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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-13124
COVER-ALL TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-2698053
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18-01 Pollitt Drive, Fair Lawn, New Jersey 07410
(Address of principal executive office) (Zip Code)
(201)794-4800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------ ------------------------
Common Stock, par value $.01
per share Philadelphia Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
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Common Stock, par value $.01 per share
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY
OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT AT APRIL 7, 1997 WAS $16,454,451.
NUMBER OF SHARES OUTSTANDING AT APRIL 7, 1997:
16,720,297 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE.
THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO
BE HELD JUNE 19, 1997, TO BE FILED WITH THE COMMISSION NOT LATER THAN 120
DAYS AFTER THE CLOSE OF THE REGISTRANT'S FISCAL YEAR, HAS BEEN
INCORPORATED BY REFERENCE IN WHOLE OR IN PART FOR PART III, ITEMS 10, 11,
12 AND 13, OF THE DECEMBER 31, 1996 FORM 10-K
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ITEM 1. BUSINESS
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GENERAL
-------
Cover-All Technologies Inc. (the "Company"), a Delaware corporation
formed in 1971, is a provider of state-of-the-art software products for
the property/casualty insurance industry through its wholly-owned
subsidiary, COVER-ALL Systems, Inc. ("COVER-ALL").
Historically, the Company (formerly Warner Insurance Services, Inc.)
also provided services to the automobile insurance industry including
underwriting, policy maintenance and claims adjustment which was carried
out by its Insurance Services Division ("ISD"). However, in March 1996,
the ISD business was transferred to a subsidiary of The Robert Plan
Corporation, in connection with the settlement of two lawsuits between
the Company and The Robert Plan Corporation and the release of the
Company from its obligations under long-term processing contracts with
the customers of ISD, and therefore the activities of the ISD are
reflected as discontinued operations as more fully described in Note 2 to
the Consolidated Financial Statements.
During March 1997, the Company announced several major changes as
part of its overall strategy. Mr. Brian Magowan was named Chairman of
the Board and Chief Executive Officer and Mr. Mark Johnston was named
Chief Financial Officer. Four of the existing Board members resigned and
two additional Board members, Messrs. Earl Gallegos and Ian Meredith,
were added. Further, the Company raised $3 million of financing through
the sale of 12 1/2% Convertible Debentures ("Debentures"), due March
2002. The Debentures are convertible into shares of Common Stock at
$1.25 per share and carry certain restrictive covenants. See Note 12
to the Consolidated Financial Statements.
OVERVIEW
COVER-ALL offers standard as well as customized software application
products together with implementation support services to the
property/casualty insurance industry. The Company derives revenue from
Software Contract Licenses to new and existing customers and from
continuing Maintenance Fees for servicing the product. The Company also
provides Professional Consulting Services to customize the software for
specific uses.
In December 1989, the Company purchased, through its wholly-owned
subsidiary, the assets related to the exclusive proprietary rights to a
PC-based software application for policy rating and issuance for
property/casualty insurance companies. This acquired software has been
enhanced and is the Company's "Classic" product line which is one of two
current product lines.
The Classic product line is a self-contained rating, issuance and
transaction management application system utilized in the
property/casualty insurance industry. This software was developed using
the Microfocus COBOL language, and the Company has upgraded this product
line for use in the Windows 95 operating system. The Company believes
that this software product provides cost-effectiveness and flexibility
for self-contained Local Area Network ("LAN") systems. The Classic
product is in use in over 45 property/casualty insurance companies. Total
Classic revenues were $3,654,587 for the year ended December 31, 1996 as
compared to $2,752,055 and $1,926,822 for the years ended December 31,
1995 and 1994, respectively.
Since 1993, COVER-ALL has been developing its second product line
entitled the Total Administrative Solution ("TAS 2000") and, as of
December 31, 1996, COVER-ALL completed several modules. TAS 2000
comprises an architecture and a suite of application development tools
for property/casualty insurers designed to enable a client-driven re-
engineering of an insurer's business processes. TAS 2000 applications
run on commodity priced open computer systems and use state-of-the-art
client/server software technology provided by Oracle Corporation. Total
TAS 2000 revenues were $1,814,085 for the year ended December 31, 1996 as
compared to
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$1,366,699 for the year ended December 31, 1995. There were no TAS 2000
revenues for the year ended December 31, 1994.
In 1996, the Company was granted by Care Corporation Limited
("Care") the exclusive license for the Care software systems for use in
the workers' compensation and group health claims administration markets
in Canada, Mexico and Central and South America. The Care software is an
integrated suite of computer applications for the administration of
claims processing of workers' compensation. The software utilizes the
"Open System" environment and, in particular, relational database
technology. The product has been successfully deployed in Australia and
the United States in Third Party Administration ("TPA") and self insured
environments, including city and state government operations as well as
with major private corporations. A feature of the software is the
integration of advanced managed care algorithms and databases.
PRODUCT DESCRIPTION
-------------------
CLASSIC PRODUCT LINE
--------------------
The Classic product line is a set of LAN based PC software packages
designed to automate the rating and issuance tasks in the property and
casualty insurance industry. Functionality includes rating and issuance
for quoting new business, mid-term changes, cancellations, reinstatements
and renewals. Multiple recipient copies of all relevant documentation
for each of these transactions, including quote summaries, declaration
pages and mandatory and optional manuscript forms, are printed by the
system's print engine. This product life cycle functionality is
supported for property and casualty lines of business in a user friendly
system.
The Company believes that the Classic product line brings to the
customer many useful functions, features and capabilities. Some are line
of business specific and some are line of business independent. These
include:
- Clear and comprehensive data collection
- On-line system level, screen level, and field level help
- On-line ISO Commercial Lines Manual Tables and Footnotes
- Easy and direct system navigation
- Standard Bureau coverages and rates support
- Company customized coverages and rates support
- Fully automated recipient driven issuance of declaration pages,
worksheets, ID card, etc.
- Help Desk assistance
- Remote diagnostic and fix capabilities
The Classic products were originally brought to the marketplace in
the mid 1980's and subsequently have been enhanced to provide greater
functionality and to better utilize newer technology. The Classic
product line is based upon several specific proprietary design features.
COVER-ALL has upgraded the Classic product line for use in the Windows 95
operating system. This makes it a Graphical User Interface ("GUI")
application. This enhancement increases user friendliness and provides
customers with an easier integration of peripheral support applications
(e.g., imaging, work flow management, etc.).
TAS 2000 PRODUCT LINE
---------------------
The TAS 2000 product line was developed to be used for client/server
Wide Area Network ("WAN") applications in the property/casualty industry.
COVER-ALL created the TAS 2000 product line to better position itself to
penetrate the larger customer market segment. The client/server
architectural concept allows companies to take advantage of the power of
distributed processing. The TAS 2000 product line currently includes the
following application modules:
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- Client Management
- End User Tools
- Agency Profile Management
- Product Developer
- Policy Administration
The TAS 2000 has Windows compliant GUI to enhance its user
friendliness. The TAS 2000 can be used on many different client/server
hardware platforms and offers capability to process the voluminous
transactions that are common to large scale insurance operations. The
TAS 2000 is an architecture of open LAN and WAN based modules possessing
varying elements of interdependence.
The changing of the century is an issue which has never been faced
in the computer industry and poses a massive problem for automation
systems previously designed and currently being used. Companies must
modify their systems to accommodate a four-digit year in order to
properly affect the calculations and sorting routines which provide the
core of their data processing accuracy. Although seemingly minor, this
change requires finding, analyzing, implementing and testing tens of
thousands of isolated incidents within millions of lines of source code.
The cost for the industry can reach into the millions of dollars to
affect proper change. The TAS 2000 product line already accommodates the
advent of the new century. All of a customer's "date affected" programs
must be fully tested for interoperatibility, as must any programs which
transfer date sensitive data, to a customer's system, whether by
Electronic Data Interchange ("EDI") or other means. Any such program,
which has not been correctly changed to address the millennium issue, has
the potential to corrupt the customer's database and cause a system
failure.
COVER-ALL intends to continue to enhance both of its product lines
based on customer needs and changes in technology. COVER-ALL is also
committed to maintaining a quality support service program for its
customers.
COMPETITIVE PRODUCTS
--------------------
The Company believes that its products offer customers certain
advantages not available from COVER-ALL's competitors. The Classic
product line has significant functionality and can accommodate specific
customer requirements while retaining a single source integrated core
system, thus making the system cost effective. TAS 2000's architecture
is distinguished from competitive offerings by the integrated use of
Oracle's relational database and the Designer 2000 and Developer 2000
tool sets. The underlying database and language used for the TAS 2000
products are the Oracle Relational Database Management System and the
Oracle Cooperative Development Environment products. These products
provide an integrated application environment. Through Oracle's tools,
these new products take advantage of the power of Oracle Version 7 on
over 90 different server platforms. This software allows processing to
be centralized, dedicated to specific server(s) or clients or distributed
across the network. The TAS 2000 product line was developed with an
emphasis on quality from the conceptual design stage using Oracle CASE
tools through to the physical coding and testing phases.
COVER-ALL's competitors for both of its product lines are in most
instances larger and financially stronger than the Company. The Classic
product line competes primarily with three competitors who are also
actively selling LAN based policy rating and issuance software used by
property/casualty insurance companies. The TAS 2000 primary competitors
are two systems' suppliers who are also larger and financially stronger
than the Company.
MARKETING
---------
The Company maintains a sales staff at its principal executive
offices in Fair Lawn, New Jersey. The Company also utilizes distributors
and outside consultants to market its products. The Company also
participates in and displays its software products at trade shows
organized by industry trade groups.
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RESEARCH AND DEVELOPMENT
------------------------
COVER-ALL's business is characterized by rapid technological change.
The Company's success will depend, in part, on its ability to keep its
products current based on new technologies. Accordingly, the Company
must maintain ongoing research and development programs to continually
add value to its suite of products, as well as any possible expansion of
its product lines. The Company believes that research and development
expenditures will continue to constitute a significant percentage of
revenues.
Research and development expenses for COVER-ALL were $1,846,410,
$1,932,920 and $2,499,436 for the years ended December 31, 1996, 1995 and
1994, respectively.
BACKLOG
-------
Backlog is not applicable to the business of the Company.
MAJOR CUSTOMERS
---------------
The Classic product line is in use in over forty-five
property/casualty insurance companies while the TAS 2000 product line is
currently in use in one property/casualty insurance company. The
Company's revenues from major customers (more than 10 percent of total
revenues) for the years ended December 31, 1996, 1995 and 1994 as a
percentage of total revenue were as follows:
YEAR YEAR YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER
CUSTOMER 31, 1996 31, 1995 31, 1994
-------- -------- --------- --------
Sun Alliance Management 27% 16%
Services
Glatfelter Insurance Group 13%
Millers Insurance Group 13% 13%
New Jersey State Medical 18%
Underwriters
Secura, Inc. 11%
Empire Insurance Company 17%
In 1996 and 1995 export sales were made to a U.K. customer of
approximately $1,465,000 and $640,000, respectively.
EMPLOYEES
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The Company had over 80 employees during 1996 and 52 employees at
year-end. None of the Company's employees are represented by a labor
union, and the Company has not experienced any work stoppages. The
Company believes that relations with its employees are good.
DISCONTINUED OPERATIONS
-----------------------
INSURANCE SERVICES DIVISION
---------------------------
ISD revenues decreased substantially in 1994 and 1995 because of
lower fees attributable to the reduced number of policies and claims
being handled on contracts that were winding down or were completed. As
a result, ISD suffered losses and operated under considerable uncertainty
as a result of the pendency of lawsuits with certain affiliates of The
Robert Plan Corporation. In March 1996, the Company entered into a
series of agreements which
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provided for the transfer and discontinuance of its ISD operations and
the issuance of the Company's Common Stock and Warrants to certain
customers of the ISD business in exchange for the release of the Company
from its obligations to provide insurance services to ISD customers and
to The Robert Plan Corporation in exchange for the settlement and
dismissal of two lawsuits with The Robert Plan Corporation. Effective
March 1, 1996 the Company discontinued providing insurance processing
services to the automobile insurance industry and reflected those
activities as discontinued operations in its Financial Statements. See
Note 2 to the Consolidated Financial Statements.
As part of the restructuring transactions (the "Restructuring"), the
Company transferred certain assets, employees, contracts and leased
premises relating to its ISD business to a subsidiary of The Robert Plan
Corporation, which replaced the Company as the provider of insurance
services to the ISD customers. In exchange for settling the lawsuits,
releasing the Company's obligations to provide insurance services under
its contracts and executing mutual releases, the Company issued to
certain of the ISD customers and certain parties to the litigation: (a)
a total of 3,256,201 shares of the Company's Common Stock, (b) five-year
Warrants to purchase up to an additional aggregate of 1,553,125 shares of
the Company's Common Stock at $2.00 per share and (c) cash of $2.5
million. The Company had the option, exercisable for a period of six
months, to (i) purchase 50% of the aforementioned 3,256,201 shares at a
cash price equal to the greater of $3.00 or 50% of the then market price
of a share of the Company's Common Stock and (ii) acquire 50% of the
1,553,125 Warrants at a cash price equal to $1.00 per Warrant. On March
31, 1996, the Company assigned its aforementioned repurchase option
applicable to the Company's Common Stock and Warrants to Software
Investments Limited ("SIL"). SIL subsequently exercised all of the
options to purchase the Company's Common Stock and Warrants as discussed
in Note 9 to the Consolidated Financial Statements. As a result of the
issuance of shares described in Note 9, the antidilution provisions of
the Warrants required an adjustment of shares to 1,725,694 from 1,553,125
and a price adjustment to $1.80 from $2.00 per share. As a result of the
issuance of the 12 1/2% Convertible Debentures discussed in Note 12 to the
Consolidated Financial Statements, the Warrants may require a further
adjustment to the number of shares purchasable and the exercise price.
In late 1993, the Company established Alerion, a wholly-owned
property/casualty insurance subsidiary. By early 1994, the Company had
funded Alerion with approximately $10 million of cash and securities and
Alerion entered into a reinsurance agreement with Clarendon National
Insurance Company ("Clarendon") to reinsure a portion of the risk on
certain insurance policies written by a primary insurer. In late 1994,
the Company decided to discontinue assuming any underlying insurance
risk. This was accomplished by Alerion commuting all its rights and
obligations under the reinsurance contract back to Clarendon and paying
to Clarendon all amounts received in excess of payments made since the
inception. In 1996, Alerion surrendered its Certificate of Authority to
transact insurance business in New Jersey.
ITEM 2. PROPERTIES
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The Company's headquarters is located in Fair Lawn, New Jersey where
it occupies approximately 36,000 square feet under a lease which expires
in 2000 at a current annual rental expense of approximately $400,000.
In addition, the Company also leased a facility with approximately
22,000 square feet in Somerset, New Jersey. This lease was to expire in
2002 but was terminated in December 1996 at a cost of $371,408. This
facility was previously used by ISD and the Company did not anticipate
utilizing this facility in the near future.
Pursuant to the Restructuring entered into in March 1996 (See
Discontinued Operations) the Company's lease for its former principal
headquarters has been transferred to The Robert Plan Corporation.
The Company believes that its headquarters is well maintained and
adequate to meet its needs in the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
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In March 1994, Material Damage Adjustment Corporation ("MDA"), a
subsidiary of The Robert Plan Corporation and a subcontractor for the
Company performing claims processing work, instituted an action in the
Superior Court of New Jersey seeking injunctive relief requiring that the
Company turn over to MDA in excess of $1 million that the Company had
withheld from certain claims fees allegedly owed to MDA. This action
arose out of the Company's servicing contract with the Market Transition
Facility of New Jersey ("MTF"). The Company had withheld the funds as a
set off to cover unpaid invoices for data processing services rendered by
the Company for MDA. MDA also added a claim for approximately $2.5
million of surcharge fees paid to the Company by the MTF. The MTF was
brought into the case to resolve disputes between MTF and MDA over
refunds of claims fees paid on claims later closed without payment
("CWP's"). The Company vigorously contested MDA's claims and asserted
counterclaims against MDA to establish the Company's entitlement to the
disputed sums.
In May 1994, the Company filed an action in the Superior Court of
New Jersey against Lion Insurance Company, National Consumer Insurance
Corporation and The Robert Plan Corporation seeking payment of
unsatisfied invoices under an April 1991 agreement totalling
approximately $2.7 million. Under the agreement, the Company agreed to
provide data processing services for a three-year term in support of Lion
Insurance Company's "depopulation pool" automobile insurance business in
New Jersey. Lion Insurance Company is a subsidiary of The Robert Plan
Corporation whose affiliate, National Consumer Insurance Corporation, has
taken over the "depopulation pool" business. The Robert Plan Corporation
guaranteed Lion's performance and payment.
On March 1, 1996, the two lawsuits described above were settled as
part of the overall settlement with certain of the Company's insurance
services customers. The settlement and restructuring transactions are
described in Note 2 to the Consolidated Financial Statements.
On February 2, 1995, Sol M. Seltzer commenced an action in the
Supreme Court of New York against Mr. Krieger, the then Chairman of the
Board and former President of the Company, and each of the other then
members of the Board of Directors. The plaintiff, Sol M. Seltzer, who
purported to sue derivatively on behalf of the Company and COVER-ALL,
sought among other things, compensatory damages in an amount to be
determined at trial and punitive damages in an aggregate amount of $12
million. Sol M. Seltzer was a vice president of the Company and a
director of COVER-ALL until he resigned from such positions in late 1994.
The plaintiff alleged, among other things, breach of fiduciary duty,
waste and mismanagement, as well as alleged wrongful acts by the Board
and the former President, including among other things, self-dealing and
misuse of corporate funds by the former President. The Company, and the
other defendants, contested Mr. Seltzer's claims and on July 23, 1996 won
a motion to dismiss the case. Mr. Seltzer attempted to file a notice of
appeal from the order of dismissal, but failed to do so in a timely
manner. He has since motioned the court to recognize his notice of
appeal and it is anticipated that the court will rule on such motion in
the near future.
On February 6, 1995, the Company commenced an action in the Superior
Court of New Jersey against Sol M. Seltzer, a former vice president of
the Company and a director of COVER-ALL, alleging fraud, mismanagement,
negligent misrepresentation and breach of fiduciary duty with respect to
the development and implementation of COVER-ALL's TAS 2000 software
product. The Company claimed compensatory and punitive damages in an
amount to be determined at trial. The case was largely inactive pending
the motion to dismiss Seltzer's New York action. After the dismissal of
the New York case brought by Seltzer, the Company voluntarily dismissed
the New Jersey case without prejudice.
In addition to the above lawsuits, the Company is named as defendant
in a number of legal actions arising from its operations. All of these
actions have been considered in establishing liabilities. Management and
its legal counsel are of the opinion that these actions will not have
a material adverse effect on the Company's financial position or
results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of the Company's security
holders through the solicitation of proxies or otherwise during the
fourth quarter ended December 31, 1996.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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Since May 23, 1996, the Company's Common Stock has been traded on
The Nasdaq SmallCap Market tier of The Nasdaq Stock Market, initially
under the symbol "WISI". As of July 1, 1996, the symbol for the
Company's Common Stock on The Nasdaq SmallCap Market tier of The Nasdaq
Stock Market was changed to "COV". As of August 2, 1996, the Company's
Common Stock has also been trading on the Philadelphia Stock Exchange
under the symbol "CVA."
From March 8, 1996 to March 14, 1996, the Company's Common Stock was
traded on the Over the Counter market and from March 15, 1996, to May 22,
1996 was quoted on the NASD OTC Bulletin Board under the symbol "WISI."
Prior to March 4, 1996, the Company's Common Stock was traded on the New
York Stock Exchange under the symbol "WCP." The quotations below reflect
the high and low closing sale prices since January 1, 1994 on the
principal trading market on which the Common Stock traded during such
period.
HIGH LOW
---- ---
CALENDAR 1996:
1st Quarter $5.000 $1.625
2nd Quarter 7.375 3.375
3rd Quarter 6.250 1.500
4th Quarter 2.375 0.875
CALENDAR 1995:
1st Quarter $3.000 $1.500
2nd Quarter 1.750 0.875
3rd Quarter 2.250 1.250
4th Quarter 1.625 1.000
CALENDAR 1994:
1st Quarter $5.250 $4.125
2nd Quarter 4.250 2.375
3rd Quarter 4.250 2.250
4th Quarter 4.125 2.125
As of April 7, 1997, there were approximately 750 holders of record
of the Company's Common Stock. This number does not include beneficial
owners who may hold their shares in street name. The closing sale price
for the Company's Common Stock on April 7, 1997 was $1.813, as reported
by the Nasdaq SmallCap Market.
The Company does not currently anticipate paying any dividends. The
Company paid quarterly cash dividends of $.01 per share from the first
quarter of 1993 through the second quarter of 1994 but discontinued this
policy in the third quarter of 1994.
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ITEM 6. SELECTED FINANCIAL DATA
------- -----------------------
The following selected financial data of the Company are derived
from the consolidated financial statements. The data should be read in
conjunction with the consolidated financial statements, related notes,
and other financial information included herein.
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
STATEMENTS OF OPERATIONS
DATA:
Revenues: $ 5,469 $ 4,119 $ 1,927
Loss from continuing
operations(1) (5,608) (3,544) (7,466)
(Loss) income from
discontinued operations
less applicable income
taxes/(benefit) of none,
none, ($924), $670,
$3,633 and $2,852,
respectively -- (7,108) (6,754)
Loss on disposal of
discontinued operations,
no tax benefit provided (393) (750)
Net (loss) income (6,001) (11,402) (14,220)
Loss per share from
continuing operations (.38) (.41) (.84)
Net (loss) income per
share(2) (.40) (1.33) (1.60)
Cash dividends per share -- -- $.02
BALANCE SHEET DATA:
Working capital
(deficiency) $(1,293) $(8,717) $ 3,110
Total assets 8,243 8,369 18,795
Short-term debt -- -- 2,000
Stockholders' equity
(deficit) 4,911 (6,013) 5,376
YEARS ENDED OCTOBER 31,
TWO MONTHS -----------------------
ENDED
DECEMBER 31,
1993 1993 1992
---- ---- ----
STATEMENTS OF OPERATIONS
DATA:
Revenues: $ 224 $ 1,740 $ 1,802
Loss from continuing
operations(1) (781) (1,943) (850)
(Loss) income from
discontinued operations
less applicable income
taxes/(benefit) of none,
none, ($924), $670,
$3,633 and $2,852,
respectively 1,158 5,653 4,116
Loss on disposal of
discontinued operations,
no tax benefit provided
Net (loss) income 377 3,710 3,266
Loss per share from
continuing operations (.09) (.21) (.09)
Net (loss) income per
share(2) .04 .40 .36
Cash dividends per share $.01 $.03 --
Balance Sheet Data:
Working capital
(deficiency) $12,475 $12,843 $17,102
Total assets 22,748 22,443 18,544
Short-term debt -- -- --
Stockholders' equity
(deficit) 20,574 20,541 17,637
(1) Includes a $1,165 ($.14 per share) and $3,373 ($.25 per share
net of tax) special charge in 1995 and 1994, respectively.
(2) All per share amounts are based on the increased number of
shares giving retroactive effect to the impact of the five for
four stock split by way of a twenty-five percent (25%) stock
dividend declared on March 18, 1993.
(3) Revenues of the discontinued operations (ISD) were none,
$20,228, $32,893, $8,589, $68,515 and $88,858 respectively, for
each of the periods above.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
---------------------
DISCONTINUED OPERATIONS
-----------------------
During the years 1994 and 1995, the Company derived most of its
revenues from providing full service automobile insurance services
(policy processing, policy administration and claims administration)
through its ISD business. The Company has also provided state-of-the-art
computer products for the property casualty insurance industry through
its wholly-owned subsidiary, COVER-ALL.
ISD revenues in 1994 and 1995 primarily consisted of policy
administration and claims servicing fees from customers such as
Atlantic/Pacific Employers Insurance Company and to a lesser extent,
Clarendon National Insurance Company ("Clarendon"), for servicing
policies in the New Jersey voluntary and assigned risk markets. The
contract with Atlantic/Pacific Employers Insurance Company reached its
peak level of activity in 1994 and policy volumes declined sharply in
1995. During 1995 and 1996, Atlantic/Pacific Employers Insurance Company
planned to non-renew all of their auto insurance policies in New Jersey
in accordance with the accelerated withdrawal order entered into with the
New Jersey Department of Insurance in August 1994. In addition, the MTF
program had been phasing out since 1994 and, as of March 1, 1996, the
Company's contracted activity for the MTF ended.
Revenues earned under the contract with Clarendon involved full
service policy administration and claims services for approximately 18
percent of the assigned risk drivers in New Jersey. This activity
started in 1993 with the commencement of the New Jersey Personal
Automobile Insurance Plan ("PAIP") following the end of New Jersey's
direct insurance program provided by its MTF. The Company's service for
Clarendon was performed under New Jersey's Limited Assignment
Distribution Program ("LAD") which required that servicing carriers such
as the Company bear some of the underlying insurance risk of the policies
being handled. For this reason, the Company formed a wholly-owned
insurance subsidiary, Alerion, and effective January 1, 1994, Alerion
reinsured a portion of Clarendon's insurance risk under the PAIP program.
By the end of 1994, the Company decided that risk taking, even as a
reinsurer, was not an attractive business strategy, particularly because
of the substantial capital required by its insurance subsidiary relative
to other Company capital commitments. The Company and Clarendon agreed,
therefore, to end the reinsurance arrangement in the fourth quarter of
1994 and "commute" all reinsurance interests and liabilities back to the
inception of the agreement, thus eliminating all reinsurance activity of
Alerion. This had the effect of reducing revenues by $6.1 million and
operating income by $.5 million in the fourth quarter of 1994. Since the
Company was no longer willing to share in the underlying insurance risk
of PAIP policies, it could not, by law, continue to provide policy
administration and claims servicing to Clarendon under the LAD program
after 1994.
Most of the Company's insurance services contracts included a
variable fee structure based on the loss ratios of the underlying
insurance policies which could increase or decrease fee revenues. The
Company obtained periodic independent actuarial evaluations of the loss
ratios for these programs and adjusted the amount of its revenue when
required. Subsequent to December 31, 1994, the Company obtained
independent actuarial projections of loss adjustment expenses expected to
be incurred in 1995 and beyond with respect to the Company's contractual
obligations under its insurance services contracts. As a result of this
review, the Company determined that its deferred contract revenues at the
end of 1994 should be increased by $4.1 million to adequately cover
contract costs and profit margins in 1995 and beyond. This change in
accounting estimate was recorded in the fourth quarter of 1994 as a
reduction of insurance services revenue.
-10-
<PAGE>
In the fourth quarter of 1994, ISD wrote off $2.3 million of
unamortized capitalized software development costs previously incurred to
develop a version of the COVER-ALL system for use in-house to process
policies and claims.
As a result of the developments discussed above, ISD was suffering
losses and, in addition, was operating under considerable uncertainty
because of the pendency of lawsuits with certain affiliates of The Robert
Plan Corporation, a customer and subcontractor for the Company. In March
1996, the Company entered into a series of agreements resulting in the
settlement and dismissal of the lawsuits and the release of the Company
from continuing obligations under contracts for the provision of
insurance services to ISD customers. See Note 2 to the Consolidated
Financial Statements for a discussion of the various financial elements
of those agreements. In essence, the Company no longer offers full
service automobile insurance services, and its ISD operations have been
transferred to a subsidiary of The Robert Plan Corporation which has
replaced the Company as a service provider to such customers.
These agreements have resulted in a net loss for 1996 and 1995 of
$392,872 and $749,758, respectively. The additional net loss for 1996
relates to additional loss adjustment expenses (mostly legal fees),
pertaining to the discontinued operations, in excess of the amount
accrued in 1995. The 1995 net loss includes a provision for estimated
ISD losses in 1996 prior to the March 1, 1996 effective date of the
Restructuring.
Accordingly, the Company's Consolidated Financial Statements have
been restated for all periods to reflect ISD operations as "discontinued
operations."
CONTINUING OPERATIONS
---------------------
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
-----------------------------------------------------------------------
Total revenues were $5,468,672 for the year ended December 31, 1996
as compared to $4,118,754 for the year ended December 31, 1995, an
increase of 33%. License fees were $1,044,460 for the year ended
December 31, 1996 compared to $1,421,866 in the same period in 1995 due
to the sale of one additional contract in 1995. For the year ended
December 31, 1996, maintenance revenues were $2,252,378 compared to
$1,174,150 in the same period of the prior year due to an increased
customer base and renegotiations of all contracts resulting in higher
fees to customers. Professional services revenue contributed $2,171,834
for the year ended December 31, 1996 compared to $1,522,738 for the year
1995 as a result of new contracts signed and customers requesting
additional modifications to the existing systems.
Cost of sales increased to $4,585,727 for the year ended December
31, 1996 as compared to $1,329,693 for 1995. Significant increases in
capitalized software and license fees amortization, and salary and
benefit costs relating to dedication of resources to maintenance and
professional services, accounted for the bulk of the increase. In
addition, the Company wrote off approximately $500,000 of unamortized
capitalized software costs representing certain modules of the TAS 2000
product line not expected to be completed in the near future due to
reprioritizing of marketing and development efforts.
Research and development expenses in 1996 decreased slightly to
$1,846,410 compared to $1,932,920 for the year ended December 31, 1995
due to personnel reductions in the Engineering Department and the
decision to focus the Company's Engineering resources on completing
several TAS 2000 modules for the marketplace. In the future, the Company
will continue to dedicate significant resources to its ongoing research
and development efforts since its success depends on its ability to keep
products current based on new technologies.
Sales and marketing expenses increased to $1,124,884 in 1996
compared to $465,045 as of December 31, 1995 due mostly to increased
salary and benefit costs. The Company allocated additional resources to
its sales and marketing group to work on a proposal for a major contract.
-11-
<PAGE>
General and administrative expenses increased approximately 27% to
$3,519,973 in 1996 from $2,770,186 for the year ended December 31, 1995
due to costs incurred in connection with the procurement of the SIL and
CARE contracts and additional staffing. In addition, the Company
terminated the lease at the Somerset facility for a cost of $371,408
since the anticipated utilization of this facility to house a significant
number of new employees to work on a joint venture project with a new
customer did not occur.
A loss from discontinued operations of $392,872 was recorded in the
year ended December 31, 1996 as a result of additional loss adjustment
expenses in excess of the amount anticipated at December 31, 1995.
The Company is working toward fulfilling long-term objectives. In
the Classic line, COVER-ALL has been positioned to increase market share
in 1997 as a result of the successful completion of the project making it
Windows 95 compliant and maintaining the strengths upon which its current
market acceptance is based.
In 1996, COVER-ALL formed an alliance with ORACLE Corporation
related to the TAS 2000 product to facilitate the advance of both
organizations in the property and casualty insurance marketplace. ORACLE
will provide technical assistance, consultative services as well as sales
direction and support to the TAS 2000 market entry. The Company has
completed some of the major components of the TAS 2000 product. Future
development of additional modules will be customer driven.
COVER-ALL has commenced marketing efforts in the United Kingdom. A
contract for the TAS 2000 product successfully installed in a large
insurer in the United Kingdom is expected to expand in the next year.
This successful installation has increased customer awareness of the TAS
2000 product in the United Kingdom and Europe.
A marketing campaign for the Care software is presently under way in
Canada.
The preceding forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act) are subject to the
occurrence of certain contingencies which may not occur in the time
frames anticipated or otherwise, and, as a result, could cause actual
results to differ materially from such statements. These contingencies
include the successful completion of continuing developmental efforts
under existing software contracts within anticipated time frames or
otherwise, the successful negotiation, execution and implementation of
anticipated new software contracts, the successful utilization of
additional personnel in the marketing and technical areas, the continuing
favorable responses to the Company's products from existing and potential
new customers, and the Company's ability to complete development and sell
and license its products at prices which result in sufficient revenues to
realize profits.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
-----------------------------------------------------------------------
Total revenues were $4,118,754 for the year ended December 31, 1995
as compared with $1,926,822 for the year ended December 31, 1994,
reflecting increasing progress on initial installations of TAS 2000 and
increased fee arrangements for professional support to most customers.
In December 1994, management adopted a plan to reduce the COVER-ALL
marketing and product development costs until revenues increased to
significantly higher levels. The total cash outlay had grown to a level
of approximately $1 million per month but the revenues from customers
continued to lag expectations. The total head count, including employees
and technical consultants, was reduced by approximately one half in the
first quarter of 1995 and a business plan was adopted for 1995 which
would match slowly growing revenues with reduced costs. In addition, the
sales offices in most cities were closed and sales staffing reduced by
over 50 percent.
