SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission file number 0-13124
COVER-ALL TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-2698053
(State(I.R.S. Employer Identification No.)ion or organization)
07410 18-01 Pollitt Drive, Fair Lawn, New Jersey
(Zip Code) (Address of principal executive office)
(201)794-4800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
NASDAQ SmallCap Market
Common Stock, par value $.01 per share Philadelphia Stock Exchange
Securities registered pursuant to Section (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at March 27, 1998 was $45,970,000.
Number of shares outstanding at March 27, 1998:
16,907,522 shares of Common Stock, par value $.01 per share.
The definitive Proxy Statement for the Annual Meeting of Stockholders to be held
June 18, 1998, to be filed with the Commission not later than 120 days after the
close of the Registrant's fiscal year, has been incorporated by reference in
whole or in part for Part III, Items 10, 11, 12 and 13, of the December 31, 1997
Form 10-K.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholder and the Board of Directors of
Cover-All Technologies Inc.
We have audited the accompanying consolidated balance sheet of
Cover-All Technologies Inc. and its subsidiaries as of December 31, 1997, and
the related consolidated statements of operations, changes in stockholders'
equity [deficit], and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in Item 14(a) of this Form 10-K
for the year ended December 31, 1997. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Cover-All Technologies Inc. and its subsidiaries as of December 31,
1997, and the consolidated results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein for the year ended December 31, 1997.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 31, 1998
16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Cover-All Technologies Inc.
We have audited the accompanying consolidated balance sheet of Cover-All
Technologies Inc. and its subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for the years ended December 31, 1996 and 1995. Our
audits also included the financial statement schedule for the years ended
December 31, 1996 and 1995 listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cover-All Technologies Inc. at December 31, 1996 and the consolidated results of
their operations and their cash flows for the years ended December 31, 1996 and
1995 in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Hackensack, New Jersey
April 11, 1997
17
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
December 31,
1 9 9 7 1 9 9 6
Assets:
Current Assets:
<S> <C> <C>
Cash and Cash Equivalents $2,908,167 $ 446,672
Accounts Receivable [Less Allowance for Doubtful Accounts
of $185,610 and $43,870] 1,234,706 1,585,398
Prepaid Expenses 140,783 7,161
---------- -----------
Total Current Assets 4,283,656 2,039,231
---------- -----------
Property and Equipment - At Cost:
Furniture, Fixtures and Equipment 2,625,678 3,072,706
Less: Accumulated Depreciation (2,397,704) (2,662,713)
---------- -----------
Property and Equipment - Net 227,974 409,993
---------- -----------
Software License Held for Sale at December 31, 1997
[Less Accumulated Amortization of $1,750,000 and $750,000]3,250,000 4,250,000
--------- -----------
Capitalized Software [Less Accumulated Amortization of $1,820,857
and $1,005,964] 663,057 1,477,950
Other Assets 59,335 66,181
---------- -----------
Total Assets $8,484,022 $ 8,243,355
========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
18
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
December 31,
1 9 9 7 1 9 9 6
Liabilities and Stockholders' Equity:
Current Liabilities:
<S> <C> <C>
Accounts Payable $ 571,309 $ 536,172
Accrued Liabilities 1,618,676 1,614,612
Unearned Revenue 447,133 1,181,575
---------- -----------
Total Current Liabilities 2,637,118 3,332,359
---------- -----------
Convertible Debentures 3,000,000 --
---------- -----------
Total Liabilities 5,637,118 3,332,359
---------- -----------
Commitments and Contingencies -- --
Stockholders' Equity:
Common Stock, $.01 Par Value, Authorized 30,000,000
Shares, Issued 16,791,122 and 17,351,883 Shares,
1997 and 1996, respectively 167,911 173,519
Capital In Excess of Par Value 25,273,031 27,258,352
Accumulated Deficit (22,594,038) (19,953,668)
Treasury Stock - At Cost - 633,986 Shares -- (2,567,207)
---------- -----------
Total Stockholders' Equity 2,846,904 4,910,996
---------- -----------
Total Liabilities and Stockholders' Equity $8,484,022 $ 8,243,355
========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
19
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
Y e a r s e n d e d
D e c e m b e r 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Revenues:
<S> <C> <C> <C>
Licenses $3,940,000 $ 1,044,460 $ 1,421,866
Maintenance 2,722,000 2,252,378 1,174,150
Professional Services 1,275,573 2,171,834 1,522,738
---------- ----------- -----------
Total Revenues 7,937,573 5,468,672 4,118,754
---------- ----------- -----------
Costs and Expenses:
Cost of Revenues 5,426,000 4,585,727 1,329,693
Research and Development -- 1,846,410 1,932,920
Sales and Marketing 1,900,000 1,124,884 465,045
General and Administrative 2,988,919 3,627,351 2,760,298
Special Charges -- -- 1,165,000
---------- ----------- -----------
Total Costs and Expenses 10,314,919 11,184,372 7,652,956
---------- ----------- -----------
Operating Loss (2,377,346) (5,715,700) (3,534,202)
---------- ----------- -----------
Interest Expense [Income]:
Interest Expense 300,593 1,924 15,220
Interest Income (37,569) (109,302) (5,332)
---------- ----------- -----------
Interest Expense [Income] 263,024 (107,378) 9,888
---------- ----------- -----------
Loss from Continuing Operations (2,640,370) (5,608,322) (3,544,090)
Loss from Discontinued Operations, Without Tax
Benefit -- -- (7,107,987)
Loss on Disposal of Discontinued Operations,
Without Tax Benefit -- (392,872) (749,758)
---------- ----------- -----------
Net Loss $(2,640,370) $(6,001,194)$(11,401,835)
=========== =========== ============
Loss Per Common Share from Continuing
Operations $ (0.16) $ (0.38)$ (0.41)
========== =========== ===========
Net Loss Per Common Share $ (0.16) $ (0.40)$ (1.33)
========== =========== ===========
Weighted Average Number of Common Shares
Outstanding 16,794,000 14,866,000 8,559,000
========== =========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
20
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY [DEFICIT]
- ------------------------------------------------------------------------------
<TABLE>
Retained Total
Capital Earnings Stockholders'
in Excess [Accumulated Treasury Equity
Common Stock of Par Value Deficit] Stock [Deficit]
------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 91,873 $10,401,994 $(2,550,639) $(2,567,207) $ 5,376,021
Sale of 7,567 Shares of Common
Stock under Employee Stock
Purchase Plan 76 12,259 -- -- 12,335
Net Loss -- -- (11,401,835) -- (11,401,835)
-------- ----------- ----------- ---------- -----------
Balance at December 31, 1995 91,949 10,414,253 (13,952,474) (2,567,207) (6,013,479)
Sale of 125,187 Shares of Common
Stock under Stock Option Plans 1,252 370,562 -- -- 371,814
Issuance of 3,256,201 Shares of
Common Stock under the
Restructuring Agreement 32,562 6,479,840 -- -- 6,512,402
Issuance of Five-year Warrants to
Purchase up to an Aggregate of
1,725,694 Shares of Common
Stock under the Restructuring
Agreement -- 465,938 -- -- 465,938
Sale of 1,412,758 Shares of Common
Stock to Software Investments
Limited ["SIL"] 14,128 2,811,388 -- -- 2,825,516
Sale of Five Year Warrants to
Purchase an Aggregate of 196,875
Shares of Common Stock to SIL -- 196,875 -- -- 196,875
Issuance of 2,500,000 Shares of
Common Stock to Care
Corporation Limited 25,000 4,975,000 -- -- 5,000,000
Exercise of Five-year Warrants to
Purchase 862,847 Shares of
Common Stock 8,628 1,544,496 -- -- 1,553,124
Net Loss -- -- (6,001,194) -- (6,001,194)
-------- ----------- ----------- ---------- -----------
Balance at December 31, 1996 173,519 27,258,352 (19,953,668) (2,567,207) 4,910,996
Exercise of 73,225 Stock Options 732 140,233 -- -- 140,965
