UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
___________
FORM 10-Q/A
AMENDMENT NO. 1
TO
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998 Commission File
------------------
Number 0-13124
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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 offices) (Zip code)
Registrant's telephone number, including area code: (201) 794-4800
--------------
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 and 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
---- ----
Number of shares outstanding at October 28, 1998:
16,984,022 shares of Common Stock, par value $.01 per share.
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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INDEX TO FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998.
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PART I: FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
[Unaudited] and December 31, 1997 [Audited] . . . . . . . 1
Consolidated Statements of Operations for the three
and nine months ended September 30, 1998 and 1997
[Unaudited] . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997
[Unaudited] . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements [Unaudited] . . 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . 11
PART II: OTHER INFORMATION . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 17
. . . . . . . . . .
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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SEPTEMBER DECEMBER
30, 1998 31, 1997
[UNAUDITED] [AUDITED]
----------- -----------
Assets:
CURRENT ASSETS:
Cash and Cash Equivalents $2,278,430 $2,908,167
Accounts Receivable [Less Allowance
for Doubtful Accounts of $185,610
and $185,610] 4,793,188 1,234,706
Note Receivable - Related Party 1,000,000 --
Prepaid Expenses 193,034 140,783
----------- -----------
TOTAL CURRENT ASSETS 8,264,652 4,283,656
----------- -----------
PROPERTY AND EQUIPMENT - AT COST:
Furniture, Fixtures and Equipment 2,734,857 2,625,678
Less: Accumulated Depreciation (2,514,636) (2,397,704)
----------- -----------
PROPERTY AND EQUIPMENT - NET 220,221 227,974
----------- -----------
SOFTWARE LICENSE HELD FOR SALE AT
DECEMBER 31, 1997 [LESS ACCUMULATED
AMORTIZATION OF $-0- AND -- 3,250,000
$1,750,000] ----------- -----------
CAPITALIZED SOFTWARE [LESS
ACCUMULATED AMORTIZATION OF 926,403 663,057
$2,325,274 AND $1,820,857] ----------- -----------
NOTE RECEIVABLE - RELATED PARTY 2,407,617 --
----------- -----------
OTHER ASSETS 65,735 59,335
----------- -----------
TOTAL ASSETS $11,884,628 $8,484,022
=========== ===========
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
1
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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SEPTEMBER DECEMBER
30, 31,
1998 1997
[UNAUDITED] [AUDITED]
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts Payable $ 897,287 $ 571,309
Accrued Liabilities 1,701,552 1,618,676
Unearned Revenue 356,313 447,133
----------- -----------
TOTAL CURRENT LIABILITIES 2,955,152 2,637,118
CONVERTIBLE DEBENTURES 3,000,000 3,000,000
---------- -----------
TOTAL LIABILITIES 5,955,152 5,637,118
---------- -----------
COMMITMENTS AND CONTINGENCIES -- --
---------- -----------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 Par Value,
Authorized 30,000,000 Shares,
Issued 16,984,022 and 16,791,122
Shares, Respectively 169,840 167,911
Capital in Excess of Par Value 26,723,392 25,273,031
Accumulated Deficit (20,963,756) (22,594,038)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,929,476 2,846,904
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $11,884,628 $ 8,484,022
=========== ===========
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
2
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
-----------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------
SEPTEMBER 30,
---------------------------------
1998 1997
---------------- -------------
REVENUES:
Licenses $1,527,105 $ 994,203
Maintenance 956,089 674,397
Professional Services 1,328,009 389,606
---------- ----------
3,811,203 2,058,206
TOTAL REVENUES ---------- ----------
COST OF REVENUES:
Licenses 1,026,898 453,728
Maintenance 455,157 432,206
Professional Services 155,215 144,069
---------- ----------
1,637,270 1,030,003
TOTAL COST OF REVENUES ---------- ----------
2,173,933 1,028,203
GROSS PROFIT ---------- ----------
OPERATING EXPENSES:
Sales and Marketing 575,233 540,850
General and Administrative 567,775 627,972
Research and Development 239,593 --
---------- ----------