As a result of this reorganization plan for COVER-ALL, special
charges were reported in the fourth quarter of 1994 to write down a
substantial portion of the unamortized capitalized software development
costs (approximately $2.7 million) and accrue for excess facilities and
other costs ($.6 million). Additional costs were
-12-
<PAGE>
incurred in the first quarter of 1995 for executive severance, employee
severance, and write-off of software development costs as the COVER-ALL
reorganization was completed. These 1995 provisions and write-offs,
aggregating $1,165,000, were reflected as special charges in the
Statement of Operations for the quarter ended March 31, 1995.
As described in Note 6 to the Consolidated Financial Statements, no
net income tax benefit is available to the Company with respect to the
loss it incurred in 1995.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At December 31, 1996, the Company had a working capital deficit of
$1,293,128 compared to a working capital deficit of $8,716,643 in 1995.
The improvement in working capital was due to the discharging of
liabilities relating to the discontinued operations through the issuance
of the Company's common stock and warrants with a fair value of
approximately $7 million.
In March 1996, the Company received $3,022,391 from the sale of
Common Stock and Warrants and another $1,553,124 in May 1996 from the
sale of additional Common Stock pursuant to a series of transactions with
Software Investments Limited and Care Corporation Limited that are
described in Note 9 to the Consolidated Financial Statements.
On March 31, 1997, the Company sold $3,000,000 of 12 1/2% Convertible
Debentures due March 2002 (the "Debentures") to an institutional
investor. The Debentures were sold at face value, pay interest quarterly
and are convertible, in whole or in part, into shares of Common Stock of
the Company at $1.25 per share, subject to adjustment. The Debentures
contain certain covenants which restrict the Company's ability to incur
indebtedness, grant liens, pay dividends or other defined restricted
payments and make investments and acquisitions. The Company cannot
redeem the Debentures for two years and thereafter may only call the
Debentures if the closing price of the Company's Common Stock for the
twenty business days preceding the redemption date exceeds $1.50. The
net proceeds from this financing will be used for working capital
purposes.
At December 31, 1996 and 1995 the Company had approximately
$14,000,000 and $7,000,000 of operating tax loss carryforwards expiring
in 2011 and 2010, respectively. The Tax Reform Act of 1986 enacted a
complex set of rules which limit a company's ability to utilize net
operating loss carryforwards and tax credit carryforwards in periods
following an ownership change. These rules define an ownership change as
a greater than 50 percent point change in stock ownership within a
defined testing period which is generally a three-year period. As a
result of stock issued relative to the Restructuring and other stock
which may be issued related to the Debentures (see Note 12 to the
Consolidated Financial Statements) the Company may experience an
ownership change and consequently the Company's utilization of its
net operating losses could be significantly limited.
At this time the Company does not anticipate having to make any
significant investment in software development. The Company believes
that the proceeds from the sale of the Debentures, its current cash
balances and anticipated cash flows from continuing operations will be
sufficient to meet normal operating needs for the continuing COVER-ALL
business in 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------ -------------------------------------------
The financial statements and supplementary data listed in Item
14(a)(1) and (2) are included in this report beginning on page 16.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
-------------------------------------------------
None.
-13-
<PAGE>
PART III
--------
The information called for by Part III (Items 10, 11, 12 and 13) of
this Report is hereby incorporated by reference from the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A under
the Securities Act of 1934 in connection with the election of directors
at the 1997 Annual Meeting of Stockholders of the Company, which
definitive Proxy Statement will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal
year ended December 31, 1996.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------- ---------------------------------------------------------------
(a) The following are filed as a part of this report.
(1) Financial Statements
--------------------
Page
----
Report of Independent Auditors 15
Consolidated Balance Sheets December 31, 1996 and 1995 16
Consolidated Statements of Operations Years ended December 31, 1996,
1995 and 1994 18
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 1996, 1995 and 1994 19
Consolidated Statements of Cash Flows Years ended December 31, 1996,
1995 and 1994 21
Notes to Consolidated Financial Statements 24
(2) Financial Statement Schedule
----------------------------
II Valuation and qualifying accounts 39
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 pages 40 to 44.
(b) Reports on Form 8-K
-------------------
None.
-14-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Cover-All Technologies Inc.
We have audited the accompanying consolidated balance sheets of Cover-All
Technologies Inc. (formerly Warner Insurance Services, Inc.) as of
December 31, 1996 and 1995 and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for
the years ended December 31, 1996, 1995, and 1994. Our audits also
included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Cover-All Technologies Inc. at December 31, 1996 and 1995 and
the consolidated results of its operations and its cash flows for the
years ended December 31, 1996, 1995 and 1994 in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young, LLP
----------------------
Ernst & Young LLP
Hackensack, New Jersey
April 11, 1997
-15-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 446,672 $1,576,745
Accounts receivable, less
allowance for doubtful
accounts of $43,870 and none 1,585,398 1,763,890
Income taxes receivable -- 2,300,000
Prepaid expenses 7,161 5,355
---------- ----------
Total current assets 2,039,231 5,645,990
---------- ----------
Property and equipment, at cost:
Furniture, fixtures and
equipment 3,072,706 3,095,529
Less accumulated depreciation (2,662,713) (2,369,873)
---------- ----------
Property and equipment-net 409,993 725,656
---------- ----------
Software license, less
amortization of $750,000 4,250,000 --
Capitalized software, less
amortization of $1,005,964 and
$489,227 1,477,950 1,510,782
Other assets 66,181 486,726
---------- ----------
$ 8,243,355 $8,369,154
========= ============
-16-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -(CONTINUED)
December 31, December 31,
1996 1995
---------- ----------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 536,172 $ 955,060
Accrued liabilities 1,614,612 4,123,641
Unearned revenue 1,181,575 635,564
Liabilities in excess of assets
of ISD business discontinued -- 8,648,368
in 1996 ---------- ----------
Total current liabilities 3,332,359 14,362,633
---------- ----------
Deferred income taxes -- 20,000
---------- ----------
Commitments and contingencies
(Notes 4 and 5)
Stockholders' equity (deficit):
Common Stock, $.01 par value:
authorized 30,000,000 shares,
issued 17,351,883 and 9,194,890
shares 173,519 91,949
Capital in excess of par value 27,258,352 10,414,253
Accumulated deficit (19,953,668) (13,952,474)
Treasury stock at cost-633,986 (2,567,207) (2,567,207)
shares ---------- ----------
Total stockholders' equity 4,910,996 (6,013,479)
(deficit) ---------- ----------
$ 8,243,355 $ 8,369,154
---------- ----------
---------- ----------
See accompanying notes.
-17-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
---------- ---------- ----------
Revenues:
Licenses $ 1,044,460 $ 1,421,866 $ 1,184,860
Maintenance 2,252,378 1,174,150 548,116
Professional services 2,171,834 1,522,738 193,846
---------- ---------- ----------
5,468,672 4,118,754 1,926,822
---------- ---------- ----------
Costs and expenses:
Cost of sales 4,585,727 1,329,693 675,119
Research and
development 1,846,410 1,932,920 2,499,436
Sales and marketing 1,124,884 465,045 1,584,902
General and
administrative 3,519,973 2,770,186 5,107,161
Special charges -- 1,165,000 3,373,000
---------- ---------- ----------
11,076,994 7,662,844 13,239,618
---------- ---------- ----------
Loss from continuing
operations before
income tax (benefit) (5,608,322) (3,544,090) (11,312,796)
Income tax (benefit) -- -- (3,846,351)
---------- ---------- ----------
Loss from continuing
operations (5,608,322) (3,544,090) (7,466,445)
Loss from discontinued
operations,
less applicable
income tax (benefit)
of none, none, and
$(923,649),
respectively -- (7,107,987) (6,753,637)
Loss on disposal of
discontinued
operations, (392,872) (749,758) --
without tax benefit ---------- ---------- ----------
Net loss $ 6,001,194) $(11,401,835) $(14,220,082)
---------- ---------- ----------
---------- ---------- ----------
Loss per share from
continuing operations $(0.38) $(0.41) $(0.84)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share $(0.40) $(1.33) $(1.60)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number
of common shares
outstanding 14,865,757 8,559,307 8,868,926
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes.
-18-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
RETAINED
CAPITAL EARNINGS
COMMON IN EXCESS (ACCUMULATED
STOCK OF PAR VALUE DEFICIT)
---------- ---------- ----------
BALANCE AT DECEMBER 31, 1993 $91,317 $10,229,608 $11,846,300
Sale of 33,748 shares of
Common Stock under employee
stock purchase plans 337 76,948 --
Sale of 21,875 shares of
Common Stock under stock
option plans 219 95,438 --
Purchase of treasury stock --
108,900 shares -- -- --
Net loss -- -- (14,220,082)
Payment of cash dividends -- -- (176,857)
Loan to officer/stockholder
exchanged for 268,111
shares of Treasury Stock -- -- --
in January 1995 ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1994 91,873 10,401,994 (2,550,639)
Sale of 7,567 shares of
Common Stock under employee
stock purchase plan 76 12,259 --
Net loss -- -- (11,401,835)
---------- ---------- ----------
BALANCE AT DECEMBER 31, 1995 91,949 10,414,253 (13,952,474)
Sale of 125,187
shares of Common Stock under
stock option plans 1,252 370,562 --
Issuance of 3,256,201 shares
of Common Stock under the
Restructuring Agreement 32,562 6,479,840 --
Total
Treasury Stockholders'
Stock Equity
(Deficit)
----------- --------------
BALANCE AT DECEMBER 31, 1993 $(1,592,793) $20,574,432
Sale of 33,748 shares of
Common Stock under employee
stock purchase plans -- 77,285
Sale of 21,875 shares of
Common Stock under stock
option plans -- 95,657
Purchase of treasury stock --
108,900 shares (338,657) (338,657)
Net loss -- (14,220,082)
Payment of cash dividends -- (176,857)
Loan to officer/stockholder
exchanged for 268,111
shares of Treasury Stock (635,757) (635,757)
in January 1995 ---------- ----------
BALANCE AT DECEMBER 31, 1994 (2,567,207) 5,376,021
Sale of 7,567 shares of
Common Stock under employee
stock purchase plan -- 12,335
-- (11,401,835)
Net loss ---------- ----------
BALANCE AT DECEMBER 31, 1995 (2,567,207) (6,013,479)
Sale of 125,187
shares of Common Stock under
stock option plans -- 371,814
Issuance of 3,256,201 shares
of Common Stock under the
Restructuring Agreement -- 6,512,402
-19-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT) -- CONTINUED
RETAINED
CAPITAL EARNINGS
COMMON IN EXCESS (ACCUMULATED
STOCK OF PAR VALUE DEFICIT)
---------- ---------- ----------
Issuance of five-year
warrants to purchase up
to an aggregate of 1,725,694
shares of Common Stock under the
Restructuring Agreement -- 465,938 --
Sale of 1,412,758 shares of
Common Stock to Software
Investments Limited ("SIL") 14,128 2,811,388 --
Sale of five year warrants to
purchase an aggregate of
196,875 shares of Common Stock
to SIL -- 196,875 --
Issuance of 2,500,000 shares of
Common Stock to Care
Corporation Limited 25,000 4,975,000 --
Exercise of five-year warrants to
purchase 862,847 shares of
Common Stock 8,628 1,544,496 --
-- -- (6,001,194)
Net loss ---------- ---------- ----------
$173,519 $27,258,352 $(19,953,668)
BALANCE AT DECEMBER 31, 1996 ========== ========== ==========
Total
Treasury Stockholders'
Stock Equity
(Deficit)
----------- ----------------
Issuance of five-year
warrants to purchase up
to an aggregate of 1,725,694
shares of Common Stock
under the Restructuring
Agreement -- 465,938
Sale of 1,412,758 shares of
Common Stock to Software
Investments Limited ("SIL") -- 2,825,516
Sale of five year warrants to
purchase an aggregate of
196,875 shares of Common Stock
to SIL -- 196,875
Issuance of 2,500,000 shares of
Common Stock to Care
Corporation Limited -- 5,000,000
Exercise of five-year warrants to
purchase 862,847 shares of
Common Stock -- 1,553,124
-- (6,001,194)
Net loss ---------- ----------
$(2,567,207) $4,910,996
BALANCE AT DECEMBER 31, 1996 ========== ==========
See accompanying notes.
-20-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
Cash flows from operating
activities:
Net loss from continuing
operations $(5,608,322) $(3,544,090) $(7,466,445)
Adjustments to reconcile
net loss to net cash
provided from (used for)
operating activities:
Depreciation and
amortization 341,798 365,129 538,751
Amortization and write-off
of capitalized software
and software license 2,101,576 489,227 3,313,023
Loss on disposal of
securities - 86,223 465,195
Accounts receivable 178,492 (1,374,169) (129,603)
Income taxes receivable 2,300,000 (163,972) (2,136,028)
Deferred income taxes (20,000) 2,800,000 (3,180,000)
Prepaid expenses (1,806) (2,646) 410
Other assets 420,545 (3,776) (60,506)
Accounts payable (418,888) 161,561 733,471
Accrued liabilities (2,449,304) 3,123,208 540,671
Unearned revenue 546,011 513,447 590,338
---------- ---------- ----------
Net cash (used for)
provided from continuing
operating activities (2,609,898) 2,450,142 (6,790,723)
---------- ---------- ----------
Loss from discontinued
operations - (7,107,987) (6,753,637)
Loss on disposal of
discontinued operations (392,872) (749,758) -
Decrease (increase) in
net assets of discontinued
operations (1,670,028) (82,238) 11,208,695
---------- ---------- ----------
Net cash (used for)
provided from
discontinued activities (2,062,900) (7,939,983) 4,455,058
---------- ---------- ----------
-21-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
Cash flows from
investing activities:
Proceeds from sale of
fixed maturity
investments - $ 3,786,277 $ 18,271,905
Purchase of fixed
maturity investments - - (12,661,482)
Capital expenditures (85,860) (139,818) (269,345)
Capitalized software
expenditures (1,318,744) (1,000,009) (3,350,981)
---------- ---------- ----------
Net cash (used for)
provided from investing
activities (1,404,604) 2,646,450 1,990,097
---------- ---------- ----------
Cash flows from
financing activities:
Credit line borrowings - - 4,500,000
Payments on credit lines - (2,000,000) (2,500,000)
Dividends to
stockholders - - (176,857)
Net proceeds from
issuance of common
stock 4,947,329 12,335 172,942
Payment for purchase of
treasury shares - - (974,414)
---------- ---------- ----------
Net cash provided from
(used for) financing
activities 4,947,329 (1,987,665) 1,021,671
---------- ---------- ----------
Change in cash and
cash equivalents (1,130,073) (4,831,056) 676,103
Cash and cash equivalents
beginning of year 1,576,745 6,407,801 5,731,698
---------- ---------- ----------
Cash and cash equivalents
end of year $ 446,672 $ 1,576,745 $ 6,407,801
========== ========== ==========
-22-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -(CONTINUED)
Supplemental disclosures of noncash investing and financing activities:
Financing:
---------
The Company in connection with the discontinuance of ISD issued Common
Stock and Warrants for $6,978,340 as a result of the restructuring
agreement. (See Note 2.)
Investing:
---------
The Company acquired a software license from Care by issuing Common Stock
valued at $5,000,000. (See Note 9.)
See accompanying notes.
-23-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------
DESCRIPTION OF BUSINESS
-----------------------
COVER-ALL Technologies Inc. (formerly Warner Insurance Services,
Inc.), through its wholly-owned subsidiary, COVER-ALL Systems, Inc.
("COVER-ALL"), licenses and maintains its software products to the
property/casualty insurance industry throughout the United States, Puerto
Rico and the United Kingdom. COVER-ALL also provides professional
consulting services to its customers interested in customizing their
software. In 1996, COVER-ALL was granted by Care Corporation Limited
("Care") the exclusive license for the Care software systems for use in
the workers' compensation and group health claims administration markets
in Canada, Mexico and Central and South America.
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements are prepared on the basis of
generally accepted accounting principles and include the accounts of
Cover-All Technologies Inc. and its wholly-owned subsidiary (the
"Company"). All material intercompany balances and transactions have
been eliminated.
USE OF ESTIMATES
----------------
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
-------------------
Revenue from the sale of software licenses is recognized as modules
and modifications are provided and accepted by the customer. Revenue
from software maintenance contracts is recognized ratably over the life
of the contract. Revenue from professional consulting services is
recognized when the service is provided.
CONCENTRATIONS OF CREDIT RISK
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and trade
accounts receivable.
The Company places its temporary cash investments with high credit
quality institutions to limit its credit exposure. The Company believes
no significant concentration of credit risk exists with respect to these
investments. Concentrations of credit risk with respect to trade
accounts receivable are limited due to the wide variety of customers,
principally major insurance companies, who are dispersed across many
geographic regions. Three major customers accounted for a significant
portion of the Company's trade accounts receivable portfolio. The
Company performs ongoing credit evaluations of its customers but does not
require collateral. The Company maintains allowances for potential
credit losses.
INSURANCE COMPANY
-----------------
In late 1993, the Company obtained approval from the New Jersey
Department of Insurance to form Alerion Insurance Company of New Jersey
("Alerion"). Alerion entered into a reinsurance agreement with Clarendon
National Insurance Company ("Clarendon") to assume a portion of
Clarendon's risk in the New Jersey Assigned Risk Program. The subsidiary
was initially capitalized with $10 million. During the fourth quarter of
-24-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1994, the Company decided to discontinue assuming any underlying
insurance risk. This was accomplished by Alerion commuting all its
rights and obligations under the reinsurance contract back to Clarendon
and paying to Clarendon all amounts received in excess of payments made
since the inception of the reinsurance contract in January 1994. In
1996, Alerion surrendered its Certificate of Authority to transact
insurance business in New Jersey.
MARKETABLE SECURITIES
---------------------
As of January 1, 1994, the Company adopted the provisions of the
Statement of Financial Accounting Standards 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No.
115 requires that investments in fixed maturity securities and those
equity securities with readily determinable market values be classified
into one of three categories: held-to-maturity, trading or available-
for-sale. Classification of investments is based upon management's
current intent. The impact of adoption was not material to the Company.
All of the Company's fixed maturity securities, which consist of
municipal, state, and mortgage-backed securities with original maturities
in excess of three months, have been categorized as available-for-sale
and recorded at their fair value at December 31, 1994. Unrealized
depreciation of the securities available for sale at December 31, 1994
($237,737) was recorded as a realized loss in 1994 because the
securities, which were held by the Company's insurance subsidiary, were
either sold, or expected to be sold in early 1995 in connection with the
liquidation or sale of the insurance subsidiary.
CASH AND CASH EQUIVALENTS
-------------------------
The Company considers all highly liquid investments, with a maturity
of three months or less when purchased, to be cash equivalents.
PROPERTY AND EQUIPMENT
----------------------
Furniture, fixtures and equipment are carried at cost. Depreciation
is recorded on the straight-line method over three to ten years, which
approximates the estimated useful lives of the assets.
Routine maintenance and repair costs are charged to expense as
incurred and renewals and improvements that extend the useful life of the
assets are capitalized. Upon sale or retirement, the cost and related
accumulated depreciation are eliminated from the respective accounts and
any resulting gain or loss is reported as income or expense.
CAPITALIZED SOFTWARE
--------------------
Certain software development costs are being capitalized and
amortized over a three-year period. The software license (see Note 9) is
being amortized over a five-year period. In the fourth quarter of 1994,
the Company wrote down the unamortized capitalized software costs by
approximately $2.7 million (see Note 3). In addition, during the fourth
quarter of 1996, the Company wrote off approximately $500,000 of
unamortized software development costs representing certain modules of
the TAS 2000 product line not expected to be completed in the near future
due to reprioritizing of marketing and development efforts. This write
off is reflected in cost of sales in 1996.
-25-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME TAXES
------------
Deferred income tax assets and liabilities are recognized for the
expected future tax effects attributable to temporary differences between
the financial reporting and tax basis of assets and liabilities. Such
differences relate primarily to: the application of different
depreciation methods for tax versus financial reporting purposes; the
amortization of capitalized software costs for financial statement
purposes and the current write-off for tax purposes; revenue recognition
and the alternative minimum tax credit carryover. Cash (received) paid
for income taxes was: 1996 -($2,375,000), 1995 -($2,600,000), and 1994 -
$1,375,000.
RESEARCH AND DEVELOPMENT
------------------------
For the years ended December 31, 1996, 1995 and 1994, $1,846,410,
$1,932,920 and $2,499,436, respectively, was expensed for research and
development of new software products. These expenses are in addition to
software development costs which are capitalized and then amortized over
their expected useful lives.
NET LOSS PER SHARE
------------------
Net loss per share is based on the weighted average number of common
shares and, where applicable, common share equivalents outstanding during
the periods.
STOCK-BASED COMPENSATION
------------------------
The Company follows Accounting Principles Board Opinion No. 25.
"Accounting for Stock Issued to Employees" ("APB No. 25") with regard to
the accounting for its employee stock options. Under APB No. 25,
compensation expense is recognized only when the exercise price of
options is below the market price of the underlying stock on the date of
grant.
RECLASSIFICATIONS
-----------------
Certain amounts in the 1995 and 1994 Consolidated Financial
Statements have been reclassified to conform with the 1996 presentation.
NOTE 2--DISCONTINUED OPERATIONS
-------------------------------
Insurance Services Division ("ISD") revenues decreased substantially
in 1994 and 1995 because of lower fees attributable to the reduced number
of policies and claims being handled on contracts that were winding down
or were completed. As a result, ISD had been suffering losses and
operating under considerable uncertainty as a result of the pendency of
lawsuits with certain affiliates of The Robert Plan Corporation ("The
Robert Plan Corporation") as described in Note 4. In March 1996, the
Company entered into a series of agreements which provided for the
transfer and discontinuance of its ISD operations and the issuance of the
Company's Common Stock and Warrants to certain customers of the ISD
business in exchange for the release of the Company from its obligations
to provide insurance services to ISD customers and to The Robert Plan
Corporation in exchange for the settlement and dismissal of lawsuits with
The Robert Plan Corporation. Effective March 1, 1996 the Company has
discontinued providing insurance processing services to the automobile
insurance industry and has reflected those activities as discontinued
operations in its Financial Statements.
-26-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
As part of the restructuring transactions (the "Restructuring"), the
Company transferred certain assets, employees, contracts and leased
premises relating to its ISD business to a subsidiary of The Robert Plan
Corporation, which has replaced the Company as the provider of insurance
services to the ISD customers. In exchange for settling the lawsuits,
releasing the Company's obligations to provide insurance services under
its contracts and executing the mutual releases, the Company issued to
certain of the ISD customers and certain parties to the litigation: (a)
a total of 3,256,201 shares of the Company's Common Stock, (b) five-year
Warrants to purchase up to an additional aggregate of 1,553,125 shares of
the Company's Common Stock at $2.00 per share and (c) cash of $2.5
million. The holders of these securities can request the Company to
register these securities with such registration costs to be paid by the
Company. The Company had the option, exercisable for a period of six
months (from March 1, 1996), to (i) purchase 50% of the aforementioned
3,256,201 shares at a cash price equal to the greater of $3.00 or 50% of
the then market price of a share of the Company's Common Stock and (ii)
acquire 50% of the 1,553,125 Warrants at a cash price equal to $1.00 per
Warrant. On March 31, 1996, the Company assigned its aforementioned
repurchase option applicable to the Company's Common Stock and Warrants
to Software Investment Limited ("SIL"), which SIL subsequently exercised,
as discussed in Note 9. As a result of the issuance of shares described
in Note 9, the antidilution provisions of the Warrants required an
adjustment of shares to 1,725,694 from 1,553,125 and a price adjustment
to $1.80 from $2.00 per share.
Assets and liabilities of the discontinued ISD operations,
classified separately in the Consolidated Balance Sheets, are summarized
as follows:
December 31,
1995
----------
Cash $ 2,487,500
Accounts receivable 18,722,178
Other current assets 155,370
Property and equipment, net 1,674,639
Capitalized software, net 81,494
Other assets 21,017
Accounts payable (459,111)
Accrued expenses (10,771,406)
Unearned contract revenue (20,560,049)
----------
Net liabilities $ (8,648,368)
==========
The discontinuance of ISD resulted in a $392,872 loss in 1996 and a
$749,758 loss in 1995.
The Consolidated Statements of Operations have been restated for all
periods to report the net results of the ISD operations as loss from
discontinued operations. The results of ISD are summarized as follows:
-27-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1994
---------- ----------
NET REVENUES $20,228,212 $32,892,898
Loss from
operations before
income taxes (7,107,987) (7,677,286)
Income taxes/(benefit) - (923,649)
---------- ----------
Loss from
discontinued $(7,107,987) $(6,753,637)
operations ========== ==========
NOTE 3--SPECIAL CHARGES
In March 1994, the Company adopted a plan to implement a tax-free
spin-off of 100% of the stock of COVER-ALL on a pro rata basis to the
Company's stockholders. On November 11, 1994, the Company announced that
its Board of Directors had voted to retain COVER-ALL, thereby canceling
the spin-off plan. Prior to 1995 COVER-ALL revenues came from licensing
of its Classic software product line and services. Since 1993 COVER-ALL
has been developing a suite of computer applications for property and
casualty insurers entitled the Total Administration Solution ("TAS
2000"). TAS 2000 is designed to enable a client-driven re-engineering of
the insurer's business programs. TAS 2000 applications run on commodity
priced open computer systems and use state-of-the-art client/server
technology provided by Oracle Corporation.
In December 1994, management instituted a plan to down-size the
COVER-ALL organization and reduce the rate of product development to a
level consistent with the reduced level of customer installations planned
for 1995. As a result, unamortized software development costs related to
modules of the TAS 2000 application for which the development process had
been curtailed were written down by $2,733,000 and provision of $640,000
was made at December 31, 1994 for excess facilities and equipment
appropriate for the smaller organization. Costs of $1,165,000 were
incurred and written off in the first quarter of 1995 for executive and
other severance costs as well as additional software development costs.
These write-offs and provisions were reflected as special charges in
the 1995 and 1994 Statements of Operations.
NOTE 4--LITIGATION
In March 1994, Material Damage Adjustment Corporation ("MDA"), a
subsidiary of The Robert Plan Corporation and a subcontractor for the
Company performing claims processing work, instituted an action in the
Superior Court of New Jersey seeking injunctive relief requiring that the
Company turn over to MDA in excess of $1 million that the Company had
withheld from certain claims fees allegedly owed to MDA. This action
arose out of the Company's servicing contract with the Market Transition
Facility of New Jersey ("MTF"). The Company had withheld the funds as a
set off to cover unpaid invoices for data processing services rendered by
the Company for MDA. MDA also added a claim for approximately $2.5
million of surcharge fees paid to the Company by the MTF. The MTF was
brought into the case to resolve disputes between MTF and MDA over
refunds of claims fees paid on claims later closed without payment
("CWP's"). The Company vigorously contested MDA's claims and asserted
counterclaims against MDA to establish the Company's entitlement to the
disputed sums.
-28-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In May 1994, the Company filed an action in the Superior Court of
New Jersey against Lion Insurance Company, National Consumer Insurance
Corporation, and The Robert Plan Corporation seeking payment of
unsatisfied invoices under an April 1991 agreement totalling
approximately $2.7 million. Under the agreement, the Company agreed to
provide data processing services for a three-year term in support of Lion
Insurance Company's "depopulation pool" automobile insurance business in
New Jersey. Lion Insurance Company is a subsidiary of The Robert Plan
Corporation whose affiliate, National Consumer Insurance Corporation, has
taken over the "depopulation pool" business. The Robert Plan Corporation
guaranteed Lion's performance and payment.
On March 1, 1996, the two lawsuits described above were settled as
part of the overall settlement with certain of the Company's insurance
services customers. The settlement and restructuring transactions are
described in Note 2.
On February 2, 1995, Sol M. Seltzer commenced an action in the
Supreme Court of New York against Mr. Krieger, the then Chairman of the
Board and former President of the Company, and each of the other then
members of the Board of Directors. The plaintiff, Sol M. Seltzer, who
purported to sue derivatively on behalf of the Company and COVER-ALL,
sought among other things, compensatory damages in an amount to be
determined at trial and punitive damages in an aggregate amount of $12
million. Sol M. Seltzer was a vice president of the Company and a
director of COVER-ALL until he resigned from such positions in late 1994.
The plaintiff alleged, among other things, breach of fiduciary duty,
waste and mismanagement, as well as alleged wrongful acts by the Board
and the former President, including among other things, self-dealing and
misuse of corporate funds by the former President. The Company, and the
other defendants, contested Mr. Seltzer's claims and on July 23, 1996 won
a motion to dismiss the case. Mr. Seltzer attempted to file a notice of
appeal from the order of dismissal, but failed to do so in a timely
manner. He has since motioned the court to recognize his notice of
appeal and it is anticipated that the court will rule on such motion in
the near future.
On February 6, 1995, the Company commenced an action in the Superior
Court of New Jersey against Sol M. Seltzer, a former vice president of
the Company and a director of COVER-ALL, alleging fraud, mismanagement,
negligence, misrepresentation, and breach of fiduciary duty with respect
to the development and implementation of COVER-ALL's TAS 2000 software
product. The Company claimed compensatory and punitive damages in an
amount to be determined at trial. The case was largely inactive pending
the motion to dismiss Seltzer's New York action. After the dismissal of
the New York case brought by Seltzer, the Company voluntarily dismissed
the New Jersey case without prejudice.
In addition to the above lawsuits, the Company is named as defendant
in a number of legal actions arising from its operations. All of these
actions have been considered in establishing liabilities. Management and
its legal counsel are of the opinion that these actions will not have a
material adverse effect on the financial position or results of
operations.
NOTE 5--COMMITMENTS, CONTINGENCIES AND OTHER
OPERATING LEASES
The Company leases office space in Fair Lawn, NJ, where it occupies
approximately 36,000 square feet, under a lease which expires in 2000.
The current annual rental expense is approximately $400,000. The lease
includes escalation clauses for increased real estate taxes, insurance
and maintenance expenses. The lease provides for a renewal period of
five years.
-29-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Rent expense for COVER-ALL office space was $334,170, $174,710, and
$265,363, for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company's future minimum rental commitments under its
noncancellable operating lease in effect at December 31, 1996 follows:
years ending December 31, 1997 -$400,000; 1998 -$400,000; 1999 -$400,000;
2000 -$170,000; thereafter -NONE.
EMPLOYMENT CONTRACTS
The Company has employment contracts with certain of its executives
with various dates of expiration through the year ending December 31,
1998. Certain of the contracts are automatically renewable from year to
year. The aggregate annual commitment for future salaries at December
31, 1996 was approximately $675,000.
RELATED PARTY TRANSACTIONS
A director of the Company is a partner in a law firm with which the
Company incurred legal expenses of approximately $600,000, $360,000 and
$500,000 in 1996, 1995 and 1994, respectively.
LETTER OF CREDIT
At December 31, 1994, the Company had an outstanding letter of
credit for $1,000,000 with First Fidelity Bank, N.A., NJ, which
guaranteed a performance bond issued in connection with the Company's
contract with the JUA/MTF, an ISD customer. In February 1995, this
letter of credit was replaced by a $1,000,000 letter of credit issued by
Chase Manhattan Bank N.A. which was collateralized by $1,000,000 that was
placed in a restricted account. The letter of credit expired in February
1996 and the $1,000,000 of cash collateral was returned to the Company.
MAJOR CUSTOMERS
COVER-ALL had a substantial portion of its revenues from three
customers in 1996 and 1995 and two customers in 1994 as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
CUSTOMER 1996 1995 1994
---------- ---------- ---------- ----------
Sun Alliance Management Services 27% 16%
Glatfelter Insurance Group 13%
Millers Insurance Group 13% 13%
New Jersey State Medical
Underwriters 18%
Secura, Inc. 11%
Empire Insurance Company 17%
In 1996 and 1995 export sales were made to a U.K. customer of
approximately $1,465,000 and $640,000, respectively.
-30-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CREDIT LINES
At December 31, 1994, the Company had outstanding $2 million in
short-term borrowings against its $4 million secured credit line with a
bank. In 1995 the Company repaid the $2 million and the credit line was
withdrawn. Cash paid during the periods for interest was: 1996 -none,
1995 -none, and 1994 -$199,120.