Retirement of 633,986 Shares of
Treasury Shares (6,340) (2,560,867) -- 2,567,207 --
Compensation Expense for Stock
Options Issued Below Fair Value -- 435,313 -- -- 435,313
Net Loss -- -- (2,640,370) -- (2,640,370)
-------- ----------- ----------- ---------- -----------
Balance at December 31, 1997 $167,911 $25,273,031 $(22,594,038) $ -- $ 2,846,904
======== =========== ============= ========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
21
</TABLE>
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Y e a r s e n d e d
D e c e m b e r 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Loss from Continuing Operations $(2,640,370) $(5,608,322) $(3,544,090)
Adjustments to Reconcile Net Loss to Net Cash
Provided from [Used for] Operating Activities:
Depreciation 182,374 341,798 365,129
Amortization of Capitalized Software and Software
License 1,814,893 2,101,576 489,227
Provision for Uncollectible Accounts 172,190 43,870 --
Noncash Compensation Expense on Granting
of Stock Options 435,313 -- --
Loss on Disposal of Securities -- -- 86,223
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 178,502 134,622 (1,374,169)
Income Taxes Receivable -- 2,300,000 (163,972)
Deferred Income Taxes -- (20,000) 2,800,000
Prepaid Expenses (133,622) (1,806) (2,646)
Other Assets 6,846 420,545 (3,776)
Increase [Decrease] in:
Accounts Payable 116,429 (418,888) 161,561
Accrued Liabilities (77,228) (2,449,304) 3,123,208
Unearned Revenue (734,442) 546,011 513,447
---------- ----------- -----------
Net Cash [Used For] Provided from Continuing
Operating Activities - Forward (679,115) (2,609,898) 2,450,142
---------- ----------- -----------
Loss from Discontinued Operations -- -- (7,107,987)
Loss on Disposal of Discontinued Operations -- (392,872) (749,758)
Decrease [Increase] in Net Assets of Discontinued
Operations -- (1,670,028) (82,238)
---------- ----------- -----------
Net Cash Used For Discontinued Activities -
Forward -- (2,062,900) (7,939,983)
---------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from Sale of Fixed Maturity Investments -- -- 3,786,277
Proceeds from Sale of Equipment 3,640 -- --
Capital Expenditures (3,995) (85,860) (139,818)
Capitalized Software Expenditures -- (1,318,744) (1,000,009)
---------- ----------- -----------
Net Cash [Used For] Provided from Investing
Activities - Forward $ (355) $(1,404,604) $ 2,646,450
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
22
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Y e a r s e n d e d
D e c e m b e r 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Net Cash [Used For] Provided from Continuing
<S> <C> <C> <C>
Operating Activities - Forwarded $ (679,115) $(2,609,898) $ 2,450,142
---------- ----------- -----------
Net Cash Used For Discontinued Activities -
Forwarded -- (2,062,900) (7,939,983)
---------- ----------- -----------
Net Cash [Used For] Provided from Investing
Activities - Forwarded (355) (1,404,604) 2,646,450
---------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from Bridge Financing 750,000 -- --
Payments on Bridge Financing (750,000) -- --
Proceeds from Convertible Debentures 3,000,000 -- --
Payments on Credit Lines -- -- (2,000,000)
Net Proceeds from Issuance of Common Stock -- 4,947,329 12,335
Proceeds from Exercise of Stock Options 140,965 -- --
---------- ----------- -----------
Net Cash Provided from [Used For] Financing
Activities 3,140,965 4,947,329 (1,987,665)
---------- ----------- -----------
Change in Cash and Cash Equivalents 2,461,495 (1,130,073) (4,831,056)
Cash and Cash Equivalents - Beginning of Years 446,672 1,576,745 6,407,801
---------- ----------- -----------
Cash and Cash Equivalents - End of Years $2,908,167 $ 446,672 $ 1,576,745
========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest $ 206,843 $ 1,924 $ 15,220
Income Taxes [Received] $ -- $(2,375,000) $(2,600,000)
</TABLE>
Supplemental Disclosures of Noncash Investing and Financing Activities:
Financing:
In 1996, the Company in connection with the discontinuance of ISD issued
Common Stock and Warrants for $6,978,340 as a result of the restructuring
agreement [See Note 2].
In 1997, the Company retired 633,986 shares of its Common Stock previously
held in the treasury.
Investing:
In 1996, the Company acquired a software license valued at $5,000,000 from
Care by issuing 2,500,000 of its Common Stock crediting Common Stock for $25,000
and capital in excess of par value for $4,975,000 [See Note 9].
In 1997, the Company retired property and equipment having a net book value
of $447,383.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
23
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
Description of Business - COVER-ALL Technologies Inc. [formerly Warner Insurance
Services, Inc.], through its wholly-owned subsidiary, COVER-ALL Systems, Inc.
["COVER-ALL"], licenses and maintains its software products to the
property/casualty insurance industry throughout the United States, Puerto Rico
and the United Kingdom. COVER-ALL also provides professional consulting services
to its customers interested in customizing their software.
Insurance Company - In late 1993, the Company obtained approval from the New
Jersey Department of Insurance to form Alerion Insurance Company of New Jersey
["Alerion"]. Alerion entered into a reinsurance agreement with Clarendon
National Insurance Company ["Clarendon"] to assume a portion of Clarendon's risk
in the New Jersey Assigned Risk Program. The subsidiary was initially
capitalized with $10 million. During the fourth quarter of 1994, the Company
decided to discontinue assuming any underlying insurance risk. This was
accomplished by Alerion commuting all its rights and obligations under the
reinsurance contract back to Clarendon and paying to Clarendon all amounts
received in excess of payments made since the inception of the reinsurance
contract in January 1994. In 1996, Alerion surrendered its Certificate of
Authority to transact insurance business in New Jersey.
Principles of Consolidation - The consolidated financial statements are prepared
on the basis of generally accepted accounting principles and include the
accounts of Cover-All Technologies Inc. and its wholly-owned subsidiary [the
"Company"]. All material intercompany balances and transactions have been
eliminated.
Use of Estimates - Preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Revenue Recognition - Revenue from the sale of software licenses is recognized
when modules are provided to and accepted by the customer. Revenue from
software maintenance contracts is recognized ratably over the life of the
contract. Revenue from professional consulting services is recognized when the
service is provided.
Cash and Cash Equivalents - The Company considers all highly liquid investments,
with a maturity of three months or less when purchased, to be cash equivalents.
Concentrations of Credit Risk - Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash and
cash equivalents and trade accounts receivable.
The Company places its cash and cash equivalents with high credit quality
institutions to limit its credit exposure. The Company believes no significant
concentration of credit risk exists with respect to these investments.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the wide variety of customers, principally major insurance
companies, who are dispersed across many geographic regions. Three major
customers accounted for approximately 53% of the Company's trade accounts
receivable portfolio. The Company performs ongoing credit evaluations of its
customers but does not require collateral. The Company maintains allowances for
potential credit losses.
Impairment - Long-lived assets of the Company are reviewed at least annually as
to whether their carrying value has become impaired pursuant to Statement of
Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No 121
requires long-lived assets, if impaired, to be remeasured at fair value,
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Management also reevaluates the periods of
amortization of long-lived assets to determine whether events and circumstances
warrant revised estimates of useful lives.