1,382,601 1,168,822
TOTAL OPERATING EXPENSES ---------- ----------
OPERATING INCOME (LOSS) 791,332 (140,619)
INTEREST INCOME 30,780 8,435
INTEREST EXPENSE 94,437 107,709
---------- ----------
$ 727,675 $ (239,893)
NET INCOME (LOSS) ========== ==========
BASIC EARNINGS (LOSS) PER $ .04 $ (.01)
SHARE ========== ==========
DILUTED EARNINGS (LOSS) $ .04 $ (.01)
PER SHARE ========== ==========
WEIGHTED AVERAGE NUMBER OF 16,981,574 16,720,297
COMMON SHARES OUTSTANDING ========== ==========
NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30,
---------------------------------
1998 1997
---------------- -------------
REVENUES:
Licenses $ 4,951,494 $1,480,711
Maintenance 2,761,420 1,889,575
Professional Services 2,600,850 908,834
---------- ----------
10,313,764 4,279,120
TOTAL REVENUES ---------- ----------
COST OF REVENUES:
Licenses 3,151,508 1,361,179
Maintenance 1,171,774 1,581,336
Professional Services 522,025 636,553
---------- ----------
4,845,307 3,579,068
TOTAL COST OF REVENUES ---------- ----------
5,468,457 700,052
GROSS PROFIT ---------- ----------
OPERATING EXPENSES:
Sales and Marketing 1,408,661 1,349,320
General and Administrative 1,432,200 2,007,075
Research and Development 782,434 --
---------- ----------
3,623,295 3,356,395
TOTAL OPERATING EXPENSES ---------- ----------
OPERATING INCOME (LOSS) 1,845,162 (2,656,343)
INTEREST INCOME 67,057 28,237
INTEREST EXPENSE 281,937 208,230
---------- ----------
$ 1,630,282 $(2,836,336)
NET INCOME (LOSS) ========== ==========
BASIC EARNINGS (LOSS) PER $ .10 $ (.17)
SHARE ========== ==========
DILUTED EARNINGS (LOSS) $ .09 $ (.17)
PER SHARE ========== ==========
WEIGHTED AVERAGE NUMBER OF 16,920,449 16,719,146
COMMON SHARES OUTSTANDING ========== ==========
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
3
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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NINE MONTHS ENDED
----------------------------
SEPTEMBER 30,
----------------------------
1998 1997
----------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income [Loss] $ 1,630,282 $(2,836,336)
Adjustments to
Reconcile Net Income
[Loss] to Net Cash
Used for Operating
Activities:
Depreciation 116,932 143,755
Amortization of
Capitalized Software
and Software License 504,417 1,361,178
Noncash Compensation
Expense on Granting
of Stock Options -- 369,688
Changes in Assets and
Liabilities:
[Increase] Decrease in:
Accounts Receivable (2,558,482) (74,583)
Note Receivable - Short
Term - Related Party (1,000,000) --
Note Receivable - Long
Term - Related Party (14,563) --
Prepaid Expenses (52,251) (237,796)
Other Assets (6,400) 6,846
Increase [Decrease] in:
Accounts Payable 325,978 (84,073)
Accrued Liabilities 82,875 (458,233)
Unearned Revenue (90,820) (541,211)
----------- ----------
NET CASH [USED FOR]
OPERATING ACTIVITIES (1,062,032) (2,350,765)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital Expenditures (109,179) (1,202)
Capitalized Software (767,763) --
Expenditures ----------- ----------
NET CASH [USED FOR] (876,942) (1,202)
INVESTING ACTIVITIES ----------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from Bridge
Financing -- 750,000
Payments on Bridge
Financing -- (750,000)
Proceeds from
Convertible
Debentures -- 3,000,000
Proceeds from Sale of
Software License 1,000,000
Proceeds from
Exercise of Stock 309,237 7,993
Options ----------- ----------
NET CASH PROVIDED
FROM FINANCING 1,309,237 3,007,993
ACTIVITIES ----------- ----------
CHANGE IN CASH AND
CASH EQUIVALENTS (629,737) 656,026
CASH AND CASH EQUIVALENTS 2,908,167 446,672
- BEGINNING OF PERIODS ----------- ----------
CASH AND CASH EQUIVALENTS
- END OF PERIODS $ 2,278,430 $ 1,102,698
=========== ===========
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
4
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
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[1] GENERAL
For a summary of significant accounting policies, refer to Note 1
of Notes to Consolidated Financial Statements included in Cover-
All Technologies Inc.'s [the "Company"] Annual Report on Form 10-
K for the year ended December 31, 1997. While the Company
believes that the disclosures herein presented are adequate to
make the information not misleading, these consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the
Company's latest annual report. Certain amounts for the prior
year have been reclassified to conform with the current period's
financial statement presentation. The financial statements
include on a consolidated basis the results of all subsidiaries.
