price

Per Warrant

 

Weighted-Average

Remaining

Contractual Life

 

Weighted-Average

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2007

 

257,144

 

$

.22 - .35

 

2.3 Years

 

$

.29

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

(135,715)

 

 

.22 - .35

 

 

 

 

.23

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2007

 

121,429

 

$

.35 - .35

 

3.35 Years

 

$

.35

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2008

 

121,429

 

$

.35 - .35

 

2.35 Years

 

$

.35

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

(21,429)

 

 

.35 - .35

 

 

 

 

.35

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2009

 

100,000

 

$

.35 - .35

 

1.11 Years

 

$

.35


Exercisable Warrants at December 31, 2009, 2008 and 2007 were as follows:

 

 

Number of

Exercisable Warrants

 

Weighted-Average

Exercise Price

December 31,

 

 

2009

 

100,000


$

.35

2008

 

121,429


$

.35

2007

 

121,429


$

.35





  

F-21





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14


[5] Stock-Based Compensation [Continued]

Time-Based Restricted Stock Units

In 2009 and 2008, we granted -0- and 257,500, respectively, time-based RSUs vesting through August 5, 2011.

A summary of our time-based RSUs for the years ended December 31, 2009 and 2008 are as follows:

 

 

Shares

 

Weighted-Average Grant Date

Fair Value

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2008

 

125,000

 

$

1.40

 

 

 

 

 

 

 

 

Granted

 

257,500

 

$

1.16

 

Vested

 

--

 

 

--

 

Forfeited or Expired

 

--

 

 

--

 

 

 

 

 

 

 

 

Balance, December 31, 2008

 

382,500

 

$

1.24

 

 

 

 

 

 

 

 

Granted

 

--

 

$

--

 

Vested

 

(150,000)

 

 

--

 

Forfeited or Expired

 

(17,500)

 

 

--

 

 

 

 

 

 

 

 

Balance, December 31, 2009

 

215,000

 

$

1.13

 


The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable.  In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.  Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our employee stock options.

We follow ASC 718, “Accounting for Stock Options and Other Stock-Based Compensation.” Among other items, ASC 718 requires companies to record compensation expense for share-based awards issued to employees and directors in exchange for services provided. The amount of the compensation expense is based on the estimated fair value of the awards on their grant dates and is recognized over the required service periods. Our share-based awards include stock options and restricted stock awards. For restricted stock awards, the calculation of compensation expense under ASC 718 is based on the intrinsic value of the grant.



  

F-22





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15


[5] Stock-Based Compensation [Continued]

For the year ended December 31, 2009, we recognized $409,762 of stock-based compensation expense in our consolidated financial statements. For the year ended December 31, 2008, we recognized $583,351 of stock-based compensation expense in our consolidated financial statements. For the year ended December 31, 2007, we recognized $220,650 of stock-based compensation expense in our consolidated financial statements.

[6] Basic Earnings Per Share Disclosures

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share [“EPS”] computations:


 

 

2009

 

2008

 

2007

Numerator:

 

 

 

 

 

 

 

 

 

Net Income

 

$

3,916,906

 

$

4,556,326

 

$

1,231,437

Effect of Dilutive Securities:

 

 

 

 

 

 

 

 

 

Interest Reversal Convertible Debentures [Net of Tax]

 

 

--

 

 

--

 

 

12,600

 

 

 

 

 

 

 

 

 

 

Numerator for Diluted Earnings Per

 

 

 

 

 

 

 

 

 

Common Share

 

$

3,916,906

 

$

4,556,326

 

$

1,244,037

Denominator:

 

 

 

 

 

 

 

 

 

Weighted Average Number of Common Shares

 

 

 

 

 

 

 

 

 

Outstanding for Basic Earnings Per Common Share

 

 

24,591,000

 

 

23,794,000

 

 

21,806,000

 

 

 

 

 

 

 

 

 

 

Effect of Dilutive Securities:

 

 

 

 

 

 

 

 

 

Exercise of Options

 

 

398,000

 

 

329,000

 

 

697,000

Exercise of Warrants

 

 

68,000

 

 

80,000

 

 

86,000

Conversion of Convertible Debentures

 

 

--

 

 

--

 

 

874,000

 

 

 

 

 

 

 

 

 

 

Denominator for Diluted Earnings Per

 

 

 

 

 

 

 

 

 

Common Share

 

 

25,057,000

 

 

24,203,000

 

 

23,463,000

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

$

.16

 

$

.19

 

$

.06

 

 

 

 

 

 

 

 

 

 

Diluted Earnings Per Common Share

 

$

.16

 

$

.19

 

$

.05



Equity instruments that may dilute earnings per share in the future are listed in Note 5. We use the treasury stock method to compute diluted earnings per share, whereby the proceeds from the exercise of dilutive instruments are hypothetically used to repurchase outstanding shares at market prices.