NOTE 6--INCOME TAXES
An analysis of the components of the income tax provision and the
classification between continuing and discontinued operations is as
follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
Current:
Federal $ -- $(2,800,000) $(2,050,000)
-- -- 460,000
State ---------- ---------- ----------
-- (2,800,000) (1,590,000)
---------- ---------- ----------
Deferred:
Federal -- 2,800,000 (3,110,000)
-- $ -- ( 70,000)
State ---------- ---------- ----------
-- 2,800,000 (3,180,000)
---------- ---------- ----------
$ -- $ -- $(4,770,000)
Total ========== ========== ==========
Income taxes (benefit):
Continuing operations $ -- $ -- $(3,846,351)
-- $ -- (923,649)
Discontinued operations ---------- ---------- ----------
Total income taxes $ -- $ -- $(4,770,000)
(benefit) ========== ========== ==========
-31-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The income tax provision (benefit) for continuing operations differs
from the amount computed by applying the statutory federal income tax
rate as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
Computed federal
statutory tax (benefit) $(1,781,000) $(1,204,991) $(3,846,351)
Valuation allowance to
reduce deferred tax asset 1,781,000 1,204,991 --
---------- ---------- ----------
Total $ -- $ -- $(3,846,351)
========== ========== ==========
The components of the net deferred tax asset and liability were as
follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
---------- ---------- ----------
Deferred tax assets current:
Deferred revenue $ -- $(1,185,000 $(4,000,000
Reserve for contract adjustments -- 2,075,000 1,300,000
Bad debts 18,000 186,000 188,000
Reserve for loss on disposal 414,000 300,000 --
Other net 36,000 31,000 112,000
(468,000) (3,777,000) (2,350,000)
Valuation allowance ---------- ---------- ----------
$ -- $ -- $(3,250,000
Current deferred tax asset ========== ========== ==========
Deferred tax asset (liability) -
long-term:
Net operating loss carryforward $8,421,000 $2,790,000 $ --
Capitalized software (590,000) (600,000) (460,000)
Depreciation and amortization 200,000 200,000 (10,000)
(8,031,000) (2,410,000) --
Valuation allowance ---------- ---------- ----------
$ -- $ (20,000) $ (470,000)
Long-term deferred tax liability ========== ========== ==========
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<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1996 and 1995 the Company had approximately
$14,000,000 and $7,000,000 of operating tax loss carryforwards expiring
in 2011 and 2010, respectively. The Tax Reform Act of 1986 enacted a
complex set of rules which limit a company's ability to utilize net
operating loss carryforwards and tax credit carryforwards in periods
following an ownership change. These rules define an ownership change as
a greater than 50 percent point change in stock ownership within a
defined testing period which is generally a three-year period. As a
result of stock issued relative to the Restructuring and other stock
which may be issued related to the Debentures (see Note 12) the Company
may experience an ownership change and consequently the Company's
utilization of its net operating losses could be significantly limited.
NOTE 7--STOCK OPTION AND STOCK PURCHASE PLANS
In March 1995, the Company adopted the 1995 Employee Stock Option
Plan. Options for the purchase of up to 600,000 shares may be granted by
of the Board of Directors to employees of the Company at an exercise
price determined by the Board of Directors or the date of grant. Options
may be granted as incentive or non-qualified stock options with a term of
not more than ten years. At December 31, 1996 and 1995, 210,175 and
482,325 shares, respectively, were available for grant.
On November 15, 1994 the Company adopted the 1994 Stock Option Plan
for Independent Directors. Options for the purchase of up to 300,000
shares may be granted to directors of the Company who are not employees
("non-employee director"). Each non-employee director who is serving on
"Date of Grant" shall automatically be granted an option to purchase
10,000 shares of Common Stock at the fair market value of Common Stock on
the date the option is granted. Dates of Grant are November 15, 1994,
1999, 2004, and 2009 for non-employee directors serving on November 15,
1994. For individuals who become non-employee directors after November
15, 1994, such directors' Dates of Grant will be the date such individual
becomes a director and the fifth, tenth and fifteenth anniversaries of
such date. Options are exercisable in full 6 months after the applicable
date of grant and expire 5 years after the date of grant. At December
31, 1996, and 1995, 240,000 and 260,000 shares, respectively, were
available for grant.
In October 1994, the Company adopted the 1994 Non-Qualified Stock
Option Plan for Consultants. Options for the purchase of up to 200,000
shares may be granted by the Board of Directors to any individual who has
entered into a written consulting contract with the Company. The non-
qualified stock options will have a 5 year term from date of grant and
will be exercisable at a price and time as determined by the Board of
Directors on the date of grant. At December 31, 1996 and 1995, 105,000
shares were available for grant.
In June 1991, the Company adopted the Key Employee Stock Option Plan
(the "KESO Plan"). Options for the purchase of up to 721,875 shares may
be granted by the Board of Directors to key employees of the Company at
an exercise price determined by the type of option granted. Options may
be granted as incentive or non-qualified stock options with a term of not
more than ten years from the date of grant. At December 31, 1996 and
1995, 279,938 and 229,938 shares, respectively, were available for grant.
-33-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the changes in outstanding Common Stock options for all
outstanding plans is as follows:
WEIGHTED-
AVERAGE WEIGHTED-
REMAINING AVERAGE
CONTRACTUAL EXERCISE
SHARES PER SHARE LIFE PRICE
------ -------- ---- -----
Balance, December 31, 1993 567,739 $2.29 - 10.40 -- $4.71
Granted 222,000 2.63 - 4.38 2.9 years 3.53
Exercised (021,875) 3.53 -- 3.53
(314,514) 2.29 - 10.40 -- 4.59
Canceled ---------- ---------- ---------- --------
Balance, December 31, 1994 453,350 2.63 - 10.00 2.9 years 4.17
Granted 462,225 1.13 - 3.75 2.1 years 1.80
(225,608) 3.13 - 10.00 -- 3.87
Canceled ---------- ---------- ---------- --------
Balance, December 31, 1995 689,967 1.13 - 10.00 2.3 years 2.66
Granted 337,250 2.00 - 5.25 2.9 years 3.20
Exercised (125,187) 1.75 - 3.53 -- 2.97
(233,205) 1.75 - 10.00 -- 3.75
Canceled ---------- ---------- ---------- --------
Balance, December 31, 1996 668,825 $1.13 - 5.25 2.6 years $2.49
At December 31, 1996 under the above plans, 351,909 shares were
exercisable.
In 1985, the Board of Directors authorized, and the stockholders
approved, the adoption of an Employee Stock Purchase Plan (the "Purchase
Plan"). An aggregate of 344,531 shares of the Company's Common Stock
could be issued under the Purchase Plan. As of December 31, 1995,
207,681 shares were issued under the Purchase Plan which was terminated
in March 1995.
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations,
for stock options issued to employees in accounting for its stock option
plans. The exercise price for all stock options issued during 1996 and
1995 was equal to the market price of the Company's stock at the date of
grant. Accordingly, no compensation expense has been recognized for the
Company's stock-based compensation plans.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options. The weighted average fair
value of stock options granted to employees used in determining pro forma
amounts is estimated at $1.95 and $.94 during 1996 and 1995,
respectively.
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<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pro forma information regarding net loss and net loss per share has
been determined as if the Company had accounted for its employee stock
options under the fair value method prescribed under Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock
Based Compensation. The fair value of these options was estimated at the
date of grant using the Black-Scholes option-pricing model for the pro
forma amounts with the following weighted average assumptions:
December 31, December 31,
1996 1995
---------- ----------
Risk-free interest rate . . 6.29% 6.74%
Expected life . . . . . . . 3.3 years 3.6 years
Expected volatility . . . . 89% 70%
Expected dividends . . . . None None
The pro forma amounts are indicated below (in thousands, except per
share amounts):
Year Ended December 31,
----------------------
1996 1995
---- ----
Net loss as reported . . . $( 6,001) $(11,402)
Pro forma net loss . . . . $( 6,166) $(11,660)
Loss per share as reported $( .40) $(1.33)
Pro forma loss per share . $( .41) $(1.36)
NOTE 8--COMMON STOCK
The Company made a series of loans in 1994, 1993 and 1992
aggregating $635,757 at December 31, 1994, to its former President in
exchange for a demand note receivable with interest at 1% over the bank's
prime rate. Effective January 6, 1995, the Board of Directors approved
the receipt of 268,111 shares of the Company's Common Stock, which were
added to treasury shares, in full satisfaction for the repayment of these
loans by the former President. The cost of $2.37 per common share for
this treasury stock was $.37 per share less than the closing bid price of
the Company's Common Stock on January 6, 1995. This receivable at
December 31, 1994 was reflected in treasury stock as a reduction of
stockholders' equity.
On November 17, 1989, the Company adopted a Stockholder Rights Plan
and declared a dividend distribution of one Right for each outstanding
share of Common Stock. Under certain conditions, each Right shall
initially entitle the registered holder thereof to purchase one-fifth of
one share of Common Stock at a purchase price of $10.00, subject to
adjustment. The Rights will be exercisable only if (i) a person or group
has acquired, or obtained the right to acquire 15% or more of the
outstanding shares of Common Stock (other than a person that acquires the
stock directly from the Company in a transaction that the Company's
independent Directors determine to be in the best interests of the
Company and its stockholders) or (ii) following the commencement of a
tender offer or exchange offer for 15% or more of the then outstanding
shares of Common Stock. Each Right will entitle its holder to receive,
upon exercise, Common Stock (or, in certain circumstances, cash,
property, or other securities of the Company) having a value equal to two
times the purchase price of the Right under certain circumstances,
including the acquisition of 20% of the outstanding Common Stock. All
rights holders, except the acquiror, may purchase a number of shares of
Common Stock equal to $10.00 (subject to adjustment under the terms of
the Rights
-35-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Plan) divided by 50% of the market price of the Company's Common Stock
on the date which is ten days after a public announcement by the
Company that a person or group has acquired, or obtained the right to
acquire, 15% or more of the outstanding shares of Common Stock. In the
event that the Company is acquired in a merger or other business
combination transaction in which the Company is not the surviving
corporation, the rights holders may purchase the acquiror's shares at the
similar discount.
The Company may redeem the Rights at $.01 each until ten days
following the date on which a person or group of affiliated persons has
acquired, or obtained the right to acquire, the beneficial ownership of
15% or more of the outstanding shares of Common Stock. The Rights will
expire on December 4, 1999 unless earlier redeemed by the Company.
NOTE 9--SALE OF STOCK AND WARRANTS
On March 31, 1996, the Company entered into a series of transactions
with Software Investments Limited ("SIL") and Care Corporation Limited
("Care") whereby the Company:
(A) sold to SIL for total proceeds of $3,022,391: (i) 1,412,758
shares of the Company's Common Stock for $2.00 per share and (ii) five-
year warrants to purchase an aggregate of 196,875 shares of the Company's
Common Stock exercisable at $2.00 per share for $1.00 per warrant
($196,875).
(B) assigned to SIL the rights it retained in the Restructuring
(see Note 2) to repurchase within six months 1,628,100 shares of the
Company's Common Stock for the greater of $3.00 per share or 50 percent
of the then market price of the Company's Common Stock and its rights to
purchase from the warrant holders for $1.00 per share five-year warrants
to acquire 776,562 shares of the Company's Common Stock at $2.00 per
share. As a result of the issuance of the above mentioned shares, the
antidilution provisions of the Warrants required an adjustment from
776,562 shares at $2.00 per share to 862,847 shares at $1.80 per share.
As a result of the issuance of the 12 1/2% Convertible Debentures
discussed in Note 12, the Warrants may require a further adjustment to
the number of shares purchasable and the exercise price.
On May 1, 1996, SIL acquired 1,628,100 shares of the Company's
Common Stock at $3.00 per share, and at $1.00 per Warrant, 862,847
Warrants to acquire 862,847 shares of the Company's Common Stock at $1.80
per share. SIL exercised these Warrants on May 6, 1996, resulting in the
Company receiving $1,553,124 in additional equity.
In addition, on March 31, 1996, the Company was granted by Care the
exclusive license for the Care software systems for use in the workers'
compensation and group health claims administration markets in Canada,
Mexico and Central and South America. In exchange for this license, the
Company issued to Care 2,500,000 shares of the Company's Common Stock.
The agreement was revised on March 14, 1997 and the Company engaged Care
as its exclusive sales agent for a monthly fee of $10,000 against
commissions of 20%. Depending upon the level of revenue reached, the
Company will have the right to repurchase portions of the shares issued
to Care at $.01 per share based upon the level of revenues actually
achieved. Under certain circumstances, based upon aggregate net sales in
excess of $10 million from a maximum of two separate sales during such
three-year period, the Company may be required to grant Care five-year
warrants to buy an additional 1,000,000 shares of the Company's Common
Stock at $2.00 per share.
-36-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
(Dollar amounts in thousands except per share data)
QUARTER
--------
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
YEAR ENDED DECEMBER 31, 1996:
Revenues $ 1,120 $ 1,897 $ 1,052 $ 1,400
Loss from continuing operations(1) (798) (1,280) (2,046) (1,484)
Loss on disposal of discontinued
operations -- -- (393) --
Net loss (798) (1,280) (2,439) (1,484)
Loss per share from continuing
operations ($0.07) ($0.08) ($0.12) ($0.10)
Net loss per share ($0.07) ($0.08) ($0.15) ($0.10)
YEAR ENDED DECEMBER 31, 1995:
Revenues 1,054 925 1,136 1,004
Loss from continuing operations(1) (2,158) (280) (388) (718)
Loss from discontinued operations (1,330) (3,103) (1,128) (1,547)
Loss on disposal of discontinued
operations -- -- -- (750)
Net loss (3,488) (3,383) (1,516) (3,015)
Loss per share from continuing
operations ($0.25) ($0.03) ($0.05) ($0.08)
Net loss per share ($0.41) ($0.40) ($0.18) ($0.34)
YEAR ENDED DECEMBER 31, 1994:
Revenues 484 630 155 658
Loss from continuing operations(1) (905) (1,531) (1,671) (3,359)
(Loss) income from discontinued
operations (1,951) 1,252 1,911 (7,966)
Net (loss) income (2,856) (279) 240 (11,325)
Loss per share from continuing
operations ($0.10) ($0.17) ($0.19) ($0.38)
Net (loss) income per share ($0.32) ($0.03) $0.03 ($1.28)
(1) The first quarter of 1995 and the fourth quarter of 1994 were
adversely affected by the special charges as described in Note
3.
-37-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 11--SUPPLEMENTAL DATA
Accrued liabilities consist of the following:
DECEMBER 31,
------------
1996 1995
---- ----
Accrued payroll, benefits
temporary help, consulting
and severance $ 371,186 $ 229,623
Reserve for contract costs
and adjustments -- 200,000
Reserve for loss on disposal
of discontinued operations -- 749,758
Accrued expenses of the
discontinued operations not
assumed by The Robert Plan
Corporation 1,036,736 2,839,702
206,690 104,558
Other ---------- ----------
$1,614,612 $4,123,641
Total ========== ==========
NOTE 12--SUBSEQUENT EVENTS
On March 14, 1997, the Company obtained $750,000 in bridge financing
through the sale of 12 1/2% Convertible Notes to three major stockholders.
The principal and accrued interest on the bridge financing was repaid in
full on March 31, 1997 out of the proceeds from the financing discussed
below.
On March 31, 1997, the Company sold $3,000,000 of 12 1/2% Convertible
Debentures due March 2002 (the "Debentures") to an institutional
investor. The Debentures were sold at face value, pay interest quarterly
and are convertible, in whole or in part, into shares of Common Stock of
the Company at $1.25 per share, subject to adjustment. The Debentures
contain certain covenants which restrict the Company's ability to incur
indebtedness, grant liens, pay dividends or other defined restricted
payments and make investments and acquisitions. The Company cannot
redeem the Debentures for two years and thereafter may only call the
Debentures if the closing price of the Company's Common Stock for the
twenty business days preceding the redemption date exceeds $1.50. The
net proceeds from the permanent financing were used to repay the bridge
financing and the remainder will be used for working capital purposes.
-38-
<PAGE>
COVER-ALL TECHNOLOGIES INC.
AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE AT
BEGINNING DEDUCTIONS END
OF PERIOD ADDITIONS (1) OF PERIOD
--------- --------- ------------- ------
Accumulated amortization of
capitalized software and
software license:
Year Ended December 31,
1996 $ 489,227 $2,101,576 $834,839 $1,755,964
Year Ended December 31,
1995 $ -- $ 489,227 $ -- $ 489,227
Year Ended December 31,
1994 $1,388,601 $3,313,023 $4,701,624 $ --
(1) Represents primarily a write-off of $506,000 of capitalized software
costs in 1996 and reduction of fully amortized software in 1994.
-39-
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- ------------
2 Certificate of Merger of the Company Computer Systems, Inc.
(a New York corporation) into the Registrant, filed on June
11, 1985 [incorporated by reference to Exhibit 2 to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on January 29, 1986].
3(a) Certificate of Incorporation of the Registrant filed on
April 22, 1985 [incorporated by reference to Exhibit 3(a)
to the Registrant's Annual Report on Form 10-K (Commission
File No. 0-13124) filed on January 29, 1986].
3(b) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed on May 6, 1987 [incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (Commission File No. 33-17533) filed
on September 29, 1987].
3(c) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed on March 26, 1990 [incorporated by
reference to Exhibit 3(d) to the Registrant's Quarterly
Report on Form 10-Q (Commission File No. 0-13124) filed on
June 14, 1990].
3(d) Certificate of Amendment of Certificate of Incorporation of
the Registrant filed on March 18, 1992 [incorporated by
reference to Exhibit 1 to the Registrant's Current Report
on Form 8-K (Commission File No. 0-13124) filed on March
30, 1992].
3(e) Certificate of Amendment of Certificate of Incorporation of
the Registrant [incorporated by reference to Exhibit 3(e)
to the Registrant's Amendment No. 1 to Registration
Statement on Form S-3 (Commission File No. 0-13124) filed
on July 10, 1996].
3(f) Bylaws of the Registrant, as amended [incorporated by
reference to Exhibit 3(g) to the Registrant's Amendment No.
1 to Registration Statement on Form S-3 (Commission file
No. 0-13124) filed on July 10, 1996].
4 Form of Common Stock Certificate of the Registrant
[incorporated by reference to Exhibit 4(a) to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on January 29, 1986].
10(a) Partnership Agreement, dated December 7, 1978, by and among
the Registrant, James R. Poole, Ira M. Cantor and Stanley
A. Rothenberg [incorporated by reference to Exhibit 10(a)
to the Registrant's Registration Statement on Form S-18
(Commission File No. 2-88695-NY) filed on December 30,
1983].
10(b) Employment Agreement, dated as of August 1, 1990, between
the Registrant and Bradley J. Hughes [incorporated by
reference to Exhibit 10(h) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1991].
10(c) Employment Agreement, dated as of July 11, 1990, between
the Registrant and Theodore I. Botter [incorporated by
reference to Exhibit 10(j) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1991].
10(e)(1) Employment Agreement, dated as of November 1, 1992, between
the Registrant and Harvey Krieger [incorporated by
reference to Exhibit 10(h) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 28, 1993].
10(e)(2) Amendment to Employment Agreement, dated June 7, 1995,
between the Registrant and Harvey Krieger.
-40-
<PAGE>
10(e)(3) Consulting Agreement, dated as of June 1, 1996, between the
Registrant and Harvey Krieger [incorporated by reference to
Exhibit 10(e)(3) to the Registrant's Registration Statement
on Form S-3 (Commission File No. 0-1324) filed on June 17,
1996].
10(f)(1) Employment Agreement, dated as of March 22, 1994, among
COVER-ALL Systems, Inc., Michael G. Repoli and the
Registrant [incorporated by reference to Exhibit 10(f)(1)
to the Registrant's Annual Report on Form 10-K (Commission
File No. 0-13124) filed on April 17, 1995].
10(f)(2) Amendment to Employment Agreement, dated August 10, 1994,
among COVER-ALL Systems, Inc., Michael G. Repoli and the
Registrant [incorporated by reference to Exhibit 10(f)(2)
to the Registrant's Annual Report on Form 10-K (Commission
File No. 0-13124) filed on April 17, 1995].
10(f)(3) Amendment to Employment Agreement, dated January 11, 1995,
among COVER-ALL Systems, Inc., Michael G. Repoli and the
Registrant [incorporated by reference to Exhibit 10(f)(3)
to the Registrant's Annual Report on Form 10-K (Commission
File No. 0-13124) filed on April 17, 1995].
10(g) Employment Agreement, dated as of January 24, 1996, among
COVER-ALL Systems, Inc., the Registrant and Peter C. Lynch
[incorporated by reference to Exhibit 10(g) to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on April 11, 1996].
10(h) Warner Insurance Services, Inc. Tax Saver 401(k) Salary
Reduction Plan adopted May 31, 1985 and restated as of
August 11, 1992 [incorporated by reference to Exhibit 10(k)
to the Registrant's Annual Report on Form 10-K (Commission
File No. 0-13124) filed on January 28, 1993].
10(i) Incentive Stock Option Plan adopted by the Board of
Directors of the Registrant on February 22, 1982, and
approved by the stockholders in February 1983 as amended on
December 16, 1983 and March 31, 1988 [incorporated by
reference to Exhibit 10(b) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1989].
10(j) Stock Option Agreement, dated March 22, 1990, between the
Registrant and Harvey Krieger [incorporated by reference to
Exhibit 10(q) to the Registrant's Annual Report on Form 10-
K (Commission File No. 0-13124) filed on January 24, 1991].
10(k) Stock Option Agreement, dated August 15, 1990, between the
Registrant and Bradley J. Hughes [incorporated by reference
to Exhibit 10(t) to the Registrant's Annual Report on Form
10-K (Commission File No. 0-13124) filed on January 24,
1991].
10(l) Stock Option Agreement, dated August 15, 1990, between the
Registrant and Theodore I. Botter [incorporated by
reference to Exhibit 10(u) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1991].
10(m)(1) The 1991 Key Employee Stock Option Plan, adopted by the
Board of Directors of the Registrant on June 18, 1991, as
amended on September 6, 1991 and November 19, 1991 and
approved by stockholders on March 18, 1992 [incorporated by
reference to Exhibit 4(a) to the Registrant's Registration
Statement on Form S-8 (Commission File No. 33-44270) filed
on November 26, 1991].
10(m)(2) Form of Incentive Stock Option Agreement under the 1991 Key
Employee Stock Plan [incorporated by reference to Exhibit
4(b) to the Registrant's Registration Statement on Form S-8
(Commission File No. 33-44270) filed on November 26, 1991].
-41-
<PAGE>
10(m)(3) Form of Non-Qualified Stock Option Agreement under the 1991
Key Employee Stock Option Plan [incorporated by reference
to Exhibit 4(c) to the Registrant's Registration Statement
on Form S-8 (Commission File No. 33-44270) filed on
November 26, 1991].
10(m)(4) Form of Stock Option Agreement under the 1991 Key Employee
Stock Option Plan dated as of June 21, 1991, between the
Registrant and each of Theodore I. Botter, Thomas F.
Rocchio, and Harvey Krieger [incorporated by reference to
Exhibit 4(d) to the Registrant's Registration Statement on
Form S-8 (Commission File No. 33-44270) filed on November
26, 1991].
10(m)(5) Stock Option Agreement, dated as of November 20, 1992,
between the Registrant and Bradley J. Hughes [incorporated
by reference to Exhibit 10(x)(vi) to the Registrant's
Annual Report on Form 10-K (Commission File No. 0-13124)
filed on January 28, 1993].
10(n)(1) 1994 Stock Option Plan for Independent Directors adopted by
the Board of Directors of the Registrant on November 10,
1994 [incorporated by reference to Exhibit 10(n)(1) to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on April 17, 1995].
10(n)(2) Form of Stock Option Agreement under the 1994 Stock Option
Plan for Independent Directors [incorporated by reference
to Exhibit 10(n)(2) to the Registrant's Annual Report on
Form 10-K (Commission File No. O-13124) filed on April 17,
1995].
10(o)(1) The 1995 Employee Stock Option Plan, adopted by the Board
of Directors of the Registrant on March 22, 1995
[incorporated by reference to Exhibit 10(o)(1) to the
Registrant's Annual Report on Form 10-K (Commission File
No. O-13124) filed on April 17, 1995].
10(o)(2) Form of Incentive Stock Option Agreement under the 1995
Employee Stock Option Plan [incorporated by reference to
Exhibit 10(o)(2) to the Registrant's Annual Report on Form
10-K (Commission File No. 0-13124) filed on April 17,
1995].
10(o)(3) Form of Non-Qualified Stock Option Agreement under the 1995
Employee Stock Option Plan [incorporated by reference to
Exhibit 10(o)(3) to the Registrant's Annual Report on Form
10-K (Commission File No. 0-13124) filed on April 17,
1995].
10(p)(1) Indenture of Lease, dated as of July 1, 1994, between Fair
Lawn Industrial Park, Inc. and the Registrant for premises
located at 17-01 Pollitt Drive, Fair Lawn, New Jersey
[incorporated by reference to Exhibit 10(p)(1) to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on April 17, 1995].
10(p)(2) Termination Agreement, dated as of June 30, 1994, among
Fair Lawn Industrial Park, Inc., Symtron Systems, Inc., and
the Registrant [incorporated by reference to Exhibit
10(p)(2) to the Registrant's Annual Report on Form 10-K
(Commission File No. 0-13124) filed on April 17, 1995].
10(q) Lease Agreement, dated as of March 2, 1990, between the
Registrant and Polevoy Associates for premises located at
18-01 Pollitt Drive, Fair Lawn, New Jersey [incorporated by
reference to Exhibit 10(z) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1991].
10(r) Lease Agreement, dated as of December 11, 1991, between the
Registrant and Aetna Life Insurance Company for premises
located at 125 Belmont Drive, Somerset, New Jersey
[incorporated by reference to Exhibit 10(ee) to the
Registrant's Annual Report on Form 10-K (Commission File
No. 0-13124) filed on January 24, 1992].
-42-
<PAGE>
10(s) Rights Agreement, dated November 17, 1989, between the
Registrant and First Fidelity Bank, N.A., as Rights Agent
[incorporated by reference to Exhibit 1 to the Registrant's
Registration Statement on Form 8-A (Commission File No. 13-
2698053) filed on October 20, 1989].
10(t)(i) Severance Agreement, dated as of November 28, 1989, between
the Registrant and Harvey Krieger [incorporated by
reference to Exhibit 1 to the Registrant's Form 8-K
(Commission File No. 0-13124) filed on December 6, 1989].
10(t)(ii) Severance Agreement, dated August 15, 1990, between the
Registrant and Bradley J. Hughes [incorporated by reference
to Exhibit 10(o)(i) to the Registrant's Annual Report on
Form 10-K (Commission File No. 0-13124) filed on January
24, 1991].
10(t)(iii) Severance Agreement, dated August 15, 1990, between the
Registrant and Theodore I. Botter [incorporated by
reference to Exhibit 10(t)(i) to the Registrant's Annual
Report on Form 10-K (Commission File No. 0-13124) filed on
January 24, 1991].
10(u)(i) Restructuring Agreement, dated as of March 1, 1996, by and
among the Registrant, Atlantic Employers Insurance Company,
Pacific Employers Insurance Company, Electric Insurance
Company, The Robert Plan Corporation, Material Damage
Adjustment Corporation, Lion Insurance Company, and
National Consumer Insurance Company [incorporated by
reference to Exhibit 10.1 to the Registrant's Form 8-K
(Commission File No. 0-13124) filed on March 7, 1996].
10(u)(ii) Form of Warrant issued by the Registrant pursuant to the
Restructuring Agreement listed as Exhibit 10(u)(i) above
[incorporated by reference to Exhibit 10.2 to the
Registrant's Form 8-K (Commission File No. 0-13124) filed
on March 7, 1996].
10(u)(iii) Asset Purchase Agreement, dated as of March 1, 1996, by and
among the Registrant, MDA Services, Inc. and The Robert
Plan Corporation [incorporated by reference to Exhibit 10.3
to the Registrant's Form 8-K (Commission File No. 0-13124)
filed on March 7, 1996].
10(v)(i) Stock Purchase Agreement, dated as of March 31, 1996, by
and among the Registrant, Software Investments Limited and
Care Corporation Limited [incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on April 8, 1996].
10(v)(ii) Repurchase Rights Assignment, dated as of March 31, 1996,
between the Registrant and Software Investments Limited
[incorporated by reference to Exhibit 10.2 to the
Registrant's Form 8-K (Commission File No. 0-13124) filed
on April 8, 1996].
10(v)(iii) Warrant, dated as of March 31, 1996, issued by the
Registrant to Software Investments Limited [incorporated by
reference to Exhibit 10.3 to the Registrant's Form 8-K
(Commission File No. 0-13124) filed on April 8, 1996].
10(v)(iv) Exclusive Software License Agreement, dated as of March 31,
1996, by and among the Registrant, Care Corporation Limited
and COVER-ALL Systems, Inc. [incorporated by reference to
Exhibit 10.4 to the Registrant's Form 8-K (Commission File
No. 0-13124) filed on April 8, 1996].
10(w) Settlement Agreement dated April 1, 1996 between the
Registrant and Clarendon National Insurance Company
[incorporated by reference to Exhibit 10.5 to the
Registrant's Form 8-K (Commission File No. 0-13124) filed
on April 8, 1996].
*10(x) Employment Agreement, dated as of April 1, 1996, between
the Registrant and Raul F. Calvo.
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<PAGE>
*10(y) General Release and Termination of Lease Agreement, dated
as of December 4, 1996, between the Registrant and Somerset
Realty Associates, L.L.C.
10(z)(i) Convertible Note Purchase Agreement, dated as March 14,
1997, between the Registrant, Software Investments Limited,
Atlantic Employers Insurance Company and Roger D. Bensen
[incorporated by reference to Registrant's Current Report
on Form 8-K (Commission File No. 0-13124) filed on March
24, 1997.
*10(z)(ii) Form of 12 1/2% Convertible Note issued by Registrant
pursuant to the Convertible Note Purchase Agreement listed
as Exhibit 10(z)(i) above.
*10(aa)(i) Debenture Purchase Agreement, dated as of March 31, 1997,
between the Registrant and Sirrom Capital Corporation.
*10(aa)(ii) 12 1/2% Convertible Debenture Due March 31, 2002, issued by
Registrant to Sirrom Capital Corporation.
*10(aa)(iii) Amendment to Stock Purchase Agreement, dated as of March
14, 1997, among the Registrant, Software Investments
Limited and Care Corporation Limited.
*10(aa)(iv) Amendment to Exclusive Software License Agreement, dated as
of March 14, 1997, among the Registrant, Care Corporation
Limited and, for certain purposes, Cover-All Systems, Inc.
21 Subsidiaries of the Registrant [incorporated by reference
to Exhibit 21 to the Registrant's Annual Report on Form 10-
K (Commission File No. 0-13124) filed on April 11, 1996].
*23 Consent of Ernst & Young LLP.
*27 Financial Data Schedule.
______________________________
* Filed herewith
-44-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
Annual Report to be signed on its behalf by the undersigned, thereunto
duly authorized.
COVER-ALL TECHNOLOGIES INC.
Date: April 15, 1997 By: /s/ Brian Magowan
-----------------
Brian Magowan
Chairman of the Board of
Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
SIGNATURES TITLE DATE
---------- ---------- ----------
/s/ Brian Magowan Chairman of the Board April 15, 1997
-------------------- of Directors and Chief
Brian Magowan Executive Officer and
Director (Principal
Executive Officer)
/s/ Mark D. Johnston Chief Financial April 15, 1997
-------------------- Officer and
Mark D. Johnston Director
/s/ Earl Gallegos Director April 15, 1997
--------------------
Earl Gallegos
/s/ Ian Meredith Director April 15, 1997
--------------------
Ian Meredith
/s/ James R. Stallard Director April 15, 1997
--------------------
James R. Stallard
-45-
EXHIBIT 10(x)
EMPLOYMENT AGREEMENT
----------------------
AGREEMENT made as of the 1st day of April, 1996, by and
among WARNER INSURANCE SERVICES, INC., a Delaware corporation
(the "Company"), having its principal office at 18-01 Pollitt
Drive, Fair Lawn, New Jersey 07410 and RAUL F. CALVO, residing at
16 Primrose Avenue, Floral Park, New York 11001-2505 (the
"Employee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Employee has been serving as a Vice
President of the Company and has been performing the duties of a
Vice President for the Company, and the Company and the Employee
desire to continue the Employee's employment pursuant to the
terms hereof.