All material intercompany transactions have been eliminated.
In the opinion of management, the accompanying consolidated
financial statements include all adjustments which are necessary
to present fairly the Company's financial position as of
September 30, 1998 and December 31, 1997, and the results of
operations for the three and nine month periods ended September
30, 1998 and 1997, and the cash flows for the nine month periods
ended September 30, 1998 and 1997. Such adjustments are of a
normal and recurring nature. The results of operations for the
three and nine month period ended September 30, 1998, are not
necessarily indicative of the results to be expected for a full
year.
[2] CONVERTIBLE NOTES & DEBENTURES
On March 14, 1997, the Company obtained $750,000 in bridge
financing through the sale of 12 1/2% Convertible Notes to three
major stockholders. The principal and accrued interest on the
bridge financing was repaid in full on March 31, 1997 out of the
proceeds from the financing discussed below.
On March 31, 1997, the Company issued $3,000,000 of 12 1/2%
Convertible Debentures [the "Debentures"] to an institutional
investor at face value. The Debentures are immediately
convertible, in whole or in part, into shares of the Company's
Common Stock at a conversion price of $1.25 per share, subject to
adjustment, and mature on March 31, 2002. Interest is payable
quarterly. The Debentures contain certain covenants which
restrict the Company's ability to incur debt, grant liens, pay
dividends or other restricted payments and make investments and
acquisitions. The Company cannot redeem the Debentures for two
years and thereafter may call the Debentures only if the closing
price of the Company's Common Stock exceeds $1.50 for the twenty
days preceding the redemption date. A portion of the proceeds
from the issuance was used to repay the bridge financing. The
remaining net proceeds were used for working capital purposes.
5
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COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
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[3] SALE OF STOCK AND WARRANTS, AND PURCHASE AND SALE OF CARE
SOFTWARE LICENSE
On March 31, 1996, the Company was granted by Care Corporation
Limited ["Care"] the exclusive license for the Care software for
use in the workers' compensation claims administration markets in
Canada, Mexico and Central and South America [the "Care Software
License"]. In exchange for this license, the Company issued to
Care 2,500,000 shares of the Company's Common Stock and the
Company recorded a software license for $5,000,000. 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, or not reached, the Company had the right to repurchase
all or a portion of the shares issued to Care at $.01 per share.
In the fourth quarter of 1997, the Company made a strategic
decision to allocate its future resources to its TAS 2000 and
Classic product lines rather than the product line obtained via
the Care Software License. In this regard, on March 31, 1998,
the Company negotiated and consummated a buy back by Care of the
Care Software License.
For the buy back of the Care Software License by Care, the
Company received $500,000 on March 31, 1998, and a $4,500,000
non-interest bearing non-recourse [except as to collateral] note,
payable in semi-annual installments of $500,000 which, when
discounted, results in a principal amount of the note of
$3,893,054. Due to the related party nature of the Care Software
License buy back agreement, the Company recorded the $1,143,000
difference between the carrying value of the Care Software
License and the discounted $4,393,000 buy back agreement to
capital in excess of par value at March 31, 1998. Upon receipt
of the first $500,000 payment under the agreement on March 31,
1998, the Company lifted the aforementioned $.01 per share stock
repurchase restriction on the 2,500,000 shares.
The discounted note is collateralized by unencumbered Cover-All
stock owned by Care and Software Investments Limited. The number
of shares required as collateral will vary, such that the market
value of the shares held as collateral must equal 150% of the
outstanding balance. The number of shares required as collateral
will be adjusted at each payment date based on the market price
of the Company's shares and the balance outstanding on such date.
Based on the market price of the Company's stock on March 30,
1998, approximately 1,700,000 shares were pledged as collateral.
Upon receiving the second installment of $500,000 on September
30, 1998, the number of shares required as collateral was
recalculated. An additional 2,000,000 shares were required as
collateral bringing the total number of shares pledged to
approximately 3,700,000. The carrying value of the note at
September 30, 1998 is $3,408,000.