Options to purchase 554,963 shares of common stock at prices ranging from $1.38 to $1.40 per share were outstanding at December 31, 2009, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares.

Options to purchase 577,463 shares of common stock at prices ranging from $1.16 to $1.40 per share were outstanding at December 31, 2008, but were not included in the computation of diluted EPS because the options’ exercise prices were greater than the average market price of the common shares.



  

F-23





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #16


[7] Supplemental Data

Accrued liabilities consist of the following:


 

 

Years Ended

December 31,

 

 

 

 

2009

 

2008

Accrued Bonuses, Payroll, Commissions, Benefits, Temporary

 

 

 

 

 

 

Help and Consulting

 

$

908,069

 

$

781,695

Accrued Professional Fees

 

 

224,726

 

 

218,450

Other

 

 

142,263

 

 

60,920

 

 

 

 

 

 

 

Totals

 

$

1,275,058

 

$

1,061,065

 

 

 

 

 

 

 





  

F-24





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #17


[8] 401(k) Plan

After completing a year of service and working 1,000 hours, employees age 21 and over are eligible to participate in our Tax Saver 401(k) Salary Reduction Plan.  Employees can save a percentage of pay on a pre-tax basis to an annual maximum of $16,500 for the year ended December 31, 2009.  We match $.50 for each $1.00 of the first 5% of pay employees elect to defer.  Expenses associated with this plan in 2009, 2008 and 2007 were approximately $81,274, $76,184 and $75,166, respectively.

[9] Stockholders’ Equity

In February 2009, we announced that our Board of Directors declared a special cash dividend in the amount of $0.03 per share on our common stock.  This dividend was paid on April 7, 2009 to common stockholders of record as of the close of business on March 27, 2009.  The Company also announced that, in light of their decision to declare a special cash dividend, the Board of Directors had determined that the Company would suspend its common stock buyback plan until further notice.

On June 25, 2008, John Roblin, our Chairman and Chief Executive Officer, and certain other investors elected to convert all of the unpaid principal amount due on convertible debentures in their possession, totaling $262,265, into an aggregate of 874,217 shares of our common stock at the conversion price of $0.30 per share.  We made an aggregate of $10,000 of interest payments on the debentures during 2008.

In March 2007, the RENN Funds, the holders of certain convertible debentures, elected to convert all of their remaining unpaid principal amount due, totaling $1,631,601, into an aggregate of 5,438,670 shares of our common stock at the conversion price of $0.30 per share.  In June 2007, other holders of our convertible debentures elected to convert an aggregate of $33,617 in principal of such debentures into a total of 112,055 shares of our common stock at the conversion price of $0.30 per share.  We made an aggregate of $52,000 of interest payments on these debentures during 2007.

During 2007, the holders of certain convertible debentures elected to convert an aggregate of $119,807 in principal of such debentures, representing their monthly installments of principal under such debentures (in lieu of necessary such installment payments in cash), for an aggregate of 399,358 shares of our common stock at the conversion price of $0.30 per share.




  

F-25





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #18


[9] Stockholders’ Equity [Continued]

In June 2008, the Board of Directors authorized a share buyback plan of up to 1,000,000 shares of the Company’s Common Stock.

In 2008, we purchased an aggregate of 201,870 shares of treasury stock on the open market at an average purchase price of $0.82 per share for a total purchase price of approximately $164,894.

During 2007, we cancelled 2,500,000 shares of treasury stock that had been previously repurchased for $703,000.

[10] Fair Value of Financial Instruments

ASC 825, “Disclosures about Fair Value of Financial Instruments,” defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.  In assessing the fair value of our cash and cash equivalents, trade receivables and accounts payables and accrued expenses, management concluded that the carrying amount of these financial instruments approximates fair value because of their short maturities.

[11] Major Customers

For the year ended December 31, 2009, sales to three customers amounted to approximately 15%, 15% and 12% of revenues, respectively.

For the year ended December 31, 2008, sales to three customers amounted to approximately 27%, 17% and 15% of revenues, respectively.

For the year ended December 31, 2007, sales to two customers amounted to approximately 25% and 19% of revenues, respectively.

All of the major customers referred to above, other than the one customer in 2009 with 15% of revenues, are units of American International Group, Inc.

[12] Subsequent Events

We evaluated subsequent events through March 19, 2010.

.  .  .  .  .  .  .  .  .  .