NOW, THEREFORE, in consideration of the
representations, warranties and mutual covenants set forth
herein, the parties agree as follows:
1. Employment. The Company, effective April 1st,
----------
1996, hereby agrees to continue to retain the Employee as Vice
President of the Company and the Employee hereby accepts such
employment, all upon and subject to the terms and conditions
hereinafter set forth.
2. Term. The term of employment under this Agreement
----
(the "Employment Agreement") shall commence as of April 1, 1996
and shall continue in full force and effect until March 31, 1998
(the "Employment Term"), subject to earlier termination for
disability or for cause as provided in Section 5 hereof. This
Agreement may be renewed by the Company and Employee for
successive one-year terms by providing written notice of renewal
to each other, provided such written notice is given at least
ninety (90) days prior to the expiration of the then current
term.
3. Duties.
------
(a) The Employee will render his services to the
Company as a Vice President and shall perform such duties and
services of those offices or positions or of such other office or
position as may be assigned to him from time to time by the Board
of Directors of the Company. In addition, the Employee will
hold, without additional compensation therefor, such other
offices and directorships in the Company or any parent or
subsidiary of the Company to which, from time to time, he may be
appointed or elected.
(b) Except as otherwise provided herein and except for
illness, permitted vacation periods and permitted leaves of
absence consistent with the past practice of the Company or as
otherwise approved by the Board of Directors of the Company, the
Employee agrees that during the term of his employment hereunder,
he shall devote all of his full working time and attention, and
give his best effort, skill and abilities, exclusively to the
business and interests of the Company.
4. Compensation; Benefits
----------------------
(a) Salary. In consideration of the services to be
------
rendered by the Employee hereunder, including, without
limitation, any services rendered by him as an officer or
director of the Company or any parent, subsidiary or affiliate of
the Company, the Company agrees to pay to the Employee, and the
Employee agrees to accept as compensation, a salary of
$131,250.00 (the "Salary"), payable in accordance with the
Company's normal payroll policies. The Company, by action of the
Board of Directors or the Compensation Committee of the Board of
Directors of the Company, may, in their sole discretion, increase
the Salary at any time. The Employee's Salary shall be subject
to all applicable withholding and other taxes.
(b) Benefits. During the term of his employment
--------
hereunder, the Employee shall be entitled to the following
employment benefits:
(i) vacations and sick leaves in accordance with
the Company's policies from time to time in effect for
officers and executive employees of the Company; and
(ii) participation, subject to qualification and
participation requirements, in medical, life or other
insurance or hospitalization plans and any pension, profit
sharing or other employee benefit plans, presently in effect
or hereafter instituted by the Company and applicable to its
officers and executive employees.
(c) Reimbursement of Expenses. The Employee shall be
--------------------------
reimbursed for reasonable and necessary expenses incurred by the
Employee in performing his employment hereunder, provided such
expenses are adequately documented in accordance with the
Company's policies.
5. Termination in Case of Disability Death or for Cause.
-----------------------------------------------------
(a) If the Employee, due to physical or mental injury,
illness, disability or incapacity, shall fail to render the services
provided for in this Agreement for a consecutive period of three (3)
months, or an aggregate of three (3) months in any six (6) month
period, the Company may, at its option, terminate the Employee's
employment hereunder upon fourteen (14) days' written notice to the
Employee.
(b) If the Employee shall die during the term of this
Agreement, this Agreement and the Employee's employment hereunder shall
terminate immediately upon the Employee's death.
(c) Notwithstanding anything to the contrary in this
Agreement, the Company, upon notice to the Employee, may terminate this
Agreement and the employment of the Employee hereunder for cause.
6. Severance Compensation.
----------------------
(a) In the event the Employee's employment hereunder is
terminated by the Company during the Employment Term for any reason
other than for cause, death or disability, the Company shall pay to the
Employee as severance compensation an amount equal to six (6) months'
Salary.
(b) In the event the Employee's employment hereunder is
terminated by the Company after the Employment Term for any reason,
including the expiration of the Employment Term without renewal thereof
by the Company, and other than for cause, death or disability, the
Company shall pay to the Employee as severance compensation an amount
equal to six (6) months' Salary.
(c) If the Employee resigns from the employ of the Company
during the Employment Term as a result of the principal place of
business of the Employee being moved to a location which is greater
than fifty (50) miles from the Employee's current residence in Floral
Park, New York, the Company shall be obligated to pay to the Employee
as severance compensation an amount equal to six (6) months' Salary.
(d) Severance compensation shall be paid biweekly in
accordance with the Company's usual practices. Employee shall also be
paid biweekly for unused vacation time.
(e) In the event the Employee receives severance
compensation under this Section 6, the Employee shall not be entitled
to receive any other compensation or benefits under this Agreement
after the termination of the Employee's employment hereunder and, as a
condition to receiving such severance compensation, the Employee hereby
agrees that he shall have no other claim against the Company by reason
of this Agreement.
7. Disclosure and Assignment of Discoveries.
----------------------------------------
(a) The Employee shall (without any additional compensation)
promptly disclose in writing to the Board of Directors of the Company
all ideas, processes, devices and business concepts (hereinafter
referred to collectively as "Discoveries"), whether or not patentable
or copyrightable, which he, while employed by the Company, conceives,
develops, acquires or reduces to practice, whether alone or with others
and whether during or after usual working hours, and which are related
to the Company's business or interests, or arise out of or in
connection with the duties performed by him hereunder; and the Employee
hereby transfers and assigns to the Company all right, title and
interest in and to such Discoveries. Upon the request of the Company,
the Employee shall (without any additional compensation), from time to
time during or after the expiration or termination of his employment,
execute such further instruments and do all such other acts and things
as may be deemed necessary or desirable by the Company to protect
and/or enforce its rights in respect of such discoveries.
(b) For purposes of this Section 7 and the following Section
8, the term "Company" shall mean and include any and all subsidiaries,
parents and affiliated corporations of the Company in existence from
time to time.
8. Non-Disclosure of Confidential Information and
----------------------------------------------
Non-Competition .
--------------
(a) The Employee represents that he has been informed that
it is the policy of the Company to maintain as secret and confidential
all information relating to (i) the products, processes and/or business
concepts used by the Company and (ii) the customers and employees of
the Company ("Confidential Information"), and the Employee further
acknowledges that such Confidential Information is of great value to
the Company and is the property of the Company. The parties recognize
that the services to be performed by the Employee are special and
unique, and that by reason of his employment by the Company, he will
acquire Confidential Information as aforesaid. The parties confirm
that to protect the Company's goodwill, it is reasonably necessary that
the Employee agree, and accordingly the Employee does hereby agree,
that he will not directly or indirectly (except where authorized by the
Board of Directors of the Company for the benefit of the Company):
A. at any time during his employment hereunder or after he
ceases to be employed by the Company, divulge to any persons,
firms or corporations other than the Company (hereinafter referred
to collectively as "Third Parties"), or use, or cause to authorize
any Third Parties to use, any such Confidential Information, or
any other information regarded as confidential and valuable by the
Company which he knows or should know is regarded as confidential
and valuable by the Company (whether or not any of the foregoing
information is actually novel or unique or is actually known to
others); or
B. at any time during his employment hereunder and for a
period of one (1) year after he ceases to be employed by the
Company (the "Restricted Period"), solicit or cause or authorize,
directly or indirectly, to be solicited for employment, for or on
behalf of himself or Third Parties, any persons who were at any
time within one year prior to the cessation of his employment
hereunder, employees of the Company; or
C. at any time during his employment hereunder and during
the Restricted Period, employ or cause or authorize, directly or
indirectly, to be employed, for or on behalf of himself or Third
Parties, any such employees of the Company;
D. at any time during his employment hereunder and during
the Restricted Period, unless agreed to by the Company in writing,
the Employee will not accept employment with or participate,
directly or indirectly, as owner, stockholder, director, officer,
manager, consultant or agent or otherwise use his special, unique
or extraordinary skills or knowledge with respect to the business
of the Company or of any affiliate of the Company in or with any
business, firm, corporation, partnership, association, venture or
other entity or person which is engaged in any business activities
competitive with the business of the Company as such business was
conostituted during the period of employment, except that this
paragraph D shall not be construed to prohibit the Employee from
owning up to 5% of the securities of a corporation which are
publicly traded on a national securities exchange or in the
over-the-counter market; or
E. at any time during his employment hereunder and during
the Restricted Period, solicit or cause or authorize, directly or
indirectly, to be solicited, for or on behalf of himself or Third
Parties, any business from Third Parties who were, at any time
within one (1) year prior to the cessation of his employment
hereunder, customers of the Company; or
F. at any time during his employment hereunder and during
the Restricted Period, accept or cause or authorize, directly or
indirectly, to be accepted, for or on behalf of himself or Third
Parties, any business from any such customers of the Company.
(b) The Employee agrees that he will not, at any time,
remove from the Company's premises any drawings, notebooks, data and
other documents and materials relating to the business and procedures
heretofore or hereafter acquired, developed and/or used by the Company
without prior written consent of the Board of Directors of the Company,
except as reasonably necessary to the discharge of his duties
hereunder.
(c) The Employee agrees that, upon the expiration of his
employment by the Company for any reason, he shall forthwith deliver up
to the Company any and all order-books, customer lists, logs, drawings,
notebooks and other documents and materials, and all copies thereof, in
his possession or under his control relating to any Confidential
Information or any discoveries or which is otherwise the property of
the Company.
(d) The Employee agrees that any breach or threatened breach
or alleged breach or alleged threatened breach by him of any provision
of this Section 8 shall entitle the Company, in addition to any other
legal remedies available to it, to apply to any court of competent
jurisdiction to enjoin such breach or threatened breach or alleged
breach or alleged threatened breach. The parties understand and intend
that each restriction agreed to by the Employee hereinabove shall be
construed as separable and divisible from every other restriction, and
that the unenforceability, in whole or in part, of any other
restriction, will not effect the enforceability of the remaining
restrictions and that one or more or all of such restrictions may be
enforced in whole or in part as the circumstances warrant. No waiver
of any one breach of the restrictions contained in this Section 8 shall
be deemed a waiver of any future breach.
(e) The Employee hereby acknowledges that he is fully
cognizant of the restrictions put upon him by this Section 8, and that
the provisions of this Section 8 shall survive the termination of this
Employment Agreement and his employment with the Company.
9. Conflicting Agreements and Warranties of the Employee.
------------------------------------------------------
The Employee hereby represents and warrants to the Company that (a)
neither the execution of this Agreement by the Employee nor the
performance by the Employee of any of his obligations or duties
hereunder will conflict with or violate or constitute a breach of the
terms of any employment or other agreement to which the Employee is a
party or by which the Employee is bound, and (b) the Employee is not
required to obtain the consent of any person, firm, corporation or
other entity in order to enter into this Agreement or to perform any of
his obligations or duties hereunder.
10. Notices.
-------
(a) All notices, requests, demands or other communications
hereunder shall be deemed to have been given if delivered in writing
personally or by certified mail to each party at the address set forth
below, or at such other address as each party may designate in writing
to the other:
If to the Company:
Warner Insurance Services, Inc.
18-01 Pollitt Drive
Fair Lawn, New Jersey 07410
Attention: President and Chief Executive Officer
with a copy to:
Reid & Priest LLP
40 West 57th Street
New York, New York 10019
Attention: Leonard Gubar, Esq.
If to the Employee:
Raul F. Calvo
16 Primrose Avenue
Floral Park, New York 11001-2505
11. Entire Agreement. This Agreement contains the
----------------
entire understanding of the parties with respect to the subject
matter hereof, supersedes any prior agreement between the
parties, and may not be changed or terminated orally. No change,
termination or attempted waiver of any of the provisions hereof
or thereof shall be binding unless in writing and signed by the
party against whom the same is sought to be enforced. No
provision hereof shall be construed against a party because that
provision or any other provision was drafted by or at the
direction of such party.
12. Successors and Assigns. This Agreement shall be
----------------------
binding upon and shall inure to the benefit of the respective
heirs, legal representatives, successors and assigns of the
parties hereto.
13. Severability. In the event that any one or more
------------
of the provisions of this Agreement shall be declared to be
illegal or unenforceable under any law, rule or regulation of any
government having jurisdiction over the parties hereto, such
illegality or unenforceability shall not affect the validity and
enforceability of the other provisions of this Agreement.
14. Counterparts. This Agreement may be executed in
-------------
one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the
same instrument.
15. Governing Law. All matters concerning the
--------------
validity and interpretation of and performance under this
Agreement shall be governed by the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first above written.
WARNER INSURANCE SERVICES, INC.
By: /s/ Alfred J. Moccia
--------------------------------
Name: Alfred J. Moccia
Title: President
/s/ Raul F. Calvo
----------------------------------
RAUL F. CALVO
Exhibit 10(y)
GENERAL RELEASE AND TERMINATION OF LEASE AGREEMENT
GENERAL RELEASE AND TERMINATION OF LEASE AGREEMENT
("Release"), dated as of December 4, 1996, by and between
-----------
COVER-ALL TECHNOLOGIES INC. (formerly Warner Insurance Services,
Inc.), a Delaware corporation ("Tenant"), and SOMERSET REALTY
ASSOCIATES, L.L.C., a New Jersey limited liability company
("Landlord").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Landlord and Tenant are parties to that
certain Lease Agreement, dated December 11, 1991, as amended by
that certain Lease Modification and Extension Agreement, dated
May 12, 1995 (together referred to as the "Lease"), relating to
22,368 square feet of the premises located at 130 Belmont Drive,
Somerset, New Jersey (the "Premises"); and
WHEREAS, Landlord and Tenant desire to terminate the
Lease as of the date hereof and fully release each other from any
and all issues, differences, rent, additional rent, escalations,
liabilities, costs, expenses, obligations, undertakings and
claims, whether potential or actual, with respect to, or arising
under, the Lease or otherwise, that may currently exist or arise
hereafter (hereafter referred to collectively as the "Claims").
NOW THEREFORE, in consideration of the payments to be
made by Tenant to Landlord as hereinafter provided and the mutual
covenants contained in this Release, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as
follows:
1. Termination of Lease. Landlord and Tenant agree
--------------------
that the Lease and the obligations thereunder are terminated and
are of no further force and effect as of the date hereof.
2. Buyout Fee. Tenant, in full and final settlement
----------
of the Claims and as consideration for this Release hereby agrees
to pay Landlord a buyout fee (the "Buyout Fee") of $250,000. less
the deposit of $104,000. or net payment herewith of $146,000. The
Buyout Fee is the only consideration due from Tenant to Landlord.
3. Release by Landlord. Landlord hereby releases and
------------------- -------- ---
forever discharges Tenant, Tenant's current, former, and future
------ ----------
controlling shareholders, affiliates, related companies,
subsidiaries, predecessor companies, divisions, shareholders,
directors, officers, employees, agents, attorneys, successors,
and assigns (and the current, former and future shareholders,
directors, officers, employees, agents, and attorneys of such
controlling shareholders, affiliates, related companies,
subsidiaries, predecessor companies, and divisions), and all
persons acting by, through, under, or in concert with any of them
(Tenant and the foregoing other persons and entities are
hereinafter defined separately and collectively as the "Tenant
Releasees"), from the Claims and from all actions, causes of
action, suits, debts, dues, sums of money, accounts, reckonings,
bonds, bills, specialties, covenants, contracts, controversies,
agreements, promises, variances, trespasses, damages, judgments,
extents, executions, claims, and demands whatsoever, whether
-------
known or unknown, in law or equity, whether statutory or common
----- -- -------
law, whether federal, state, local, or otherwise, including, but
not limited to, any claims relating to, or arising out of any
aspect of Tenant's occupancy of the Premises, the Lease or the
termination of the Lease which against the Tenant Releasees, or
any of them, Landlord, Landlord's successors and assigns ever
had, now have, or hereafter can, shall, or may have, for, upon,
or by reason of any matter, cause, or thing whatsoever from the
beginning of the world to the date of this Release.
4. Release by Tenant. Tenant hereby releases and
----------------- -------- ---
forever discharges Landlord, Landlord's current, former, and
------- ----------
future controlling shareholders, affiliates, related companies,
subsidiaries, predecessor companies, divisions, shareholders,
directors, officers, employees, agents, attorneys, successors,
and assigns (and the current, former and future shareholders,
directors, officers, employees, agents, and attorneys of such
controlling shareholders, affiliates, related companies,
subsidiaries, predecessor companies, and divisions), and all
persons acting by, through, under, or in concert with any of them
(Landlord and the foregoing other persons and entities are
hereinafter defined separately and collectively as the "Landlord
Releasees"), from all actions, causes of action, suits, debts,
dues, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements,
promises, variances, trespasses, damages, judgments, extents,
executions, claims, and demands whatsoever, whether known or
------- ----- --
unknown, in law or equity, whether statutory or common law,
-------
whether federal, state, local, or otherwise, including, but not
limited to, any claims relating to, or arising out of any aspect
of Tenant's occupancy of the Premises, the Lease or the
termination of the Lease which against the Landlord Releasees, or
any of them, Tenant, Tenant's successors and assigns ever had,
now have, or hereafter can, shall, or may have, for, upon, or by
reason of any matter, cause, or thing whatsoever from the
beginning of the world to the date of this Release.
5. Existence and Qualification. Each of Tenant and
---------------------------
Landlord, as the case may be, is validly existing and in good
standing under the laws of its respective jurisdiction and has
all requisite power and authority to carry on its business as now
being conducted and to own, lease and operate its properties as
and in the places where such business is now conducted and such
properties are now owned, leased or operated. Each of Tenant and
Landlord, as the case may be, has all requisite power to execute
and deliver this Release and to perform its obligations
hereunder.
6. Authorization of Agreements. The execution and
---------------------------
delivery by each of Tenant and Landlord, as the case may be, of
this Release and the transactions contemplated hereby have been
duly authorized by all requisite action on behalf of each such
party. This Release has been duly executed and delivered by each
of Tenant and Landlord, as the case may be, and this Release
constitutes the legal, valid and binding obligation of each of
Tenant and Landlord and is enforceable against each such party in
accordance with its respective terms except to the extent that
such validity, binding effect and enforceability may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium
and other laws affecting creditors' rights generally from time to
time in effect and by general equitable principles.
7. Successors and Assigns. This Release shall be
----------------------
binding upon and shall inure to the benefit of Landlord and
Tenant and their respective heirs, legal representatives,
successors and assigns.
8. Entire Agreement. This Release contains the
----------------
entire understanding between Landlord and Tenant with respect to
the subject matter hereof and supersedes all prior negotiations
and understandings. This Release may not be amended or modified
except by a written instrument signed by Landlord and Tenant.
9. Severability. In the event that any one or more
------------
provisions of this Release is held to be invalid or
unenforceable, such illegality or unenforceability shall not
affect the validity or enforceability of the other provisions
hereof and such other provisions shall remain in full force and
effect, unaffected by such invalidity or unenforceability.
10. Governing Law. This Release shall be interpreted,
-------------
construed and enforced in accordance with the internal laws of
the State of New York.
11. Headings. The section headings of this Release
--------
are for convenience of reference only and are not to be
considered in construing this Release.
12. Execution in Counterparts. This Release may be
-------------------------
executed in counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Release to be executed as of the day and year first above
written.
COVER-ALL TECHNOLOGIES INC.
By: /s/ Alfred J. Moccia
--------------------------------
Name: Alfred J. Moccia
Title: Chairman of the Board and
Chief Executive Officer
SOMERSET REALTY ASSOCIATES
By: /s/ Illegible
--------------------------------
Name:
Title:
Exhibit 10(z)(ii)
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAW
---
AND NEITHER THIS NOTE NOR ANY INTEREST THEREIN MAY BE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SUCH ACT OR SUCH LAWS AND RULES
AND REGULATIONS THEREUNDER.
COVER-ALL TECHNOLOGIES, INC.
CONVERTIBLE NOTE
New York, New York
$250,000.00 March 14, 1997
FOR VALUE RECEIVED, Cover-All Technologies, Inc.,
a Delaware corporation (the "Company"), hereby promises to
-------
pay to Atlantic Employers Insurance Company, a New Jersey
corporation, or its registered assigns (the "Holder"), the
------
principal sum of TWO HUNDRED FIFTY THOUSAND DOLLARS
($250,000.00), together with interest thereon from the date
hereof (computed on the basis of a 360-day year and actual
days elapsed) at the rate of 12.5% per annum (but in no
event to exceed the maximum rate permitted under applicable
provisions of law). Subject to the prior automatic
conversion of this Note pursuant to Section 2 hereof, the
principal of and accrued interest on this Note shall be due
and payable on the earlier to occur of (i) the closing of a
"permanent financing" (as defined in Section 5.6 hereof) by
the Company, and (ii) when declared due and payable by the
Holder, or when this Note automatically becomes due and
payable, upon the occurrence of an Event of Default (as
defined below); provided, that the Holder shall, in either
--------
event, have the option to convert this Note pursuant to
Section 2.2 hereof in lieu of the repayment by the Company
of the principal and accrued interest due hereunder. The
date on which this Note becomes due and payable is referred
to herein as the "Maturity Date." The payment of principal
-------------
and interest shall be made in such coin or currency of the
United States of America as at the time of payment shall be
legal tender for the payment of public and private debts.
Principal and interest on this Note shall be paid by wire
transfer in accordance with the written instructions of the
Holder or, in the absence of such instructions, by check
mailed to the Holder's address set forth in the Purchase
Agreement (as defined below). This Note may be prepaid at
any time, in whole or in part, without premium or penalty,
and the amount of the prepayment shall be applied first to
accrued interest and the remainder to the unpaid principal
balance hereof. This Note is issued pursuant to that
certain Convertible Note Purchase Agreement between the
Company, the Holder and certain other purchasers of similar
notes, dated as of the date hereof (the "Purchase
--------
Agreement"), and the Holder of this Note is entitled to
---------
certain rights and privileges set forth in the Purchase
Agreement.
1. EVENTS OF DEFAULT.
-----------------
1.1 If any of the following events specified
in this Section 1 shall occur (herein individually referred
to as an "Event of Default"), then (i) with respect to the
----------------
Events of Default set forth in clauses (i), (ii), (iii),
(iv) and (v), the Holder of this Note may, so long as such
condition exists, declare the entire principal and unpaid
accrued interest hereunder to be immediately due and
payable, by notice in writing to the Company, and (ii) with
respect to the Events of Default set forth in clauses (vi)
and (vii), this Note shall automatically become immediately
due and payable:
(i) default in the payment of the
principal of or accrued interest on this Note when
due and payable, whether on the Maturity Date, by
acceleration or otherwise;
(ii) any representation or warranty made
by the Company in the Purchase Agreement shall
have been incorrect in any material respect when
made;
(iii) the Company shall default in the
performance or observance of any term, covenant,
condition or agreement contained in this Note
(other than the payment of principal or interest
hereunder) or in the Purchase Agreement and, if
capable of being remedied, such default shall
continue unremedied for a period of twenty (20)
days after written notice shall have been given by
the Holder to the Company;
(iv) this Note or the Purchase Agreement
shall cease to be enforceable in accordance with
its terms against the Company, or the Company
shall so state in writing;
(v) the Company shall default beyond
any period of grace provided with respect thereto
in the payment of principal of, premium, if any,
or interest on any obligation in an amount in
excess of $50,000 in respect of borrowed money
when due, whether by acceleration or otherwise; or
the Company shall default in the performance or
observance of any other agreement under which any
such obligation is created, if the effect of any
such default is to cause or permit the holder or
holders of such obligation (or a trustee on behalf
of such holder or holders) to cause such
obligation to become due prior to the date of its
stated maturity, unless such holder or holders or
trustee shall have waived such default after its
occurrence or unless such holder or holders or
trustee shall have failed to give any notice
required to create an event of default thereunder;
(vi) the institution by the Company of
proceedings to be adjudicated as bankrupt or
insolvent, or the consent by it to the institution
of bankruptcy or insolvency proceedings against
it, or the filing by it of a petition or answer or
consent seeking reorganization or release under
the Federal Bankruptcy Act or any other applicable
federal or state law, or the consent by it to the
filing of any such petition or the appointment of
a receiver, liquidator, assignee, trustee or other
similar official of the Company, or the making by
it of an assignment for the benefit of creditors,
or the taking of corporate action by the Company
in furtherance of any such action; or
(vii) if, within sixty (60) days after
the commencement of an action against the Company
seeking any bankruptcy, insolvency,
reorganization, liquidation, dissolution or
similar relief under any present or future
statute, law or regulation, such action shall not
have been resolved in favor of the Company or all
orders or proceedings thereunder affecting the
operations or the business of the Company stayed,
or if the stay of any such order or proceeding
shall thereafter be set aside, or if, within sixty
(60) days after the appointment, without the
consent or acquiescence of the Company, of any
trustee, receiver or liquidator of the Company or
of all or any substantial part of its properties,
such appointment shall not have been vacated.
1.2 In the case any one or more of the
Events of Default specified in Section 1.1 hereof shall have
occurred and be continuing, the Holder may, subject to the
provisions of Section 1.3 hereof, proceed to protect and
enforce its rights hereunder, either by suit in equity
and/or by action at law, whether for the specific
performance of any covenant or agreement contained in this
Note, or the Holder may proceed to enforce the payment of
all sums due upon this Note or to enforce any other legal or
equitable right of the Holder. If an Event of Default shall
have occurred and the Holder shall employ attorneys, or
incur other costs and expenses for the collection of
payments due or to become due, or for the enforcement or
performance or observance of any obligation or agreement of
the Company under this Note, the Company agrees that it will
pay to the Holder, on demand, the fees of such attorney
together with all other costs and expenses incurred by the
Holder.
1.3 No remedy herein conferred upon the
Holder is intended to be exclusive of any other remedy and
each and every such remedy shall be cumulative and shall be
in addition to every other remedy given hereunder or now or
hereafter existing at law or in equity or by statute or
otherwise.
1.4 No course of dealing between the Company
and the Holder or any delay on the part of the Holder hereof
in exercising any rights hereunder shall operate as a waiver
of any rights of the Holder hereof.
2. CONVERSION.
----------
2.1 Automatic Conversion. Unless this Note
--------------------
shall have been previously paid in full or converted
pursuant to Section 2.2, the outstanding principal amount of
this Note and accrued and unpaid interest thereon
automatically shall be converted into fully paid and
nonassessable shares of common stock, par value $0.01 per
share, of the Company (the "Common Stock"), on the close of
------------
business on May 31, 1997. The number of shares of Common
Stock into which this Note will be so converted shall be
determined by dividing the aggregate principal amount and
interest to be converted by the Conversion Price (as defined
below) in effect at the time of such conversion. The
conversion price (the "Conversion Price") initially shall
----------------
equal $1.00, and shall be subject to adjustment as provided
in Section 3.
2.2 Optional Conversion on Maturity Date.
------------------------------------
On the Maturity Date and at the Holder's option, the Holder
may elect to convert this Note into shares of Common Stock
in lieu of the repayment by the Company of the principal and
accrued interest due hereunder. The number of shares into
which this Note will be so converted will be determined by
reference to the Conversion Price in effect on the Maturity
Date. In order to so convert this Note, the Holder shall
notify the Company of its election to do so three (3) days
prior to the closing of a permanent financing or promptly
upon Holder's receiving notification of the occurrence of an
Event of Default, as the case may be.
2.3 Mechanics and Effect of Conversion. No
----------------------------------
fractional shares of Common Stock will be issued upon
conversion of this Note. In lieu of any fractional shares
to which the Holder would otherwise be entitled, the Company
will pay to the Holder the cash value of any fractional
share. Upon conversion of this Note into Common Stock
pursuant to Sections 2.1 or 2.2, the Holder shall surrender
this Note at the principal executive offices of the Company,
together with a written notice stating the name or names
(with address or addresses) in which the certificate or
certificates for shares of Common Stock which shall be
issuable on such conversion shall be issued. At its
expense, the Company will, as soon as practicable after
receipt of this Note, issue and deliver to such Holder at
such principal executive office, a certificate or
certificates for the number of shares of Common Stock to
which such Holder is entitled upon such conversion, together
with any other securities and property to which the Holder
is entitled upon such conversion under the terms of this
Note, including a check payable to the Holder for any cash
amounts payable in respect of fractional shares. Whether or
not the Holder so delivers this Note and such notice as
aforesaid, such conversion shall be deemed to have been made
on the close of business on the date set forth in Section
2.1 on which this Note automatically converts, or on the
close of business on the Maturity Date, as the case may be,
and the Holder shall be treated for all purposes as the
record holder of such shares of Common Stock as of such
date.
3. ANTI-DILUTION AND OTHER PROVISIONS.
----------------------------------
3.1 Adjustments for Stock Dividends,
--------------------------------
Subdivisions, Combinations and Reclassifications. If the
------------------------------------------------
Company shall (i) pay a stock dividend or make a
distribution to holders of Common Stock in shares of its
Common Stock, (ii) subdivide its outstanding shares of
Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares, or (iv) issue by
reclassification of its shares of Common Stock any shares of
capital stock of the Company, then (A) the Conversion Price
----
shall be increased or decreased, as the case may be, to an
amount which shall bear the same relation to the Conversion
Price in effect immediately prior to such action as the
total number of shares of Common Stock outstanding
immediately prior to such action shall bear to the total
number of shares of Common Stock outstanding immediately
after such action, and (B) this Note automatically shall be
adjusted so that it thereafter shall be convertible into the
kind and number of shares of Common Stock or other
securities which the Holder would have owned and would have
been entitled to receive after such action if this Note had
been converted immediately prior to such action or any
record date with respect thereto. An adjustment made
pursuant to this Section 3.1 shall become effective
retroactively immediately after the record date in the case
of a dividend or distribution of Common Stock and shall
become effective immediately after the effective date in the
case of a subdivision, combination or reclassification.
3.2 Adjustment for Certain Distributions.
------------------------------------
If the Company shall fix a record date for the making of a
distribution to all holders of Common Stock (including,
without limitation, any such distribution made in connection
with a consolidation or merger in which the Company is the
continuing corporation) of (i) assets (including cash
dividends), (ii) equity or debt securities of the Company
(except for the Common Stock of the Company) or evidences of
indebtedness of the Company, (iii) equity or debt securities
of any corporation other than the Company or evidences of
indebtedness of any such corporation, or (iv) subscription
rights, options or warrants to purchase any of the foregoing
assets or securities, whether or not such rights, options or
warrants are immediately exercisable (hereinafter
collectively called "Distributions on Common Stock"), the
-----------------------------
Company shall make provisions for the Holder to receive upon
conversion of this Note a proportional amount (depending
upon the extent to which this Note is converted) of such
assets, equity or debt securities, evidences of indebtedness
or such other rights, as if such Holder had converted this
Note on or before such record date.
3.3 Adjustment for Consolidations and
---------------------------------
Mergers. In case of any consolidation or merger of the
-------
Company with or into another corporation or the sale of all
or substantially all of the assets of the Company to another
corporation, this Note thereafter shall be convertible into
the kind and amount of shares of stock or other securities
or property to which a holder of the number of shares of
Common Stock issuable upon conversion of this Note would
have been entitled upon such consolidation, merger or sale;
and, in such case, appropriate adjustment (as determined in
good faith by the Board of Directors of the Company) shall
be made in the application of the provisions in this Section
3, to the end that the provisions set forth in this Section
3 (including provisions with respect to changes in and
adjustments of the number of shares of Common Stock into
which this Note is convertible) shall thereafter be
applicable, as nearly as reasonably may be, in relation to
any shares of stock or other securities or property
thereafter deliverable upon the conversion of this Note.
3.4 Other Dilutive Events. If any event
---------------------
shall occur as to which the provisions of this Section 3
shall not be strictly applicable, but with respect to which
the failure to make any adjustment to the Conversion Price
and the number of shares of Common Stock issuable upon
conversion of this Note would not fairly protect the
conversion rights contained in this Note in accordance with
the intent and principles of this Section 3, upon request of
the Holder, the Company shall appoint a firm of independent
public accountants reasonably acceptable to the Holder which
shall give its opinion upon the adjustments, if any,
consistent with the intent and principles established in
this Section 3 necessary to preserve without dilution the
conversion rights represented by this Note. Upon receipt of
such opinion, the Company will promptly mail a copy thereof
to the Holder and shall make the adjustments described
therein.
3.5 No Impairment. The Company will not, by
-------------
amendment of its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good
faith assist in the carrying out of all the provisions of
this Section 3 and in the taking of all such action as may
be necessary or appropriate in order to protect the
conversion rights of the Holder against impairment.