6
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
-----------------------------------------------------------------
[3] SALE OF STOCK AND WARRANTS, AND PURCHASE AND SALE OF CARE
SOFTWARE LICENSE [CONTINUED]
In separate but related agreements, Care agreed to grant to the
Company certain non-exclusive reseller rights to the Care
software, and the Company agreed to grant to Care certain non-
exclusive reseller rights to the TAS 2000 software Classic product
lines.
[4] INCOME TAXES
An analysis of the components of the income tax provision is
as follows:
The income tax provision [benefit] for continuing operations
differs from the amount computed by applying the statutory
federal income tax rate as follows:
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30,
1998 1997
------------------- ------------
Computed Federal
Statutory Tax
[Benefit] $ 554,000 $ (900,000)
Utilization of Net
Operating Loss
Carryforward (554,000) --
Valuation Allowance to
Reduce Deferred Tax -- 900,000
Asset --------- --------
ACTUAL PROVISION
---------------- $ -- $ --
[BENEFIT] ========= ========
---------
7
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
-----------------------------------------------------------------
[4] INCOME TAXES [CONTINUED]
The components of the net deferred tax asset and liability
were as follows:
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SEPTEMBER 30,
1998 1997
------------------- ------------
Deferred Tax Assets
- Current:
Bad Debts $ 74,000 $ 74,000
Reserve for Loss
on Disposal 127,000 185,000
Other - Net 13,000 13,000
Valuation Allowance (214,000) (272,000)
---------- ----------
CURRENT DEFERRED
----------------
TAX ASSET $ -- $ --
--------- ========== ==========
Deferred Tax Asset
[Liability] Long-Term:
Net Operating Loss
Carryforward $8,900,000 $9,500,000
Capitalized Software (371,000) (265,000)
Depreciation and
Amortization 88,000 91,000
Valuation Allowance (8,617,000) (9,326,000)
---------- ----------
LONG-TERM DEFERRED
------------------
TAX LIABILITY $ -- $ --
------------- ========== ==========
The net change during 1998 in the total valuation allowance is
$(767,000).
Pursuant to Statement of Financial Accounting Standards ["SFAS"]
No. 109, "Accounting for Income Taxes," income tax expense [or
benefit] for the period is the sum of deferred tax expense [or
benefit] and income taxes currently payable [or refundable].
Deferred tax expense [or benefit] is the change during the year
in a company's deferred tax liabilities and assets. Deferred tax
liabilities and assets are determined based on differences
between financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. At December 31, 1997, the Company had approximately
$3,000,000, $14,000,000 and $7,000,000 of operating tax loss
carryforwards expiring in 2012, 2011, and 2010, respectively. No
provision for income taxes is reflected in these financial
statements as the Company anticipates utilizing the operating tax
loss carryforwards to offset any taxable income the Company may
have.
8
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
-----------------------------------------------------------------
[5] NET INCOME [LOSS] PER SHARE
The Financial Accounting Standards Board has issued SFAS No. 128,
"Earnings per Share," which is effective for financial statements
issued for periods ending after December 15, 1997. Accordingly,
earnings per share data in the financial statements for the three
and nine months ended September 30, 1998 have been calculated in
accordance with SFAS No. 128. Prior periods loss per share data
have been recalculated and it was determined that no adjustment
was necessary to conform with SFAS No. 128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No.
15, Earnings per Share, and replaces its primary earnings per
share with a new basic earnings per share representing the amount
of earnings for the period available to each share of common
stock outstanding during the reporting period. Basic earnings
[loss] per share is computed by dividing income [loss] available
to common stockholders by the weighted average number of common
shares outstanding during the period. SFAS No. 128 also requires
a dual presentation of basic and diluted earnings per share on
the face of the statement of operations for all companies with
complex capital structures. Diluted earnings per share reflects
the amount of earnings for the period available to each share of
common stock outstanding during the reporting period, while
giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could
result from the potential exercise or conversion of securities
into common stock.