24
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
Property and Equipment - Furniture, fixtures and equipment are carried at cost.
Depreciation is recorded on the straight-line method over three to ten years,
which approximates the estimated useful lives of the assets.
Routine maintenance and repair costs are charged to expense as incurred and
renewals and improvements that extend the useful life of the assets are
capitalized. Upon sale or retirement, the cost and related accumulated
depreciation are eliminated from the respective accounts and any resulting gain
or loss is reported as income or expense.
Capitalized Software and Related License - Qualifying software development costs
are capitalized and amortized over a three-year period. There were no software
development costs capitalized during 1997. During the fourth quarter of 1996,
the Company wrote off approximately $500,000 of unamortized software development
costs representing certain modules of the TAS 2000 product line not expected to
be completed in the near future due to reprioritizing of marketing and
development efforts. This write off is reflected in cost of revenues in 1996.
As more fully described in Note 9, in March of 1996, the Company acquired a
software license [the "Care Software License"] by issuing 2,500,000 shares of
its common stock and began amortizing such license over a five-year period. In
the fourth quarter of 1997, the Company made a strategic decision to allocate
its future resources to its TAS and Classic product lines rather than the
product line obtained via the Care Software License. In this regard, on March
31, 1998, the Company negotiated the Care Software License back to the original
seller of the license. The Company also acquired the worldwide reseller rights
(excluding Australia, New Zealand, and the United States).
Advertising Expense - It is the Company's policy to expense advertising costs as
incurred. Advertising expense in 1997, 1996 and 1995 was $56,361, $128,803 and
$73,495, respectively.
Research and Development - No research and development costs were incurred for
the year ended December 31, 1997. For the years ended December 31, 1996 and
1995, $1,846,410 and $1,932,920, respectively, was expensed for research and
development of new software products. These expenses are in addition to software
development costs in 1996 and 1995 which are capitalized and then amortized over
their expected useful lives. See capitalized software and related license above.
Income Taxes - Pursuant to SFAS No. 109, "Accounting for Income Taxes," income
tax expense [or benefit] for the year is the sum of deferred tax expense [or
benefit] and income taxes currently payable [or refundable]. Deferred tax
expense [or benefit] is the change during the year in a company's deferred tax
liabilities and assets. Deferred tax liabilities and assets are determined based
on differences between financial reporting and tax basis of assets and
liabilities, and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Net Loss Per Share - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ["SFAS"] No. 128, Earnings per
Share, which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended December 31, 1997, have been calculated in
accordance with SFAS No. 128. Prior periods loss per share data have been
recalculated and it was determined that no adjustment was necessary.
25
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
Net Loss Per Share [Continued] - SFAS No. 128 supersedes Accounting Principles
Board Opinion No. 15, Earnings per Share, and replaces its primary earnings per
share with a new basic earnings per share representing the amount of earnings
for the period available to each share of common stock outstanding during the
reporting period. Basic earnings [loss] per share is computed by dividing income
[loss] available to common stockholders by the weighted average number of common
shares outstanding during the period. SFAS No. 128 also requires a dual
presentation of basic and diluted earnings per share on the face of the
statement of operations for all companies with complex capital structures.
Diluted earnings per share reflects the amount of earnings for the period
available to each share of common stock outstanding during the reporting period,
while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on per share amounts (i.e., increasing earnings per share or reducing
loss per share). The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants. The Company's options and warrants were not included in the
computation of loss per share because to do so would have been antidilutive for
the periods presented, however, such options and warrants could potentially
dilute basic earnings per share in the future.
The dilutive effect of convertible debt is reflected in dilutive earnings per
share by the application of the if-converted method. Convertible debt will have
a dilutive effect only when the amount of interest (net of tax) on a per share
basis is less than basic earnings per share. The Company's convertible debt does
not affect the loss per share calculation because it would be antidilutive for
the year ended December 31, 1997, however, such convertible debt could
potentially dilute basic earnings per share in the future.
Stock-Based Compensation - The Company follows Accounting Principles Board
Opinion No. 25. "Accounting for Stock Issued to Employees" ["APB No. 25"] with
regard to the accounting for its employee stock options. Under APB No. 25,
compensation expense is recognized only when the exercise price of options is
below the market price of the underlying stock on the date of grant. The
Company applies the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" to non-employee stock-based compensation and the pro forma
disclosure provisions of SFAS No. 123 to employee stock-based compensation.
Presentation - Certain items have been reclassified from the prior year to
conform with the current year's presentation.
[2] Discontinued Operations
Insurance Services Division ["ISD"] revenues decreased substantially in 1994 and
1995 because of lower fees attributable to the reduced number of policies and
claims being handled on contracts that were winding down or were completed. As a
result, ISD had been suffering losses and operating under considerable
uncertainty as a result of the pendency of lawsuits with certain affiliates of
The Robert Plan Corporation ["The Robert Plan Corporation"] as described in Note
4. In March 1996, the Company entered into a series of agreements which provided
for the transfer and discontinuance of its ISD operations and the issuance of
the Company's Common Stock and Warrants to certain customers of the ISD business
in exchange for the release of the Company from its obligations to provide
insurance services to ISD customers and to The Robert Plan Corporation in
exchange for the settlement and dismissal of lawsuits with The Robert Plan
Corporation. Effective March 1, 1996 the Company has discontinued providing
insurance processing services to the automobile insurance industry and has
reflected those activities as discontinued operations in its Financial
Statements.
26
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[2] Discontinued Operations [Continued]
As part of the restructuring transactions [the "Restructuring"], the Company
transferred certain assets, employees, contracts and leased premises relating to
its ISD business to a subsidiary of The Robert Plan Corporation, which has
replaced the Company as the provider of insurance services to the ISD customers.
In exchange for settling the lawsuits, releasing the Company's obligations to
provide insurance services under its contracts and executing the mutual
releases, the Company issued to certain of the ISD customers and certain parties
to the litigation: (a) a total of 3,256,201 shares of the Company's Common
Stock, (b) five-year Warrants to purchase up to an additional aggregate of
1,553,125 shares of the Company's Common Stock at $2.00 per share and (c) cash
of $2.5 million. The holders of these securities can request the Company to
register these securities with such registration costs to be paid by the
Company. The Company had the option, exercisable for a period of six months
[from March 1, 1996], to (i) purchase 50% of the aforementioned 3,256,201 shares
at a cash price equal to the greater of $3.00 or 50% of the then market price of
a share of the Company's Common Stock and (ii) acquire 50% of the 1,553,125
Warrants at a cash price equal to $1.00 per Warrant. On March 31, 1996, the
Company assigned its aforementioned repurchase option applicable to the
Company's Common Stock and Warrants to Software Investment Limited ["SIL"],
which SIL subsequently exercised, as discussed in Note 9. As a result of the
issuance of shares described in Note 9, the antidilution provisions of the
Warrants required an adjustment of shares to 1,725,694 from 1,553,125 and a
price adjustment to $1.80 from $2.00 per share.
The discontinuance of ISD resulted in a loss on disposal of discontinued
operations of $392,872 in 1996 and $749,758 in 1995.
The Consolidated Statement of Operations for 1995 has been restated to report
the net results of the ISD operations as loss from discontinued operations. The
results of ISD are summarized as follows:
Year ended
December 31, 1995
Net Revenues $ 20,228,212
============
Loss from Operations Before Income Taxes $ (7,107,987)
Income Taxes/[Benefit] --
------------
Loss from Discontinued Operations $ (7,107,987)
============
[3] Special Charges
In December 1994, management instituted a plan to down-size the COVER-ALL
organization and reduce the rate of product development to a level consistent
with the reduced level of customer installations planned for 1995. Costs of
$1,165,000 were incurred and written off in the first quarter of 1995 for
executive and other severance costs as well as additional software development
costs and have been reflected as special charges in the 1995 Statement of
Operations.