3.6 Notices to Holder.
-----------------
If at any time,
(a) the Company shall take any action which
would require an adjustment pursuant to this
Section 3 in the Conversion Price or in the number
of shares of Common Stock issuable upon conversion
of this Note; or
(b) the Company shall authorize the making
to the holders of its Common Stock of any
Distributions on Common Stock as set forth in
Section 3.2; or
(c) the Company shall issue any additional
shares of Common Stock or declare any dividend (or
any other distribution) on its Common Stock; or
(d) there shall be any capital
reorganization or reclassification of the Common
Stock, or any consolidation or merger to which the
Company is a party, or any sale or transfer of all
or substantially all of the assets of the Company;
or
(e) there shall be a voluntary or
involuntary dissolution, liquidation or winding up
of the Company;
then, in any one or more of such cases, the Company shall
----
give written notice to the Holder, not less than twenty (20)
days before any record date or other date set for definitive
action, or of the date on which such reorganization,
reclassification, sale, consolidation, merger, dissolution,
liquidation or winding up shall take place, as the case may
be. Such notice also shall set forth such facts as shall
indicate the effect of such action (to the extent such
effect may be known at the date of such notice) on the
current Conversion Price and the kind and amount of Common
Stock and other securities and property deliverable upon
conversion of this Note. Such notice also shall specify the
date as of which the holders of the Common Stock of record
shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such
reorganization, reclassification, sale, consolidation,
merger, dissolution, liquidation or winding up, as the case
may be.
3.7 Reservation of Stock. The Company
--------------------
covenants that it will at all times reserve and keep
available, solely for issuance upon conversion of this Note,
such number of shares of Common Stock as shall then be
sufficient to effect conversion of this Note. If at any
time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of
this Note, the Company will take such corporate action as
may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose;
provided, however, that the Company will not take any action
-------- -------
which results in any adjustment of the Conversion Price if
the total number of shares of Common Stock issued and
issuable after such action upon conversion of this Note
would exceed the total number of shares of Common Stock then
authorized by the certificate of incorporation of the
Company.
3.8 Notice of Adjustment of Conversion
----------------------------------
Price. Upon any adjustment of the Conversion Price, then
-----
and in each such case the Company shall give notice thereof
to the Holder, which notice shall state the Conversion Price
resulting from such adjustment, setting forth in reasonable
detail the method of calculation and the facts upon which
such calculation is based.
3.9 Closing of Books. The Company will at
----------------
no time close its transfer books against the transfer of any
shares of Common Stock issued or issuable upon the
conversion of this Note in any manner which interferes with
the timely conversion of this Note.
4. EXCHANGE OR REPLACEMENT OF NOTE.
-------------------------------
4.1 The Holder, at its option, may in person
or by duly authorized attorney surrender this Note for
exchange, at the principal executive offices of the Company,
and, at the expense of the Company, receive in exchange
therefor a new Note in the same aggregate principal amount
as the aggregate unpaid principal amount of the Note so
surrendered, bearing interest at the same annual rate as the
Note so surrendered and otherwise in substantially the form
of the Note so surrendered.
4.2 Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or
mutilation of this Note, and (in case of loss, theft or
destruction) of an indemnity reasonably satisfactory to it,
and upon surrender and cancellation of this Note, if
mutilated, the Company, upon reimbursement to it of
reasonable expenses incidental thereto, will make and
deliver a new Note, of like tenor, in lieu of this Note.
4.3 Any Note made and delivered in
accordance with the provisions of this Section 5 shall be
dated as of the original issuance date.
5. MISCELLANEOUS.
-------------
5.1 The Company hereby waives presentment
for payment, demand, notice of non-payment, protest and
notice of protest.
5.2 This Note shall be binding upon the
Company and its successors and assigns and shall inure to
the benefit of the Holder and its successors, assigns and
transferees.
5.3 All headings used herein are for
convenience only and shall not be used to construe or
interpret this Note.
5.4 All notices required or permitted under
this Note shall be given in writing and shall be sent in
accordance with the provisions of Section 8.9 of the
Purchase Agreement.
5.5 THIS NOTE SHALL BE GOVERNED BY THE LAWS
OF THE STATE OF DELAWARE. ANY JUDICIAL PROCEEDING INVOLVING
ANY DISPUTE, CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING
TO THIS NOTE SHALL BE BROUGHT ONLY IN A COURT LOCATED IN THE
STATE OF DELAWARE AND EACH OF THE PARTIES HERETO (I)
UNCONDITIONALLY ACCEPTS THE EXCLUSIVE JURISDICTION OF SUCH
COURTS AND ANY RELATED APPELLATE COURT AND IRREVOCABLE
AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY, AND
(II) IRREVOCABLY WAIVES ANY OBJECTION SUCH PARTY MAY NOW OR
HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN
INCONVENIENT FORUM.
5.6 For purposes hereof, the term "permanent
---------
financing" means a transaction (whether or not arranged by
---------
Tandem (as defined in the Purchase Agreement)) pursuant to
which the Company receives no less than $2.5 million of
proceeds from an institutional investor (or investors),
which transaction may either be in the form or the sale of
Company equity or the incurrence by the Company of
indebtedness (or both), and, if the transaction is the
incurrence of debt (in whole or in part), such indebtedness
is due no less than one (1) year from the date of its
incurrence.
IN WITNESS WHEREOF, the Company has executed this
Note on the date specified above.
COVER-ALL TECHNOLOGIES, INC.
By: /s/ Alfred J. Moccia
-----------------------------
Authorized Officer
Exhibit 10(aa)(i)
DEBENTURE PURCHASE AGREEMENT
OF
SIRROM CAPITAL CORPORATION
AND
COVER-ALL TECHNOLOGIES INC.
<PAGE>
DEBENTURE PURCHASE AGREEMENT
This DEBENTURE PURCHASE AGREEMENT (the "Agreement") entered
into the 31st day of March 1997, by and between COVER-ALL
TECHNOLOGIES INC., a Delaware corporation (the "Company"), and
SIRROM CAPITAL CORPORATION, a Tennessee corporation (the
"Purchaser"). The terms which are capitalized herein shall have
the meanings set forth in Section 10.1 hereof unless the context
shall otherwise require.
W I T N E S S E T H:
WHEREAS, the Company desires to obtain additional capital
for use in connection with its business through the issue and
sale of certain obligations, and Purchaser is willing to purchase
such obligations of the Company, on the terms and conditions set
forth herein.
NOW, THEREFORE, in mutual consideration of the premises and
the respective representations, warranties, covenants and
agreements contained herein, the parties agree as follows:
ARTICLE I - SALE AND PURCHASE OF DEBENTURES
Section 1.1 Description of Debentures.
---------------------------------------
The Company has authorized the issue and sale of
$3,000,000.00 aggregate principal amount of its 12.5% Convertible
Debentures due March 31, 2002 (the "Debentures"), to be dated the
date of issue, to bear interest from such date at the rate of
12.5% per annum, payable quarterly on the first day of each
January, April, July and October in each year (commencing July 1,
1997) and at maturity and to bear interest on overdue principal
(including any overdue required or optional prepayment of
principal) and premium, if any, and (to the extent legally
enforceable) on any overdue installment of interest at the rate
of 15% per annum after maturity, whether by acceleration or
otherwise, until paid, to be expressed to mature on March 31,
2002, and to be substantially in the form attached hereto as
Exhibit A. Interest on the Debentures shall be computed on the
---------
basis of a 360-day year of twelve 30-day months. The Debentures
are not subject to prepayment or redemption at the option of the
Company prior to their expressed maturity dates except on the
terms and conditions and in the amounts and with the premium, if
any, set forth in Section 5.24 of this Agreement. The term
"Debentures" as used herein shall include each Debenture
delivered pursuant to this Agreement.
Section 1.2 Commitment; Closing Date.
--------------------------------------
Subject to the terms and conditions hereof and on the basis
of the representations and warranties hereinafter set forth, the
Company agrees to issue and sell to Purchaser, and Purchaser
agrees to purchase from the Company, Debentures in the
aggregated principal amount of $3,000,000.00 at a price of 100%
of the principal amount thereof.
Delivery of the Debentures will be made at the offices of
Sherrard & Roe, PLC, 424 Church Street, Suite 2000, Nashville,
Tennessee 37219, against payment therefor by federal funds wire
transfer in immediately available funds and to the accounts and
in the amounts in accordance with the Company's written wire
instructions received at least twenty-four (24) hours previously,
at 10:00 A.M., Nashville time, on March 31, 1997, or such later
date (not later than _________________________, 1997) as the
Company and Purchaser shall agree (the "Closing Date"). The
Debentures delivered to Purchaser on the Closing Date will be
delivered to Purchaser in the form of a single registered
Debenture for the full amount of such purchase (unless different
denominations are specified by Purchaser), registered in
Purchaser's name or in the name of such nominee as Purchaser may
specify and, with appropriate insertions, in the form attached
hereto as Exhibit A, all as Purchaser may specify at least 24
---------
hours prior to the date fixed for delivery.
Section 1.3 Processing Fee.
----------------------------
The Company agrees to pay to Purchaser on or before the
Closing Date a processing fee in an amount equal to Seventy-five
Thousand and No/100 Dollars ($75,000).
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Purchaser as
follows:
Section 2.1 Corporate Status.
------------------------------
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State
of Delaware and has the corporate power to own and operate its
properties, to carry on its business as now conducted and to
enter into and to perform its obligations under this Agreement,
the Debentures and any other document executed or delivered by
the Company in connection herewith or therewith (collectively,
the "Operative Documents"). The Company is qualified to do
business and is in good standing in each state or other
jurisdiction in which such qualification is necessary under
applicable provisions of law, except where the failure to be so
qualified or in good standing would not have a Materially Adverse
Effect. The states or other jurisdictions in which the Company
is so qualified are set forth on Schedule 2.1(a) hereto.
---------------
(b) Schedule 2.1(b) sets forth a complete list of each
---------------
corporation, partnership, joint venture, limited liability
company or other business organization in which the Company owns,
directly or indirectly, any capital stock or other equity
interest (the "Subsidiary" or, collectively, the "Subsidiaries"),
or with respect to which the Company or any Subsidiary, alone or
in combination with others, is in a control position, which list
shows the jurisdiction of incorporation or other organization and
the percentage of stock or other equity interest of each
Subsidiary owned by the Company. Each Subsidiary is duly
organized, validly existing and in good standing under the laws
of the jurisdiction of incorporation or other organization as
indicated on Schedule 2.1(b), each has all requisite power and
---------------
authority and holds all material licenses, permits and other
required authorizations from government authorities necessary to
own its properties and assets and to conduct its business as it
is now being conducted, and is qualified to do business as a
foreign corporation (or business organization) and is in good
standing in every jurisdiction in which such qualification is
necessary under applicable provisions of law, except where the
failure to be so qualified or in good standing would not have a
Materially Adverse Effect. All of the outstanding shares of
capital stock, or other equity interest, of each Subsidiary
owned, directly or indirectly, by the Company have been validly
issued, are fully paid and nonassessable, and are owned by the
Company free and clear of all liens, charges, security interests
or encumbrances. A certified charter for each Subsidiary and
good standing certificates for each of the states in which each
Subsidiary is qualified to do business are attached to Schedule
--------
2.1(b).
-------
(c) Schedule 2.1(c) sets forth a complete list of
--------------
"affiliates," as that term is defined in Rule 405 of Regulation C
adopted under the Securities Act of 1933, as amended (the
"Securities Act"), with a brief statement describing the basis of
each affiliation.
Section 2.2 Capitalization.
----------------------------
(a) The authorized capital stock of the Company
consists of (i) 30,000,000 shares of common stock, par value $.01
per share (the "Common Stock"), of which as of March 28, 1997,
17,352,783 shares are issued and outstanding. All shares of
Common Stock outstanding have been validly issued and are fully
paid and nonassessable. There are sufficient shares of such
Common Stock reserved for issuance upon the conversion of the
Debentures as described herein or therein; provided, that the
number of shares so reserved shall be increased in accordance
with the terms of this Agreement or the Debentures. Such shares
of Common Stock issuable upon conversion of the Debentures have
been duly and validly authorized and, upon conversion of the
Debentures, will be validly issued, fully paid, nonassessable and
free of any liens or encumbrances created by the Company. Except
as provided on Schedule 2.2(a), there are no statutory or
---------------
contractual pre-emptive rights, rights of first refusal,
antidilution rights or any similar rights held by any party with
respect to the issuance of the Debentures or the issuance of the
Common Stock upon conversion of the Debentures as described
herein and therein. The Company has not violated any federal or
state securities laws in connection with the issuance of any
securities, and the offer, sale and issuance of the Debentures
and the conversion of the Debentures as described therein do not
require registration under the Securities Act or any applicable
state securities laws.
(b) The Company has not granted, or agreed to grant or
issue, any options, warrants or rights to purchase or acquire
from the Company any shares of capital stock of the Company, and
there are no contracts, commitments, agreements, understandings,
arrangements or restrictions as to which the Company is a party,
or by which it is bound, relating to any shares of capital stock
or other securities of the Company, whether or not outstanding
except for (i) the Debentures to be issued pursuant to this
Agreement and (ii) such options, warrants and other rights to
acquire capital stock of the Company set forth on Schedule
--------
2.2(b).
------
Section 2.3 Authorization.
---------------------------
The Company has full legal right, power and authority to
enter into and perform its obligations under this Agreement and
any of the other Operative Documents, without the consent or
approval of any other person, firm, governmental agency or other
legal entity. The execution and delivery of this Agreement, the
issuance of the Debentures hereunder, the execution and delivery
of each other document in connection herewith or therewith to
which the Company is a party, and the performance by the Company
of its obligations hereunder and/or thereunder are within the
corporate powers of the Company and have been duly authorized by
all necessary corporate action properly taken, have received all
necessary governmental approvals, if any were required. The
officer(s) executing this Agreement, the Debentures and any other
document executed and delivered by the Company in connection
herewith or therewith, is duly authorized to act on behalf of the
Company.
Section 2.4 Validity and Binding Effect.
-----------------------------------------
Each of the Operative Documents is the legal, valid and
binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
the enforcement of creditors rights generally and except that the
availability of the equitable remedy of specific performance or
injunctive relief is subject to the discretion of the court
before which any proceeding may be brought.
Section 2.5 Other Transactions.
--------------------------------
The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof do not and will
not contravene or conflict with the certificate of incorporation
or bylaws of the Company or any material agreement to which the
Company or any of its Subsidiaries is now a party or by which any
of them or their properties is bound, or constitute a default
thereunder, or result in the creation or imposition of any lien,
charge, security interest or encumbrance of any nature upon any
of the property or assets of the Company or any of its
Subsidiaries pursuant to the terms of any such agreement or
instrument, or violate any provision of law or any applicable
judgment, ordinance, regulation or order of any court or
governmental agency.
Section 2.6 Litigation.
------------------------
Except as set forth on Schedule 2.6, there is no litigation,
------------
arbitration, claim, proceeding or investigation pending or
threatened in which the Company or any Subsidiary is a party or
to which any of its respective properties or assets is the
subject which, if determined adversely to the Company or such
Subsidiary, would individually or in the aggregate have a
Materially Adverse Effect.
Section 2.7 Financial Statements.
----------------------------------
The consolidated financial statements of the Company and
its Subsidiaries for the fiscal years ended December 31, 1993,
1994 and 1995 and the unaudited consolidated financial statements
as of the nine months ended September 30, 1996, which the Company
previously has heretofore delivered to Purchaser, are true and
correct in all material respects and have been prepared in
accordance with generally accepted accounting principles ("GAAP")
consistently followed throughout the periods involved. The
consolidated balance sheets and the related notes fairly present
the financial condition of the Company and its consolidated
Subsidiaries as of the respective dates thereof, and the
consolidated statements of operations, cash flows and changes in
stockholders' equity and the related notes fairly present the
results of operations of the Company and its consolidated
Subsidiaries for the respective periods indicated, provided that
the unaudited consolidated statements as of the nine months ended
September 30, 1996 are subject to normal recurring year-end
adjustments and accruals.
Section 2.8 SEC Reports.
-------------------------
The Company's Common Stock is listed on the Philadelphia
Stock Exchange and the Nasdaq SmallCap Market and has been duly
registered with the Securities and Exchange Commission ("SEC")
under the Securities Act of 1933, as amended (the "Securities
Act") or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Since December 31, 1993 the Company has timely
filed all reports, registrations, proxy or information statements
and all other documents, together with any amendments required to
be made thereto, required to be filed with the SEC under the
Securities Act and the Exchange Act (collectively, the "SEC
Reports"). The Company previously has furnished to Purchaser
true copies of all the SEC Reports, together with all exhibits
thereto that Purchaser has requested. The financial statements
contained in the SEC Reports fairly presented (or will fairly
present, as the case may be) the financial position of the
Company as of the dates mentioned and the results of operations,
changes in stockholders' equity and changes in financial position
or cash flows for the periods then ended in conformity with GAAP
applied on a consistent basis throughout the periods involved
except to the extent set forth therein. As of their respective
dates, the SEC Reports complied (or will comply, as the case may
be) in all material respects with all rules and regulations
promulgated by the SEC and did not (or will not, as the case may
be) contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Section 2.9 Absence of Changes.
--------------------------------
Except as set forth on Schedule 2.9, since September 30,
------------
1996, (i) neither the Company nor any of its Subsidiaries have
incurred any liabilities or obligations, direct or contingent, or
entered into any transactions, not in the ordinary course
business, that are material to the Company, (ii) neither the
Company nor any of its Subsidiaries have purchased any of its
outstanding capital stock or declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock, (iii)
there has not been any change in the capital stock, long-term
debt or short-term debt of the Company, and (iv) there has not
been any material adverse change, or any development involving a
prospective change that would have a Materially Adverse Effect,
other than the fact that the Company has continued to incur
operating losses since such date which have resulted in cash flow
shortages.
Section 2.10 No Defaults.
--------------------------
Except as set forth on Schedule 2.10 and except where a
-------------
default or event of default does not and would not constitute a
Material Adverse Event, no default or event of default by the
Company or any Subsidiary exists under this Agreement or any of
the other Operative Documents, or under any other instrument or
agreement to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary or its respective properties
may be bound or, to the knowledge of the Company, affected, and
no event has occurred and is continuing that with notice or the
passage of time or both would constitute a default or event of
default thereunder.
Section 2.11 Compliance With Law.
----------------------------------
Except where failure to do so does not and would not
constitute a Material Adverse Event, the Company has obtained all
licenses, permits and governmental approvals and authorizations
necessary or proper in order to conduct its business and affairs
as heretofore conducted and as hereafter intended to be
conducted. To the Company's knowledge, the Company is in
compliance with all laws, regulations, decrees and orders
applicable to it (including but not limited to laws, regulations,
decrees and orders relating to environmental, occupational and
health standards and controls, antitrust, monopoly, restraint of
trade or unfair competition) to the extent that noncompliance, in
the aggregate, cannot reasonably be expected to have a Materially
Adverse Effect.
Section 2.12 Taxes.
--------------------
Except as set forth on Schedule 2.12, the Company and its
-------------
Subsidiaries have filed or caused to be filed all federal, state
and local income, excise and franchise tax returns required to be
filed (except for returns that have been appropriately extended),
and have paid, or provided for the payment of, all taxes shown to
be due and payable on said returns and all other taxes,
impositions, assessments, fees or other charges imposed on it by
any governmental authority, agency or instrumentality, prior to
any delinquency with respect thereto (other than taxes,
impositions, assessments, fees and charges currently being
contested in good faith by appropriate proceedings, for which
appropriate amounts have been reserved), and the Company does not
know of any proposed assessment for additional taxes or any basis
therefor. No tax liens have been filed against the Company or
its Subsidiaries or any of their properties. The Company's
federal income tax liability has been finally determined by the
Internal Revenue Service and satisfied for all taxable years up
to and including the taxable year ended December 31, 1995 or
closed by applicable statutes of limitation.
Section 2.13 Certain Transactions.
----------------------------------
Except as set forth on Schedule 2.13(i) and except as to
----------------
indebtedness incurred in the ordinary course of business and
approved by the Board of Directors of the Company, the Company is
not indebted, directly or indirectly, to any of its officers or
directors, or to their respective spouses or children, in excess
of an aggregate amount of $5,000, and none of its officers or
directors or any members of their immediate families are indebted
to the Company in excess of an aggregate amount of $5,000 or have
any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which
the Company has a business relationship, or any firm or
corporation which competes with the Company, except that officers
and/or directors of the Company may own no more than 4.9% of the
outstanding stock of any publicly traded company which competes
directly with the Company. Except as set forth on Schedule
--------
2.13(ii), no officer or director or any member of their
--------
immediate families is, directly or indirectly, interested in any
material contract with the Company. Except as set forth on
Schedule 2.13(iii), the Company is not a guarantor or indemnitor
------------------
of any indebtedness of any other person, firm or corporation.
Section 2.14 Title to Property.
--------------------------------
The Company and each Subsidiary has good and marketable
title to all real and personal property owned by it, free and
clear of all liens, security interests, pledges, encumbrances,
equities claims and restrictions of every kind and nature
whatsoever, except as disclosed on Schedule 2.14 and except for
-------------
such liens, security interests, pledges, encumbrances, equities
claims and restrictions which are not in the aggregate material
to the business, operations or financial condition of the Company
and its Subsidiaries taken as a whole. Any real property and
buildings held under lease by the Company or any Subsidiary are
held under valid existing and enforceable leases, except as
disclosed on Schedule 2.14 or which are not material and do not
-------------
interfere with the use to be made of such buildings or property
by the Company.
Section 2.15 Intellectual Property.
------------------------------------
Except as set forth in Schedule 2.15, the Company and each
-------------
Subsidiary is the lawful owner of its proprietary information
free and clear of any claim, right, trademark, patent or
copyright protection of any third party. As used herein,
"proprietary information" includes without limitation (i) any
computer software and related documentation, inventions,
technical and nontechnical data related thereto, and (ii) other
documentation, inventions and data related to patterns, plans,
methods, techniques, drawings, finances, customer lists,
suppliers, products, special pricing and cost information,
designs, processes, procedures, formulas, research data owned or
used by the Company or any Subsidiary or marketing studies
conducted by the Company or any Subsidiary, all of which the
Company considers to be commercially important and competitively
sensitive and which generally has not been disclosed to third
parties other than customers in the ordinary course of business.
Except as set forth in Schedule 2.15, the Company and each
-------------
Subsidiary has good and marketable title to all patents,
trademarks, trade names, service marks, copyrights or other
intangible property rights, and registrations or applications for
registration thereof, owned by the Company or any Subsidiary or
used or required by the Company or any Subsidiary in the
operation of its business as presently being conducted. The
Company has no knowledge of any infringements or conflict with
asserted rights of others with respect to copyrights, patents,
trademarks, service marks, trade names, trade secrets or other
intangible property rights or know-how which could result in any
Materially Adverse Effect. To the Company's knowledge, no
products or processes of the Company or any Subsidiary infringe
or conflict with any rights of patent or copyright, or any
discovery, invention product or process, that is the subject of a
patent or copyright application or registration known to the
Company. The Company follows such procedures as the Board of
Directors of the Company deems necessary or appropriate to
provide reasonable protection of the Company's or any
Subsidiary's trade secrets and proprietary rights in intellectual
property of all kinds. To the knowledge of the Company, no
person employed by or affiliated with the Company or any
Subsidiary has employed or proposes to employ any trade secret or
any information or documentation proprietary to any former
employer, and to the knowledge of the Company, no person employed
by or affiliated with the Company has violated any confidential
relationship that such person may have had with any third person,
in connection with the development, manufacture or sale of any
product or proposed product or the development or sale of any
service or proposed service of the Company or any Subsidiary.
Section 2.16 Debt.
-------------------
Schedule 2.16 sets forth a complete and correct list of all
-------------
loans, credit agreements, indentures, purchase agreements,
promissory notes and other evidences of indebtedness, Guaranties,
capital leases and other instruments, agreements and arrangements
presently in effect providing for or relating to extensions of
credit (including agreements and arrangements for the issuance of
letters of credit or for acceptance financing) in respect of
which the Company, any Subsidiary or any of their properties is
in any manner directly or contingently obligated; and the maximum
principal or face amounts of the credit in question that are
outstanding and that can be outstanding are correctly stated; and
all liens, pledges or security interests of any nature given or
agreed to be given as security therefor or in connection
therewith are correctly described or indicated in such Schedule.
Section 2.17 Significant Contracts.
------------------------------------
Schedule 2.17 sets forth a complete and correct list of all
-------------
contracts, agreements and other documents pursuant to which the
Company or any Subsidiary receives revenues in excess of $100,000
per fiscal year. Each such contract, agreement and other
document is in full force and effect as of the date hereof and
the Company knows of no reason why such contracts, agreements and
other documents would not remain in full force and effect
pursuant to the terms thereof.
Section 2.18 Environment.
--------------------------
The Company and each Subsidiary has duly complied with, and
its business, operations, assets, equipment, property, leaseholds
or other facilities are in compliance with, the provisions of all
federal, state and local environmental, health, and safety laws,
codes and ordinances, and all rules and regulations promulgated
thereunder. The Company and each Subsidiary has been issued and
will maintain all required federal, state and local permits,
licenses, certificates and approvals relating to (1) air
emissions; (2) discharges to surface water or groundwater;
(3) noise emissions; (4) solid or liquid waste disposal; (5) the
use, generation, storage, transportation or disposal of toxic or
hazardous substances or wastes (which shall include any and all
such materials listed in any federal, state or local law, code or
ordinance and all rules and regulations promulgated thereunder as
hazardous or potentially hazardous); or (6) other environmental,
health or safety matters. Neither the Company nor any Subsidiary
has received notice of, or knows of any violations of any
federal, state or local environmental, health or safety laws,
codes or ordinances, and any rules or regulations promulgated
thereunder with respect to its businesses, operations, assets,
equipment, property, leaseholds, or other facilities. Except in
accordance with a valid governmental permit, license, certificate
or approval, there has been no emission, spill, release or
discharge into or upon (1) the air; (2) soils, or any
improvements located thereon; (3) surface water or groundwater;
or (4) the sewer, septic system or waste treatment, storage or
disposal system servicing the property, leaseholds or other
premises of the Company, of any toxic or hazardous substances or
wastes at or from the property, leaseholds or other premises of
the Company; and accordingly property, leaseholds and other
premises of the Company and each Subsidiary are free of all such
toxic or hazardous substances or wastes. There has been no
complaint, order, directive, claim, citation or notice by any
governmental authority or any person or entity with respect to
(1) air emissions; (2) spills, releases or discharges to soils or
improvements located thereon, surface water, groundwater or the
sewer, septic system or waste treatment, storage or disposal
systems servicing the premises; (3) noise emissions; (4) solid or
liquid waste disposal; (5) the use, generation, storage,
transportation or disposal of toxic or hazardous substances or
waste; or (6) other environmental, health or safety matters
affecting the Company or any Subsidiary or any of their
businesses, operations, assets, equipment, property, leaseholds
or other facilities. Neither the Company nor any Subsidiary has
any Indebtedness, obligation or liability (absolute or
contingent, matured or not matured), with respect to the storage,
treatment, cleanup or disposal of any solid wastes, hazardous
wastes or other toxic or hazardous substances (including without
limitation any such indebtedness, obligation, or liability with
respect to any current regulation, law or statute regarding such
storage, treatment, cleanup or disposal).
Section 2.19 ERISA.
--------------------
The Company and each Subsidiary is in compliance in all
material respects with all applicable provisions of Title IV of
the Employee Retirement Income Security Act of 1974, Pub. L. No.
93-406, September 2, 1974, 88 Stat. 829, 29 U.S.C.A. Section 1001
et seq. (1975), as amended from time to time ("ERISA"). Neither a
reportable event nor a prohibited transaction (as defined in
ERISA) has occurred and is continuing with respect to any
"pension plan" (as such term is defined in ERISA, a "Plan"); no
notice of intent to terminate a Plan has been filed nor has any
Plan been terminated; no circumstances exist which constitute
grounds entitling the Pension Benefit Guaranty Corporation
(together with any entity succeeding to or all of its functions,
the "PBGC") to institute proceedings to terminate, or appoint a
trustee to administer, a Plan, nor has the PBGC instituted any
such proceedings; neither the Company nor any commonly controlled
entity (as defined in ERISA) has completely or partially
withdrawn from a multiemployer plan (as defined in ERISA); the
Company and each commonly controlled entity has met its minimum
funding requirements under ERISA with respect to all of its Plans
and the present fair market value of all Plan property exceeds
the present value of all vested benefits under each Plan, as
determined on the most recent valuation date of the Plan and in
accordance with the provisions of ERISA and the regulations
thereunder for calculating the potential liability of the Company
or any commonly controlled entity to the PBGC or the Plan under
Title IV or ERISA; and neither the Company nor any commonly
controlled entity has incurred any liability to the PBGC under
ERISA.
Section 2.20 Employees.
------------------------
Schedule 2.20 sets forth the number of full-time employees
-------------
and full-time equivalent employees of the Company and each
Subsidiary as of the most recent payroll date, which date is set
forth therein. Neither the Company nor any Subsidiary has
current labor problems or disputes which have resulted in, or
which the Company reasonably believes could be expected to have,
a Materially Adverse Effect.
Section 2.21 Accounting Matters.
---------------------------------
The Company and each Subsidiary maintains a system of
internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions
are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting
principles and to maintain accountability for the assets of the
Company and each Subsidiary; (iii) access to the assets of the
Company and each Subsidiary is permitted only in accordance with
management's general or specific authorization; and (iv) the
recorded accountability for assets of the Company and each
Subsidiary are compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any
differences.
Section 2.22 Distributions to Company.
---------------------------------------
No Subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company,
from making any other distributions on such Subsidiary's capital
stock, from repaying to the Company any loans or advances to such
subsidiary or from transferring any of such Subsidiary's property
or assets to the Company or any other Subsidiary of the Company.
Section 2.23 Margin Regulations.
---------------------------------
The Company is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock.
No proceeds received pursuant to this Agreement will be used to
purchase or carry any equity security of a class which is
registered pursuant to Section 12 of the Exchange Act.
Section 2.24 Limited Offering of Note and Option.
--------------------------------------------------
Neither the Company nor anyone acting on its behalf has
offered the Debentures or any similar securities for sale to, or
solicited any offer to buy any of the same from, or otherwise
approached or negotiated in respect thereof, with, any person
other than Purchaser and not more than 35 other institutional
investors. Neither the Company nor anyone acting on its behalf
has taken, or will take, any action which would subject the
issuance or sale of the Debentures to Section 5 of the Securities
Act or the registration or qualification provisions of the blue
sky laws of any state.
Section 2.25 Registration Rights.
----------------------------------
Except as described in Schedule 2.25, the Company is not
-------------
under any obligation to register under the Securities Act or the
Trust Indenture Act of 1939, as amended, any of its presently
outstanding securities or any of its securities that may
subsequently be issued.
Section 2.26 Fees/Commissions.
-------------------------------
The Company has not agreed to pay any finder's fee,
commission, origination fee (except for the processing due to
Purchaser pursuant to Section 1.3 hereof) or other fee or charge
to any person or entity with respect to the investment or other
transactions contemplated hereunder.
Section 2.27 Regulatory Compliance.
------------------------------------
Except as set forth on Schedule 2.27, the conduct of the
-------------
business of the Company and each Subsidiary is not dependent on
any license, permit or other authorization of any federal, state
or local regulatory body, and except as set forth on Schedule
--------
2.27, such business is not subject to the regulation of any
----
federal, state or local government regulatory body by reason of
the nature of the business being conducted. All material
licenses, permits and authorizations set forth on Schedule 2.27
-------------
are in full force and effect.
Section 2.28 1940 Act Compliance.
----------------------------------
The Company is an "eligible portfolio company" as such term
is defined in Section 2(a)(46) of the Investment Company Act of
1940, as amended, and the issuance and sale by the Company of the
Debentures does not constitute a "public offering" as such term
is used in Section 55(a)(1) thereof.
Section 2.29 Disclosure.
-------------------------
No representation or warranty given as of the date hereof by
the Company contained in this Agreement or any schedule attached
hereto or any statement in any document, certificate or other
instrument furnished or to be furnished to the Purchaser pursuant
hereto, taken as a whole, contains or will (as of the time so
furnished) contain any untrue statement of a material fact, or
omits or will (as of the time so furnished) omit to state any
material fact which is necessary in order to make the statements
contained herein or therein not misleading in any material
respect.
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser hereby represents to the Company as follows:
Section 3.1 Corporate Status.
------------------------------
Purchaser is a corporation duly organized, validly existing
and in good standing under the laws of the State of Tennessee and
has the corporate power to own and operate its properties, to
carry on its business as now conducted and to enter into and to
perform its obligations under this Agreement and any other
document executed or delivered by Purchaser in connection
herewith.