  

F-26





COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARY


SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS


 

 

Balance at

Beginning

of Period

 

Additions

 

Deductions

 

Balance at

End of Period

 

 

 

 

 

 

 

 

 

 

Accumulated amortization of

 

 

 

 

 

 

 

 

 

 

 

 

capitalized software and

 

 

 

 

 

 

 

 

 

 

 

 

software license:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2009

 

$

11,049,157

 

$

917,208

 

$

--

 

$

11,966,365

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2008

 

$

10,180,752

 

$

868,405

 

$

--

 

$

11,049,157

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2007

 

$

9,301,096

 

$

879,656

 

$

--

 

$

10,180,752

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Doubtful Accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2009

 

$

25,000

 

$

--

 

$

--

 

$

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2008

 

$

25,000

 

$

20,770

 

$

20,770

 

$

25,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2007

 

$

25,000

 

$

50,661

 

$

50,661

 

$

25,000





  

F-27






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

COVER-ALL TECHNOLOGIES INC.

Date:  March 19, 2010

By:  /s/ John W. Roblin

John W. Roblin

Chairman of the Board of Directors and

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signatures

Title

Date

 

 

 

/s/ John W. Roblin

John W. Roblin

Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

March 19, 2010

 

 

 

/s/ Ann F. Massey

Ann F. Massey

Chief Financial Officer, Controller and Secretary (Principal Financial Officer and Principal Accounting Officer)

March 19, 2010

 

 

 

/s/ Manish D. Shah

Manish D. Shah

Director, President and Chief Technology Officer

March 19, 2010

 

 

 

/s/ Russell Cleveland

Russell Cleveland

Director

March 19, 2010

 

 

 

/s/ Earl Gallegos

Earl Gallegos

Director

March 19, 2010

 

 

 

/s/ Mark D. Johnston

Mark D. Johnston

Director

March 19, 2010

 

 

 

/s/ Stephen M. Mulready

Stephen M. Mulready

Director

March 19, 2010




  






EXHIBIT INDEX

The following is a list of exhibits required by Item 601 of Regulation S-K filed as part of this Form 10-K.  For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses.

Exhibit No.

Description

2

Certificate of Merger of the Company Computer Systems, Inc. (a New York corporation) into the Registrant, filed on June 11, 1985 [incorporated by reference to Exhibit 2 to the Registrant’s Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 29, 1986].

3(a)

Certificate of Incorporation of the Registrant filed on April 22, 1985 [incorporated by reference to Exhibit 3 (a)to the Registrant’s Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 29, 1986].

3(b)

Certificate of Amendment of Certificate of Incorporation of the Registrant filed on May 6, 1987 [incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (Commission File No. 33-17533) filed on September 29, 1987].

3(c)

Certificate of Amendment of Certificate of Incorporation of the Registrant filed on March 26, 1990 [incorporated by reference to Exhibit 3(d) to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on June 14, 1990].

3(d)

Certificate of Amendment of Certificate of Incorporation of the Registrant filed on March 18, 1992 [incorporated by reference to Exhibit 1 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-13124) filed on March 30, 1992].

3(e)

Certificate of Amendment of Certificate of Incorporation of the Registrant [incorporated by reference to Exhibit 3(e) to the Registrant’s Amendment No. 1 to Registration Statement on Form S-3 (Commission File No. 0-13124) filed on July 10, 1996].

3(f)

Certificate of Amendment of Certificate of Incorporation of the Registrant filed on July 12, 2000 [incorporated by reference to Exhibit 3(g) to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 11, 2000].

3(g)

By-laws of the Registrant, as amended [incorporated by reference to Exhibit 3(g) to the Registrant’s Amendment No. 1 to Registration Statement on Form S-3 (Commission file No. 0-13124) filed on July 10, 1996].

4

Form of Common Stock Certificate of the Registrant [incorporated by reference to Exhibit 4(a) to the Registrant’s Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 29, 1986].

10(a)

Warner Insurance Services, Inc. Tax Saver 401(k) Salary Reduction Plan adopted May 31, 1985 and restated as of August 11, 1992 [incorporated by reference to Exhibit 10(k) to the Registrant’s Annual Report on Form 10-K (Commission File No. 0-13124) filed on January 28, 1993].

10(b)(1)†

1994 Stock Option Plan for Independent Directors adopted by the Board of Directors of the Registrant on November 10, 1994 [incorporated by reference to Exhibit 10(n)(1) to the Registrant’s Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 17, 1995].

10(c)(8)†

Amendment to Non-Qualified Stock Option Agreement, dated as of December 20, 2004, between the Registrant and Mark D. Johnston [incorporated by reference to Exhibit 10(c)(8) to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 15, 2005].

10(c)(9)†

Amendment to Non-Qualified Stock Option Agreement, dated as of December 20, 2004, between the Registrant and Earl Gallegos [incorporated by reference to Exhibit 10(c)(9) to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 15, 2005].

10(c)(10)†

Amendment to Incentive Stock Option Agreement, dated as of December 20, 2004, between the Registrant and John Roblin [incorporated by reference to Exhibit 10(c)(10) to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 15, 2005].