[4] Litigation
In March 1994, Material Damage Adjustment Corporation ["MDA"], a subsidiary of
The Robert Plan Corporation and a subcontractor for the Company performing
claims processing work, instituted an action in the Superior Court of New Jersey
seeking injunctive relief requiring that the Company turn over to MDA in excess
of $1 million that the Company had withheld from certain claims fees allegedly
owed to MDA. This action arose out of the Company's servicing contract with the
Market Transition Facility of New Jersey ["MTF"]. The Company had withheld the
funds as a set off to cover unpaid invoices for data processing services
rendered by the Company for MDA. MDA also added a claim for approximately $2.5
million of surcharge fees paid to the Company by the MTF. The MTF was brought
into the case to resolve disputes between MTF and MDA over refunds of claims
fees paid on claims later closed without payment. The Company vigorously
contested MDA's claims and asserted counterclaims against MDA to establish the
Company's entitlement to the disputed sums.
27
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[4] Litigation [Continued]
In May 1994, the Company filed an action in the Superior Court of New Jersey
against Lion Insurance Company, National Consumer Insurance Corporation, and The
Robert Plan Corporation seeking payment of unsatisfied invoices under an April
1991 agreement totaling approximately $2.7 million. Under the agreement, the
Company agreed to provide data processing services for a three-year term in
support of Lion Insurance Company's "depopulation pool" automobile insurance
business in New Jersey. Lion Insurance Company is a subsidiary of The Robert
Plan Corporation whose affiliate, National Consumer Insurance Corporation, has
taken over the "depopulation pool" business. The Robert Plan Corporation
guaranteed Lion's performance and payment.
On March 1, 1996, the two lawsuits described above were settled as part of the
overall settlement with certain of the Company's insurance services customers.
The settlement and restructuring transactions are described in Note 2.
On February 2, 1995, Sol M. Seltzer commenced an action in the Supreme Court of
New York against Mr. Krieger, the then Chairman of the Board and former
President of the Company, and each of the other then members of the Board of
Directors. The plaintiff, Sol M. Seltzer, who purported to sue derivatively on
behalf of the Company and COVER-ALL, sought among other things, compensatory
damages in an amount to be determined at trial and punitive damages in an
aggregate amount of $12 million. Sol M. Seltzer was a vice president of the
Company and a director of COVER-ALL until he resigned from such positions in
late 1994. The plaintiff alleged, among other things, breach of fiduciary duty,
waste and mismanagement, as well as alleged wrongful acts by the Board and the
former President, including among other things, self-dealing and misuse of
corporate funds by the former President. The Company, and the other defendants,
contested Mr. Seltzer's claims and on July 23, 1996 won a motion to dismiss the
case. Mr. Seltzer filed a Notice of Appeal; however, the Notice of Appeal
initially was rejected for defects of form. Subsequently, Mr. Seltzer was
granted leave to file a corrected Notice of Appeal and did so on or about
November 26, 1996. However, Mr. Seltzer's time to "perfect" his appeal ran out
on or about August 26, 1997. Accordingly, the appeal is dismissible for failure
to prosecute and the Company considers this matter resolved.
On February 6, 1995, the Company commenced an action in the Superior Court of
New Jersey against Sol M. Seltzer, a former vice president of the Company and a
director of COVER-ALL, alleging fraud, mismanagement, negligence,
misrepresentation, and breach of fiduciary duty with respect to the development
and implementation of COVER-ALL's TAS 2000 software product. The Company claimed
compensatory and punitive damages in an amount to be determined at trial. The
case was largely inactive pending the motion to dismiss Seltzer's New York
action. After the dismissal of the New York case brought by Seltzer, the Company
voluntarily dismissed the New Jersey case without prejudice.
The Company is not currently named as a defendent in any lawsuit.
28
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[5] Commitments, Contingencies and Other
Operating Leases - The Company leases office space in Fair Lawn, NJ, where it
occupies approximately 36,000 square feet, under a lease which expires in 2000.
The lease includes escalation clauses for increased real estate taxes, insurance
and maintenance expenses. The lease provides for a renewal period of five years.
Rent expense for COVER-ALL office space was $311,240, $334,170 and $174,710, for
the years ended December 31, 1997, 1996 and 1995, respectively.
The Company's future minimum rental commitments under its noncancellable
operating lease in effect at December 31, 1997 follows: years ending December
31, 1998 -- $400,000; 1999 -- $400,000; 2000 -- $170,000; thereafter -- NONE.
Employment Contracts - The Company has employment contracts with certain of its
executives with various dates of expiration through the year ending December 31,
1998. Certain of the contracts are automatically renewable from year to year.
The aggregate annual commitment for future salaries at December 31, 1997 was
approximately $650,000.
Related Party Transactions - A director of the Company in 1995 and 1996 and for
part of 1997 is a partner in a law firm with which the Company incurred legal
expenses of approximately $290,000, $600,000 and $360,000, in 1997, 1996 and
1995, respectively. An attorney associated with the Chairman provides legal
services to the Company. The Company incurred approximately $82,000 in legal
costs with this attorney in 1997.
In 1997, the Company entered into (i) an agreement with a consulting firm, in
which the Chairman is a managing partner, to engage the Chairman and Chief
Executive Officer of the Company, pursuant to which, the Company will pay the
consulting firm $12,500 per month, plus expenses, five-year options to purchase
400,000 shares of Common Stock, exercisable at $1.25 per share and a bonus
payment of $100,000 if the Company achieves projected sales goals for the 1997
fiscal year, which sales goals were achieved, (ii) an agreement to engage a
director of the Company as Chief Financial Officer of the Company on an interim
basis by granting him five-year options to purchase 195,000 shares of Common
Stock, exercisable at $2.00 per share, representing 30,000 shares for each month
during which he was engaged to act as Chief Financial Officer through the end of
his contract term of September 30, 1997, and paid him $37,500 through the end of
the fiscal year for continuation of his services as interim Chief Financial
Officer, and (iii) a consulting agreement with a director of the Company, with a
term engagement through January 15, 1998, and providing compensation consisting
of a five-year option to purchase 25,000 shares of Common Stock, exercisable at
$1.25 per share, with respect to each month during which he performs consulting
services and an additional 250,000 shares of Common Stock, exercisable at $1.25
per share, as a result of the Company achieving certain sales goals in the 1997
fiscal year.
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.
29
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[5] Commitments, Contingencies and Other [Continued]
Major Customers - The Company had a portion of its revenues from one customer in
1997 and three customers in 1996 and 1995 as follows:
Y e a r s e n d e d
D e c e m b e r 31,
Customer 1 9 9 7 1 9 9 6 1 9 9 5
-------- ------- ------- -------
Inspire Insurance Solutions 20% -- --
Sun Alliance Management Services -- 27% 16%
Glatfelter Insurance Group -- 13% --
Millers Insurance Group -- 13% --
New Jersey State Medical Underwriters -- -- 18%
Secura, Inc. -- -- 11%
In 1997, 1996 and 1995 export sales were made to a U.K. customer of
approximately $500,000, $1,465,000 and $640,000, respectively.
Credit Lines - At December 31, 1994, the Company had outstanding $2 million in
short-term borrowings against its $4 million secured credit line with a bank. In
1995 the Company repaid the $2 million and the credit line was withdrawn.