The computation of diluted earnings per share does not assume
conversion, exercise, or contingent issuance of securities that
would have an antidilutive effect on per share amounts [i.e.,
increasing earnings per share or reducing loss per share]. The
dilutive effect of outstanding options and warrants and their
equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use
of proceeds that could be obtained upon exercise of options and
warrants in computing diluted earnings per share. It assumes
that any proceeds would be used to purchase common stock at the
average market price during the period. Options and warrants will
have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the
options or warrants. The Company's options and warrants were
not included in the computation of loss per share for the three
and nine months ended September 30, 1997 because to do so would
have been antidilutive for that period. However, although such
options and warrants did dilute earnings per share for the three
and nine months ended September 30, 1998, the effect was not
material.
9
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
-----------------------------------------------------------------
[5] NET INCOME [LOSS] PER SHARE [CONTINUED]
The dilutive effect of convertible debt is reflected in diluted
earnings per share by the application of the if-converted method.
While the Company's convertible debt had a dilutive effect on
earnings per share for the three and nine months ended September
30, 1998, its effect was not material. The Company's convertible
debt did not affect the loss per share calculation for the three
and nine months ended September 30, 1997 because its inclusion
would have been antidilutive.
. . . . . . . . . .
10
<PAGE>
ITEM 2:
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Total revenues for the three months ended September 30, 1998 were
$3,811,000 as compared to $2,058,000 for the same period in 1997,
an increase of 85%. Licenses fees were $1,527,000 for the three
months ended September 30, 1998 compared to $994,000 in the same
period in 1997 as a result of sales of TAS 2000 product modules.
For the three months ended September 30, 1998, maintenance
revenues were $956,000 compared to $674,000 in the same period of
the prior year due to an increased customer base. Professional
services revenue contributed $1,328,000 in the three months ended
September 30, 1998 compared to $390,000 in the third quarter of
1997 as a result of additional TAS 2000 work. Total Classic
revenues were $1,417,000 for the three months ended September 30,
1998 as compared to $2,008,000 for the three months ended
September 30, 1997. Total TAS 2000 revenues were $2,394,000 for
the three months ended September 30, 1998 as compared to $50,000
for the three months ended September 30, 1997. For the nine
months ended September 30, 1998, total revenues were $10,314,000
compared to $4,279,000 in the same period of the prior year, an
increase of 141%. Total Classic revenues were $4,676,000 for the
nine months ended September 30, 1998 as compared to $3,829,000 in
the same period in 1997. Total TAS 2000 revenues were $5,638,000
for the first nine months of 1998 as compared to $450,000 in the
same period in 1997.
Cost of sales increased to $1,637,000 and $4,845,000 for the
three and nine months ended September 30, 1998 as compared to
$1,030,000 and $3,579,000 for the same periods in 1997 as a
result of higher sales volume. Non-cash capitalized software and
license fee amortization was $165,000 and $504,000 for the three
and nine months ended September 30, 1998 as compared to $454,000
and $1,361,000 in the same periods in 1997, because there was no
license fee amortization for the three and nine months ended
September 30, 1998 due to the sale of the Care license back to
Care Corporation Limited.
Research and development expenses were $240,000 and $782,000 for
the three and nine months ended September 30, 1998 compared to
none for the same periods in 1997 as a result of development for
billing and statistics modules related to the TAS 2000 product
line.
Sales and marketing expenses were $575,000 and $1,409,000 for the
three and nine months ended September 30, 1998 as compared to
$541,000 and $1,349,000 in the same periods of 1997 due to an
increased marketing and sales effort to improve the market share
of both of the Company's product lines.
General and administrative expenses decreased to $568,000 and
$1,432,000 in the three and nine months ended September 30, 1998
as compared to $628,000 and $2,007,000 in the same periods in
1997 due to continued efforts to reduce overhead costs.
11
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
-----------------------------------------------------------------
The TAS 2000 product line offers a complete policy and claims
administration system to property and casualty insurance
companies. The newly developed billing module was released to
two customers in June 1998. The TAS 2000 products are being
marketed in both the domestic marketplace and in the United
Kingdom. In the Classic line, the Company is completing the
release later this year of a 32 bit full graphical user interface
[GUI] version.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
On March 31, 1996, the Company was granted by Care the Care
Software License. In exchange for this license, the Company
issued to Care 2,500,000 shares of the Company's common stock and
the Company recorded a software license for $5,000,000. 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, or not reached, the Company had the right to repurchase
all or a portion of the shares issued to Care at $.01 per share.