Section 3.2 Other Transactions.
--------------------------------
The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof do not and will
not contravene or conflict with the certificate of incorporation
or bylaws of Purchaser or any material agreement to which
Purchaser is now a party or by which it or any of its properties
is bound, or constitute a default thereunder, or result in the
creation or imposition of any lien, charge, security interest or
encumbrance of any nature upon any of the property or assets of
Purchaser pursuant to the terms of any such agreement or
instrument, or violate any provision of law or any applicable
judgment, ordinance, regulation or order of any court or
governmental agency.
Section 3.3 Authorization.
---------------------------
Purchaser has full legal right, power and authority to enter
into and perform its obligations under this Agreement and any
other document executed and delivered by Purchaser in connection
herewith, without the consent or approval of any other person,
firm, governmental agency or other legal entity. The execution
and delivery of this Agreement and any other document executed
and delivered by Purchaser in connection herewith, and the
performance by Purchaser of its obligations hereunder and/or
thereunder are within the corporate powers of Purchaser, have
received all necessary governmental approvals, if any were
required, and do not and will not contravene or conflict with the
charter or bylaws of Purchaser. The officer(s) executing this
Agreement and any other document executed and delivered by
Purchaser in connection herewith, is duly authorized to act on
behalf of Purchaser.
Section 3.4 Validity and Binding Effect.
-----------------------------------------
This Agreement and any other document executed and delivered
by Purchaser in connection herewith are the legal, valid and
binding obligations of the Purchaser, enforceable against it in
accordance with their respective terms.
Section 3.5 Purchaser Investment Representations.
--------------------------------------------------
Purchaser is acquiring the Debentures for its own account,
for investment, and not with a view to the distribution or resale
thereof, in whole or in part, in violation of the Securities Act
or any applicable state securities law, and Purchaser has no
present intention of selling, negotiating or otherwise disposing
of the Debentures; it being understood that Purchaser intends to
transfer and assign the Debentures and all Purchaser's rights and
obligations under this Agreement to one or more wholly-owned
subsidiaries of Purchaser. Purchaser is an "accredited investor"
as defined in Rule 501(a) under the Securities Act.
ARTICLE IV - CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASER
The obligation of Purchaser to purchase and pay for the
Debentures on the Closing Date shall be subject to the
fulfillment on or before the Closing Date of each of the
following conditions:
Section 4.1 Representations and Warranties.
--------------------------------------------
The representations and warranties of the Company contained
in this Agreement and in any Schedule hereto or any document or
instrument delivered to Purchaser or its representatives
hereunder, shall have been true and correct when made and shall
be true and correct as of the Closing Date as if made on such
date, except to the extent such representations and warranties
expressly relate to a specific date. The Company shall have duly
performed all of the covenants and agreements to be performed by
it hereunder on or prior to the Closing Date.
Section 4.2 Officer's Certificate.
-----------------------------------
The Company shall have delivered to Purchaser a certificate,
dated the Closing Date, signed by the Chairman of the Board of
the Company, substantially in the form of Exhibit B attached
---------
hereto and incorporated herein by this reference, regarding the
accuracy of the representations and warranties and the
performance of the obligations of the Company.
Section 4.3 Secretary's Certificate.
-------------------------------------
The Company shall have delivered to Purchaser a certificate,
dated the Closing Date, signed by the Secretary of the Company,
substantially in the form of Exhibit C attached hereto and
---------
incorporated herein by this reference, regarding the satisfaction
of the conditions in Section 4.1 hereof and certain other
matters.
Section 4.4 Legal Opinion.
---------------------------
Purchaser shall have received the opinion of Reid & Priest
LLP, counsel for the Company, dated the Closing Date, addressed
to Purchaser, in form and substance satisfactory to Purchaser's
counsel, and covering the matters set forth in Exhibit D hereto.
---------
Section 4.5 Authorization Agreement.
-------------------------------------
The Company shall have delivered to Purchaser an
Authorization Agreement for Pre-Authorized Payments (Debit),
dated the Closing Date, executed by a duly authorized officer(s)
of the Company, substantially in the form of Exhibit E attached
hereto and incorporated herein by this reference.
Section 4.6 Existence and Authority.
-------------------------------------
Existence and Authority. The Company shall have delivered
------------------------
to Purchaser the following certificates of public officials, in
each case as of a date within ten (10) days of the Closing Date:
(i) the certificate of incorporation of the Company
and each of the Subsidiaries, certified by the Secretary of
State or other appropriate official in the jurisdiction each
such entity is incorporated;
(ii) a certificate as to the legal existence and good
standing of the Company and each of the Subsidiaries issued
by the Secretary of State or other appropriate official in
the jurisdiction each such entity is incorporated;
(iii) a certificate as to the qualification to do
business as a foreign corporation and good standing of the
Company and each of the Subsidiaries, as appropriate, issued
by the Secretary of State or other appropriate official in
each jurisdiction listed in Schedule 2.1(a).
---------------
Section 4.7 Required Consents.
-------------------------------
Any consents or approvals required to be obtained from any
third party, including any holder of indebtedness or any
outstanding security of the Company, and any amendments of
agreements which shall be necessary to permit the consummation of
the transactions contemplated hereby on the Closing Date, shall
have been obtained and all such consents or amendments shall be
satisfactory in form and substance to Purchaser and Purchaser's
counsel.
Section 4.8 Waiver of Conditions.
----------------------------------
If on the Closing Date the Company fails to tender to
Purchaser the Debentures to be issued to Purchaser on such date
or if the conditions specified in this Article IV have not been
----------
fulfilled, Purchaser may thereupon elect to be relieved of all
further obligations under this Agreement. Without limiting the
foregoing, if the conditions specified in this Article IV have
----------
not been fulfilled, Purchaser may waive compliance by the Company
with any such condition to such extent as Purchaser, in
Purchaser's sole discretion, may determine. Nothing in this
Section 4.8 shall operate to relieve the Company of any of its
obligations hereunder or to waive any of Purchaser's rights
against the Company.
ARTICLE V - COVENANTS OF COMPANY
From and after the Closing Date and continuing so long as
any amount remains unpaid on any of the Debentures:
Section 5.1 Use of Proceeds.
-----------------------------
The Company shall use the proceeds of the Debentures only
for the purposes set forth on Schedule 5.1 attached hereto. No
------------
later than ninety (90) days after the sale of the Debentures, the
Company shall furnish Purchaser a certificate, executed by the
Chief Executive Officer of the Company, itemizing the use of
proceeds from the Debentures.
Section 5.2 Payment of Debentures.
-----------------------------------
The Company shall pay the indebtedness evidenced by the
Debentures according to the terms thereof and shall timely pay or
perform all of the other obligations of the Company under this
Agreement.
Section 5.3 Repurchase of Debenture.
-------------------------------------
Neither the Company nor any Subsidiary or Affiliate,
directly or indirectly, may repurchase or make any offer to
repurchase any Debentures unless the offer has been made to
repurchase Debentures, pro rata, from all holders of the
Debentures at the same time and upon the same terms and in
accordance with the provisions of Section 5.24. In case the
Company repurchases or otherwise acquires any Debentures, such
Debentures shall immediately thereafter be canceled, and no
Debentures shall be issued in substitution therefor. Without
limiting the foregoing, upon the purchase or other acquisition of
any Debentures by the Company or any Subsidiary or Affiliate,
such Debentures shall no longer be outstanding for purposes of
any Section of this Agreement relating to the taking by the
holders of the Debentures of any actions with respect hereto,
including, without limitation, Sections 9.3 and 10.1.
Section 5.4 Corporate Existence, Etc.
--------------------------------------
Except as provided in Section 5.18(a)(i), the Company will
preserve and keep in force and effect, and will cause each
Subsidiary to preserve and keep in force and effect, its
corporate existence and good standing in the state of
incorporation thereof, its qualification and good standing as a
foreign corporation in each jurisdiction where such qualification
is required by applicable law and all licenses and permits
necessary to the proper conduct of its business.
Section 5.5 Maintenance, Etc.
------------------------------
The Company will maintain, preserve and keep, and will cause
each Subsidiary to maintain, preserve and keep, its properties
and assets which are used or useful in the conduct of its
business (whether owned in fee or pursuant to a leasehold
interest) in good repair and working order and from time to time
will make all necessary repairs, replacements, renewals and
additions so that at all times the efficiency thereof shall be
maintained.
Section 5.6 Nature of Business.
--------------------------------
Neither the Company nor any Subsidiary will engage in any
business if, as a result, the general nature of the business,
taken on a consolidated basis, which would then be engaged in by
the Company and its Subsidiaries would be substantially changed
from the general nature of the business engaged in by the Company
and its Subsidiaries on the date of this Agreement.
Section 5.7 Insurance.
-----------------------
The Company will maintain, and will cause each Subsidiary to
maintain, insurance coverage by financially sound and reputable
insurers with respect to their respective properties and business
in such forms and amounts and against such risks, casualties and
contingencies as are customary for corporations engaged in the
same or a similar business and owning and operating similar
properties.
Section 5.8 Taxes, Claims for Labor and Materials.
---------------------------------------------------
The Company will promptly pay and discharge, and will cause
each Subsidiary promptly to pay and discharge, (i) all lawful
taxes, assessments and governmental charges or levies imposed
upon the property or business of the Company or such Subsidiary,
respectively, (ii) all trade accounts payable in accordance with
usual and customary business terms, and (iii) all claims for
work, labor or materials, which if unpaid might become a lien or
charge upon any property of the Company or such Subsidiary;
provided the Company or such Subsidiary shall not be required to
pay any such tax, assessment, charge, levy, account payable or
claim if (i) the validity, applicability or amount thereof is
being contested in good faith by appropriate actions or
proceedings which will prevent the forfeiture or sale of any
property of the Company or such Subsidiary or any material
interference with the use thereof by the Company or such
Subsidiary, and (ii) the Company or such Subsidiary shall set
aside on its books, reserves deemed by it to be adequate with
respect thereto.
Section 5.9 Compliance with Laws, Agreements, etc.
---------------------------------------------------
Except where failure to do so does not and would not
constitute a Material Adverse Event, the Company shall maintain
its business operations and property owned or used in connection
therewith in compliance with (i) all applicable federal, state
and local laws, regulations and ordinances, and such laws,
regulations and ordinances of foreign jurisdictions, governing
such business operations and the use and ownership of such
property, and (ii) all agreements, licenses, franchises,
indentures and mortgages to which the Company is a party or by
which the Company or any of its properties is bound.
Section 5.10 ERISA Matters.
----------------------------
If the Company has in effect, or hereafter institutes, a
pension plan that is subject to the requirements of ERISA, then
the following Plan covenants shall be applicable during such
period as any Plan shall be in effect: (i) the Company hereby
covenants that throughout the existence of the Plan, the
Company's contributions under the Plan will meet the minimum
funding standards required by ERISA and the Company will not
institute a distress termination of the Plan; and (ii) the
Company covenants that it will send to Purchaser a copy of any
notice of a reportable event (as defined in ERISA) required by
ERISA to be filed with the Labor Department or the PBGC, at the
time that such notice is so filed.
Section 5.11 Books and Records; Rights of Inspection.
------------------------------------------------------
The Company will keep, and will cause each Subsidiary to
keep, proper books of record and account in which full and
correct entries will be made of all dealings or transactions of
or in relation to the business and affairs of the Company or such
Subsidiary, in accordance with GAAP consistently maintained. The
Company will furnish to Purchaser such financial data and other
information relating to the business of the Company as Purchaser
may from time to time reasonably request. The Company shall
permit a representative of Purchaser to visit any of its
properties and inspect its corporate books and financial records,
and will discuss its accounts, affairs and finances with a
representative of Purchaser, during reasonable business hours, at
all such times as Purchaser may reasonably request.
Section 5.12 Reports.
----------------------
The Company will furnish to Purchaser the following:
(a) Monthly statements. Within 30 days of the end of
each month, monthly internal financial reports which at a minimum
shall consist of a balance sheet of the Company as of the close
of such month and related statements of income and cash flows for
the one-month period then ended, as well as any additional
financial reports for such period routinely prepared with respect
to the Company and the Subsidiaries;
(b) Quarterly Statements. As soon as available and in
any event within 45 days after the end of each quarterly fiscal
period (except the last) of each fiscal year, copies of:
(i) consolidated balance sheets of the Company
and Subsidiaries as of the close of the
three-month period then ended, setting forth
in comparative form the consolidated figures
for the corresponding period of the preceding
fiscal year,
(ii) consolidated statements of operations of the
Company and Subsidiaries for the three-month
period then ended, setting forth in
comparative form the consolidated figures for
the corresponding period of the preceding
fiscal year, and
(iii) consolidated statements of cash flows of the
Company and Subsidiaries for the portion of
the fiscal year ending with such three-month
period, setting forth in comparative form
the consolidated figures for the
corresponding period of the preceding fiscal
year,
all in reasonable detail and certified as complete and
correct, by an authorized financial officer of Company;
(c) Annual Statements. As soon as available and in
any event within 90 days after the close of each fiscal year of
the Company, copies of:
(i) consolidated balance sheets of the Company
and Subsidiaries as of the close of such
fiscal year, and
(ii) consolidated statements of operations and
cash flows of the Company and Subsidiaries
for such fiscal year,
in each case setting forth in comparative form the consolidated
figures for the preceding fiscal year, all in reasonable detail
and accompanied by an unqualified report thereon of a firm of
independent public accountants of recognized national standing;
(d) Audit Reports. Promptly upon receipt thereof, one
copy of each interim or special audit made by independent
accountants of the books of the Company or any Subsidiary;
(e) SEC and Other Reports. Promptly upon their
becoming available, one copy of each financial statement, report,
notice or proxy statement sent by the Company to stockholders
generally and of each periodic or current report, and any
registration statement or prospectus filed by the Company or any
Subsidiary with any securities exchange or the SEC or any
successor agency, and copies of any orders in any proceedings to
which the Company or any of its Subsidiaries is a party, issued
by any governmental agency, federal or state, having jurisdiction
over the Company or any of its Subsidiaries. The Company
specifically covenants to timely file each such item required to
be filed with the SEC and each state requiring securities laws
filings; and
(f) Requested Information. With reasonable
promptness, such other data and information as Purchaser or any
such institutional holder may reasonably request.
(g) Delivery of SEC Reports. The parties agree that
the Company shall be deemed to have complied with its obligations
under Section 5.12(b) or (c), as the case may be, by delivering
to Purchaser, in accordance with Section 5.12(e) hereof, the
reports filed by the Company with the SEC pursuant to Section
13(a) of the Securities Act in respect of the applicable
reporting period, provided that the financial statements in each
such SEC report that is an Annual Report on Form 10-K shall be
accompanied by an unqualified report thereon of the Company's
accountants. In the event the Company is permitted, pursuant to
Rule 12b-25 under the Exchange Act, to delay the filing with the
SEC of any periodic report of the Company, the Company shall be
deemed to have complied with its obligations under Section
5.12(b) or (c), as the case may be, by delivering such report to
Purchaser within the time period permitted therein.
Section 5.13 Limitations on Debt and Obligations.
--------------------------------------------------
Except as to (i) the indebtedness incurred pursuant to the
Debentures, (ii) accounts payable and other trade payables
incurred in the ordinary course of business, including certain
due and unpaid legal and administrative expenses ("ALE") incurred
by the Company in connection with its performance of insurance
services and for which the Company has assumed responsibility
pursuant to the terms of a Restructuring Agreement, dated March
1, 1996, such expenses not to exceed an aggregate of $394,258 at
any time outstanding and (iii) purchase money indebtedness
incurred by the Company in the purchase of office equipment and
other property used by the Company in the ordinary course of
business, such purchase money indebtedness not to exceed an
aggregate amount of principal and interest thereon of $250,000 at
any time outstanding, the Company, for itself together with each
Subsidiary, shall not incur, without the prior written consent of
Purchaser, additional indebtedness in excess of an aggregate
amount of principal and interest thereon of $250,000 at any time
outstanding.
Section 5.14 Guaranties.
-------------------------
Without the prior written consent of Purchaser, the Company
will not, and will not permit any Subsidiary to, become or be
liable in respect of any Guaranty except Guaranties by Company
which are limited in amount to a stated maximum dollar exposure
and are incurred in compliance with the provisions of this
Agreement.
Section 5.15 Limitation on Liens.
----------------------------------
Without the prior written consent of Purchaser, the Company
will not, and will not permit any Subsidiary to, create or incur,
or suffer to be incurred or to exist, any mortgage, pledge,
security interest, encumbrance, lien or charge of any kind
(collectively, "Liens") on its or their property or assets,
whether now owned or hereafter acquired, or upon any income or
profits therefrom, or transfer any property for the purpose of
subjecting the same to the payment of obligations in priority to
the payment of its or their general creditors, or acquire or
agree to acquire, or permit any Subsidiary to acquire, any
property or assets upon conditional sales agreement or other
title retention devices, except (i) Liens for taxes, assessments
and governmental charges or levies which the Company is
contesting in good faith by proper proceedings and as to which
appropriate reserves are being maintained in accordance with GAAP
on the books of the Company; (ii) Liens imposed by law, such as
materialmen's, mechanics', carriers', workmen's and repairmen's
liens and other similar liens arising in the ordinary course of
business and securing obligations (other than indebtedness for
borrowed money) that (A) are not overdue for a period of more
than 60 days or (B) are being contested in good faith by proper
proceedings and as to which appropriate reserves are being
maintained in accordance with GAAP on the books of the Company;
(iii) pledges or deposits to secure obligations under worker's
compensation laws or other similar legislation or to secure
public or statutory obligations; (iv) Liens securing the
performance of, or payment in respect of, bids, tenders,
government contracts (other than for the repayment of borrowed
money) surety and appeal bonds and other obligations of a similar
nature incurred in the ordinary course of business; (v) Liens
existing on the date hereof; (vi) Liens created in connection
with purchase money financing permitted pursuant to Section 5.13
(iii) hereof; and (vii) Liens on computer source codes placed in
escrow for the benefit of the Company's customers as described on
Schedule 2.16 hereof or hereinafter created.
-------------
Section 5.16 Restricted Payments.
----------------------------------
The Company will not, without the prior written consent of
Purchaser:
(i) declare or pay any dividends, either in cash or
property, on any shares of its capital stock of
any class (except dividends or other
distributions payable solely in shares of capital
stock of Company);
(ii) directly or indirectly, or through any
Subsidiary, purchase, redeem or retire any shares
of its capital stock of any class or any
warrants, rights or options to purchase or
acquire any shares of its capital stock (other
than in exchange for or out of the net proceeds
to the Company from the substantially concurrent
issue or sale of other shares of capital stock of
the Company or warrants, rights or options to
purchase or acquire any shares of its capital
stock); or
(iii) make any other payment or distribution, either
directly or indirectly or through any Subsidiary,
in respect of its capital stock.
Section 5.17 Investments.
--------------------------
The Company will not, and will not permit any Subsidiary to,
make any Investments outside the ordinary course of business for
the Company or any Subsidiary, without the prior written consent
of Purchaser, except:
(i) Investments in direct obligations of the
United States of America, or any agency or
instrumentality of the United States of
America, the payment or guaranty of which
constitutes a full faith and credit
obligation of the United States of America,
in either case maturing in twelve months or
less from the date of acquisition thereof;
(ii) Investments in certificates of deposit
maturing within one year from the date of
origin, issued by a bank or trust company
organized under the laws of the United
States of any state thereof, having capital,
surplus and undivided profits aggregating at
least $100,000,000 and whose long-term
certificates of deposit are, at the time of
acquisition thereof by Company or a
Restricted Subsidiary, rated AA or better by
Standard & Poor's Corporation or Aa or
better by Moody's Investors Service, Inc.;
and
(iii) receivables arising from the sale of goods
and services in the ordinary course of
business of Company and its Subsidiaries;
provided, that the provisions of this Section shall not apply to
the use of proceeds obtained by the Company from the sale of its
capital stock.
Section 5.18 Mergers, Consolidations and Sales of Assets.
----------------------------------------------------------
(a) Without the prior written consent of Purchaser,
the Company will not, and will not permit any Subsidiary to (1)
consolidate with or be a party to a merger or share exchange with
any other corporation or (2) sell, lease or otherwise dispose of
all or any substantial part (as defined in paragraph (d) of this
Section 5.18) of the assets of Company and its Subsidiaries;
provided, however, that:
(i) any Subsidiary may merge or consolidate with
or into the Company or any wholly-owned
Subsidiary so long as in any merger or
consolidation involving the Company, the
Company shall be the surviving or continuing
corporation; and
(ii) any Subsidiary may sell, lease or otherwise
dispose of all or any substantial part of its
assets to the Company or any wholly-owned
Subsidiary.
(b) Without the prior written consent of Purchaser,
the Company will not permit any Subsidiary to issue or sell any
shares of stock of any class (including as "stock" for the
purposes of this Section 5.18, any warrants, rights or options to
purchase or otherwise acquire stock or other Securities
exchangeable for or convertible into stock) of such Subsidiary to
any Person other than the Company or a wholly-owned Subsidiary,
except for the purpose of qualifying directors, or except in
satisfaction of the validly pre-existing preemptive rights of
minority shareholders in connection with the simultaneous
issuance of stock to the Company and/or a Subsidiary whereby the
Company and/or such Subsidiary maintain their same proportionate
interest in such Subsidiary.
(c) Without the prior written consent of Purchaser,
the Company will not sell, transfer or otherwise dispose of any
shares of stock in any Subsidiary (except to qualify directors)
or any indebtedness of any Subsidiary, and will not permit any
Subsidiary to sell, transfer or otherwise dispose of (except to
the Company or a wholly-owned Subsidiary) any shares of stock or
any indebtedness of any other Subsidiary, unless all of the
following conditions are met:
(i) simultaneously with such sale, transfer or
disposition, all shares of stock and all
indebtedness of such Subsidiary at the time
owned by the Company and by every other
Subsidiary shall be sold, transferred or
disposed of as an entirety;
(ii) the Board of Directors of the Company shall
have determined, as evidenced by a
resolution thereof, that the retention of
such stock and indebtedness is no longer in
the best interests of the Company;
(iii) such stock and Indebtedness is sold,
transferred or otherwise disposed of to a
Person, for a cash consideration and on
terms reasonably deemed by the Board of
Directors to be adequate and satisfactory;
(iv) the Subsidiary being disposed of shall not
have any continuing investment in the
Company or any other Subsidiary not being
simultaneously disposed of; and
(v) such sale or other disposition does not
involve a substantial part (as hereinafter
defined) of the assets of the Company and
its Subsidiaries.
(d) As used in this Section 5.18, a sale, lease or
other disposition of assets shall be deemed to be a "substantial
part" of the assets of the Company and its Subsidiaries only if
the book value of such assets, when added to the book value of
all other assets sold, leased or otherwise disposed of by the
Company and its Subsidiaries (other than in the ordinary course
of business) during the same twelve month period ending on the
date of such sale, lease or other disposition, exceeds 25% of the
consolidated net tangible assets of the Company and its
Subsidiaries determined as of the end of the immediately
preceding fiscal year.
Section 5.19 Transactions with Affiliates.
-------------------------------------------
Without the prior written consent of Purchaser, the Company
will not, and will not permit any Subsidiary to, enter into or be
a party to any transaction or arrangement with any officer,
director or Affiliate (including, without limitation, the
purchase from, sale to or exchange of property with, or the
rendering of any service by or for, any Affiliate), except in the
ordinary course of and pursuant to the reasonable requirements of
the Company's or such Subsidiary's business and upon fair and
reasonable terms no less favorable to Company or such Subsidiary
than would obtain in a comparable arm's-length transaction with a
Person other than an Affiliate, in each case as determined in
good faith by a majority of the disinterested directors of the
Company.
Section 5.20 Notice.
---------------------
The Company shall promptly upon the discovery thereof give
written notice to Purchaser of (i) the occurrence of any default
or Event of Default or event which, with the passage of time,
would constitute an Event of Default, under this Agreement, (ii)
the occurrence of any default or event of default under any other
agreement providing for indebtedness of the Company or any
Subsidiary or under a capitalized lease obligation, (iii) any
actions, suits or proceedings instituted by any Person against
the Company or a Subsidiary or materially affecting any of the
assets of the Company or any Subsidiary, and (iv) any dispute
between the Company or any Subsidiary, on the one hand, and any
governmental regulatory body, on the other hand, which dispute
might interfere with the normal operations of the Company or any
Subsidiary; provided, however, that Purchaser shall not disclose
any such information provided in (iii) or (iv) above to any third
party other than Purchaser's counsel and except to the extent
compelled by law or otherwise authorized by the Company.
Section 5.21 Board of Directors; Observer Rights.
--------------------------------------------------
(a) Effective on the Closing Date, the Purchaser shall
have the right to require that a nominee of Purchaser be elected
to the Company's Board of Directors (as a member of the class of
directors whose terms next expire in 1998), such election to be
effective within fifteen (15) days of notice from Purchaser to
the Company. For so long as the Purchaser or any Affiliate owns
Debentures representing at least 25% of the original principal
amount of the Debentures, the Company agrees to include a nominee
of the Purchaser in management's slate of nominees to be elected
to the Board of Directors (at such time as the class of directors
of which Purchaser's nominee is a member is elected) and to
recommend to the stockholders the election of such nominee.
(b) For so long as the Purchaser or any Affiliate owns
Debentures representing at least 25% of the original principal
amount of the Debentures, provided that no nominee of the
Purchaser is a director, the Company shall invite one
representative of Purchaser to attend, at the Company's expense,
all meetings of the Company's Board of Directors and all
committees of the Company's Board of Directors in a nonvoting
capacity and, in this respect, shall give such representative
copies of all notices and meeting agenda in advance of such
meetings and shall permit such representative to review all
documents and other materials provided to directors at such
meetings. The Company shall also provide Purchaser, in advance,
with copies of all actions proposed to be taken by the Board of
Directors in lieu of meeting.
Section 5.22 Annual Business Plan.
-----------------------------------
Prior to the close of each fiscal year of the Company,
management of the Company shall present to the Board of Directors
for its review a business plan with respect to the operations,
activities, prospects and strategies of the Company for the next
succeeding fiscal year. Such business plan shall be reviewed
and, if necessary, modified or supplemented by the Board of
Directors and, as so modified or supplemented, shall be approved
by the Board not later than the first Business Day of the fiscal
year to which such plan applies, for execution and implementation
by management.
Section 5.23 Further Assurances.
---------------------------------
The Company will take all actions reasonably requested by
Purchaser to effect the transactions contemplated by this
Agreement and the other Operative Documents.
Section 5.24 Optional Redemptions of Debentures.
-------------------------------------------------
The Debentures may not be redeemed, repaid or repurchased by
the Company at the option of the Company or any Subsidiary or
Affiliate at any time prior to the second anniversary of the date
of initial issuance of the Debentures. On and after the second
anniversary of the date of initial issuance but only in the event
that the average of the closing bid price for the twenty (20)
Business Days immediately preceding any Redemption Date (as
hereafter defined) exceeds $1.50 per share of Common Stock, the
Debentures may be redeemed, at the Company's option, in whole or
in part, provided that in case of each redemption at the
Company's option hereunder, the Company will give written notice
thereof to each holder of a Debenture to be redeemed not less
than forty-five (45) nor more than seventy-five (75) days prior
to the date fixed for such redemption (the "Redemption Date"), in
each case specifying the Redemption Date, the aggregate principal
amount of the Debentures to be redeemed on such date and the
principal amount of Debentures held by such holder to be redeemed
on such date. In the case of a redemption of part of the
Debentures, such redemption shall be effected pro rata among all
holders of Debentures.
ARTICLE VI - CONVERSION OF DEBENTURES
Section 6.1 Conversion Privilege.
----------------------------------
Subject to and upon compliance with the provisions of this
Article VI, the holder of the Debentures shall have the right, at
its option, at any time and from time to time, to convert the
principal amount of the Debenture, or any portion thereof, into
that number of fully paid and nonassessable shares of Common
Stock of the Company (the "Common Stock") (calculated as to each
conversion to the nearest 1/100th of a share) obtained by
dividing the principal amount of the Debenture or portion thereof
to be converted by the Conversion Price. The Conversion Price
shall be the lower of (i) $1.25 per share of Common Stock or (ii)
the bid price per share of Common Stock on the Closing Date, in
either case adjusted as set forth in Section 6.4 below.
Section 6.2 Manner of Exercise of Conversion Privilege.
--------------------------------------------------------
In order to exercise the conversion privilege, the Purchaser
shall surrender such Debenture to the Company, accompanied by
written notice (the "Conversion Notice") to the Company that the
Purchaser elects to convert such Debenture or the portion thereof
specified in said notice. The Conversion Notice shall also state
the name or names, together with address or addresses, in which
the certificate or certificates for shares of Common Stock which
shall be issuable on such conversion shall be issued, as well as
the information required under Section 7.2 below. Each Debenture
surrendered for conversion shall, unless the shares issuable on
conversion are to be issued in the same name as that in which
such Debenture is registered, be accompanied by instruments of
transfer, in form satisfactory to the Company, duly executed by
the Purchaser or its duly authorized attorney. As promptly as
practicable after the surrender of such Debenture, as aforesaid,
the Company shall issue and shall deliver to the Purchaser a
certificate or certificates for the number of full shares of
Common Stock issuable upon the conversion of such Debenture or
portion thereof in accordance with the provisions of this
Section, and any fractional interest in respect of a share of
Common Stock arising upon such conversion shall be settled as
provided in Section 6.3 below. In case the Debenture is
surrendered for partial conversion, the Company shall deliver to
Purchaser, at the expense of the Company, a new Debenture in an
aggregate principal amount equal to the unconverted portion of
the surrendered Debenture. Each conversion shall be deemed to
have been effected immediately prior to the close of business on
the date on which such Debenture shall have been surrendered and
the Conversion Notice received by the Company as aforesaid, and
the person or persons in whose name or names any certificate or
certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or
holders of record of the shares represented thereby at such time,
and such conversion shall be at the Conversion Price in effect at
such time, unless the stock transfer books of the Company shall
be closed on that date, in which event such person or persons
shall be deemed to have become such holder or holders of record
at the close of business on the next succeeding day on which such
stock transfer books are open, but such conversion shall be at
the Conversion Price in effect on the date upon which such
Debenture shall have been surrendered and the Conversion Notice
received by the Company. No payment or adjustment shall be made
on conversion for interest accrued on the Debentures surrendered
for conversion or for dividends on Common Stock delivered on such
conversion.
Section 6.3 Payment in Lieu of Fractional Shares.
--------------------------------------------------
No fractional shares of Common Stock shall be issued upon
conversion of the Debentures. Instead of any fractional interest
in a share of Common Stock which would otherwise be deliverable
upon the conversion of the Debenture, the Company shall make an
adjustment to the nearest 1/100th of a share in cash at the
current market price thereof at the close of business on the
Business Day next preceding the day of conversion.
Section 6.4 Adjustment of Conversion Price.
--------------------------------------------
The Conversion Price shall be adjusted from time to time as
follows:
(a) In case the Company shall hereafter (i) pay a
dividend or make a distribution on its Common Stock in shares of
Common Stock, (ii) subdivide its outstanding shares of Common
Stock into a greater number of shares, (iii) combine its
outstanding shares of Common Stock into a smaller number of
shares, or (iv) issue by reclassification of its Common Stock any
shares of capital stock of the Company, the Conversion Price in
effect immediately prior to such action shall be adjusted so that
the holder of any Debenture thereafter surrendered for conversion
shall be entitled to receive the number of shares of Common Stock
or other capital stock of the Company which it would have owned
immediately following such action had such Debenture been
converted immediately prior thereto. An adjustment made pursuant
to this subsection (a) shall become effective immediately after
the record date in the case of dividend or distribution and shall
become effective immediately after the effective date in the case
of a subdivision, combination or reclassification. If, as a
result of an adjustment made pursuant to this subsection (a), the
holder of any Debenture thereafter surrendered for conversion
shall become entitled to receive shares of two or more classes of
capital stock or shares of Common Stock and other capital stock
of the Company, the Board of Directors of the Company (whose
determination shall be conclusive) shall determine the allocation
of the adjusted Conversion Price between or among shares of such
classes of capital stock or shares of Common Stock and other
capital stock.