[6] Income Taxes
An analysis of the components of the income tax provision is as follows:
Y e a r s e n d e d
D e c e m b e r 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Current:
Federal $ -- $ -- $(2,800,000)
State -- -- --
-------- --------- ----------
Totals -- -- (2,800,000)
-------- --------- ----------
Deferred:
Federal -- -- 2,800,000
State -- -- --
-------- --------- ----------
Totals -- -- 2,800,000
-------- --------- ----------
Totals $ -- $ -- $ --
------ ======== ========= ==========
The income tax provision [benefit] for continuing operations differs from the
amount computed by applying the statutory federal income tax rate as follows:
Y e a r s e n d e d
D e c e m b e r 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Computed Federal Statutory Tax [Benefit] $(900,000)$(1,781,000)$(1,204,991)
Valuation Allowance to Reduce Deferred Tax
Asset 900,000 1,781,000 1,204,991
Actual Provision [Benefit] $ -- $ -- $ --
-------------------------- ========= ========== ===========
30
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[6] Income Taxes [Continued]
The components of the net deferred tax asset and liability were as follows:
D e c e m b e r 31,
--------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Deferred Tax Assets - Current:
Deferred Revenue $ -- $ -- $1,185,000
Reserve for Contract Adjustments -- -- 2,075,000
Bad Debts 74,000 18,000 186,000
Reserve for Loss on Disposal 185,000 414,000 300,000
Other - Net 13,000 36,000 31,000
Valuation Allowance (272,000) (468,000) (3,777,000)
--------- ---------- ----------
Current Deferred Tax Asset $ -- $ -- $ --
-------------------------- ========= ========== ==========
Deferred Tax Asset [Liability] - Long-Term:
Net Operating Loss Carryforward $9,500,000 $8,421,000 $2,790,000
Capitalized Software (265,000) (590,000) (600,000)
Depreciation and Amortization 91,000 200,000 200,000
Valuation Allowance (9,326,000)(8,031,000) (2,410,000)
---------- ---------- ----------
Long-Term Deferred Tax Liability $ -- $ -- $ (20,000)
-------------------------------- ========= ========== ==========
The net change during 1997 in the total valuation allowance is $1,099,000.
At December 31, 1997, the Company had approximately $3,000,000, $14,000,000 and
$7,000,000 of operating tax loss carryforwards expiring in 2012, 2011, and 2010,
respectively. The Tax Reform Act of 1986 enacted a complex set of rules which
limit a company's ability to utilize net operating loss carryforwards and tax
credit carryforwards in periods following an ownership change. These rules
define an ownership change as a greater than 50 percent point change in stock
ownership within a defined testing period which is generally a three-year
period. As a result of stock issued relative to the Restructuring and other
stock which may be issued related to the Debentures [see Note 12] the Company
may experience an ownership change and consequently the Company's utilization of
its net operating losses could be significantly limited.
[7] Stock Option and Stock Purchase Plans
In March 1995, the Company adopted the 1995 Employee Stock Option Plan, which
was ammended in April 1997. Options for the purchase of up to 2,000,000 shares
may be granted by the Board of Directors to employees of the Company at an
exercise price determined by the Board of Directors on the date of grant.
Options may be granted as incentive or non-qualified stock options with a term
of not more than ten years. At December 31, 1997, 1996 and 1995, 341,775,
210,175 and 482,325 shares, respectively, were available for grant.
On November 15, 1994 the Company adopted the 1994 Stock Option Plan for
Independent Directors. Options for the purchase of up to 300,000 shares may be
granted to directors of the Company who are not employees ["non-employee
director"]. Each non-employee director who is serving on "Date of Grant" shall
automatically be granted an option to purchase 10,000 shares of Common Stock at
the fair market value of Common Stock on the date the option is granted. Dates
of Grant are November 15, 1994, 1999, 2004, and 2009 for non-employee directors
serving on November 15, 1994. For individuals who become non-employee directors
after November 15, 1994, such directors' Dates of Grant will be the date such
individual becomes a director and the fifth, tenth and fifteenth anniversaries
of such date. Options are exercisable in full 6 months after the applicable date
of grant and expire 5 years after the date of grant. At December 31, 1997, 1996
and 1995, 240,000, 240,000 and 260,000 shares, respectively, were available for
grant.
31
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[7] Stock Option and Stock Purchase Plans [Continued]
In October 1994, the Company adopted the 1994 Non-Qualified Stock Option Plan
for Consultants. Options for the purchase of up to 200,000 shares may be granted
by the Board of Directors to any individual who has entered into a written
consulting contract with the Company. The non-qualified stock options will have
a 5 year term from date of grant and will be exercisable at a price and time as
determined by the Board of Directors on the date of grant. At December 31, 1997,
1996 and 1995, 105,000, 105,000 and 105,000 shares, respectively, were available
for grant.
In June 1991, the Company adopted the Key Employee Stock Option Plan [the "KESO
Plan"]. Options for the purchase of up to 721,875 shares may be granted by the
Board of Directors to key employees of the Company at an exercise price
determined by the type of option granted. Options may be granted as incentive or
non-qualified stock options with a term of not more than ten years from the date
of grant. At December 31, 1997, 1996 and 1995, 319,938, 279,938 and 229,938
shares, respectively, were available for grant.
A summary of the changes in outstanding Common Stock options for all outstanding
plans is as follows:
Weighted-Average
Remaining Weighted-Average
Shares Per Share Contractual Life Exercise Price
Balance, December 31, 1994 453,350 $2.63 - 10.00 2.9 years $ 4.17
Granted 462,225 1.13 - 3.75 2.1 years 1.80
Canceled (225,608) 3.13 - 10.00 3.87
Balance, December 31, 1995 689,967 1.13 - 10.00 2.3 years $ 2.66
Granted 337,250 2.00 - 5.25 2.9 years 3.20
Exercised (125,187) 1.75 - 3.53 2.97
Canceled (233,205) 1.75 - 10.00 3.75
Balance, December 31, 1996 668,825 1.13 - 5.25 2.6 years $ 2.49
Granted 1,410,000 1.25 - 3.81 3.9 years 1.48
Exercised (73,225) 1.75 - 2.00 1.93
Canceled (186,600) 1.38 - 5.25 2.08
Balance, December 31 1997 1,819,000 1.13 - 5.00 3.4 years $ 1.70
The options granted during 1997 are distributed as follows, relative to the
difference between the exercise price and the stock price at grant date:
Number Weighted-AverageWeighted-Average
Granted Exercise Price Fair Value
Exercise Price Above Stock Price 100,000 $ 2.00 $ .74
Exercise Price at Stock Price 215,000 1.72 1.10
Exercise Price Below Stock Price 1,095,000 1.38 1.38
----------- --------- -------
Totals 1,410,000 $ 1.48 $ 1.29
------ =========== ========= =======
32
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[7] Stock Option and Stock Purchase Plans [Continued]
Exercisable options at December 31, 1997, 1996 and 1995 were as follows:
Number of Weighted-Average
December 31, Exercisable Options Exercise Price
1997 1,582,334 $ 1.69
1996 351,909 $ 2.29
1995 302,675 $ 1.69
The following table summarizes information about stock options at December 31,
1997:
<TABLE>
Exercisable
Outstanding Stock Options Stock Options
Weighted-Average
Range of Remaining Weighted-Average Weighted-Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
$1.13 - $1.25 1,000,000 3.9 Years $ 1.24 800,000 $ 1.23
$1.38 - $1.94 260,150 3.2 Years $ 1.61 255,150 $ 1.61
$2.00 - $2.25 448,850 2.8 Years $ 2.02 448,850 $ 2.02
$3.81 - $5.00 110,000 2.6 Years $ 4.76 78,334 $ 4.81
--------- ------------------------ --------- -------
1,819,000 3.4 Years $ 1.70 1,582,334 $ 1.69
========= ========= ======= ========= =======
</TABLE>
In 1985, the Board of Directors authorized, and the stockholders approved, the
adoption of an Employee Stock Purchase Plan [the "Purchase Plan"]. An aggregate
of 344,531 shares of the Company's Common Stock could be issued under the
Purchase Plan. As of December 31, 1995, 207,681 shares were issued under the
Purchase Plan which was terminated in March 1995.