In the fourth quarter of 1997, the Company made a strategic
decision to allocate its future resources to its TAS 2000 and
Classic product lines rather than the product line obtained via
the Care Software License. In this regard, on March 31, 1998,
the Company negotiated and consummated a buy back by Care of the
Care Software License.
For the buy back of the Care Software License by Care, the
Company received $500,000 on March 31, 1998, and a $4,500,000
non-interest bearing non-recourse [except as to collateral] note,
payable in semi-annual installments of $500,000 which, when
discounted, results in a principal amount of the note of
$3,893,054. Due to the related party nature of the Care Software
License buy back agreement, the Company recorded the $1,143,000
difference between the carrying value of the Care Software
License and the discounted $4,393,000 buy back agreement to
capital in excess of par value at March 31, 1998. Upon receipt
of the first $500,000 payment under the agreement on March 31,
1998, the Company lifted the aforementioned $.01 per share stock
repurchase restriction on the 2,500,000 shares.
The discounted note is collateralized by unencumbered Cover-All
stock owned by Care and Software Investments Limited (a party
related to Care). The number of shares required as collateral
will vary, such that the market value of the shares held as
collateral must equal 150% of the outstanding balance. The
number of shares required as collateral will be adjusted at each
payment date based on the market price of the Company's shares
and the balance outstanding on such date. Based on the market
price of the Company's stock on March 30, 1998, approximately
1,700,000 shares were pledged as collateral. Upon receiving the
second installment of $500,000 on September 30, 1998, the number
of shares required as collateral was recalculated. An additional
12
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
-----------------------------------------------------------------
2,000,000 shares were required as collateral bringing the total
number of shares pledged to approximately 3,700,000. The
carrying value of the note at September 30, 1998 is $3,408,000.
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 were used for
working capital purposes.
At September 30, 1998, the Company had working capital of
$5,310,000, as compared to working capital of $1,647,000 at
December 31, 1997 and $759,000 at September 30, 1997. The
improvement in working capital was due to the payments received
on new contracts signed and the recording of $1,000,000 cash
received as a result of the buy back of the Care Software License
by Care.
The Company believes that its current cash balances and
anticipated cash flows from operations will be sufficient to meet
normal operating needs for the Company in 1998.
YEAR 2000 READINESS
-------------------
The Year 2000 issue ("Y2K") is the result of computer programs
that were written using two digits rather than four to define the
applicable year. As a result, software may recognize a date
using the two digits "00" as 1900 rather than the year 2000.
Computer programs that do not recognize the proper date could
generate erroneous data or cause systems to fail. In addition,
the Year 2000 problem also affects non-information technologies
such as machines, equipment and other systems that contain
embedded microprocessors. The Year 2000 problem could affect the
Company's computers, software programs, equipment and other
systems used by the Company as well as such technologies of other
companies with which the Company does business.
The Company has identified four major areas determined to be
critical for successful Y2K readiness: (1) financial
applications, (2) software products held for sale, (3) customers
and (4) third-party relationships.
In the first area, the Company has installed a managerial and
financial reporting system which is warranted to be Y2K
ready. The cost of this system was approximately $40,000.
Therefore, the Company believes that its financial applications
currently are capable of functioning without substantial Year
13
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
-----------------------------------------------------------------
2000 readiness problems. The Company has also completed an
assessment of its non-information technology systems and does not
believe it will incur significant costs remediating those systems
for Y2K readiness.
In the second area, software products held for sale, the Company
has two product lines, TAS 2000 and Classic. TAS 2000, a recently
developed product, has been tested and is Y2K ready. Costs
incurred in readying this product for the Year 2000 were treated
as normal development expenses. For the Classic product line
Y2K upgrade, the Company spent approximately $192,000 in order
to make the product line Y2K ready and the Company believes that
the modifications to the Classic product line will achieve Y2K
readiness. Moreover, the Company's products are often used by
its customers in systems that also contain third party products.
Therefore, even though the Company's current products may be Year
2000 ready, the failure of such third party products to be Year
2000 ready, or to properly interface with the Company's current
products, may result in customer system failure.