  






10(c)(11)†

Amendment to Incentive Stock Option Agreement, dated as of December 20, 2004, between the Registrant and John Roblin [incorporated by reference to Exhibit 10(c)(11) to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on August 15, 2005].

10(c)(14)†

Form of Non-Qualified Stock Option Agreement [incorporated by reference to Exhibit 10(c)(14) the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 15, 2006].

10(c)(15)†

Form of Incentive Stock Option Agreement [incorporated by reference to Exhibit 10(c)(15) the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 15, 2006].

10(c)(16)†

Form of Restricted Stock Grant Agreement [incorporated by reference to Exhibit 10(c)(16) the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 15, 2006].

10(c)(17)†

Form of Non-Qualified Stock Option Agreement (for Consultants) [incorporated by reference to Exhibit 10 (c)(13) the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 0-13124) filed on May 15, 2006].

10(c)(18)†

Cover-All Technologies, Inc. Amended and Restated 2005 Stock Incentive Plan [incorporated by reference to Exhibit 10(c)(18) to the Registrant’s Form 8-K (Commission File No. 0-13124) filed on March 27, 2008].

10(c)(19)†

Summary of 2009 Non-Employee Director Compensation dated March 2, 2009 [incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K (Commission File No. 0-13124) filed on March 2, 2009].

10(c)(20)†

Summary of 2010 Non-Employee Director Compensation dated March 12, 2010 [incorporated by reference to Exhibit 10(c)(20) to the Registrant’s Form 8-K (Commission File No. 0-13124) filed on March 16, 2010].

10(d)(1)

Lease Agreement, dated March 3, 2005, by and between the Registrant and Fairfield 80 Venture, LLC [incorporated by reference to Exhibit 10(d)(4) to the Registrant’s Annual Report on Form 10-K (Commission File No. 0-13124) filed on March 25, 2005].

10(e)(3)†

Tuition Reimbursement Agreement, dated September 1, 2006, between the Registrant and Manish D. Shah [incorporated by reference to Exhibit 10(p) to the Registrant’s Form 8-K (Commission File No. 0-13124) filed on September 1, 2006].

10(e)(5)†

Employment Agreement, dated December 26, 2006, by and between the Registrant and John Roblin [incorporated by reference to Exhibit 10(e)(5) to the Registrant’s Form 8-K (Commission File No. 0-13124) filed on December 27, 2006].

10(e)(6)†

Amendment No. 1 to the Employment Agreement, dated April 26, 2007, between the Registrant and John Roblin [incorporated by reference to Exhibit 10(e)(6) to the Registrant’s Form 8-K (Commission File No.  0-13124) filed on April 30, 2007].

10(e)(7)†

Employment Agreement, dated December 26, 2007, by and between the Registrant and John Roblin [incorporated by reference to Exhibit 10(e)(7) to the Registrant’s Form 8-K (Commission File No. 0- 13124) filed on December 27, 2007].

10(e)(8)†

Employment Agreement, dated December 22, 2009, by and between the Registrant and John Roblin [incorporated by reference to Exhibit 10(e)(8) to the Registrant’s Form 8-K (Commission File No. 0- 13124) filed on December 23, 2009].

10(j)(i)

Asset Purchase Agreement, dated January 22, 2007, between the Registrant and Maloy Risk Services, Inc. [incorporated by reference to Exhibit 10(j)(i) to the Registrant’s Form 8-K (Commission File No. 0-13124) filed on January 26, 2007].

10(j)(ii)

Commission Agreement, dated January 22, 2007, between the Registrant and Maloy Risk Services, Inc. [incorporated by reference to Exhibit 10(j)(ii) to the Registrant’s Form 8-K (Commission File No. 0-13124) filed on January 26, 2007].

10(k)

Client Services Addendum, effective as of January 1, 2005, between the Registrant and AIG [incorporated by reference to Exhibit 10(k) to the Registrant’s Registration Statement on Form S-1/A (Commission File No. 333-156397) filed on August 6, 2009].***

14

Code of Ethics and Business Conduct [incorporated by reference to Exhibit 14 to the Registrant’s Annual Report on Form 10-K (Commission File No. 0-13124) filed on March 31, 2006].



  






21

Subsidiaries of the Registrant [incorporated by reference to Exhibit 21 to the Registrant’s Annual Report on Form 10-K (Commission File No. 0-13124) filed on April 11, 1996].

23.1*

Consent of MSPC.

31.1*

Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

____________________

*

Filed herewith.

Denotes a management contract or compensatory plan or arrangement.

*** Confidential treatment has been requested for certain provisions of this Exhibit pursuant to Rule 24b-2 under the Exchange Act.