(b) In case the Company shall hereafter issue rights
or warrants to holders of its outstanding shares of Common Stock
generally entitling them (for a period expiring within 45 days
after the record date mentioned below) to subscribe for or
purchase shares of Common Stock at a price per share less than
the current market price per share (as determined pursuant to
subsection (d) of this Section 6.4) of the Common Stock on the
record date mentioned below, the Conversion Price of the shares
of Common Stock shall be adjusted so that the same shall equal
the price determined by multiplying the Conversion Price in
effect immediately prior to the date of issuance of such rights
or warrants by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding on the date of
issuance of such rights or warrants plus the number of shares
which the aggregate offering price of the total number of shares
so offered would purchase at such current market price, and of
which the denominator shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights or
warrants plus the number of additional shares of Common Stock
offered for subscription or purchase. Such adjustment shall
become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or
warrants.
(c) In case the Company shall hereafter distribute to
holders of its outstanding Common Stock generally evidences of
its indebtedness or assets (excluding any cash dividend paid from
retained earnings of the Company and dividends or distributions
payable in stock from which adjustment is made pursuant to
subsection (a) of this Section 6.4) or rights or warrants to
subscribe to securities of the Company (excluding those referred
to in subsection (b) of this Section 6.4), then in each such case
the Conversion Price of the shares of Common Stock shall be
adjusted so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to
the date of such distribution by a fraction of which the
numerator shall be the current market price per share (determined
as provided in subsection (d) of this Section 6.4) of the Common
Stock on the record date mentioned below less the then fair
market value (as determined by the Board of Directors, whose
determination shall be conclusive) of the portion of the
evidences of indebtedness or assets so distributed to the holder
of one share of Common Stock or of such subscription rights or
warrants applicable to one share of Common Stock, and of which
the denominator shall be such current market price per share of
Common Stock. Such adjustment shall become effective immediately
after the record date for the determination of stockholders
entitled to receive such distribution.
(d) For the purpose of any computation under
subsections (b) and (c) of this Section 6.4, the current market
price per share of Common Stock on any date shall be deemed to be
the average of the daily market prices for the twenty (20)
consecutive Business Days before the day in question.
(e) In any case in which this Section 6.4 shall
require that an adjustment be made immediately following a record
date, the Company may elect to defer (but only until five
business days following the filing by the Company with the
Purchaser of the certificate of independent public accountants
described in subsection (g) of this Section 6.4) issuing to the
holder of any Debenture converted after such record date the
shares of Common Stock issuable upon such conversion over and
above the shares of Common Stock issuable upon such conversion on
the basis of the Conversion Price prior to adjustment.
(f) No adjustment in the Conversion Price shall be
required unless such adjustment would require an increase or
decrease of at least 1% of such price; provided, however, that
any adjustments which by reason of this subsection (f) are not
required to be made shall be carried forward and taken into
account in any subsequent adjustment, and provided further, that
adjustment shall be required and made in accordance with the
provisions of this Section 6.4 (other than this subsection (f))
not later than such time as may be required in order to preserve
the tax-free nature of a distribution to the holders of
Debentures or Common Stock. All calculations under this Section
6.4 shall be made to the nearest cent or to the nearest 1/100th
of a share, as the case may be. Anything in this Section 6.4 to
the contrary notwithstanding, the Company shall be entitled to
make such reductions in the Conversion Price, in addition to
those required by this Section 6.4, as it in its discretion shall
determine to be advisable in order that any stock dividend,
subdivision of shares, distribution of rights to purchase stock
or securities, or distribution of securities convertible into or
exchangeable for stock hereafter made by the Company to its
stockholders shall not be taxable.
(g) Whenever the Conversion Price is adjusted as
herein provided, (i) the Company shall promptly deliver to the
Purchaser a certificate of a firm of independent public
accountants setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts
requiring such adjustment and the manner of computing the same,
which certificate shall be conclusive evidence of the correctness
of such adjustment and (ii) a notice stating that the Conversion
Price has been adjusted and setting forth the adjusted Conversion
Price shall forthwith be given by the Company to the Purchaser.
(h) In the event that at any time as a result of an
adjustment made pursuant to subsection (a) of this Section 6.4,
the holder of any Debenture thereafter surrendered for conversion
shall become entitled to receive any shares of the Company other
than shares of Common Stock, thereafter the conversion price (if
any) of such other shares so receivable upon conversion of any
Debenture shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to Common Stock contained in this Section
6.4.
Section 6.5 Notice of Certain Corporate Action.
------------------------------------------------
In case:
(a) the Company shall take any action which would
require an adjustment in the Conversion Price pursuant to
subsection (a), (b) or (c) of Section 6.4; or
(b) the Company shall authorize the granting to the
holders of its Common Stock of rights or warrants to subscribe
for or purchase any shares of stock of any class or of any other
rights; or
(c) there shall be any capital reorganization or
reclassification of the Common Stock (other than a subdivision or
combination of the outstanding Common Stock and other than a
change in the par value of the Common Stock), or any
consolidation or merger to which the Company is a part or any
statutory exchange of securities with another corporation and for
which approval of any stockholders of the Company is required, or
any sale or transfer of all or substantially all of the assets of
the Company; or
(d) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company;
then the Company shall provide to Purchaser, at least ten (10)
days prior to the applicable date hereinafter specified, a notice
stating (i) the date on which a record is to be taken for the
purpose of such distribution or rights, or, if a record is not to
be taken, the date as of which the holders of Common Stock of
record to be entitled to such distribution or rights are to be
determined, or (ii) the date on which such reorganization,
reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding-up is expected to become
effective, and the date as of which it is expected that holders
of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property
deliverable upon such reorganization, reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation
or winding-up. Failure to give such notice or any defect therein
shall not affect the legality or validity of the proceedings
described in subsection (a), (b), (c) or (d) of this Section 6.5.
Section 6.6 The Company to Provide Stock.
------------------------------------------
The Company covenants that it will at all times reserve and
keep available, free from preemptive rights, out of the aggregate
of its authorized but unissued shares of Common Stock or its
issued shares of Common Stock held in its treasury, or both, for
the purpose of effecting conversions of the Debenture, the full
number of shares of Common Stock deliverable upon the conversion
of the Debentures.
Before taking any action which would cause an adjustment
reducing the Conversion Price below the then par value (if any)
of the shares of Common Stock deliverable upon conversion of the
Debenture, the Company will take any corporate action which may,
in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and non-
assessable shares of Common Stock at such adjusted Conversion
Price.
Prior to the delivery of any securities which the Company
shall be obligated to deliver upon conversion of the Debenture,
the Company shall comply with all federal and state laws and
regulations thereunder requiring the registration of such
securities with, or any approval of or consent to the delivery
thereof by, any governmental authority.
Section 6.7 Taxes on Conversions.
----------------------------------
The Company will pay any and all documentary stamp or
similar issue or transfer taxes payable in respect of the issue
or delivery of shares of Common Stock upon conversion of the
Debenture pursuant hereto; provided, however, that the Company
shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issue or delivery of
shares of Common Stock in a name other than that of Purchaser,
and no such issue or delivery shall be made unless and until the
person requesting such issue or delivery has paid to the Company
the amount of any such tax or has established, to the
satisfaction of the Company, that such tax has been paid.
Section 6.8 Covenant as to Stock.
----------------------------------
The Company covenants that all shares of Common Stock which
may be delivered upon conversion of the Debenture will upon
delivery be duly and validly issued and fully paid and
nonassessable, free of all liens and charges and not subject to
any preemptive rights.
Section 6.9 Consolidation or Merger.
-------------------------------------
Notwithstanding any other provision herein to the contrary,
in case of any consolidation or merger to which the Company is a
party other than a merger or consolidation in which the Company
is the continuing corporation, or in case of any sale or
conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, or in the case of
any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of a
third corporation into the Company), there shall be no
adjustments under Section 6.4 but the Purchaser shall have the
right thereafter to convert such Debenture into the kind and
amount of securities, cash or other property which he would have
owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale or conveyance had
such Debenture been converted immediately prior to the effective
date of such consolidation, merger, statutory exchange, sale or
conveyance and in any such case, if necessary, appropriate
adjustment shall be made in the application of the provisions set
forth in this Article VI with respect to the rights and interests
thereafter of the holders of the Debentures, to the end that the
provisions set forth in this Article VI shall thereafter
correspondingly be made applicable, as nearly as may reasonably
be, in relation to any shares of stock or other securities or
property thereafter deliverable on the conversion of the
Debentures. Any such adjustment shall be approved by a firm of
independent public accountants, evidenced by a certificate to
that effect; and any adjustment so approved shall for all
purposes hereof conclusively be deemed to be an appropriate
adjustment.
The above provisions of this Section 6.9 shall similarly
apply to successive consolidations, mergers, statutory exchanges,
sales or conveyances.
ARTICLE VII - RESTRICTIONS ON TRANSFER; REGISTRATION RIGHTS
Section 7.1 Legends; Restrictions on Conversion and
----------------------------------------------------
Transfer.
---------
Neither the Debenture nor the shares of Common Stock
issuable upon conversion of the Debenture have been registered
under the Securities Act or any state securities laws. Each
Debenture issued pursuant to this Agreement and each stock
certificate issued upon the conversion of any Debenture (except
as permitted by this Article VII) shall bear a legend in
substantially the following form:
NEITHER THIS DEBENTURE NOR THE SHARES OF COMMON STOCK
ISSUABLE UPON THE CONVERSION HEREOF HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OR ANY APPLICABLE STATE SECURITIES LAW AND
MAY NOT BE TRANSFERRED UNLESS (i) THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS, OR (ii) IN THE OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY REGISTRATION
UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH TRANSFER.
The outstanding Common Stock of the Company evidenced by a
certificate bearing such a legend is sometimes referred to herein
as "Legend Stock." Any certificate issued at any time in
exchange or substitution for any certificate bearing such a
legend (except a new certificate issued upon completion of a
public distribution under a registration statement under the
Securities Act of the securities represented thereby) shall also
bear such a legend unless in the opinion of counsel to such
holder, specified in subsection 7.2 below, the securities
represented thereby are no longer subject to the restrictions
described herein. The provisions of this Article VII shall be
binding upon all subsequent holders of Legend Stock, shall also
be applicable to and inure to the benefit of all subsequent
holders of the Debentures.
Section 7.2 Notice of Intention to Convert or Transfer;
--------------------------------------------------------
Opinions of Counsel.
--------------------
The Debentures and the Legend Stock to be issued upon such
conversion thereof shall not be transferable except upon the
conditions specified in this Article VII. Each holder of any
Debenture or Legend Stock, by acceptance thereof, agrees, prior
to any transfer of such Debenture or Legend Stock or in the
Conversion Notice delivered pursuant to Section 6.2 above, in
connection with any conversion of such Debenture, to give written
notice to the Company of such holder's intention to effect such
transfer or conversion and briefly describe the manner of the
proposed transfer or, in the case of conversion, whether such
holder intends to retain or dispose of the Common Stock issuable
upon the proposed conversion and, if applicable, the intended
method of disposition, such notice of intended transfer or
Conversion Notice shall be accompanied by, if applicable, a copy
of the opinion of counsel to such holder reasonably satisfactory
to the Company, to the effect that registration under the
Securities Act of such Debenture or Legend Stock or Common Stock,
as the case may be, in connection with such proposed transfer,
disposition or retention upon such proposed conversion is not
required. If in the opinion of such counsel, the proposed
transfer of such Debenture or Legend Stock, or the proposed
disposition or retention of Common Stock to be issued upon such
conversion, may be effected without registration of such
Debenture, Legend Stock or Common Stock, as the case may be,
under the Securities Act, such holder shall be entitled to
transfer such Debenture or Legend Stock or to dispose or retain
such Common Stock to be issued upon conversion, in accordance
with the terms of the notice delivered by such holder to the
Company. The Company will promptly upon such conversion or
transfer deliver new Debentures or certificates for Common Stock
not bearing a legend of the character set forth in Section 7.1,
unless in the opinion of such counsel subsequent disposition by
such holder or by others of the Common Stock to be issued upon
conversion or of the Legend Stock to be so transferred may
require registration under the Securities Act. If the proposed
transfer of such Debenture or Legend Stock, or the proposed
disposition or retention of the Common Stock to be issued upon
such conversion, may not be affected without registration of such
Debenture, Legend Stock or Common Stock under the Securities Act,
the holder thereof shall not be entitled to transfer such
Debenture, such Legend Stock or Common Stock in the absence of an
effective registration statement.
Section 7.3 Requested Registration.
-------------------------------------
(a) General. If the Company shall receive from
Initiating Holders at any time or times a written request that
the Company effect any registration with respect to Registrable
Securities, in an offering to be firmly underwritten by
underwriters selected by the Initiating Holders (subject to the
consent of the Company, which consent will not be unreasonably
withheld), the Company will:
(i) promptly give written notice of the proposed
registration to all other holders of
Registrable Securities; and
(ii) as soon as practicable, use its best efforts
to effect such registration (including,
without limitation, filing post-effective
amendments, appropriate qualifications under
applicable blue sky or other state securities
laws, and appropriate compliance with the
Securities Act) as would permit or facilitate
the sale and distribution of all or such
portion of such Registrable Securities as are
specified in such request, together with all
or such portion of the Registrable Securities
of any holders of Registrable Securities
joining in such request as are specified in a
written request received by the Company
within twenty (20) days after such written
notice from the Company is mailed or
delivered.
The Company shall only be required to effect, pursuant
to this Section 7.3, one (1) registration of Registrable
Securities in any calendar year.
(b) Proviso. The Company shall not be obligated to
effect, or to take any action to effect, any such registration
pursuant to this Section 7.3:
(i) In any particular jurisdiction in which the
Company would be required, solely as a
result of effecting registration,
qualification or compliance and except as
may otherwise be required by the Securities
Act, to (A) execute a general consent to
service of process (other than a uniform
consent to service of process in connection
with the offer and sale of securities),
unless the Company is already subject to
service in such jurisdiction or (B) qualify
to do business as a foreign corporation;
(ii) During the period starting with the date
fifteen (15) days prior to the Company's
good faith estimate of the date of filing
of, and ending on a date ninety (90) days
after the effective date of, a Company-
initiated registration, provided that the
Company is actively employing in good faith
all reasonable efforts to cause such
registration statement to become effective;
or
(iii) If the Initiating Holders propose to dispose
of shares of Registrable Securities which
may be immediately registered on Form S-3
pursuant to a request made under Section 7.5
hereof.
(c) Deferral of Registration. The Company shall file
a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable after receipt
of the request or requests of the Initiating Holders; provided,
however, that if (i) in the good faith judgment of the Board of
Directors of the Company, such registration would be materially
detrimental to the Company because there exist bona fide
financing, acquisition or other activities of the Company and the
Board of Directors of the Company concludes, as a result, that it
is essential to defer the filing of such registration statement
at such time, and (ii) the Company shall furnish to the
Initiating Holders a certificate signed by the Chief Executive
Officer of the Company stating that in the good faith judgment of
the Board of Directors of the Company, it would be materially
detrimental to the Company for such registration statement to be
filed in the near future and that it is, therefore, essential to
defer the filing of such registration statement, then the Company
shall have the right to defer such filing (except as provided in
subsection (b)(ii) above) for a period of not more than ninety
(90) days after receipt of the request of the Initiating Holders,
and, provided further, that the Company shall not defer its
obligation in this manner more than once in any twelve-month
period.
The registration statement filed pursuant to the
request of the Initiating Holders may, subject to the provisions
of Sections 7.3(b) hereof, include other securities of the
Company, with respect to which registration rights have been
granted, and may include securities of the Company being sold for
the account of the Company, provided that all the Registrable
Shares for which the Initiating Holders have requested
registration shall be covered by such registration statement
before any other securities are included.
(d) Underwriting. The right of any other holders of
Registrable Securities joining in a request for registration as
provided in Subsection (a)(i) above to registration pursuant to
this Section 7.3 shall be conditioned upon such holder's
participation in such underwriting and the inclusion of such
holder's Registrable Securities in the underwriting on the same
terms as those of the Initiating Holders (unless otherwise
mutually agreed by a majority in interest of the Initiating
Holders and such holder with respect to such participation and
inclusion).
(e) Procedures. In any registration pursuant to this
Section 7.3, if the Company shall request inclusion of securities
to be sold for its own account, or if other persons entitled to
incidental registrations shall request inclusion in such
registration pursuant to this Section 7.3, subsection (a)(i)
above, the Initiating Holders shall, on behalf of all holders of
Registrable Securities, offer to include such securities in the
underwriting and may condition such offer on the acceptance by
the Company or such other persons of the further applicable
provisions of this Article VII. The Company shall (together with
all such other persons proposing to distribute their securities
through such underwriting) enter into an underwriting agreement
in customary form with the representative of the underwriter or
underwriters selected for such underwriting by the Company, which
underwriters are reasonably acceptable to a majority of the
Initiating Holders. Notwithstanding any other provision of this
Section, if the representative of the underwriters advises the
Initiating Holders of the need for an Underwriter's Cutback, the
number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 7.10
hereof. If a person who has requested inclusion in such
registration as provided in this Subsection (e) does not agree to
the terms of any such underwriting, such person shall be excluded
therefrom by written notice from the Company, the underwriter or
the Initiating Holders, and the securities owned by such
person(s) shall be withdrawn from registration (the "Withdrawn
Securities"). If there are any Withdrawn Securities and if there
was an Underwriter's Cutback, then the Company shall offer to all
holders who have retained rights to include securities in the
registration the right to include additional securities in the
registration in an aggregate amount equal to the number of
Withdrawn Securities that would have been included in the
registration after giving effect to the Underwriter's Cutback had
such securities not been withdrawn, with such shares to be
allocated among such Holders requesting additional inclusion in
accordance with Section 7.10.
Section 7.4 The Company Registration
-------------------------------------
(a) Notice and Procedures. If the Company shall
determine to register any of its Common Stock either for its own
account or the account of a security holder or holders exercising
their respective demand registration rights (other than pursuant
to Sections 7.3 or 7.5 hereof), other than a registration
relating solely to employee benefit plans (as defined under Rule
405 of the Securities Act), or a registration relating solely to
a Rule 145 transaction, or a registration on any registration
form that does not permit secondary sales, the Company will:
(i) promptly give written notice thereof to each
holder of Debentures or Registrable
Securities; and
(ii) use its best efforts to include in such
registration (and any related qualification
under blue sky laws or other compliance),
except as set forth in Section 7.4(b) below,
and in any underwriting involved therein, all
the Registrable Securities specified in a
written request or requests, made by any
holder of Registrable Securities and
received by the Company within ten (10) days
after the written notice from the Company
described in clause (i) above is mailed or
delivered by the Company, which written
request may specify the inclusion of all or a
part of such holder's Registrable Securities.
Notwithstanding the foregoing, the Company shall not be
required to register stock of the holders of Debentures more than
one (1) time in any calendar year.
(b) Underwriting. If the registration of which the
Company gives notice is for a registered public offering
involving an underwriting, the Company shall so advise the
holders of Registrable Securities as a part of the written notice
given pursuant to Section 7.4(a)(i). In such event, the right of
any holders to registration pursuant to this Section shall be
conditioned upon such holder's participation in such underwriting
and the inclusion of such holder's Registrable Securities in the
underwriting to the extent provided herein. All holders of
Registrable Securities proposing to distribute their securities
through such underwriting shall (together with the Company and
the other holders of securities of the Company with registration
rights to participate therein distributing their securities
through such underwriting) enter into an underwriting agreement
in customary form with the representative of the underwriter or
underwriters selected by the Company.
Notwithstanding any other provision of this Section, if the
representative of the underwriters advises the Company of the
need for an Underwriter's Cutback, the representative may
(subject to the limitations set forth below) limit the number of
Registrable Securities to be included in the registration and
underwriting; provided, however, that, unless the underwriters
shall otherwise require, Registrable Securities shall be included
in any over-allotment option granted to the underwriters before
inclusion of any shares from the Company. The Company shall
advise all holders of securities requesting registration of the
Underwriter's Cutback, and the number of shares of securities
that are entitled to be included in the registration and
underwriting shall be allocated first to the Company for
securities being sold for its own account and thereafter as set
forth in Section 7.10. If any person does not agree to the terms
of any such underwriting, it shall be excluded therefrom by
written notice from the Company or the underwriter and any
securities so excluded or withdrawn shall be Withdrawn
Securities.
If there are Withdrawn Securities and if there was an
Underwriter's Cutback, the Company shall then offer to all
persons who have retained the right to include securities in the
registration the right to include additional securities in the
registration in an aggregate amount equal to the number of shares
of Withdrawn Securities that would have been included in the
registration after giving effect to the Underwriter's Cutback had
such securities not been withdrawn, with such shares to be
allocated among the persons requesting additional inclusion in
accordance with Section 7.10 hereof.
Section 7.5 Registration on Form S-3.
--------------------------------------
(a) If the Company has qualified for the use of Form
S-3, in addition to the rights contained in the foregoing
provisions of this Article VII, the holders of Registrable
Securities shall have the right to request registrations on Form
S-3 or any comparable or successor form (such requests shall be
in writing and shall state the number of shares of Registrable
Securities to be disposed of and the intended methods of
disposition of such shares by such holder or holders (including
whether such resales are to be made on a continuous basis
pursuant to Rule 415)), provided, however, that the Company shall
not be obligated to effect any such registration if (i) the
holder of Registrable Securities, together with the holders of
any other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such
other shares of Common Stock (if any) on Form S-3 at an aggregate
price to the public of less than $500,000, or (ii) in the event
that the Company shall furnish the certification described in
paragraph 7.3(b)(ii) or 7.3(c) (but subject to the limitations
set forth therein), or (iii) the Company will be required to
obtain an audit (other than for its normal year-end audit) for
such registration to become effective. The Company shall only be
required to effect one (1) registration of Registrable Securities
pursuant to this Section 7.5 in each calendar year.
(b) If a request complying with the requirements of
Section 7.5 hereof is delivered to the Company, the provisions of
Sections 7.3(a)(i) and (ii) and Section 7.3(b) hereof shall apply
to such registration. If the registration is for an underwritten
offering, the provisions of Sections 7.3(c) and 7.3(d) hereof
shall also apply to such registration.
Section 7.6 Expenses of Registration.
--------------------------------------
All Registration Expenses incurred in connection with any
registration, qualification or compliance pursuant to Sections
7.3, 7.4 and 7.5 hereof, shall be borne by the Company; provided,
however, that a holder shall bear the Registration Expenses for
any registration proceeding begun pursuant to Section 7.3 and
subsequently withdrawn by that holder registering shares therein,
unless such withdrawal is based upon (a) material adverse
information relating to the Company that is different from the
information known or available (upon request from the Company or
otherwise) to the Initiating Holders at the time of their request
for registration under Section 7.3, or (b) material adverse
changes in the financial markets which result in a significant
decline in the public market price for the Company's Common Stock
of at least twenty percent (20%) from the date such registration
proceeding is begun to the date of such withdrawal. All Selling
Expenses relating to securities so registered shall be borne by
the holders of such securities pro rata on the basis of the
number of shares of securities so registered on their behalf.
Section 7.7 Registration Procedures.
-------------------------------------
In the case of each registration effected by the Company
pursuant to this Agreement, the Company will use its best efforts
to:
(a) Prepare and file with the SEC a registration
statement with respect to the securities to be registered on such
form as the Company deems appropriate and is permitted or
qualified to use, and shall use all reasonable efforts to cause
such registration statement to become and remain effective for a
period of ninety (90) days or until the holders have completed
the distribution described in the registration statement relating
thereto, whichever first occurs or, in the case of any
registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, for such
period as shall be necessary to keep the registration statement
effective until all such Registrable Securities are sold;
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus
used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish to the holders of Registrable Securities
to be included in a registration statement, at a reasonable time
prior to the filing thereof with the SEC, a copy of the
registration statement (and each amendment thereto) in the form
the Company proposes to file same; and furnish such number of
prospectuses and other documents incident thereto, including any
amendment of or supplement to the prospectus, as such holder of
Registrable Securities from time to time may reasonably request;
(d) Notify each seller of Registrable Securities
covered by such registration statement at any time when a
prospectus relating thereto is required to be delivered under the
Securities Act of the happening of any event as a result of which
the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing, and
prepare and furnish to such seller a reasonable number of copies
of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of
such shares, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or incomplete in the light of the
circumstances then existing;
(e) Cause all such Registrable Securities registered
pursuant hereunder to be listed on each securities exchange on
which similar securities issued by the Company are then listed;
and provide a transfer agent and registrar for all the securities
registered pursuant to such registration statement and a CUSIP
number for all such Registrable Securities, in each case not
later than the effective date of such registration;
(f) Otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make available
to its security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months,
but not more than eighteen (18) months, beginning with the first
month after the effective date of the registration statement,
which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act; and
(g) In connection with any underwritten offering
pursuant to a registration statement filed pursuant to Section
7.3 or 7.5 hereof, the Company will enter into an underwriting
agreement containing customary underwriting provisions so as to
effect the offer and sale of the Common Stock.
Section 7.8 Indemnification.
-----------------------------
(a) The Company will indemnify each holder of
Registrable Securities, each of its officers, directors and
partners, and each person controlling such holder within the
meaning of Section 15 of the Securities Act, with respect to
which registration has been effected pursuant to this Article
VII, and each underwriter, if any, and each person who controls
within the meaning of Section 15 of the Securities Act any
underwriter, against all expenses, claims, losses, damages, and
liabilities (or actions, proceedings, or settlements in respect
thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any
prospectus (including any related registration statement,
notification, or the like) incident to any registration under
this Article VII, or based on any omission (or alleged omission)
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any
violation by the Company of the Securities Act or any rule or
regulation thereunder applicable to the Company and relating to
action or inaction required of the Company in connection with any
such registration, and will reimburse each such holder, each of
its officers, directors, partners, and each person controlling
such holder, each such underwriter, and each person who controls
any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating and
defending or settling any such claim, loss, damage, liability, or
action, provided that the Company will not be liable in any such
case to the extent that any such claim, loss, damage, liability
or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company
by such holder or underwriter and stated to be specifically for
use therein. It is agreed that the indemnity agreement contained
in this Section shall not apply to amounts paid in settlement of
any such loss, claim, damage, liability, or action if such
settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld).
(b) In connection with the registration or sale of
shares of Registrable Securities pursuant to this Article VII,
each holder whose Registrable Securities are included in such
registration being effected under this Article VII, will
indemnify the Company, each of its directors, officers, partners,
and each underwriter, if any, of the Company's securities covered
by such a registration statement, each person who controls the
Company or such underwriter within the meaning of Section 15 of
the Securities Act, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement or
prospectus, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will
reimburse the Company and such directors, officers, partners,
underwriters, or control person for any legal or any other
expenses reasonably incurred in connection with investigating or
defending any such claim, loss, damage, liability, or action, in
each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement or prospectus,
in reliance upon and in conformity with written information
furnished to the Company by such holder of the Registrable
Securities, and stated to be specifically for use therein;
provided, however, that the obligations of such holder hereunder
shall not apply to amounts paid in settlement of any such claims,
losses, damages, or liabilities (or actions in respect thereof
(if such settlement is effected without the consent of such
holder, which consent shall not be unreasonably withheld); and
provided that in no event shall any indemnity under this Section
exceed the gross proceeds from the offering received by such
holder.
(c) Each party entitled to indemnification under this
Section (the "Indemnified Party") shall give notice to the party
or parties required to provide indemnification (the "Indemnifying
Party") promptly after such Indemnified Party has actual
knowledge of any claim as to which indemnity may be sought, and
shall permit the Indemnifying Party to assume the defense of such
claim or any litigation resulting therefrom, provided that
counsel for the Indemnifying Party, who shall conduct the defense
of such claim or any litigation resulting therefrom, shall be
approved by the Indemnified Party (whose approval shall not be
unreasonably withheld), and the Indemnified Party may participate
in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its
obligations under this Section, to the extent such failure is not
prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into
any settlement that does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to
such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall
be reasonably required in connection with defense of such claim
and litigation resulting therefrom.
(d) If the indemnification provided for in this
Section is held by a court of competent jurisdiction to be
unavailable to an Indemnified Party with respect to any loss,
liability, claim, damage, or expense referred to therein, then
the Indemnifying Party, in lieu of indemnifying such Indemnified
Party hereunder, shall contribute to the amount paid or payable
by such Indemnified Party as a result of such loss, liability,
claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one
hand and of the Indemnified Party on the other in connection with
the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other
relevant equitable considerations. The relative fault of the
Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied
by the Indemnifying Party or by the Indemnified Party and the
parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained in
the underwriting agreement entered into in connection with the
underwritten public offering are in conflict with the foregoing
provisions, the provisions in the underwriting agreement shall
control.
Section 7.9 Information by Holder.
-----------------------------------
Each holder of Registrable Securities shall furnish to the
Company in writing such information regarding such holder and the
distribution proposed by such holder as the Company or
underwriters may reasonably request in writing and as shall be
reasonably required in connection with any registration,
qualification, or compliance referred to in this Section.
Section 7.10 Allocation of Registration Opportunities.
-------------------------------------------------------
Except with regard to any registration of Registrable
Securities commenced pursuant to the provisions of Section 7.3
hereof, in any circumstance in which all of the Registrable
Securities and other shares of Common Stock of the Company with
registration rights (the "Other Shares") requested to be included
in a registration on behalf of the holders of Registrable
Securities or other selling stockholders cannot be so included as
a result of limitations of the aggregate number of shares of
Registrable Securities and Other Shares that may be so included,
the number of shares of Registrable Securities and Other Shares
that may be so included shall be allocated among the holders of
Registrable Securities and other selling stockholders requesting
inclusion of shares pro rata on the basis of the number of shares
of Registrable Securities and Other Shares that would be held by
such holders and other selling stockholders. If any holder of
Registrable Securities or other selling stockholder does not
request inclusion of the maximum number of shares of Registrable
Securities and Other Shares allocated to him pursuant to this
procedure, the remaining portion of his allocation shall be
reallocated among those requesting holders of Registrable
Securities and other selling stockholders whose allocations did
not satisfy their requests pro rata on the basis of the number of
shares of Registrable Securities and Other Shares which would be
held by such holders and other selling stockholders, and this
procedure shall be repeated until all of the shares of
Registrable Securities and Other Shares which may be included in
the registration on behalf of the holders of Registrable
Securities and other selling stockholders have been so allocated.
The Company shall not limit the number of Registrable Securities
to be included in a registration pursuant to this Agreement in
order to include shares held by stockholders with no registration
rights or to include in that registration shares of stock issued
to employees, officers, directors, or consultants pursuant to the
Company's stock option plan, or in order to include in such
registration securities registered for the Company's own account.
Section 7.11 Survival of Rights.
---------------------------------
The provisions of Section 7.3 through 7.10 hereof shall
survive the payment in full and/or the conversion of the
Debentures.
ARTICLE VIII - EVENTS OF DEFAULT; REMEDIES
Section 8.1 Events of Default.
-------------------------------
The occurrence of any one of the following shall constitute
an "Event of Default" under this Agreement:
(a) Default shall occur in the payment of interest on
any Debenture when the same shall have become due; or
(b) Default shall occur in the making of any payment
of the principal of any Debenture or the premium, if any, by the
Company thereon at the expressed or any accelerated maturity date
or at any date fixed by the Company for prepayment; or
(c) Default continuing beyond the period of grace, if
any, allowed with respect thereto shall be made in the payment of
the principal of or interest on any Indebtedness of the Company
or any Subsidiary (other than the Debentures) for (i) money
borrowed evidenced by notes payable, drafts accepted, bonds,
debentures, or similar instruments or (ii) obligations arising
under any lease; or
(d) Default continuing beyond the period of grace, if
any, allowed with respect thereto shall be made in the payment of
the principal of or interest on any Indebtedness of the Company
or any Subsidiary (other than the Debentures and other than
Indebtedness described in Section 8.3(c)), and the aggregate of
such overdue principal and interest for all such defaulted
Indebtedness shall exceed $50,000 at any one time; or
(e) Default or the happening of any event shall occur
under any contract, agreement, lease, indenture or other
instrument under which any Indebtedness (other than the
Debentures) of the Company or any Subsidiary may be issued and
such default or event shall continue for a period of time
sufficient to permit the acceleration of the maturity of any such
indebtedness of the Company or any Subsidiary outstanding
thereunder; or
(f) Default shall occur in the observance or
performance of the covenant contained in Section 5.13 hereof; or
(g) Default shall occur in the observance or
performance of any other provision of this Agreement which is not
remedied within thirty (30) days after the earlier of (i) the
date on which the Company first obtains knowledge of such Default
and (ii) the date on which written notice thereof is given to the
Company by the holder of any Debenture; or
(h) Any representation or warranty made by the Company
herein, or made by the Company in any statement or certificate
furnished by the Company in connection with the consummation of
the issuance and delivery of the Debentures or furnished by the
Company pursuant hereto, is untrue in any material respect as of
the date of the issuance or making thereof; or
(i) Final judgment or judgments for the payment of
money aggregating in excess of $100,000 is or are outstanding
against the Company or any Subsidiary or against any property or
assets of either and any one of such judgments has remained
unpaid, unvacated, unbonded or unstayed by appeal or otherwise
for a period of thirty (30) days from the date of its entry; or
(j) The Company or any Subsidiary becomes insolvent or
bankrupt, is generally not paying its debts as they become due or
makes an assignment for the benefit of creditors, or the Company
or any Subsidiary applies for or consents to the appointment of a
custodian, trustee, liquidator, or receiver for the Company or
such Subsidiary or for the major part of the property of either;
or
(k) A custodian, trustee, liquidator, or receiver is
appointed for the Company or any Subsidiary or for the major part
of the property of either and is not discharged within thirty
(30) days after such appointment; or
(l) Bankruptcy, reorganization, arrangement or
insolvency proceedings, or other proceedings for relief under any
bankruptcy or similar law or laws for the relief of debtors, are
instituted by or against the Company or any Subsidiary and, if
instituted against the company or any Subsidiary, are consented
to or are not dismissed within thirty (30) days after such
institution.