In the third area, the Company is currently having discussions
with its customers concerning Year 2000 readiness. The Company,
however, has little or no control over the actions of these
customers, and thus, there can be no assurance that these
customers will resolve any or all Year 2000 problems with their
own systems (and with their other suppliers and vendors) before
the occurrence of a material disruption or slowdown in their
business which could, in turn, have a material adverse effect on
their demand for the Company's products. In the event that any
of the Company's significant customers do not successfully and
timely achieve Year 2000 readiness, there could be a material
adverse effect on the Company's business, financial condition
and results of operation.
In the fourth area, the Y2K problem creates risk for the Company
from unforeseen problems from third party suppliers, vendors and
service providers. The Company is currently in the process of
identifying those suppliers, vendors and service providers that
are believed to be critical to the Company's business operations.
The Company has identified only one major strategic vendor. The
Company has been verbally advised by, and is in the process of
obtaining written confirmation from, this vendor regarding its
Y2K readiness. The Company does not have extensive electronic
interaction with third parties. To the extent that the Company
ascertains that its suppliers, vendor and/or service providers
will be not Y2K ready, the Company expects to take remedial
action such as procuring new suppliers, vendors or service
providers whose systems are Y2K ready. There can be no
assurance, however, that the Company will be successful in
finding such alternative suppliers, vendors or service providers.
Such failures of these third parties' computer systems could
have a material impact on the Company's ability to conduct its
business.
14
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
-----------------------------------------------------------------
At this time, the Company does not expect to incur any
significant additional expense relating to the Y2K problem and
the Company has not budgeted any expenditures accordingly. Since
the Company believes that its products are Y2K ready, we do
not expect any delays in deliveries of product concerning the Y2K
problem.
The Company has not developed a "worst case" scenario with
respect to Year 2000 issues, but instead has focused its
resources on identifying material, remediable problems and
reducing uncertainties generally, through the Year 2000
assessment described above. The Company is not actively engaged
in preparing any formal Year 2000 contingency plan, and does not
intend to do so unless the Company believes such plans are
merited by the results of its continuing Year 2000 review.
Based on the results to date of its assessment of the Year 2000
issues of which the Company is aware at this time, the Company
does not believe Year 2000 problems will have a material adverse
effect on the Company or its operations. No assurance can be
given, however, that the Company has been able to identify all
potential Year 2000 problems or that if Year 2000 problems are
discovered by the Company in the future, it will be able to
resolve them satisfactorily and at an affordable cost.
Statements in this Form 10Q, other than statements of historical
information are forward-looking statements that are made pursuant
to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements
involve known and unknown risks which may cause the Company's
actual results in future periods to differ materially from
expected results. Those risks include, among others, risk
associated with increased competition, customer decisions, delays
in productivity programs and new product introductions, and other
business factors beyond the Company's control. Those and other
risks are described in the Company's filings with the Securities
and Exchange Commission ["SEC"] over the last 12 months, copies
of which are available from the SEC or may be obtained upon
request from the Company.
15
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
----------------------------------------------------------------
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
--------
27. Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
None.
16
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
-----------------------------------------------------------------
SIGNATURES
-----------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned thereunto duly
authorized.
COVER-ALL TECHNOLOGIES INC.
Date: November 17, 1998 By: /s/ Brian Magowan
--------------------------
Brian Magowan, Chairman
and Chief Executive
Officer
Date: November 17, 1998 By: /s/ John R. Nobel
-------------------------
John R. Nobel, Chief
Financial Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COVER-ALL
TECHNOLOGIES INC. FORM 10-Q/A FOR THE QUARTER ENDED SEPTEMBER 30, 1998, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,278,430
<SECURITIES> 0
<RECEIVABLES> 5,978,798
<ALLOWANCES> 185,610
<INVENTORY> 0
<CURRENT-ASSETS> 8,264,652
<PP&E> 2,734,857
<DEPRECIATION> 2,514,636
<TOTAL-ASSETS> 11,884,628
<CURRENT-LIABILITIES> 2,955,152
<BONDS> 0
0
0
<COMMON> 169,840
<OTHER-SE> 5,759,636
<TOTAL-LIABILITY-AND-EQUITY> 11,884,628
<SALES> 0
<TOTAL-REVENUES> 10,313,764
<CGS> 0
<TOTAL-COSTS> 4,845,307
<OTHER-EXPENSES> 3,623,295
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214,880
<INCOME-PRETAX> 1,630,282
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,630,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,630,282
<EPS-PRIMARY> .10
<EPS-DILUTED> .09
</TABLE>