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, for stock options issued
to employees in accounting for its stock option plans. The exercise price of
certain options issued during 1997 was below the market price at the date of
grant. Accordingly, compensation expense of $435,313 was recorded in 1997. The
exercise price for all stock options issued during 1996 and 1995 was equal to
the market price of the Company's stock at the date of grant. Accordingly, no
compensation expense has been recognized for the Company's stock-based
compensation plans for fiscal years 1996 and 1995.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The weighted average
fair value of stock options granted to employees used in determining pro forma
amounts is estimated at $1.29, $1.95 and $.94 during 1997, 1996 and 1995,
respectively.
33
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[7] Stock Option and Stock Purchase Plans [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 SFAS No. 123, Accounting for Stock Based
Compensation. The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model for the pro forma amounts with the
following weighted average assumptions:
D e c e m b e r 3 1,
------------------------------------
1 9 9 7 1 9 9 61 9 9 5
------- --------------
Risk-Free Interest Rate 6.70% 6.29% 6.74%
Expected Life 3.8 Years 3.3 Years 3.6 Years
Expected Volatility 88% 89% 70%
Expected Dividends None None None
The pro forma amounts are indicated below [in thousands, except per share
amounts]:
<TABLE>
Y e a r s e n d e d
D e c e m b e r 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
<S> <C> <C> <C>
Net Loss as Reported $ 2,640 $ (6,001) $ (11,402)
Pro Forma Net Loss $ 3,787 $ (6,166) $ (11,660)
Loss Per Share as Reported $ (.16)$ (.40) $ (1.33)
Pro Forma Loss Per Share $ (.23)$ (.41) $ (1.36)
</TABLE>
[8] Common Stock
On November 17, 1989, the Company adopted a Stockholder Rights Plan and declared
a dividend distribution of one Right for each outstanding share of Common Stock.
Under certain conditions, each Right shall initially entitle the registered
holder thereof to purchase one-fifth of one share of Common Stock at a purchase
price of $10.00, subject to adjustment. The Rights will be exercisable only if
(i) a person or group has acquired, or obtained the right to acquire 15% or more
of the outstanding shares of Common Stock (other than a person that acquires the
stock directly from the Company in a transaction that the Company's independent
Directors determine to be in the best interests of the Company and its
stockholders] or (ii) following the commencement of a tender offer or exchange
offer for 15% or more of the then outstanding shares of Common Stock. Each Right
will entitle its holder to receive, upon exercise, Common Stock (or, in certain
circumstances, cash, property, or other securities of the Company] having a
value equal to two times the purchase price of the Right under certain
circumstances, including the acquisition of 20% of the outstanding Common Stock.
All rights holders, except the acquiror, may purchase a number of shares of
Common Stock equal to $10.00 (subject to adjustment under the terms of the
Rights Plan] divided by 50% of the market price of the Company's Common Stock on
the date which is ten days after a public announcement by the Company that a
person or group has acquired, or obtained the right to acquire, 15% or more of
the outstanding shares of Common Stock. In the event that the Company is
acquired in a merger or other business combination transaction in which the
Company is not the surviving corporation, the rights holders may purchase the
acquiror's shares at the similar discount.
The Company may redeem the Rights at $.01 each until ten days following the date
on which a person or group of affiliated persons has acquired, or obtained the
right to acquire, the beneficial ownership of 15% or more of the outstanding
shares of Common Stock. The Rights will expire on December 4, 1999 unless
earlier redeemed by the Company.
34
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[9] Sale of Stock and Warrants, and Purchase and Sale of Care Software License
On March 31, 1996, the Company entered into a series of transactions with
Software Investments Limited ["SIL"] and Care Corporation Limited ["Care"]
whereby the Company:
[A] sold to SIL for total proceeds of $3,022,391: (i) 1,412,758 shares of the
Company's Common Stock for $2.00 per share and (ii) five-year warrants to
purchase an aggregate of 196,875 shares of the Company's Common Stock
exercisable at $2.00 per share for $1.00 per warrant ($196,875). As a result of
the issuance of the 12 1/2% Convertible Debentures discussed in Note 12, the
warrants required an adjustment of shares to 206,152 and a price adjustment to
$1.91 per share. As of December 31, 1997, no warrants had been exercised.
[B] assigned to SIL the rights it retained in the Restructuring [see Note 2]
to repurchase within six months 1,628,100 shares of the Company's Common Stock
for the greater of $3.00 per share or 50 percent of the then market price of the
Company's Common Stock and its rights to purchase from the warrant holders for
$1.00 per share five-year warrants to acquire 776,562 shares of the Company's
Common Stock at $2.00 per share. As a result of the issuance of the above
mentioned shares, the antidilution provisions of the Warrants required an
adjustment from 776,562 shares at $2.00 per share to 862,847 shares at $1.80 per
share. As a result of the issuance of the 12 1/2% Convertible Debentures
discussed in Note 12, the Warrants may require a further adjustment to the
number of shares purchasable and the exercise price.
On May 1, 1996, SIL acquired 1,628,100 shares of the Company's Common Stock at
$3.00 per share, and at $1.00 per Warrant, 862,847 Warrants to acquire 862,847
shares of the Company's Common Stock at $1.80 per share. SIL exercised these
Warrants on May 6, 1996, resulting in the Company receiving $1,553,124 in
additional equity.
In addition, on March 31, 1996, the Company was granted by Care the exclusive
license for the Care software systems for use in the workers' compensation
claims administration markets in Canada, Mexico and Central and South America.
In exchange for this license, the Company issued to Care 2,500,000 shares of the
Company's Common Stock using the $2.00 per share price in [A] above to value the
license as $5,000,000 at March 31, 1996. The license agreement was revised on
March 14, 1997, and the Company engaged Care as its exclusive sales agent for a
monthly fee of $10,000 against commissions of 20%. Depending upon the level of
revenue reached, or not reached, under the license agreement, the Company has
the right to repurchase all or portions of the shares issued to Care at $.01 per
share.
In the fourth quarter of 1997, the Company made a strategic decision to allocate
its future resources to its TAS and Classic product lines rather than the
product line obtained via the Care Software License. In this regard, on March
31, 1998, the Company negotiated a buy back by Care of the Care Software
License.
For the buy back of Care Software License by Care, the Company received $500,000
on March 31, 1998, and a $4,500,000 non-interest bearing note, payable in
semi-annual installments of $500,000 which, when discounted, results in a
principal amount of the note of $3,893,054. The discounted note is
collateralized by unencumbered Cover-All stock owned by Care. The number of
shares required as collateral will vary, such that the market value of the
shares held as collateral must equal 150% of the outstanding balance. The number
of shares required as collateral will be adjusted at each payment date based on
the market price of the Company's shares and the balance outstanding on the
date. Based on the market price of the Company's stock on March 30, 1998,
approximately 1,700,000 shares were pledged as collateral. Upon receipt of the
first $500,000 payment under the agreement on March 31, 1998, the Company lifted
the aforementioned $.01 per share stock repurchase restriction on the 2,500,000
shares. The Company also acquired worldwide reseller rights (excluding
Australia, New Zealand, and the United States.
35
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- ------------------------------------------------------------------------------
[9] 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 re-seller rights to the Care software, and the Company agreed to
grant to Care certain non-exclusive re-seller rights to the Classic and TAS
software.