Section 8.2 Notice to Holders.
-------------------------------
When any Event of Default described in the foregoing Section
8.1 has occurred, or if the holder of any Debenture or of any
other evidence of indebtedness of the Company gives any notice or
takes any other action with respect to a claimed default, the
Company agrees to give notice within three (3) Business Days of
such event to all holders of the Debentures then outstanding.
Section 8.3 Acceleration of Maturities.
----------------------------------------
When any Event of Default described has occurred, then all
outstanding Debentures shall immediately become due and payable
without presentment, demand or notice of any kind, all of which
are hereby expressly waived. Upon the Debentures becoming due
and payable as a result of any Event of Default as aforesaid, the
Company will forthwith pay to the holders of the Debentures the
entire principal and interest accrued on the Debentures. No
course of dealing on the part of any Debentureholder nor any
delay or failure on the part of any Debentureholder to exercise
any right shall operate as a waiver of such right or otherwise
prejudice such holder's rights, powers and remedies. The Company
further agrees, to the extent permitted by law, to pay to the
holder or holders of the Debentures all costs and expenses,
including reasonable attorneys' fees, incurred by them in the
collection of any Debentures upon any default hereunder or
thereon.
ARTICLE IX - AMENDMENTS, WAIVERS AND CONSENTS
Section 9.1 Consent Required.
------------------------------
Any term, covenant, agreement or condition of this Agreement
may, with the consent of the Company, be amended or compliance
therewith may be waived (either generally or in a particular
instance and either retroactively or prospectively), if the
Company shall have obtained the consent in writing of the holders
of at least 50% in aggregate principal amount of outstanding
Debentures; provided that without the written consent of the
holders of all of the Debentures then outstanding, no such
waiver, modification, alteration or amendment shall be effective
(a) which will change the time of payment of the principal of or
the interest on any Debenture or reduce the principal amount
thereof or change the rate of interest thereon, or (b) which will
change any of the provisions with respect to optional
prepayments, or (c) which will change the percentage of holders
of the Debentures required to consent to any such amendment,
modification or waiver of any of the provisions of this Article
IX or Article VIII.
Section 9.2 Solicitation of Debenture Holders.
-----------------------------------------------
The Company will not solicit, request or negotiate for or
with respect to any proposed amendment, modification or waiver
of any of the provisions of this Agreement or the Debentures
unless each holder of the Debentures (irrespective of the amount
of Debentures then owned by it) shall be informed thereof by the
Company and shall be afforded the opportunity of considering the
same and shall be supplied by the Company with sufficient
information to enable it to make an informed decision with
respect thereto. Executed or true and correct copies of any
waiver effected pursuant to the provisions of this Section 9.2
shall be delivered by the Company to each holder of outstanding
Debentures forthwith following the date on which the same shall
have been executed and delivered by the holder or holders of the
requisite percentage of outstanding Debentures. The Company
will not, directly or indirectly, pay or cause to be paid by
remuneration, whether by way of supplemental or additional
interest, fee or otherwise, to any holder of the Debentures as
consideration for or as an inducement to the entering into by any
holder of the Debentures of any waiver or amendment of any of the
terms and provisions of this Agreement unless such remuneration
is concurrently paid, on the same terms, ratably to the holders
of all of the Debentures then outstanding.
Section 9.3 Effect of Amendment or Waiver.
-------------------------------------------
Any such amendment or waiver shall apply equally to all of
the holders of the Debentures and shall be binding upon them,
upon each future holder of any Debenture and upon the Company,
whether or not such Debenture shall have been marked to indicate
such amendment or waiver. No such amendment or waiver shall
extend to or affect any obligation not expressly amended or
waived or impair any right consequent thereon.
ARTICLE X - INTERPRETATION OF AGREEMENT; DEFINITIONS
Section 10.1 Definitions.
--------------------------
Unless the context otherwise requires, the terms hereinafter
set forth when sued herein shall have the following meanings and
the following definitions shall be equally applicable to both the
singular and plural forms of any of the terms herein defined:
"Affiliate" shall mean any Person (other than a Restricted
Subsidiary) (a) which directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common
control with, the Company, (b) which beneficially owns or holds
5% or more of any class of the Voting Stock of the Company or (c)
5% or more of the Voting Stock (or in the case of a Person which
is not a corporation, 5% or more of the equity interest) of which
is beneficially owned or held by the Company or a Subsidiary.
The term "control" means take possession, directly or indirectly,
of the power to direct or cause the direction of the management
and policies of a Person, whether through the ownership of Voting
Stock, by contract or otherwise.
"Business Day" shall mean any day other than a Saturday,
Sunday, or other day on which banks in Tennessee are authorized
to close.
"Default" shall mean any event or condition, the occurrence
of which would, with the lapse of time or the giving of notice,
or both, constitute an Event of Default as defined in Section
8.1.
"Event of Default" shall have the meaning set forth in
Section 8.1 hereof.
"Guaranties" by any Person shall mean all obligations (other
than endorsements in the ordinary course of business of
negotiable instruments for deposit or collection) of such Person
guaranteeing, or in effect guaranteeing, any Indebtedness,
dividend or other obligation of any other Person (the "primary
obligor") in any manner, whether directly or indirectly,
including, without limitation, all obligations incurred through
an agreement, contingent or otherwise, by such Person: (a) to
purchase such Indebtedness or obligation or any property or
assets constituting security therefor, (b) to advance or supply
funds (i) for the purchase or payment of such Indebtedness or
obligation, (ii) to maintain working capital or other balance
sheet condition or (iii) otherwise to advance or make available
funds for the purchase or payment of such Indebtedness or
obligation, or (c) to lease property or to purchase Securities or
other property or services primarily for the purpose of assuring
the owner of such Indebtedness or obligation of the ability of
the primary obligor to make payment of the Indebtedness or
obligation, or (d) otherwise to assure the owner of the
Indebtedness or obligation of the primary obligor against loss in
respect thereof. For the purposes of all computations made under
this Agreement, a Guaranty in respect of any Indebtedness for
borrowed money shall be deemed to be Indebtedness equal to the
principal amount of such Indebtedness for borrowed money which
has been guaranteed, and a Guaranty in respect of any other
obligation or liability or any dividend shall be deemed to be
Indebtedness equal to the maximum aggregate amount of such
obligation, liability or dividend.
"Indebtedness" of any Person shall mean and include all
obligations of such Person which in accordance with generally
accepted accounting principles shall be classified upon a balance
sheet of such Person as liabilities of such Person, and in any
event shall include all (a) obligations of such Person for
borrowed money or which have been incurred in connection with the
acquisition of property or assets, (b) obligations secured by any
lien or other charge upon property or assets owned by such
Person, even though such Person has not assumed or become liable
for the payment of such obligations, (c) obligations created or
arising under any conditional sale or other title retention
agreement with respect to property acquired by such Person,
notwithstanding the fact that the rights and remedies of the
seller, Purchaser or lessor under such agreement in the Event of
Default are limited to repossession or sale or property, (d)
capitalized rentals, and (e) Guaranties of obligations of others
of the character referred to in this definition.
"Initiating Holders" shall mean holders of Debentures and
Legend Stock who in the aggregate hold not less than twenty five
percent (25%) of the shares of Common Stock received or
receivable upon conversion of the aggregate principal amount of
the Debenture initially issued, and who exercise rights to
request registration under Section 7.3.
"Investments" shall mean all investments, in cash or by
delivery of property made, directly or indirectly in any Person,
whether by acquisition of shares of capital stock, indebtedness
or other obligations or Securities or by loan, advance, capital
contribution or otherwise; provided, however that "Investments"
shall not mean or include routine investments in property to be
used or consumed in the ordinary course of business.
"Materially Adverse Effect" shall mean a materially adverse
effect upon the business, assets, liabilities, financial
condition, results of operations or business prospects, in each
case of the Company and its Subsidiaries taken as a whole, or
upon the ability of the Company to perform its obligations under
this Agreement, the Debentures or the other Operative Documents.
"Person" shall mean an individual, partnership, corporation,
trust or unincorporated organization, and a government or agency
or political subdivision thereof.
"Register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable
rules and regulations thereunder, and the declaration or ordering
of the effectiveness of such registration statement and such
other action as might be required with respect to registration,
qualification or compliance under applicable state securities
laws.
"Registration Expenses" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including,
without limitation, all registration, qualification, and filing
fees, printing expenses, escrow fees, fees and disbursements of
counsel for the Company, blue sky fees and expenses, expenses of
any regular or special audits incident to or required by any such
registration and fees and reasonable disbursements of one counsel
for the holders as selling stockholders, but shall not include
Selling Expenses.
"Registrable Securities" shall mean shares of Common Stock
issued or issuable pursuant to the conversion of the Debentures;
provided, however, that Registrable Securities shall not include
any shares of Common Stock which have previously been registered
under the Securities Act.
"Rule 144" shall mean Rule 144 as promulgated by the SEC
under the Securities Act, as such Rule may be amended from time
to time, or any similar successor rule that may be promulgated by
the SEC.
"Rule 145" shall mean Rule 145 as promulgated by the
Commission under the Securities Act, as such Rule may be amended
from time to time, or any similar successor rule that may be
promulgated by the SEC.
"Security" shall have the same meaning as in Section 2(1) of
the Securities Act of 1933, as amended.
"Selling Expenses" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the
sale of Registrable Securities and fees and disbursements of
counsel for any stockholder (other than the fees and
disbursements of counsel for the selling stockholders included in
Registration Expenses).
The term "Subsidiary" shall mean, as to any particular
parent corporation, any corporation of which more than 50% (by
number of votes) of the Voting Stock shall be owned by such
parent corporation and/or one or more corporations which are
themselves Restricted Subsidiaries of such parent corporation.
The term "Subsidiary" shall mean a subsidiary of the Company.
"Underwriter's Cutback" shall mean a reduction in the number
of shares to be included in any underwritten offering as the
result of receipt of written notice from the representative of
the underwriters to the effect that adverse marketing factors
require a limitation on the number of shares to be underwritten.
"Voting Stock" shall mean Securities of any class or classes
the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the corporate
directors (or Persons performing similar functions).
Section 11.2 Accounting Principles.
------------------------------------
Where the character or amount of any asset or liability or
item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be
made for the purposes of this Agreement, the same shall be done
in accordance with GAAP, to the extent applicable, except where
such principles are inconsistent with the requirements of this
Agreement.
Section 11.3 Directly or Indirectly.
-------------------------------------
Where any provision in this Agreement refers to action to be
taken by any Person, or which such Person is prohibited from
taking such provision shall be applicable whether the action in
question is taken directly or indirectly by such Person.
SECTION XII - MISCELLANEOUS
Section 12.1 Expenses, Stamp Tax Indemnity.
--------------------------------------------
Whether or not the transactions herein contemplated shall be
consummated, the Company agrees to pay directly all of
Purchaser's out-of-pocket expenses in connection with the
entering into of this Agreement and the consummation of the
transactions contemplated hereby, including but not limited to
the reasonable fees, expenses and disbursements of Sherrard &
Roe, PLC, Purchaser's counsel. The Company also agrees that it
will pay and save Purchaser harmless against any and all
liability with respect to stamp and other taxes, if any, which
may be payable in connection with the execution and delivery of
this Agreement or the Debentures, whether or not any Debentures
are then outstanding. The Company agrees to protect and
indemnify Purchaser against any liability for any and all
brokerage fees and commissions payable or claimed to be payable
to any Person in connection with the transactions contemplated by
this Agreement.
Section 12.2 Powers and Rights Not Waived; Remedies
----------------------------------------------------
Cumulative.
-----------
No delay or failure on the part of the holder of any
Debenture in the exercise of any power or right shall operate as
a waiver thereof; nor shall any single or partial exercise of the
same preclude any other of further exercise thereof, or the
exercise of any other power or right, and the rights and remedies
of the holder of any Debenture are cumulative to and are not
exclusive of any rights or remedies any such holder would
otherwise have, and no waiver or consent, given or extended
pursuant to Article IX hereof, shall extend to or affect any
obligation or right not expressly waived or consented to.
Section 12.3 Notices.
----------------------
All communications provided for hereunder shall be in
writing and shall be delivered personally, or mailed by
registered mail, or by prepaid overnight air courier, or by
facsimile communication, in each case addressed:
If to Purchaser: Tandem Capital, Inc.
500 Church Street
Suite 200
Nashville, Tennessee 37219
Fax: (615) 726-1208
Attention: Craig Macnab
with a copy to: Sherrard & Roe, PLC
424 Church Street, Suite 2000
Nashville, TN 37219
Fax: (615) 742-4539
Attn: Thomas J. Sherrard, Esq.
If to the Company: Cover-All Technologies Inc.
18-01 Pollitt Drive
Fair Lawn, New Jersey 07410
Fax: (201) 791-9113
Attention: Brian Magowan,
Chairman of the Board
with a copy to: Reid & Priest LLP
40 West 57th Street
New York, New York
Fax: (201) 603-2001
Attention: Leonard Gubar, Esq.
or such other address as Purchaser or the subsequent holder of
any Debenture initially issued to Purchaser may designate to the
Company in writing, or such other address as the Company may in
writing designate to Purchaser or to a subsequent holder of the
Debenture initially issued to Purchaser, provided, however, that
a notice sent by overnight air courier shall only be effective if
delivered at a street address designated for such purpose by such
person and a notice sent by facsimile communication shall only be
effective if made by confirmed transmission at a telephone number
designated for such purpose by such person or, in either case, as
Purchaser or a subsequent holder of any Debentures initially
issued to Purchaser may designate to the Company in writing or at
a telephone number herein set forth in the case of the Company.
Section 12.4 Assignment.
-------------------------
This Agreement, the Debentures and the other Operative
Documents may be endorsed, assigned and/or transferred in whole
or in part by Purchaser, and any such holder and/or assignee of
the same shall succeed to and be possessed of the rights and
powers of Lender under all of the same to the extent transferred
and assigned. The Company shall not assign any of its rights nor
delegate any of its duties under this Agreement or any of the
other Operative Documents by operation of law or otherwise
without the prior express written consent of Lender, and in the
event the Company obtains such consent, this Agreement and the
other Operative Documents shall be binding upon such assignee.
Section 12.5 Survival of Covenants and Representations.
--------------------------------------------------------
All covenants, representations and warranties made by the
Company and the Purchaser herein and in any certificates
delivered pursuant hereto, whether or not in connection with the
Closing Date, shall survive the closing and the delivery of this
Agreement and the Debentures.
Section 12.6 Severability.
---------------------------
Should any part of this Agreement for any reason be declared
invalid or unenforceable, such decision shall not affect the
validity of any remaining portion, which remaining portion shall
remain in force and effect as if this Agreement had been executed
with the invalid or unenforceable portion thereof eliminated and
it is hereby declared the intention of the parties hereto that
they would have executed the remaining portion of this Agreement
without including therein any such part, parts or portion which
may for any reason, be hereafter declared invalid or
unenforceable.
Section 12.7 Governing Law.
----------------------------
This Agreement and the Debentures issued and sold hereunder
shall be governed by and construed in accordance with Tennessee
law, without regard to its conflict of law rules.
Section 12.8 Captions.
-----------------------
The descriptive headings of the various Sections or parts of
this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
* * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Debenture Purchase Agreement to be executed and delivered by
their duly authorized officers as of the date first written
above.
COMPANY:
COVER-ALL TECHNOLOGIES INC.
By: /s/ Brian Magowan
---------------------------------
Name: Brian Magowan
---------------------------------
Title: Chairman & Chief Executive Officer
---------------------------------
PURCHASER:
SIRROM CAPITAL CORPORATION
By: /s/ Craig Macnab
--------------------------------
Name: Craig Macnab
--------------------------------
Title: V.P.
--------------------------------
Exhibit 10(aa)(ii)
NEITHER THIS DEBENTURE NOR THE SHARES OF COMMON STOCK ISSUABLE
UPON THE CONVERSION HEREOF HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY
APPLICABLE STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED UNLESS
(i) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS, OR (ii)
IN THE OPINION OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY
REGISTRATION UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH TRANSFER.
COVER-ALL TECHNOLOGIES INC.
12.5% CONVERTIBLE DEBENTURE DUE MARCH 31, 2002
No. 1 March 31, 1997
$3,000,000
For value received, COVER-ALL TECHNOLOGIES INC., a Delaware
corporation (the "Company"), hereby promises to pay to Sirrom
Capital Corporation, or registered assigns, on the 31st day of
March, 2002, the principal amount of Three Million Dollars
($3,000,000) and to pay interest (computed on the basis of a 360-
day year of twelve 30-day months) on the principal amount from
time to time remaining unpaid hereon at the rate of 12.5% per
annum from the date hereof until maturity, payable quarterly on
the first day of each January, April, July and October in each
year commencing July 1, 1997, and at maturity. The Company
agrees to pay interest (computed on the same basis) on overdue
principal and premium, if any, and (to the extent legally
enforceable) on any overdue installment of interest, at the rate
of 15% per annum (or, in each case, at the highest rate permitted
by applicable law, whichever is less) until paid.
Both the principal hereof and interest hereon are payable to
the order of the holder hereof at its address registered on the
books of the Company or by federal funds wire transfer to a bank
account designated in writing by the holder to the Company in
coin or currency of the United States of America which at the
time of payment shall be legal tender for the payment of public
and private debts. If any amount of principal, premium, if any,
or interest on or in respect of this Debenture becomes due and
payable on any date which is not a Business Day, such amount
shall be payable on the next preceding Business Day. "Business
Day" means any day other than a Saturday, Sunday, statutory
holiday or other day on which banks in Tennessee are required by
law to close or are customarily closed.
This Debenture is one of the 12.5% Convertible Debentures
due March 31, 2002 of the Company in the aggregate principal
amount of $3,000,000 issued under and pursuant to the terms and
provisions of the Debenture Purchase Agreement, dated as of
March 31, 1997 (the "Debenture Agreement"), entered into by the
Company with the original purchaser referred to therein, and
this Debenture and the holder hereof are entitled, equally and
ratably with the holders of all other Debentures outstanding
under the Debenture Agreement, to all the benefits provided
for thereby or referred to therein, and to which Debenture
Agreement reference is hereby made for all such terms and provisions.
This Debenture is convertible into shares of voting Common
Stock, par value $.01 per share, of the Company, in the manner
and upon the terms and conditions set forth in the Debenture
Agreement.
If an Event of Default, as defined in the Debenture
Agreement, occurs and is continuing, the principal of this
Debenture and the other Debentures outstanding under the
Debenture Agreement may be declared due and payable in the manner
and with the effect provided in the Debenture Agreement.
This Debenture is registered on the books of the Company and
is transferable only by surrender thereof at the principal office
of the Company at 18-01 Pollitt Drive, Fair Lawn, New Jersey
07410, or such other address as the Company shall have advised
the holders of the Debenture in writing, duly endorsed or
accompanied by a written instrument of transfer duly executed by
the registered holder of this Debenture or its attorney duly
authorized in writing. Payment of or on account of principal,
premium, if any, and interest on this Debenture shall be made
only to or upon the order in writing of the registered holder.
If the indebtedness represented by this Debenture or any
part thereof is placed in the hands of attorneys for collection
after an Event of Default, or the enforcement of any rights under
the Debenture Agreement, the Company agrees to pay the principal,
premium if any, and interest due and payable hereon, and an
amount equal to all costs of collecting this Debenture, including
reasonable attorneys' fees and expenses.
This Debenture and said Debenture Agreement shall be
governed by and construed in accordance with Tennessee law,
without regard to its conflict of law rules. Notwithstanding the
foregoing, the parties hereby acknowledge and agree that (i) the
issue and sale by the Company of this Debenture and the other
transactions described herein and in the Debenture Purchase
Agreement bear a reasonable relationship to the State of New
Jersey and (ii) the laws of the State of New Jersey shall govern
the rights and duties with respect to interest, loan charges,
commitment fees and brokerage commissions.
[Corporate Seal] COVER-ALL TECHNOLOGIES INC.
ATTEST: BY:
/s/ Leonard Gubar /s/ Brian Magowan
------------------------- ------------------------------
Leonard Gubar Brian Magowan
------------------------- ------------------------------
Secretary President
Exhibit 10(aa)(iii)
AMENDMENT TO STOCK PURCHASE AGREEMENT
-------------------------------------
This is an amendment (the "Amendment") to that certain
---------
Stock Purchase Agreement dated as of March 31, 1996 by and among
Warner Insurance Services, Inc., a Delaware corporation whose
name has been changed to Cover-All Technologies, Inc., Software
Investments Limited, a British Virgin Islands corporation, and
Care Corporation Limited, a British Virgin Islands corporation
(the "Original Agreement"). Capitalized terms utilized in this
------------------
Amendment and not defined herein shall have the meanings ascribed
to them in the Original Agreement.
WHEREAS, this Amendment is being entered into pursuant
to the terms of a certain Convertible Note Purchase Agreement,
dated of even date herewith, among Cover-All Technologies, Inc.,
Software Investments Limited, Atlantic Employers Insurance
Company, a New Jersey corporation, and Roger D. Bensen (the "Note
Purchase Agreement"). ----
------------------
NOW, THEREFORE, in consideration of the benefits to be
realized by the parties hereto under the Note Purchase Agreement
and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. For purposes of consistency, references to
"Warner" in Sections 2 and 3 below are being utilized
notwithstanding that Warner Insurance Services, Inc. has changed
its name to Cover-All Technologies, Inc.
2. A new subsection 5(l) is hereby added to the
Original Agreement as follows:
"(l) Commencing March __, 1997, notwithstanding
anything to this contrary provided in this Section 5 or
elsewhere herein, the number of License Shares subject
to repurchase by Warner shall be reduced by an
aggregate of 500,000 License Shares for each $1,000,000
of cumulative Net Sales earned on and after such date
by Warner, such reduction to be effective when each
such $1,000,000 of Net Sales is actually earned by the
Company."
3. Subsections 5(b), 5(c), 5(d) and 5(e) of the
Original Agreement are deleted in their entirety and the
following text is hereby substituted as new subsections 5(b),
5(c), 5(d) and 5(e) of the Original Agreement:
"(b) If during the period ending three (3) years
after the Closing Date Warner recognizes cumulative Net
Sales from $1,000,000 to $1,999,999, then, to the
extent that the number of License Shares subject to
repurchase shall not have been previously reduced
pursuant to subsection 5(l) below, Warner shall have
the right to repurchase 2,000,000 of the License Shares
at a price of $.01 per share, provided, however, that
the License Shares repurchasable by Warner shall be
reduced by 1 share for each $2.00 of Net Sales in
excess of $1,000,000.
(c) If during the period ending three (3) years
after the Closing Date Warner recognizes cumulative Net
Sales from $2,000,000 to $2,999,999, then, to the
extent that the number of License Shares subject to
repurchase shall not have been previously reduced
pursuant to subsection 5(l) below, Warner shall have
the right to repurchase 1,500,000 of the License Shares
at a price of $.01 per share, provided, however, that
the License Shares repurchasable by Warner shall be
reduced by 1 share for each $2.00 of Net Sales in
excess of $2,000,000.
(d) If during the period ending three (3) years
after the Closing Date Warner recognizes cumulative Net
Sales from $3,000,000 to $3,999,999, then, to the
extent that the number of License Shares subject to
repurchase shall not have been previously reduced
pursuant to subsection 5(l) below, Warner shall have
the right to repurchase 1,000,000 of the License Shares
at a price of $.01 per share, provided, however, that
the License Shares repurchasable by Warner shall be
reduced by 1 share for each $2.00 of Net Sales in
excess of $3,000,000.
(e) If during the period ending three (3) years
after the Closing Date Warner recognizes cumulative Net
Sales from $4,000,000 to $4,999,999, then, to the
extent that the number of License Shares subject to
repurchase shall not have been previously reduced
pursuant to subsection 5(l) below, Warner shall have
the right to repurchase 500,000 of the License Shares
at a price of $.01 per share, provided, however, that
the License Shares repurchasable by Warner shall be
reduced by 1 share for each $2.00 of Net Sales in
excess of $4,000,000.
4. Except as specifically provided herein, the
Original Agreement shall not be otherwise affected by this
Amendment and shall continue to be in full force and effect in
accordance with its terms.
5. Each of Software Investments Limited and Care
Corporation Limited represents and warrants, on its own behalf
and not on behalf of the other, to Cover-All Technologies, Inc.
that (i) it has all requisite corporate power to execute and
deliver this Amendment, (ii) all corporate action on its part
necessary for the authorization, execution and delivery by it of
this Amendment and the performance of all of its obligations
hereunder has been taken, and (iii) this Amendment constitutes
its valid and legally binding obligation enforceable in
accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or
other equitable remedies.
IN WITNESS WHEREOF, the undersigned have entered into
this Amendment as of the 14th day of March, 1997.
----
COVER-ALL TECHNOLOGIES, INC.
By: /s/ Alfred J. Moccia
--------------------------
Authorized Officer
SOFTWARE INVESTMENTS LIMITED
By: /s/ Mark Johnston
--------------------------
Authorized Officer
CARE CORPORATION LIMITED
By: /s/ Mark Johnston
--------------------------
Authorized Officer
Exhibit 10(aa)(iv)
AMENDMENT TO EXCLUSIVE SOFTWARE LICENSE AGREEMENT
-------------------------------------------------
This is an amendment (the "Amendment") to that certain
---------
Exclusive Software License Agreement dated as of March 31, 1996
by and between Care Corporation Limited, a company incorporated
in the British Virgin Islands, Warner Insurance Service, Inc., a
Delaware corporation whose name has been changed to Cover-All
Technologies, Inc., and, for certain limited purposes set forth
therein, Cover-All Systems, Inc., a Delaware corporation and a
wholly owned subsidiary of Cover-All Technologies, Inc. (the
"Original Agreement"). Capitalized terms utilized in this Amendment
------------------
and not defined herein shall have the meanings ascribed to them
in the Original Agreement.
WHEREAS, this Amendment is being entered into pursuant
to the terms of a certain Convertible Note Purchase Agreement,
dated of even date herewith, among Cover-All Technologies, Inc.,
Software Investments Limited, a British Virgin Islands
corporation, Atlantic Employers Insurance Company, a New Jersey
corporation, and Roger D. Bensen (the "Note Purchase Agreement").
-----------------------
NOW THEREFORE, in consideration of the benefits to be
realized by the parties hereto under the Note Purchase Agreement
and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. For purposes of consistency, references to
"WARNER" in Section 2 below are being utilized notwithstanding
that Warner Insurance Services, Inc. has changed its name to
Cover-All Technologies, Inc.
2. Section 4 of the Original Agreement is deleted in
its entirety and the following text is hereby substituted as a
new Section 4 of the Original Agreement:
"4. AGREEMENTS RELATING TO MARKETING EFFORTS. To the
extent set forth in this Section 4, WARNER, Cover-All
and CCL agree to use their commercially reasonable best
efforts to (i) develop and market CARE Software in the
Licensed Territory and (ii) generate License Revenue
and Net Sales. Without limiting the foregoing, WARNER
hereby engages CCL to act as its sales agent with
respect to the CARE Software in the Licensed Territory
until March 31, 1999 (the "Term"). WARNER agrees that
----
CCL shall act as its exclusive sales agent during the
Term with respect to (a) the current marketing and
sales prospects identified by letter of even date
herewith from CCL to WARNER, and (b) any prospect with
respect to which CCL engages in marketing and sales
efforts pursuant to this Section 4 and provides prior
written notice thereof to WARNER. WARNER agrees to pay
CCL a sales commission equal to twenty percent (20%) of
Net Sales derived from CCL's efforts as sales agent
during the Term. As a draw against any commissions
payable to CCL, WARNER agrees, during the Term, to pay
CCL, an amount equal to $10,000 per month (which amount
includes all of CCL's costs and expenses), payable no
later than by the 10th day of each such month. The
failure by WARNER to pay such monthly amount, which
failure is not promptly cured by WARNER after notice
thereof from CCL, shall constitute a breach of this
Section 4, which breach shall result in WARNER having a
nonexclusive license of the Licensed Rights thereafter.
CCL shall have the right, as determined in its sole
discretion, to utilize its subsidiaries, other
affiliates, or agents in the performance of its
marketing and sales efforts pursuant to this Section 4.
3. Except as specifically provided herein, the
Original Agreement shall not be otherwise affected by this
Amendment and shall continue to be in full force and effect in
accordance with its terms.
4. Care Corporation Limited ("CCL") represents and
---
warrants to Cover-all Technologies, Inc. that (i) CCL has all
requisite corporate power to execute and deliver this Amendment,
(ii) all corporate action on the part of CCL necessary for the
authorization, execution and delivery by CCL of this Amendment
and the performance of all of CCL's obligations hereunder has
been taken, and (iii) this Amendment constitutes a valid and
legally binding obligation of CCL enforceable in accordance with
its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other
equitable remedies.
IN WITNESS WHEREOF, the undersigned have entered into
this Amendment as of the 14th day of March, 1997.
----
CARE CORPORATION LIMITED COVER-ALL TECHNOLOGIES, INC.
(formerly Warner Insurance
Services, Inc.)
By: /s/ Mark Johnston By: /s/ Alfred J. Moccia
------------------------ --------------------------
Authorized Officer Authorized Officer
COVER-ALL SYSTEMS, INC.
By:
-----------------------
Authorized Officer
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-3 No. 333-6131) and
related Prospectus of Cover-All Technologies Inc. (formerly Warner
Insurance Services, Inc.) for the registration of 6,591,528 shares of its
common stock and to the incorporation by reference therein of our report
dated April 11, 1997, with respect to the consolidated financial
statements and schedule of Cover-All Technologies Inc. included in its
Annual Report (Form 10-K) for the year ended December 31, 1996, filed
with the Securities and Exchange Commission.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-18243) pertaining to the 1982 Incentive Stock
Option Plan and in the Registration Statement (Form S-8 No. 33-44270)
pertaining to the 1991 Key Employee Stock Option Plan, the 1988 Non-
Employee Director Stock Option Plan and certain Non-Qualified Stock
Option Contracts, and in the related Prospectuses of Cover-All
Technologies Inc. of our report dated April 11, 1997, with respect to the
consolidated financial statements and schedule of Cover-All Technologies
Inc. included in its Annual Report (Form 10-K) for the year ended
December 31, 1996, filed with the Securities and Exchange Commission.
/s/ Ernst & Young, LLP
------------------------
Ernst & Young LLP
Hackensack, New Jersey
April 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COVER-
ALL TECHNOLOGIES INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 446,672
<SECURITIES> 0
<RECEIVABLES> 1,629,268
<ALLOWANCES> 43,870
<INVENTORY> 0
<CURRENT-ASSETS> 2,039,231
<PP&E> 3,072,706
<DEPRECIATION> 2,662,713
<TOTAL-ASSETS> 8,243,355
<CURRENT-LIABILITIES> 3,332,359
<BONDS> 0
0
0
<COMMON> 173,519
<OTHER-SE> 4,737,477
<TOTAL-LIABILITY-AND-EQUITY> 8,243,355
<SALES> 0
<TOTAL-REVENUES> 5,468,672
<CGS> 0
<TOTAL-COSTS> 4,585,727
<OTHER-EXPENSES> 6,491,267
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,608,322)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,608,322)
<DISCONTINUED> (392,872)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,001,194)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