Based on the above, and due to the related party nature of the Care Software
License buy back agreement, the Company will record the $1,143,054 difference
between the carrying value of the Care Software License and the discounted
$4,393,054 buy back agreement to capital in excess of par value in the first
quarter of 1998.
[10] Quarterly Financial Data [Unaudited]
Summarized quarterly financial data is as follows:
[Dollar amounts in thousands except per share data]
<TABLE>
Quarter
First Second Third Fourth
Year ended December 31, 1997:
<S> <C> <C> <C> <C>
Revenues $ 883 $ 1,338 $ 2,058 $ 3,658
Loss from Continuing Operations(1) (1,586) (1,010) (240) 196
Loss on Disposal of Discontinued
Operations -- -- -- --
Net Loss (1,586) (1,010) (240) 196
Loss Per Common Share from Continuing
Operations (0.09) (0.06) (0.01) 0.01
Net Loss Per Common Share (0.09) (0.06) (0.01) 0.01
Loss Per Common Share from Continuing
Operations Assuming Dilution -- -- -- --
Net Loss Per Common Stock Assuming
Dilution -- -- -- 0.01
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 Common Share from Continuing
Operations (0.07) (0.08) (0.12) (0.10)
Net Loss Per Common 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 Common Share from Continuing
Operations (0.25) (0.03) (0.05) (0.08)
Net Loss Per Common Share (0.41) (0.40) (0.18) (0.34)
(1)The first quarter of 1995 was adversely affected by the special charges as
described in Note 3.
</TABLE>
36
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
- ------------------------------------------------------------------------------
[11] Supplemental Data
Accrued liabilities consist of the following:
Years ended
December 31,
1 9 9 7 1 9 9 6
------- -------
Accrued Payroll, Benefits, Temporary Help, Consulting
and Severance $ 358,447 $ 371,186
Accrued Expenses of the Discontinued Operations Not
Assumed by The Robert Plan Corporation 461,506 1,036,736
Accrued Software Costs 312,764 --
Accrued Interest Costs 93,750 --
Accrued Professional Fees 150,000 --
Other 242,209 206,690
---------- -----------
Totals $1,618,676 $ 1,614,612
------ ========== ===========
[12] Convertible Debentures
On March 14, 1997, the Company obtained $750,000 in bridge financing through the
sale of 12 1/2% Convertible Notes to three major stockholders. The principal and
accrued interest on the bridge financing was repaid in full on March 31, 1997
out of the proceeds from the permanent financing discussed below.
On March 31, 1997, the Company sold $3,000,000 of 12 1/2% Convertible Debentures
due March 2002 [the "Debentures"] to an institutional investor. The Debentures
were sold at face value, pay interest quarterly and are convertible, in whole or
in part, into shares of Common Stock of the Company at $1.25 per share, subject
to adjustment. Neither the debentures nor the shares of Common Stock issuable
upon any conversion of such debentures have been registered under the Securities
Act of 1933 or any applicable state securities law. The Debentures contain
certain covenants which restrict the Company's ability to incur indebtedness,
grant liens, pay dividends or other defined restricted payments and make
investments and acquisitions. The Company cannot redeem the Debentures for two
years and thereafter may only call the Debentures if the closing price of the
Company's Common Stock for the twenty business days preceding the redemption
date exceeds $1.50. The net proceeds from this permanent financing were used to
repay the bridge financing and the remainder is being used for working capital
purposes.
[13] 401(k) Plan
After completing a year of service and working 1,000 hours, employees age 21 and
over are eligible to participate in the Company's Tax Saver 401(k) Salary
Reduction Plan. Employees can save 1% to 15% of pay on a pre-tax basis to a
current annual maximum of $9,500. The Company matches $.50 for each $1.00 of the
first 5% of pay employees elect to defer. Expenses associated with this plan in
1997, 1996 and 1995 were approximately $47,900, $21,100 and $18,400,
respectively.
[14] Fair Value of Financial Instruments
In assessing the fair value of its cash and cash equivalents, trade receivables
and trade payables management concluded that the carrying amount of these
financial instruments approximates fair value because of their short maturities.
Management estimates that the carrying amount of its convertible debentures,
based on current rates and terms at which the Company could borrow funds, is
approximately $3,050,000.
37
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
- ------------------------------------------------------------------------------
[15] New Authoritative Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ["FASB"] issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company is in the
process of determining its preferred format. The adoption of SFAS No. 130 will
have no impact on the Company's consolidated results of operations, financial
position or cash flows.
In June 1997, the FASB has issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. Financial
statement disclosures for prior periods are required to be restated. The Company
is in the process of evaluating the disclosure requirements. The adoption of
SFAS No. 131 will have no impact on the Company's consolidated results of
operations; financial position or cash flows.
In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants, after clearance by the FASB, issued
Statement of Position (SOP) 97-2, Software Revenue Recognition. This SOP
supersedes SOP 91-1 of the same name and provides the most recent guidance on
applying generally accepted accounting principles in recognizing revenue on
software transactions. SOP 97-2 is effective for transactions entered into in
fiscal years beginning after December 15, 1997.
SOP 97-2 requires that in arrangements to deliver software or a software system
that does not require significant production, modification, or customization,
revenue should be recognized when there is persuasive evidence that an
arrangement does in fact exist; delivery has occurred; the fee is fixed or
determinable; and collectibility is probable. If the software or software system
selling contract arrangement, either alone or together with other products or
services, requires significant production, modification or customization
construction type/production type contract accounting should be used for the
entire arrangement. Such accounting would recognize revenues and costs on a
contract arrangement as it progresses toward completion, rather than deferred
recognition of these items until persuasive evidence of delivery has occurred.
In software or software system selling arrangements that consist of multiple
elements (that is, additional software products, upgrades/enhancements, rights
to exchange or return software, postcontract customer support, or services), and
contract accounting does not apply, the fee must be allocated to the various
elements based on vendor-specific objective evidence of fair values. In general,
if sufficient vendor-specific objective evidence of fair values does not exist,
all revenue from the arrangement should be deferred until such sufficient
evidence exists, or until all elements have been delivered. The principle
difference between SOP 97-2 and its predecessor SOP 91-1 is in the accounting
for multiple-element arrangements based on vendor-specific objective evidence of
fair values.
Cover-All generally does not sell its products, Classic and TAS, under
multiple-element arrangements. Classic and TAS are standard "off the shelf"
application program packages, and while these packages may be tailored to meet
customer requirements, the core package is the standard product sold. Management
does not believe that SOP 97-2 will materially affect the way the Company
recognizes revenue.
There is a proposed SOP dated February 11, 1998, which would defer for one year
the provision of SOP 97-2 with respect to what constitutes vendor-specific
objective evidence of fair value for multiple-element arrangements in which a
software element is sold only in combination with postcontract customer support
or other service elements. For those multiple-element arrangements,
determination of the portion of the sales price allocable to the software
element may be based on a reasonable method.
. . . . . . . . . .
38
<PAGE>
COVER-ALL TECHNOLOGIES INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------
<TABLE>
Balance at
Beginning Balance at
of Period Additions Deductions(1) End of Period
Accumulated amortization of
capitalized software and software
license:
<S> <C> <C> <C> <C>
Year Ended December 31, 1997 $1,755,964 $1,814,893 $ -- $ 3,570,857
Year Ended December 31, 1996 $ 489,227 $2,101,576 $ 834,839 $ 1,755,964
Year Ended December 31, 1995 $ -- $ 489,227 $ -- $ 489,227
(1) Represents primarily a write-off of $506,000 of capitalized software
costs in 1996.
</TABLE>
<TABLE>
Allowance for Doubtful Accounts:
<S> <C> <C> <C> <C>
Year Ended December 31, 1997 43,870 $ 172,190 $ 30,450 $ 185,610
Year Ended December 31, 1996 -- $ 43,870 $ -- $ 43,870
Year Ended December 31, 1995 -- $ -- $ -- $ --
</TABLE>
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].
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
42
<PAGE>
Registration Statement on Form 8-A (Commission File No. 13-2698053)
filed on October 20, 1989].
10(t)(i) Severance Agreement, dated as of November 28, 1989, between the
Registrant and Harvey Krieger [incorporated by reference to Exhibit 1
to the Registrant's Form 8-K (Commission File No. 0-13124) filed on
December 6, 1989].
10(t)(ii) Severance Agreement, dated August 15, 1990, between the Registrant
and Bradley J. Hughes [incorporated by reference to Exhibit 10(o)(i)
to the Registrant's Annual Report on Form 10-K (Commission File No.
0-13124) filed on January 24, 1991].
10(t)(iii) Severance Agreement, dated August 15, 1990, between the Registrant
and Theodore I. Botter [incorporated by reference to Exhibit 10(t)(i)
to the Registrant's Annual Report on Form 10-K (Commission File No.
0-13124) filed on January 24, 1991].
10(u)(i) Restructuring Agreement, dated as of March 1, 1996, by and among the
Registrant, Atlantic Employers Insurance Company, Pacific Employers
Insurance Company, Electric Insurance Company, The Robert Plan
Corporation, Material Damage Adjustment Corporation, Lion Insurance
Company, and National Consumer Insurance Company [incorporated by
reference to Exhibit 10.1 to the Registrant's Form 8-K (Commission
File No. 0-13124) filed
on March 7, 1996].
10(u)(ii) Form of Warrant issued by the Registrant pursuant to the
Restructuring Agreement listed as Exhibit 10(u)(i) above
[incorporated by reference to Exhibit 10.2 to the Registrant's Form
8-K (Commission File No. 0-13124) filed on March 7, 1996].
10(u)(iii) Asset Purchase Agreement, dated as of March 1, 1996, by and among the
Registrant, MDA Services, Inc. and The Robert Plan Corporation
[incorporated by reference to Exhibit 10.3 to the Registrant's Form
8-K (Commission File No. 0-13124) filed on March 7, 1996].
10(v)(i) Stock Purchase Agreement, dated as of March 31, 1996, by and among
the Registrant, Software Investments Limited and Care Corporation
Limited [incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8,
1996].
10(v)(ii) Repurchase Rights Assignment, dated as of March 31, 1996, between the
Registrant and Software Investments Limited [incorporated by
reference to Exhibit 10.2 to the Registrant's Form 8-K (Commission
File No. 0-13124) filed on April 8, 1996].
10(v)(iii) Warrant, dated as of March 31, 1996, issued by the Registrant to
Software Investments Limited [incorporated by reference to Exhibit
10.3 to the Registrant's Form 8-K (Commission File No. 0-13124) filed
on April 8, 1996].
10(v)(iv) Exclusive Software License Agreement, dated as of March 31, 1996, by
and among the Registrant, Care Corporation Limited and COVER-ALL
Systems, Inc. [incorporated by reference to Exhibit 10.4 to the
Registrant's Form 8-K (Commission File No. 0-13124) filed on April 8,
1996].
10(w) Settlement Agreement dated April 1, 1996 between the Registrant and
Clarendon National Insurance Company [incorporated by reference to
Exhibit 10.5 to the Registrant's Form 8-K (Commission File No.
0-13124) filed on April 8, 1996].
*10(x) Employment Agreement, dated as of April 1, 1996, between the
Registrant and Raul F. Calvo.
*10(y) General Release and Termination of Lease Agreement, dated as of
December 4, 1996, between the Registrant and Somerset Realty
Associates, L.L.C.
43
<PAGE>
10(z)(i) Convertible Note Purchase Agreement, dated as March 14, 1997, between
the Registrant, Software Investments Limited, Atlantic Employers
Insurance Company and Roger D. Bensen [incorporated by reference to
Registrant's Current Report on Form 8-K (Commission File No. 0-13124)
filed on March 24, 1997.
*10(z)(ii) Form of 12 1/2% Convertible Note issued by Registrant pursuant to the
Convertible Note Purchase Agreement listed as Exhibit 10(z)(i) above.
*10(aa)(i) Debenture Purchase Agreement, dated as of March 31, 1997, between the
Registrant and Sirrom Capital Corporation.
*10(aa)(ii)12 1/2% Convertible Debenture Due March 31, 2002, issued by
Registrant to Sirrom Capital Corporation.
*10(aa)(iiiAmendment to Stock Purchase Agreement, dated as of March 14, 1997,
among the Registrant, Software Investments Limited and Care
Corporation Limited.
*10(aa)(iv)Amendment to Exclusive Software License Agreement, dated as of March
14, 1997, among the Registrant, Care Corporation Limited and, for
certain purposes, Cover-All Systems, Inc.
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: March 31, 1998 By: /s/ Brian Magowan
---------------------------------
Brian Magowan
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signatures Title Date
/s/ Brian Magowan
- ---------------------------
Brian Magowan Chairman of the Board of Directors March 31, 1998
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ John R. Nobel Chief Financial Officer March 31, 1998
- ---------------------------
John R. Nobel
/s/ Earl Gallegos
- ---------------------------
Earl Gallegos Director March 31, 1998
/s/ Ian Meredith
- ---------------------------
Ian Meredith Director March 31, 1998
/s/ James R. Stallard
- ---------------------------
James R. Stallard Director March 31, 1998
/s/ Mark D. Johnston
- ---------------------------
Mark D. Johnston Director March 31, 1998
/s/ Steven Hough
- ---------------------------
Steven Hough Director March 31, 1998
45
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Amendment No. 1 to
the Registration Statement (Form S-3 No. 333-6131) and related Prospectus of
Cover-All Technologies Inc. for the registration of 6,591,528 shares of its
common stock of our report dated March 31, 1998, with respect to the 1997
consolidated financial statements and schedule of Cover-All Technologies Inc.
included in its Annual Report (Form 10-K) for the year ended December 31, 1997.
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
March 31, 1998, with respect to the 1997 consolidated financial statements and
schedule of Cover-All Technologies Inc. included in its Annual Report (Form
10-K) for the year ended December 31, 1997.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
March 31, 1998
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Amendment No. 1 to
the Registration Statement (Form S-3 No. 333-6131) and related Prospectus of
Cover-All Technologies Inc. for the registration of 6,591,528 shares of its
common stock of our report dated April 11, 1997, with respect to the 1996 and
1995 consolidated financial statements and schedule of Cover-All Technologies
Inc. included in this Annual Report (Form 10-K) for the year ended December 31,
1997.
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 1996 and 1995 consolidated financial
statements and schedule of Cover-All Technologies Inc. included in this Annual
Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG LLP
Hackensack, New Jersey
March 30, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 2,908,167
<SECURITIES> 0
<RECEIVABLES> 1,234,706
<ALLOWANCES> 185,610
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<DEPRECIATION> 2,397,704
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<CURRENT-LIABILITIES> 2,637,118
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0
0
<COMMON> 167,911
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<TOTAL-LIABILITY-AND-EQUITY> 8,484,022
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<TOTAL-REVENUES> 7,937,573
<CGS> 5,426,000
<TOTAL-COSTS> 4,888,919
<OTHER-EXPENSES> (37,569)
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<INTEREST-EXPENSE> 300,593
<INCOME-PRETAX> (2,640,370)
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<NET-INCOME> (2,640,370)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
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